Issue 5 • May 2020 Mergers and Acquisitions Guidance Note

Public M&A in Hong Kong: an introductory guide Does the Code apply? This article looks at, in outline, the principal issues surrounding The Code applies not only to companies with a primary mergers and acquisitions (M&As) where the target is a public listing on the Hong Kong Exchange (the Exchange), company (which can be listed or unlisted) in Hong Kong and but also to public companies in Hong Kong, even if introduces the key considerations for companies, investors and they are unlisted.1 Whether a company is considered a their advisers when in a or privatisation situation. public company in Hong Kong will depend on a range of factors, including the location of its head office Regulations governing public in Hong Kong and place of central management, the location of its Public M&As in Hong Kong are regulated principally by the business and assets (including corporate and tax status) Codes on Takeovers and Mergers and Share Buy-backs (Code). and whether, in the absence of the Code applying, Hong The Code, which is intended to afford fair and equal treatment Kong shareholders would be afforded protection under of shareholders, does not have the force of law. However, it is an alternative regime. administered by the Securities and Futures Commission (SFC) and its rules are, in practice, binding on all market participants. Friendly or hostile? Takeovers in Hong Kong can be made with or without Other key sources of regulation governing takeovers are the the support of the target company’s board. However, Listing Rules and the Companies Ordinance. Sector specific while there are no restrictions on hostile takeovers in regulation may also apply depending on the type of business Hong Kong, they are uncommon in comparison to other involved (for example the Telecommunications Ordinance). major global markets like New York and London. This is largely a function of the fact that listed companies This article deals primarily with Hong Kong legislation and in Hong Kong are frequently tightly held, often with rules. However, laws applicable in other jurisdictions will often a founding family having a large stake, meaning that be relevant to a takeover of a Hong Kong listed company, in achieving control without the support of the major particular if – as is often the case – the target is incorporated shareholder(s) (and their board representatives) can be overseas. impossible.

1 The Code also applies to real estate investment trusts (REITs) with a primary listing of their units in Hong Kong. However, the rules applicable to REITS are beyond the scope of this article. Issue 5 • May 2020 Mergers and AcquisitionsPublic GuidanceGovernance Note

Two principal deal structures (see ‘Squeeze out’ below). The consideration for a mandatory There are two principal methods of acquiring a target: general offer must also be in cash or, at the least, contain a • by way of a general offer (voluntary or mandatory), or cash alternative. • by way of a scheme of arrangement (whether under the Companies Ordinance for a Hong Kong company or under Scheme of arrangement the relevant companies legislation in the jurisdiction of An alternative form of acquiring the target is by way of a incorporation of the target). scheme of arrangement. A scheme is typically structured as a proposal to cancel (or transfer to the bidder) all shares in the By and large, the Code and other applicable laws and target in return for cash or shares. For a Hong Kong incorporated regulations will apply equally to both general offers and company this would be a scheme of arrangement under the schemes of arrangement. Companies Ordinance, but similar provisions exist under both the Cayman Islands and Bermuda companies legislation. General offer A general offer is a contractual offer to acquire all of the shares Under the Companies Ordinance (which applies to Hong in the target (those shares not already owned or agreed to be Kong incorporated targets), to become effective a scheme acquired by them outside of the offer). A general offer can must be approved at a shareholders’ meeting by shareholders either be voluntary, or, where the Code requires the bidder to representing at least 75% of the voting rights present and launch an offer, mandatory. The Code also allows an offer to be voting at the scheme meeting and the votes cast against the 2 a partial offer , which is an offer only for part of the shares in scheme must not exceed 10% of the total voting rights attached the target, in limited circumstances. to all ‘disinterested shares’ in the company (not solely those present and voting at the scheme meeting). Disinterested shares There are broadly two circumstances in which a mandatory bid are, broadly, all those shares that are not owned by the offeror will be required: or its concert parties. 3 (1) where a person or persons ‘acting in concert’ (see below), acquires 30% or more of the voting rights in the target, or On top of the Companies Ordinance requirements, the Code also requires that: (i) the scheme must be approved by at least 75% (2) where a person or concert party that holds between 30 of the votes attaching to ‘disinterested shares’ that are present and 50% acquires further shares carrying more than 2% of at a duly convened meeting of the holders of the disinterested the voting rights in the target (by reference to its lowest shares; and (ii) the number of votes cast against the scheme shareholding over the past 12 months).4 must not be more than 10% of the votes attaching to all disinterested shares.5 All general offers are required to be conditional on the bidder acquiring more than 50% of the voting rights in the target. In addition to the shareholders’ approval, the key distinction The key difference between a voluntary general offer and a in terms of process between a scheme and a general offer is mandatory general offer is that a must only that the scheme must be sanctioned by the Court. This is not be conditional on the bidder acquiring more than 50% of the a ‘rubber-stamp’ exercise and the Court will scrutinise the voting rights in the target. In contrast, voluntary general offers scheme to confirm not only that the provisions of the statute can be subject to a higher acceptance condition and may have been complied with, but also that the shareholders were contain objective conditions, including on the bidder receiving fairly represented at the meeting and the terms of the scheme a higher level of acceptances to enable the bidder to squeeze are such that an intelligent and honest person might reasonably out any remaining minority shareholders on a compulsory basis approve them in respect of her interest in the company.

