PLC Which
Lawyer
Private
equity in Hong Kong: market and regulatory overview
A Q&A guide to private equity law in Hong Kong.
This Q&A is part of the PLC multi-jurisdictional guide to
private equity. It gives a structured overview of the key practical issues
including, the level of activity and recent trends in the market; investment
incentives for institutional and private investors; the mechanics involved in
establishing a private equity fund; equity and debt finance issues in a private
equity transaction; issues surrounding buyouts and the relationship between the
portfolio company's managers and the private equity funds; management
incentives; and exit routes from investments. Details on national private
equity and venture capital associations are also included.
To compare answers across multiple jurisdictions, visit the
Private Equity Country Q&A tool.
The Q&A is part of the PLC multi-jurisdictional guide to private equity
law. For a full list of jurisdictional Q&As visit www.practicallaw.com/privateequity-mjg.
Simon Luk and Mark Jacobsen, Winston &
Strawn
Market
overview
Many
private equity (PE) funds with a presence in Hong Kong are established in
offshore tax havens such as the Cayman Islands, but managed in Hong Kong.
Funding of PE funds generally comes from high net-worth individuals, pension
funds, insurance companies, financial institutions, sovereign wealth funds
(SWF) and companies that have surplus money to make investments. Financial
institutions and SWFs can compete directly with PE funds for investment
opportunities or invest directly in PE funds.
Hong
Kong is a relatively small market. However, Hong Kong traditionally serves as a
base of operations and gateway to larger markets in Northeast Asia (excluding
Japan), such as mainland China, South Korea and Taiwan. Therefore, the PE focus
in Hong Kong is mostly on investing in those markets or supporting businesses
that originate from those markets. More recently, the focus has been almost
exclusively on China, as other markets once serviced out of Hong Kong have
become more localised (such as South Korea) or reoriented towards Singapore
(such as the Philippines and Vietnam). Therefore, discussion of PE investments
in Hong Kong in this article focuses on PE investments in mainland China.
Inbound mainland China PE investments have
slowed, starting in the second half of 2012 and continuing into 2013. PE
investors' primary concern is receiving a good return on investment at exit,
which is usually through an IPO or a sale of the company or its assets to a
strategic investor.
IPOs are usually the preferred form of exit
for PE/VC-backed Chinese companies. However, a combination of the poor
performance of the PRC domestic economy and accounting scandals of previously
listed PRC-based companies resulted in a significant drop of IPOs of
PE/VC-backed Chinese companies in 2012.
According to a Wall Street Journal report
in January 2013, which cites relevant data from Dealogic, trade sales in China
are not as active as in the more developed markets, with only an average of 15
per year over the past three years. This trend looks to continue, as:
·
Profit
margins for PRC companies are very thin and almost every industry in China is
dealing with oversupply or overinvestment issues (therefore inhibiting strategic
investors' desire to expand through acquisitions of PRC businesses).
·
Many
private PRC companies are still under the control of the founders, who tend to
view the company as their own and are not as interested in being bought out.
As an alternative investment strategy, a
number of US-listed companies based in China have been taken private by their
founders in recent years. Successful transactions in 2011 included
privatisations of China Fire (backed by Bain Capital), Chemspec (backed by
Primavera), Funtalk China (backed by PAG Asia) and Harbin Electric (backed by
Abax). However, late 2012 saw fewer of these deals, as prospects for potential
relisting have diminished and the deployment of further funds by PE investors
(providing liquidity for these privatisation deals) has slowed.
Fundraising
Fundraising
for PRC-focused funds tends to be divided into onshore and offshore funds.
Onshore funds are domestic (in focus and legally) and denominated in RMB.
Offshore funds have traditionally been US dollar denominated, but international
sponsors started RMB denominated vehicles in 2009, under a "5% rule"
introduced in a Shanghai pilot programme. If no more than 5% of the total capital
of an RMB fund sponsored by foreign investors originates offshore, the fund is
treated as a domestic fund and is therefore not subject to the foreign
investment restrictions in China (5% rule). However, a proclamation issued by
the National Development and Reform Commission (NDRC) in April 2012 states that
an RMB fund with any foreign source remains "foreign". Compared with
US dollar-denominated funds, RMB funds still dominate the current market.
