Mandatory offer price under Rule 26.3 of Hong Kong’s Takeovers Code

The rule protects equal treatment

A mandatory general offer gives remaining shareholders an opportunity to sell after a person or concert group crosses a Rule 26 threshold. The offer price must meet the Code’s minimum so that the controller cannot acquire voting rights from one seller at a high price and then offer public shareholders less.

Rule 26.3 uses the highest price paid by the offeror or any concert party for voting rights during the offer period or in the preceding six months. The test is a minimum, not a valuation opinion about what the shares are worth.

Define the relevant persons and period

Identify the offeror and all persons acting in concert. Their acquisitions may be aggregated for the price test. The period begins six months before the offer period and continues throughout it. An acquisition by a concert party during the offer period can therefore raise or increase the minimum offer price.

The relevant price is the price paid for voting rights in the offeree. Examine purchases, transfers, options, agreements to acquire, and other arrangements under the Code. The facts may require consultation with the Executive about whether a transaction counts as an acquisition and how its consideration is valued.

A numerical example

Suppose the offeror bought shares for HK$8.10 five months before the offer period began, while other purchases were at HK$7.60 and HK$7.90. The minimum mandatory-offer price is at least HK$8.10, subject to the Code’s detailed rules and any relevant Executive ruling.

If a concert party pays HK$8.40 after the offer period begins, that later price may become the minimum for the offer. The offeror cannot keep the initial HK$8.10 price if the Code requires it to match the higher purchase price.

Non-cash consideration and unusual transactions

A transaction may involve non-cash consideration, a related-party transfer, or an acquisition whose price is not directly stated per share. The Code can require an assessment of the value paid for voting rights. Do not ignore an acquisition because it was structured as a subscription, exchange, or settlement rather than a cash market purchase.

The Executive may consider the circumstances and apply the Code’s rules to determine the relevant price. Deal documentation should preserve the valuation method, consideration components, and the transaction’s economic substance. If the offeror has traded through affiliates, obtain a full trading history for all concert parties.

Voluntary offers and mandatory offers differ

Rule 26.3 specifically addresses the price of a mandatory offer. A voluntary offer may have different pricing rules and conditions, though other Code provisions still apply. If a voluntary offer later becomes mandatory, the minimum price obligations must be considered.

The trigger analysis and price calculation are separate steps. First determine whether Rule 26 requires an offer; then identify the correct offer price. The offer period definition and date can affect the six-month window, so do not start the lookback from the public announcement unless the Code’s definition leads to that result.

Records and compliance controls

The offeror and advisers should review trading records for the offeror, concert parties, and relevant accounts, including derivatives or agreements that may confer voting rights. Preserve price, date, quantity, counterparty, and beneficial ownership records. A complete record reduces the risk of later corrections to offer terms.

During an offer period, monitor all connected acquisitions and obtain internal pre-clearance. A purchase above the stated offer price may require an increase. The offer document and announcements must reflect the applicable minimum and any change in price.

Build the price comparison from the right transactions

To apply Rule 26.3, identify the offer period start date and examine the offeror’s and concert parties’ acquisitions of voting rights during the offer period and the six months before it began. Determine the highest price paid, including transactions that may not look like an ordinary market purchase. Then compare the proposed offer price: it cannot be below the relevant highest price under the rule.

Keep a transaction-by-transaction record of buyer, concert-party status, date, consideration, voting rights acquired, and any unusual terms. Non-cash consideration or connected transactions may require careful valuation and consultation. The SFC Executive can apply the Code and interpret the facts; a mechanical spreadsheet is only the first pass.

Example and common mistake

If the offeror paid HK$8.20 per share in the lookback period and proposes a cash offer at HK$8.00, the proposed price is below the Rule 26.3 minimum and must be raised, subject to the detailed Code provisions. If the offeror paid different prices, use the highest relevant price rather than the average acquisition cost.

A common error is to look only at the offeror and overlook persons acting in concert. Another is to use a six-month period measured backward from announcement instead of from commencement of the offer period as specified in the rule. Always anchor the dates to the Code’s wording and verify whether the facts involve a special case.

Exam traps

The price test is the highest price paid, not the average, closing price, or market price at the announcement. It covers the six months before the offer period and the period itself, and it includes concert parties.

Keep Rule 26.3 price separate from Rule 26.1 trigger thresholds and from voluntary-offer pricing. A good answer identifies the offer period, relevant purchasers, acquisition consideration, and highest paid price.

Apply the highest-price principle carefully

Rule 26.3 protects shareholders by linking the mandatory offer price to the highest price paid by the offeror or a person acting in concert for shares of the relevant class during the period specified by the Code. The key exam phrase is “highest price,” not the offeror’s average cost, the latest market price, or the price the board considers fair. First identify the correct class of shares and the relevant dealing period under the current Code; then compare the qualifying purchases.

For example, if the offeror bought shares at several different prices in the relevant period, the mandatory offer cannot simply be set at the average of those purchases. The highest qualifying price is the starting reference, subject to the Code’s detailed provisions and any applicable Executive ruling. Dealings by concert parties matter too, so the bidder needs a complete and accurate dealing record.

Separate the trigger question from the price question

Rule 26 answers whether a mandatory offer obligation has arisen; Rule 26.3 addresses the minimum consideration for the offer. A person can correctly identify a trigger and still calculate the offer price incorrectly. Conversely, a generous proposed price does not remove the need to make an offer if the trigger applies.

In a real transaction, the exact reference period, treatment of different forms of consideration and any adjustment are governed by the full Code and the Executive’s practice. For a short exam problem, state the highest-price principle and explain which purchases must be checked rather than inventing a market-based valuation test.