A comparison of M&A laws

Government incentives and increased interest from global investors fuel Asia M&A buzz. Staying on top of emerging trends and the latest regulatory environments is crucial for dealmakers to keep relevant in the competitive market

INDIA

JAPAN

PHILIPPINES

TAIWAN

THAILAND

VIETNAM

HONG KONG

INDIA

M&A activity witnessed a return to pre-pandemic levels globally in 2022 with businesses seeking long-term investments at attractive valuations and returns. As a result, India became a desirable location encouraged by government efforts to increase corporate efficiency and implement progressive reforms; while Indian businesses reached scalable levels for investment and buyout.

India’s attractiveness resulted in surpassing all previous records of strategic M&A deal volume and value in 2022, driven by expansion, consolidation and new entries into the Indian market. Record levels of cash targeting the market along with the availability of quality assets helped deliver a boom in dealmaking, with deal values rising by 139%.

The country’s regulatory framework provides a variety of investment paths with varied categorisations, depending on the type of investment vehicle utilised. This enables domestic and foreign investors to take advantage of India’s rapidly expanding sectors through structured transactions.

M&A in India is predominantly governed by the Companies Act, 2013; the Foreign Exchange Management Act, 1999, read alongside the Foreign Direct Investment Policy and circulars, notifications and master directions issued by the Reserve Bank of India; the Securities and Exchange Board of India Act, 1992, along with the circulars, notifications, guidelines and directions issued by the Securities Exchange Board of India (SEBI); the Competition Act, 2022; and various rules framed under the above-mentioned acts.

KEY FOCUS AREAS

• As an essential instrument for achieving net-zero emissions, green financing is gaining traction in the Indian economy. The transition to a greener economy is being steered by initiatives like sustainable investment techniques, renewable energy assets and avoidance of carbon taxes.
• Increased interest is seen from banks, non-banking financial companies, venture capital and private equity funds in green finance opportunities.
• Traditional sectors including banking, financial services, insurance, healthcare, energy and manufacturing grew by 50% to around USD28 billion.
• Environmental, social and governance (ESG) investments emerged as a breakout theme in 2022, with clean energy and electric vehicle investments leading the way, reaching nearly USD7.9 billion.

ESG INVESTMENT

Along with notification of the Energy Conservation (Amendment) Act, 2022, regulators have increased their focus on ESG. Measures include authorising 100% foreign direct investment for renewable power generation and distribution projects, introducing an ESG category of mutual funds, granting a INR350 billion (USD4.3 billion) outlay for growth in the green energy transition, approving the National Green Hydrogen Mission, and mandating ESG-related disclosures under SEBI and the business responsibility and sustainability report framework under the Companies Act, 2013.

India has also witnessed visible traction with many ESG-focused funds making entries. For instance, Aavishkaar Capital, the Mumbai-headquartered impact investing arm of the Aavishkaar Group, announced the launch of a USD250 million ESG-first fund in collaboration with German investment and development bank KfW. The fund will focus on investing in Asia and Africa to strengthen ESG practices of mid-cap businesses, and offer them growth capital.

Corporations are also taking steps towards ESG. For example, JSW Cement signed its first sustainability-linked loan of INR4 billion (USD50 million) with MUFG Bank India and plans to deploy these funds to achieve its capacity target of 25 million tonnes per annum with an increasing focus on sustainability.

INSURANCE

With an increase in private equity investments, the emergence of customised risk products, development of an experienced ecosystem of underwriters – and advisers providing solution-oriented counsel – are some of the key metrics paving the way for warranty and indemnity insurance.

With developments in the warranty and indemnity insurance market and comfort insurers, the value proposition of the product is stronger due to reduced “deductibles” (including zero deductibles for title risks), lower insurance premiums and strong terms for the insured.

VALUATIONS

After a decade of stable, low-interest rates and steadily rising valuations, a major concern of the M&A industry has been inflated valuations and a significant gap between investor expectations and the bid-ask from investor companies or sellers. Valuations are now returning to healthy figures as liquidity tightens around the world. Investors are undertaking due diligence on time and revising valuation metrics not only in the fintech sector but also in edtech and the fast-moving consumer goods sectors.

