Public mergers and acquisitions in Hong Kong: overview

A Q&A guide to public mergers and acquisitions law in Hong Kong.

The country-specific Q&A looks at current market activity; the regulation of recommended and hostile bids; pre-bid formalities, including due diligence, stakebuilding and agreements; procedures for announcing and making an offer (including documentation and mandatory offers); consideration; post-bid considerations (including squeeze-out and de-listing procedures); defending hostile bids; tax issues; other regulatory requirements and restrictions; as well as any proposals for reform.

To compare answers across multiple jurisdictions visit the Country Q&A tool. This Q&A is part of the global guide to public mergers and acquisitions. For a full list of jurisdictional Q&As visit www.practicallaw.com/acquisitions-guide.

Contents

M&A activity

1. What is the current status of the M&A market in your jurisdiction?

In 2015, M&A activity targeting China and Hong Kong hit a record high both in terms of value and volume, with 1,972 deals valued at US$629.8 billion (source: Mergermarket). A series of restructuring exercises by Hong Kong conglomerates contributed significantly to deal values in early 2015.

Compared to the first half of 2015, deal values for the same period in 2016 were down by 27.2%, valued at US$204.5 billion. However, this is still the second highest value for deals in the first half of the year according to Mergermarket records.

The top industry sectors for China and Hong Kong M&A targets in 2015 and the first half of 2016 included:

  • Technology.

  • Industrial and chemicals.

  • Financial services.

  • Real estate.

Recent public M&A activity has been driven by a combination of:

  • Chinese Mainland companies acquiring Hong Kong listed vehicles in "backdoor listing" transactions.

  • De-listings from Hong Kong in favour of potential re-listing on the A-share market.

  • Owners taking advantage of undervalued companies in certain sectors.

In 2015, 44 public takeover transactions (including contractual takeover offers and privatisations by schemes of arrangement) for main board-listed companies closed (source: HKEX Factbook). In the first ten months of 2016, 38 public takeover transactions for main-board listed companies closed.

Significant recent Hong Kong public takeover transactions include:

  • Voluntary cash offer for New World China Land by New World Development Company.

  • Privatisation by Wumei Holdings of Wumart Stores by voluntary conditional offer for the H shares and domestic shares.

  • Partial offer by China Grand Automotive Services to acquire up to 75% of the shares in Baoxin Auto Group.

  • CRH (Enterprise)'s partial offer for up to 20% of China Resources Beer (Holdings) Company's issued share capital.

  • Privatisation of Dalian Wanda Commercial Properties by a consortium led by Dalian Wanda Group.

  • The recently launched voluntary conditional share exchange offer by Fullshare Holdings for China High Speed Transmission Equipment.

  • The recently launched mandatory offer by an indirect subsidiary of China Great Wall Asset Management for Armada Holdings (previously SCMP Group).

 
2. What are the main means of obtaining control of a public company?

The two main methods of obtaining control of a public company are:

  • Contractual general offer.

  • Scheme of arrangement.

Contractual general offer

A bidder makes an offer to the shareholders of a target to acquire all the shares in the company not already held by it. The Code on Takeovers and Mergers (Takeovers Code) (see Question 4) provides the framework for making takeover offers. A takeover offer can be voluntary or mandatory. Any person can make a voluntary offer to acquire control of a Hong Kong public company. In contrast, the Takeovers Code requires a mandatory offer to be made where a person's shareholding in the target reaches certain control triggers (see Question 16).

Scheme of arrangement

This is a statutory process through which a court can sanction proposed arrangements between a company and its shareholders. Listed companies commonly use a scheme of arrangement to achieve privatisation. This typically involves a proposal that all the shares in the target (except those owned by the bidder) are cancelled in return for cash or non-cash consideration from the bidder, followed by a de-listing of the target's shares.

The Takeovers Code requires that a scheme of arrangement used to effect a privatisation must be 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. The company law relevant to the target will also apply. For Hong Kong-incorporated companies, a scheme of arrangement must be approved by a 75% majority of the target's shareholders and sanctioned by the court (Companies Ordinance (Cap. 622)). Once approved, the scheme is binding on all shareholders (subject to filing formalities).

A scheme of arrangement must be acceptable to both the bidder and the target because it must be put to the target's shareholders and the target board co-ordinates the process. By comparison, takeover offers are made by a bidder and can be either friendly or hostile.

 

Hostile bids

3. Are hostile bids allowed? If so, are they common?

Hostile bids are permitted but uncommon. Many Hong Kong-listed companies are held by shareholders with significant controlling stakes, which makes it difficult for hostile bids to succeed.

