Jurisdiction - Hong Kong
Reports and Analysis
Hong Kong – Some Important Lessons From The HK Takeovers Panel.

3 May, 2013



  • The decision of the Hong Kong Takeovers and Mergers Panel (Panel) in January 2013 in the Sino-Forest case is a reminder that restructuring a company may inadvertently trigger a mandatory offer obligation under the Hong Kong Code on Takeovers and Mergers (Code).
  • In all circumstances where the control of a company subject to the Code is to be acquired, consideration must be given to the possibility of triggering a mandatory offer and the Takeovers Executive must be consulted.




Sino-Forest Corporation (Sino-Forest), a company whose shares were listed on the Toronto Stock Exchange was in severe financial difficulties and as a result it had defaulted on various obligations under certain notes it had issued. A debt restructuring plan had been developed under which Sino-Forest would transfer (amongst other things) the entire share capital of its wholly-owned subsidiary, Sino-Capital Global Inc. (SCGI), which held a 63.6% interest in Greenheart Group Limited (Greenheart), a company listed on the Hong Kong Stock Exchange (Stock Code: 94), to a new company (New Holdco), to be owned by the noteholders and other Sino-Forest creditors.


Key provision of the Code – the Chain Principle


Note 8 to Rule 26.1 dealing with the Chain Principle provides that the Takeovers Executive will not normally require a mandatory offer to be made due to the acquisition of statutory control of a company which in turn holds (directly or indirectly) a controlling interest in a second downstream company to which the provisions of the Code applies, unless: (1) the holding in the second downstream company is ‘significant’ in relation to the first (and in this regard ‘significance’ is generally considered to be 60% or more of the assets and profits of the first company); or (2) the acquisition of the second company is ‘one of the main purposes’ of the transaction. The Note also makes clear that in all cases the Takeovers Executive should be consulted when a transaction may come within its scope.


The Panel’s decision


The Panel considered that the Sino-Forest restructuring would trigger a mandatory offer obligation on the part of New Holdco in relation to Greenheart. The Panel also determined that under the circumstances, it would not be appropriate to waive the mandatory offer obligation pursuant to section 2.1 of the Introduction to the Code (which gives the Takeovers Executive and the Panel a discretion to modify the application of a Rule in certain circumstances).


In coming to its decision, the Panel stated the following:


  • Any acquisition of control will normally give rise to a mandatory offer obligation unless a waiver is granted by the Takeovers Executive.
  • The focus of the Chain Principle is narrow – it simply looks at a transaction, regardless of whether it is part of a larger transaction, in which statutory control of one company results in the acquisition or consolidation of control of a second company. In this case, the Sino-Forest restructuring plan clearly fell within this scenario. Given Greenheart constituted more than 60% of SCGI’s assets and revenues, it was deemed ‘significant’ compared to SCGI, hence triggering a mandatory offer obligation under Note 8 to Rule 26.1.
  • The Panel, in determining whether to exercise its discretion to waive the requirement for New Holdco to make a mandatory offer, said that the meaning of the wording of Note 8 to Rule 26.1 and its implications were clear; they were operating in the manner for which they were designed and how they had been interpreted in the past. The Note is intended to place parties on notice that the transfer of an indirect holding of a controlling interest always comes within the provisions of the Code. Waiving the mandatory offer obligation for reasons other than those specifically expressed in Rule 26 and its Notes would set a dangerous precedent.


Concluding remarks


This case clearly illustrates that, at its heart, the Code seeks to protect shareholders’ interests where the acquisition of control of a company (to which the Code applies) is contemplated. In these circumstances, one must always consider whether such an acquisition would trigger a mandatory offer obligation, even if that acquisition is part of a wider transaction involving companies and parties that have no connection to Hong Kong. Consultation with the Takeovers Executive is critical in this regard.


In connection with the above discussion on Chain Principle offer, we also draw reader attention to practice Note 19 issued by the Takeovers Executive providing guidance on determining the offer price when a Chain Principle offer is triggered (link).



For further information, please contact:

Tommy Tong, Partner, Herbert Smith Freehills

[email protected]


Victor Ding, Herbert Smith Freehills

victor.ding[email protected]


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