The Private Equity Review: Hong Kong

i Overview

i Deal activity

The global pandemic following closely on the heels of the widespread social unrest and protests in 2019, coupled with the growing friction between mainland China and the United States, made investors and buyers more cautious, creating uncertainty for Hong Kong's role as a financial centre and gateway to the market, and prompting a slowdown in the Hong Kong economy as a result. According to Refinitiv, M&A transactions involving Hong Kong-based acquirers dropped by 13.7 per cent compared with 2019; the decline rate was less than the 18.4 per cent drop in 2018. Similarly, M&A transactions involving Hong Kong-based targets decreased by 13.5 per cent compared with the previous year, when the decline rate was also slightly below the 15.4 per cent decrease compared with 2018 to 2017.

For the private equity market, the number of outbound private equity investments by Hong Kong-domiciled private equity firms increased by 10 per cent. While the overall portion of Hong Kong private equity investments into the United States and mainland China have been decreasing over the years, 2020 saw a 3 per cent increase in the number of such investments in mainland China from Hong Kong compared with the previous year. In terms of industry, tech-related investment still tops Hong Kong investors' list over the years, with a steady increase in the number of private equity investments in semiconductors and other electronics (4 per cent of the overall private equity investment in 2020, compared with 1.7 per cent in 2017). In 2020, there was an uptick in the number of investments in the medical, health and life sciences sectors, from 10 per cent of the private equity investments in 2019 to 14 per cent in 2020.

In Hong Kong, private equity transactions decreased substantially in both volume and value compared with 2019. There were 31 private equity transactions in Hong Kong in 2020, representing a 16 per cent drop from the previous year. In the few years leading up to 2020, there had already been a steadily diminishing increase in private equity transactions. An opposite trend was observed in venture capital investments involving Hong Kong investors, with a 9 per cent increase in 2020 compared with 2019, in comparison to the 15.7 per cent decline in 2019 compared with 2018.

Private equity buyout transactions for control acquisitions involving a Hong Kong target decreased by 44 per cent to only nine transactions last year from 2019, contrasted with the 3.1 per cent drop in private equity buyout activity across the Asia Pacific region. There were 214 new growth equity (minority stakes) investments in 2020 – a 4 per cent increase from 2019. There were 183 control acquisition transactions, with the buyer acquiring a majority of the equity in a Hong Kong target, down 29 per cent from 2019, the largest percentage drop since 2016.

The number of investment firms founded in Hong Kong decreased year-on-year, a trend that escalated in 2019. In 2020, only four investment firms set up in Hong Kong, compared with seven in 2019. In stark contrast to the number of active initial public offerings (IPOs) in Hong Kong in 2020, there were three private equity exits in 2020. All three exits took place via trade sales last year and none of them exited via IPOs, as opposed to one trade sale and two IPOs in 2019. Details are laid out in Section III.iv. This is in contrast to the wider Asia Pacific region, where trade sale exits decreased significantly because of the limited level of in-person due diligence possible amidst the covid-19 pandemic.

ii Operation of the market

In line with international practice, various management incentive arrangements are used in Hong Kong private equity transactions with a view to retaining and incentivising key management members of the target company to achieve common financial objectives desired by the target company and the private equity sponsors.

Where management members are existing shareholders of the target company, it is common for private equity sponsors to enter into contractual arrangements to require such management members to reinvest a portion of their proceeds alongside the private equity sponsor in connection with its acquisition of the target company. Further, transfer restrictions, lock-up and standstill provisions imposed on the management members are commonly included in definitive transaction documents along with restrictive covenants such as non-compete and non-solicitation undertakings.

In the context of target companies listed on the Stock Exchange of Hong Kong Limited (the SEHK), equity incentive arrangements commonly take the form of a share option scheme governed by the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited (the Listing Rules). A share option scheme is generally a private contractual scheme and is often subject to a combination of stipulated performance target conditions and time vesting schedules to ensure alignment of management performance with the strategic goals of the target company.