 

Regulation and regulatory bodies

4. How are public takeovers and mergers regulated, and by whom?

Regulation

Public takeovers and mergers are governed by the following regulatory framework:

  • The Code on Takeovers and Mergers (Takeovers Code). This is issued and administered by the Securities and Future Commission (SFC) and is the key regulatory framework for Hong Kong public takeovers. The Takeovers Code applies to takeovers and mergers affecting both public companies (within the meaning defined in the Takeovers Code) and companies with a primary listing on The Stock Exchange of Hong Kong Limited (Stock Exchange). The primary purpose of the Takeovers Code is to ensure fair treatment for any affected shareholders. The Takeovers Code is made up of general principles (which set out the expected good standards of conduct), as well as more detailed rules. It does not have the force of law. However, any person in breach of the Takeovers Code can be subject to disciplinary action from the SFC, which includes:

    • public criticism/censure; and

    • ordering licensed securities market service providers to refrain from acting for the person in breach.

  • Companies Ordinance (Cap. 622). This applies to Hong Kong-incorporated companies and contains the statutory provisions governing schemes of arrangements and compulsory acquisitions (see Question 20). For companies incorporated in jurisdictions other than Hong Kong, the relevant local company law will apply.

  • The Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (Listing Rules). These govern the obligations of listed companies to comply with the Takeovers Code and contain provisions on withdrawal from the Stock Exchange where bidders are seeking to privatise a listed target. In addition, the Listing Rules require listed companies to disclose inside information as required under the Securities and Futures Ordinance and regulate the disclosure and shareholder approval requirements for transactions contemplated by listed companies. The Listing Rules also require listed companies to maintain a minimum level of public float (normally 25% or more of issued shares in public hands), which will be a relevant consideration in a takeover.

  • Securities and Futures Ordinance (Cap. 571) (SFO). This contains provisions requiring shareholders to disclose interests in securities in listed companies and provides listed companies with the power to investigate ownership of interests in its shares. The SFO also regulates the disclosure of inside information by listed companies and restricts insider dealing and other market misconduct offences that may be relevant in takeover scenarios.

Regulatory bodies

The principal regulators overseeing takeovers and mergers are the:

  • SFC. The SFC regulates takeovers and mergers under the Takeovers Code. The Takeovers Panel (a committee of the SFC) can review the SFC's decisions and consider novel, important or difficult cases referred by the SFC. The Takeovers Panel also hears disciplinary matters on breaches of the Takeovers Code.

  • Stock Exchange of Hong Kong Limited (Stock Exchange). The Stock Exchange is the primary regulator for listing matters and for monitoring compliance with the Listing Rules.

See box, The regulatory authorities.

Sector-specific regulation

In addition to the main regulatory framework there are also regulations for specific industry sectors. These regulate the ownership and control of companies in certain industries, including:

  • Banking Ordinance (Cap. 155). This regulates ownership of Hong Kong banks and is administered by the Hong Kong Monetary Authority.

  • Insurance Companies Ordinance (Cap. 41). This regulates the control of insurance companies and is overseen by the Office of the Commissioner of Insurance.

  • Telecommunications Ordinance (Cap. 106). This regulates Hong Kong's telecommunications industry and is overseen by the Communications Authority.

  • Broadcasting Ordinance (Cap. 562). This regulates the ownership of television licensees, which is also overseen by the Communications Authority.

  • Competition Ordinance (Cap. 619). This came into force in December 2015 and sets out a merger control regime which currently only applies to the telecommunications sector. The Communications Authority and the Competition Commission have concurrent jurisdiction in relation to mergers in the telecommunications sector.

See also Question 25.

 

Pre-bid

Due diligence

5. What due diligence enquiries does a bidder generally make before making a recommended bid and a hostile bid? What information is in the public domain?

Recommended bid

A bidder will usually conduct due diligence based on information available in the public domain. For recommended bids, the scope of due diligence is usually far more extensive. The target's board can permit the bidder access to additional due diligence information, subject to it entering into a confidentiality agreement.

The target's board must ensure that it complies with the requirements under both the Securities and Futures Ordinance (SFO) and the Listing Rules on disclosure of inside information (which is prevented on a selective basis). If any inside information is provided to the bidder by the target, strict confidentiality must be observed. If the target provides due diligence information, it will be obliged by the Takeovers Code to provide equal information to any bona fide competing bidder on request, even if the bidder is less welcome.

Where a bidder wishes to stake-build by buying shares in the market before launching its offer, its knowledge of any inside information from the target may prevent it from dealing (see Question 8).

Hostile bid

In a hostile bid situation, a target is unlikely to provide any non-public due diligence information and the bidder must rely solely on information in the public domain (see below, Public domain). However, if there are multiple bidders, any information that the target has provided to one bidder must be provided equally and promptly to another bidder on request.

