Hong Kong Winston & Strawn 1. What has been the general level of M&A activity over the last 12 months in your jurisdiction? What were the most notable mergers and acquisitions during that period? According to the research of MergerMarket, for the year 2012, there were over 760 M&A transactions in Hong Kong and China. The aggregate transaction value of 2012 increased by 4.7 per cent to US$144.9 billion as compared to 2011. Outbound crossborder M&A transactions remained strong in 2012 with the transaction value amounting to US$64.6 billion. Inbound activity, however, experienced a 20 per cent decline compared with 2011, slipping to US$25.3 billion. Tops deals in 2012, in terms of their transactional value, include the acquisition of 15.57 per cent stake in Ping An Insurance Company by Charoen Pokphand Group Co Ltd and the acquisition of CDMA network assets in China Telecommunications Corporation by China Telecom Corporation Ltd. In 2012, there were four privatisation transactions involving listed companies in Hong Kong, including Little Sheep Group Ltd, Zhengzhou China Resources Gas Co Ltd, Samling Global Ltd and Alibaba.com Ltd. According to the HKEx Fact Book 2012, 17 Hong Kong listed companies, including Far East Global Group Ltd, Frasers Property (China) Ltd and Hang Ten Group Holdings Ltd underwent takeovers and mergers in that year. 2. What are the most common methods for acquiring or merging with a public company in your jurisdiction? Acquisitions of public companies in Hong Kong are commonly structured as a takeover offer or a scheme of arrangement. Voluntary or Mandatory Takeover Offer One of the common methods used for obtaining control of a public company in Hong Kong, if considered fit for commercial reasons, is to make a voluntary offer to acquire the shares held by the shareholders of the target public company (hereinafter known as the target company ) pursuant to the Code on Takeovers and Mergers (the Takeovers Code) of the Securities and Futures Commission of Hong Kong (SFC). If the offer is accepted, the offeror will obtain the majority control of the target company. Subject to certain restrictions, the consideration for the offer can be in cash or in securities, or a combination of both. Under the Takeovers Code, there are certain events the occurrence of which will require a person or persons to make a mandatory offer to the shareholders of the target company to acquire all the shares of the target company s shareholders. This requirement to make a mandatory offer will arise if : 1. A person (and the persons acting in concert) acquires 30 per cent or more of the voting rights in the target company, whether through a single or a series of transactions; or 2. A person (and the persons acting in concert) holding not less than 30 per cent, but not 117
LEXISNEXIS MERGERS & ACQUISITIONS LAW GUIDE 2015 more than 50 per cent of the voting rights in the target company, and that person (and the persons acting in concert) acquires voting rights in the target company, which has the effect of increasing such person(s) s percentage holding in the target company by more than two per cent from the lowest percentage holding of that person(s) in the 12-month period ending on and inclusive of the date of the relevant acquisition. The consideration of a mandatory offer must be in cash or be accompanied by a cash alternative at not less than the highest price paid for by the offeror, or any person acting in concert with it, for shares carrying voting rights during the offer period and within the six-month prior to the commencement of the offer period. Scheme of Arrangement Apart from voluntary and mandatory takeovers, the Hong Kong Companies Ordinance (the CO ) provides for a court-sanctioned scheme of arrangement, which can be undertaken by listed companies that wish to undergo corporate reorganisation or privatisation. A scheme of arrangement usually involves the controlling shareholder(s) of the listed target company acquiring the shares of the minority shareholders, which is usually called a transfer scheme, followed by an application to the Hong Kong Stock Exchange (the SEHK) to de-list the company. Apart from such acquisition, a scheme of arrangement may be effected through the cancellation of the existing shares of the minority shareholders and issuance of new shares to the controlling shareholder of the target company. This is sometimes referred to as a cancellation scheme. If the scheme of arrangement is effected by way of a transfer scheme, stamp duty will be payable for the sale and purchase of shares. The implications of Hong Kong stamp duty are further elaborated in Question 8 below. If a scheme of arrangement is proposed, the Hong Kong court, upon the application of the listed company, may order to convene a general meeting of all shareholders to consider, and if thought fit, approve the proposal. Under the CO and the Takeovers Code, which also applies to schemes of arrangement, a scheme of arrangement can only take effect if: 1. A majority in number representing 75 per cent in value of the disinterested shareholders present and voting either in person or by proxy at the meeting have approved the scheme; 2. The number of votes cast against the scheme at the meeting is not more than 10 per cent of the votes attaching to all disinterested shares; and 3. The court approves the scheme. 