M&A Guide Hong
Kong - LexisNexis
1.
What has been the general level of M&A activity over the
last 12 months in your jurisdiction? What were the most notable mergers and acquisitions
during that period?
According to the research
of MergerMarket, for the
year 2012, there were over 760 M&A
transactions in Hong Kong and China. The aggregate transaction value of 2012 increased by 4.7 per cent to US$144.9
billion as compared to 2011. Outbound cross-
border M&A transactions remained strong in 2012 with
the transaction value amounting to US$64.6 billion. Inbound activity, however, experienced a 20 per cent decline
compared with 2011, slipping
to US$25.3 billion.
Tops deals
in
2012, in terms
of
their transactional value, include the acquisition of 15.57 per
cent stake in Ping
An Insurance Company
by Charoen Pokphand Group Co Ltd and the
acquisition of CDMA network assets in China Telecommunications
Corporation by China Telecom Corporation Ltd.
In 2012, there were four privatisation transactions involving listed companies in Hong Kong, including Little Sheep Group Ltd, Zhengzhou China Resources Gas Co
Ltd, Samling
Global Ltd and Alibaba.com Ltd. According to the HKEx
Fact Book 2012, 17 Hong Kong listed
companies, including Far East Global Group Ltd, Frasers Property (China)
Ltd and Hang Ten Group Holdings Ltd underwent takeovers and mergers in that year.
2.
What are the most
common methods for acquiring or merging with a public
company in your jurisdiction?
Acquisitions of public companies in Hong Kong are commonly structured as a takeover
offer or a scheme of arrangement.
Voluntary or Mandatory Takeover
Offer
One of the common
methods used for obtaining control of a public company in Hong Kong, if
considered fit for commercial reasons, is to make a voluntary offer to acquire the shares
held by the shareholders of the target public company (hereinafter known as the ‘target company’) pursuant to the Code on Takeovers and Mergers
(the Takeovers Code)
of
the Securities and Futures
Commission of Hong
Kong (SFC).
If the offer is accepted,
the
offeror will obtain the majority
control of the target company.
Subject to certain
restrictions, the consideration for the offer can be in cash or in securities, or a combination of both.
Under the Takeovers Code,
there are
certain events – the occurrence of which will require a
person or persons to make a
mandatory offer to the
shareholders of the target company
to acquire all the shares of the target company’s shareholders.
This requirement to make a mandatory offer will
arise if :
1.
A person (and the persons acting in concert)
acquires 30 per cent or more of the voting
rights in the target company, whether through
a single or a series of transactions; or
2. A person (and the persons acting in concert) holding not less than 30 per cent, but not more than 50 per cent of the voting rights
in the target company, and that person (and
the persons acting
in concert)
acquires voting rights in the target company, which has
the effect of increasing
such person(s)’s percentage holding
in the
target company
by more than two per cent from the lowest percentage holding of that person(s) in the 12-month
period ending on and inclusive
of the date of the relevant acquisition.
The consideration of a mandatory
offer must be in cash
or be accompanied by a cash alternative at not
less than the highest price paid for by the offeror,
or
any person acting in concert
with it, for shares
carrying voting rights during the offer period and
within the six-month
prior to the commencement of
the offer period.
Scheme of Arrangement
Apart from voluntary
and mandatory takeovers,
the Hong Kong
Companies Ordinance (the
‘CO’) provides
for a court-sanctioned
scheme of arrangement, which
can be
undertaken by listed companies that wish to undergo corporate reorganisation or privatisation.
A scheme of
arrangement usually involves the controlling
shareholder(s) of the listed target company
acquiring the shares of the minority shareholders, which is
usually called a ‘transfer scheme’, followed by an application
to
the Hong Kong Stock Exchange
(the SEHK) to de-list
the company. Apart from
such acquisition, a scheme of arrangement may be effected through
the cancellation of the existing shares of the minority shareholders and issuance
of new shares to the controlling shareholder of the target company. This is sometimes referred to as a ‘cancellation scheme’. If the scheme of arrangement
is effected
by way of a transfer
scheme, stamp duty
will be payable
for the sale
and purchase of shares.
The implications of Hong Kong stamp duty are
further elaborated in Question 8 below.
If a scheme of arrangement is proposed, the Hong Kong court, upon the application
of
the listed company, may order to convene a general
meeting of all shareholders to
consider,
and if
thought fit, approve the proposal. Under the CO and the Takeovers
Code, which also applies to schemes of
arrangement, a scheme of arrangement can only take
effect if:
1.