Public domain

Publicly available information on Hong Kong listed companies includes:

  • Information required to be published under the Listing Rules and the SFO. This includes:

    • annual and interim reports containing financial information, corporate governance reports and, where applicable, reporting on environmental and social matters;

    • announcements of material inside information;

    • other announcements, circulars and listing documents relating to corporate actions and business developments; and

    • constitutional documents and (where made available), terms of reference of board committees.

  • Shareholding disclosures by directors and substantial shareholders.

  • Documents filed with the Companies Registry.

  • Information available from public searches, such as searches conducted at the:

    • Hong Kong courts;

    • Land Registry;

    • Business Registration Office; and

    • various government departments, such as the Official Receivers Office and Intellectual Property Department.

Secrecy

 
6. Are there any rules on maintaining secrecy until the bid is made?

The Takeovers Code emphasises that secrecy is vitally important until the public announcement of an offer. Secrecy must be preserved by all parties involved in the potential offer. Confidential information (particularly if it is price sensitive) about an offer or a proposed offer must be treated as secret and can only be passed on to another if it is necessary and that person is made aware of the need for secrecy.

Companies must disclose inside information to the public as soon as reasonably practicable, subject to certain safe harbours (Securities and Futures Ordinance). Discussions about a potential takeover offer typically amount to inside information.

The company can delay disclosure of an incomplete proposal or negotiation if it has taken reasonable precautions to preserve the confidentiality of the information and confidentiality has been preserved. However, if there is a leak, the safe harbour will no longer apply and disclosure will be required.

An announcement must be made before a formal offer announcement where (Takeovers Code):

  • There are rumours or speculation about a possible offer.

  • There is undue movement in the target's share price or in the volume of share turnover.

  • Negotiations or discussions are extended beyond a very restricted number of people (those who need to know at the companies concerned and their immediate advisers).

For details on when announcements are due, see Question 12.

Agreements with shareholders

 
7. Is it common to obtain a memorandum of understanding or undertaking from key shareholders to sell their shares? If so, are there any disclosure requirements or other restrictions on the nature or terms of the agreement?

Irrevocable undertakings to accept an offer are usually obtained from the holders of significant stakes (particularly the controlling shareholder in a recommended bid). The Takeovers Code regulates the practice of gathering irrevocable commitments by restricting the:

  • Timing when approaching shareholders to seek undertakings to accept the offer.

  • Number of shareholders who can be approached.

  • Information that can be provided by the bidder to those it intends to approach.

Details of any irrevocable undertakings obtained must be set out in the announcement of the firm intention to make an offer, setting out any circumstances in which they will cease to be binding. Disclosure must also be made in the offer document and the undertaking must be on display until the end of the offer period.

In addition, unless consent is obtained from the Securities and Futures Commission, a bidder must not make any arrangements with any shareholder to purchase or sell the target's securities, or to agree to accept an offer, if the arrangement has favourable conditions that will not be extended to all shareholders (known as a "special deal" under the Takeovers Code). This restriction applies:

  • During an offer.

  • When an offer is in contemplation.

  • For six months after the close of the offer.

Stakebuilding

 
8. If the bidder decides to build a stake in the target (either through a direct shareholding or by using derivatives) before announcing the bid, what disclosure requirements, restrictions or timetables apply?

Statutory obligations

If the bidder becomes interested in 5% (or more) of a listed target's relevant share capital (which includes shares and unissued shares which, if issued, would carry voting rights), he must disclose his interest (Securities and Futures Ordinance (SFO)). Once the 5% threshold is reached, a bidder must disclose certain changes in its interest (including when there is an increase or decrease in the percentage figure that results in a bidder's interest crossing over a whole percentage number above 5%). Disclosure must be made within three business days of the date when the disclosure obligation arose.

When calculating the number of shares the bidder is interested in, the bidder must aggregate deemed interests and derivative interests, including:

  • Deemed family interests.

  • Interests held by controlled companies.

  • Shares held in trust or contracts for purchase of shares.

  • Nominee arrangements.

  • Shares held where there is an agreement between two or more persons about the use, retention or disposal of the shares.

If the bidder is (or is controlled by) a director or chief executive of the target, the disclosure obligations are more extensive and require disclosure of all interests and deemed interests (not just those over 5%) and all changes in those interests.

A target also has the power to investigate ownership of its shares by sending a notice to any person that it reasonably believes is interested in its shares. A bidder receiving this notice must reply within a reasonable time, providing details of its shareholding interests.

A bidder will also be subject to the insider dealing regime under the SFO, which prevents it from dealing in the market if it has inside information relating to the target. Information about the contemplated takeover offer itself also constitutes inside information. However, the insider dealing regime does not prevent a bidder possessing knowledge of the fact of its intended takeover offer from dealing (or counselling a concert party to deal) for the purpose of stakebuilding only.