In addition, Chapter 17 of the Listing Rules provides a transparent framework regulating a share option scheme's terms and conditions and implementation by imposing certain governance requirements and limits. Adoption of a share option scheme requires approval by shareholders2 and the total number of shares issued or to be issued to a particular grantee on a rolling 12-month basis cannot exceed 1 per cent of the relevant class of shares.3 In particular, grants to substantial shareholders (i.e., shareholders holding 10 per cent or more of the voting power of the target company) and independent non-executive directors, who otherwise approve grants to executive directors, fall under a lower threshold at 0.1 per cent (or HK$5 million in value).4 Any grant exceeding these thresholds would require approval by independent shareholders. Further, the option price must be the market closing price on the date of grant (or the five-day average closing price immediately preceding the date of grant, if higher).5

Other forms of equity incentive arrangements, such as share award schemes and restricted share units plans, are also commonly seen in the market. Although share awards and restricted share unit schemes of target companies listed on the SEHK do not fall within the ambit of the Listing Rules, in the context of take private transactions, private equity sponsors should be mindful that equity incentive arrangements that give rise to special deals with favourable conditions not extended to all shareholders of the target company would require consultation and prior approval by the Executive Director of the Corporate Finance Division of the Securities and Futures Commission of Hong Kong (the Executive). Under the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Chapter 32 of the Laws of Hong Kong),6 equity incentive plans made available to 'qualifying persons' of the target company such as its directors, employees, officers or consultants are generally exempt from the requirement for the issuance of a prospectus.

Private equity exits in Asia often adopt a dual track approach where a target company prepares for an initial public offering and concurrently pursues a possible trade sale process. To maximise sale proceeds and elicit the most favourable terms for sale, a trade sale is often conducted by way of auction. The flexibility and speed of the trade sale may be affected by pre-emption, tag-along or drag-along rights of the existing shareholders. Additionally, the timeline may be further extended where relevant consents, waivers or regulatory approvals need to be obtained or where debt financing arrangements are in place.

In the initial stage, a teaser containing preliminary information of the target company such as its business model, development strategy and principal assets is circulated to potential bidders to gauge interest and bids. Potential bidders who show interest will typically be required to sign non-disclosure agreements before being provided with the information memorandum setting out the auction bid process parameters and timeline. Further, potential bidders will also be given access to the data room to conduct their due diligence exercise and management interviews and onsite visits may be scheduled. Upon completion of the due diligence exercise, bidders will be required to submit a binding offer and proposed comments to the transaction documentation. Once the winning bidder is selected, the auction process is concluded with the execution of the transaction documents.

ii Legal framework

i Acquisition of control and minority interests

M&A transactions involving public companies or companies listed on the SEHK are subject to the regulations of the Takeovers Code and Mergers and Share Buy-backs (the Takeovers Code), the Listing Rules and the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong). Where the target company operates in a regulated industry, any change of control may also require the consent of the relevant regulator. Although Hong Kong's merger control regime is only applicable to certain licensed companies in the telecommunications and broadcasting sectors, the Hong Kong Competition Commission is reviewing the existing framework and a more expansive merger control regime in line with the trend across Asia is expected in the near future.

The privatisation process of a target company listed on the SEHK is typically effected by way of a general offer or a scheme of arrangement. Under a voluntary general offer, a bidder, typically a controlling shareholder, may make a general offer to all other shareholders to acquire their shares in the listed target company. Once the offeror and its concert parties have obtained acceptances that in aggregate represent 90 per cent in value of the shares for which the offer is made, the offeror may opt to compulsorily acquire the remaining shares held by the other shareholders who have not accepted the offer and the listed target company will then be delisted.7 Further, pursuant to the Code, a mandatory general offer must be made by a person acting alone or in concert to acquire all the remaining shares of a listed target not already held by them when they acquire 30 per cent or more of the voting rights in the target company. To initiate the process of a general offer, a joint announcement by the offeror and the listed target confirming the offeror's firm intention to make the general offer is made. Within 21 days of this announcement, the offer document containing the terms of the offer accompanied by forms of acceptance must be posted to the shareholders of the target company. The board of the target company then has 14 days to issue a response document to set out its recommendation on the offer and the written advice obtained from its independent financial adviser. All offers must be conditional on the offeror having received acceptances in respect of shares that will result in the offeror reaching 50 per cent control of the target company, but may also be made conditional on acceptance level of shares carrying a higher percentage of voting rights.8

In contrast, a scheme of arrangement is a statutory corporate restructuring procedure whereby a court-sanctioned scheme of arrangement proposal is put forward by the target company to its shareholders.9 The process is typically implemented by cancellation of all the issued shares (other than those shares held by the offeror) followed by issuance of new shares to the offeror. In return, the offeror will pay the consideration, which may take any form such as cash or other assets to the target company's former shareholders. The approval of the scheme must be obtained at a meeting of the disinterested shareholders and the approval threshold is not less than 75 per cent of the voting rights of the shareholders present and voting provided that votes cast against the scheme do not exceed 10 per cent of the voting rights attached to all disinterested shares, which has replaced the 'headcount test' – requiring approval by a majority in number of those voting at the meeting – that remains applicable in the Cayman Islands.

