Country snapshot
Trends and climate
What is the current state of the M&A market in your jurisdiction?
Hong Kong has an active M&A market. Consistent with the trend in Asia-Pacific, Hong Kong's M&A market has seen solid growth in 2014 and robust increase in 2015. According to the Mergermarket Q1-Q3 2015 M&A Trend Report, M&A activity targeting Hong Kong reached US$121.9 billion in quarters one to three of 2015, representing a 263.7% increase from quarters one to three of 2014 and the highest value recorded in Mergermarket history.
What is the current state of the M&A market in your jurisdiction?
Hong Kong has an active M&A market. Consistent with the trend in Asia-Pacific, Hong Kong's M&A market has seen solid growth in 2014 and robust increase in 2015. According to the Mergermarket Q1-Q3 2015 M&A Trend Report, M&A activity targeting Hong Kong reached US$121.9 billion in quarters one to three of 2015, representing a 263.7% increase from quarters one to three of 2014 and the highest value recorded in Mergermarket history.
Have any significant economic or political developments affected the M&A market in your jurisdiction over the past 12 months?
No significant economic or political developments have affected the M&A market in Hong Kong in the past 12 months. However, in his 2015 policy address the chief executive stated that the government will continue to support Hong Kong's "pillar industries" of trading, financial services, shipping, tourism and professional services, as well as emerging small industries with potential.
In the 2015-16 Budget (announced on February 25 2015), tax measures were proposed and government funding earmarked to encourage start-ups and technological enterprises; promote cultural and creative industries; and increase competitiveness within the pillar industries by offering services such as IP consultation and manpower training to small and medium-sized enterprises. Whether and to what extent these initiatives will significantly affect the M&A market in Hong Kong is yet to be seen.No significant economic or political developments have affected the M&A market in Hong Kong in the past 12 months. However, in his 2015 policy address the chief executive stated that the government will continue to support Hong Kong's "pillar industries" of trading, financial services, shipping, tourism and professional services, as well as emerging small industries with potential.
Are any sectors experiencing significant M&A activity?
M&A activity in the consumer, technology, financial services and real estate sectors remain strong and buoyant. In particular, M&A activity is expected to grow in the technology, media and telecoms sector, as outbound investors from other jurisdictions (including mainland China) continue to look for technological breakthroughs and other inventions which they can return to the domestic markets.
M&A activity in the consumer, technology, financial services and real estate sectors remain strong and buoyant. In particular, M&A activity is expected to grow in the technology, media and telecoms sector, as outbound investors from other jurisdictions (including mainland China) continue to look for technological breakthroughs and other inventions which they can return to the domestic markets.
Are there any proposals for legal reform in your jurisdiction?
The following legal reforms have been proposed:
The following legal reforms have been proposed:
- The Competition Ordinance, passed on June 14 2012 by the Legislative Council, was expected to become fully effective on December 14 2015. The ordinance aims to prohibit conduct that prevents, restricts or distorts competition in Hong Kong, as well as mergers among carrier licensees under the Telecommunications Ordinance which may substantially lessen competition in the telecoms sector.
- From January 1 2016 third parties to a contract may, in certain circumstances, benefit from a contract or enforce its terms under the new Contracts (Rights of Third Parties) Ordinance, which amends the common law principle of privity of contract. The new law will apply only to contracts entered into on or after January 1 2016 and will not have retrospective effect.
- The Corporate Insolvency Bill was gazetted on October 2 2015. It seeks to introduce an efficient winding-up regime to promote business efficacy, while maintaining a level of protection to investors and creditors (including via well-recognised means such as setting aside transactions at an under-value, restricting unfair preferences to certain creditors and regulating share redemption and buybacks).
While the practical impact of these developments remains to be seen, parties conducting M&A should keep an eye on these new laws, as they are likely to affect M&A transactions in general (as opposed to those in specific industries).
Legal framework
Legislation
What legislation governs M&A in your jurisdiction?
The main laws and regulations governing M&A activities in Hong Kong are:
What legislation governs M&A in your jurisdiction?
The main laws and regulations governing M&A activities in Hong Kong are:
- the Companies Ordinance;
- where listed companies are involved, regulations such as the Listing Rules, the Securities and Futures Ordinance and the Code on Takeovers and Mergers;
- industry-specific legislation, such as that which applies to the telecoms, banking, insurance, securities and futures sectors; and
- the common law of contract (which is heavily based on the English common law of contract), as interpreted by the Hong Kong courts.