Overall,
PRC-focused PE fundraising plummeted in 2012 as compared to 2011.
Investment
While
many PE funds tend to provide development or growth capital,
buyout/rescue/vulture capital funds have begun to be more active lately. PE
investors remain a small part of the overall funding mix in the PRC and have
failed to provide a sufficient source of capital for most small and medium
enterprises (SMEs) in China seeking capital. Manufacturing, agriculture,
energy, health care, real estate and financial services are among the most
popular target industries for PE investors.
Transactions
Notable PE-backed proposed going-private
transactions disclosed in 2012 include:
·
7 Days Inn. Listed on NYSE and disclosed privatisation
plan in September 2012 (backed by the Carlyle Group and Sequoia Capital).
·
Focus Media. Listed on NASDAQ and disclosed
privatisation plan in August 2012 (backed by FountainVest Partners, the Carlyle
Group and CITIC Capital).
·
ShangPharma Corp. Listed on NYSE and
disclosed privatisation plan in July 2012 (backed by TPG).
Successful private investment in public
equity (PIPE) deals involving Chinese companies increased in 2012, focused on
the Chinese A-share market.
Exits
The number of PE-backed IPOs of PRC assets
dropped significantly in 2012 (see
Question
2).
China's secondary buyout market remains
immature. A notable sale in 2012 is Actis Capital's sale of a majority stake in
Beijing hot-pot chain Xiabu Xiabu to another US firm, General Atlantic, for an
undisclosed amount. It had paid US$50 million for Xiabu Xiabu in 2008.
Reform
4. Are there any proposals for regulatory or other reforms
affecting private equity in your jurisdiction?
A new
Companies Ordinance (New Companies Ordinance) was passed in July 2012 and is
expected to have effect from 2014. Some of the changes to the old Companies
Ordinance are relevant to PE investors (for example, rules requiring directors
to obtain members' authority to allot shares will be extended). In addition,
directors will need shareholders' approval to grant rights to subscribe for or
convert securities into shares such as warrants, share options or convertible
bonds. However, the directors would not need to seek further approval for the
allotment of shares on conversion or exercise of those rights. In addition, if
a portfolio company is obliged to repurchase a PE investor's shares, any
portfolio company wanting to buy back its shares will be able to repurchase
shares out of the company's capital, subject to a solvency test (in addition to
using the company's distributable profits) (New
Companies Ordinance).
Tax
incentive schemes
5. What tax incentive or other schemes exist to encourage
investment in unlisted companies? At whom are the schemes directed? What
conditions must be met?
Profits
Profits derived from carrying on a trade,
profession or business in Hong Kong are subject to profits tax. However, only
profits which arise in or are derived from Hong Kong (that is, Hong Kong-source
profits) are subject to Hong Kong tax.
Dividends
There is no capital gains tax or withholding
tax on dividends. Dividend income is chargeable to profits tax if it
constitutes Hong Kong-source profits, unless it falls within section 26 of the
Inland Revenue Ordinance (Cap. 112 of the Laws of Hong Kong) (IRO). Under this
exemption, dividend income is not subject to profits tax if the corporation
distributing the dividends is subject to profits tax on the dividend income.
Fund
structuring
6. What legal structure(s) are most commonly used as a vehicle
for private equity funds in your jurisdiction?
Most PE
funds with a presence in Hong Kong are established in offshore tax havens and
are managed or advised from Hong Kong. These PE funds are usually structured as
limited liability partnerships in jurisdictions like the Cayman Island, with
one general partner. Some PE funds established in Hong Kong also take the form
of limited liability companies.
7. Are these structures taxed, tax exempt or tax transparent
(flow through structures) for domestic and foreign investors?
Limited
liability partnerships and companies
Limited
liability partnerships and companies are generally not tax transparent in Hong
Kong. The profits tax liability of a partnership is usually calculated by
applying, to the total assessable profits of the partnership, either the:
·
Standard
tax rate (in the case of a partnership of individuals).
·
Corporate
tax rate (if the partnership is comprised only of corporations).