Private investment in public equity (PIPE) transactions are an alternative source of funding for target companies listed on the SEHK. In contrast to pre-IPO investments, in which special investor rights terminate upon completion of an IPO as required by SEHK guidance and policies, PIPE transactions in the form of convertible bonds or similar instruments offer some flexibility to allow investors to include rights and protections typically not enjoyed by individual shareholders of a SEHK-listed target company in the form of debt covenants. Support may also be obtained by private equity sponsors from controlling shareholders with respect to their board representation or observer rights at the target company. As many listed companies on the SEHK have a general mandate from their shareholders permitting them to issue up to 20 per cent of their issued share capital during the relevant year, the completion of a PIPE transaction can be a swift process taking weeks or even days, so long as the pricing requirements are complied with and there are no connected transaction implications. However, where the target company's general mandate is not available or the general mandate cannot be utilised for the proposed PIPE transaction, the target company would need to convene an extraordinary general meeting to obtain a specific mandate from its shareholders to proceed with the transaction. To ensure there is an open market for listed securities, unless the SEHK has exercised its discretion to accept a lower percentage at the time of the target company's listing, the public float threshold is set at 25 per cent. The shares held by a substantial shareholder (as defined above) will not be counted towards the public float. Thus, in structuring a PIPE transaction, the requisite public float would need to be maintained upon completion. Where the public float requirement has been breached, the SEHK has the right to suspend trading of the securities of the target company pending remedial action.

An investor acquiring more than 10 per cent of the voting power at the general meeting of a listed company or its subsidiary (other than an 'insignificant subsidiary') would become a connected person of that listed company. This renders any subsequent transaction between the investor (and certain categories of persons affiliated or associated with the investor) and the listed company or its subsidiaries subject to the Listing Rules regarding connected transactions,10 making such transactions subject to disclosure and independent shareholder approval requirements, unless exemptions apply.

The structure of a cross-border private equity transaction or privatisation is usually determined in consideration of tax-related issues. As Hong Kong operates a territorial system of taxation, the profits tax rules apply equally to Hong Kong incorporated companies carrying on a trade or business in Hong Kong and overseas incorporated companies carrying on a trade or business in Hong Kong through a branch. For foreign companies listed on the SEHK, the tax costs of the transaction and the tax liabilities based on local jurisdiction tax laws and disposal rules should also be considered.

For a change of ownership or control of Hong Kong businesses in certain sectors, such as banking, insurance, financial services, telecommunications and broadcasting, consent is required from the relevant regulatory body. Save for only a few exceptions, such approvals apply equally to foreign and local investors.

The Competition Ordinance (Cap. 619 of the Laws of Hong Kong) establishes the competition law regime in Hong Kong. However, unlike many other major jurisdictions, it does not provide for general merger control provisions that apply across sectors, and the current scope of the merger rule applies only to the telecommunications sector. While local merger control rules have limited application, many Hong Kong businesses have substantial business and turnover in mainland China, meaning Chinese merger control rules may need to be considered in the acquisition of Hong Kong businesses. With Chinese companies making up a significant proportion of companies listed in Hong Kong, Chinese merger control review is also often a relevant consideration for public takeovers of Hong Kong-listed targets.

ii Fiduciary duties and liabilities

In general, the sponsor as a shareholder of a portfolio company does not owe any fiduciary duties to other shareholders. It is entitled to exercise its vote in its own interests. However, if as a result of the decision arrived at by the general meeting, the company conducts its affairs and does an act that is unfairly prejudicial to the interests of another shareholder, that shareholder may petition to the court for remedies against the prejudicial conduct, which may include the payment of damages or an order for one shareholder to buy out the shares of another shareholder. If the portfolio company is listed on the SEHK, the sponsor must abstain from voting at a general meeting on any resolutions approving any transaction or arrangement in which it has a material interest.

