Structure and process, legal regulation and consentsStructure
How are acquisitions and disposals of privately owned companies, businesses or assets structured in your jurisdiction? What might a typical transaction process involve and how long does it usually take?
Typically, a contract, referred to as a sale and purchase agreement, is executed between the relevant parties to acquire or dispose of privately owned companies, businesses or assets. Privately owned companies can also be acquired by ‘contractual offer’ followed by a minority squeeze-out, provided that the offer is made in accordance with Part 13 of the Companies Ordinance (Cap 622) (CO), or by ‘scheme of arrangement’ proposed by the company to be acquired in accordance with Part 4 of the CO.
The process of acquiring a company, business or assets will often turn on the complexity of the issues and the number of parties involved, as well as whether the transaction involves a bilateral negotiation or a controlled auction process with multiple potential buyers.
An auction process in which interest from several buyers is solicited will typically involve:
- drafting an information memorandum as the basis of marketing the company, business or assets, completion of vendor due diligence, and drafting of a sale and purchase agreement and other transaction documentation (approximately six to eight weeks);
- ‘round one’ expressions of interest from potential buyers who will then be permitted to undertake due diligence (approximately four weeks);
- ‘round two’ offers by potential buyers with mark ups of the transaction documentation (approximately four weeks); and
- negotiation of transaction documentation with one or more buyers until definitive terms are agreed with one party (up to two weeks).
The larger and more international the target company, business or assets, the longer each phase of a process can take. Up to three months will often elapse between distribution of an information memorandum and execution of definitive transaction documents. A bilateral transaction can take longer to complete owing to the lack of competitive tension in the process.Legal regulation
Which laws regulate private acquisitions and disposals in your jurisdiction? Must the acquisition of shares in a company, a business or assets be governed by local law?
The CO sets out the regulatory framework for Hong Kong-incorporated companies. There is a range of statutes and regulations dealing with the transfer of employees, title to property, third-party rights, data protection, pensions and competition that are relevant to private acquisitions and disposals in Hong Kong.
Although most sales of Hong Kong incorporated companies will be governed by the laws of Hong Kong, there is no requirement to be so, and accordingly it is possible for acquisitions to be governed by the law of an overseas jurisdiction. Further, legal formalities applicable to the transfer of shares and assets and liabilities that are subject to local law will also have to be complied with. In Hong Kong, there have been cases for transactions to be governed by the laws of China. These transactions usually involve assets that are based in the China, albeit they are owned by a Hong Kong natural person or Hong Kong incorporated entity or transaction parties that are both in China.Legal title
What legal title to shares in a company, a business or assets does a buyer acquire? Is this legal title prescribed by law or can the level of assurance be negotiated by a buyer? Does legal title to shares in a company, a business or assets transfer automatically by operation of law? Is there a difference between legal and beneficial title?
The content and implications of title to shares and related assurances are not expressly prescribed by Hong Kong law and can generally be negotiated by the parties.
Legal title to shares in a company incorporated under the CO transfers upon the company’s register of members being updated to reflect the buyer as the registered holder of the shares following receipt by the company of an instrument of transfer duly executed by the parties. The transfer of title to assets subject to Hong Kong law may require notifications to be given, consents from third parties to be obtained and registrations to be made.
Legal and beneficial titles are distinct interests in property. A person registered as holding the legal title to a share in a company incorporated under the CO may be a nominee with a different party having the right to receive the economic benefits of the share. Accordingly, the beneficial interest can be transferred without having to update the register of members of the company. Interests in other assets, such as real estate, can be held in the same way.Multiple sellers
Specifically in relation to the acquisition or disposal of shares in a company, where there are multiple sellers, must everyone agree to sell for the buyer to acquire all shares? If not, how can minority sellers that refuse to sell be squeezed out or dragged along by a buyer?
Typically a buyer will prefer all sellers to sign the transaction documentation and agree to be bound by the same.
Minority shareholders may, however, be required to sell their shares pursuant to ‘drag-along’ provisions contained in a company’s articles of association or in a shareholders’ agreement requiring the transfer of title to their shares if specified conditions are satisfied.
Under the CO, if a purchaser makes an offer to acquire all the shares not held by it in a Hong Kong incorporated company and has, by virtue of acceptances of the offer (through signing of transaction documentation or otherwise), acquired at least 90 per cent in number of the shares of any class to which the offer relates, the purchaser may invoke the procedures set out in the CO in order to compulsorily acquire the remaining shares.
If the target company is a ‘public company’ under the Hong Kong Code on Takeovers and Mergers (Takeovers Code), the Takeovers Code would also apply to the process of compulsory acquisition, regardless of whether the target company is incorporated in Hong Kong or elsewhere. The primary factor in determining whether a company is considered as a public company is the number of shareholders in Hong Kong. Accordingly, an unlisted company with a significant number of Hong Kong shareholders is likely to be a public company to which the Takeovers Code applies. Pursuant to the Takeovers Code, in addition to complying with the relevant laws of the jurisdiction of incorporation of the target company, the offeror (purchaser) must have acquired 90 per cent of the disinterested shares (ie, shares other than those owned by the purchaser or persons acting in concert with it) during the four-month period after posting the initial offer document before it can exercise its right to compulsorily acquire the remaining shares not already acquired by it. This is a more stringent threshold than the one set out in the CO.