2 The rules attaching to partial offers are beyond the scope of this article, which addresses offers for all the issued share capital of the company only. However, Rule 28 of the Code does permit a bidder to make a partial offer to acquire a certain proportion of each shareholder’s shares. Such offers have historically been rare in Hong Kong.

3 Acting in concert: For the purposes of the Code, persons are acting in concert where, pursuant to an agreement or understanding (whether formal or informal), they actively co-operate to obtain or consolidate ‘control’ of a company through the acquisition by any of them of voting rights. The Code contains a number of rebuttable presumptions where, unless the contrary is established, persons will be presumed to be acting in concert (for example, a parent and subsidiary or a company and its directors and their close relatives).

4 The obligation to make a mandatory offer may be waived if there is an independent vote at a shareholders’ meeting of the target at which 75% of independent votes approve a waiver (referred to as a ‘whitewash waiver’). However, notwithstanding a vote from shareholders, the SFC maintains discretion over whether or not to waive the requirement and it will typically attach significant weight on the ability of shareholders to exit their investment via a general offer where a new controlling shareholders enters the register.

5 While this second limb appears to be identical to the requirements of the Companies Ordinance, the definitions of ‘disinterested shares’ do differ slightly between the Code and the Companies Ordinance. Care should be taken to ensure that both tests are satisfied. Issue 5 • May 2020 Mergers and AcquisitionsPublic GuidanceGovernance Note

Scheme or offer? legal factors. A table setting out a summary of some of the Whether a general offer or a scheme is more suitable considerations to be taken into account by bidders is provided depends on the particular facts of a case and will depend below (Figure 1) together with an indicative timetable for on a mixture of the commercial, financial, tactical and each acquisition process (Figure 2).

Figure 1 – Comparison between general offer and scheme of arrangement

Comparison of approval thresholds

General Offer Scheme of arrangement (HK company)

To acquire 100% • Must get acceptances in respect of 90% • 75% of disinterested shares at meeting vote of the shares ‘to which the offer relates’ in favour and not more than 10% of all (Companies Ordinance) disinterested shares vote against • Takeovers Code: acquire 90% of ‘disinterested • Scheme applies to all shareholders, even shares’ those who voted against • Potentially lower hurdle in absolute terms

Excludes shareholders • Offeror and concert parties cannot be • Offeror and concert parties votes do not counted as part of the 90% count • Shareholders giving irrevocables can be • Shareholders giving irrevocables can vote counted towards the 90%

Ability to block • 10% of disinterested shares (to block overall • 10% of disinterested shares (to block the control) transaction entirely) • Passive, simply not tender their acceptances • Requires positive action to vote against at the EGM

