2013 Asia Pacific Guide to Mergers & Acquisitions – Hong Kong Chapter


October, 2013


The terms “merger” and “acquisition” have no legislative meaning in Hong Kong. There is no concept of true “merger” practised under Hong Kong law – i.e. whereby two Hong Kong companies merge into one entity through the absorption of one by the other. “Acquisition” has a more generally accepted meaning and can encompass a number of methods by which a party acquires whole or partial ownership of a business enterprise or shares in a target company.


As in other jurisdictions, mergers and acquisitions in Hong Kong are typically structured through the transfer of the target company’s shares or assets to the purchaser.


This brief guide will focus on share transfers in a private or negotiated M&A context although it also touches on some aspects of M&A involving public (and therefore almost invariably listed) companies.


Choosing the transaction structure


Share transfers tend to be more common than asset transfers in Hong Kong.  Factors affecting the choice of structure might include:


  • whether the purchaser only wants to purchase a small or specific part of the target company’s business, which would mean a share transfer may not be appropriate;
  • avoiding the assumption of undisclosed or contingent liabilities, which might also tip the balance towards an asset transfer;
  • if the target company’s assets are not transferable (e.g. certain licences or non-assignable agreements with third parties), a share transfer may be more appropriate.


Common legal issues


Whilst many of the kind of issues that arise on M&A transactions in Hong Kong would be familiar to overseas practitioners, the following highlights some specific areas worth noting.




A share transfer would generally not involve a transfer of employees, as the employees would usually remain in the employment of the target company. 


In an asset or business transfer, employees of the target company will not automatically transfer to the purchaser. Under Hong Kong law, all existing contracts of employment have to be terminated and, if it is desired to retain employees in the business, new contracts of employment need to be offered to those employees who are to transfer.  If employees are not retained, redundancy issues may arise on termination and the previous employer may be liable to make severance payments and provide certain other statutory benefits.


The Employment Ordinance provides a specific exemption regarding redundancy liability of the previous employer if certain procedures are complied with.  These include the new owner of the business making an offer to re-employ the employees on no less favourable terms and conditions at least seven days before their previous employment terminates and the new employment taking effect on or before the termination date of the previous employment.


If these procedures are complied with and an employee unreasonably refuses the new owner’s offer, then no liability to make severance payments will arise, although there may still be residual liabilities to make long service payments. If transferring employees accept the offer, they achieve continuity of employment for the purposes of the Employment Ordinance and any eventual liability for redundancy benefits rolls over to the new employer by reference to the total period of employment.


Transfer of liabilities


The Transfer of Businesses (Protection of Creditors) Ordinance provides that whenever a business is transferred (i.e. such legislation would not apply on a share transfer), the purchaser shall, notwithstanding any agreement to the contrary, become liable for all the debts and obligations arising out of the carrying on of that business by the seller, unless the procedures set down in the ordinance are followed. These procedures require the parties to publish a notice of transfer (setting out prescribed particulars of the transfer) not more than four months and not less than one month before the date the transfer takes place.


The purchaser ceases to be liable for all obligations of the seller with effect from the date on which the notice of transfer becomes complete, which occurs upon the expiration of one month after the date of the last publication of the notice (unless within that period a creditor commences proceedings against the seller in respect of any liability of the seller arising out of the business).




Hong Kong real estate leases are generally not assignable without landlord consent. It is also very often the case that consent of the landlord will be required for any change in control of the tenant. Failure to obtain consent will usually give rise to a right of termination of the lease.  Parties should note that obtaining consent is not necessarily a formality and will not necessarily be done quickly.  To avoid problems in a transaction where the target business or company has real estate leases, the question of approaching landlords should be addressed as early as possible.


Competition regime


Hong Kong’s Legislative Council passed legislation, known as the Competition Ordinance, in June 2012 aimed at preventing certain anti-competitive behaviour.  However, the legislation is only being implemented in stages and the newly-established Competition Commission remains in the process of drafting guidelines, carrying out public and industry consultations and educating Hong Kong’s business community about the new regime (as at September 20130.