Regulation
How is the M&A market regulated?
Hong Kong remains one of the least regulated jurisdictions in Asia. No general investment approvals exist other than those that apply to specific industries.
How is the M&A market regulated?
Hong Kong remains one of the least regulated jurisdictions in Asia. No general investment approvals exist other than those that apply to specific industries.
Are there specific rules for particular sectors?
In certain industries, the regulatory body’s consent is required for a change of ownership, the acquisition of even a minority interest or the disposal or amalgamation of the regulated business. Such businesses include:
In certain industries, the regulatory body’s consent is required for a change of ownership, the acquisition of even a minority interest or the disposal or amalgamation of the regulated business. Such businesses include:
- banking, restricted licensed banking or deposit taking (the Banking Ordinance);
- insurance companies (the Insurance Companies Ordinance);
- securities dealers and securities investment advisers (the Securities and Futures Ordinance); and
- radio and television broadcasting (the Telecommunications Ordinance and the Broadcasting Ordinance).
With only a few exceptions, these merger approvals apply equally to foreign and local investors.
Types of acquisition
What are the different ways to acquire a company in your jurisdiction?
Acquisitions in Hong Kong may be structured as an acquisition of either the company's shares (through the purchase of existing shares and/or the subscription of new shares) or the company's assets and liabilities.
What are the different ways to acquire a company in your jurisdiction?
Acquisitions in Hong Kong may be structured as an acquisition of either the company's shares (through the purchase of existing shares and/or the subscription of new shares) or the company's assets and liabilities.
The new Companies Ordinance provides a regime for the amalgamation of companies, but more for the purpose of internal restructuring (eg, that involving the target group in preparation for buy-out or investment by a third party). Other than through this amalgamation regime, mergers between companies are not possible.
Preparation
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 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.
Information
What information is available to buyers?
The buyer can obtain basic information about the target through public searches such as:
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:
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.
Stakebuilding
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:
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.
Documentation
Preliminary agreements
What preliminary agreements are commonly drafted?
The initial phase of M&A transactions will ordinarily involve discussions between the seller and the buyer on the commercial and legal parameters of the transaction. Often these parameters will be recorded in a heads of agreement, letter of intent or memorandum of understanding, which may or may not be legally binding.
What preliminary agreements are commonly drafted?
The initial phase of M&A transactions will ordinarily involve discussions between the seller and the buyer on the commercial and legal parameters of the transaction. Often these parameters will be recorded in a heads of agreement, letter of intent or memorandum of understanding, which may or may not be legally binding.
Even if not expressed as legally binding, it is common for a period for exclusive negotiation to be agreed and for the buyer to undertake confidentiality obligations (either as part of the letter of intent or as a separate non-disclosure agreement) with respect to the information that it will receive on the target.
Principal documentation
What documents are required?
The principal documents for M&A transactions vary depending on the nature and structure of the transaction. Documents which are commonly used include:
What documents are required?
The principal documents for M&A transactions vary depending on the nature and structure of the transaction. Documents which are commonly used include:
- share purchase agreements;
- share subscription agreements;
- asset purchase agreements;
- disclosure letters;
- amended or restated shareholders' or joint venture agreements; and
- agreements for terminating certain arrangements between the seller and the target (eg, existing inter-company or shareholder's loans).
Which side normally prepares the first drafts?
While there is no predominant trend, the buyer (and its legal counsel) will often prepare the first draft. This tends to be particularly true for private equity investors, which may have well-developed precedents for certain industries.
While there is no predominant trend, the buyer (and its legal counsel) will often prepare the first draft. This tends to be particularly true for private equity investors, which may have well-developed precedents for certain industries.
However, this is a generalisation from which there are departures. One example is where the target is being sold through a bidding process. The seller may provide a draft of the acquisition agreement and will consider the buyer's comments on the agreement in deciding who to do the deal with.
What are the substantive clauses that comprise an acquisition agreement?