Flexibility • Can waive 90% acceptances condition (but • All or nothing. If the approval level is not must obtain 50%+1) reached, the whole scheme fails • Can revise up to D + 46. No impact on the • Can revise up to D + 46, but must start the rest of the timetable Court timetable again

Other considerations

General Offer Scheme of arrangement

Target independent board Yes Yes

Target IFA Yes Yes

Offeror FA Yes Yes

FA cash confirmation Yes Yes

Irrevocable undertakings To accept the offer To vote in favour of the scheme

Stamp duty 0.2% of total offer value Either 0.2% (in the case of a transfer scheme) or nil (in the case of a cancellation scheme)

Costs Potentially greater costs, because of more involved Court scheme procedure

Target shareholder vote No, just tender acceptances Shareholders meetings requiring voting. Provides required forum for shareholders

Settlement Maximum of 7 business days after going unconditional in all respects (in respect of acceptances which have been received by that date), or a maximum of 7 business days after acceptances are tendered (if tendered after the date on which the offer has gone unconditional in all respects) Issue 5 • May 2020 Mergers and AcquisitionsPublic GuidanceGovernance Note

Figure 2 – Outline offer timetable and summary

Outline comparative timetable

General Offer Scheme of arrangement (HK company)

A Day Initial announcement Initial announcement

Prepare and finalise offer document. Prepare and finalise scheme documents. Issue Originating Composite document issued by the Summons in Hong Kong Court. Hearing of Originating Summons Offeror and the Target (not < 7 days after issue of Originating Summons)

A + 21 = D day Dispatch offer documents Dispatch scheme documents

D + 21 Earliest possible closing date

D + 24 Court convened shareholders meeting. Followed by extraordinary general meeting (EGM)

D + 32 (approx) Hearing of petition to sanction scheme

D + 46 Latest date for revising offer

D + 48 (approx) Effective date of scheme (assuming all other conditions have by then been fulfilled)

D + 60 Latest date for going unconditional (as to acceptances)

D+ 81 Latest date for fulfillment of all other conditions to the offer (max. 21 days after the offer becomes or is declared unconditional as to acceptances)

D + 4 months Latest date for acquiring 90% and invoking compulsory acquisition procedure. Must serve notices within earlier of 3 months of closing or within 6 months of dispatch

D + 6 months Settlement of compulsory acquisition. 2 months after date of notices

Notes: (1) The indicative timetable has been prepared on the basis that the scheme document is sent out at the same time as the offer document. However, in practice the dispatch of a scheme document often takes longer because of the Court process involved – it depends on whether the preparation process has begun before the announcement is made. If not, documents are usually dispatched later than D + 21 (often around D + 35). The SFC is usually prepared to extend the normal 21 day requirement for dispatching the documents if it is necessary to accommodate the Court schedule.

(2) De-listing usually takes place (in the case of a general offer) after completion of the compulsory acquisition process, and (in the case of a scheme) after the effective date of the scheme.

(3) Courts dates are approximations, and depend on what dates the courts sits.

The key distinction is that a scheme is necessarily all or below). However, where the bidder fails to achieve the nothing; it is binding on all shareholders if the scheme 75% approval threshold (or 10% of disinterested shares is approved regardless of how they voted. That is likely are voted against), its offer will fail entirely. That may to mean that a lower number of acceptances in absolute be attractive to the bidder where it is only interested in terms is required to obtain 100% control of and delist the achieving 100% control, but the all or nothing nature of target, when compared with the 90% required in a general a scheme means that it will be an inappropriate structure offer to invoke the compulsory acquisition procedure and where the bidder intends to retain the target’s listing squeeze out the remaining minority (see 'Squeeze out' after the offer closes. Issue 5 • May 2020 Mergers and AcquisitionsPublic GuidanceGovernance Note

