Recently, there has been an upward trend in the number of privatisation projects announced in the market. With the price-earnings (P/E) ratio of the Hang Seng Index at a 10-year low due to the covid-19 epidemic, and the global economic slowdown that began last year, many major shareholders of listed companies are attracted to the idea of taking their companies private.
The goal of privatisation of listed companies is to delist the subject listed companies. The controlling shareholders acquire all the shares held by the minority shareholders and increase their stakes in the company, so that the company is converted from a public to a private company.
Most listed companies in Hong Kong are non-Hong Kong companies. Offshore companies registered in Cayman Islands and Bermuda, which are commonly known as red-chip companies, constitute the majority of the listed companies.
Red-chip companies account for about 75% of the total listed companies in Hong Kong. Therefore, when considering the approach of privatisation of listed companies, we must consider the legal requirements of the jurisdiction of registration of the listed companies.
There are three main methods to privatise listed companies: (1) statutory merger; (2) scheme of arrangement; and (3) general offer together with compulsory acquisition.
(1) Statutory merger. This is commonly used by companies listed in the US. American-listed Cayman Islands companies that have been delisted by way of statutory merger include Focus Media, Giant, Mindray Bio-Medical and Shanda Games. Some companies are delisted in the US by statutory merger in order to prepare for re-listing at a higher valuation in China’s domestic market.
Usually, the shareholders or investors who put forward the merger plan will set up a clean shell company with a view to merging it with the target listed company. In general, except for short-form mergers, this requires the approval of the merger plan by the directors and shareholders of every constituent company (including the listed company) involved in the merger.
However, the merger plan does not require the approval of the court of the place of registration. If a shareholder objects to the acquisition of his/her shares as part of the merger plan, such shareholder may apply to a Cayman court for appraisal of the value of his/her shares. Therefore, if there are dissenting shareholders who apply to the Cayman court for appraisal of the value of their shares, the subject company may need to deal with such dissenting shareholders in court for a period of time after its delisting.
(2) Scheme of arrangement. For this method, the controlling shareholders may propose to the other minority shareholders in the scheme to cancel all shares held by them, and pay consideration to them in exchange.
Although a listed company is listed in Hong Kong or the US, the relevant arrangement must be implemented in accordance with the companies law of the place where the company is incorporated or registered. If the scheme of arrangement is approved by shareholders and the court, it will be binding on all shareholders. The shares held by minority shareholders may then be cancelled, and the controlling shareholders will hold 100% of the shares of the company when the scheme becomes effective.
Apart from the right to appeal against court decisions in general, the minority shareholders are not entitled to challenge the scheme of arrangement after it becomes effective. Therefore, this gives certainty of outcome to the privatisation.
(3) General offer. The offeror is often a major shareholder or the controller, who will make an offer to all shareholders of the listed company. After the general offer is completed, if the privatisation conditions are met, the offeror can apply to the relevant stock exchange for delisting the shares of the subject company.
Where the offer has, within four months being made by the offeror, been accepted by the holders of not less than 90% in value of the shares affected, the offeror may exercise the right of compulsory acquisition, and acquire the shares held by shareholders who have not accepted the general offer. The dissenting shareholders have the right to apply to the court if they object to the compulsory acquisition.
Except where consideration for the privatisation will be satisfied by a share swap, the offeror will usually need to obtain financing from a syndicate of lenders before completion of the privatisation to ensure it has sufficient cash to settle the purchase consideration. Regulators will also require the offeror to confirm that it has sufficient resources to fund the privatisation in full.
If the privatisation is by way of a statutory merger, the conditions precedent to funding will include:
(1) an executed merger agreement and agreed form of plan of merger;
(2) copies of all other documents relating to the merger required under the laws of Cayman Islands to be filed with the Registry of Companies in the Cayman Islands; and
(3) consent of the creditors.
Conditions subsequent for the merger financing include: A certificate of merger issued by the Registrar of Companies in the Cayman Islands; a Cayman legal opinion on effectiveness of the merger, updated register of shareholders and register of directors of the surviving company; and the amended and restated memorandum and articles of association of the surviving company after delisting.
If the privatisation is by way of a scheme of arrangement, the conditions precedent to funding will include: A copy of the order of the Cayman court sanctioning the scheme of arrangement; and the public announcement made in respect of the scheme of the arrangement. The conditions subsequent are similar to those for merger financing.
If the privatisation is by way of a general offer, the conditions precedent to funding will include: Evidence that the offeror has met the requirements for compulsory acquisition; a public announcement of the general offer; and so on. The conditions subsequent are similar to those for the financings described above.
Jo Lit is a partner at Walkers. She can be contacted on +852 2596 3383 or by email at firstname.lastname@example.org
Kristen Kwok is a partner at Walkers. She can be contacted on +852 2596 3324 or by email at email@example.com