Takeovers Code

A key requirement in any stakebuilding exercise is the obligation to make a mandatory offer under Rule 26 of the Takeovers Code, which arises when certain control triggers are reached (see Question 16).

Dealings can also impact the price at which an offer must be made (see Question 18).

Listing Rules

If the bidder is itself listed on the Stock Exchange, it may be required by the Listing Rules to announce or obtain its shareholders' approval to acquire shares in the target, depending on the size of the acquisition relative to the bidder.

Agreements in recommended bids

 
9. If the board of the target company recommends a bid, is it common to have a formal agreement between the bidder and target? If so, what are the main issues that are likely to be covered in the agreement? To what extent can a target board agree not to solicit or recommend other offers?

It is uncommon for the board of the target to enter into a formal agreement for a recommended offer.

Agreements between the bidder and target are more common for schemes of arrangement. These set out the implementing steps and sometimes contain undertakings by the target on the operation of the business pending fulfilment of the scheme. The implementation agreement for a scheme will also deal with the costs of the scheme. Under the Takeovers Code, the costs must be borne by the bidder if the scheme is not recommended by the target's independent board committee or its financial adviser and the scheme is not approved.

The directors of the target must exercise their fiduciary duty and act in the best interests of the company as a whole. This duty prevents the target's board from agreeing not to solicit or recommend other offers (unless they are made subject to the exercise of the directors' fiduciary duty).

Break fees

 
10. Is it common on a recommended bid for the target, or the bidder, to agree to pay a break fee if the bid is not successful?

It is not common for break fees to be paid in recommended bids by either the target or the bidder.

The Takeovers Code regulates break fees or any other inducement fees payable by the bidder in connection with an offer that does not proceed.

If such an arrangement is agreed, the target's board and its financial adviser must confirm to the Securities and Futures Commission in writing that each of them believes that the fee is in the best interests of the shareholders. The fee must be limited to no more than 1% of the offer value. Any break fee or inducement fee arrangements must be disclosed in both the:

  • Announcement of the firm intention to make an offer.

  • Offer document.

The relevant documentation must be on display during the offer period.

Committed funding

 
11. Is committed funding required before announcing an offer?

A bidder must only announce a firm intention to make an offer when it has every reason to believe that it can and will continue to be able to implement the offer and it has sufficient resources to satisfy full acceptance of the offer.

The announcement must include confirmation by the bidder's financial adviser that resources available to the bidder are sufficient to satisfy full acceptance of the offer. This confirmation must also be included in the offer document.

The financial adviser must provide a direct written confirmation to the Securities and Futures Commission that the financial adviser is satisfied that there are sufficient resources available to satisfy the offer in full.

 

Announcing and making the offer

Making the bid public

12. How (and when) is a bid made public? Is the timetable altered if there is a competing bid?

Announcement of offers or potential offers

The target must make an announcement when a firm intention to make an offer is notified to its board from a serious source, irrespective of the attitude of the board in relation to the offer.

An earlier announcement may be required, including where:

  • The target is the subject of rumour and speculation about a possible offer.

  • There is undue movement in the target's share price or in the volume of share turnover.

  • Negotiations or discussions in relation to a possible offer will be extended to include more than a very restricted number of people (outside those who need to know in the companies concerned and their immediate advisers).

  • The acquisition of voting rights gives rise to an obligation to make a mandatory offer under Rule 26 of the Takeovers Code (see Question 16).

Before the target is approached, the responsibility for making an announcement rests with the bidder. Following an approach, the prime responsibility (except for mandatory offer announcements) shifts to the target's board.

The announcement of a firm intention to make an offer must contain all the terms and conditions of the offer and other information set out in the Takeovers Code, including the cash confirmation by the bidder's financial adviser (see Question 11).

Offer timetable

The offer timetable is set out below.

Day 0 (posting date). The bidder must post the offer document within 21 days (or if the offer includes securities, within 35 days) after the offer announcement. In a recommended bid, a composite document is usually prepared by the bidder and target, which also includes the target board's response and advice to shareholders. In a hostile bid or other situation where a composite document is not used, the target must send its response document to shareholders within 14 days from the posting date.

If a competing offer is announced, both bidders will be bound by the timetable established by posting the competing offer document.

Day 21/28 (first closing date). The earliest date on which an offer can close is 21 days after the posting date (if a composite document is used or the offer and response documents are posted on the same day), or 28 days if the target's response circular is issued later.

However, the offer must remain open for acceptances for 14 days after a conditional offer becomes or is declared unconditional as to acceptances or in all respects, and can remain open for up to four months where a bidder seeks to reach the 90% threshold to commence the compulsory acquisition procedure.

