General overview

What legislation governs M&A activity in your jurisdiction?

Public takeovers and mergers are primarily governed by the Hong Kong Code on Takeovers and Mergers (the Code), which is administered by the executive director of the corporate division of the Securities and Futures Commission (SFC).

In addition, all public takeovers and mergers must comply with the listing rules issued by The Stock Exchange of Hong Kong Ltd, which regulates, among other things, disclosure and approval requirements in respect of certain merger and acquisition transactions undertaken by publicly listed companies.

The Securities and Futures Ordinance (SFO) regulates the disclosure obligations relating to changes in the ownership of shares in listed companies.

In the context of structuring or preparing for a public takeover, court ordered schemes of arrangement under the Companies Ordinance (CO) are also subject to the Code in the same way as a general offer.

Private takeovers and mergers are not regulated by specific legislation, but must generally comply with the relevant provisions of the CO.

Mergers and acquisitions in certain regulated industries could also be subject to specific legislation, for example, under the SFO (in relation to licensing), Insurance Companies Ordinance, Banking Ordinance, Broadcasting Ordinance and Telecommunications Ordinance.

What impact have recent legislative changes had on the nature and amount of M&A activity?

Several changes have been made recently to the CO and the Code that are intended to streamline the legal and regulatory environment in Hong Kong and facilitate greater transparency. It is difficult to determine at this stage the impact that these changes have had, but they will generally be viewed favourably and provide an attractive framework for future M&A activity in Hong Kong.

Since the consultation process, the following changes to the Code affecting M&A transactions took effect from October 1 2005:

• to prevent the frustration of a public company's business that is the subject of an offer, offers at less than 50% of the market price of the company's shares (that is, low-ball offers) will not normally be permitted to proceed;
• to prevent deliberate (although lawful) action by an incumbent board to frustrate a successful bidder from exercising board control, the existing board must fully cooperate and convene as soon as possible a general meeting called by the bidder to appoint new directors. In addition, before the general meeting, the existing board must not issue new shares or sell or acquire significant assets without shareholder approval; and
• in relation to competitive bid situations, a rule has been introduced to prevent frustrating activity by restricting a competing bidder, after the lapse of its offer, from purchasing shares in the target on terms more favourable than those made available under its lapsed offer.

Enhancements to shareholder remedies under the CO (which are modelled on the Australian Corporations Act 2001) permitting shareholders in certain circumstances to apply for a court order to inspect any records of the company were also introduced, but only for proper purposes. Based on Australian case law, proper purposes has been held to include determining the value of shares or investigating whether legal proceedings are appropriate to challenge certain transactions adversely affecting the shareholders' investment in the company. One improper purpose was held to be assisting in the preparation of a takeover bid for the company.

What have been the most significant M&A transactions in your jurisdiction over the past year?

In the past year, M&A activity in Hong Kong has been buoyant and numerous landmark transactions provide testament to the strength of activity.

One such landmark transaction was Hong Kong-listed Lenovo Group Ltd's acquisition of IBM's Personal Computing Division to form the world's third-largest PC business. This transaction was one of the first big outward-bound Chinese investments and marks what many commentators believe will be a growing trend.

Other notable acquisitions, such as the unsuccessful bids by CNOOC Ltd and Haier Electronics Group Co Ltd for the US companies Unocal Corporation and Maytag Corporation respectively, show and confirm the growing trend towards outbound acquisitions by Hong Kong-listed companies.

Hong Kong-listed company Harbin Brewery Group Ltd was acquired in a hostile takeover situation by a white-knight bidder, Anheuser-Busch Companies Inc, which overcame and defeated the unsolicited hostile bid of SABMiller plc. Historically there have been few hostile takeovers in Hong Kong, with so many Hong Kong companies being family-controlled, so, although noteworthy, this deal does not necessarily mark a new trend.

How, and to what extent, is foreign involvement in M&A transactions in your jurisdiction regulated or restricted?

Hong Kong has no exchange controls or restrictions on remittances of profits and dividends nor are there any generally applicable foreign ownership restrictions with respect to properties or investments in the shares of Hong Kong companies. However, ownership in some highly regulated/sensitive areas is restricted, such as securities and asset management and advice, banking, insurance, television and broadcasting, and prohibited in the case of government-owned corporations (for example, Kowloon-Canton Railway Corporation and Radio Television Hong Kong), which are not open to outside, including foreign, investors.

In general terms, therefore, the Hong Kong M&A framework presents a level playing field for foreign and domestic investors as the same restrictions will apply equally to both classes of investor.

Due diligence

What are the principal disclosure requirements in a typical M&A transaction?

Listed companies in Hong Kong are subject to generally applicable ongoing disclosure obligations in relation to price-sensitive information as well as the disclosure of notifiable transactions, for example, the announcement of a takeover bid or the acquisition or disposal of assets or of a business, such obligations being pursuant to Chapters 13 and 14 of the Listing Rules.