CHALLENGES IN DEALMAKING

• India has progressively increased the flow of money towards the ESG sector, but still faces challenges. Many sectors are unable to contribute towards ESG solely because of the nature of their product and the techniques utilised. Companies need to consciously move towards ESG and diversion of capital towards business models utilising greener sources of energy and renewables. The Competition (Amendment) Act, 2023, has also ushered in significant regulations affecting the cross-border space.
• Scrutiny into deals and heavy fines on non-compliant conglomerates – notably Amazon and Google – points towards uncertainty and added concerns among dealmakers in respect of strict regulatory adherence and their impact on ongoing transactions.
• In terms of data protection, India does not have a standalone law at present and usage of personal data is regulated by the Information Technology Act, 2000. With the introduction of the Digital Personal Data Protection Bill, 2022, regulators are intensifying scrutiny on the processing of digital personal data both within and outside the country for limited purposes.

Greater attention to data protection will prompt acquirers to examine target companies’ business models to ascertain the amount of data possessed and transferred.

GROWTH TRENDS

Recent M&A in industries including contract manufacturing, renewables, pharmaceuticals and healthcare are being fuelled by a shift in which private equity firms, conglomerates and unicorns are acquiring assets and combining them to build platforms. For example, with strategic investment in health food brand Yoga Bar, Indian conglomerate ITC bolstered its position and quickly expanded its nutrition-driven healthy foods market. Zomato’s acquisition of delivery service Blinkit facilitated the former’s Zomato competition with its rival Swiggy, infiltrating the instant delivery market.

Amid a surge in acquisitions of companies, some of the larger deals also include HDFC Bank and Housing Development Finance Corp nearing completion of their much-awaited and unprecedented merger via a swap of shares, creating India’s fifth most valuable bank, with a net worth of about USD168 billion. Also noteworthy is Reliance Retail Ventures’ acquisition of the cash and carry business Metro Cash & Carry India, of German retailer Metro AG, growing the retail empire of Reliance Industries.

Corporate management teams and investors are also raising the bar on capital allocation in response to rising capital costs by divesting underperforming and non-core companies where there is less confidence in their ability to expand profitably as a member of the group organisation. Debt reduction is one of the significant reasons for divestment. For example, with Citibank losing momentum in the credit card business, its spending share fell to 6% in 2021 from around 11% in 2018. In 2021, Citibank decided to sell its retail banking business to the fourth-largest issuer of credit cards, Axis Bank, which acquired Citibank’s consumer business and non-banking financial assets business for approximately INR116 billion, adding approximately 2.5 million credit card holders, making it one of the top three card businesses in India.

Meanwhile, the Reserve Bank of India has streamlined and liberalised the existing regulatory fabric to cover a wider scope of economic activities and reduce the need for approvals with the introduction of the Foreign Exchange Management (Overseas Investment) Rules, 2022, Foreign Exchange Management (Overseas Investment) Regulations, 2022, and Foreign Exchange Management (Overseas Investment) Directions, 2022 – collectively known as the OI Guidelines. These enhanced OI Guidelines will boost both local and international players’ trust in the government’s goal to ease dealmaking over coming decades.

KEY TAKEAWAYS

Shardul Amarchand Mangaldas & Co

Express Towers, 23rd Floor

Nariman Point, Mumbai

Maharashtra – 400 021, India

Contact details:
Tel: +91 22 4933 5555
Email: Connect@AMSShardul.com

www.amsshardul.com

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JAPAN

The pandemic and rise in geopolitical tensions have triggered significant developments in the regulation of M&A worldwide, and Japan is no exception. Prospective investors should pay attention to recent developments in two major areas of regulation on foreign direct investments (FDIs) and takeover defence measures in Japan.

FDI REGULATION

A key piece of legislation regulating FDIs that has been amended to address international developments is the Foreign Exchange and Foreign Trade Act (FEFTA). Although some of the activities are not expressly referred to as investments, among others, the FEFTA broadly regulates the following:

• Acquisition of 1% or more of the shares in a listed company in Japan;
• Acquisition of share(s) in unlisted companies in Japan from people who are not foreign investors;
• Affirmative votes on certain matters in a Japanese company under certain circumstances, such as a substantial change in the scope of business, and the appointment of a director or corporate auditor;
• Provision of loans to Japanese companies that exceed statutory thresholds; and
• Establishment of a branch, factory, or other business office in Japan.

Under the FEFTA, a foreign entity investing in Japan must submit an ex post facto report to the relevant government ministries via the Bank of Japan. However, if the target company (or any of its subsidiaries) is within certain business sectors prescribed by the FEFTA and related government ordinances (designated business sectors), the act requires the provision of prior notification to the relevant government ministries.