However,
a partnership's tax liability is calculated by determining the tax liability of
each partner individually, if either:
·
The
partnership is comprised of both individual and corporate partners. Each
partner is taxed individually as different profit tax rates apply to
individuals and companies.
·
Some
partners have losses to carry forward from previous assessment years.
Limited
liability partnerships and companies are taxed in Hong Kong on any profits
derived from carrying on a trade or business in Hong Kong, unless they qualify
for one of the following profits tax-exempt investment schemes:
·
A
collective investment scheme authorised by the Securities and Futures
Commission (SFC). These generally consist of funds organised as unit trusts and
mutual funds, investment-linked assurance schemes, pooled-retirement funds, MPF
master trust schemes and MPF pooled investment funds.
·
An
investment scheme where the Commissioner of Inland Revenue of Hong Kong is
satisfied that the scheme both:
o is a bona fide widely
held investment scheme;
o complies with the
requirements of a supervisory authority within an acceptable regime.
This usually applies
to investment schemes outside Hong Kong and recognised and regulated by their
home jurisdiction. This includes money market, open end funds and other
similarly regulated funds from one of a list of SFC recognised jurisdictions
(for example, Australia, France, Germany, the US, UK or Taiwan).
Offshore
funds
The Revenue (Profits Tax Exemption for
Offshore Funds) Ordinance 2006 amended the IRO. This provides that an offshore
fund is exempt from profits tax if all of the following apply:
·
The
fund is non-resident in Hong Kong.
·
The
fund's activities in Hong Kong are limited to "specified transaction"
(such as transaction in securities, future contracts or foreign exchange
contracts).
·
The
transactions are carried out through or arranged by a specified person.
Specified person means a corporation licensed or an authorised financial
institution registered under the Securities and Futures Ordinance to carry on
regulated activities.
Due to a technical interpretation of the
law by the Inland Revenue Department, transactions relating to the offerings of
private companies in Hong Kong (defined under the Companies Ordinance as having
not more than 50 investors) are not exempted. Therefore, the exemption only
exists for investments in the offerings of either listed or unlisted public
companies.
8. What (if any) structures commonly used for private equity
funds in other jurisdictions are regarded in your jurisdiction as not being tax
transparent (in so far as they invest in companies in your jurisdiction)? What
parallel domestic structures are typically used in these circumstances?
PE funds
are commonly structured as limited liability partnerships in other tax havens,
but they are not tax transparent in Hong Kong. Some PE funds established in
Hong Kong take the form of limited liability companies.
Investment
objectives
The most
common objective of PE funds is to achieve capital appreciation on an exit from
the portfolio companies. The average life cycle is from three to six years and
the typical average rate of return sought is from 30% to 40% over the fund's
life expectancy.
Fund
regulation and licensing
A PE
fund's sponsors, principals and managers only need to be licensed if they carry
on a regulated activity in Hong Kong. Regulated activities are defined as (Securities and Futures Ordinance
(Cap. 571 of the Laws of Hong Kong) (SFO)):
·
Dealing
in securities.
·
Dealing
in future contracts.
·
Leveraged
foreign exchange trading.
·
Advising
on securities.
·
Advising
on future contracts.
·
Advising
on corporate finance.
·
Providing
automated trading services.
·
Securities
margin financing.
·
Asset
management.
·
Providing
credit rating service.
Among these, dealing in securities is most
relevant to a PE sponsor or manager. However, the meaning of
"securities" in this context does not include shares or debentures of
a private company within the meaning of section 29 of the CO. Therefore, if a
PE fund only invests in shares of these private companies in Hong Kong, the
sponsor or the manager may not be required to obtain a licence from or register
with the SFC. However, many sponsors and managers will continue to advise or
deal in the shares of the portfolio companies after they are listed. Therefore,
they usually obtain a licence from the SFC.
11. Are private equity funds regulated as investment companies
or otherwise and, if so, what are the consequences? Are there any exemptions?
Regulation
The SFO regulates, among other things, the
authorisation and operation of collective investment schemes, which is broadly
defined and can include PE funds. If a PE fund qualifies as a collective
investment scheme, it is subject to specific regulations including restrictions
on public offerings.