It is anticipated that this process could take a further 12 months or more to complete, which would mean that the substantive provisions would not come into force until early 2015.  At present Hong Kong does not therefore have any generally applicable competition regulation.


Sectoral Regulation


In certain industries, including telecommunications, banking and insurance, in Hong Kong the consent of a regulatory body is required for a change of ownership.


Foreign Exchange and Investment Restrictions


Hong Kong does not currently impose any controls on the inflow or outflow of foreign exchange, or any restrictions on investment or repatriation of capital or remittance of profits or dividends to or from a Hong Kong company.


Tax Issues


The relative simplicity and transparency of the tax regime in Hong Kong means that tax considerations are often less of an issue in Hong Kong M&A transactions. Some of the principal features of the Hong Kong tax regime are:


  • no taxation on capital gains on the disposal of assets (including property and shares); 
  • no withholding tax payable in respect of distributions to shareholders by way of dividend;
  • dividends are not taxable income; and
  • there is no concept of group taxation


Stamp duty is charged on the sale of shares of Hong Kong incorporated companies. The rate is currently set at 0.2% of the higher of (i) the amount of the consideration paid and (ii) the value of the shares being transferred. It is normally paid in equal proportions by the seller and the purchaser.


The use of offshore companies incorporated in jurisdictions such as the British Virgin Islands is common in Hong Kong for a number of reasons, including the relative simplicity of maintenance of such companies and the avoidance of Hong Kong stamp duty on share transfers (save as regards shares traded on the Hong Kong Stock Exchange, which are required to be registered on a Hong Kong branch register).


Third party consents


The parties will need to consider the procedures for transferring any licences, consents and permits which may be required for the conduct of a business in Hong Kong or for obtaining new licences, consents and permits when there is an acquisition of assets.  In addition, listed companies may be subject to the listing rules of the Hong Kong Stock Exchange and the takeover rules instituted by the Securities and Futures Commission (“SFC”) (see below).


Typical documentation


The core documentation involved in a sale and purchase of a company or a business in Hong Kong will be familiar to anyone who has worked on M&A transactions in a common law jurisdiction and would typically include:


  • a confidentiality letter (which may include a provision for exclusive negotiations for a particular period (While an agreement which purports to commit the parties to enter into a definitive sale and purchase agreement would be unenforceable under Hong Kong law on the basis that it is an agreement to agree, the seller may commit that he will not enter into negotiations for a sale with other parties. Such a commitment would be enforceable provided that it is sufficiently certain. Consideration should be provided for the commitment to be enforceable, which is often drafted as the incurring of fees by the potential purchaser in the due diligence investigation of the target company.);
  • a due diligence questionnaire and report in relation to the target;
  • a sale and purchase agreement that specifies the obligations and liabilities of each party in relation to the sale;
  • a disclosure letter in which the seller makes disclosures against the representations and warranties in the sale and purchase agreement;
  • share transfer forms where the sale and purchase involves the sale of shares, and bought and sold notes if these are shares in a Hong Kong company;
  • a notice under the Transfer of Businesses (Protection of Creditors) Ordinance in the case of the sale of a business; and
  • with respect to public companies, any documentation specifically required by the relevant listing or takeover rules.


Due Diligence


In addition to financial due diligence, legal due diligence in some form is normally undertaken by the purchaser. Reports on title are sometimes prepared in relation to properties owned by the target company.  With regard to other non-financial due diligence, the main items commonly investigated include, among other things, the statutory books, major contracts, plant and machinery leases, service agreements, loan details and particulars of any litigation.

As in other jurisdictions, it is common practice for the prospective purchaser to submit a questionnaire to the target company and for the purchaser’s lawyers to prepare a due diligence report. When the target company has operations or assets in mainland China, a greater degree of proactivity in due diligence is usual and prudent, particularly in light of recent developments around the enforceability or otherwise of certain ownership structures often used by foreign entities investing in mainland China.