It should be noted that designated business sectors encompass not only traditional ones related to national security (e.g., telecommunications, nuclear power and others) but also covers tech-related industries, including software manufacturing and information processing. It is also noteworthy that the designated business sectors list is continually updated based on global developments around national and economic security.

Some sectors recently added to the list include pharmaceuticals or medical equipment-related businesses (in response to the global pandemic) in 2020, rare earth-related mining businesses (to ensure the stable supply of rare earths) in 2021, and several businesses in the supply chain of essential materials and products, such as semiconductors, industrial robotics and the like (in light of increasing concerns around supply chains and unsanctioned use of civilian technologies for military purposes) in 2023.

It is generally understood that these additions are designed to bring FDI regulation into alignment with the newly introduced Economic Security Promotion Act, which seeks to enhance Japan’s economic security, although it does not directly regulate FDIs in Japan.

The FEFTA provides exemptions from the prior notification requirement, but assessment of their applicability involves considerably complex and technical analysis and procedures. For example, exemptions from the prior notification requirement are not available in principle for investments in “core” designated business sectors that are particularly important and “sensitive”. This creates uncertainty for investors because authorities tend to pay greater attention and are more likely to closely scrutinise investments into core business sectors.

Regulators possibly may also continue to monitor investments that qualify for an exemption but are still considered sensitive. For instance, Tencent Holdings’ investment in Rakuten Group, Japan’s mobile network operator, was structured to qualify for exemption from prior notification to the regulatory authority, but the Japanese government subsequently announced its intention to keep surveilling the investment.

Where prior notification is required, the government ministries responsible for the relevant designated business sector will review a proposed transaction for a 30-day statutory period from the date on which the notification is formally accepted, and the transaction cannot be closed during this time. Proposed transactions deemed as problematic on grounds of national security or public order and safety will be subject to suspension or transaction restructuring.

Given the continued expansion of the designated business sectors list in the past few years, foreign investors need to be well advised to determine whether the prior notification requirement is applicable. For instance, a significant number of investments into tech startups have triggered a pre-closing review under the FEFTA. Further, it can sometimes be overlooked that FDIs under the FEFTA involve affirmative voting by foreign shareholders of the target and such votes may trigger the prior notification requirement.

Foreign investors should conduct careful checks in advance and work with experienced local counsel to come up with a systematic approach to navigate Japan’s FDI regulations and avoid inadvertent violation of the prior notification requirement, as well as streamlining the investment process.

TAKEOVER DEFENCE MEASURES

Anderson Mori & Tomotsune

Otemachi Park Building

1-1-1 Otemachi, Chiyoda-ku

Tokyo 100 8136, Japan

Contact details:
Tel: +81 3 6775 1000
Email: info@amt-law.com

www.amt-law.com

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PHILIPPINES

Fuelled by a strong mandate from the people, the Philippines is implementing key reforms affecting M&A.

RENEWABLE ENERGY

Philippine solar, wind and hydropower projects are now open to 100% foreign ownership. In September 2022, the Department of Justice (DOJ) issued DOJ Opinion No. 21 recognising that solar, wind, hydro and ocean or tidal energy resources are not “natural resources” under the 1987 Constitution.

In line with this opinion, the Department of Energy (DOE) issued DOE Department Circular No. DC 2022-11-0034 in November 2022, lifting foreign ownership restrictions in the renewable energy industry. Prior to the DOJ opinion, the foreign equity restrictions under article XII, section 2 of the 1987 Constitution were applied to the renewable energy sector.

The strict constitutional restrictions on natural resources were often viewed as discouraging much-needed foreign investment in the Philippines. Initially, the DOJ opinion was met with skepticism as some viewed it as an unauthorised reinterpretation of the term “natural resources” under the 1987 Constitution. Nevertheless, no one has challenged the validity of the issuances of the DOJ and DOE. Pending the final action of the Supreme Court in an actual case or controversy, investors can rely on the legal principle that these issuances are presumed to be valid and constitutional.

PUBLIC UTILITIES

Philippine telecoms, including several businesses previously regarded as public utilities, are now open to 100% foreign ownership. In March 2022, the Congress of the Philippines enacted Republic Act No. 11659, amending the archaic Commonwealth Act No. 146 that defined public utility. The amendments restricted the definition of public utility to a public service that operates, manages, or controls for public use any of the following:

• Distribution of electricity;
• Transmission of electricity;
• Petroleum and petroleum products including pipeline and transmission systems;
• Water pipeline distribution systems and wastewater pipeline systems, including sewerage pipeline systems;
• Seaports; and
• Public utility vehicles.

