Whitewash waivers under Hong Kong’s Takeovers Code

Why a whitewash waiver exists

A company may issue new shares as acquisition consideration, raise cash, or underwrite a share issue. That dilution can increase an existing shareholder’s percentage voting interest enough to trigger a mandatory offer under Rule 26, even if the shareholder did not buy shares in the market. A whitewash waiver can address that specific result.

The waiver is not automatic. The Takeovers Executive must grant it, the transaction must fit the Code’s conditions, and independent shareholders must approve the relevant proposals. Without a waiver, the person or concert group may need to make a mandatory general offer.

Which transactions may qualify

The SFC Code describes whitewash procedures for new securities issued as consideration for an acquisition, a cash subscription, or underwriting a share issue where the resulting voting rights would otherwise trigger an offer. The rule applies to the person or group acting in concert that crosses the threshold because of the issue.

A whitewash is not a general exemption for any increase in control. It addresses specified new-issue scenarios. Ordinary purchases of existing shares, creeping acquisitions, or changes in a concert-party group may require a different Rule 26 analysis and may not qualify for a whitewash.

Two independent votes and their thresholds

The Code’s note says the waiver and underlying transaction are separately approved by independent votes: at least 75% of votes cast on the whitewash waiver and more than 50% of votes cast on the underlying transaction. The eligible independent shareholders exclude persons involved in or interested in the transaction.

The two resolutions serve different purposes. Shareholders first decide whether the control change can proceed without an offer; separately, they approve the transaction that creates the new shares. A resolution cannot simply bundle both questions and count one vote for both thresholds.

Disclosure and independent advice

The circular must explain the potential voting-rights position after the transaction and include competent independent advice. It should state that the Executive has agreed to waive the resulting mandatory-offer obligation, subject to the required conditions and shareholder votes. The offeror’s control and concert-party holdings must be clearly disclosed.

Shareholders need enough information to understand dilution, the potential control outcome, the transaction rationale, and their alternatives. The waiver does not remove the general principles of fair treatment or adequate disclosure. The SFC may require consultation or additional information before the meeting.

After the waiver: the 2% creeper

A whitewash waiver does not give the recipient unlimited freedom to increase its voting rights. The Code treats the post-transaction holding as a reference point for later acquisitions, and subsequent purchases may be subject to the 2% creeper over a 12-month period. The concert group’s position must be monitored after completion.

This rule prevents a whitewash from becoming a permanent exemption from mandatory-offer triggers. An additional acquisition after the transaction can create a fresh Rule 26 obligation if it exceeds the permitted movement or another threshold applies. Record the post-waiver percentage and subsequent acquisitions carefully.

Conditions and disqualifying conduct

The whitewash guidance includes conditions, including restrictions related to disqualifying transactions in the period around the proposal and the shareholders’ meeting. The applicant should consult the Executive early, disclose relevant purchases or dealings, and avoid assuming that an application guarantees a waiver.

A waiver can be conditional, refused, or lost if the proposal changes materially. If shareholder approval fails, or if the Executive does not grant the waiver, the parties may need to restructure or proceed with a mandatory offer. These consequences should be included in the transaction’s conditions precedent.

The independent votes protect disinterested shareholders

A whitewash proposal involves two separate decisions. Independent shareholders vote on the waiver itself, with at least 75% of votes cast in favour, and separately vote on the underlying transaction, which generally requires more than 50% of votes cast. The person seeking the waiver, parties acting in concert, and other excluded shareholders cannot use their votes to approve the waiver.

The Executive’s consent and the Code’s procedural safeguards also matter. Shareholders need sufficient disclosure to assess the transaction and the resulting control position. The waiver is not automatic simply because the company believes an issue is commercially sensible or because the transaction receives ordinary shareholder approval.

A simplified scenario

A company proposes to issue new shares to a strategic investor as consideration for an acquisition. The investor and its concert parties would cross the mandatory-offer threshold after issue. The company may seek a whitewash waiver, but it needs to structure the proposal within the Code, obtain the Executive’s consent, and secure the required independent votes on both the waiver and acquisition.

After completion, future purchases still need separate analysis. In particular, the 2% creeper can trigger an offer obligation for a person holding between 30% and 50% who acquires more than 2% of voting rights in a 12-month period. A whitewash does not grant a permanent exemption from later Rule 26 triggers.

Exam traps

Do not confuse the whitewash waiver with a general mandatory-offer threshold exemption. It is transaction-specific and linked to a new issue of securities. Remember the separate 75% and more-than-50% independent vote requirements.

For a problem, calculate the post-issue voting rights, identify the person and concert parties, determine whether the Rule 26 trigger would otherwise occur, test waiver eligibility, and check independent votes and follow-on creeping acquisitions.

A simple voting-rights calculation

Suppose an investor and its concert parties hold 28% of a company. A proposed issue of new shares to that group would leave them with 32% of the voting rights. The issue can cross the Rule 26 mandatory-offer threshold even though the investor did not buy existing shares. The first step is to calculate the group’s voting rights after the issue; the next is to test whether the transaction fits the whitewash procedure and whether the Executive is willing to grant the waiver.

The calculation must use the concert group as a whole. A person cannot assess only their own registered holding while ignoring associates or parties acting in concert. The transaction documents should make the post-issue position and the relevant group holdings clear, and changes to the proposal can require the analysis to be revisited.

Keep the waiver separate from the deal approval

The independent vote on the whitewash asks shareholders to accept the control consequence without requiring the recipient to make a Rule 26 offer. The separate vote on the underlying transaction asks whether the company should complete the acquisition, subscription or other transaction that creates the new shares. A shareholder could support the commercial transaction but oppose the waiver, or the reverse; separate resolutions preserve that choice.

If the waiver is not granted or the required vote fails, the parties need to consider whether the transaction can be restructured or whether the investor must make an offer. The waiver process should therefore be treated as a condition of the transaction, not an administrative formality to address after completion.