3. What are the key laws and regulation that govern mergers and acquisitions in your jurisdiction? The Hong Kong Companies Ordinance The CO is the main legislation governing M&A transactions in Hong Kong. Under the CO, all Hong Kong incorporated companies and overseas companies registered under Part XI of the CO must comply with the requirements applicable to such transactions. The Securities and Futures Ordinance (SFO) Bidders in takeover transactions will have to consider the implications of the requirements under the disclosure of interests regime under Part XV of the SFO. The statute imposes filing obligations on persons who acquire five per cent or more of interests in shares, whether voting or non-voting, of a Hong Kong listed company. Filings are required to be made for subsequent changes to such interests. Stricter obligations are imposed on directors of listed companies, who are required to report all their interests in shares held in the listed companies. 118
HONG KONG The SFO further prohibits any insider dealings and other forms of market misconduct. transaction and if any exemption applies. The Takeovers Code Takeovers, mergers and schemes of arrangement involving public companies in Hong Kong are primarily regulated by the Takeovers Code, which aims to ensure all shareholders affected by the takeover or merger are treated equally. The Takeovers Code applies to offers, including partial offers, offers by a parent company to acquire shares of its subsidiary, and certain other transactions where control of a company is obtained or consolidated for the purpose of a takeover or merger of companies regulated by the code. The Takeovers Code sets down the standards of commercial conduct and behavior acceptable in the situation of a takeover or merger. Whilst the Takeovers Code does not have the force of law, the Executive Director of the Corporate Finance Division of the SFC (hereinafter known as the executive ) has the power to refer matters for ruling to the Committee of the SFC (hereinafter known as the Panel ) and institute disciplinary proceedings if it considers that there has been a breach of either the Takeovers Code or a ruling of the executive or the Panel, upon investigation. The Listing Rules All Hong Kong listed companies are required to comply with the Rules Governing the Listing of Securities (Listing Rules) of the SEHK, depending on whether it is listed on the Main Board or the Growth Enterprise Market (GEM). As such, if the acquirer is a Hong Kong listed company, apart from the CO and the Takeovers Code, it should comply with the relevant Listing Rules of the SEHK. For instance, if the acquisition would constitute a notifiable transaction under the Listing Rules, the acquirer listed company must comply with the relevant announcement, reporting and shareholders approval requirements, depending on the size of the 4. What are the government regulators and agencies that play key roles in mergers and acquisitions? The Securities and Futures Commission (SFC) The SFC is an independent statutory body to regulate securities and futures markets in Hong Kong. It aims to ensure orderly securities and futures market operations and protect investors. The SFC is empowered by the SFO to conduct investigative, remedial and disciplinary actions against possible breaches. The functions of the SFC include: 1. Setting market regulations, investigating breaches of such rules and market misconduct and taking appropriate enforcement actions; 2. Administering the Codes on Takeovers and Mergers and Share Repurchases of the SFC; 3. Overseeing regulations governing takeovers and mergers of public companies and the SEHK s regulation of listing matters; and 4. Promoting investor education in relation to market operations, the investment risks involved and investor rights and obligations. The Stock Exchange of Hong Kong Limited (SEHK) The SEHK, a wholly-owned subsidiary of HKEx, operates and maintains the stock market in Hong Kong. It is a recognised exchange company under the SFO and is the primary regulator of stock exchange participants, including companies listed on the Main Board and GEM. The SEHK works closely with the SFC in regulating listed issuers and administers listing, trading and clearing rules. 119
LEXISNEXIS MERGERS & ACQUISITIONS LAW GUIDE 2015 5. Are hostile bids permitted? Hostile bids are offers to purchase shares in the company not pursuant to any agreements, nor any co-operation with the target company. Although hostile bids are allowed in Hong Kong, they are rare since most listed companies in Hong Kong are either family-controlled or held by a single group of controlling shareholders. The hostile pre-conditional takeover bid jointly made by ENN Energy Holdings Limited and China Petroleum & Chemical Corporation against China Gas Holdings in December 2011, although unsuccessful, may be the first unsolicited takeover bid in Hong Kong. 6. What laws may restrict or regulate certain takeovers and mergers, if any? (For example, anti-monopoly or national security legislation). Generally speaking, there are no restrictions on foreign investments in Hong Kong or restricted levels of foreign ownership of Hong Kong companies in Hong Kong, save for certain industry-specific restrictions which are applicable to a particular industry. Those industries include telecommunication, television and radio broadcasting, banking and securities and insurance. In addition, there are neither foreign-exchange regulations in Hong Kong, nor any restrictions or tax withholding imposed on repatriation of capital or remittance of profits or dividends to or from a Hong Kong company and its shareholders. The Hong Kong Competition Ordinance, which is expected to be enforced in either late 2013 or early 2014 may have implications to future takeover transactions. Briefly speaking, the Ordinance regulates anti-competitive agreements and instances of abuse of market power. 