The Mergers & Acquisitions Review: Hong Kong
Overview of M&A activity
M&A activity in Hong Kong2 dropped in both volume and value in 2019, with a total of 679 announced deals and a total disclosed value of US$130.867 billion, representing a notable decrease compared with 2018, as a result of factors including global economic and trade conditions. Despite the downturn, Hong Kong saw a number of high-profile M&A transactions.
The Hong Kong securities markets showed an increase in terms of market capitalisation but less trading activity in 2019. A total of 183 companies were newly listed on the Stock Exchange of Hong Kong Limited (SEHK) in 2019, and the total amount of equity funds raised on the SEHK in 2019 was approximately HK$454.25 billion.3
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General introduction to the legal framework for M&A
The law governing M&A comprises primary legislation, regulatory rules, the law of contract and case law.
The primary legislation that applies principally to Hong Kong incorporated companies in general is the Companies Ordinance (CO) and includes provisions relating to financial assistance for the acquisition of a company's own shares, merger relief, transfers of shares and schemes of arrangement affecting mergers. The Securities and Futures Ordinance (SFO) is also relevant, covering the regulation of offers of securities, and the communication of invitations and inducements to engage in securities transactions.
For companies in certain industries, there is also specific legislation that may be relevant, for example:
- the Banking Ordinance for banking, restricted licence banking and deposit-taking companies;
- the SFO for securities, financial advisory and asset management companies;
- the Broadcasting Ordinance (BO) and the Telecommunications Ordinance (TO) for radio, television broadcasting and telecommunications companies; and
- the Insurance Companies Ordinance for insurance companies.
Prior approval of ownership changes from the relevant regulatory bodies may be required under the legislation listed above.
If an M&A transaction involves a company whose shares are listed on the SEHK, the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited (the Listing Rules) will also apply. In addition, the Securities and Futures Commission (SFC), in consultation with the Takeovers and Mergers Panel (Panel) – a committee formed by the SFC pursuant to the SFO – has issued the Code on Takeovers and Mergers and Share Buy-backs (the Takeovers Code), which applies to takeovers, mergers and share buy-backs affecting public companies4 in Hong Kong and companies with a primary listing of their equity securities in Hong Kong. The Takeovers Code is not statutory and does not have the force of law, but the Listing Rules expressly require compliance with the Takeovers Code. As a non-governmental statutory body, the SFC regulates the securities and futures markets in Hong Kong and oversees the development of these markets. Its decisions apply to M&A of public companies.
Strategies to increase transparency and predictability
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Developments in corporate and takeover law and their impact
i The Takeovers Code
To ensure that the Takeovers Code takes account of market developments and developing international practice, it is kept under regular review by the Executive of the SFC, in consultation with the Panel. In 2019, there were no significant amendments to the Takeovers Code.
ii Listing Rules
The Listing Rules reflect currently acceptable standards in the marketplace and are designed to ensure that investors have, and can maintain, confidence in the market. To ensure that the Listing Rules take account of market developments and developing international practice, they are regularly reviewed by the SEHK, which may, subject to the approval of the SFC under Section 24 of the SFO, make amendments to them.
In 2019, the SEHK introduced amendments to the Listing Rules, tightening the rules on backdoor listings and continuing listing criteria. These amendments aim to address concerns over the perceived negative impact of increased market activities related to shell companies.