A majority in number representing 75
per cent
in value of the disinterested shareholders
present and voting either in person or by proxy at
the meeting have approved the scheme;
2.
The number of votes cast against
the
scheme at the meeting is not more than 10 per cent of the votes attaching to all
disinterested shares; and
3. The court approves
the scheme.
4.
What are the key laws and regulation that govern mergers and
acquisitions in your jurisdiction?
The Hong Kong Companies Ordinance
The CO is the main legislation governing M&A
transactions in Hong Kong. Under
the CO, all
Hong Kong incorporated companies and overseas companies registered under Part XI
of the CO must comply with the requirements applicable to such transactions.
The Securities and Futures Ordinance (SFO)
Bidders in
takeover transactions
will have
to consider the implications of the requirements under
the disclosure of interests
regime under Part XV of the SFO. The statute imposes filing obligations
on persons who acquire
five per cent or more of
interests in shares,
whether voting or non-voting, of a Hong Kong listed company. Filings are required to be made for subsequent changes to such interests.
Stricter obligations are imposed
on directors of listed
companies, who are required to report all
their interests in shares held in the listed
companies.
The SFO further prohibits any
insider dealings and
other forms of market
misconduct.
The Takeovers
Code
Takeovers, mergers and schemes of arrangement involving public companies
in
Hong Kong are
primarily regulated by the
Takeovers
Code, which aims to ensure all shareholders
affected by the takeover
or merger are treated equally. The
Takeovers Code applies to offers, including
partial offers, offers by a parent company
to acquire shares
of its subsidiary,
and
certain other transactions
where control of a company
is
obtained or consolidated for the purpose of a takeover or merger of companies regulated by the code.
The Takeovers
Code sets down the standards of
commercial conduct
and behavior acceptable in the situation of a takeover
or merger. Whilst the Takeovers
Code does not have the force of law, the Executive
Director of the Corporate
Finance Division of
the SFC
(hereinafter known as the
‘executive’) has the power to refer matters for ruling to
the Committee of the SFC (hereinafter known as the ‘Panel’) and institute disciplinary proceedings if it considers that there has been a breach
of either the Takeovers Code or a ruling of the executive
or
the Panel, upon investigation.
The Listing Rules
All Hong Kong listed companies
are
required to
comply with the Rules Governing the Listing of Securities (Listing Rules) of the SEHK, depending on whether it is listed on the Main Board or the
Growth Enterprise Market (GEM). As such, if the
acquirer is a Hong Kong listed company, apart from the
CO and the Takeovers Code, it should comply
with the relevant Listing Rules of the SEHK. For
instance, if the acquisition would constitute a notifiable transaction under the Listing Rules, the
acquirer listed company must comply with the relevant announcement, reporting and shareholders’
approval requirements, depending on the size of the transaction and if any exemption applies.
5.
What are the government regulators and agencies that play
key roles in mergers and acquisitions?
The Securities and Futures Commission (SFC) The SFC is
an independent
statutory body to
regulate securities and futures markets in Hong
Kong. It
aims to
ensure orderly
securities and futures market operations and protect
investors. The SFC is empowered by the SFO to conduct
investigative, remedial
and disciplinary
actions against possible breaches.
The functions of the SFC include:
1. Setting market regulations, investigating
breaches of such rules and market
misconduct and taking appropriate enforcement actions;
2. Administering the Codes on Takeovers and Mergers and Share Repurchases of the SFC;
3. Overseeing regulations governing takeovers
and mergers of public companies and the SEHK’s regulation of listing matters; and
4. Promoting
investor education
in relation
to market operations, the investment risks involved and investor
rights and obligations.
The Stock Exchange of
Hong Kong
Limited (SEHK)
The SEHK, a wholly-owned subsidiary of HKEx, operates and maintains
the
stock market in Hong
Kong. It is a recognised
exchange company under
the SFO and is the primary
regulator of stock exchange participants, including
companies listed
on the Main Board and GEM. The SEHK works closely with the SFC in regulating listed issuers and
administers listing,
trading and clearing rules.
6.
Are hostile bids permitted?
Hostile
bids are offers to purchase shares in the company not pursuant to any
agreements, nor any co-operation with the target company. Although hostile bids
are allowed in Hong Kong, they are rare since most listed companies in Hong
Kong are either family-controlled or held by a single group of controlling
shareholders.