By restricting the definition of public utility to the above-mentioned exclusive list, Republic Act No. 11659 now excludes numerous businesses traditionally classified as public utilities including airport operations, railway operations and telecommunications, from article XII, section 11 of the 1987 Constitution, which imposes a 40% maximum foreign ownership restriction.

The restricted definition under the amended law also effectively reverses many opinions rendered by the Securities and Exchange Commission and other government agencies that expanded the definition of public utility, which then included, among others, ground-handling operations at airports.

In light of the above-mentioned development, the 12th Foreign Investment Negative List (FINL) now reflects that the telecoms industry is not a public utility, for instance, and hence not covered by the 40% maximum foreign equity restriction. So a telecoms company may now be 100% foreign owned, subject only to special conditions including the requirement of reciprocity by the state of the foreign investor where critical infrastructure is involved.

It is important to note, however, that Republic Act No. 11659 prohibits an entity controlled by or acting on behalf of a foreign government, or foreign state-owned enterprises, from owning capital in any public service classified as a public utility or critical infrastructure. The law defines critical infrastructure to mean any public service that owns, uses or operates systems and assets, whether physical or virtual, so vital to the Philippines that the incapacity or destruction of such systems or assets would have a detrimental impact on national security, including telecoms and other vital services as may be declared by the president.

Where the public service is critical infrastructure, the law prohibits foreign nationals from owning more than 50% of the capital of entities engaged in the operation and management of said critical infrastructure, unless the country of such foreign national accords reciprocity to Philippine nationals under foreign law, treaty or international agreement. Reciprocity may be satisfied if the country of the foreign investor accords rights of similar value in other economic sectors.

As in the case of relaxation of the constitutional restrictions on the utilisation of natural resources, the amendment to the definition of public utility was also initially met with criticism from conservative constitutionalists who look at the definition of public utility as not merely a statutory one but, more importantly, a constitutional one. As a constitutional concept, it has been argued that the same cannot be modified by a mere statute. Nevertheless, the law is presumed valid unless annulled by appropriate courts.

RETAIL TRADE, DEFENCE MATERIAL

The FINL also reflects amendments to the Retail Trade Liberalisation Act, lowering the paid-up capital of retail trade enterprises from USD2.5 million to PHP25 million (USD458,000). Hence, foreign entities engaged in retail trade enterprises may set up business more easily.

The manufacture or distribution of products requiring clearance from the Department of National Defence was removed from the 12th FINL, effectively removing any foreign equity restriction. Previously, the manufacture of guns and ammunition for warfare, military ordnance, guided missiles, tactical aircraft, space vehicles and military communication equipment were limited to 40% foreign equity.

NEW MERGER THRESHOLDS

Parties to M&A must also consider the new merger notification thresholds set by the Philippine Competition Commission (PCC): the size of the parties test; and the size of the transaction test.

From 1 March 2023, M&A parties are required to notify the PCC if the size of the party exceeds PHP7 billion and the size of the transaction exceeds PHP2.9 billion.

Failure to comply with merger notification exposes parties to substantial fines ranging from 1% to 5% of the value of the transaction. Under the Philippine Competition Act, the M&A agreement is also void without prejudice to the PCC’s finding that the M&A is prohibited if it leads to a substantial lessening of competition in the relevant market. A declaration that the M&A is void for non-compliance with the merger control requirements also exposes future transactions of the parties to stricter regulatory scrutiny.

TAX REFORMS

Sarmiento Loriega Law Office

29/F, Joy Nostalg Center, 17 ADB Ave. Ortigas

Pasig City, Metro Manila – 1600, the Philippines

Contact details:
Tel: +63 2 7 798 8115
Email: info@sl-lawoffice.com

www.sl-lawoffice.com

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TAIWAN

Taiwan’s cross-border transactions had declined in the past two years, due to global uncertainties relating to the pandemic, travel restrictions and supply chain disruptions. With a greater focus on local development, there has been a rise in injected capital into domestic green energy developments, such as wind and solar power farms.

As evidenced by statistics published by the Investment Commission of the Ministry of Economic Affairs (MoEA), the authors also see an increase in industries such as shipping, warehousing, wholesale and retail, signalling that businesses in Taiwan are ready for the opening of borders and anticipating a renewed rise in cross-border commerce.

This is also expected to bring about a new upward trend in the local M&A market, as companies begin to seek new opportunities while manufacturers, suppliers and business partners deepen their impact and presence in the Asia-Pacific region.

