1. China: Going West in a challenging economy

China reported a disappointing 7.7% GDP growth for the first quarter of 2013, confirming that the Chinese economy is facing headwinds.

For foreign investors already in China, this means a more challenging domestic market in 2013. Given rapidly rising wages in China, new investors are just as likely to consider elsewhere in South East Asian.

China, however, remains keen to attract foreign investment:

  • The Ministry of Commerce (MOFCOM) has recently indicated that China plans to further open up its service sector in 2013. The extent of any new concessions remains to be seen. However, the first quarter of 2013 has already seen more foreign direct investment (FDI) in the service sector than in the manufacturing sector.
  • China will also continue to promote FDI in Central and Western China, where land prices and wages are typically lower. With many migrant workers in Eastern China now preferring to return home to inland China, a skilled labour force should be more readily available.
  • Finally, China's central bank has indicated that it will further liberalize foreign exchange capital controls. This follows a partial relaxing of China foreign exchange controls in late 2012.

The number of new foreign investment enterprises established in China during the first quarter of 2013 fell slightly. However, the monetary value of the investments grew 1.44% year-on-year. The big winner so far, however, has been Western China, which saw FDI during the first quarter increase by over 18%.

For more information on investing in China, please contact Betty Tam.  

2. Spotlight on Malaysian Investment

Malaysian companies have been very active in M&A markets, securing a number of high value and high profile acquisitions in recent times.  Why is this, which sectors and where to next?

Malaysia's outbound investment is at an all-time high.  Last year saw record outbound investment by Malaysian companies across various sectors. Petronas' US$5.4 billion acquisition of Canadian gas exploration company, Progress Energy Resources was a high profile example in the energy sector.  Financial services companies were also very acquisitive, including the acquisition by CIMB group of RBS' cash equities and associated investment banking business in Southeast Asia, In the telecoms sector, Axiata's strategic merger of Hello Axiata and Latelz Company in Cambodia* saw Axiata emerge as one of the largest operators in Cambodia in terms of subscribers and revenue.

Activity shows no signs of slowing down.  Just last month, Sime Darby entered into a US$525 million joint venture with Ramsay Healthcare for the provision of healthcare services in South East Asia*.  In March, a survey of foreign investment, published on the eve of the fifth BRICS summit, revealed that Malaysia is now the third biggest investor into Africa, behind France and the US, but ahead of China and India.

Such activity extends beyond outbound M&A: 2012 saw three initial public offerings of more than US$1 billion on Bursa Malaysia, as well as the issue of the world's largest sukuk bond, a RM 31 billion (approximately US$10 billion) issue by the Malaysian road toll operator, PLUS, and at least four further bond issuances totalling more than RM 1 billion.  Major inbound M&A transactions in 2012 included the acquisition of ING Management Holdings (Malaysia) Sdn Bhd by AIA Group Limited for US$1.73 billion and the acquisition of Carrefour Malaysia Sdn Bhd and Magnificient Diagraph Sdn Bhd by the Japanese based company, Aeon Co., Ltd.

What has spurred such economic activity?  Malaysia's recent economic growth has been the highest recorded in Asia, and it is one of only thirteen counties in the world to have recorded a 7% or more increase in gross national income for twenty-five years.  This has been fuelled by a burgeoning middle class and renewed confidence in Malaysia as an investment decision, due in large part to concentrated initiatives by the Malaysian government, such as the "Economic Transformation Program", to make Malaysia more attractive to foreign investors.  In various sub-sectors, the government raised the foreign investment ceiling from 49% to 70%, which has generated activity and led to further capital inflows to Malaysia.

Another differentiator may lie in the country's importance as an Islamic finance centre.  Malaysia dominates the global market for sukuk, or Islamic bonds, and just over a fifth of the country's banking system, by assets, is sharia-compliant.  The country issued the world's first sovereign sukuk in 2002, and in the first three quarters of 2012, it was responsible for almost three quarters of total global issuance.  Such figures are striking for a relatively small country of just 30 million people. The ability to raise large sums of money can give Malaysian companies a competitive edge in the M&A market: the Malaysian telecom group, Axiata, for example, recently established a USD1.5 billion multi-currency sukuk program, with the inaugural issuance under the program, a 2-year RMB1 billion sukuk, the largest RMB sukuk offering to date.  Such examples highlight Malaysia's advantage in combining its traditional heritage, outward-looking nature and its links with financial hubs such as London and Singapore.