The
hostile pre-conditional takeover bid jointly made by ENN Energy Holdings
Limited and China Petroleum & Chemical Corporation against China Gas
Holdings in December 2011, although unsuccessful, may be the first unsolicited
takeover bid in Hong Kong.
7.
What laws may restrict or regulate certain takeovers and
mergers, if any? (For example, anti-monopoly or national security legislation).
Generally
speaking, there are no restrictions on foreign investments in Hong Kong or
restricted levels of foreign ownership of Hong Kong
companies
in Hong Kong, save for certain industry-specific restrictions which are
applicable to a particular industry. Those industries include
telecommunication, television and radio broadcasting, banking and securities
and insurance.
In
addition, there are neither foreign-exchange regulations in Hong Kong, nor any
restrictions or tax withholding imposed on repatriation of capital or
remittance of profits or dividends to or from a Hong Kong company and its
shareholders. The Hong Kong Competition Ordinance, which is expected to be
enforced in either late 2013 or early 2014 may have implications to future
takeover transactions. Briefly speaking, the Ordinance regulates
anti-competitive agreements and instances of abuse of market power.
8.
What documentation is required to implement these
transactions?
The
principal transactional documentation involved in a simple sale and purchase of
shares of a Hong Kong company typically includes:
1.
A
confidentiality letter in which the parties undertake to keep confidential any information
relating to the transaction and the counterparties;
2.
A
sale and purchase agreement which records the terms and conditions of the
transaction, and usually includes representations and warranties regarding the
business and the company to be acquired;
3.
A
disclosure letter under which a seller makes disclosures against the
representations and warranties given by it to the purchaser under the sale and
purchase agreement; and
4.
An
instrument of transfer and bought and sold notes for the sale shares.
For
transactions which constitute takeovers transactions under the Takeovers Code,
the announcement and circular and offering documentation requirements will
apply.
9.
What government charges or fees apply to these transactions?
Pursuant
to the Stamp Duty Ordinance of Hong Kong, stamp duty on the sale or purchase of
any ‘Hong Kong stock’, which includes shares of a company listed in Hong Kong,
is subject to stamp duty of a total of 0.2 per cent of either the amount of the
consideration paid or of its value of such shares, whichever is higher.
Therefore, stamp duty will apply if the offeror takes over the target company
by way of acquiring shares of the minority shareholders. However, stamp duty is
not applicable to cancellation of existing shares or issuance of new shares.
The
Securities and Futures (Fees) Rules under the SFO and the Takeovers Code have
prescribed certain fees which are payable to the SFC in relation to takeovers
transactions. Application fees are payable to the SFC when a party would like
to seek a formal ruling as to the application of the Takeovers Code from the
executive. A fee is payable for the review of any rulings of the executive.
However, no fees are required for any initial consultations with the executive,
whose views however, will be preliminary and non-binding on the executive.
10. What sources of
information are available in the public domain?
To conduct due diligence over the
shares and affairs of the target company, the following information will be
obtainable in the public domain:
1.
Corporate
filings records maintained at the Hong Kong Companies Registry;
2.
Information
relating to real properties owned and leased by the target company in Hong Kong
which is registered with the Land Registry of Hong Kong;
3.
Intellectual
property rights which are registered with the Trade Marks Registry of Hong
Kong;
4.
Information
relating to legal proceedings in Hong Kong which can be searched at the Hong
Kong Courts;
5.
Bankruptcy
and compulsory winding-up searches which can be carried out at the Official
Receiver’s Office of Hong Kong; and
6.
If
the Target Company is a listed company in Hong Kong:
a.
Announcements, reports and circulars published under the relevant Listing Rules;
and
b.
The disclosure of interest in shares pursuant to the SFO.
11. Do directors and
controlling shareholders owe a duty to the stakeholders in connection with a
deal?
Broadly
speaking, directors owe fiduciary duties and the duty of skill, care and
diligence towards the shareholders of the company. The source of these duties
mainly comes from common law, the company’s constitutional documents and other
guidance materials issued by the regulatory authorities. According to the
Companies Registries’ Guide on Directors’ Duties, directors have duties:
1.
To
act in good faith for the benefit of the company as a whole;
2.
To
use powers for a proper purpose for the benefit of the members as a whole;
3.
To
avoid conflicts between personal interests and interests of the company;
4.
Not
to enter into transactions in which the directors have an interest except in compliance
with the requirements of the law;
5.
