Since the commencement of the Companies Ordinance 2014, we have seen a steady increase in court-free amalgamation of companies. We have successfully completed many amalgamations, vertical and horizontal, in an array of industries including regulated entities. Here are our observations and thoughts:

Why amalgamate?

Amalgamation could be employed to achieve a number of purposes. Many companies consider it a convenient, cheap and hassles-free process to streamline organisational structures and to achieve efficient allocation of group resources. Others find it useful for tax planning purposes.

Amalgamation Process

The statutory process under the Companies Ordinance takes approximately 4 to 8 weeks, but one should be mindful that the actual process may take longer depending on the complexity in each case.

The process kicks off by the board of directors of amalgamating companies passing resolutions to approve the amalgamation. The directors need to issue an opinion to confirm that, in their view, the relevant amalgamation companies (and the amalgamated company, after amalgamation) are (and will be) able to pay its debts. An amalgamation notice will need to be published in newspapers. After the public notice, the amalgamation further requires the approval by shareholders by way of a special resolution.

The process also contemplates the obtaining of express consent of holders of floating charges and notifying secured creditors.

Certain filings with the Companies Registry are necessary. The date of the Certificate of Amalgamation issued by the Companies Registry is the effective date of the amalgamation.

Effect of Amalgamation

On the effective date of an amalgamation, each amalgamating company ceases to exist as an entity separate from the amalgamated company (i.e. the surviving entity) and the amalgamated company succeeds to all the property, rights and privileges, and all the liabilities and obligations, of each amalgamating company.

Things you need to know

1. Any resistance from Directors in signing a Solvency Statement?

The solvency statement is a pre-requisite to an amalgamation under the Companies Ordinance. In forming an opinion on solvency, the directors are required to make an informed judgement, taking into account all liabilities of the amalgamated company (including contingent and prospective liabilities). Under the law it is possible for Directors to assume personal criminal liability for making a false statement or making the statement without reasonable grounds. It is prudent for directors to commission audited accounts to be prepared immediately prior to amalgamation. Directors should also engage the business team in conversations to investigate into the company affairs in order to accurately assess solvency risks which may not be revealable in the accounts.

In our experience directors (especially independent non-executive directors) may ask for indemnification for making a solvency statement. Also note the ambit that a company may provide for indemnification in favour of directors under the Companies Ordinance.

2. Due Diligence prior to implementation

Whilst the contractual rights and liabilities of the amalgamating companies will be succeeded by the amalgamated company by operation of law, you will need to assess if existing contracts contain restrictions on amalgamation. It is not uncommon that loan documentation and property leases contain this kind of restrictions.

The consequences of breach of these restrictions may vary and they are normally set out in the contracts. You will need to assess the impact of amalgamation on the companies’ contracts prior to implementation. In some cases, prior consent from the counterparties may be necessary.

3. What will happen to the overseas subsidiaries or offices?

If the amalgamating companies have operations outside Hong Kong, the legal effect on overseas subsidiaries or offices should be assessed.

Companies should consider seeking foreign legal advice on how the laws of the place of incorporation of the offshore subsidiaries will recognize the amalgamation under Hong Kong law and what is the necessary process to update the investor of the subsidiaries. In our experience it may possibly involve a process more complicated than merely a change of name. Different jurisdictions have different requirements. The same applies to overseas representative offices or liaison offices.

Dialogues with overseas authorities should be included as part of the planning process. Clearing these hurdles at an early stage could go a long way in saving time and costs down the road.

4. When to inform banks, suppliers and customers?

The Companies Ordinance does not specify when the amalgamating company should inform the banks (other than floating chargees and secured creditors) and business counterparts. Do you wish to notify the banks and business counterparts before they read it from the news? Corporate relations management is certainly an item on the agenda.