It is an offence to issue an advertisement,
invitation or document which is or contains an invitation to the Hong Kong
public to invest in collective investment schemes, unless either (section 103, SFO):
·
The
SFC has authorised it.
·
An
exemption applies.
If the PE fund is structured as a limited
liability company, any prospectus, notice, circular, brochure, advertisement or
other documents which offers or invites offers to subscribe for shares in the
company must generally comply with the SFO's content and registration
requirements (CO).
Exemptions
Professional
investor exemption. Section 103 of the SFO provides exemptions
from the content and registration requirements for offers made only to
professional investors. The term "professional investors" is broadly
defined in the SFO and the Securities and Futures (Professional Investor) Rules
to include:
·
A
recognised exchange company or recognised clearing house.
·
An
intermediary or other entity providing investment services and regulated under
the laws of any place outside Hong Kong.
·
An
authorised financial institution or any bank which is not an authorised
financial institution but is regulated under the law of any place outside Hong
Kong.
·
An
insurer authorised under the Insurance Companies Ordinance (Cap. 41 of the Laws
of Hong Kong) or any other person carrying on insurance business and regulated
under the law of any place outside Hong Kong.
·
An
authorised collective investment scheme under the SFO, or any similar overseas
collective investment scheme regulated and permitted under the law of that
foreign jurisdiction.
·
A
trust company with total assets worth at least HK$40 million.
·
An
individual, alone or with any of his associates on a joint account, with a
portfolio worth at least HK$8 million.
·
A
corporation or partnership with either a portfolio worth at least HK$8 million
or total assets worth at least HK$40 million.
Offerings in Hong Kong are often
co-ordinated to comply with the US laws on public offerings (including
sophisticated and institutional investor definitions), as frequently there are
US resident investors.
Private
placement exemption. There is no statutory private placement
exemption. However, if a PE fund is structured as a general partnership or a
private company under the CO, an offer to 50 persons or fewer is not deemed to
be a public offer of securities. Therefore, this type of "private
placement" can be exempted from the requirement to issue a prospectus.
This exemption can be used in conjunction
with the professional investor exemption. Therefore, an offer to 50 persons or
fewer who are not professional investors in conjunction with an offer to an
unlimited number of professional investors does not constitute a public offer.
A fund aiming to raise capital in Hong Kong
should comply with the following general guidelines:
·
The
offering should not be publicly advertised or publicised.
·
The
offer should be made to fewer than 50 non-professional investors.
·
Each
offering document should be serial numbered by the fund sponsor and contain a
prescribed warning statement (as outlined in the CO) on its cover.
·
All
recipients must be warned that the offering is not made to the public, is
restrictive and that the offer document should not be passed on to anyone.
There
are no direct restrictions on investors in PE funds. However, there may be
restrictions on soliciting investors for capital, which limits marketing (see Question
11, Regulation). To avoid this restriction, PE funds usually
require potential investors to be high net-worth individuals, pension funds,
insurance companies or other financial institutions.
13. Are there any statutory or other limits on maximum or
minimum investment periods, amounts or transfers of investments in private
equity funds?
There
are no statutory limits on maximum or minimum investment periods, amounts or
transfers of investment in PE funds. There may be contractual restrictions
relating to these matters and detailed terms are usually set out in the limited
liability partnership agreement.
Investor
protection
14. How is the relationship between the investor and the fund
governed? What protections do investors in the fund typically seek?
For many
US dollar denominated offshore funds, the relationship between the investors
(limited partners) (LPs), the general partner (GP) and the fund is mainly
governed by a limited liability partnership agreement (LPA). The LPA specifies
the rights and obligations of the parties and typically provides the following
mechanisms to protect LPs' interests:
·
Restrictions
on the maximum amount of investment that the fund can invest in a single
portfolio company.
·
LPs'
rights to appoint members to the investment advisory committee.
·
LPs'
rights to remove the general partner under certain specified conditions.
·
LPs'
rights to access the fund's books and records.
·
LPs'
rights to terminate the GP's ability to call the remaining capital commitments
to make new investments if certain events occur (for example, key individuals
have left the GP or the fund manager).
·
Restrictions
on the transfer of the general partner's interest in the fund.