* Herbert Smith Freehills acted on these transactions.

For more information regarding Malaysia, please contact Veronica O'Shea or Nicola Yeomans.  

3. Recent banking developments in Indonesia

Over the course of the last 12 months Bank Indonesia ("BI"), the Indonesian central bank has issued a number of important new regulations changing the rules relating to the ownership and control of banks in Indonesia and their ability to operate and expand in the future.

Indonesia has been widely regarded as having one of the most liberal regimes in the Asian region for foreign ownership of banks. This was in part a legacy of the Asian financial crisis of the late 1990s when foreign ownership was opened up to help capitalise many of the struggling banks at that time. However, over the past few years there has been a growing move from certain bodies within Indonesia to put in place more controls on the ownership of Indonesian banks. This had created uncertainty and speculation over the form such new controls would take and how they would be implemented which in turn impeded M&A activity in the sector.

The new Regulations consist of the long anticipated new BI rules on limits to bank ownership in Indonesia ("Bank Ownership Regulation"), the new Business Activities and Office Network Regulation ("BAON Regulation") and the 2012 BI Regulation on Single Presence Policy ("New SPP Regulation"). These together constitute a significant overhaul of the regulatory landscape for banks in Indonesia and have helped reduce to an extent, although not completely, the regulatory uncertainty which has clouded the banking sector in Indonesia in recent years. Importantly, the new rules are not specifically directed at foreign controllers of Indonesian banks, but aim to restrict the ability of single controllers to dominate banks unless the bank continually achieves high "health ratings" and good corporate governance standards.

The extent to which the newly established regulatory landscape will facilitate M&A transactions in the Indonesian banking sector remains to be seen. However, the number of deals in the financial services sector in Indonesia is certainly increasing and 2012 saw almost twice the number of reported deals as 2011 and a third more than 2010. It is expected that as the new Regulations are better understood they will provide the clarity needed to facilitate M&A transactions in the sector.

Indeed the general feeling within the industry is that in principle the new regulations are well intended and should have a positive effect on the Indonesian banking sector in the years ahead. The Regulations provide incentives for existing controllers of banks with poor good corporate governance ("GCG") ratings to improve the corporate governance of their banks. This philosophy appears to be guided by principles of good corporate governance and the promotion of a healthy banking sector in Indonesia rather than an attempt to curb foreign investment.

The new SPP Regulation is also expected to provide greater flexibility to parties looking to control more than one bank, which may help facilitate the consolidation of the banking sector in Indonesia.

However, one potentially significant hurdle which could still undermine recent developments is the possibility of a new Banking Law being passed, which is currently being considered by the Indonesian Parliament. It is suspected that debate around the draft Banking Law will engender more nationalistic sentiment than the recent Regulations introduced by BI. It will be interesting to see how BI responds to this political initiative in due course.

A full and detailed analysis of all the recently published regulations can be found in our previous e-bulletins:

  • New Bank Indonesia Rules on Bank Ownership Limits
  • Indonesia Central Bank Amends Single Presence Policy for Banks
  • Indonesian Central Bank Publishes Business Activities and Office Network Regulation.

For further information on any of the issues or new Regulations discussed in this briefing, please contact David Dawborn, Haydn Dare or Brian Scott.  

4. Don’t get caught in a Chain Principle chain reaction - some important lessons from the Hong Kong Takeovers Panel


  • The decision of the Hong Kong Takeovers and Mergers Panel (Panel) in January 2013 in the Sino-Forest case is a reminder that restructuring a company may inadvertently trigger a mandatory offer obligation under the Hong Kong Code on Takeovers and Mergers (Code).
  • In all circumstances where the control of a company subject to the Code is to be acquired, consideration must be given to the possibility of triggering a mandatory offer and the Takeovers Executive must be consulted.


Sino-Forest Corporation (Sino-Forest), a company whose shares were listed on the Toronto Stock Exchange was in severe financial difficulties and as a result it had defaulted on various obligations under certain notes it had issued. A debt restructuring plan had been developed under which Sino-Forest would transfer (amongst other things) the entire share capital of its wholly-owned subsidiary, Sino-Capital Global Inc. (SCGI), which held a 63.6% interest in Greenheart Group Limited (Greenheart), a company listed on the Hong Kong Stock Exchange (Stock Code: 94), to a new company (New Holdco), to be owned by the noteholders and other Sino-Forest creditors.