The Sale and Purchase Agreement


The sale and purchase agreement is often drafted by the lawyers for the purchaser.  The types of clauses found in such agreements are consistent with those used internationally so we have only sought to highlight certain key areas or aspects which might be relevant from a Hong Kong law perspective.


  • Consideration


It should be noted that section 47A of the Companies Ordinance, as a general rule, prohibits a company or any of its subsidiaries from giving financial assistance by way of a gift, security or indemnity, a loan or a guarantee for the purchase of the company’s own shares.  There are, however, certain exceptions to the above prohibition and specific legal advice should be sought if the parties consider that there may be an issue.


  • Representations and Warranties


The common law rule of caveat emptor (“buyer beware”) applies to the acquisition of shares or assets in private companies in Hong Kong. In respect of a share transfer, there is no statutory protection by way of implied terms in favour of the purchaser.


A purchaser will normally require comprehensive warranties to be provided by the seller in the sale and purchase agreement and will usually try to negotiate assessment of loss on an indemnity basis.  The seller will normally obtain some basic warranties from the purchaser on matters such as its capacity.


Warranties are usually given on the date of signing of the sale and purchase agreement. Where there is a gap between signing and completion, the agreement usually provides for repetition on completion. The purchaser will want to have a right to terminate the agreement if the seller is in breach of its warranties before completion.


  • Indemnities


In addition to the warranties, indemnity clauses are a standard feature in sale and purchase agreements and sometimes appear in a separate deed for further protection.  It is common to enter into a separate deed of tax indemnity, usually given by the seller in favour of both the target company and the purchaser, in addition to including tax warranties in the sale and purchase agreement.


  • Restrictive covenants


The purchaser will usually also seek to include provisions in the sale and purchase agreement which restrict the competitive freedom of the seller, such as non-compete covenants, non-solicitation clauses in relation to the target company’s customers, suppliers or employees, confidentiality provisions prohibiting the seller from disclosing or using any confidential information about the target company and its customers and provisions restricting the seller from using the same name or similar name of the target company.


At common law, restrictive covenants are prima facie unenforceable as they restrain trade and are therefore contrary to public policy. However, the courts are willing to uphold restrictive covenants which they consider to be reasonable in order to protect the legitimate interest of a purchaser. In order to be enforceable, any restraints must not go beyond what is necessary to achieve that purpose (which would generally involve limitations on the geographical area restricted, the duration of the restraint and the business activities prohibited).


  • Completion (share transfers)


Transfer of title to shares of Hong Kong incorporated companies takes place by the delivery of a properly executed instrument of transfer and related contract (or “bought and sold”) notes (required for stamp duty purposes) and the original share certificate, followed by the stamping and registration of the transfer in the statutory records and books of the target company.


Stamping must take place before a transfer can be reflected in the register of members of the relevant Hong Kong company.  Such registration is determinative of legal title. As stamping invariably follows completion, there will be a period when the purchaser has beneficial but not legal title to the sale shares.


  • Dispute Resolution


Litigation and arbitration are the two typical alternatives in Hong Kong.  If litigation is chosen, it is common for the parties to irrevocably submit to the non-exclusive jurisdiction of the courts of Hong Kong.  Typically, process agents will be appointed to receive service locally for parties not ordinarily resident in Hong Kong.


If the parties choose arbitration, the Arbitration Rules of the United Nations Convention on International Trade Law are often adopted with specific amendments to provisions such as the number of arbitrators and the place and language in which the arbitration will be conducted.


Public company mergers and acquisitions


In addition to many of the points outlined above, where a transaction involves a public company (which is likely also to be listed) the parties will need to consider two further key sources of regulation, namely the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited (the “Listing Rules”) and the SFC’s Codes on Takeovers and Mergers and Share Repurchases (the “Takeovers Code”).


The Listing Rules


(Reference is made here to the Listing Rules applicable to the main board of the Hong Kong stock exchange.  The Growth Enterprise Market (“GEM”) (perhaps equivalent to AIM in the UK) is a second, smaller board which was established to promote technology companies and what might be deemed riskier enterprises.  Different listing rules apply to GEM but most are similar to those for the main board.)