Substantive clauses of an acquisition agreement generally include:
Substantive clauses of an acquisition agreement generally include:
- the parties and subject matter;
- price and pricing mechanism (including any price adjustment, hold-back of purchase price, escrow arrangement and timeline for payment);
- deal structure (eg, whether signing and closing will occur simultaneously and whether there will be one closing or multiple closings);
- conditions precedent to closing;
- pre-closing covenants (governing the target's conduct and affairs between the signing of the acquisition agreement and the closing of the transaction);
- warranties and indemnities from the seller;
- non-compete and confidentiality obligations (from the seller and the target's executives and senior management, particularly those who will not be retained after closing);
- post-closing arrangements (eg, provision of transitional services or IP licences to the target by the seller or its affiliates) – the acquisition agreement often sets out the key terms, while providing for separate agreements (eg, a transitional services agreement and a trademark licence agreement) to be entered into at closing;
- apportionment of tax liabilities and transactional costs and expenses; and
- governing law and dispute resolution.
Where all or substantially all of the assets of a business are being transferred in Hong Kong, the Transfer of Business (Protection of Creditors) Ordinance provides that any party with a claim against the seller may bring a claim against the purchaser. This provision can be avoided by publishing certain public notices; a creditor must then make its claim within one month of the public notice.
What provisions are made for deal protection?
The deal protection provisions usually form part of the substantive clauses of an acquisition agreement since they are intrinsically linked to the economics and risk allocation of the deal. Examples are:
The deal protection provisions usually form part of the substantive clauses of an acquisition agreement since they are intrinsically linked to the economics and risk allocation of the deal. Examples are:
- conditions precedent;
- pre-closing covenants;
- warranties and indemnities;
- non-compete clauses; and
- confidentiality obligations.
Break fees are rare.
Closing documentation
What documents are normally executed at signing and closing?
Signing and closing may occur separately or on the same day (if no conditions precedent must be fulfilled before closing). Where closing is to take place after signing, most of the transaction documents will be signed first – with common exceptions being the amended/restated shareholders' or joint venture agreement, and agreements for terminating existing arrangements between the seller and the target, which may only be executed at closing (although they would be in an agreed form before that).
What documents are normally executed at signing and closing?
Signing and closing may occur separately or on the same day (if no conditions precedent must be fulfilled before closing). Where closing is to take place after signing, most of the transaction documents will be signed first – with common exceptions being the amended/restated shareholders' or joint venture agreement, and agreements for terminating existing arrangements between the seller and the target, which may only be executed at closing (although they would be in an agreed form before that).
Other documents to be executed at closing include:
- documents for the transfer of title to the shares or assets in question, such as instrument of transfer for shares and (for shares in a Hong Kong company) bought and sold notes;
- resolutions of the target and parties, approving the transaction;
- resolutions of the target approving the change of each member's directors, secretary, auditor, banking signatories and (if applicable) senior management, together with corresponding resignation or termination letters;
- new employment or service contracts with incoming management;
- resolutions for the change of company name or address (if applicable); and
- closing letters (confirming the fulfilment or waiver of the conditions precedent and that none of the warranties has been breached at closing).
Are there formalities for the execution of documents by foreign companies?
Foreign companies should comply with their articles of association and constitutional documents in executing documents. Other than that, Hong Kong law does not require legalisation or notarisation for the execution of M&A documents in general.
Foreign companies should comply with their articles of association and constitutional documents in executing documents. Other than that, Hong Kong law does not require legalisation or notarisation for the execution of M&A documents in general.
Are digital signatures binding and enforceable?
Under the Electronic Transactions Ordinance, electronic signatures (if correctly used) are recognised as binding and enforceable.
Under the Electronic Transactions Ordinance, electronic signatures (if correctly used) are recognised as binding and enforceable.
However, the signatory should exercise care in using the appropriate signature, depending on the parties and the type of document, for instance:
- in transactions involving government entities, a digital signature supported by a digital certificate (issued by a certification authority recognised under the Electronic Transactions Ordinance) should be used;
- in transactions not involving government entities, any form of electronic signature can be used, provided that it is logically associated with the electronic record for identifying the signatory; is reliable and appropriate for purpose; and the recipient of the signature has agreed to its use; and
- the Electronic Transactions Ordinance sets out certain documents to which electronic signatures should not be applied (eg, wills or other testamentary documents; documents for the creation, variation or revocation of a trust arrangement; powers of attorney; most instruments required to be stamped under the Stamp Duty Ordinance; and conveyancing documents for real estate).