Key provision of the Code – the Chain Principle

Note 8 to Rule 26.1 dealing with the Chain Principle provides that the Takeovers Executive will not normally require a mandatory offer to be made due to the acquisition of statutory control of a company which in turn holds (directly or indirectly) a controlling interest in a second downstream company to which the provisions of the Code applies, unless: (1) the holding in the second downstream company is ‘significant’ in relation to the first (and in this regard ‘significance’ is generally considered to be 60% or more of the assets and profits of the first company); or (2) the acquisition of the second company is ‘one of the main purposes’ of the transaction. The Note also makes clear that in all cases the Takeovers Executive should be consulted when a transaction may come within its scope.

The Panel’s decision

The Panel considered that the Sino-Forest restructuring would trigger a mandatory offer obligation on the part of New Holdco in relation to Greenheart. The Panel also determined that under the circumstances, it would not be appropriate to waive the mandatory offer obligation pursuant to section 2.1 of the Introduction to the Code (which gives the Takeovers Executive and the Panel a discretion to modify the application of a Rule in certain circumstances).

In coming to its decision, the Panel stated the following:

  • Any acquisition of control will normally give rise to a mandatory offer obligation unless a waiver is granted by the Takeovers Executive.
  • The focus of the Chain Principle is narrow – it simply looks at a transaction, regardless of whether it is part of a larger transaction, in which statutory control of one company results in the acquisition or consolidation of control of a second company. In this case, the Sino-Forest restructuring plan clearly fell within this scenario. Given Greenheart constituted more than 60% of SCGI’s assets and revenues, it was deemed ‘significant’ compared to SCGI, hence triggering a mandatory offer obligation under Note 8 to Rule 26.1.
  • The Panel, in determining whether to exercise its discretion to waive the requirement for New Holdco to make a mandatory offer, said that the meaning of the wording of Note 8 to Rule 26.1 and its implications were clear; they were operating in the manner for which they were designed and how they had been interpreted in the past. The Note is intended to place parties on notice that the transfer of an indirect holding of a controlling interest always comes within the provisions of the Code. Waiving the mandatory offer obligation for reasons other than those specifically expressed in Rule 26 and its Notes would set a dangerous precedent.

Concluding remarks

This case clearly illustrates that, at its heart, the Code seeks to protect shareholders’ interests where the acquisition of control of a company (to which the Code applies) is contemplated. In these circumstances, one must always consider whether such an acquisition would trigger a mandatory offer obligation, even if that acquisition is part of a wider transaction involving companies and parties that have no connection to Hong Kong. Consultation with the Takeovers Executive is critical in this regard.

In connection with the above discussion on Chain Principle offer, we also draw reader attention to practice Note 19 issued by the Takeovers Executive providing guidance on determining the offer price when a Chain Principle offer is triggered (link).

If you would like to learn more, please contact Tommy Tong or Victor Ding.  

5. Cornerstone investors in Hong Kong

Cornerstone investments continue to play a key part in Hong Kong IPOs. Cornerstone investors are introduced to an IPO to demonstrate to the market and other investors that these investors have confidence in the listing applicant. The cornerstone investors are guaranteed to receive a specific allocation of shares in the IPO irrespective of the offer price. In 2012, the Hong Kong Stock Exchange noted that cornerstone placings ranged between 6% and 66% of the total offering size for new listings. In 2011, the range was between 9% and 76%.

Recently, the Exchange has issued a guidance letter (GL51-13) confirming its guiding principles for cornerstone placings, which include: (i) that the placing must be at the IPO price; (ii) that the cornerstone investors will be subject to a lock-up period of at least six months following the listing date; and (iii) that each cornerstone investor will not have any board representation in the listing applicant.

The Exchange further reminded the market that cornerstone investors should not be given any direct or indirect benefits save for the guaranteed allocation of shares at the IPO price. Any other form of direct or indirect benefits may result in such investors being treated as pre-IPO investors. For pre-IPO investments, the exchange will generally require, except in very exceptional circumstances, that the investment must be completed either at least 28 days before the first submission of the listing application or at least 180 days before the listing date.

Investors considering participating in Hong Kong IPOs should take note of the above.

If you would like to learn more, please contact Tommy Tong or Victor Ding.