Parties seeking to use a scheme of arrangement to privatise a Hong Kong incorporated company under the Takeovers Code should note the High Court of Hong Kong SAR judgment regarding Chong Hing Bank Limited (HCMP 968/2021, [2021] HKCFI 3091)1 – as flagged by the Hong Kong Securities and Futures Commission (SFC) in its latest ‘Takeovers Bulletin’ of December 20212.
This Legal Update discusses the interpretation adopted in Chong Hing and its implication.
Shareholders' Approval Requirement under HKCO and Takeovers Code
The Hong Kong Companies Ordinance (HKCO) requires a privatisation scheme to be approved by "independent shareholders" (i.e. shareholders other than the offeror and its associates)3 before the court may sanction it.
The Takeovers Code (i.e. the Code on Takeovers and Mergers administered by the SFC) imposes a higher voting threshold in the sense that votes of concert parties of the offeror whose shares are subject to the privatisation scheme (Concert Scheme Shareholders) should not be counted for the approval threshold of 75% of "disinterested shareholders" (i.e. shareholders other than the offeror and parties acting in concert with it)4.
The voting threshold is said to be higher because the Takeovers Code definition of "concert parties" is wider than the HKCO definition of "associates", thereby narrowing the scope of "disinterested shares” for vote counting purpose.
Previous Conventional Understanding
Pre-Chong Hing, the conventional way to structure a court meeting was either for Concert Scheme Shareholders to abstain from the court meeting; or, if they were not in a position to abstain (for instance, deemed concert parties holding by asset managers - see further discussion below), not to count their votes for Takeovers Code purpose.
As a matter of practice, the Takeovers Code (in particular Rule 2.10) has previously been administered to allow votes of Concert Scheme Shareholders to be cast, but disregarded for vote counting purpose (i.e. the Non-Prohibition View5).
In most cases, Concert Scheme Shareholders (to the extent they could) would simply abstain from voting. Therefore, in structuring a conventional Hong Kong privatisation scheme, issue was not normally taken as to whether the court meeting was convened in such a way to permit or prohibit voting by the Concert Scheme Shareholders.
Changes Resulting from Chong Hing
Chong Hing has tightened up the above conventional understanding in adopting the Prohibition View5 that the offeror and his concert parties are prohibited from voting on the relevant resolution as the correct interpretation of Rule 2.10 of the Takeovers Code.
Given that Concert Scheme Shareholders are legally entitled to attend court meeting(s), there may also be a need to hold two court meetings (one for concert parties and another for disinterested shareholders) – unless the Court is satisfied that a separate concert parties meeting is not required, in one of the following situations, where:
- court meeting is convened for all disinterested shareholders including the Concert Scheme Shareholders, who undertake to the Court not to attend and vote at the meeting; or
- court meeting convened does not permit the Concert Scheme Shareholders to vote, and concert parties agree with the company – or give an undertaking to the Court at the time when the company sought an order to convene meetings – that they will be bound by the terms of the scheme.
A third alternative to structure a scheme, as suggested by Chong Hing, is for the concert parties to have a side-agreement to be bound by the terms of the scheme – then the scheme may simply be entered into between the company and the disinterested shareholders.
Current Implication
We believe it would not be practical in most cases to hold two court meetings for a privatisation scheme (especially with one for concert parties only), or to strike a side-agreement with concert parties (as the third alternative in Chong Hing suggested).
In our view, the practical implication of Chong Hing going forward is that if parties want to continue to convene only one court meeting, their Concert Scheme Shareholders will be expected to give undertakings to not attend and vote, and be bound by the terms of the scheme.
The Chong Hing judgement may not have created an immediate issue for this particular privatisation of Chong Hong Bank Limited, as their Concert Scheme Shareholders appear to be able to provide the requested undertakings6.
However, as explained above, the Takeovers Code definition of “concert parties” is very wide – and may cover persons who (if they are Concert Scheme Shareholders) may not be willing or able to give the sort of undertakings that Chong Hing expects.
For instance, certain asset management operations within the same group of a financial adviser (without exempt status) may hold shares and are deemed concert parties. Certain third party joint venture partners with the offeror may also be presumed to be concert parties, unless a submission to the SFC is made to rebut the presumption.
It remains to be seen how this predicament concerning Chong Hing undertakings will be resolved as market practices evolve.
Chances are that practitioners will need to be prepared to ask concert parties for Chong Hing undertakings; be more pro-active in reviewing the concert parties presumption (and make rebuttal submission, if required); or seek High Court direction at the next Hong Kong scheme hearings if Concert Scheme Shareholders are unable to produce a Chong Hing undertaking.
1 The judgment of Re Chong Hing Bank Limited can be viewed here.
2 The SFC Takeovers Bulletin can be viewed here.
3 Under the HKCO, a privatisation scheme must be approved by 75% of the voting rights of the members present and voting at the meeting, and the votes cast against the scheme at the meeting do not exceed 10% of the voting rights attached to all "disinterested shares" in the company (s674).
"Independent shareholders" here mean holders of such disinterested shares (i.e., shares other than those held by (a) the offeror; (b) an associate of the offeror; or (c) a person who is a party to an acquisition agreement with the offeror). "Associate" means, in the case the offeror being a body corporate (i) a body corporate in the same group of companies as the offeror; (ii) a body corporate in which the offeror is substantially interested; or (iii) a person who is a party to an acquisition agreement with the offeror (s667).
4 Under Rule 2.10 of the Takeovers Code, a privatisation scheme may only be implemented, in addition to satisfying any voting requirements imposed by law, if (a) it is approved by at least 75% of the votes attaching to the disinterested shares at a duly convened meeting of the holders of the disinterested shares; and (b) the number of votes cast against the resolution to approve the scheme at the meeting is not more than 10% of the votes attaching to all disinterested shares.
"Disinterested shareholders" here mean holder of the disinterested shares as defined under the Takeovers Code, meaning shares in the company other than those which are owned by the offeror or persons acting in concert with it. The definition of "acting in concert" sets out a list of nine different classes of persons who will be presumed to be acting in concert with others in the same class, including amongst others, a financial adviser with its client in respect of the shareholdings of the adviser and persons controlling, controlled by or under the same control as the adviser (except in the capacity of an exempt principal trader or exempt fund manager).
5 In Re Cosmos Machinery Enterprises Limited (HCMP 601/2021, [2021] HKCFI 2088), Harris J. stated that there are apparently two schools of thought on the meaning of Rule 2.10 of the Takeovers Code: (1) Prohibition view – the offeror and his concert parties are prohibited from voting on the relevant resolution; and (2) Non-prohibition view – the offeror and his concert parties are not prohibited from voting as such, but their votes cannot be counted for the purposes of complying with the Takeovers Code.
Harris J took the view that the Non-prohibition view is the correct position as it is more consistent with the natural and ordinary meaning of both Rule 2.10 and s674(2) of the HKCO and the offeror’s concert parties who are part of the scheme must be allowed to vote as a matter of scheme law. However, in Chong Hing, Linda Chan J considered Harris J’s view to be obiter dicta only, and concluded that the Prohibition view is the correct interpretation of Rule 2.10.
6 Shortly before the Court Meeting of Chong Hing Bank Limited, each of the Concert Parties gave an irrevocable undertaking (in Chinese) to the effect that it/he would not vote at the Court Meeting irrespective of whether they were eligible to vote at such Meeting (paragraph 35 of the Judgement).
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