In practice, transactional documents in M&A deals are mostly executed by hand rather than electronically. This may be attributable in part to the above limitations, and partly due to conventional preferences.
Foreign law and ownership
Foreign law
Can agreements provide for a foreign governing law?
Yes.
Can agreements provide for a foreign governing law?
Yes.
Foreign ownership
What provisions and/or restrictions are there for foreign ownership?
Approval of (or limit on) foreign ownership of Hong Kong companies is industry based, and applies only to a handful of specific industries, such as the broadcasting sector.
What provisions and/or restrictions are there for foreign ownership?
Approval of (or limit on) foreign ownership of Hong Kong companies is industry based, and applies only to a handful of specific industries, such as the broadcasting sector.
Valuation and consideration
Valuation
How are companies valued?
There are no requirements to carry out a valuation or follow a particular valuation model for determining the purchase price for companies or assets in Hong Kong. In practice, commonly used valuation methods include net asset value and using a debt-free, cash-free basis (representing the enterprise value of the business). The parties may also agree on an adjustment to the consideration, based on any shortfall or excess of the target's actual working capital against a target working capital.
How are companies valued?
There are no requirements to carry out a valuation or follow a particular valuation model for determining the purchase price for companies or assets in Hong Kong. In practice, commonly used valuation methods include net asset value and using a debt-free, cash-free basis (representing the enterprise value of the business). The parties may also agree on an adjustment to the consideration, based on any shortfall or excess of the target's actual working capital against a target working capital.
Consideration
What types of consideration can be offered?
Cash is still the most common form of consideration in M&A transactions in Hong Kong. While the parties may agree to use any other forms of asset as consideration (eg, shares or intellectual property), this is seldom seen in practice as valuation issues will pose a significant challenge. One possible exception is the use of listed securities as consideration, although that will trigger regulations governing listed companies and their securities.
What types of consideration can be offered?
Cash is still the most common form of consideration in M&A transactions in Hong Kong. While the parties may agree to use any other forms of asset as consideration (eg, shares or intellectual property), this is seldom seen in practice as valuation issues will pose a significant challenge. One possible exception is the use of listed securities as consideration, although that will trigger regulations governing listed companies and their securities.
Strategy
General tips
What issues must be considered when preparing a company for sale?
When preparing a company for sale, there are a number of issues to be considered in terms of how the sale will be structured. The acquisition of a business in Hong Kong may be structured as a sale of shares or a sale of assets, or as a combination of the two.
What issues must be considered when preparing a company for sale?
When preparing a company for sale, there are a number of issues to be considered in terms of how the sale will be structured. The acquisition of a business in Hong Kong may be structured as a sale of shares or a sale of assets, or as a combination of the two.
A share acquisition may not be practical when only part of the target's business is to be sold. In fact, one of the main advantages of an asset acquisition is that the buyer can pick and choose specific assets or liabilities to be purchased or assumed, leaving behind those assets and liabilities that it does not require.
In light of the chosen structure for the sale, the seller must also consider whether it is necessary to carry out any pre-sale restructuring. For example, if the target is to be sold by way of a share sale, but the seller would like to retain certain assets of the company, it may be necessary to carve out such assets from the target before the share sale is completed.
In relation to the sale process, the seller should consider whether the target should be sold through a controlled auction process or by way of a private treaty sale. In the case of a controlled auction process, the seller will need to be much better prepared than would be the case in a typical private treaty sale.
What tips would you give when negotiating a deal?
A seller will generally look to negotiate favourable terms in relation to the payment structure of the consideration and achieve a clean break from any potential liabilities and obligations owed to the buyer under the transaction documents.
A seller will generally look to negotiate favourable terms in relation to the payment structure of the consideration and achieve a clean break from any potential liabilities and obligations owed to the buyer under the transaction documents.
The most attractive option for a seller would usually be an immediate cash payment at completion for the full purchase price. This would avoid any uncertainties and potential credit risk in connection with other payment structures, including earn-out mechanisms or other forms of deferred payment structures. The seller should also look to limit its potential liability to the buyer as much as possible in the context of negotiating the sale agreement.