For that reason, a general offer will give the bidder greater However, the target should be mindful that any information flexibility. While the acceptance condition in a voluntary provided to one bidder will need to be provided to any bona fide general offer is often set at 90% with the intention of competing bidder on request, even if that potential bidder is a acquiring 100% of the target’s shares, the bidder is able less welcome suitor (or even pursuing a hostile bid). to waive that condition where it obtains such acceptances that it will hold over 50%. That would result in a minority Stakebuilding continuing on the register post-close and ordinarily prevent Other than a possible requirement to launch a mandatory offer, the target from being de-listed. However, the bidder is able there is no restriction under the Code on a bidder acquiring to achieve statutory control of the target through its majority shares in the target before or after launching its offer. However, stake.6 Conversely, in a scheme, a mere 10% of disinterested any purchases during the offer period or in the preceding shareholders can block the transaction entirely. This is three months (or, in the case of a mandatory general offer, six particularly significant in a privatisation scenario, where the months) will set a floor price, which the offer price may not be bidder is already a controlling shareholder. As its shares are below. In addition, where the offeror has been given access to not ‘disinterested’, the power to block the transaction may rest due diligence materials, care should be taken to ensure that the in a very small proportion of the overall register. bidder is not in possession of inside information on the target when stakebuilding. Key pre-bid considerations Secrecy In a recommended offer, market purchases are likely to be Before the bid is announced, secrecy is paramount. Not only perceived as aggressive by the target. Moreover, tactical is confidentiality vital under the Code, but a possible offer considerations may weigh against stakebuilding. Any shares will typically be considered inside information, the disclosure that are acquired by the bidder other than as part of its offer of which may constitute a criminal offence in Hong Kong or will not count towards achieving the statutory 90% threshold elsewhere. to squeeze out minority shareholders. Similarly, such shares will not be ‘disinterested’, meaning that they will not count towards The parties to an offer will usually be able to delay disclosure satisfying the approval thresholds in a scheme of arrangement. of the offer while negotiations are ongoing, provided they are able to maintain confidentiality. However, an announcement If a bidder does acquire shares in the target, the Securities and may be required where there is rumour or speculation about Futures Ordinance requires the acquisition of an interest of 5% the deal in the market or where there is undue movement in or more of the voting rights of a Hong Kong listed company to the target’s share price. be disclosed to the Exchange within three business days. The market will then need to be notified of any relevant subsequent The parties and their advisers should prepare a draft leak change in that holding on an ongoing basis. announcement early in the process and their financial advisers will keep a close eye on the target’s share price. The Certain funds and appointment of financial adviser time frame in which the target (or, where an approach has Before announcing the offer, the bidder is required to appoint a not yet been made, the bidder) will be expected to respond to financial adviser. The financial adviser will typically have been a leak will often be measured in minutes rather than hours. involved early on in the preparation of the offer to advise the bidder on , due diligence and its bid more generally. Due diligence As in private M&A transactions, a bidder will usually want to In addition to this advisory function, a key role of the financial conduct due diligence on the target company before making adviser is to satisfy the Code requirement that it provides its offer. As the target will often be listed, a significant written confirmation to the SFC that it is satisfied that the amount of information on the company will be available from bidder has sufficient resources available to satisfy the offer information required to be published by virtue of the target’s consideration, assuming full acceptance. To be able to give that listing. If the bid is recommended, the target will usually confirmation, the financial adviser will need to be happy that permit access to additional due diligence information. the bidder has sufficient cash immediately available (and often