iii The CO
The CO came into effect on 3 March 2014. Various key concepts under the CO that are relevant in the context of M&A are as follows:
- the requirements for approving a scheme of arrangement differ depending on the type of scheme. For privatisation schemes and members' schemes involving a takeover offer or a general offer, the 'disinterested shares test' (which requires not more than 10 per cent of the total voting rights attached to all disinterested shares to be voted against the proposal) applies so as to align with the requirement under the Takeovers Code in the context of a takeover. The headcount test (which requires that a majority of the shareholders of the target company voting on a scheme of arrangement (either in person or by proxy) must vote in favour of it) applies to creditors' schemes and members' schemes not involving a takeover offer or a general offer, and in these situations, the court is given discretion to dispense with the test in appropriate circumstances;
- a company and its wholly owned subsidiaries may amalgamate and continue as one company without the sanction of the court, provided that certain conditions are met. Such conditions include, for example, that each amalgamating company is a Hong Kong incorporated company limited by shares, that each amalgamating company is solvent and that no creditor of an amalgamating company will be prejudiced by the amalgamation. This includes subsidiaries of a non-Hong Kong holding company provided that each amalgamating company is a Hong Kong incorporated company;
- the general prohibition on private and public companies providing financial assistance for an acquisition of shares in itself and streamlined 'whitewash' procedures are extended to listed companies. In addition, it is expressly provided that a company is not prohibited from giving financial assistance for the purpose of an acquisition of shares in its holding company if the holding company is incorporated outside Hong Kong; and
- increased flexibility for companies to structure and organise their share capital in light of updated concepts relating to share capital (par value (or nominal value), share premium and the requirement for authorised capital have been abolished). Despite the absence of share premium, merger relief continues to be available. The amount required to be recorded as share capital in respect of the consideration shares issued by an acquiring company is the subscribed capital attributable to the acquired shares.
Us antitrust enforcement: the year in review
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Foreign involvement in M&A transactions
Given Hong Kong's position as a hub for investment into China, its status as a major regional financial centre and the widespread use of offshore companies for investment into and out of China, a substantial number of transactions have foreign involvement, including in the form of acquisitions by offshore companies. An analysis by reference to foreign involvement in transactions is therefore not particularly meaningful.
Significant transactions, key trends and hot industries
Despite the relatively subdued level of M&A activity in 2019, there were a number of high-profile M&A transactions. The largest outbound deal in 2019 was the acquisition by CK Asset Holdings Limited (CK Asset), a Hong Kong-listed company, of Greene King Plc, a UK-listed integrated brewer and pub retailer that operates over 2,700 pubs, restaurants and hotels across England, Wales and Scotland, for a cash consideration of approximately £2.7 billion in October 2019.7 The acquisition represented a significant additional investment by CK Asset in the UK pub and brewing sector.
Another notable cross-border M&A deal was the acquisition by Hong Kong-based FWD Group (FWD) of SCB Life Assurance Public Company Limited from the Siam Commercial Bank Public Company Limited (SCB) for a consideration of 92.7 billion Thai baht in September 2019.8 FWD and SCB also entered into a 15-year distribution agreement for the distribution of FWD's life insurance products to SCB customers in Thailand. The transaction was described by the parties as the 'largest life insurance transaction in Southeast Asia in terms of total value' and is expected to yield commercial benefits by combining SCB's large customer base, local expertise and distribution network with FWD's digital capabilities and product propositions.
The key trend observed in 2019 was the marked increase in privatisations of Hong Kong-listed companies, driven by offers from controlling shareholders. The market has seen multiple privatisations of state-owned enterprises listed in Hong Kong in connection with larger restructurings of their businesses, as part of the PRC government's recent drive to restructure its state-owned enterprises. The privatisation of Huaneng Renewables Corporation Limited in February 20209 by Huaneng Group Co, Ltd, an integrated energy company primarily focused on power generation and one of the largest Chinese state-owned enterprises, was, at the time of its completion, the largest privatisation of a Chinese state-owned enterprise from the SEHK. The trend has continued into 2020, with two long-standing Hong Kong-listed companies, namely Li & Fung Limited, a global supply chain manager, and Wheelock and Company Limited, one of Hong Kong's oldest listed property companies, being privatised in May 202010 and July 2020,11 respectively. Both companies were local family controlled conglomerates and both privatisations were implemented by way of a scheme of arrangement.
