A comparison of M&A laws: 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.