6 It should be noted that, if the target remains listed after completion of the offer, it will need to maintain compliance with the public float requirements under the listing rules. That may result in a bidder that acquires more than 75% of the target’s shares having to sell down part of its stake in order to ensure that 25% remain in public hands. Issue 5 • May 2020 Mergers and AcquisitionsPublic GuidanceGovernance Note in a blocked account) or committed financing in place with Offer and response little or no conditions to draw down. In practice, the financial Absent a leak (see ‘Secrecy’ above), the first time a bid is adviser will need to have been engaged a few weeks prior to made public is when the bidder announces its firm intention announcement to be in a position to issue the confirmation. to make an offer. This firm intention announcement will set out the terms of the offer and any other details required Irrevocable undertakings and special deals under the Code. The bidder is then required to post an offer Where the target has a controlling shareholder, a bidder will document within 21 days. The Code contains a number of often seek to obtain upfront support from key shareholders in provisions that set out the content requirements of the offer the form of an irrevocable undertaking from the shareholder to document; the overriding principle is that it should contain accept the offer (or, in the case of a scheme, to vote in favour). all information required to enable the target’s shareholders However, the Code restricts the bidder from approaching to reach a properly informed decision on the merits of the anyone beyond a restricted number of sophisticated investors offer. who have a controlling shareholding and, in all circumstances, the SFC must be consulted before an approach is made. Given Target response that seeking an irrevocable will lead to the disclosure of inside In a hostile bid, the target board must respond to the information to the shareholder, the bidder is usually only offer document by circulating a response document to entitled to approach the shareholder immediately prior to shareholders within 14 days of the publication of the offer announcement (usually one or, for overseas shareholders, two document. Where the bid is recommended however, the days in advance). target board circular and offer document will ordinarily be combined. Care must be taken when entering into irrevocables (or any other agreement) with target shareholders that none of the In either case, the target must establish an independent provisions would constitute a ‘special deal’ with favourable board committee to issue a recommendation to shareholders conditions, which are prohibited under the Code. The Code on whether to accept the offer. The Code requires the seeks to ensure that all shareholders are treated equally target retain an independent financial adviser to assist its and therefore any agreement that confers a benefit on a evaluation of the offer and, in particular, whether the offer particular shareholder not available to all is likely to violate is fair and reasonable. The independent financial adviser’s this rule. Arrangements that are likely to cause concern are written advice to the board, accompanied by its reasons, an irrevocable that is combined with an option to put shares must be included in the target’s shareholder circular. onto the bidder should the offer fail or where the shareholder is given a ‘finder’s fee’ for promoting the offer to other Once the target receives an offer or believes that an offer is shareholders. Particular care should be taken over incentives imminent, the Code imposes strict restraints on the actions given to management staying on after the transaction. The of the target company. These rules are intended to prevent target’s independent financial adviser will typically need the board of the target company from taking actions which to provide an opinion that such arrangements are fair and could frustrate the offer or deny the shareholders the reasonable and, where the management in question hold more opportunity to decide on the merits of the offer. While the than 5% of the target, arrangements may need to be approved restrictions are naturally particularly relevant in a hostile by independent shareholders of the target. scenario, care should be taken by the board even where the offer is recommended. In particular, the Code prevents target Share options companies from issuing shares, disposing of material assets A listed target will often have an equity incentive scheme in or entering into contracts otherwise in the ordinary course place under which options are granted to employees as part of business without the approval of shareholders at a general of their overall remuneration package. The bidder will need meeting. These rules may be waived by the SFC in appropriate to examine the share option scheme rules to determine the circumstances, particularly where the bidder agrees. impact of the offer on outstanding options. Frequently, the offer will cause such options to become exercisable meaning Conditions that they will need to be priced into the overall consideration As noted above, both a voluntary general offer and a payable by the bidder. In any event, the bidder will need to mandatory general offer must be conditional on the bidder or make an appropriate offer to the holders of options (and other its concert parties receiving such acceptances that the bidder convertible securities) to ensure their interests are safeguarded. will hold more than 50% of the voting rights in the target. Issue 5 • May 2020 Mergers and AcquisitionsPublic GuidanceGovernance Note