From the buyer's perspective, it is important to carry out thorough due diligence investigations in order to obtain as much information as possible on the target. This will help the buyer to identify any issues in respect of the target that may need to be addressed through the negotiation of additional protections in the transaction documentation (including additional warranties and indemnities). Buyers should also consider appropriate payment structures, including a deferred purchase price payment structure based on the future performance of the target, or the use of escrow arrangements in the event of any claims against the target.
Hostile takeovers
Are hostile takeovers permitted and what are the possible strategies for the target?
Hostile takeover bids are permitted in Hong Kong. However, the ownership of most Hong Kong public companies is often controlled by small groups of shareholders which can appoint and remove members of the board of directors of the company. Most companies are therefore unlikely to be subject to a hostile takeover bid and hostile takeovers remain rare in Hong Kong.
Are hostile takeovers permitted and what are the possible strategies for the target?
Hostile takeover bids are permitted in Hong Kong. However, the ownership of most Hong Kong public companies is often controlled by small groups of shareholders which can appoint and remove members of the board of directors of the company. Most companies are therefore unlikely to be subject to a hostile takeover bid and hostile takeovers remain rare in Hong Kong.
Warranties and indemnities
Scope of warranties
What do warranties and indemnities typically cover and how should they be negotiated?
In a share acquisition, representations and warranties will generally cover the target's:
What do warranties and indemnities typically cover and how should they be negotiated?
In a share acquisition, representations and warranties will generally cover the target's:
- accounts;
- taxation;
- corporate matters;
- title to assets;
- trading;
- properties;
- IP rights;
- plant and equipment;
- stock and work in progress;
- insurance;
- employment matters;
- environmental matters;
- banking and finance;
- regulatory and tax compliance;
- litigation; and
- the accuracy and completeness of information provided by the seller.
In an asset acquisition, the representations and warranties tend to be less extensive. They will generally include:
- ownership and the condition of assets;
- accounts of the business;
- trading activities;
- employees; and
- other specific issues regarding the business to be transferred.
In particular, materiality qualifiers are common in representations and warranties but they are often not quantified, other than specific warranties such as the contract value. Knowledge qualifiers are also increasingly common in Hong Kong, but they are often limited to the actual knowledge and due enquiry of a specified list of senior management.
Indemnities are usually most appropriate to cover specific risks which are of particular concern to the buyer and are often used where a warranty may not allow a buyer to recover. For example, if the buyer had knowledge of the matter before signing the acquisition agreement or if a claim for damages may not be available.
Limitations and remedies
Are there limitations on warranties?
Where representations and warranties are given, there will normally be significant negotiation over the limits of the seller's liabilities. The seller will usually seek to negotiate a cap or fixed maximum on the total amount of claims, provisions restricting small claims and limits on the time within which any claims must be brought. The common cap amount ranges from 10% to 100% of the purchase price. Common exceptions to the cap include key warranties such as title, capitalisation and authority. Tax and specific areas such as environmental matters may have specific higher caps. Other limitations such as baskets and de minimis claims are also common in the market.
Are there limitations on warranties?
Where representations and warranties are given, there will normally be significant negotiation over the limits of the seller's liabilities. The seller will usually seek to negotiate a cap or fixed maximum on the total amount of claims, provisions restricting small claims and limits on the time within which any claims must be brought. The common cap amount ranges from 10% to 100% of the purchase price. Common exceptions to the cap include key warranties such as title, capitalisation and authority. Tax and specific areas such as environmental matters may have specific higher caps. Other limitations such as baskets and de minimis claims are also common in the market.
The seller may also seek to qualify the representations and warranties contained in the agreement by issuing a disclosure letter, which operates to exclude liability on the part of the seller regarding the specific matters disclosed, as the buyer has or is deemed to have knowledge of such matters.
What are the remedies for a breach of warranty?
The main claim for a breach of warranty will be for damages, although the parties may also agree an indemnity provision to cover breach of warranties. Claims arising from a breach of warranty are ultimately enforceable only by litigation, which can be both costly and time consuming. Recovery of damages will also depend on the creditworthiness of the seller at the time the judgment is enforced.
The main claim for a breach of warranty will be for damages, although the parties may also agree an indemnity provision to cover breach of warranties. Claims arising from a breach of warranty are ultimately enforceable only by litigation, which can be both costly and time consuming. Recovery of damages will also depend on the creditworthiness of the seller at the time the judgment is enforced.