A sponsor's representatives who are on the board of directors of a Hong Kong- incorporated portfolio company owe fiduciary duties to the company as directors. These fiduciary duties include a duty to act in good faith in the interests of the company as a whole, to exercise his or her powers for a proper purpose and to avoid conflicts of interests. The director must not use his or her position to gain an advantage for himself or herself or the sponsor. The director must also not use the company's property or information of which he or she becomes aware as a director of the company, except where the use or benefit has been disclosed to and approved by the company in a general meeting. In addition, the director has a statutory duty under the Companies Ordinance to exercise reasonable care, skill and diligence. The standard is a mixed objective and subjective test, with the care, skill and diligence that would be exercised by a reasonably diligent person with the general knowledge, skill and experience reasonably expected of a person carrying out a similar function, as well as the general knowledge, skill and experience that the director has. Where the company is insolvent, the director should take into account the interests of creditors in exercising his or her fiduciary duties.

Other obligations

If the portfolio company is listed on the SEHK, the directors will be required to comply with duties under the Listing Rules. In addition to the general duties of directors, there are also additional responsibilities under the Corporate Governance Code, such as the requirement to ensure that the director could devote sufficient time and attention to the company's affairs, to actively participate in regular board meetings and to participate in continuous professional development. Where the portfolio company is involved in a transaction with implications under the Takeovers Code, the directors will be subject to further duties, including that they should not make any commitments that would restrict their freedom to advise shareholders or to take any actions that would frustrate a bona fide offer.

In situations where a sponsor has an investment in a SEHK-listed portfolio company, or is conducting due diligence into a potential investment in a SEHK-listed company, it must ensure that it does not contravene the insider dealing provisions under the Securities and Futures Ordinance. Insider dealing takes place if a person receives, from a person connected with the company such as a director, information about the company or its listed securities that is not generally known but if known would be likely to materially affect the price of the securities, and deals in the securities of the company. If the sponsor's representative or other director discloses the inside information to the sponsor and the sponsor deals in the company's securities on the basis of the information, both the sponsor and the director will be regarded as engaging in insider dealing. Breach of the insider dealing provisions, as well as other forms of market misconduct under the Securities and Futures Ordinance, will result in civil and criminal liability.

In general, if the sponsor acquires an interest of 5 per cent or more of the voting rights of a SEHK-listed company, or its interest crosses a percentage threshold, it must submit a disclosure of interests form with the SEHK within three business days. The chain of controlled entities will need to be disclosed up to the ultimate controlling shareholder, and the information submitted will become publicly available. For a limited liability partnership, the Securities and Futures Commission (the SFC) expects that the general partner as well as any limited partner contributing more than one-third of the capital to the partnership should disclose their interests. Any person who fails to comply with the duty of disclosure or provides materially false or misleading information will commit an offence.

If a sponsor launches a takeover offer for a SEHK-listed company or enters into a transaction that falls within the Takeovers Code, it will need to comply with the requirements under the Takeovers Code. The Takeovers and Mergers Panel may impose sanctions on any person who breaches the Takeovers Code, which may include a public statement of criticism, a public censure, or a 'cold shoulder order' to withhold the facilities of the securities market from the person.

iii Year in review

i Recent deal activity

Notable private equity transactions in 2020 included the investment by China Resources Investment Management and Investcorp Holdings into City'super, a Hong Kong-headquartered lifestyle retail chain, having taken place at a time when the Chinese economy and its retail sector were rebounding off the back of strong consumer demand; the acquisition by a consortium fund led by Templewater, an alternative investment firm, of Citybus and New World First Bus, the largest franchised bus operations in Hong Kong, for US$410.2 million in the midst of the covid-19 pandemic; a US$70 million financing of Green Monday, a Hong Kong-headquartered social venture with focus on sustainable living; and Talon Esport, a Hong Kong-based professional esports organisation, which raised a seed round for expansion across the Asia Pacific region.