A voluntary general offer may also contain additional, on Court availability. However, after approval by target objective conditions. For example, it may be conditional on shareholders at a general meeting and subsequent sanction by acceptances being received in respect of a higher number of the Court, the scheme will take effect on registration of the shares; as already highlighted this is often set at 90% so as to Court order at the Companies’ Registry (see Figure 2 for an ensure that, in the case of Hong Kong incorporated companies, indicative timetable). the statutory squeeze out mechanism is available to a bidder who wishes to compulsorily acquire the remaining shares in Squeeze out the target to reach 100% control. Once the general offer has closed, in order to trigger the ‘squeeze out’ compulsory acquisition procedures under the Other common conditions in a voluntary general offer include Companies Ordinance (for a Hong Kong incorporated target), the receipt of regulatory or antitrust approvals, approval by the offeror must receive acceptances in respect of at least 90% the bidder’s own shareholders, or that there has been no of the target shares 'to which the offer relates' (those shares material adverse change to the business of target prior to which are not already owned by the offeror or its concert closing of the offer. Any conditions must be objective and not parties). be solely within the control of the bidder. An offeror would not be allowed to invoke any condition so as to cause the offer In brief, where the offeror reaches the 90% threshold, it may to lapse unless the circumstances which give rise to the right serve a notice on the remaining shareholders to acquire their to invoke such condition are of material significance to the shares (but such notice must be given before the earlier of (i) 3 offeror in the context of the offer. months from the end of the offer period and (ii) 6 months from the date of the takeover offer). Once the notice is given, the Other documentation offeror is bound to acquire the target shares on the terms of In a typical voluntary general offer, it would be unusual for the takeover offer within 2 months. the bidder and the target to enter into any formal agreement relating to the offer. More importantly and in addition, the Code overrides the effect of the Companies Ordinance, by imposing a timing/eligibility A mandatory general offer will often be triggered by a restriction on reaching the 90% threshold. Even where the substantial off-market share acquisition from a large offeror satisfies the requirements of the Companies Ordinance shareholder in the target. That acquisition will usually be (or other equivalent overseas legislation), such compulsory documented in the form of a share purchase agreement acquisition rights may only be exercised if acceptances of the negotiated bilaterally between the bidder and the shareholder offer and purchases made by the offeror and its concert parties and would typically contain some protection for the buyer in during the period of 4 months after posting of the initial offer the form of conditions and/or warranties. document total 90% of the disinterested shares.

Closing the deal Withdrawal or lapse of bid In a recommended general offer, where the offer document If the offer lapses or is withdrawn, the bidder and any of its and target board circular are combined, the earliest date concert parties are ‘offside’ and prevented from making an on which the offer can close, assuming all conditions have offer for a period of 12 months (including from taking steps been satisfied at that point, is 21 days after posting of the which would trigger a requirement to make a mandatory composite document. The timetable for a scheme will depend general offer). HKICS

The members of the Takeovers, Mergers and Acquisitions Interest Group are: Michelle Hung FCIS FCS (Chairman), Dr David Ng FCIS FCS, Henry Fung, Kevin Cheung, Lisa Chung, Patrick Cheung and Philip Pong. Gratitude is expressed to PY Chui, Partner, Advisory Services, PwC, and Margot Lam, Deals Services, PwC, as the authors of this paper. Mohan Datwani FCIS FCS(PE) serves as secretary. Please contact Mohan Datwani, Senior Director and Head of Technical & Research, HKICS, if you have any suggestions about topics relevant to this interest group at: mohan. [email protected].

The Hong Kong Institute of Chartered Secretaries (HKICS) 香港特許秘書公會 (Incorporated in Hong Kong with limited liability by guarantee) Disclaimer and Copyright Notwithstanding the recommendations herein, this publication is not intended to constitute legal advice or to derogate from the responsibility of HKICS members or any persons to comply with the relevant rules and regulations. Members and readers should be aware that this publication is for reference only and they should form their own opinions on each individual case. In case of doubt, they should consult their own legal or professional advisers, as they deem appropriate. The views expressed herein do not necessarily represent those of HKICS. It is also not intended to be exhaustive in nature, but to provide guidance in understanding the topic involved. HKICS shall not be responsible to any person or organisation by reason of reliance upon any information or viewpoint set forth under this publication, including any losses or adverse consequences consequent therefrom. The copyright of this publication is owned by HKICS. This publication is intended for public dissemination and any reference thereto, or reproduction in whole or in part thereof, should be suitably acknowledged.