Interests
in portfolio companies
15. What forms of equity and debt interest are commonly taken by
a private equity fund in a portfolio company? What are the relative advantages
and disadvantages of each? Are there any restrictions on the issue or transfer
of shares by law?
Common
forms
The PE's investments commonly take the form
of preferred shares and/or equity-linked debts, such as convertible bonds. In
buyouts, part of the investment may also take the form of loan notes.
Advantages
and disadvantages
The investment agreement governing PE
investments usually imposes restrictions on the transfer of shares. Therefore,
conversion rights afforded by equity-linked debts give a PE investor
flexibility in deciding how to maximise its investment on the basis of the
investee company's performance. In addition, as all equity securities rank
behind all debt in liquidation, debt is preferable to a PE investor.
Restrictions
If the investee is a Hong Kong company
incorporated under the CO, the company directors can only issue and allot new
shares after obtaining shareholders' approval in general shareholder meetings.
However, this does not apply to allotments of shares to the founder members or
allotments by pro-rata offers to the existing shareholders.
If the investee is a private company in
Hong Kong, the articles of association must restrict the transfer of its
shares, so that the company retains private status. Another common restriction
for PE investments is shareholders' pre-emption rights.
Buyouts
16. Is it common for buyouts of private companies to take place
by auction? If so, which legislation and rules apply?
Buyouts
of private companies by auction are not common. There are no rules or
legislation directly governing the sale of private companies by auction.
17. Are buyouts of listed companies (public-to-private
transactions) common? If so, which legislation and rules apply?
Buyouts
of listed companies sometimes occur when the PE investors provide financing to
founders or managers to buy the listed companies and privatise them. These transactions
are governed by the:
·
CO.
·
Codes
on Takeovers and Mergers and Share Repurchases (Takeovers Code).
·
Rules
Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited
(Listing Rules), if the company is listed in Hong Kong.
The law governing the takeover of public
companies in Hong Kong is very complex and strictly enforced. Even internal
discussions relating to these activities must be regulated and carefully
considered.
Principal
documentation
·
Sale and purchase agreement. This sets out the
terms relating to the share acquisition between the selling shareholders and
the acquisition company.
·
Subscription and shareholder agreement (investment
agreement).
This sets out the terms relating to the subscription of shares in the newly
incorporated company and regulates ongoing operational matters of the company
post-buyout. A revised and restated memorandum and articles of association is
generally prepared alongside the investment agreement.
If a buyout is partially financed by the
debt providers, facilities/loan agreements, security documents and
inter-creditor agreements may also be required.
Buyer
protection
19. What forms of contractual buyer protection do private equity
funds commonly request from sellers and/or management? Are these contractual
protections different for buyouts of listed companies (public-to-private
transactions)?
Representations
and warranties
PE investors usually require
representations and warranties from the seller, including the:
·
Seller's
title to shares and capacity/authority to complete the transaction.
·
Investee
company's title to its assets and the assets' condition.
·
Proper
preparation of accounting records and statutory accounts of the investee
company.
·
Investee
company's material contracts.
·
Investee
company's employees.
·
Investee
company's compliance with applicable laws and regulations.
·
Investee
company's litigation matters and potential risks.
In the context of a management buyout
(MBO), the seller usually insists that the warranties are given "so far as
the seller is aware" and that the knowledge of the management is imputed
to the purchaser. This is so that the purchaser cannot bring a claim relating
to matters that the management knew about before completion. The PE investor
may also ask the management to give warranties in the investment agreement
both:
·
Regarding
the management's capacity to enter into the transaction (for example, that there
is no breach of any existing agreement to which the management is a party).
·
That
the management has no knowledge that anything outside the seller's disclosure
letter should be disclosed.
Covenants
The investment agreement commonly includes
restrictive covenants from the management in favour of the PE investor.
Indemnities
and guarantees
PE investors require indemnities for any
loss arising from a breach of warranties by the seller or management, in
addition to damages for breach of warranty. If the seller is a special purpose
vehicle, indemnities and/or guarantees are also required from its parent
company with sufficient funds to honour its indemnity obligation.
Tax
indemnities
PE investors usually require tax
indemnities to protect the value of their investment against any tax
liabilities which have not been provided for in the investee company's
accounts.