Are there time limits or restrictions for bringing claims under warranties?
A civil action for breach of a commercial contract must be instituted within six years from the date of the breach (or 12 years if the contract is executed as a deed). Sellers will usually try to restrict such statutory limit by inserting time limitation clauses in the agreement. Liability in respect of warranty claims commonly survives for a minimum of 18 to 24 months.
A civil action for breach of a commercial contract must be instituted within six years from the date of the breach (or 12 years if the contract is executed as a deed). Sellers will usually try to restrict such statutory limit by inserting time limitation clauses in the agreement. Liability in respect of warranty claims commonly survives for a minimum of 18 to 24 months.
The parties usually agree to different time limits for claims under commercial warranties (sometimes distinguishing between fundamental and other warranties) and tax or environmental warranties. The buyer commonly also obtains protection against taxation liabilities by a separate tax indemnity.
Tax and fees
Considerations and rates
What are the tax considerations (including any applicable rates)?
In a share acquisition, a target will retain the same tax basis for its assets regardless of the price paid for its shares. The step-up of capital asset values for depreciation purposes will be relevant in an asset transaction but not in an acquisition of shares.
What are the tax considerations (including any applicable rates)?
In a share acquisition, a target will retain the same tax basis for its assets regardless of the price paid for its shares. The step-up of capital asset values for depreciation purposes will be relevant in an asset transaction but not in an acquisition of shares.
Gains on the disposal of a capital asset are exempt from profits tax. However, if a gain is derived from a Hong Kong source through the operation of business, profits tax will be chargeable. Whether a profit is Hong Kong sourced will be determined on the basis of the location of the operations generating the profit, termed the ‘operations test’.
Where assets are being acquired, it may be necessary for the seller and the buyer to agree on an apportionment of the purchase price between the different types of asset being transferred. Generally, the parties have a degree of discretion in negotiating such values, although the Inland Revenue Department may reallocate values in respect of certain classes of asset.
Transfers of shares in Hong Kong companies are subject to stamp duty, currently calculated at a rate of 0.2% of the value of the shares or the purchase price paid, whichever is greater.
As regards the acquisition of assets, the transfer of assets in Hong Kong is not generally subject to tax, although tax is payable on the transfer of certain specific assets, such as real property.
Exemptions and mitigation
Are any tax exemptions or reliefs available?
There is an exemption available for shares that are transferred between companies with a common shareholding of 90% or more (among other conditions). An application must be made to the collector of stamp revenue in order to obtain this exemption. Stamp duty must be paid before the transfer of shares can be registered in the target’s books and within the time periods specified in the Stamp Duty Ordinance.
Are any tax exemptions or reliefs available?
There is an exemption available for shares that are transferred between companies with a common shareholding of 90% or more (among other conditions). An application must be made to the collector of stamp revenue in order to obtain this exemption. Stamp duty must be paid before the transfer of shares can be registered in the target’s books and within the time periods specified in the Stamp Duty Ordinance.
What are the common methods used to mitigate tax liability?
Where the amount of stamp duty payable on a transfer of shares is likely to be significant, certain techniques such as a fresh allotment of shares or reclassification of existing shares may be adopted to mitigate the tax liability. However, if those techniques involve steps that have no commercial or business purpose, the collector of stamp revenue may seek to apply anti-avoidance principles in order to disregard the non-commercial steps.
Where the amount of stamp duty payable on a transfer of shares is likely to be significant, certain techniques such as a fresh allotment of shares or reclassification of existing shares may be adopted to mitigate the tax liability. However, if those techniques involve steps that have no commercial or business purpose, the collector of stamp revenue may seek to apply anti-avoidance principles in order to disregard the non-commercial steps.
Fees
What fees are likely to be involved?
No fees apply to applications made to the Inland Revenue Department other than any fees incurred by legal counsel.
What fees are likely to be involved?
No fees apply to applications made to the Inland Revenue Department other than any fees incurred by legal counsel.
Management and directors
Management buy-outs
What are the rules on management buy-outs?