If structured as a scheme of arrangement to acquire all shares of a Hong Kong incorporated company, the CO requires the holding of a High Court of Hong Kong-sanctioned shareholders’ meeting in which:
- the approval by shareholders of the target representing at least 75 per cent of voting rights of the shareholders present and voting in person or by proxy at the meeting; and
- the votes cast against the arrangement at the meeting do not exceed 10 per cent of the total voting rights attached to all ‘disinterested shares’ in the target company (where the target company is also a public company to which the Takeovers Code applies, the number of votes cast against the resolution to approve the scheme at such meeting must not be more than 10 per cent of the votes attaching to all disinterested shares. While the definitions of ‘disinterested shares’ under the CO and the Takeovers Code are largely similar, they are however not identical. Accordingly, care needs to be taken to determine if the 10 per cent threshold is satisfied under both the CO and the Takeovers Code).
In addition to the shareholders’ approval, the scheme must also be sanctioned by the High Court of Hong Kong.Exclusion of assets or liabilities
Specifically in relation to the acquisition or disposal of a business, are there any assets or liabilities that cannot be excluded from the transaction by agreement between the parties? Are there any consents commonly required to be obtained or notifications to be made in order to effect the transfer of assets or liabilities in a business transfer?
As a matter of Hong Kong contract law, a buyer can generally choose which assets or liabilities it wishes to acquire in a transaction that is structured as a business or asset sale.
The transfer of assets or liabilities may require customary third-party consents: for example, a landlord’s consent to the assignment of a lease, or a counterparty’s consent to the assignment or novation of a contract (see question 7).Consents
Are there any legal, regulatory or governmental restrictions on the transfer of shares in a company, a business or assets in your jurisdiction? Do transactions in particular industries require consent from specific regulators or a governmental body? Are transactions commonly subject to any public or national interest considerations?
There are no legal, regulatory or governmental restrictions on transfers of shares in a Hong Kong incorporated company unless the target business belongs to the banking, insurance, securities and futures, provident fund or telecommunications or broadcasting sectors. In particular, the telecommunications sector is also subject to the ‘Merger Rule’ under the Competition Ordinance. Details of relevant requirements are set out below.Banking Ordinance (Cap 155)
Persons who intend on becoming a ‘shareholder controller’ in banks, restricted licence banks or deposit-taking companies (collectively, authorised institutions) must serve a notice to the Hong Kong Monetary Authority of such intention and obtain its prior approval. A shareholder controller is any person (together with his or her associates) who is entitled, directly or indirectly, to control 10 per cent or more of the voting shares at a general meeting of an authorised institution. Only upon receiving a notice of consent from the Hong Kong Monetary Authority or the passing of three months after having given notice (without receiving a notice of objection) may that person become a shareholder controller.
The Hong Kong Monetary Authority will take into account a wide range of factors to determine the ‘fitness and properness’ of a potential shareholder controller.Insurance Companies Ordinance (Cap 41)
Becoming a ‘shareholder controller’ of an insurance company requires completing an application process to ensure that the Hong Kong Insurance Authority has no objection for someone to become the proposed shareholder controller of such insurance company. Shareholder controller refers to any person who alone or with an associate is entitled to exercise 15 per cent or more of the voting power at any general meeting of the insurance company. If the Hong Kong Insurance Authority then notifies the proposed controller that there is no objection, or three months pass without any such notice, the proposed controller may become a controller. The Hong Kong Insurance Authority has the power to object to an application to become a shareholder controller if the person is not fit and proper to hold that position.Securities and Futures Ordinance (Cap 571)
To become a substantial shareholder of a licensed corporation, the proposed shareholder must gain prior approval from the Securities and Futures Commission (SFC). The relevant regulated activities are listed in Schedule 5 of the Ordinance and include, among others, dealing in or advising on securities, advising on corporate finance and asset management. Prior approval from the SFC is also required for changes to registered provident fund schemes, including changes of the trustee or change of control.
A ‘substantial shareholder’ includes a person who controls either 10 per cent of voting power (at the relevant company’s general meetings) of a licensed corporation, or 35 per cent of voting power of a company that in turn controls 10 per cent of voting power of the licensed corporation.
A substantial shareholder needs to pass the ‘fit and proper’ assessment before the SFC can grant approval.Mandatory Provident Fund Schemes (General) Regulation (Cap 485A)
To become a substantial shareholder of an approved trustee, the proposed shareholder must gain prior written consent from the Mandatory Provident Fund Schemes Authority.Telecommunications Ordinance (Cap 106)
No ‘disqualified person’ shall ‘exercise control’ of a corporation that is a licensee under the Telecommunications Ordinance (Cap 106). Disqualified persons include advertising agents, suppliers of material for broadcasting, a licensee, a person who transmits sound or television material or an associate of a licensee. Any person who is a beneficial owner of more than 15 per cent or holds an office in that company can ‘exercise control’.