The year 2020 has seen a number of consortium offers launched or proposed. It is anticipated that the consortium structure may become more commonly used as private equity sponsors continue to seek investment opportunities to deploy the high level of dry powder raised. In particular, the controlling shareholders of Hong Kong-listed companies may increasingly team up with consortia, as we saw in Li & Fung Limited, IT Limited and CIMC-TianDa Holdings Company Limited, where, in each case, a consortium for making an offer was formed by the target's controlling shareholder and investors. Controlling shareholders may also turn to consortia as an alternative to banks for funding in take-private deals.

ii Financing

Given the complexity and bespoken nature of acquisition transactions, leverage financing is still the most popular option that we have seen in the market being adopted to finance acquisitions, in particular take-private deals.

In some deals, there are mezzanine facilities and senior facility structures, where the mezzanine lenders are funding part of the equity to be put into the vehicle that will act as borrower under the senior facilities. The minimum equity contribution at the senior borrower level could range from 30 per cent to 55 per cent of the total acquisition consideration (taking account of the size of the debts of the target group that are to be retired with the senior facilities).

Chinese banks have been progressively taking a more active role in leverage financing deals in Hong Kong directly or indirectly through their offshore branches, in particular in take-private transactions where the targets have significant operations in mainland China.

The margin could range from below 1 per cent plus the Hong Kong Inter Bank Offered Rate (HIBOR) or the London Interbank Offered Rate (LIBOR) to a two-digit number, depending on the creditworthiness of the sponsor and the assets that could be offered as security. In some of the agreements, there are margin step-down arrangements where the margin of the loans in a particular year will be gradually reduced along with the decrease of the leverage ratio (being the ratio of total debt-to-adjusted-EBITDA in respect of a relevant period, which is often 12 months). It is also common for arrangers to charge a one-off arrangement fee in leverage financing deals if the financing is provided in the form of syndicate lending. The arrangement fee is often expressed as a percentage to the total facility amount committed. It usually ranges from 1 per cent but rarely exceeds 2.75 per cent.

EBITDA, meaning the earnings before interest, taxation, depreciation and amortisation, is still the core parameter that drives a financial covenants test. For example, the most often tested financial covenants in a leverage financing deal, such as leverage ratios (as mentioned above) and interest cover (being the ratio of EBITDA to finance charge), are both tested against EBTDA. The opening leverage ratio roughly ranges between 4.5:1 to 5:1 and lenders may require the leverage ratio to be lowered gradually every half year or yearly to roughly 2.5:1.

iii Key terms of recent control transactions

Conditions for a private control transaction

Regulatory approvals and anti-trust approvals (for transactions involving targets in the telecommunications sector or groups with overseas operations) are typical conditions precedent to closing, if applicable. In competitive auctions, conditions may be limited to these only. In other transactions, closing conditions vary depending on the transaction and the parties' relative bargaining powers. Third-party consents having been obtained, no governmental action prohibiting the transaction and, where there is a long period between signing and completion, absence of material adverse change (MAC) impacting the target group, are some of the common conditions.

Conditions for a public takeover

As explained above, there are two main methods to obtain control of a Hong Kong public company – a general offer or a scheme of arrangement. A general offer can either be voluntary or mandatory. Except with the consent of the Securities and Futures Commission of Hong Kong, all offers must be conditional on the offeror receiving acceptances that result in the offeror and its concert parties holding more than 50 per cent of the voting rights in the target. A voluntary offer may be made conditional on a higher percentage acceptance level. Voluntary offers may also be subject to other conditions, provided that such conditions must not depend on judgments by the offeror or the target company or the fulfillment of which is in their respective hands. However, no such condition may be invoked to lapse an offer unless the circumstances that give rise to the right to invoke it are of material significance to the offeror in the context of the offer. Common conditions attached to a takeover offer include regulatory approvals, target shares remaining listed and traded up to the closing date, no material adverse change and no illegality. For a mandatory offer, the only condition that will normally be permitted is the 50 per cent acceptance condition.

An offer cannot be made subject to a financing condition. An offeror must have committed funding to satisfy its obligations under the offer at the time of the announcement of its firm intention to make an offer. As such, where an offeror takes out external debt financing to finance an offer, lenders will be expected to provide certainty of funds through limiting the number of events that would trigger a drawstop.

As the Takeovers Code prescribes a time period within which all conditions to a voluntary general offer or a scheme of arrangement must be satisfied, regulatory approvals that may not be obtained within the deadline are often set as pre-conditions instead of conditions to an offer.


