What are the key rules/laws relevant to M&A and who are the key regulatory authorities?
Hong Kong is a key financial hub, more generally for the wider Asia-Pacific region and specifically for investments into and out of China. Offshore companies are involved in a significant number of Chinese and other Asian corporate structures and in cross-border corporate transactions. Cayman, BVI and Bermuda are the most popular offshore jurisdictions for these purposes.
The primary sources of M&A law and regulation involving an Offshore Entity are the respective company or partnership legislation and the common law of the relevant jurisdiction where the Offshore Entity is domiciled. Specifically:
(a) for Cayman Islands entities: (i) Companies Law (2016 Revision) – for Cayman Islands companies; (ii) Limited Liability Companies Law, 2016 – for Cayman Islands limited liability companies; (iii) Exempted Limited Partnership Law, 2014 – for Cayman Islands exempted limited partnerships and (iv) other legislation particularly if the entity is regulated as a matter of Cayman law.
(b) for Bermuda entities: (i) Companies Act 1981 (as amended) – for Bermuda companies; (ii) Limited Liability Companies Act 2016 – for Bermuda limited liability companies; (iii) Exempted Partnerships Act 1992 (as amended) – for Bermuda partnerships, and (iv) other legislation particularly if the entity is regulated as a matter of Bermuda law.
(c) for BVI entities: (i) the BVI Business Companies Act 2004 (as amended) – for BVI companies; (ii) the Partnership Act, 1996 and the Limited Partnership Act, 2017 – for BVI partnerships, and (iii) other legislation particularly if the entity is regulated as a matter of BVI law.
In Hong Kong, companies incorporated in the Cayman Islands and Bermuda as exempted companies are widely used as the listing vehicle for corporate groups listed on the Stock Exchange of Hong Kong Limited (the “SEHK”), whereas companies incorporated in the BVI are often utilized as private holding companies. As a consequence, a listing on the SEHK subjects the listing vehicle (the “Offshore Listing Vehicle”) to the listing rules of the SEHK (the “Listing Rules”). Further, as required by the Listing Rules, the provisions of the Codes on Takeovers and Mergers and Share Repurchases (the “Takeover Code”) will be required to be complied with in cases of takeovers, mergers, share buy-backs and acquisitions involving a public company under the Takeover Code, which includes an Offshore Listing Vehicle, as well as certain unlisted companies with a significant number of Hong Kong shareholders.
Other legislation of Hong Kong, such as the Banking Ordinance, the Insurance Ordinance and the Securities and Futures Ordinance, may be applicable for companies in the relevant areas.
What is the current state of the market?
In early 2017, the markets globally witnessed a general decline in volume and deal flow. This decline was precipitated by several notable events, including the United Kingdom’s decision to withdraw from the European Union and the presidential election in the United States. Moreover, China pursued a more strategic approach to outbound M&A, of which the resulting restrictions on capital outflows led to a decline in the volume and value of cross-border M&A transactions since 2016.
M&A activity in Hong Kong similarly witnessed a decline, in line with global market trends. In the first half of 2017, the Hong Kong market witnessed approximately 68 equity acquisitions among companies listed on the SEHK, with an aggregate deal value of approximately HK$45.72 billion (US$5.858 billion).
However, towards the later period of 2017, the market experienced an increase of M&A deals. This was largely driven by a number of mainland Chinese firms and companies investing into or acquiring Hong Kong property companies. Major property M&A deals included the US$23.3 billion spin-off of the share capital of Wharf Real Estate Investment to its shareholders, the US$5.15 billion acquisition of the Centre tower and the Link REIT’s US$2.95 billion proposed sale of assets.
In the second half of 2017, there were approximately 85 equity acquisitions among companies listed on the SEHK with an aggregate deal value of approximately HK$33.3 billion (US$4.26 billion). Examples of such acquisitions include China Investment International Limited’s acquisition of a 28.01% stake in Kenford Group Holdings Limited (SEHK: 464) for HK$200 million (approximately US$25.6 million) and investor Zhang Jinbing’s acquisition of a 75% stake in Chong Kin Group Holdings Limited (SEHK: 1609) from Pioneer Investment Limited for HK$660 million (approximately US$84 million).
In addition, a number of insurance companies have been involved in M&A deals in Hong Kong. According to data from Thomson Reuters, M&A transactions involving Hong Kong insurers reached US$2.84 billion in 2017, up from US$1 billion in 2016. AIA’s US$3.05 billion acquisition of Commonwealth Bank of Australia’s life insurance business in Australia and New Zealand is a good example of a major insurance M&A deal in the wider Asia-Pacific region. Another example is the HK$7.1 billion acquisition of Hong Kong’s tenth largest life insurer, Hong Kong Life Insurance Ltd., by a consortium of buyers including UCF Capital, from Chong Hing Bank and Oversea-Chinese Banking Corp.
Hong Kong continues to retain its appeal in connection with both inbound and outbound M&A activities. Such appeal is fueled by several factors. Firstly, the city remains a central financial and trading hub, both in Asia and globally. Secondly, it offers favourable conditions for large corporations and favourable conditions for trade. Finally, it is significant that Hong Kong shares a cultural and geographic link with mainland China. This has fueled the trend of mainland Chinese companies buying listed companies in Hong Kong, and subsequently using that listed status as a platform for further fundraising.
