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Due diligence requirements
What due diligence is necessary for buyers?
Due diligence investigations remain an essential tool for assessing and reducing the risks inherent in a merger/acquisition transaction in Hong Kong. In the absence of complete knowledge of the operations, the scope of the assets and the extent of the liabilities of the target, due diligence investigations give the prospective buyer an opportunity to assess the legal and financial state of affairs of the target. They also facilitate consideration of structuring issues. Accordingly, thorough due diligence is vital in most M&As in Hong Kong.
What information is available to buyers?
The buyer can obtain basic information about the target through public searches such as:
- a company search (including whether the company has registered any charge over its assets);
- a litigation search;
- a winding-up search;
- an IP search (for trademarks, patents and designs); and
- a real estate search.
More specific information is usually obtained through due diligence on the target group.
In addition to the customary confidentiality obligations, parties should pay attention to the following when dealing with information during due diligence:
- the disclosure and collection of personal data on individuals, which is regulated by the Personal Data (Privacy) Ordinance; and
- what is commonly referred to as the ‘gun-jumping’ restriction under anti-monopoly laws, as underlined by the principle that business operators which are competitors should continue to act as such until the transaction is complete. The extent to which this restriction applies depends on the anti-monopoly laws applicable to the transaction.
What information can and cannot be disclosed when dealing with a public company?
Where the target is a listed company (‘listco’), the seller should be aware of:
- the listco's obligations with respect to inside information - in particular, its continuing obligation to disclose any inside information to the public as soon as reasonably practicable, until which time the information must be kept strictly confidential; and
- the associated restrictions against insider dealing under the Securities and Futures Ordinance and the Listing Rules.
In brief, ‘inside information’ can be described as specific information concerning the listco that is of a price-sensitive nature and not generally known to public investors. Insider dealing occurs when a person who has inside information deals in listed securities or their derivatives. There are exceptions under the Securities and Futures Ordinance, in which a person will not be regarded as having engaged in market misconduct by reason of insider dealing. These apply in specific circumstances and a person seeking to rely on any exception should consider its application carefully with his or her legal adviser. However, the determination in practice can be complex, since it is often a matter of degree rather than mere classification.
How is stakebuilding regulated?
For companies listed on the Stock Exchange of Hong Kong Limited, stakebuilding is mainly regulated by the Listing Rules, the Securities and Futures Ordinance and the Takeovers Code. Generally speaking, there are three shareholding thresholds that trigger regulation - namely, where the investor has acquired:
- 5% or more of shares in a listed company (‘listco’) – the investor has a notifiable interest and is under a continuing obligation to disclose movements in its shareholding (or other changes in its interest or short position) to The Stock Exchange of Hong Kong Limited and to the listco, within three business days after the movement (or change) occurs;
- 10% or more of shares in a listco – the investor becomes a substantial shareholder and a connected person of the listco under the Listing Rules. All its future transactions with the listco (or transactions between the listco and third parties which may confer benefits on the investor) will be deemed as the listco's connected transactions, and may subsequently require public announcement by the listco or approval by the listco's independent shareholders.
- 30% or more of shares in a listco – once the investor has acquired up to 30% of the shares in a listco, it has an obligation under the Takeovers Code to make a general offer in respect of the listco's remaining shares. Notwithstanding this, the mandatory offer obligation may be avoided by a whitewash procedure (available in specific circumstances, such as where the obligation arises due to the issue of new shares by the listco as consideration for an acquisition). Detailed steps and requirements must be complied with in a whitewash procedure, at the end of which the Securities and Futures Commission may waive the mandatory offer obligation.
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