The covid-19 pandemic has prompted parties to examine whether the pandemic has created a material adverse change at the target justifying termination by the buyer. In general, the threshold for a court to permit the invocation of a MAC clause to terminate a deal is high. In the context of a take-private transaction, the bar is even higher as the offeror generally cannot invoke a condition (including MAC) to lapse an offer under the Takeovers Code.


Completion accounts remain the more common consideration adjustment mechanism, but locked-box mechanisms are becoming more common in the secondary buy-out market involving financial sellers or in auctions where price certainty is key.

Under the Takeovers Code, a break fee has to be de minimis (normally no more than 1 per cent of the offer value) and the target board and its financial adviser have to confirm to the SFC that the fee is in the best interests of the target's shareholders. In light of such regulatory constraints, break fees are uncommon in Hong Kong public M&A transactions.

Warranties and indemnities

As expected given the history of its legal system, Hong Kong M&A deals tend to follow UK market practice. For example, general indemnities are relatively uncommon and sellers tend to seek to disclose the entire contents of the documents contained in the disclosure bundle or data room against the representations and warranties. Subject to negotiation, time limit for claims for breach of representations and warranties is often limited to between 12 and 24 months after closing, although claims on fundamental and tax warranties tend to survive for longer periods. Seller liability is often capped at the total purchase price for breaches of fundamental warranties (such as title) and often around 15 to 30 per cent of the purchase price for other breaches. The increasing use of warranty and indemnity insurance may impact such terms and how they are negotiated. For example, where buy-side insurance is purchased, buyers may be more likely to resist data room disclosure as the insurance policy will usually deem the disclosures made in the data room as part of the general disclosures under the policy.

iv Exits

More exits have taken place by trade sales since 2018. In 2020, all exits occurred through trade sales, including the take-private of Li & Fung, a 114-year-old supply chain company which listed in Hong Kong in 1992, at HK$1.25 per share; and the privatisation of Haier Electronics Group by Haier Smart Home by way of a scheme of arrangement pursuant to which new H shares of Haier Smart Home were offered to the shareholders of Haier Electronics Group in exchange.

In 2019, according to Refinitiv, the sole trade sale exit by a private equity investor of a Hong Kong target was the sale of PSM International Holding Limited to Bulten AB, a leading supplier and manufacturer of fasteners in the automotive sector. In 2018, there were two exits effected through trade sales: New World Development purchased FTLife Insurance from JD Group, for HK$21.5 billion, regarded as the largest acquisition in the insurance sector in Asia at the time; and the merger of HKBN, a subsidiary of Metropolitan Light Company Limited, with WTT HK Limited (WTT), a company owned by TPG Capital and MBK Partners.

iv Regulatory developments

The SEHK has primary regulatory oversight for transactions involving companies listed or applying to be listed on the SEHK. The SFC regulates takeovers, mergers and share buy-backs of public companies, as well as requirements under the Securities and Futures Ordinance relating to corporate disclosure, disclosure of interests and market misconduct. The SFC also regulates private equity firms that carry on regulated activities under the Securities and Futures Ordinance.

Where a transaction involves the sponsor acquiring a certain percentage interest in a company that operates in a regulated industry – for example, banking, securities, insurance, telecommunications and broadcasting – the sponsor will need to obtain approval from the relevant industry regulator. In addition, Hong Kong has a limited merger control regime for holders of telecommunications carrier licences, and the Competition Commission is the principal competition authority responsible for enforcing the regime.

i Profit requirement for listing

The SEHK published a consultation paper in November 2020 proposing to increase the minimum profit requirement for listing from HK$20 million for the most recent financial year and HK$30 million in aggregate for the preceding two financial years to HK$50 million or HK$75 million for the most recent financial year and HK$60 million or HK$90 million for the preceding two financial years.11 If implemented, this would raise the minimum profit threshold that a portfolio company must achieve before the sponsor could exit through an IPO.

ii Corporate weighted voting rights

Following the decision by the SEHK to permit listings of companies with weighted voting right (WVR) structures from 30 April 2018, the SEHK issued its consultation conclusions in October 2020 for listings of issuers with corporate WVR beneficiaries.12 As a way forward, the SEHK will allow Greater China issuers with corporate WVR structures and listed on the New York Stock Exchange, NASDAQ or the Main Market of the London Stock Exchange on or before 30 October 2020 to list on the SEHK through a concessionary secondary listing route. The issuers must meet other criteria including that it is an 'innovative company', has a very high minimum market capitalisation and satisfies certain shareholder protection standards.