Public-to-private
transactions
In addition to the standard buyer
protection provisions (see
above), transactions with public companies often include provisions
outlining transactional deal-breakers under the Takeovers Code and the Listing
Rules. These include lack of shareholder approval, regulatory compliance and
breach of covenants on the proper disclosure and handling of the takeover by
the seller or company to be purchased. There may also be a material adverse
change/effect clause, which provides a catch-all for various market, investor
or insider events that may happen to a public company during the course of a
transaction.
·
A
duty to maintain confidentially with regard to information relating to the
company and its business.
·
Fiduciary
duties if they are directors.
·
Duties
of care and skill.
In addition, the Companies Ordinance
imposes numerous statutory duties on directors (for example, to keep proper
books and accounts, and properly file documents and returns at the Companies Registry).
These duties are owed to the company and can generally be enforced by the
company.
Directors of public companies are subject
to additional statutory duties under the SFO, the Listing Rules and the
Takeovers Code (during the course of a takeover). These include prohibitions on
insider trading and duties relating to fair dealing with minority shareholders
and takeover offers.
21. What terms of employment are typically imposed on management
by the private equity investor in an MBO?
·
Non-compete
covenants.
·
Non-solicitation
covenants.
·
Non-disclosure
covenants.
·
Compulsory
sale of shares on departure.
22. What measures are commonly used to give a private equity
fund a level of management control over the activities of the portfolio
company? Are such protections more likely to be given in the shareholders'
agreement or company governance documents?
To have
some level of management control, PE investors usually require various special
rights, such as:
·
A
right to appoint director(s) on the board of the investee company.
·
A
right to appoint the chief financial officer or financial manager of the
investee company.
·
Veto
rights over major corporate actions of the investee company.
·
Information
and inspection rights.
These rights are usually found in both the
investment agreement and the company's memorandum and articles of association,
to give the public notice of these rights.
Debt
financing
23. What percentage of finance is typically provided by debt and
what form does that debt financing usually take?
The
choice of debt as a financing capital depends, to a certain extent, on the
relative cost of capital and the willingness of the PE investor to take equity
versus debt. For venture capital or development capital investments, PE
investors traditionally only seek equity stakes or equity linked instruments,
due to the potential for appreciation in equity on exit.
However, for buyouts, debt (often in the
form of notes) is usually used in combination with equity. Senior debt
(including term facilities and revolving credit facilities) and junior debt
(that is, mezzanine debts or high yield bonds) may constitute part of the
financing required for buyout.
Lender
protection
Security
The security structure usually consists of
the borrower (typically the investee group company that is closest to the core
assets of the business) granting a charge over its assets. The remaining
investee group companies guarantee the borrower's obligations supported by
charges over the assets of those companies, including the shares of their subsidiaries.
Contractual
and structural mechanisms
Positive
and negative undertakings. Undertakings aim to ensure that
business is maintained and operated lawfully within certain agreed parameters,
to prevent any leakage or diminution of the company's value that may be
prejudicial to the position of debt providers.
Financial
covenants. Financial covenants both:
·
Enable
debt providers to monitor the financial strength of the borrower and the
borrower group.
·
In
the case of a breach of covenant, give debt providers an ability to accelerate
the debt.
Subordination. Subordination is commonly used
where the investee company has existing inter-company indebtedness or acquired
shareholders' loans.
Financial
assistance
25. Are there rules preventing a company from giving financial
assistance for the purpose of assisting a purchase of shares in the company? If
so, how does this affect the ability of a target company in a buyout to give
security to lenders? Are there exemptions and, if so, which are most commonly
used in the context of private equity transactions?
Rules
It is generally not lawful for a Hong Kong
company or any of its subsidiaries to (CO):
·
Give
financial assistance to a person acquiring the company's shares, whether it is
given before or at the time of the acquisition, directly or indirectly.
·
Reduce
or discharge any liability incurred for the purpose of acquiring the company's
shares.
Financial assistance is statutorily defined
as:
·
A
gift.
·
A
guarantee, security, indemnity, release or waiver.
·
A
loan, novation or assignment of a loan.
·
Any
other financial assistance resulting in the reduction of the company's net
assets to a material extent.