Not
to accept personal benefit from third parties conferred cause of his position
as a director; and
6.
To
observe the company’s Memorandum and Articles of Association and Resolutions.
If
there are possible conflicts between a director’s personal interests and the
interests of the company (for instance, if the director is connected to the offeror),
such director is required to make proper disclosure of his interests. The
Listing Rules prohibit any director who has a material interest in the
transaction from being included in the quorum of the relevant board meeting and
must abstain from voting on the relevant resolutions.
Under
r 2 of the Takeovers Code, when the target company receives an offer or is
approached with a proposed offer, the board of directors of the target company
is required to establish an independent committee to make recommendations as to
the fairness and reasonableness of the offer, and the acceptance or voting
thereof. The independent committee shall comprise all non-executive directors
who have no direct or indirect interest in any offer or possible offer other
than as a shareholder of the target company. The board is required to retain a
competent independent financial advisor to advise the independent committee on these
matters. The appointment of such independent financial advisor must have been
first approved by the independent committee. The written advice of the
independent financial advisor and the reasons thereof must be provided to the
shareholders by inclusion in the offeree board circular along with the
recommendations of the independent committee with respect of the offer.
12. In what circumstances
is break-up fees payable by the target company?
A
break-fee arrangement is commonly seen in takeovers and mergers transactions
involving companies listed in Hong Kong. Under such an arrangement, the offeror
(or a potential offeror) would enter into an agreement with the target company,
pursuant to which a cash sum will be payable by the target company if certain
specified events occur that would have the effect of preventing the offer from
proceeding or causing it to terminate.
The
Takeovers Code does not prohibit break-fee arrangements, but requires that they
must be de minimis, which value should normally be under one per cent of
the offer value. The board of directors of the target company and its financial
advisor must confirm to the executive in writing that each holds the opinion
that the arrangement is in the best interest of the target company. Any such
arrangement must be fully disclosed in the announcement of the offeror of its
firm intention to make an offer, and the terms of the arrangement must be
disclosed in the offer document. All documents relevant to the arrangement will
be required to be put on display for public inspection.
13. Can conditions be
attached to an offer in connection with a deal?
All
offers, with the exception of a partial offer, must at least be conditional
upon the offeror (and persons acting in concert with it) receiving acceptances of share purchases that, in
aggregate with any existing or future shares held, will confer the offeror with
over 50 per cent of the voting rights of the company, save where the executive
approves otherwise. The level of acceptance of shares may be set higher than 50
per cent in a voluntary offer, but no offers should be made subject to
conditions which are in the control of the offeror, thus allowing it to easily withdraw
the offer. Mandatory offers, however, cannot be subject to any other
conditions.
If
the potential bidder does not wish to commit itself to making a firm offer, it
may make an announcement of a possible offer. If a preconditional offer
announcement is made, the executive must be consulted in advance and the
announcement must state whether the preconditions are waivable or not.
14. Can minority
shareholders be squeezed out? If so, what procedures must be observed?
If
a takeovers offer is made, it is likely that not all minority shareholders of
the target company would accept the offer. In such circumstances, according to the
CO, if the offeror (and persons acting in concert with it) is able to secure
not less than 90 per cent in value or more of the disinterested shares for
which the offer was made within four months of posting of the initial offer
document, the offeror is entitled to serve notice on the dissenting minority
shareholders to compulsorily acquire their outstanding shares.
If
an intention of exercising the powers of compulsory acquisition is stated by
the offeror in the offer document, the offer must not remain open for more than
four months from the date of posting of the offer document, unless the offeror
has by the time become entitled to exercise such powers. Once the offeror is so
entitled to squeeze-out the minority shareholders, it must do so without delay.
15. Are there any
proposals for reforms to the laws and regulations governing mergers and
acquisitions currently being considered?
In
July 2012, the Hong Kong Legislative Council passed the Companies Bill which
will lead to substantial amendment to the current CO and will affect takeovers
and mergers transactions. The bill was gazetted on 10 August 2012 and is
expected to come into force in 2014. Major changes include the replacement of
the existing ‘headcount’ test with a ‘disinterested shares test’ when counting the
votes cast on resolutions approving a scheme of arrangement that relates to
takeovers and privatisation. Under such ‘disinterested shares test’, the number
of votes cast against the resolutions shall not exceed 10 per cent of the votes
attached to all disinterested shares, which is an alignment with the ‘10%
objection rule’ under the Takeovers Code mentioned above.