In the event that the target is a Hong Kong public company, if an offer to acquire the company is a proposed management buy-out, a director will normally be regarded as having a conflict of interest where it is intended that he or she should have any continuing role (whether in an executive or non-executive capacity) in either the offeror or the target in the event of the offer being successful. In addition, the information given to competing offerors in the context of a management buy-out of a Hong Kong public company must be at least the same information generated by the target (including its management team) which is passed to providers of finance (whether equity or debt).
What are the rules on management buy-outs?
In the event that the target is a Hong Kong public company, if an offer to acquire the company is a proposed management buy-out, a director will normally be regarded as having a conflict of interest where it is intended that he or she should have any continuing role (whether in an executive or non-executive capacity) in either the offeror or the target in the event of the offer being successful. In addition, the information given to competing offerors in the context of a management buy-out of a Hong Kong public company must be at least the same information generated by the target (including its management team) which is passed to providers of finance (whether equity or debt).
Directors’ duties
What duties do directors have in relation to M&A?
Directors owe fiduciary duties to the company. In the context of a proposed M&A transaction, directors of the buyer and seller should:
What duties do directors have in relation to M&A?
Directors owe fiduciary duties to the company. In the context of a proposed M&A transaction, directors of the buyer and seller should:
- consider whether the entry into the proposed transaction is in the best interests of the company;
- exercise reasonable care, skill and diligence relating to all matters in connection with the transaction;
- instruct any appropriate advisers, if necessary, such as accountants, financial advisers, legal counsel or any other specialist consultants;
- comply with all applicable laws and the company's constitutional documents; and
- maintain appropriate records and documentation of the decision-making process at each stage of the transaction.
Employees
Consultation and transfer
How are employees involved in the process?
Where a transaction takes the form of an acquisition of shares in a company with employees, there are unlikely to be significant employment law issues, as the underlying employment contract (and employee benefits generally) between the target and its employees will usually be unaffected by the change in control.
How are employees involved in the process?
Where a transaction takes the form of an acquisition of shares in a company with employees, there are unlikely to be significant employment law issues, as the underlying employment contract (and employee benefits generally) between the target and its employees will usually be unaffected by the change in control.
The position is a little more complex in a transfer of the assets comprising a business as the contracts of the business’s employees are not automatically transferred to the buyer. Existing employment contracts must be terminated and new contracts should be entered into with the buyer. Technically, the employees will be made redundant by the transfer and it is important to take steps, to the extent possible, to minimise the employer's potential liability to make payments to employees in this situation.
In order to avoid liability to pay severance to employees on the transfer of a business, the offer of new employment must be given by the buyer at least seven days before the date of the employees' transfer. The new terms of employment must either be identical to those under the employees' existing employment, or constitute an offer of suitable employment on terms no less favourable to the employees than those under which they were previously employed. The new employer must agree to recognise the employees' previous period of service. It is common practice for the termination and offer of new employment to be combined in a joint letter sent by both seller and buyer, or to be made in separate letters from the seller and buyer, but given to employees at the same time.
What rules govern the transfer of employees to a buyer?
The Employment Ordinance does not provide for an automatic transfer of employment contracts where there is a transfer of business. Typically, the seller will terminate the employment contract and the buyer will enter into a new employment contract with the employees.
The Employment Ordinance does not provide for an automatic transfer of employment contracts where there is a transfer of business. Typically, the seller will terminate the employment contract and the buyer will enter into a new employment contract with the employees.
Pensions
What are the rules in relation to company pension rights in the event of an acquisition?
Since December 1 2000 Hong Kong employers must participate in a provident fund scheme and make contributions in accordance with the Mandatory Provident Fund Schemes Ordinance. Alternatively or concurrently, an employer may operate an occupational retirement scheme that has been granted an exemption certificate under the Mandatory Provident Fund Schemes (Exemption) Regulation.
What are the rules in relation to company pension rights in the event of an acquisition?
Since December 1 2000 Hong Kong employers must participate in a provident fund scheme and make contributions in accordance with the Mandatory Provident Fund Schemes Ordinance. Alternatively or concurrently, an employer may operate an occupational retirement scheme that has been granted an exemption certificate under the Mandatory Provident Fund Schemes (Exemption) Regulation.
The treatment of the retirement scheme arrangement of the relevant employees - whether in the context of acquisition of shares or transfer of assets – primarily depends on:
- the wishes of the seller and the buyer;
- the schemes that the relevant employees are participating under their employment with the seller, and the benefit structure under such schemes; and
- the schemes in which the buyer operates or otherwise participates.