If a target company gives a security to
lenders providing debt finance to the purchaser in a buyout, this may constitute
unlawful prohibited financial assistance unless an exemption applies.
Exemptions
There are specific exempted transactions
that do not fall within the general prohibition. The prohibition is even more
relaxed for unlisted companies, which can give financial assistance for the
acquisition of its shares (or, if it is a subsidiary of an unlisted company,
its holding company's shares) if the:
·
Assistance
does not reduce the company's net assets or, if it does, the assistance is
provided out of distributable profits.
·
Board
makes a statutory statement confirming that, among other things, the company is
and will remain solvent.
·
Company's
shareholders approved the financial assistance by special resolution within 30
days of the board making the statutory statement. If the resolution is in the
form of unanimous written resolution, a copy of the statement must be supplied
to each member.
The directors' statement must be delivered
to the Registrar of Companies together with a copy of the special resolution
(if it is required) within 15 days of passing the resolution. The financial
assistance must:
·
Not
be given until the 29th day after the last relevant special resolution was
passed (unless every member of the company voted for the resolution).
·
Be
given within three months from the date on which the majority of the directors
proposed to give the assistance made in their statement.
Insolvent
liquidation
Secured
creditors can pay themselves out of their security. They rank as unsecured
creditors for any balance remaining unpaid. The company's assets are generally
paid in the following order:
·
Liquidation
costs.
·
Preferential
creditors. These are divided into four categories with the following order of priority
o
employees;
o
government;
o
small
depositors of licensed banks; and
o
insurers.
·
Floating
charge holders.
·
Unsecured
creditors.
·
Shareholders.
Equity
appreciation
27. Can a debt holder achieve equity appreciation through
conversion features such as rights, warrants or options?
Receiving
appreciation through conversion features is not prohibited under Hong Kong law.
However, the company must ensure that any equity converted from the convertible
securities does not exceed the company's authorised share capital without
shareholder approval.
Portfolio
company management
28. What management incentives are most commonly used to
encourage portfolio company management to produce healthy income returns and
facilitate a successful exit from a private equity transaction?
29.
Are any tax reliefs or incentives available to portfolio company managers
investing in their company?
There are no specific tax reliefs or incentives aimed at
encouraging portfolio company managers to invest in their company.
30.
Are there any restrictions on dividends, interest payments and other payments
by a portfolio company to its investors?
The
basic principles governing all payments by a company to its members are:
·
A
company's distributions must not exceed its realised profits.
·
Contributed
share capital, including share premiums and capital redemption reserve should
be returned to the members only on the winding-up of the company.
Exit strategies
31.
What forms of exit are typically used to realise a private equity fund's
investment in a successful company? What are the relative advantages and
disadvantages of each?
Forms of exit
The most
common forms of exit strategy are:
·
Initial
public offering (IPO).
·
Trade
sale.
·
Secondary
buyout.
Advantages and
disadvantages
IPO. An IPO
may help a PE investor to obtain a higher valuation for its business than a
trade sale or a secondary buyout. However, a successful IPO depends on the
capital market conditions. In addition, listing rules of that jurisdiction or
the underwriting agreement may impose lock-up periods on the shares owned by
the PE investor, preventing a quick exit.
Trade sale. A major incentive for the purchaser in a trade sale is to achieve
business synergies. Therefore, the purchaser may be willing to pay a premium to
acquire the shares from the PE investors. Trade sales are less dependent on
capital market conditions and can provide a more predictable sale price.
Secondary buyout. Secondary buyouts can provide a PE investor with access to
liquidity and may be quicker when compared to an IPO or a trade sale.
32.
What forms of exit are typically used to end the private equity fund's
investment in an unsuccessful/distressed company? What are the relative
advantages and disadvantages of each?
Forms of
exit
The common forms of exit for unsuccessful
investment are repurchase or redemption. The investor exercises its mandatory
repurchase rights and requires the investee company or its majority shareholder
to repurchase or redeem the shares owned by the PE investor after either:
·
A
certain time period has elapsed following the investments.
·
The
portfolio company is voluntarily wound up.