Day 39 (target announcements). The target board must not release any new material information (for example trading results or a material acquisition announcement) after 39 days following the posting date without the Securities and Futures Commission's (SFC) consent.

Day 46 (last day for revisions). The offer can only be revised up until 46 days after the posting date if it is still conditional as to acceptances. In competitive bid situations, the SFC will normally require revised offers to be published in accordance with an auction procedure.

Day 60 (last day for going unconditional). This is the last day for the offer to be declared unconditional as to acceptances (this can be extended with the SFC's consent in competitive situations).

All conditions must be fulfilled or the offer will lapse within 21 days of (whichever is later):

  • Regulatory and other consents have been obtained.

  • Shares in the target remain listed on the Stock Exchange.

  • The target is not subject to regulatory action or proceedings.

  • There has been no material adverse change in the target.

  • No dividends have been declared or paid by the target.

  • No frustrating action has been taken by the target.

Offer conditions

13. What conditions are usually attached to a takeover offer? Can an offer be made subject to the satisfaction of pre-conditions (and, if so, are there any restrictions on the content of these pre-conditions)?

Conditions

Unless the Securities and Futures Commission (SFC) agrees otherwise, all offers (except partial offers) must be conditional on the bidder receiving acceptances that result in the bidder (and its concert parties) holding more than 50% of the voting rights in the target. Voluntary offer conditions may set a higher percentage acceptance level, often 90% to enable the compulsory acquisition procedure to be invoked.

For a mandatory offer, the only condition that will normally be permitted is the 50% acceptance condition. However, voluntary offers can be made subject to other conditions. Conditions must not depend on judgements by the bidder and the fulfilment of these conditions must not be in the hands of the bidder only. Common conditions include that:

  • The SFC will not permit the bidder to invoke any conditions (other than the acceptance condition) unless the circumstances are of material significance to the bidder in the context of the offer.

  • The conditions specified in the formal announcement of the offer cannot subsequently be altered without the SFC's consent.

Pre-conditions

Pre-conditional offers are permitted. The bidder must consult with the SFC before announcing a pre-conditional possible offer. The announcement must be clear on whether the pre-conditions must be satisfied before an offer can be made or whether they are waivable. Depending on the circumstances, pre-conditions can be subjective (unlike offer conditions). See Question 25.

Bid documents

14. What documents do the target's shareholders receive on a recommended and hostile bid?

Following an offer announcement (see Question 12), the target's shareholders will receive the following main documents:

  • Offer document.

  • Target board's circular/response document.

In a recommended bid, the offer document and target board circular are typically combined into a composite document sent to shareholders. In a hostile bid, the target will not co-operate with the bidder and so a separate offer document and response document will be sent to shareholders.

Documents are expected to satisfy the highest standards of accuracy equivalent to prospectuses. Information must be adequately and fairly presented. Responsibility for the documents rests with the directors of the company preparing them. Where a composite document is prepared, the directors of the bidder are expected to take responsibility for the document (except for the information relating to the target, which is the responsibility of the target's directors).

Offer document

The offer document is prepared by the bidder and includes the terms of the offer. The Takeovers Code sets out the content requirements, including:

  • Details of the bidder.

  • Details of the offer and any conditions.

  • The bidder's intentions regarding the target company and its employees.

  • Shareholding and dealing disclosures.

  • Comparable information on the target's share price.

  • The financial adviser's confirmation on sufficiency of funds.

  • Additional information where the offer is a securities exchange offer.

The offer document must be accompanied by a form of acceptance prepared by the bidder, enabling the shareholders to accept the offer.

Target board's circular/response document

The target board's circular/response document is prepared by the target and includes the board's views on the offer and its recommendation to shareholders to accept or reject the offer. The independent financial adviser's advice is also included. The Takeovers Code also requires certain additional content including:

  • Shareholding and dealing disclosures.

  • Information on the target's share capital.

  • Financial information.

  • Details of material contracts and arrangements affecting directors and directors' service contracts.

Employee consultation

15. Are there any requirements for a target's board to inform or consult its employees about the offer?

There are no requirements for the target's board to inform or consult with its employees about the offer. Employees who are also shareholders will receive the same information as other shareholders.

Mandatory offers

16. Is there a requirement to make a mandatory offer?

The requirement to make a mandatory offer arises when certain control triggers are reached (Rule 26, Takeovers Code). This is generally when either:

  • A person (individually or together with parties acting in concert with it) acquires 30% or more of the voting rights in the target.

  • A person (individually or together with parties acting in concert with it) holds between 30% and 50% (both inclusive) of the voting rights and acquires additional voting rights, increasing its total holding by more than 2% from the lowest percentage held in the preceding 12 months (known as the "2% creeper").