KEY LEGISLATION

Key statutes relevant to M&A are:

• The Company Act, promulgated by the MoEA;
• The Business Mergers and Acquisitions Act, promulgated by the MoEA;
• The Securities and Exchange Act, promulgated by the Financial Supervisory Commission; and
• The Statute for Investment by Foreign Nationals, promulgated by the MoEA.

It is worth noting that depending on the industry and deal structure of each M&A transaction, additional statutes and regulations may also be applicable.

For example, where the overseas investor intends to transact in the renewable energy industry, such as wind and solar power farms, the Renewable Energy Development Act will come into play. Where the M&A deal involves a drastic change in the employment of current employees, the Labour Standards Act (as promulgated by the Ministry of Labour) may become applicable.

REGULATORY UPDATES

In response to the focus on the local market, a new amendment to the Securities and Exchange Act was promulgated on 21 April 2023. Prior to the amendment, any individual or entity acquiring more than 10% of the total issued shares of a public company shall report such an acquisition to the competent authority and make a public announcement; and any public tender offer to purchase the securities of a public company that bypassed the centralised securities exchange market or over-the-counter market could be conducted only after the offer was reported to the competent authority.

After the amendment, the reporting threshold has been lowered to 5% of the total issued shares of a public company.

The Executive Yuan also earlier published and passed an amendment to the Business Mergers and Acquisitions Act, on 24 May 2022. Since the amendment, current directors of the board are now required to declare any material interests and reasons behind their approval or objection to the merger, strengthening informational transparency between the company and shareholders, and allowing shareholders to make a more informed decision regarding mergers.

Additionally, restrictions requiring the approval of the shareholders’ meeting have been eased. Merger deals where the consideration does not exceed 20% of the net value of the company may now be decided by the board of directors alone, streamlining and accelerating the merger process. The amendment allows for the cost of intangible assets obtained through the merger to be amortised within a set range of time, and also allows startup entrepreneurs to pay income tax on considerations received from selling a startup company within the next three years.

The above-mentioned amendments aim to create a friendly environment for M&A of businesses, and the authors anticipate a rise in the number of M&As with travel restrictions cancelled and cross-border commerce picking up again.

Earlier, in January 2020, the Judicial Yuan promulgated the Commercial Case Adjudication Act. In the past, commercial litigation cases were often complicated, with a tendency to spawn other cases, and often unable to be resolved within a short period of time. This could lead to restricting operations of related companies, impacting market enthusiasm to invest, and may even impact or damage Taiwan’s economic competitiveness.

The Commercial Case Adjudication Act simplifies the litigation process by implementing mandatory mediation before any litigation commences, and appoints experienced finance professionals as well as those with related backgrounds to act as mediators.

Further, for cases that fail to be resolved through mediation, the commercial court bars parties from representing themselves and mandates parties to appoint qualified attorneys. This further simplifies and quickens the process, creating a friendlier environment for businesses to deal with potential commercial disputes.

INVESTMENT HURDLES

Despite multiple legislative efforts to attract inbound investment, foreign investors still need to jump through several hurdles, depending on the circumstances.

Firstly, to maintain an understanding of the industries and ensure compliance with regulations, the Investment Commission sets standards and examines investments both by foreign investors into Taiwan and outbound investments.Foreign investors must apply to the Investment Commission for approval prior to investment. Subject to the Statute for Investment by Foreign Nationals and related enforcement rules, it is at the discretion of the commission whether to approve or deny such a request.

Even if the application is approved, the Investment Commission may request further documentation. Due to the strict and detailed review process, it is not uncommon for an application to take several months before ultimately being approved.

Secondly, the Cross-Strait Act and its enforcement rules, as promulgated by the Mainland Affairs Council of Taiwan, regulate investment in the island by mainland-funded businesses and individuals. Mainland Chinese businesses with a large amount of capital may, depending on the circumstances, encounter difficulty investing in certain restricted industries.

In addition, due to recent global uncertainties relating to trade tension between the US and mainland China, international companies may need to reconsider their overall composition and arrangement when dealing with the two global powers.

Investors, therefore, need to think and strategise carefully about any potential impact not only of ongoing trade tension, but also ramifications on their businesses regionally.

Lastly, the US Federal Reserve announced interest rate hikes by seven times alone in 2022, continuing into 2023. In response, Taiwan’s Central Bank has also announced interest rate rises, prompting local banks to follow suit. For businesses requiring facilities from financial institutions, this may be another hurdle; taking potential future interest rate hikes into account when determining M&A offers.