Advantages
and disadvantages
For a mandatory repurchase, the PE investor
agreement specifies the buyback price or the formula for calculating the price.
The PE investor can get some money back if the investee company or its majority
shareholder obliged to repurchase is solvent. If the investee company or its
majority shareholder redeems or repurchases, there may be restrictions on the
company's ability to repurchase its own shares (provided in the Companies
Ordinance or the company's constitutional documents).
For voluntary winding-up, repurchase or
redemption are the last resort. As equity holders, the PE investor ranks behind
the company's creditors in priority and may face a write-off on its entire
investment.
Private equity/venture capital associations
Hong Kong Venture Capital and Private
Equity Association (HKVCA)
Status. The HKVCA is a non-governmental organisation.
Membership. HKVCA membership is open to both corporations and consultancy
firms. There are two categories of membership within HKVCA: full membership and
associate membership. Full membership includes institutions that directly
invest in the venture capital and private equity. Associate membership includes
institutions or individuals that are directly or indirectly associated with
venture capital and private equity, including financial institutions, law
firms, accounting firms or consultancy firms.
Principal activities. HKVCA members have monthly meetings and various courses on
private equity investments.
Published guidelines. There are no guidelines published by the HKVCA.
Online
resources
Inland
Revenue Department
Description. Hong Kong IRD guide to profits
tax exemption for offshore funds.
Contributor profiles
Simon Luk, Chairman of Asian Practice and
Partner
Winston & Strawn
Professional qualifications.
District of Columbia, Attorney; Hong Kong, Attorney; New York, Attorney
Areas of practice. Automotive and
transportation industry; corporate lending; capital markets: debt investment
and trading; project finance; international labour and employee relations;
private equity LBOs/mergers, acquisitions, divestitures; private equity funds;
venture capital/growth equity/emerging companies; PIPE transactions; corporate
governance; mergers and acquisitions; securities offerings; foreign direct
investment; joint venture.
Non-professional qualifications. Member
of the Chinese General Chamber of Commerce.
Recent transactions
·
Advising
a private offshore fund in its negotiation and entering into of a framework
agreement with a PRC real estate company for the co-operation among the parties
in the potential development of an outlet mall project in Shanghai by the
client and the development of a hotel and other commercial establishments by
the PRC company.
·
Representing
Winner Medical Group Inc. (WWIN: NASDAQ), a leading medical disposable products
manufacturer in China, in its going-private transaction, which closed on 11
December 2012.
·
Representing
Duff & Phelps Securities, LLC, financial adviser to the special committee
of the board of directors of Zhongpin, Inc. (HOGS: NASDAQ), in its going-private
transaction.
Languages. English, Mandarin, Cantonese
Professional associations/memberships. Member
of the New York State Bar Association and the Law Society of Hong Kong.
Publications. Round table: Mergers &
Acquisitions, CorporateLiveWire.com, December 2012 (www.corporatelivewire.com/round-tables.html?id=mergers-acquisitions);
Mergers and Acquisitions multi-jurisdictional guide 2012-13, PLC Which lawyer?,
November 2012; Going private in the US, China Business Law Journal, August
2012.
Mark Jacobsen, Registered Foreign Lawyer
Winston & Strawn
Professional qualifications.
California, Attorney
Areas of practice. Public finance; private
equity LBOs/mergers, acquisitions, divestitures; PIPE transactions; corporate
governance; mergers and acquisitions; securities offerings; foreign direct
investment; joint venture; commercial transactions; fund formation.
Non-professional qualifications. Company
Secretary to The Mekong Club, a Hong Kong based non-profit charity that fights
the business of human slavery.
Recent transactions
·
Representing
Winner Medical Group Inc. (WWIN: NASDAQ), a leading medical disposable products
manufacturer in China, in its going-private transaction which closed on 11
December 2012.
·
Advising
on H.K. and U.S. IPOs, including S-1 and A-1 filings.
·
Assisting
in S-3 shelf-registrations and PIPE transactions.
·
Advising
on going private/going dark transactions.
·
Advising
various reporting companies on 34 Act compliance issues, including SOX
implementation.
·
Advising
various funds on securities laws in the PRC in relation to fundraising
exercises.
Languages. English; Mandarin