Once the control triggers are reached, the bidder must make an offer to all other shareholders to acquire their shares. When considering if the control triggers have been reached, the Takeovers Code takes into account the shareholdings of the bidder and all persons "acting in concert" with it.

 

Consideration

17. What form of consideration is commonly offered on a public takeover?

The most common form of consideration offered in public takeovers in Hong Kong is cash. For a mandatory offer, the consideration must be in cash or have a cash alternative. For a voluntary offer, the consideration can be in cash or shares or a combination of both (subject to certain Takeovers Code provisions which specify the nature of the consideration to be paid in certain circumstances).

Cash offer

If the bidder (or any person acting in concert with it) purchased shares in the target for cash during the offer period or six months before it and the shares carry 10% or more of the voting rights of the target:

  • The offer must be in cash or accompanied by a cash alternative.

  • The offer price must not be less than the highest price paid by the bidder during that period.

Securities offer

If the bidder (or any person acting in concert with it) acquires 10% or more of the shares in the target in the three months before the offer, and the consideration paid by the bidder includes securities, the bidder must normally offer the securities to all shareholders of the same class.

 
18. Are there any regulations that provide for a minimum level of consideration?

For a mandatory offer, the consideration must be not less than the highest price paid by the bidder (or any person acting in concert with it) for shares in the target in the offer period and the preceding six months.

In a voluntary offer, if a bidder (or any person acting in concert with it) purchases shares in the target in the three months preceding the offer, the offer price must not be less than the highest price paid by the bidder during that period (unless consent is received from the Securities and Futures Commission). If, during the offer period, the bidder (or any person acting in concert with it) purchases shares above the offer price, the price must be increased so it is not less than the highest price paid by the bidder for the shares (for information on the minimum consideration payable where a cash offer is required, see Question 17).

The Takeovers Code also restricts voluntary offers being made at a price that is substantially below the market price. Typically this means at more than a 50% discount to either the closing price of the target's shares on the day before the offer announcement, or the previous five days' average closing price.

If the target has outstanding convertible securities, the bidder must make an appropriate offer for them. An offer based on the "see through" price for the relevant equity share capital underlying the convertible securities will be appropriate.

 
19. Are there additional restrictions or requirements on the consideration that a foreign bidder can offer to shareholders?

There are no additional restrictions or requirements on the consideration that a foreign bidder can offer to shareholders.

 

Post-bid

Compulsory purchase of minority shareholdings

20. Can a bidder compulsorily purchase the shares of remaining minority shareholders?

The Companies Ordinance contains "squeeze-out" provisions under which the bidder can give notice to buy out remaining minority shareholders following a takeover offer.

The takeover offer must have been made for all the shares (or all the shares of a particular class) not already held by the bidder and be on the same terms (except for differences required by laws applicable to overseas shareholders).

The bidder can exercise this right if it has acquired 90% of the shares to which the offer relates. "Shares to which the offer relates" excludes both:

  • Shares already held by the bidder (and its associates and nominees) at the date of the offer. Therefore, shares bought before the offer document is posted cannot be counted.

  • Shares acquired or contracted to be acquired by the bidder (and its associates and nominees) during the offer period otherwise than by acceptances of the offer, unless the consideration paid does not exceed the offer price. Shares acquired under an irrevocable undertaking from a shareholder to accept the takeover offer are, however, counted.

The compulsory acquisition provisions of the relevant local companies law will apply to Hong Kong-listed companies incorporated in overseas jurisdictions.

Restrictions on new offers

21. If a bidder fails to obtain control of the target, are there any restrictions on it launching a new offer or buying shares in the target?

When an offer is announced but is then withdrawn or lapses before becoming unconditional, the bidder and its concert parties must wait at least 12 months before announcing a new offer or acquiring further shares that trigger a mandatory offer.

A six-month restriction applies where a bidder raises the possibility that an offer might be made but does not announce a firm intention to either make or not make an offer within a reasonable time.

In addition, where a potential bidder makes an announcement that it does not intend to make an offer for a company, it will generally be restricted from making an offer or acquiring shares that will trigger a mandatory offer for six months unless either:

  • There has been a material change of circumstances.

  • An event has occurred that was specified in the announcement.

De-listing

22. What action is required to de-list a company?

The Listing Rules provide that a company can voluntarily withdraw its listing if either:

  • Following a takeover offer, compulsory acquisition procedures have been exercised, resulting in the acquisition of all of the listed securities in the company.

  • The company is privatised through a scheme of arrangement or capital reorganisation in compliance with the Takeovers Code.

The company must publish an announcement to give notice to shareholders of the proposed withdrawal of listing. The intention to de-list must also be stated in a circular to shareholders (the offer document will suffice for these purposes).

