Positioning for equity fund raising or listing
Charltons has vast experience of advising companies positioning themselves for significant equity fund raisings or listing. As well as being involved in some of the largest and most ground-breaking deals to have come to the Hong Kong market in the past decade, we also have considerable experience in helping smaller dynamic companies take their first steps in the public equity markets. Charltons is actively involved in advising companies listing on Hong Kong’s Growth Enterprise Market (GEM). The firm can also bring to bear its extensive experience in representing underwriters and sponsors on IPO projects to advise potential listing applicants.
We guide a company through all stages of the equity fundraising or listing process and offer complete project management, from pre-IPO investments, advising on listing criteria, pre-IPO planning and structuring (including due diligence and group reorganisations) and making pre-application submissions to the Stock Exchange on key issues, to prospectus drafting, review and verification, and negotiation of underwriting agreements and other key contracts. We advise companies on preparation for listing, including the need for good corporate governance procedures and internal controls, as well as optimum board composition.
We understand that an IPO is one of the biggest steps a company will ever take and a listing applicant needs its lawyers to provide an insightful and highly personalised service coupled with smart and practical advice.
Contractual protection for minority shareholders
Minority shareholders will usually seek to negotiate a list of veto rights or reserved matters which require the written consent of all of the joint venture parties before any action can be taken. In multi-party joint ventures, it may be unworkable to
obtain unanimous consent for all such matters and there may therefore be an alternative requirement for a special or super-majority, e.g. 75% to 90%, consent rather than unanimous consent in relation to certain matters.
Common reserved matters include:
- the issue of new shares and the creation of rights over shares
- the introduction of new shareholders
- the repurchase of shares by the joint venture company
- the payment of dividends and other financial matters
- the entry into major transactions
- the entry into material related party transactions (e.g. with directors or major shareholders), and
- other significant changes to the joint venture’s business
Matters can be reserved at either board level (requiring the consent of all directors or of at least one director representing each shareholder) or at shareholder level (requiring the consent of all shareholders). Details of reserved matters can be set
out in either the joint venture agreement or the articles of association. If reserved matters are included in the articles, the minority shareholder should consider whether the majority shareholder will be able to amend the articles without the minority
shareholder’s consent (which may be the case if the minority shareholder owns 25% or less of the voting shares in the company). Further protection may be provided to reserved matters in the articles by using class rights or weighted voting rights.
Wherever the reserved matters are set out, care should be taken to ensure that they cannot be viewed as fettering the statutory powers of the company, because any such provisions will be unenforceable and/or the shareholders’ agreement may be unenforceable.
If the obligations are included in the joint venture agreement rather than the articles, and bind the shareholders but not the company itself, they are less likely to be viewed as fettering the company’s powers.
In addition to reserved matters, a minority shareholder may aim to include additional protections in the joint venture agreement and/or articles, such as:
- ensuring that all the terms of the joint venture agreement are fair to the minority shareholder and do not afford unfair rights or economic advantages to the majority shareholder
- a requirement for the minority shareholder’s representatives to be a necessary part of the quorum for both board and shareholder meetings and to be given adequate notice and information in advance of such meetings
- including quasi-fiduciary duties on the shareholders in the joint venture agreement, e.g. an obligation for each shareholder to use reasonable/best endeavours to promote the success of the company in the best interests of all of the shareholders
- pre-emption rights requiring the shareholders to offer their shares to the other existing shareholders before they are able to transfer them to a third party (though such rights may not be very useful to a minority shareholder if it has limited financial
resources compared to a majority shareholder)
- a tag-along right requiring the majority shareholder to include the minority shareholder’s stake in any sale to a third party on the same terms, and
- a put option requiring the majority shareholder to buy the minority shareholder’s shares in certain specified circumstances
A majority shareholder will generally want the ability to run the joint venture with a minimum of interference from the minority shareholder. It will therefore seek to limit the minority shareholder’s influence by keeping the list of reserved matters
and other contractual protections for the minority shareholder to a minimum. The majority shareholder may also seek to include provisions to protect its own position, e.g.:
- a drag-along right requiring the minority shareholder to participate in any sale of shares to a third party on the same terms, and
- a call option requiring the minority shareholder to sell all its shares to the majority shareholder in certain specified circumstances
The extent of the majority and minority protection provisions included in the joint venture documentation will depend on the relative negotiating strength of the parties.
Charltons has experience in assisting Hong Kong SMEs with equity fund raising and offering Hong Kong listing advice.
Charltons has vast experience of advising Hong Kong SMEs positioning themselves for significant equity fund raising or listing. We can offer Hong Kong listing advice.