The Hong Kong Stock Exchange does not normally take a primary role in relation to the sale or purchase of shares in listed companies or in respect of takeover transactions. It may, however, investigate a listed company’s suitability for listing following its takeover or merger and will be concerned to see that at least 25% of the share capital of the listed company (being the minimum public float, subject to exceptions) remains in the public’s hands following the relevant transaction. The Stock Exchange will however scrutinise reverse takeovers and attempts at so-called “back-door” listings.


Acquisitions and disposals by a listed company or one of its group members are primarily regulated by Chapter 14 of the Listing Rules and transactions are categorised in accordance with specified percentage ratios (put simply, these are based on assets, net profit, revenue, consideration and, if relevant, the value of any equity issued as consideration).  The categories are: reverse takeover, very substantial acquisition/disposal, major transaction, discloseable transaction and share transaction.  Such transactions will require disclosure and may also necessitate the publication of a circular (in English and Chinese) as well as shareholder approval.


There is also a requirement for aggregation of transactions in certain circumstances and specific rules to take into account where a company becomes or ceases to be a subsidiary or where a non-wholly owned subsidiary effects a transaction.


Hong Kong incorporated listed companies and their Hong Kong incorporated group companies must also take into account the provisions of section 155A of the Companies Ordinance, which requires shareholders’ approval for disposals of any company’s fixed assets where the value of the consideration in respect of that disposal, aggregated with any other disposal(s) within the four months preceding it, exceeds 33% of the disposing company’s fixed assets.  It is worth noting that (where relevant) shareholders’ approval is required at the level of the immediate company concerned (and therefore is likely to be a simple matter in the case of a subsidiary).


Takeovers Code


Public companies in Hong Kong (whether listed or not) fall within the regulatory framework of the Takeovers Code.  It largely resembles its English counterpart although there are also significant differences. The aim of the Code is to ensure fair treatment of shareholders affected by merger or takeover transactions.  It requires the timely disclosure of adequate information to enable shareholders to make an informed decision as to the merits of any offer.


The Takeovers Code regulates acquisitions of shares in an offeree company which change control of that company (defined as a holding, or aggregate holdings, of 30% or more of the voting rights of a company, irrespective of whether that holding or holdings gives de facto control).  The Takeovers Code applies not only to the offeror and the offeree company, but also to those persons “acting in concert” with the offeror.


Rule 26 of the Takeovers Code requires the making of a mandatory general offer to all shareholders of the offeree company (unless a waiver has been granted by the SFC), where a person, or a group of persons acting in concert:


  • acquires control of a company (meaning 30% or more of the voting rights), whether by a series of transactions over a period of time, or not; or
  • when already holding between 30% and 50% of the voting rights of a company, acquires more than 2% of the voting rights in the target company in a 12-month period from the date of the relevant acquisition (known as the “creeper provision”).


As the Takeovers Code does not have legislative backing, reliance is placed on directors and advisers of public companies to conduct themselves in accordance with it.  Fines or imprisonment cannot be imposed for breaches, however the Listing Rules expressly require compliance with the Takeovers Code by public companies listed on the Stock Exchange. Any breach will be deemed to be a breach of the listed company’s listing agreement.


In addition, if the Takeovers and Mergers Panel finds that there has been a breach of the Takeovers Code it may impose a variety of sanctions ranging from private reprimand to a cold-shouldering order to the local securities industry in respect of a person who has breached the Code.


Hostile takeovers in Hong Kong have historically been rare as most public companies tended to be closely controlled by the founding families.  This is slowly beginning to change as family ownership moves into second and third generations after the founders and as a result of stresses on many companies and a necessity for restructuring to meet challenges presented by the economic environment.



For further information, please contact:


Alexander Que, Partner, Deacons

[email protected]eacons.com.hk


Rhoda Yung, Partner, Deacons

[email protected]

2013 Asia Pacific Guide to Mergers & Acquisitions.

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