In the context of a public M&A transaction, the Code also imposes disclosure obligations both on the bidding and target companies during the offer period, including a requirement that the target company must treat all bidders equally in its disclosures relating to the business of the company.

The SFO imposes disclosure obligations on acquisitions and disposals of interests in listed companies and in particular, with respect to substantial shareholders (that is, persons that acquire or own over 5% of the issued share capital in a listed company).

In general, private takeovers and mergers are governed by common law principles that will apply as a matter of contract law to the transaction documents, together with statutes such as the Misrepresentation Ordinance.

To what extent do the current disclosure requirements achieve market transparency?

As a result of the requirements described above and the potentially severe punishments that may be administered under the SFO and the Code, the level of market transparency with respect to listed companies in Hong Kong is in line with those found in international markets.

How significant an issue is prospectus liability in a typical M&A transaction?

In Hong Kong a prospectus is generally not required in an M&A transaction. However, in the context of a takeover, Rule 9 of the Code stipulates that any document issued or statement made in relation to an offer or possible offer or during an offer period by the target or bidder company (or by an adviser or relevant person such as an officer of the company) must be of a prospectus standard, that is, it must "satisfy the highest standards of accuracy and the information given must be adequately and fairly presented".

Although setting a high standard, this issue is often addressed by conducting a verification process with respect to all such documents and statements.

How have recent M&A transactions and/or current legislation dealt with the issue of material adverse change clauses?

Rule 30 of the Code provides that an offer must not normally be made subject to conditions that depend on the bidder's subjective determination or that rely on the bidder for fulfilment. Depending on the wording of the condition, a condition permitting a bidder to withdraw a bid where there has been a material adverse change in the target or its business might fall within this category.

Although the SFC executive and the Takeovers and Mergers Panel (Panel) have not recently considered Rule 30 in the context of material adverse change clauses, there has been some consideration by the equivalent body in the UK, the Panel on Takeovers and Mergers (UK Panel) and this authority would be highly persuasive in Hong Kong.

The UK Panel stipulated in a practice statement issued in 2004 that the test for invoking a condition to withdraw an offer is whether the relevant circumstances upon which the bidder is seeking to rely are of material significance to it in the context of the offer (which must be judged by reference to the facts of each case at the time the relevant circumstances arise). In the case of a material adverse change, whether the above test is satisfied will depend on the bidder demonstrating that the relevant circumstances strike at the heart of the purpose of the transaction. While setting a high threshold, this does not require the bidder to show frustration of the transaction in the legal sense.

Material adverse change clauses might be accepted conceptually by the SFC executive in Hong Kong, but their enforceability is uncertain so bidders should not place a great degree of reliance upon them as an escape mechanism.

What are the key unresolved issues in your jurisdiction?

There is an ongoing consultation process in Hong Kong in relation to the following SFC proposals affecting M&A transactions:

• consolidation and reform of the prospectus regimes contained in the SFO and CO;
• amendments to the Securities and Futures (Stock Market Listing) Rules, which would give statutory force to the Listing Rules; and
• abolition of the requirement for listed issuers to publish all announcements in the newspapers in favour of mandatory electronic publication through the HK Stock Exchange website and the issuers' own website (if any). This proposal, when implemented, should save costs for issuers and facilitate greater transparency in M&A transactions.

Takeovers

Are there any specific regulations and/or regulatory bodies governing takeovers in your jurisdiction?

The principal source of regulation is the Code, which is a non-statutory set of rules designed to provide a flexible framework and to ensure fair and equal treatment of all shareholders affected by takeovers and mergers. The Code is administered by the SFC executive who is called upon to give guidance and directions to the parties during or before an offer.

The Code applies to all public companies in Hong Kong and companies with a primary listing of their equity securities in Hong Kong. To determine whether a company is a public company in Hong Kong, the SFC executive will consider all the circumstances and apply economic or commercial tests taking into account, among other things, the number of Hong Kong shareholders and the extent of share trading in Hong Kong.

In addition, the Listing Rules could be relevant if the shares of the bidder (or the target) are listed on the HK Stock Exchange.

What are the various methods by which a takeover can be achieved?

The usual structure for a takeover of a public company in Hong Kong is a public offer to acquire all the issued (and to be issued) share capital of the target from existing shareholders.

Another method is to apply to a court to approve a scheme of arrangement for the re-structuring of the share capital of a company that has been agreed to by a statutory majority. A scheme of arrangement is often used between friendly companies as a way of structuring a takeover, in which case it will also be subject to the Code in the same way as a general offer.

With respect to a private company, the buyer may acquire the entire issued share capital and voting rights in the target or may acquire the business and assets of the target. In both cases, the transaction is governed by a share/asset sale purchase agreement, which will be subject to negotiation and customary provisions applicable to the transfer of shares or assets in each case.