It is expected that the use of consortia to effect transactions may become a more common feature of public M&A transactions in Hong Kong. A consortium structure allows offerors to reduce their risk exposure on valuations and the amount of funding that each offeror would be responsible for. In addition, particularly on privatisations, controlling shareholders will often need to obtain outside funding to make a bid. This was the case on the Li & Fung privatisation, where GLP Pte Ltd, a Singapore-based investment management firm, partnered with the founders of Li & Fung to make the offer.
The most active sectors for M&A activity in Hong Kong in 2019 included technology and fintech, energy and infrastructure, logistics, real estate, financial services, consumer goods, biotech and healthcare. It is expected that interest in these sectors will continue in 2020. In particular, the fintech sector is one to watch in light of continued regulatory support and as the first batch of successful licensees under the Hong Kong Monetary Authority's virtual banking licence scheme commence business operations.12
Financing of m&a: main sources and developments
In common with many other jurisdictions, Hong Kong's Takeovers Code requires an offeror to have certainty of funds to make an offer for a public company. Under the Takeovers Code, an announcement of a firm intention to make an offer should include a confirmation by a financial adviser (or another appropriate third party) that resources are available to the offeror sufficient to satisfy full acceptance of the offer (a sufficiency statement). Such confirmation is not only required when the consideration is cash, or includes an element of cash, but also when the consideration consists of, or includes, any other assets except new securities to be issued by the offeror. The executive may also require evidence to support the sufficiency statement, and evidence that the offeror has sufficient resources to complete the purchase of shares that gives rise to the offer obligation.
Depending on how the acquisition is structured, M&A transactions in Hong Kong are usually financed by:
- internal resources;
- shareholders' loans;
- equity issues;
- debt issues;
- loan facilities from banks and financial institutions; or
- a combination of two or more of the above.
Under Hong Kong law, there is no specific regulation that provides for the transfer of employment contracts when there is a change of ownership of a business, as opposed to an employing company. Employment contracts would therefore be terminated in the case of an acquisition of a business, and the new employer would have the freedom to decide whether to enter into new employment contracts with existing employees. However, generally speaking, where termination of an employment contract takes place due to a transfer of business, this would constitute redundancy, and employees previously employed may be entitled to severance payments and long-service awards, for which the old employer would be liable. However, under Sections 31J and 31C of the Employment Ordinance (EO), severance payments and long-service awards are not payable in the case of a business transfer if, not less than seven days before the end date of an employee's previous contract, the new employer has offered to renew that employee's contract, or to re-engage him or her under a new contract, on no less favourable terms and conditions, and the employee has unreasonably refused that offer. If an offer of renewal or re-engagement is accepted by the employee, the new contract has effect as if the renewal or re-engagement had been a renewal or re-engagement by the old employer without any substitution of the new employer; therefore, the employment relationship will be regarded as being 'continuous' for the purposes of the EO. Any redundancy issues that may arise in future disposals of the business would be passed to the new employer after the renewal or re-engagement.
Generally speaking, under the Mandatory Provident Funds Schemes Ordinance (MPFO), an employer must enrol its employees as members of one of the registered Mandatory Provident Funds (MPF) schemes (as defined in the MPFO) available in the market in Hong Kong. An employer may enrol different employees in different registered schemes. During the contribution period (as defined in the MPFO), the employer must contribute to the registered scheme from its own funds an amount determined in accordance with the MPFO, and deduct from the employee's relevant income for that period, as a contribution by the employee to the scheme, a further amount determined in accordance with the MPFO. Employees and employers may make additional voluntary contributions to the employee's scheme.
Where there is a proposed disposal of a business, the existing employer and the proposed new employer should consider the implications of the MPFO and arrangements to deal with the accrued benefits of employees under the applicable MPF scheme. If a merger or acquisition is to be effected by way of a share sale, it is not likely that there will be MPF implications (unless the target company is spun out from a group of companies that operates a group-based scheme), as the merger or acquisition will not involve a change of employer. The surviving party or acquirer would nevertheless be well advised to carry out due diligence to ensure that all target employees are employed by the target company on terms that comply with the MPFO.