iii Statutory corporate rescue procedure

The Secretary for Financial Services and the Treasury has indicated that the Companies (Corporate Rescue) Bill is expected to be introduced into the Legislative Council in 2021.13 The bill will introduce a statutory corporate rescue procedure where an independent third-party professional who is a Hong Kong certified public accountant or solicitor would be appointed as a 'provisional supervisor' to supervise the company for a period of time, during which there would be a moratorium on civil legal procedures against the company and its property. Where a sponsor is looking into investing in distressed companies, the proposed procedure would allow more flexibility for the company to conduct financial restructuring.

iv Limited partnership fund regime

The Limited Partnership Fund Ordinance came into operation on 31 August 2020 and established a regime to enable funds to be registered in the form of limited partnerships in Hong Kong. The regime was introduced specifically for use by investment funds in Hong Kong, and is part of the Hong Kong government's initiatives to promote Hong Kong as a premier fund hub in Asia. It is an opt-in registration scheme administered by the Companies Registry. The regime offers an alternative to funds domiciled in offshore jurisdictions.

v National security law

The National People's Congress of the People's Republic of China has promulgated the Law of the People's Republic of China on Safeguarding National Security in the Hong Kong Special Administrative Region (the National Security Law), which came into effect on 30 June 2020. The National Security Law prohibits secession, subversion, terrorist activities and collusion with a foreign country or external elements to endanger national security. Although the National Security Law does not directly regulate M&A activities, it has a broad extraterritorial scope of application. Parties should carefully review their business activities to ensure they do not unintentionally breach the requirements; for example, by providing financial or other assistance to persons for commission of the relevant offences.

v Outlook

Hong Kong's economy is going through an uncertain period, having weathered both the social unrest in 2019 and the continuing pandemic, as well as the global publicity surrounding the enactment of the National Security Law. While China has rebounded strongly from the pandemic, Hong Kong's economic outlook is less certain, which may impact investment flow. However, given its status as a regional financial centre and an offshore RMB hub, Hong Kong has traditionally been a bridge, instead of a focal point, for investment into and out of mainland China. It would be a deviated analysis if we focused solely on the figures of investments involving Hong Kong-based targets, without taking into consideration Hong Kong's functional and integrated role to the economies surrounding it. The decline should not be analysed in a vacuum and would not be as significant if we take into account the transactions in the Greater China region.

Set against the decreased private equity activity in Hong Kong was a record annual high of 54 buy-outs of Hong Kong-listed companies as the weakened economy made for attractive valuations for listed companies suffering from the economic downturn, a phenomenon already observed in 2019. According to Refinitiv data, the total value of such transactions stood at $22.5 billion for the year through mid-December 2020, representing a 160 per cent year-on-year increase, the highest since 2017. Despite the uncertainty, it is expected that private equity activity will pick up in 2021 as private equity investors, having been the beneficiary of the Chinese economy's rapid recovery, will continue to look for bargains in the public markets as depressed valuations present opportunities.


1 Betty Yap is a partner and Ellen Mao are counsels at Paul, Weiss, Rifkind, Wharton & Garrison LLP. The authors wish to thank Andy Chan, Charity Cheung and Nicole Chan for their significant contributions to this chapter.

2 Rule 17.02(1)(a) of the Listing Rules.

3 Rule 17.03(4) of the Listing Rules.

4 Rule 17.04(1) of the Listing Rules.

5 Note 1 to Rule 17.03(9) of the Listing Rules.

6 Section 8 of Part 1 of the Seventeenth Schedule to C(WUMP)O.

7 Section 695 of, and Division 4 of Part 13 of, the Companies Ordinance.

8 Rule 30.2 of the Code.

9 Section 673 of the Companies Ordinance.

10 Chapter 14A of the Listing Rules.

11 'Consultation Paper on the Main Board Profit Requirement' (27 November 2020).

12 'Consultation Conclusions on Corporate WVR Beneficiaries' (30 October 2020).

13 'Legislative Council Panel on Financial Affairs – Legislative Proposals of the Companies (Corporate Rescue) Bill' (23 October 2020).

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