Other relevant considerations
Competition
What legislation governs competition issues relating to M&A?
The Competition Ordinance was due to become fully effective on December 14 2015. Companies must comply with the Competition Ordinance from the date it comes into effect and any continuing conduct at that point in time will be subject to the law.
What legislation governs competition issues relating to M&A?
The Competition Ordinance was due to become fully effective on December 14 2015. Companies must comply with the Competition Ordinance from the date it comes into effect and any continuing conduct at that point in time will be subject to the law.
The Competition Ordinance has two key prohibitions:
- the first conduct rule, which prohibits anti-competitive agreements, arrangements and concerted practices (applying to both horizontal and vertical arrangements); and
- the second conduct rule, which prohibits abuse of a substantial degree of market power.
The Competition Ordinance does not include any general merger control provisions, except for merger rules which already apply to the telecoms industry. These provisions are substantially similar to those already in force, although they clarify that indirect or overseas transactions involving telecommunication or broadcasting licensees and minority acquisitions fall within the scope of the Hong Kong regime. Under the Competition Ordinance, merger activities are specifically excluded from the application of the first and second conduct rules.
Anti-bribery
Are any anti-bribery provisions in force?
In Hong Kong, bribery is primarily criminalised by the Prevention of Bribery Ordinance. The ordinance covers both public sector bribery and private sector bribery.
Are any anti-bribery provisions in force?
In Hong Kong, bribery is primarily criminalised by the Prevention of Bribery Ordinance. The ordinance covers both public sector bribery and private sector bribery.
It is an offence for any person, without lawful authority or reasonable excuse, to offer an advantage to any agent as an inducement to or reward for or otherwise on account of that agent doing or not doing something in respect of the principal's affairs or business.
Similarly, agents are prohibited, without lawful authority or reasonable excuse, from soliciting or accepting any advantage as an inducement to or reward for or otherwise on account of his or her doing or not doing something in respect of the principal's affairs or business. If an agent solicits or accepts an advantage with the permission of the agent's principal, then both the agent and the person who offers the advantage will be guilty of private sector bribery.
Similar prohibitions apply to individuals in their capacity as public servants working in the public sector.
Any person who is found guilty of public sector or private sector bribery may face up to a maximum sentence of 10 years' imprisonment and a fine of up to HK$500,000. Where it is in the public interest, the court may order that a convicted person be prohibited from taking or continuing employment as a director or manager. The Independent Commission Against Corruption is responsible for the enforcement of Hong Kong anti-bribery law.
Receivership/bankruptcy
What happens if the company being bought is in receivership or bankrupt?
A company can be placed into receivership by a security holder (eg, a creditor whose debt is secured by a debenture). A court can also appoint receivers where there are pending proceedings involving the company and where the company's assets are in jeopardy, although this tends to be less common than appointments made by a security holder.
What happens if the company being bought is in receivership or bankrupt?
A company can be placed into receivership by a security holder (eg, a creditor whose debt is secured by a debenture). A court can also appoint receivers where there are pending proceedings involving the company and where the company's assets are in jeopardy, although this tends to be less common than appointments made by a security holder.
A receiver appointed by a security holder will usually be appointed in respect of the company encompassing its entire business and undertaking, or in respect of a particular company asset. The duty of a receiver is restricted to taking control of assets and realising them for the creditor which appointed it. A receiver appointed by the court will usually be appointed to preserve assets pending the determination of a dispute.
The acquisition of a company in receivership will be subject to the receivership, which may be over substantially all of the assets of the company (depending on the scope of the security – for example, that for a floating charge is broad). This buyer of the company will be purchasing only what is left of the company after the receivership. A buyer of a company in receivership should be cautious as the value of the company may be questionable, the company may have solvency problems and the company may be liable to be wound up if there are insufficient assets to satisfy the security holder's debt.
There are two types of liquidation in Hong Kong: compulsory and voluntary liquidations. In both types of liquidation, a liquidator will be appointed to realise the company's assets and distribute them to the company's creditors. The shareholders will get a return only after all the company's creditors have been paid in full. Unless the company is listed and the acquisition is for the listed shell, it is unlikely that a buyer would wish to purchase a company in liquidation.
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