M&A OUTLOOK

DENTONS

3F, No. 77, Section 2

Dunhua South Road

Taipei, Taiwan

Contact details:
Tel: +886 2 2702 0208
Email: james.hsiao@dentons.com.tw

www.dentons.com.tw

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THAILAND

M&A transactions for private and public limited companies in Thailand can be achieved in many ways, including acquiring shares from existing shareholders of a limited company, subscribing to new shares issued by a limited company, an amalgamation of limited companies, acquiring all or part of the assets or business of a limited company, and a merger of private limited companies.

The Civil and Commercial Code is the key legislation governing private limited companies, while public limited companies are mainly governed by the Public Limited Company Act of 1992, as amended, unless listed on the Stock Exchange of Thailand (SET), in which case the Securities and Exchange Act of 1992, the Securities and Exchange Commission (SEC) Rules, the Capital Market Supervisory Board (CMSB) Rules, and the SET Rules also apply. The legal framework for most M&A transactions concerning Thai limited companies is also provided in both the code and the Public Limited Company Act.

NEW TYPE OF COMBINATION

On 7 February 2023, the Act Amending the Civil and Commercial Code came into effect, introducing a new merger scheme as another approach to business combination for private limited companies. A merger under the amended Civil and Commercial Code is a merger of two or more companies, resulting in either a new company with all merged juristic entities ceasing to exist or one of the companies continuing to exist with the other companies ceasing to exist as juristic entities.

The merger replaces the “amalgamation” in the previous version of the code, which merely prescribed a legal framework and identified the implications of mergers but did not specify a concrete legal framework for the acquisition of assets or businesses.

Arguably, the first type of merger described above is the same as an amalgamation under the previous version of the code, while the end result of the second type of merger is similar to an entire business transfer where one of the companies continues to exist after the merger. The difference is that the amended code has put the same legal procedures in place for both types of mergers, including:

• An approval resolution from a shareholders’ meeting;
• Registration of the resolution with the public registrar;
• Arrangement for a purchase of shares from disapproving shareholders;
• A notice to creditors for raising any objections;
• A joint meeting between the shareholders of all merging companies; and
• Registration of the merger with the public registrar.

After a merger (of either type), the new or surviving company assumes all assets, liabilities, rights, obligations, and responsibilities of the dissolved companies, by virtue of the amended Civil and Commercial Code.

For listed companies, the requirements and procedures under the Public Limited Company Act, the Securities and Exchange Act, the SEC Rules, the CMSB Rules, and the SET Rules also need to be considered.

COMMON M&A STRUCTURES

Although M&A transactions can be structured in many ways in Thailand, the acquisition of an existing limited company’s shares is the most common one. It is less complicated, has fewer legal procedures and makes for a smoother transition of business ownership (when the acquisition is of all or most of the shares) than an asset or business acquisition. The acquisition of shares in an existing limited company (often referred to as a target) can occur through an acquisition of shares from the target’s existing shareholders or through a subscription of new shares issued by the target (or through a combination of these). These two methods are described below.

In the acquisition of shares from existing shareholders, shares in a private or non-listed public company can be acquired through a share sale and purchase agreement with the selling shareholders that sets commercial terms such as the amount of shares to be sold, date of the transaction closing, selling price, pre-closing conditions, warranties and indemnities. An acquisition of shares in a private company can be executed by the selling shareholders through a simple share transfer instrument specifying the details as required by the Civil and Commercial Code, together with recording the transactions in the target company’s register of shareholders. A transfer of shares in a non-listed public company becomes effective between the parties on the endorsement and delivery of the share certificate to the purchaser, pursuant to the Public Limited Company Act.

An acquisition of shares from the existing shareholders of a listed company can be arranged with or without a sale and purchase agreement and by way of a mandatory or voluntary tender offer. An acquisition with one or more selling shareholders may trigger a mandatory tender offer for the remaining shares if it falls under certain conditions, such as the acquisition of shares reaching a trigger threshold of 25%, 50%, or 75% of the total voting rights of the target. Alternatively, a voluntary tender offer for all shares of the target or for 25% or more but less than 50% of the shares is another possible way of acquiring shares in a listed company.