7. What documentation is required to implement these transactions? The principal transactional documentation involved in a simple sale and purchase of shares of a Hong Kong company typically includes: 1. A confidentiality letter in which the parties undertake to keep confidential any information relating to the transaction and the counterparties; 2. A sale and purchase agreement which records the terms and conditions of the transaction, and usually includes representations and warranties regarding the business and the company to be acquired; 3. A disclosure letter under which a seller makes disclosures against the representations and warranties given by it to the purchaser under the sale and purchase agreement; and 4. An instrument of transfer and bought and sold notes for the sale shares. For transactions which constitute takeovers transactions under the Takeovers Code, the announcement and circular and offering documentation requirements will apply. 8. What government charges or fees apply to these transactions? Pursuant to the Stamp Duty Ordinance of Hong Kong, stamp duty on the sale or purchase of any Hong Kong stock, which includes shares of a company listed in Hong Kong, is subject to stamp duty of a total of 0.2 per cent of either the amount of the consideration paid or of its value of such shares, whichever is higher. Therefore, stamp duty will apply if the offeror takes over the target company by way of acquiring shares of the minority shareholders. However, stamp duty is not applicable to cancellation of existing shares or issuance of new shares. 120
HONG KONG The Securities and Futures (Fees) Rules under the SFO and the Takeovers Code have prescribed certain fees which are payable to the SFC in relation to takeovers transactions. Application fees are payable to the SFC when a party would like to seek a formal ruling as to the application of the Takeovers Code from the executive. A fee is payable for the review of any rulings of the executive. However, no fees are required for any initial consultations with the executive, whose views however, will be preliminary and non-binding on the executive. 10. Do directors and controlling shareholders owe a duty to the stakeholders in connection with a deal? Broadly speaking, directors owe fiduciary duties and the duty of skill, care and diligence towards the shareholders of the company. The source of these duties mainly comes from common law, the company s constitutional documents and other guidance materials issued by the regulatory authorities. According to the Companies Registries Guide on Directors Duties, directors have duties: 9. What sources of information are available in the public domain? To conduct due diligence over the shares and affairs of the target company, the following information will be obtainable in the public domain: 1. Corporate filings records maintained at the Hong Kong Companies Registry; 2. Information relating to real properties owned and leased by the target company in Hong Kong which is registered with the Land Registry of Hong Kong; 3. Intellectual property rights which are registered with the Trade Marks Registry of Hong Kong; 4. Information relating to legal proceedings in Hong Kong which can be searched at the Hong Kong Courts; 5. Bankruptcy and compulsory winding-up searches which can be carried out at the Official Receiver s Office of Hong Kong; and 6. If the Target Company is a listed company in Hong Kong: a. Announcements, reports and circulars published under the relevant Listing Rules; and b. The disclosure of interest in shares pursuant to the SFO. 1. To act in good faith for the benefit of the company as a whole; 2. To use powers for a proper purpose for the benefit of the members as a whole; 3. To avoid conflicts between personal interests and interests of the company; 4. Not to enter into transactions in which the directors have an interest except in compliance with the requirements of the law; 5. Not to accept personal benefit from third parties conferred cause of his position as a director; and 6. To observe the company s Memorandum and Articles of Association and Resolutions. If there are possible conflicts between a director s personal interests and the interests of the company (for instance, if the director is connected to the offeror), such director is required to make proper disclosure of his interests. The Listing Rules prohibit any director who has a material interest in the transaction from being included in the quorum of the relevant board meeting and must abstain from voting on the relevant resolutions. Under r 2 of the Takeovers Code, when the target company receives an offer or is approached with a proposed offer, the board of directors of the target company is required to establish an independent 121