However, if the merger or acquisition is to be effected by way of a business transfer involving a change of employer, the employee must, in accordance with Section 14 of the MPFO, elect to transfer the accrued benefits to a contribution account under the new employer's MPF scheme; retain the accrued benefits in the previous MPF scheme under a personal account; or transfer the accrued benefits to a personal account of another MPF scheme.
Both the seller and the buyer must observe and comply with the requirements of the MPFO with respect to the transfer of the accrued benefits of employees.
On 1 May 2011, the Minimum Wage Ordinance came into effect in Hong Kong and introduced a statutory minimum wage. The statutory minimum wage was raised by 8.7 per cent from the previous rate, with effect from 1 May 2019.
Hong Kong's competitive economy is reflected in the transparency, predictability and simplicity of its low-rate tax system. These attractive qualities mean that, unlike many other jurisdictions, Hong Kong tax is generally not the determining factor in the way in which a transaction is structured in Hong Kong. There is no capital gains tax on the disposal of assets, including the disposal of shares and property. In addition, dividends are not classified as taxable income, and there is no withholding tax on dividends.
Stamp duty on the transfer of Hong Kong shares is currently 0.2 per cent of the consideration paid (or market value), and is generally payable in equal shares of 0.1 per cent by both the seller and the buyer. Transactions that are structured as schemes of arrangement do not attract stamp duty. Stamp duty on the transfer of immovable non-residential property in Hong Kong ranges from 1.5 per cent (for transactions up to HK$2 million) to 8.5 per cent of the amount or value of the consideration (for transactions over HK$21,739,130) and is usually paid by the purchaser.18 The Stamp Duty Ordinance is the principal source of legislation governing this area.
The Inland Revenue Ordinance sets out three taxes on income: profits tax, salaries tax and property tax. Liability to tax under these three heads, as a general rule, is limited to persons or entities carrying on a trade, profession or business in Hong Kong, and to income that 'arises in or is derived from' Hong Kong. To this extent, the residence status of persons and companies is irrelevant to income tax assessment. Corporations are taxed at 8.25 per cent on assessable profits up to HK$2 million and 16.5 per cent on any part of assessable profits over HK$2 million, whereas unincorporated businesses are taxed at 7.5 per cent on assessable profits up to HK$2 million and 15 per cent on any part of assessable profits over HK$2 million.
In respect of loan repayments, as a general rule a borrower's interest expenses will be deductible where the lender is subject to Hong Kong profits tax on its receipt of the interest. In addition, where a financial institution (whether onshore or offshore) makes a genuine loan, interest expenses will generally be deductible.
The Competition Ordinance, Hong Kong's first cross-sector competition law, came into full effect on 14 December 2015. Previously, only the broadcasting and telecommunications industries were subject to competition law, as provided for in specific provisions of the BO and the TO (now largely repealed). The former TO provided a regulatory framework for the Communications Authority to consent to certain M&A involving carrier licensees in the telecommunications industry.
The Competition Ordinance retains a merger control regime in Hong Kong for the telecommunications industry known as the Merger Rule. Like the regime under the TO, the Merger Rule applies only to mergers involving carrier licensees, and the Communications Authority has concurrent jurisdiction with the Competition Commission in relation to the Merger Rule. However, unlike the merger regime under the TO, the Competition Ordinance does not specify thresholds upon which regulatory consent is triggered. Instead, the Merger Rule refers to the acquisition of control, which could apply even if the acquisition involves a minority interest not exceeding 30 per cent. A merger could be prohibited if it has or is likely to have the effect of substantially lessening competition in Hong Kong. It is worth noting that notification of mergers is voluntary rather than mandatory, but in practice the Communications Authority is consulted in most (if not all) cases, even when no competition concerns are expected.