The Listing Rules also contain provisions dealing with withdrawals of listing not incidental to a takeover, which differ depending on whether the company is listed:

  • Only in Hong Kong.

  • On an alternative recognised stock exchange.

 

Target's response

23. What actions can a target's board take to defend a hostile bid (pre- and post-bid)?

When responding to an unwelcome offer, the target's directors must have regard to their statutory and common law duties as directors. Directors owe fiduciary duties to act honestly and in good faith in the best interests of the company and the shareholders as a whole. In addition, one of the General Principles of the Takeovers Code provides that directors must, when advising their shareholders, act only in their capacity as directors and must not have regard to their personal or family shareholdings or personal relationships with the company.

Once a bona fide offer has been communicated to the target board, or when the board has reason to believe that a bona fide offer is imminent, it must not, without approval from its shareholders, take any action which could result in the offer being frustrated or in the shareholders being denied an opportunity to decide on its merits. Examples of prohibited actions include:

  • The issue of shares, convertible securities or grant of options or any redemption or buy back of shares.

  • The sale or purchase of material assets.

  • Entering into contracts other than in the ordinary course of business.

If any of these actions are taken as a requirement under a prior contractual obligation, the Securities and Futures Commission must be consulted.

The target board must appoint an independent financial adviser to advise it on whether the offer is fair and reasonable. If the board concludes that the offer is not in the best interests of the target, it can do any of the following:

  • Reject the offer and recommend that the shareholders do not accept it.

  • Issue a response document.

  • Seek alternative "white knight" bidders (where appropriate).

Hostile bids are rare in Hong Kong. However, any company that is vulnerable to a hostile bid can prepare for it by putting in place an internal defence strategy to deal with any unwelcome approach.

 

Tax

24. Are any transfer duties payable on the sale of shares in a company that is incorporated and/or listed in the jurisdiction? Can payment of transfer duties be avoided?

Stamp duty is payable on the transfer of shares in companies incorporated or listed in Hong Kong. The rate of stamp duty is 0.2% on the higher of the market value of the shares or the consideration paid. Payment is typically split equally between the buyer and seller.

A scheme of arrangement where the target shares are cancelled and new shares are issued to the bidder can be used to avoid stamp duty, as there are no share transfers.

 

Other regulatory restrictions

25. Are any other regulatory approvals required, such as merger control and banking? If so, what is the effect of obtaining these approvals on the public offer timetable?

Approvals may be required for takeovers of companies operating in certain regulated industries including:

  • Banks.

  • Insurance companies.

  • Companies regulated by the Communications Authority.

The merger control regime under the Competition Ordinance currently only applies to the telecommunications sector (see Question 4).

For companies established or operating overseas, local approvals must also be considered, particularly for companies operating in China, where approval from the Ministry of Commerce and other regulators may be necessary.

If specific regulatory approvals are required, the offer is often structured as a pre-conditional offer to allow time for the approvals to be obtained before publishing the offer document. A pre-conditional offer announcement is treated in the same way as an offer announcement, triggering the standard timetable requiring the offer document to be published within 21 days (or 35 days in the case of a securities exchange offer). If the time to satisfy the pre-conditions is expected to take longer, consent must be obtained from the Securities and Futures Commission (SFC). In these circumstances, the SFC normally requires the offer document to be posted within seven days of fulfilment of the pre-conditions.

If a conditional offer (as opposed to a pre-conditional offer) is made, the SFC's consent is required to extend the timetable to accommodate the relevant regulatory approval process. The Takeovers Code only provides specifically for delays in approvals from the Communications Authority. Where the delays are expected to extend more than three months from the offer document posting date, the SFC must be consulted to determine whether the offer should lapse and to what extent the Takeovers Code will apply after the lapse.

For details of specific regulations for regulated entities, see Question 4, Sector-specific regulation.

 
26. Are there restrictions on the foreign ownership of shares (generally and/or in specific sectors)? If so, what approvals are required for foreign ownership and from whom are they obtained?

There are no general restrictions on foreign ownership of shares in Hong Kong, but foreign ownership is restricted in certain regulated industries. For example, voting control by non-Hong Kong residents is restricted in domestic free television programme service licensees under the Broadcasting Ordinance (Cap. 562) and in sound broadcasting licensees under the Telecommunications Ordinance (Cap. 106) (see Question 4).

 
27. Are there any restrictions on repatriation of profits or exchange control rules for foreign companies?

There are no specific restrictions on repatriation of profits or exchange rules for foreign companies.

 
28. Following the announcement of the offer, are there any restrictions or disclosure requirements imposed on persons (whether or not parties to the bid or their associates) who deal in securities of the parties to the bid?