Additionally, to own (directly or indirectly) more than 49 per cent of voting shares in a licensee, a person must satisfy the requisite residency requirements. For individuals, they must ordinarily be resident in Hong Kong and have been resident for a continuous period of not less than seven years. If it is a company that acquires the shares, it must ordinarily be resident in Hong Kong with an absolute majority of persons taking an active part in the management of the corporation meeting the residency requirements and the management of the company must be bona fide exercised in Hong Kong.Competition Ordinance (Cap 619)
The ‘Merger Rule’ under the Competition Ordinance prohibits anti-competitive mergers and acquisitions, and is currently limited to mergers relating to carrier licenses issued under the Telecommunications Ordinance (Cap 106). If the transaction is deemed anti-competitive, the Competition Commission has the power to stop the merger process or to unwind the merger if already completed.
Broadcasting Ordinance (Cap 562)
Similar to provisions of the Telecommunications Ordinance (Cap 106), a person is not permitted to exercise control (being the beneficial owner of more than 15 per cent) of a domestic free television programme service licence if it is a ‘disqualified person’, which includes, among others, a sound broadcasting licensee or a proprietor of a newspaper printed or produced in Hong Kong.
A television programme service licensee and any person exercising control of it must be ‘fit and proper’, which can be determined using several factors including the person’s business record, and criminal record in respect of offences involving bribery, false accounting, corruption or dishonesty (section 21(4) of Broadcasting Ordinance (Cap 562)).
Are any other third-party consents commonly required?
For purchases of shares from an existing shareholder, the consent of the other shareholders may be required to waive pre-emptive rights, tag-along rights or other restrictions on transfer that are usually specified either under the articles of association of the target company or the relevant shareholders’ agreements.
Similarly, for any acquisition or disposal of assets, the transaction parties must scrutinise the provisions under the articles of association and shareholders’ agreement, if any, to see if there are any restrictions on the transfer or prior shareholders’ approval for the transfer, or both. The parties will also need to follow the proper procedures for transferring certain rights, permits, licences and consents that may be necessary for the smooth transition and the continuous operation of the business in Hong Kong or, if needed, for obtaining new permits or licences, or both, when there is an acquisition of a business or assets.
Consents from third parties may also be required under previous agreements of the target company with its landlords, creditors, debenture holders, mortgagees or other contracting parties that may be affected as a result of a transfer of assets or upon a change in control of the target company.
If a transaction involves a transfer of personal data, which is defined under the Personal Data (Privacy) Ordinance (Cap 486) as any data relating directly or indirectly to a living individual from which it is practicable for the identity of the individual to be directly or indirectly ascertained and in a form in which access to or processing of the data is practicable, to a place outside Hong Kong, the transaction parties must be minded to observe the restrictions as stipulated under the Ordinance. Under the Ordinance, no transfer of personal data is allowed to a place outside Hong Kong unless such place has a similar level of personal data protection as that afforded in Hong Kong.Regulatory filings
Must regulatory filings be made or registration (or other official) fees paid to acquire shares in a company, a business or assets in your jurisdiction?
For transfer of shares in relation to a Hong Kong incorporated company, it is not required to deliver any specified form to the Hong Kong Companies Registry for reporting the transfer when it takes place. However, if such transfer takes place before the lodgement of the company’s annual return with the Hong Kong Companies Registry, the transfer should be reported in the annual return after the transfer has taken place. Any change subsequent to the filing of the annual return should be reported in the next annual return. For a private company, the annual return should be filed within 42 days after the anniversary of the date of incorporation in every year. Each annual return should be accompanied with an annual registration fee.
For transactions involving a subscription of new shares of a Hong Kong incorporated company, a form relating to return of allotment must be filed with the Hong Kong Companies Registry within one month after the allotment. Details, such as the total number of allotted shares, a description of the shares allotted and a statement of capital that shows the company’s latest share capital structure, must be included. There is no filing fee involved in the submission of such return.
A deed or other written instruments such as an assignment or a mortgage are required to be executed upon the sale of an immovable property in Hong Kong. Such document will be registered at the Hong Kong Land Registry. There is no time restriction within which the registration must be made under law; however, late registration may possibly result in a loss of registration priority. If an instrument has been registered within one month after the date of its execution, it may retain its priority back to the execution date, otherwise the priority will be counted only from the date of registration. A registration fee, which varies in accordance with the nature of the instrument or the amount of consideration paid or the value of the property, will be charged.
For a discussion on stamp duties, see question 31.
Other fees are also payable when seeking regulatory approval to become a controlling or substantial shareholder of companies in certain industry sectors (see question 6).