Since the entry into force of the Competition Ordinance, the Communications Authority has reviewed four transactions under the Merger Rule. In each case, the Communications Authority decided not to commence an investigation either on the basis that each transaction was unlikely to have the effect of substantially lessening competition in Hong Kong or, in respect of the most recent case, on the basis that the commitments offered by the parties effectively addressed the competition issues identified. The first such decision under the Competition Ordinance, announced by the Communications Authority on 31 March 2016, was in respect of the indirect acquisition of New World Telecommunications Limited,19 a carrier licensee under the TO, by HKBN Ltd, the holding company of Hong Kong Broadband Network Limited, another carrier licensee under the TO.20 The second decision, announced on 10 November 2016, was in respect of the HK$9.5 billion acquisition21 by Green Energy Cayman Corp22 of the entire equity interests of Wharf T&T Limited, a carrier licensee under the TO.23 On 3 October 2017, the Communications Authority announced it had decided not to commence an investigation under the Competition Ordinance in respect of the acquisition by Asia Cube Global Communications Limited24 of the entire equity interests of Hutchison Global Communications Investment Holding Limited, which wholly owns Hutchison Global Communications Limited, a carrier licensee under the TO.25 The latest case concerned the proposed acquisition by HKBN Ltd of WTT Holding Corp, both of which hold carrier licences under the TO.26 On 17 April 2019, the Communications Authority accepted commitments from the merging parties to address competition issues that it had identified as being likely to arise relating to building access and wholesale service provision.27 The Communications Authority decided to accept the commitments and not to commence an investigation into the proposed transaction.
In the run-up to the drafting and passing of the Competition Ordinance, which, on the whole, was supported by the public, there was some debate about whether there is a need for merger control in Hong Kong to govern general M&A activity (outside the telecommunications sector). The Public Consultation Paper on Detailed Proposals for Competition Law in 2008 showed a softening of the government's stance on this issue, from 'we do not need a merger control regime' to inviting views on three possible options regarding such a regime. The recommendation of the Commerce and Economic Development Bureau of Hong Kong (the CED Bureau) was that merger activities are not to be regulated except in the telecommunications sector, which is already subject to such regulation under the former TO. The CED Bureau stated that this proposal would give the Competition Commission more time to focus on its initial work of implementing the proposed Competition Ordinance, and would allow for a more effective assessment of whether merger control provisions would be desirable in other (or all) sectors in the future once the Competition Commission has accumulated some experience in the operation of the competition regime. This was the position ultimately adopted in the Competition Ordinance. It has been suggested that the Competition Commission would seek to introduce a fully fledged merger control regime within 'two to three years' of the Competition Ordinance taking full effect. The Competition Ordinance is currently undergoing a review, which will include an assessment of whether a cross-sector merger control regime should now be introduced.
M&A activity in Hong Kong dropped in volume and in value in 2019, as compared to 2018. The outlook for 2020 continues to be somewhat subdued in light of the novel coronavirus outbreak, uncertainties in the macroeconomic environment and geopolitical developments in major advanced economies; for example, Brexit. It is expected that M&A dealmaking will proceed with caution, with increased focus on valuation, due diligence and more extensive negotiation of specific contractual clauses, such as material adverse change clauses.
The increasing trend of protectionist policies by international governments is likely to continue to be a challenge for cross-border transactions involving sensitive industries and strategic assets. Regulatory compliance will also be another key challenge. For example, the SEHK has tightened the relevant regulations to address perceived abuses related to reverse takeovers and backdoor listings.
The government has forecast that Hong Kong's GDP is likely to shrink by 1.5 per cent to 0.5 per cent in 2020.28 Although it has described the near-term outlook for the Hong Kong economy as 'extremely challenging', the government believes that the medium-term outlook remains positive, and will continue to seek to capitalise on the opportunities brought about by the Belt and Road Initiative and the development of the Guangdong–Hong Kong–Macao Greater Bay Area.
The M&A market in Hong Kong saw 276 M&A deals being announced within the first six months of 2020, with a total disclosed value of US$58.233 billion.29 While this represents a decrease compared to the first six months of 2019, M&A activity in Hong Kong is expected to remain active in 2020 and the overall outlook for 2020 remains cautiously optimistic despite the challenges and uncertainties that could yet have a material impact on deal appetite.
