Under the Hong Kong Codes on Takeovers and Mergers and Share Buy-backs (Takeovers Code), once an announcement is made of a proposed or possible offer (with or without terms), any public statement containing data sufficient to calculate an approximate figure for future profits of the listed issuer concerned may be treated as a ‘profit forecast’, which must be ‘reported on’. It includes not only any profit forecast made during an offer period but also any existing profit forecast. An obvious but easily overlooked example is the profit warning or positive profit alert announcement (Profit Announcement) published by the listed issuer before or during the offer.
As a reminder to listed issuers, this article reviews the requirements of Rule 10 of the Takeovers Code (Rule 10) in the context of Profit Announcement.
The ‘Reporting On’ Requirement
Under Rule 10, a profit forecast to be included in the document to shareholders relating to an offer (or a possible offer) must be ‘reported on’ by both the listed issuer’s financial adviser and auditor. This involves (i) the financial adviser reviewing and discussing the assumptions with their client in order to satisfy themselves that the profit forecast has been made with due care and consideration; and (ii) the auditor or accountants satisfying themselves that the profit forecast, so far as the accounting policies and calculations are concerned, has been properly compiled on the basis of the assumptions made.
Rule 10.4 of the Takeovers Codes further provides that when a profit forecast is made in an announcement, that announcement must contain a statement that the profit forecast has been reported on in accordance with the Takeovers Code and the reports have been lodged with the Hong Kong Securities and Futures Commission (SFC).
Disclosure of Inside Information and PN2
Though parties to an offer may not intend to include any profit forecast in the documents to shareholders, the listed issuer concerned is under a continuing obligation to, if in possession of relevant inside information, promptly publish a Profit Announcement pursuant to the Rules Governing the Listing of Securities on the Stock Exchange (Listing Rules) and the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong).
In Practice Note 2 - Issues relating to profit forecasts under Rule 10 (PN2), the SFC made it clear that Profit Announcement will normally be regarded as a profit forecast and must therefore be reported on. Recognising the time constraints faced by listed issuer when issuing Profit Announcement during an offer period, the SFC states that it will normally permit the relaxation of Rule 10.4 of the Takeovers Codes provided the Profit Announcement is accompanied by an appropriate warning that it does not meet the standard required by Rule 10 and that shareholders and potential investors should exercise caution in placing reliance on the forecast in assessing the merits and demerits of the transaction. The SFC will yet require the Profit Announcement to be reported on as soon as reasonably practicable in the next document to shareholders.
The Published Financial Results Exemption
Normally, upon publication of the interim or annual results (to which the Profit Announcement relates), the Profit Announcement will no longer need to be separately reported on. This is because Rule 10.9 exempts listed issuers from reporting on if the relevant financial results are required to be published and prepared to the standards required by the applicable Listing Rules. In other words, if the results announcement could be published prior to the despatch of the next document to shareholders in relation to the offer, the reporting on requirement for the Profit Announcement will be treated as superseded by the publication of the financial results.
Unaudited Quarterly Results
Note to Rule 10.9 extends the exemptions to unaudited quarterly results of GEM Board listed issuers. However, Main Board listed issuers should be aware that the exemption does not apply to their voluntary publication of quarterly results as they are not required to be published under the Main Board Listing Rules. In other words, save with the SFC’s consent, publication of routine quarterly profit figures by Main Board listed issuers during the offer period (whether voluntary or pursuant to the relevant laws and regulations of overseas jurisdiction) will normally be regarded as profit forecasts, triggering the ‘reporting on’ requirement.
Existing Profit Forecasts
The above review relates only to profit forecasts made during an offer period. It should be noted that such voluntary disclosure of unaudited quarterly results by Main Board listed issuers or publication of Profit Announcement, even made before the offer (or possible offer) is announced, may still be caught by Rule 10.11.
Rule 10.11 will be triggered if there exists information (1) about material changes in the financial or trading position or outlook of the listed issuer concerned; (2) made subsequent to the last published accounts; and (3) constituting a profit forecast under Rule 10. It is obvious from the above review that voluntary disclosure of unaudited quarterly results by Main Board listed issuers or publication of Profit Announcement, if made subsequent to the last published accounts (though before the offer is announced), falls squarely within the ambit of Rule 10.11 and must be reported on.
Tips to Take Away
When conducting an offer, always make a healthy check against all issued announcements since the last published accounts and stay alert of releasing any statement which may contain data sufficient to calculate an approximate figure for future profits of the listed issuer concerned, which will trigger the ‘reporting on’ requirement under Rule 10.