Which market sectors have been particularly active recently?
The real estate and property sectors as well as insurance sectors continue to dominate. Outside of these sectors, finance, construction/building, computers and electronics, and professional services are also significant sectors.
What do you believe will be the three most significant factors influencing M&A activity over the next 2 years?
Given the popularity of the Hong Kong market with mainland Chinese investors, levels of M&A activities are generally tied to regulatory and economic developments in China.
In particular, it is envisaged that as mainland Chinese regulators may be relaxing tough foreign exchange controls and providing greater policy clarity this year, it should result in greater availability of funds which could in turn kick-start significant outbound Chinese M&A growth.
It is estimated that the following are the three most significant factors that could influence M&A activity over the next 2 years: (1) the pace of China’s economic growth, (2) the trend of local companies already in a globalization trend continuing to be on the lookout for suitable overseas investment opportunities, and (3) the prevalence of H-shares and red chips continuing to make use of their listing vehicles in Hong Kong for M&A activity.
What are the key means of effecting the acquisition of a publicly traded company?
Privatisations of Offshore Listing Vehicles by way of schemes of arrangement continue to enjoy a significant degree of popularity in Hong Kong, for example, Bloomage BioTechnology Corporation Limited’s HK$3 billion privatisation by Grand Full Development Limited by way of a scheme of arrangement and subsequent delisting from the SEHK, and Bracell Limited’s US$1.1 billion privatisation by BHL Limited similarly by way of a scheme of arrangement and the subsequent delisting from the SEHK.
The Takeover Code requires that a scheme of arrangement used to effect a privatisation must be, amongst others, approved by at least 75% of the votes of disinterested shareholders voting in a general meeting, with no more than 10% of the total disinterested shares being voted against. Further, where any person seeks to use a scheme of arrangement to privatise a company and the proposal is either not recommended by the independent committee of the offeree company’s board or is not recommended as fair and reasonable by the financial adviser to the independent committee, all expenses incurred by the offeree company in connection with the proposal shall be borne by the person seeking to privatise the offeree company by way of the scheme of arrangement if the scheme of arrangement is not approved.
What information relating to a target company will be publicly available and to what extent is a target company obliged to disclose diligence related information to a potential acquirer?
An Offshore Listing Vehicle must comply with certain disclosure requirements pursuant to the Listing Rules, and amongst others, is required to make announcement of any information necessary to avoid a false market in its securities.
Please refer to the relevant Offshore Chapter for more detail on publicly available information and due diligence disclosure requirements in the respective offshore jurisdiction.
To what level of detail is due diligence customarily undertaken?
In most of the M&A transactions, the acquirer would usually conduct financial, business and legal due diligence on the target company.
In respect of legal due diligence, the acquirer would usually investigate the statutory books, major agreements and service agreements, details of leases, any loan and financing transactions, licenses and permits, as well as the particulars of any litigation and proceedings of the target and its group companies. The acquirer would usually submit a questionnaire to the seller (and/or its legal counsel) in respect of the target company. A legal due diligence report would usually be prepared, which could be comprehensive or relatively simple, reporting on disclosure against warranties given in the sale and purchase agreement. If the target company has assets and/or operations in China, it is usual practice for the acquirer to undertake a more in-depth and extensive due diligence.
An Offshore Listing Vehicle usually occupies the holding position in a corporate group structure. As part of the legal due diligence, an acquirer will normally carry out searches of publicly available information relating to the Offshore Listing Vehicle and its group companies. In Hong Kong, this will usually consist of searches at the relevant governmental authorities and registries, for example (and where applicable), the Companies Registry (in respect of the incorporation and registration of the target company), the Land Registry (in respect of the ownership of real property, mortgages and charges and other matters in respect of real property), the Trade Marks Registry (in respect of ownership of trademarks), the Patent Office (in respect of ownership of patents), the Official Receiver’s Office (in respect of any petition for compulsory winding up), and the Court Registry(ies) (in respect of any proceedings that have been taken). This serves as an independent check against the information and documents provided by the seller.
Please refer to the relevant Offshore Chapter for the level of detail of due diligence customarily undertaken in respect of such holding companies in the respective offshore jurisdiction.
What are the key decision-making organs of a target company and what approval rights do shareholders have?
Please refer to the relevant Offshore Chapter for the key decision-making organs of a target company and the approval rights of shareholders in the respective offshore jurisdiction.
What are the duties of the directors and controlling shareholders of a target company?
The board of directors of an Offshore Listing Vehicle will remain subject to the Listing Rules and must fulfil their fiduciary duties and duties of skill, care and diligence to a standard in accordance with the standard established by Hong Kong law. This means that every director must, in the performance of his duties as a director, amongst other things, act honestly and in good faith and in the interests of the company as a whole, and act for a proper purpose.
Please refer to the relevant Offshore Chapter for more detail on the duties of the directors and controlling shareholders of a target company incorporated in an offshore jurisdiction.