1 Jason Webber is a partner at Slaughter and May. The author would like to thank Nicola Lui for her assistance in preparing this chapter.
2 Statistics on mergers and acquisitions involving Hong Kong companies differ significantly among various sources. This summary covers all M&A activity where Hong Kong was either the target or seller or bidder region between 1 January 2019 and 31 December 2019.
3 Source: SEHK Fact Book 2019.
4 The Takeovers Code states that all circumstances are to be considered, and an economic or commercial test is to be applied (taking into account primarily the number of Hong Kong shareholders and the extent of share trading in Hong Kong), in deciding whether a company is a public company. For the purposes of the Companies Ordinance (CO), a private company is a company incorporated in Hong Kong that, by its articles of association, restricts the right to transfer its shares; limits the number of its members to 50, not including persons who are in the employment of the company and persons who, having been formerly in the employment of the company, were, while in that employment, and have continued after the termination of that employment to be, members of the company; and prohibits any invitation to the public to subscribe for any shares or debentures of the company (Section 11 of the CO).
5 Under the 'one country, two systems' approach, implemented after the transfer of sovereignty over Hong Kong to the People's Republic of China on 1 July 1997, Hong Kong remains a common law jurisdiction.
6 English case law has persuasive authority only and is subject to interpretation by the Hong Kong courts.
12 The Hong Kong Monetary Authority granted licences to eight virtual bank applicants in 2019. As of today's date, certain successful licensees have already commenced business operations, the first being ZA Bank Limited in March 2020.
13 Section 31J of the Employment Ordinance (EO).
14 Subsection 3 of Section 31J of the EO and Paragraph 5 of Schedule 1 of the EO.
15 Under the Mandatory Provident Funds Schemes Ordinance, an 'employer' means any person who has entered into a contract of employment to employ another person as his or her employee.
16 A contribution account is an account mainly used to accumulate Mandatory Provident Funds (MPF) contributions in respect of current employment and investment returns.
17 A personal account is an account mainly used to hold accrued MPF benefits in respect of former employment.
18 The same range of stamp duty is applicable to the transfer of immovable residential property executed on or after 23 February 2013 but before 5 November 2016. The stamp duty applicable to the transfer of immovable residential property executed on or after 5 November 2016 is a flat rate of 15 per cent of the consideration or value of the property (whichever is the higher).
19 New World Telecommunications Limited is indirectly owned by Concord ideas Ltd.
20 Source: Communications Authority press release, 31 March 2016 (www.coms-auth.hk/en/media_focus/press_releases/index_id_1195.html).
22 Green Energy Cayman Corp is indirectly owned by MBK Partners and TPG Capital.
23 Source: Communications Authority press release, 10 November 2016 (www.coms-auth.hk/en/media_focus/press_releases/index_id_1328.html).
24 Asia Cube Global Communications Limited is wholly owned by a fund managed by I Squared Capital, a private investment firm.
25 Source: Communications Authority press release, 3 October 2017 (www.coms-auth.hk/en/media_focus/press_releases/index_id_1530.html).
26 Source: HKBN press release, 7 August 2018 (https://reg.hkbn.net/WwwCMS/upload/pdf/en/201808_HKBN-WTT-EN-web.pdf).
27 Source: Communications Authority press release, 17 April 2019 (www.coms-auth.hk/en/media_focus/press_releases/index_id_1907.html).
28 Source: '2019 Economic Background and 2020 Prospects', Financial Secretary's Office Government of the HKSAR (www.hkeconomy.gov.hk/en/pdf/er_19q4.pdf). The HKSAR government stated that its GDP growth range forecast, provided at the time of publication of its report (in February 2020), was predicated on the assumptions that the novel coronavirus infection in the region would be kept under control within several months, that local social incidents would not cause extreme and protracted disruptions to economic activities and that there would not be a significant re-escalation of US–China trade tensions.
29 Source: Mergermarket.