General structuring of financing

Choice of law

What territory’s law typically governs the transaction agreements? Will courts in your jurisdiction recognise a choice of foreign law or a judgment from a foreign jurisdiction?

The commitment documents and finance documents are typically governed by the laws of Hong Kong where the target is a Hong Kong company. English law is also commonly used for the finance documents for an acquisition involving more than one jurisdiction. Substantial majority of high-yield bond documents are governed by New York law (with the remainder governed by English or Hong Kong law). If, the parties choose a foreign law to govern their finance documents, the courts of Hong Kong will uphold a bona fide choice of foreign law unless the choice of foreign law:

  • contravenes Hong Kong public policy or a mandatory rule of law in Hong Kong; or
  • was made in order to evade the jurisdiction with which the contract had the most substantial connection and if the contract had been governed by the law with which the contract had the most substantial connection the contract would have been invalid or unlawful.

Depending on the jurisdiction of the foreign judgment, the foreign judgment may be enforced in Hong Kong either pursuant to the Foreign Judgments (Reciprocal Enforcement) Ordinance (Cap. 319) or through an action at common law.

Restrictions on cross-border acquisitions and lending

Does the legal and regulatory regime in your jurisdiction restrict acquisitions by foreign entities? Are there any restrictions on cross-border lending?

Generally, the acquisition of Hong Kong companies by foreign entities, or cross-border lending, is not restricted under Hong Kong laws. However, if the target company is a company listed on The Stock Exchange of Hong Kong Limited (the HK Stock Exchange), the provisions of the Rules on Takeovers and Mergers (the Takeovers Code) must be complied with. Essentially, the Takeover Code obligates any person who, individually or jointly with its concert parties, acquires (whether through a series of transaction or not) 30 per cent or more of the voting rights of a listed company, unless a waiver is granted by the Securities and Futures Commission (the SFC), to make a mandatory general offer for all the outstanding issued shares of the listed company not already controlled by such person or its concert parties, and the related offer documents are subject to vetting by the SFC and the HK Stock Exchange. Further, companies engaging in particular industries with licensing requirements and of a public nature (ie, broadcasting, banking and insurance industries) are subject to certain specific restrictions on foreign ownership and control and ownership transfer.

Types of debt

What are the typical debt components of acquisition financing in your jurisdiction? Does acquisition financing typically include subordinated debt or just senior debt?

The components of acquisition financing will vary depending on the amount of debt financing required and the availability of liquidity in the relevant debt markets. Acquisition facilities in Hong Kong usually comprise a senior secured term facility and a senior secured revolving facility provided by either a syndicate or a club of lenders. Recent large acquisitions have been financed using a combination of senior debt, structurally subordinated mezzanine debt, payment-in-kind debt and/or vendor financing.

A common form of mezzanine debt are lent to, or issued by, holding companies of the borrowers of the senior debt and are therefore structurally subordinated and tend to have limited security and guarantee from the obligors under the senior debt.

Certain funds

Are there rules requiring certainty of financing for acquisitions of public companies? Have ‘certain funds’ provisions become market practice in other transactions where not required?

There is no requirement for certainty of funding for private mergers and acquisition transactions in Hong Kong, but if the target company is a company listed on the Hong Kong Stock Exchange, the Takeovers Code will apply. As mentioned in question 2, any person who, individually or jointly with its concert parties, acquires (whether through a series of transaction or not) 30 per cent or more of the voting rights of a listed company will, unless having obtained a waiver from the SFC, which will only be granted under very limited scenario, trigger a mandatory general offer obligation to acquire all the outstanding issued shares of the listed company not already controlled by such person or its concert parties. Under the Takeovers Code, such an offer for the acquisition of a Hong Kong listed company should only be made when the offeror has every reason to believe that it can and will continue to be able to implement the offer, and one important aspect is that there must be certainty of financing resources to fund the full acceptance of the offer. The SFC further requires a written confirmation be issued by the offeror’s financial adviser to confirm it is satisfied that the offeror has sufficient financial resource to support the general offer.

As such, before a person purports to hold 30 per cent or more of the issued shares of a listed company in Hong Kong, thereby triggering the general offer obligation, such person must ensure that it has secured committed financing for this purpose. From a financing perspective, this means the availability of financing may only be subject to conditions that the offeror is sure it can satisfy and does not include any conditions relating to representations and/or actions of the target group (ie the ‘cash confirmation’ requirement).

While, as mentioned above, there is no requirement for certainty of funding in acquisition involving private companies in Hong Kong, market practice has developed such that the financing documents include ‘certain funds’ provisions often seen in UK or other European jurisdictions are included in those transactions as well to ensure funding certainty for the buyers, especially in transactions involving private equity sponsors.

Restrictions on use of proceeds

Are there any restrictions on the borrower’s use of proceeds from loans or debt securities?

In Hong Kong, there are generally no statutory restrictions on the borrower’s use of proceeds from loans or debt securities. However, facilities agreements usually include a use of proceeds provision setting out the permitted uses for the loan proceeds. This will include payment of the acquisition consideration or costs and expenses incurred in connection with the acquisition and the financing.

The facilities agreement also often restricts the use of proceeds of a loan that would breach sanctions or anti-corruption laws. The Hong Kong Monetary Authority may investigate an authorised institutions’ compliance with the legal and supervisory requirements of the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615) and the Guideline on Anti-Money Laundering and Counter-Financing of Terrorism (for Authorized Institutions).

Indemnities

What kind of indemnities would customarily be provided by the borrower to lenders in connection with a financing?

Facility agreements will usually include the following indemnities:

  • tax and stamp duty;
  • indemnities for costs, losses or liabilities incurred by a lender as a result of
    • the occurrence of an event of default,
    • any investigation, subpoena or litigation with respect to the borrower or with respect to any transaction contemplated or financed by the facility agreement, or
    • the lender funding or making arrangements to fund a loan requested by the borrower that is not made due to a failure of the borrower;
  • indemnities for costs, losses or liabilities incurred by the facility agent as a result of acting or relying on any notice, request or instruction of the borrower that it reasonably believes to be genuine, correct and appropriately authorised; and
  • indemnities for costs and expenses incurred by a lender in connection with:
    • the negotiation, preparation, printing, execution and syndication of the finance documents;
      • any amendment, waiver or consent requested by the borrower; or
      • enforcement of the lender’s rights under the finance documents.