Despite the Hong Kong Stock Exchange’s high market capitalization (sixth largest worldwide at the end of September 2012), a significant number of companies listed on the Exchange are mid-cap and family controlled. Takeovers in Hong Kong typically occur through acquisition of a controlling stake (the “control” threshold being set at a minimum of 30 percent of the voting capital), triggering an obligation on the part of the acquirer to make a buy-out offer for all of the remaining shares owned by the minority.
The Hong Kong Code on Takeovers and Mergers (Code or Takeover Code) governs the takeover of public companies in Hong Kong. Its procedural and detailed nature provides fair treatment for shareholders and others who have a stake in the company (e.g., holders of convertible securities). The Code is modeled after the City Code of London and is administered by the Securities and Futures Commission of Hong Kong (SFC). In addition, where the acquirer (the offeror) is listed (or if it is part of a group that is listed) on the Hong Kong Stock Exchange, it (or its listed parent) must comply with the Stock Exchange Listing Rules, which mandate requirements for disclosure and shareholder approval where the size of the proposed corporate action exceeds prescribed thresholds, a benchmarking known as the “size tests.” Target companies must comply with the corporate law of their place of establishment, as well as those provisions of Hong Kong company law that also apply to overseas incorporated companies, and any industry sector regulations, such as those that relate to the securities business or telecom business. Hong Kong securities legislation also prohibits market misconduct (such as insider dealing by making use of information relating to a potential takeover that is not yet publicly known), and civil and criminal sanctions are imposed for breach.
Price Sensitivity, Disclosure, and Stakebuilding
All takeovers are price sensitive, and the need to balance secrecy and fair dissemination of information to the public is achieved by the prescription in the Code of announcement obligations on the part of the acquirer and/or the target company. Hong Kong is a closely knit market and information has been known to be subject to leaks before public pronouncements of news occur. The Takeover Code therefore allocates the obligation to release information regarding a takeover or potential takeover to either the acquirer or the target, depending on whether the target has actually become aware of the potential takeover offer. It is possible for a target to be subject to rumors and speculation about possible offers, or to unusual movements in share price or trading volume, even before it is itself aware of the possible takeover, and in that situation the acquirer (if there is indeed a potential takeover) would bear the responsibility of dissemination of news, if negotiations or discussion are about to be extended to include more than a restricted number of people, or if leaks occur. Furthermore as mentioned, Hong Kong Stock Exchange Listing Rules mandate disclosure if certain transaction size thresholds are exceeded, if the acquirer is itself part of a Hong Kong–listed group. These obligations work alongside the Takeover Code requirements and need to be adhered to concurrently.
To the extent that an acquirer intends to build up a stake leading up to the actual takeover, acquisitions made will impact on the terms of the actual takeover offer when this takes place. The terms on which a stake is built up will shape the eventual offer price and offer structure by, for example, setting a minimum price for the future offer. Stakebuilding is also subject to disclosure obligations on the part of persons acquiring an interest in Hong Kong–listed companies, and these obligations are applicable to the acquisition of threshold interests of 5 percent or more of the voting capital of a listed company.
To privatize a Hong Kong–listed company, a general offer made to the minority shareholders must be accepted by a requisite 90 percent of the minority in order to allow a compulsory buyout to take place. If less than 90 percent of acceptances are achieved, then the target cannot be privatized and the acquirer will only be permitted to take up a stake of up to 75 percent of the voting capital, releasing the rest of those accepting shares back into the market (placing down) and maintaining the listing of the target company (the minimum public float of Hong Kong–listed companies is 25 percent of the voting shares). In the face of such uncertainty, an acquirer may instead seek to proceed by way of a court-sanctioned proceeding known in Hong Kong as a “scheme of arrangement,” where a court hearing is initiated and the court is asked to sanction and permit a compulsory buyout, so long as a 75 percent majority in value of the target company’s shares vote in favor of the scheme.
Safeguarding the Takeover
One of the issues concerning a potential acquirer is how to minimize the chances of mishaps occurring in the takeover process. This can often be done by obtaining an undertaking from the controlling shareholder or shareholder group that it will accept any takeover offer given by the acquirer. Such undertakings can be “hard,” when the offer price is known, or “soft,” allowing the person/group giving the undertaking to withdraw it should a higher offer come along. Acquirers may also require a target to agree to pay “break fees” (which must be fair and reasonable and not exceed 1 percent of the transaction size) in the event that the transaction fails to proceed in the face of certain events occurring.
Post Deal Follow Up
An acquirer’s next steps after making a mandatory buyout offer depend on the minority response. If the acquirer receives aggregate responses giving it a total of 75 percent or under (but over 50 percent) (taking into account shares it may already own) of the total voting shares, then, regardless of whether its original intention was to privatize the target, the takeover process is complete and the target company remains listed – the acquirer must purchase the interest of the minority that have accepted its offer. If aggregate responses give the acquirer a total over 75 percent, but under 90 percent, of the total voting shares, then it is not possible for the target to be privatized (again, whatever the acquirer’s original stated intention), and shares from the minority that the acquirer has bought should be divested immediately by way of selling the excess shares (any quantity over 75 percent of voting capital) back into the market to restore the public float of 25 percent. If aggregate responses give the acquirer a total of 90 percent or more of the total voting shares, then (1) if the acquirer’s original stated intention was to privatize the company, it will be able to invoke the compulsory purchase provisions and buy out the nonaccepting minority; or, alternatively, (2) if the acquirer’s original stated intention was to maintain the listing status of the target, it will have to again effect a placing down in the market. The stamp duty payable on share transfers in the placing down is the responsibility of the acquirer.
If the takeover does not proceed, the acquirer will not be permitted to make a further takeover attempt for the following 12 months.
The investing public in Hong Kong is made up of a sizeable population of nonprofessional individuals. Takeovers in Hong Kong are therefore fairly well regulated and transparent enough to allow retail investors to understand the process. Hong Kong’s regulators are not prepared to leave the securities market entirely to caveat emptor and are overall fairly protective of the “little guy.” Hong Kong takeovers are also, generally, well planned among the participating parties, which ensures that the process proceeds smoothly. Hostile takeovers are rare. These features make takeovers in Hong Kong unique among those markets that rank the largest globally.