An acquirer can also subscribe to newly issued shares in a private or non-listed public company, which can proceed through a share subscription agreement that includes commercial terms such as the amount of shares to be allotted and subscribed, the subscription price, pre-closing conditions, warranties, and indemnities. Under this structure, the target company needs to increase its registered capital in accordance with the legal procedures prescribed in the Civil and Commercial Code or the Public Limited Company Act, including obtaining an approval resolution of not less than three-quarters of all stock held by the shareholders in the shareholders’ meeting and having the capital increase registered with the public registrar.

As for a listed company, the increase of registered capital and offering of newly issued shares on a private placement basis must be approved by the SEC in accordance with the commission’s rules and regulations, as well as any other applicable laws. The SEC has revamped various rules relating to private placements by listed companies with a view to streamlining the offering process and reducing the documentation required for submission. Most of these rules were revised by the CMSB on 28 December 2022 and came into effect on 1 July 2023. The key amendments include elimination of the application requirement, requiring submission of an independent financial advisory opinion, simplification of the market price calculation and clarification of the offering period.

FOREIGN OWNERSHIP RESTRICTIONS

Tilleke & Gibbins

26/F, Supalai Grand Tower

1011 Rama 3 Road, Chongnonsi, Yannawa

Bangkok – 10120, Thailand

Contact details:
Tel: +66 2056 5555
Email: bangkok@tilleke.com

www.tilleke.com

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TRENDS AND CHALLENGES

Tilleke & Gibbins

25/F, Viettel Tower A, Suite 2506

285 Cach Mang Thang Tam, District 10

Ho Chi Minh City, Vietnam

Contact details:
Tel: +84 28 628 45678
Email: vietnam@tilleke.com

www.tilleke.com

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HONG KONG

Hong Kong is a special administration region of China with its own legal system. It is an international deal hub and financial center with sophisticated financial and professional service capabilities. It maintains strong economic ties with the Greater China region and provides international businesses and investors with an invaluable foothold to access China and other regional markets. Transactions in Hong Kong are often multijurisdictional in nature. Thus, navigating local laws and regulations that may apply, as well as the different commercial realities and market practices is important to ensure a smooth and cost- and time-efficient deal process. It’s also necessary to ensure the transaction is appropriately structured to address parties’ concerns and mitigate risks.

Companies Ordinance

Acquisition of Hong Kong shares is mainly governed by the Companies Ordinance, which makes up a part of the Hong Kong statutory law. The Companies Ordinance regulates the registration, record-keeping and filing requirements of companies incorporated in Hong Kong and overseas companies with a place of business in Hong Kong. It also regulates the ownership and management of Hong Kong-incorporated companies and their dealings with third parties.

The ordinance imposes certain restrictions if an acquisition requires a Hong Kong-incorporated company to take the following actions:

• Reduction of share capital, in which case the company must be solvent after the reduction and the approval of the reduction by disinterested shareholders in a special resolution;
• Provision of financial assistance for the purchase of its own shares, in which case the company must be solvent after the assistance, plus one of the following: the quantum of assistance is within the 5% statutory limit or the assistance is approved by shareholders within the timeframe stipulated;
• Declaration and distribution of dividends, in which case the company must have sufficient distributable profits, an amount to be computed using the prescribed formula and on a standalone basis;
• Exercise of the statutory squeeze-out right, in which case the acquirer must extend a buy-out offer to the other shareholders, acquire at least 90% of their shares, and exercise the right within the timeframe stipulated;
• Scheme of arrangement, in which case the proposal must be approved by the court and voted upon by the stakeholders affected by the scheme and the voting results must satisfy the statutory requirements; and
• Amalgamation with another company, in which case both companies must be within the same group; all companies involved in the amalgamation, including the amalgamated company, must be solvent; and the amalgamation must approved by the shareholders of each amalgamating company in a special resolution.

Takeovers Code

Acquisitions of Hong Kong listed shares are mainly governed by the Takeovers Code, a set of non-statutory rules that does not have the force of law. Market participants in breach of the code could be penalised by “cold shoulder” orders, which effectively preclude them from functioning in the local market.

The Takeovers Code regulates the conduct of general offers, change-in-control transactions (irrespective of how the control stake is acquired), share buybacks and privatisations. The regulations are grounded on the principle that all shareholders should be treated equally and fairly when a “public company” is acquired.

The code is applicable to the acquirer (foreign or domestic) under the following circumstances:

• when the acquirer makes a voluntary general offer soliciting shareholders to sell their shares, in which case the offer must comply with the pricing terms, timing and mechanisms prescribed by the code;
• when the acquirer: (1) first crosses the 30% shareholding threshold; or (2) increases its holding by more than 2% in any given 12 months when its shareholding is between 30% and 50%, in which case (unless a waiver is obtained from the regulator) the acquirer must make a mandatory general offer giving other shareholders the option to sell their shares at the same consideration, with such amount calculated using the prescribed formula; and
• when the acquirer seeks to privatise the company, in which case the transaction must receive the support of the remaining shareholders based on the standards of the code.

