Public takeovers in Hong Kong
Charltons provides high impact advice to clients involved in public M&A transactions in Hong Kong, including offerors, targets, controlling and minority shareholders, boards of directors and special committees, financial advisers and concert group members. As well as mandatory, voluntary and recommended offers, Charltons has advised on some of the very few hostile takeovers in the Hong Kong market. We have also structured and advised on successful privatisations in Hong Kong in recent years. We have advised on public M&A transactions across a range of industries, and are particularly experienced in deals in the natural resources sector.
We aim to provide smart and practical advice when encountering the many issues that typically arise in the course of a public M&A transaction, including stake building, statutory disclosure of interests and mandatory offer thresholds under the Takeovers Code, preparing for the bid and preliminary communications, negotiating preliminary documents and deal protection measures (such as offer letters, term sheets, exclusivity, standstill and non-solicitation agreements, break-up fees, board support letters, matching rights), structuring and advising on the form of legal process to implement the deal (such as offers and schemes of arrangement), drafting bid consortium agreements, irrevocable undertakings, and offer and response documents, responding to competing offers, directors’ fiduciary duties, defensive measures, protections for minority shareholders and mechanisms to buy-out shareholders. We also advise on executive and employee compensation issues, post-closing integration and transition. We manage relations with the SFC and, where the target is to be privatised, the Hong Kong Stock Exchange. We also advise on merger control and antitrust issues in Hong Kong.
Our multidisciplinary lawyers have wide experience across M&A, capital markets and corporate finance, as well as in dealing with the SFC, the Hong Kong Stock Exchange and other regulatory and governmental bodies in Hong Kong. Julia Charlton, our senior partner, was appointed to the SFC’s Takeovers and Mergers Panel and a member of the Takeovers Appeal Committee Panel in October 2005 and continues to serve on these panels. This experience gives us crucial insights into the complexities of Hong Kong public bids and the Takeovers Code framework, as well as an understanding of how the Takeovers and Mergers Panel and Takeovers Appeal Committee operate. We provide an insightful and highly personalised service to clients, delivering legal advice on complex issues in plain language.
As well as advising on public M&A in Hong Kong, we have wide experience of cross border and international public M&A deals, and have acted on some of the most ground breaking Chinese “outbound” M&A deals in recent years, including Zijin Mining’s acquisition of Monterrico Metals, one of the first takeovers of a UK listed company by a Chinese acquirer. The firm also has extensive personal links with firms in over 60 countries worldwide and often acts as the coordinating law firm for public M&A transactions when advice from multiple jurisdictions is required.
The Hong Kong Takeovers Code
The Hong Kong Takeovers Code is particularly concerned with:
- the acquisition of shares in a listed issuer which results in a change in control (currently defined as holding or aggregate holdings, of 30% or more of the voting rights of a company, irrespective of whether that holding(s) gives de facto control); and
- further acquisitions of shares in the listed issuer of a controlling shareholder which holds 30% to 50%.
In particular, Rule 26 of the Hong Kong Takeovers Code requires the making of mandatory general offer to all shareholders of the issuer in the following circumstances:
- when any person (or two or more persons acting in concert) acquires, whether by a series of transactions over a period of time or not, 30% or more of the voting rights of a target company; and
- when any person (or two or more persons acting in concert) holding not less than 30% and not more than 50% of the voting rights of a company, acquires additional voting rights that increase his or their holding of voting rights by more than 2% from the lowest percentage holding by that person (or the concert group) in the preceding 12 month period. This is known as the “creeper provision”.
The Executive Director of the Corporate Finance Division of the Securities and Futures Commission (the “Executive”), however, has wide discretion to grant waivers in respect of the above mandatory general offer obligations. Such waivers are however subject to the adherence to the spirit and general principles of the Takeover Code. Further, a waiver would not normally be forthcoming in the case of an acquisition of further securities which trigger the creeper provision.
A mandatory offer would need to comply with the significant substantive, procedural and disclosure obligations imposed by the Hong Kong Takeovers Code.
Except with the consent of the Executive, a mandatory offer must be made conditional only upon the issuer having received acceptances in respect of voting rights which, together with voting rights acquired or agreed to be acquired before or during the mandatory offer, will result in the issuer and any person acting in concert with it holding more than 50% of the issuer’s voting rights.
Mandatory offers must be in cash or offer a cash alternative at not less than the highest price paid by the offeror for shares during the offer and the six months preceding the offer.
The offeror must be able to show that the cash consideration is fully funded at the announcement date of the offer, as the Takeover Code requires that the offeror’s announcement and the offer document both include confirmation by the offeror’s financial adviser that sufficient financial resources are available to pay the aggregate consideration.
Normally, for an offeror to acquire 100% control of the issuer, it would need to resort to a squeeze out of minority shareholders who do not accept an offer. In Hong Kong, a squeeze out can only be implemented by a shareholder who has acquired at least 90% of voting shares for which the offer is made (by virtue of acceptances of the offer).
A voluntary offer is one where the offeror and persons acting in concert with him makes an offer to all shareholders of the offeree company to purchase shares from those shareholders.
Any person may make a voluntary offer by compliance with substantive, procedural and disclosure requirements of the Hong Kong Takeovers Code provided that the consequences of such an offer does not trigger a mandatory offer or the creeper provision.
A voluntary offer would afford the offeror with greater flexibility in structuring the takeover transaction in comparison with a mandatory offer. Unlike a mandatory offer, a voluntary offer may incorporate any number of conditions (which should not be revoked) except conditions which depend on the offeror’s own judgment or the fulfillment of which is in his control or at his discretion – they must be objective conditions, such as a specific acceptance level (which can be higher than 50%) or the obtaining of regulatory approvals.
The consideration must not be substantially below the market price of shares in the issuer and it may be paid in cash or shares (or may offer either as alternate).
As with mandatory offers, the offeror must be able to show that the cash consideration is fully funded at the announcement date of the offer and the Hong Kong Takeovers Code requires that the offeror’s announcement and the offer document both include confirmation by the offeror’s financial adviser that sufficient financial resources are available to pay the aggregate consideration.
Subject to the consent of the Executive, a shareholder could also acquire up to 29.99% of the voting rights of the issuer by way of a partial offer (i.e. an offer for less than 100% of the voting rights of the issuer) although this is not common in Hong Kong.
Partial offers aimed at acquiring a controlling stake (i.e. 30%) but less than 100% of the target’s shares are effectively precluded.