Do employees/other stakeholders have any specific approval, consultation or other rights?
Please refer to the relevant Offshore Chapter.
To what degree is conditionality an accepted market feature on acquisitions?
Outside of the regulatory sphere, conditionality is largely accepted as commercial consideration. It is not uncommon for acquisitions of stakes in Offshore Entities (not being Offshore Listing Vehicles) to be subject to various conditions precedent, including satisfactory due diligence and the lack of any material adverse change in the target’s financial and operational position subsequent to the execution of the share purchase agreement.
While acquisitions of Offshore Listing Vehicles are still subject to various conditions precedent, certain restrictions against conditionality as provided under the Takeover Code may be applicable.
What steps can an acquirer of a target company take to secure deal exclusivity?
Please refer to the relevant Offshore Chapter.
What other deal protection and costs coverage mechanisms are most frequently used by acquirers?
Please refer to the relevant Offshore Chapter.
Which forms of consideration are most commonly used?
Cash is the most common form of consideration in M&A transactions in Hong Kong, particularly for an acquisition of an Offshore Listing Vehicle, and company shares as consideration is less frequently used .Other forms of consideration are also used depending on the tax positions of the seller and buyer.
At what ownership levels by an acquirer is public disclosure required (whether acquiring a target company as a whole or a minority stake)?
Acquisitions that result in a change in control of an Offshore Listing Vehicle may trigger the requirement to make a mandatory general offer to all shareholders of the company pursuant to the Takeover Code.
Please refer to the relevant Offshore Chapter for more detail on public disclosure ownership thresholds for each offshore jurisdiction.
At what stage of negotiation is public disclosure required or customary?
Please refer to the relevant Offshore Chapter
Is there any maximum time period for negotiations or due diligence?
In general, acquisitions of larger and more international target companies with more businesses and / or assets will likely involve longer negotiations and / or due diligence.
Please refer to the relevant Offshore Chapter for more detail.
Are there any circumstances where a minimum price may be set for the shares in a target company?
An Offshore Listing Vehicle may be subject to provisions under the Listing Rules and/or the Takeover Code regarding the minimum price that may be set for its shares.
Please refer to the relevant Offshore Chapter for detail regarding each offshore jurisdiction.
Is it possible for target companies to provide financial assistance?
An Offshore Listing Vehicle is subject to the Listing Rules which regulate the provision of financial assistance. In particular, financial assistance provided or received by an Offshore Listing Vehicle’s group , from a commonly held entity is a connected transaction and will be subject to, amongst others, shareholder approval and disclosure requirements.
Please refer to the relevant Offshore Chapter for detail regarding each offshore jurisdiction.
Which governing law is customarily used on acquisitions?
The businesses and assets of an Offshore Entity would normally be held outside of an offshore jurisdiction. As such, the governing law of the agreements for the sale and purchase of an Offshore Entity would typically be the jurisdiction that the business or assets are located. In Hong Kong, such acquisition documentation is typically governed by the laws of Hong Kong or the People’s Republic of China, although English or New York law is also a popular choice amongst contracting parties.
What public-facing documentation must a buyer produce in connection with the acquisition of a listed company?
Acquisitions of stakes in Offshore Listing Vehicles which trigger the provisions of the Takeover Code require the buyer to produce an offer document, containing the information set out therein. This includes information regarding the offeror, the offeror’s intentions regarding the offeree company and its employees, and the resources for such offer.
What formalities are required in order to document a transfer of shares, including any local transfer taxes or duties?
An instrument of transfer would normally be required for a transfer of shares of an Offshore Entity. Hong Kong stamp duty may be applicable for transfer of shares registered at a Hong Kong branch share register of an Offshore Listing Vehicle.
Are hostile acquisitions a common feature?
In Hong Kong, hostile takeovers of an Offshore Listing Vehicle are relatively rare as the percentage of issued share capital in public hands is not significant. Controlling shareholder blocks are therefore often in a position to block any attempted takeover.
What protections do directors of a target company have against a hostile approach?
Please refer to the relevant Offshore Chapter for detail regarding each offshore jurisdiction.
Are there circumstances where a buyer may have to make a mandatory or compulsory offer for a target company?
Acquisitions that result in a change of control of an Offshore Listing Vehicle trigger a mandatory general offer to all shareholders of the Offshore Listing Vehicle pursuant to the Takeover Code, notwithstanding that such general offer requirement may be waived by the Hong Kong Securities and Futures Commission.
Please refer to the relevant Offshore Chapter for detail regarding each offshore jurisdiction.
If an acquirer does not obtain full control of a target company, what rights do minority shareholders enjoy?
Please refer to the relevant Offshore Chapter for detail regarding each offshore jurisdiction.
Is a mechanism available to compulsorily acquire minority stakes?
In Hong Kong, the scheme of arrangement and tender offer and compulsory acquisition are the two mechanisms that have been commonly used to acquire the minority stake of an Offshore Target Company.
This Hong Kong Q&A is part of the global guide to Mergers & Acquisitions. For a full list of jurisdictional Mergers & Acquisitions Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/mergers-acquisitions/