LEXISNEXIS MERGERS & ACQUISITIONS LAW GUIDE 2015 committee to make recommendations as to the fairness and reasonableness of the offer, and the acceptance or voting thereof. The independent committee shall comprise all non-executive directors who have no direct or indirect interest in any offer or possible offer other than as a shareholder of the target company. The board is required to retain a competent independent financial advisor to advise the independent committee on these matters. The appointment of such independent financial advisor must have been first approved by the independent committee. The written advice of the independent financial advisor and the reasons thereof must be provided to the shareholders by inclusion in the offeree board circular along with the recommendations of the independent committee with respect of the offer. 11. In what circumstances is break-up fees payable by the target company? the offer document. All documents relevant to the arrangement will be required to be put on display for public inspection. 12. Can conditions be attached to an offer in connection with a deal? All offers, with the exception of a partial offer, must at least be conditional upon the offeror (and persons acting in concert with it) receiving acceptances of share purchases that, in aggregate with any existing or future shares held, will confer the offeror with over 50 per cent of the voting rights of the company, save where the executive approves otherwise. The level of acceptance of shares may be set higher than 50 per cent in a voluntary offer, but no offers should be made subject to conditions which are in the control of the offeror, thus allowing it to easily withdraw the offer. Mandatory offers, however, cannot be subject to any other conditions. A break-fee arrangement is commonly seen in takeovers and mergers transactions involving companies listed in Hong Kong. Under such an arrangement, the offeror (or a potential offeror) would enter into an agreement with the target company, pursuant to which a cash sum will be payable by the target company if certain specified events occur that would have the effect of preventing the offer from proceeding or causing it to terminate. The Takeovers Code does not prohibit break-fee arrangements, but requires that they must be de minimis, which value should normally be under one per cent of the offer value. The board of directors of the target company and its financial advisor must confirm to the executive in writing that each holds the opinion that the arrangement is in the best interest of the target company. Any such arrangement must be fully disclosed in the announcement of the offeror of its firm intention to make an offer, and the terms of the arrangement must be disclosed in If the potential bidder does not wish to commit itself to making a firm offer, it may make an announcement of a possible offer. If a preconditional offer announcement is made, the executive must be consulted in advance and the announcement must state whether the preconditions are waivable or not. 13. Can minority shareholders be squeezed out? If so, what procedures must be observed? If a takeovers offer is made, it is likely that not all minority shareholders of the target company would accept the offer. In such circumstances, according to the CO, if the offeror (and persons acting in concert with it) is able to secure not less than 90 per cent in value or more of the disinterested shares for which the offer was made within four months of posting of the initial offer document, the offeror is entitled to serve notice on the dissenting minority shareholders to compulsorily acquire their outstanding shares. 122
HONG KONG If an intention of exercising the powers of compulsory acquisition is stated by the offeror in the offer document, the offer must not remain open for more than four months from the date of posting of the offer document, unless the offeror has by the time become entitled to exercise such powers. Once the offeror is so entitled to squeeze-out the minority shareholders, it must do so without delay. 14. Are there any proposals for reforms to the laws and regulations governing mergers and acquisitions currently being considered? In July 2012, the Hong Kong Legislative Council passed the Companies Bill which will lead to substantial amendment to the current CO and will affect takeovers and mergers transactions. The bill was gazetted on 10 August 2012 and is expected to come into force in 2014. Major changes include the replacement of the existing headcount test with a disinterested shares test when counting the votes cast on resolutions approving a scheme of arrangement that relates to takeovers and privatisation. Under such disinterested shares test, the number of votes cast against the resolutions shall not exceed 10 per cent of the votes attached to all disinterested shares, which is an alignment with the 10% objection rule under the Takeovers Code mentioned above. ABOUT THE AUTHOR SIMON LUK Chairman of Asian Practice Partner, Winston & Strawn E sluk@winston.com W www.winston.com A 42nd Floor, Bank of China Tower, 1 Garden Road, Central, Hong Kong T +852 2292 2222 F +852 2292 2200 123