Private M&A deals in HK are a common process. Insurance companies and licensed securities brokerage firms continue to be in high demand as acquisition targets in this jurisdiction.
By acquiring part or all of the share capital of the target company, the investor can exercise control over the company and its assets. Many parties tend to choose to sell shares instead of selling assets because it is simpler and easier to understand. However, since the subject of the transaction is the shares of the target company, the parties should carefully consider some general legal advice when structuring the acquisition of shares in HK.
Purchase and sale of private companies in HK
In order to acquire the assets of a company in HK, it is necessary to conclude a sale and purchase agreement between the interested parties. The business acquisition process depends on whether the transaction involves bilateral negotiations or an auction with several potential buyers.
Buying a Hong Kong company through an auction typically involves:
- drafting an information memorandum as the basis for marketing the company, business or assets, completing due diligence on suppliers, drafting a sales contract, and other transaction documentation (approximately six to eight weeks);
- interest from potential buyers who will then be allowed to conduct due diligence (approximately four weeks);
- proposals of potential buyers for the transaction (approximately four weeks);
- drafting of transaction documentation (up to two weeks).
If you are interested in registering a company in HK, please note that the activities of firms are regulated by the company decree, and also, in some cases, may be regulated by the laws of foreign jurisdictions. There are also separate provisions regarding the transfer of ownership of property, transfer of workers, IP protection, etc.
Obtain legal ownership of the shares of a Hong Kong company
Ownership is transferred when the register of members is updated to reflect the buyer as the registered shareholder. Transfer of ownership of company assets to HK may require notices, third party consent and registration.
The transfer of shares to an HK registered company does not require the filing of a transaction notification with the Registrar of Companies. However, if such a transfer occurs before the filing of the annual return, then it must be notified of the change of control.
An assignment or mortgage must be made when selling real estate in HK. Such a document will be registered in the local Land Register, with no time limit for registration.
When concluding a contract, electronic signatures are subject to compulsory execution in accordance with the Decree on Electronic Transactions, subject to the basic requirements
Due diligence of private M&A transactions in HK
Due diligence confirms ownership of the company, legal structure, intellectual property, physical assets, litigation and a number of others.
DD reports allow the seller to speed up the process, minimize risks in the target business.
Bank-led acquisition financing is a common feature in private M&A transactions in HK. However, buyers are increasingly taking loans from alternative financial service providers such as direct credit funds and institutional investors. Where an acquisition is highly leveraged, payments in kind may be included in the financing structure when the borrower is allowed to pay interest in the form of additional securities.
Companies registered in HK are prohibited from providing any "financial assistance" in connection with the acquisition of shares in HK public LLCs. Violation of this statutory prohibition can be considered a crime. The company and its responsible managers will incur administrative responsibility.
The parties are generally free to negotiate assurances, guarantees and reimbursements, the scope of which varies from transaction to transaction. Warranties usually cover:
- ability and authority of the seller to enter into a sales contract in HK;
- transactions in securities related to the underlying company;
- there has been no change in the state of the business since the date of the financial statements;
- operational aspects of the business in relation to employees, pensions and benefits, real estate, financial obligations, taxes, commercial contracts, litigation and investigations, legal compliance, intellectual property and information technology.
Transfer of employees
Company acquisition by transfer of shares in HK does not change the employment relationship that such a company has with its existing employees. The transfer of assets to the target Hong Kong company implies that employees will not be automatically transferred. Existing employment contracts are terminated, and if the buyer wishes to retain employees in the business, new employment contracts are drawn up with those employees who are subject to transfer. However, pensions and employee benefit obligations remain the responsibility of the target company.
The so-called national security law adopted by the Chinese authorities significantly limited the independence of HK, a former British colony that enjoyed wide autonomy within the PRC for 23 years. The metropolis has become an important logistics hub in the supply chain of many enterprises, but now its position is shaken. The new Chinese law increases the risk of critical technology leaking outside HK, where it could fall into the hands of the Chinese government. For this reason, the American authorities intend to deprive HK of those preferences in trade and export of technologies that it has enjoyed so far. So far, the United States has not announced the withdrawal of existing preferences from HK, but the observed rhetoric suggests that appropriate steps will be taken.
Heightened tensions between the US and China have also had a significant impact on cross-border M&A activities as outbound deals continue to decline.
If you need advice on the regulation of M&A transactions in HK, please contact IQ Decision UK.