Restrictions on dealings

The Securities and Futures Ordinance (SFO) contains a general restriction on dealing in securities if the person dealing (or counselling or procuring the dealing) has inside information (see Question 8). The following general restrictions also apply:

  • The bidder (and its concert parties) cannot sell shares in the target during an offer period without consent from the Securities and Futures Commission (SFC). 24 hours' public notice must be given that the shares may be sold.

  • Where the consideration under an offer includes securities of the bidder or a person acting in concert with the bidder, the Takeovers Code prohibits dealing in the securities by the bidder (or its concert parties) without consent from the SFC.

  • The bidder, the target and their respective concert parties are prohibited from entering into or unwinding stock borrowing and lending arrangements of shares in the target (or in the case of a securities exchange offer, the bidder) during the offer period.

  • The Takeovers Code restricts certain dealings in the target's securities by its financial advisers and stock brokers (or any of the target's parents, subsidiaries, fellow subsidiaries or their associated companies or companies of which such companies are associated companies).

Disclosure of dealings

The Takeovers Code contains detailed disclosure obligations of dealings in the target's (and in the case of a securities exchange offer, the bidder's) securities by the target or bidder and persons acting in concert with them (including a broader category of associate) during the offer period. Depending on the nature of the dealing, public or private disclosure to the SFC will be required.

In addition, the disclosure requirements contained in Part XV of the SFO must be complied with (see Question 8).

 

Reform

29. Are there any proposals for the reform of takeover regulation in your jurisdiction?

There are no current proposals for reform.

 

The regulatory authorities

Securities and Futures Commission (SFC)

W www.sfc.hk/web/EN/

Main area of responsibility. The SFC carries out a broad role regulating the securities and futures markets in Hong Kong. In addition to administering the Takeovers Code, the SFC's functions include setting and enforcing market regulations (which includes investigating breaches and taking enforcement action, licensing and supervising intermediaries conducting regulated activities, supervising market operators, authorising investment products and offering documents) and overseeing the Stock Exchange's regulation of listing matters.

Stock Exchange of Hong Kong Limited (Stock Exchange)

W www.hkex.com.hk/eng/index.htm

Main area of responsibility. The Stock Exchange is the front line regulator for listed companies. The Stock Exchange administers and enforces the Listing Rules.



Online resources

Securities and Futures Commission (SFC)

W www.sfc.hk/web/EN/

Description. Contains information about the SFC, including its regulation of takeovers and mergers. This resource provides access to the Takeovers Code, practice notes and panel decisions and statements.

Stock Exchange of Hong Kong Limited (Stock Exchange)

W www.hkex.com.hk

Description. Contains information about the Stock Exchange and provides access to the Listing Rules.

Bilingual Laws Information System

W www.legislation.gov.hk/blis/eng/index

Description. Contains an electronic database of Hong Kong's legislation maintained by the Department of Justice



Contributor profile

Tommy Tong

Herbert Smith Freehills

T +852 2101 4151
F +852 2845 9099
E tommy.tong@hsf.com
W www.herbertsmithfreehills.com

Professional qualifications. Hong Kong, Solicitor, 1994; England and Wales, Solicitor, 1995

Areas of practice. Public and private M&A; private equity; corporate restructuring; regulatory compliance; equity capital markets.

Recent transactions

  • Acting for BOCI Asia as financial adviser to China Great Wall Asset Management Corporation on its acquisition and mandatory general offer for Armada Holdings (previously SCMP Group).
  • Acting for Ping An Insurance Group on its acquisition of the Mayborn Group from 3i.
  • Acting for China Resources (Holdings) on its establishment of a health and consumer products investment joint venture with Verlinvest SA.
  • Acting for GCL-Poly Energy Holdings on the disposal of all of its non-solar power business to Shanghai Qichen Investment.
  • Acting for Morgan Stanley Asia as financial adviser to Sunac China Holdings' acquisition and conditional mandatory cash offer for Kaisa Group Holdings.
  • Acting for China Resources Power Holdings on its proposed merger with China Resources Gas Group.
  • Acting for Samling Strategic Corporation on its concurrent privatisation of Samling Global, Lingui Developments and Glenealy Plantations (Malaya).
  • Acting for ICBC (Asia) in connection with its privatisation by ICBC by way of scheme of arrangement.
  • Acting for China Gas Holdings on its conditional voluntary general offer for all shares and convertible bonds of Zhongyu Gas Holdings.
  • Acting for SAIF Partners, Hony Capital and IDGVC on their management buyout and mandatory general offer for Digital China Holdings.

Languages. English, Cantonese, Mandarin

Professional associations/memberships. Law Society of Hong Kong; Law Society of England and Wales.


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