Listing Rules

The Listing Rules are promulgated by the Hong Kong Stock Exchange, operator of the sole securities exchange in Hong Kong and a listed company controlled by the Hong Kong government as its single-largest shareholder. Companies listed on the Stock Exchange have continual obligations and their directors have the contractual obligation to follow the Listing Rules, but the rules do not have the force of law.

Although the acquirer may not be subject to the Listing Rules, their requirements on the listed company could delay the transaction timetable, increase uncertainties in the process and make the acquisition more costly.

Securities and Futures Ordinance

The Securities and Futures Ordinance governs the conduct of financial intermediaries and other capital and financial markets participants. The ordinance is a part of the statutory law of Hong Kong, and non-compliance could result in civil and criminal liabilities. Provisions of the ordinance most relevant to acquisitions include:

• Directors, chief executives and significant shareholders of Hong Kong listed companies must disclose their voting interests in such companies;
• Hong Kong listed companies must follow the prescribed standards when handling material non-public information; and
• Insider dealing and other types of market misconduct are criminal offenses.

Stamp Duty Ordinance

The Stamp Duty Ordinance requires the payment of stamp duties in any transfer of shares in Hong Kong-incorporated companies, Hong Kong listed shares, and real properties located in Hong Kong. Stock transfers require payment of the ad valorem stamp duty, calculated at the rate of 0.26% of the market value or, if higher, the consideration paid. Real property transfers are more complex, as there are four types of stamp duties payable, depending on the status of the seller and buyer and the nature and use of the property.

Transaction Structure

Except for the amalgamation of companies within the same group pursuant to the Companies Ordinance, Hong Kong does not have a court-free merger regime. Acquisition of Hong Kong companies is made either through a share sale or an asset sale.

Acquisition of Hong Kong listed shares (irrespective of the jurisdiction of incorporation of the share issuer) may be made through market purchases, off-market transactions, and the extension of a general offer, plus other mechanisms permitted under the law of the company’s home jurisdiction.

Foreign Investment

Despite the general principle of “positive non-interventionism”, which Hong Kong has been generally known for, the Hong Kong government has been playing a more assertive role in shaping the economy in recent years. Although the government has not offered any significant financial incentives to promote inbound investments, Hong Kong has actively tried to attract overseas talent in the past few years.

As a general principle, foreign investors in Hong Kong are treated equally with domestic investors. For example: Hong Kong-incorporated companies can be wholly owned and controlled by foreign investors; foreign investments do not require government approval; and, except for the additional stamp duties for non-residents in residential property purchases, foreign investors may own landed properties in the same manner as domestic investors.

Key M&A Developments

Special purpose acquisition companies (SPACs). In 2022, the Stock Exchange introduced a new listing route for SPACs, which are blank-cheque companies with no prior operating history or revenue-generating business. SPACs may now be listed on the premise that they will at a later stage combine with another company with substantive operations.

The Hong Kong SPAC regime reflects the Stock Exchange’s efforts to strike a balance between its wariness of companies with minimal operations, which are targets of reverse takeovers, and the need to recognise market fundraising trends in order to maintain competitiveness. The Hong Kong SPAC regime, however, is much more stringent as compared with its Nasdaq equivalent, whether in terms of investor eligibility, quality of SPAC promoters/directors and eligibility of de-SPAC targets.

Secondary listing regime. Since 2018, the Stock Exchange has made extensive changes to its secondary listing regime to accommodate US-listed “China concept” companies with weighted voting rights structures and variable interest entity arrangements that do not meet the Listing Rules. Under such regime, subject to market capitalization and regulatory compliance track record requirements, primary-listed Greater China companies in non-innovative sectors without a weighted voting rights structure may seek a secondary listing on the Stock Exchange; and companies with a “center of gravity” in Greater China that have been listed on a qualifying exchange on or before 15 December 2017 and non-China based companies that have been listed on a qualifying exchange now have an option to dual primary list on the Stock Exchange.

K&L Gates

44/F Edinburgh Tower, The Landmark

15 Queen’s Road Central, Hong Kong

Contact details:
Tel: +852 2230 3500

www.klgates.com

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