How differently are hostile and voluntary takeover bids treated?

Hostile takeover bids are possible, although not common because many public companies in Hong Kong are family-owned. In general terms however, hostile and voluntary takeover bids are treated in the same way and in particular, pursuant to Rule 6 of the Code, target companies must treat hostile and voluntary bids equally with respect to the provision of information (as it can sometimes prove difficult for an unsolicited bidder to obtain information from the target). As discussed above, recent amendments to the Code have also aimed to prevent frustrating action being taken in competitive bid situations by bidders whose offers have lapsed.

In a voluntary takeover bid situation however, some care should be taken with respect to lock-out or standstill agreements between the bidder and target to ensure that the terms of the agreement are fully disclosed to shareholders of the target and that the agreement would not lead to a determination that the parties are acting in concert.

What penalties are imposed for parties who violate takeover regulations (or equivalent)?

Although the Code does not have the force of law, any breach of the Code could result in serious sanctions. The SFC executive may invite the person concerned to appear before the Panel and, if the Panel finds that there has been a breach of the Code or of a ruling, it may impose sanctions such as a private reprimand, public censure or require dealers and advisers not to act in any capacity for any person who has failed to comply with the Code. So compliance with the Code is, in practice, considered mandatory.

Other laws regulate certain aspects of takeovers, such as, the general requirements of the company and securities laws.

What are the thresholds for disclosing bids and offers?

Rule 3 of the Code details the situations in which offers or possible offers should be disclosed. In summary, the bidder must make announcements at each stage of the offer process, that is:

• when, before an approach has been made to the target, there are reasonable grounds for concluding that the actions of the potential bidder have led to rumours about a potential offer or undue share fluctuations or trading volumes;
• when negotiations and discussions are about to be extended to include more than a restricted number of people (outside those who need to know in the companies concerned and their immediate advisers); and
• immediately after acquisition of voting rights in the target by the bidder (or persons acting in concert with it) giving rise to an obligation to make a cash offer, to increase the offer price or the obligation to make a mandatory offer (as defined in the Code).

The target must also make corresponding announcements upon the occurrence of the above events that apply to it.

Competition/Antitrust

What have been the major recent developments in competition policy and legislation as they relate to M&A in your jurisdiction?

In general, Hong Kong is open and competition is not heavily regulated, except in industries such as telecommunications. In 2005, an independent committee, the Competition Policy Review Committee, was established to review the effectiveness of the existing competition policy in Hong Kong. The Committee will consider, among other things, whether the implementation of the current policy is in line with market norms, and whether the available investigative powers are adequate. The Committee will also draw on international experience and discuss the need to introduce in Hong Kong a comprehensive and cross-sector law on fair competition, as well as its scope and application. The Committee expects its review to be completed in mid-2006.

As one example of a development in competition policy, in 2004 a new section in the Telecommunications Ordinance came into effect that enables the Telecommunications Authority to determine whether a change in respect of the control of a licensee is likely to substantially lessen competition in a telecoms market and if so, direct the licensee to take steps to eliminate or avoid that effect.

How are the competition/antitrust regulations enforced in your jurisdiction?

Hong Kong takes a sector-specific approach to encouraging competition and restraining anti-competitive behaviour. Enforcement of the regulations therefore lies with the regulatory authorities for each sector, for example, the Telecommunications Authority and the Television and Entertainment Licensing Authority.

In certain circumstances, the Telecommunications Ordinance and Broadcasting Ordinance provide persons affected by a breach of their respective competition provisions with a right to civil damages and/or, where appropriate, an injunction. This extends both to consumers and to competitors of the licensee that is in breach.

How do legislation and regulation approach the issue of abuse of dominant position?

The Telecommunications Ordinance and the Broadcasting Ordinance have express provisions prohibiting the abuse of dominant position by a licensee. A licensee who is in a dominant position is deemed to have abused its position if, in the opinion of the respective regulatory body, the licensee has engaged in conduct that has the purpose or effect of preventing, distorting or substantially restricting competition in its respective industry.

To what extent are parties to an M&A transaction subject to prior notification requirements?

Prior notification requirements in the form of conditions precedent to completion of an M&A transaction generally only apply with respect to regulated industries under the relevant legislation, which includes:

• the SFO, which requires approval to be obtained with respect to any new substantial shareholder of a licensed corporation as well as any new responsible or executive officers;
• the Insurance Ordinance, which requires notification of any new controllers of an authorized insurer, including the appointment of a new managing director; and
• the Banking Ordinance, which provides that the Hong Kong Monetary Authority's approval must be obtained in certain specified circumstances, for example: (1) if upon completion of an M&A transaction, a person or company would hold more than 10% in an authorized institution incorporated in Hong Kong; or (2) where an authorized institution incorporated in Hong Kong proposes to acquire all or part of the share capital of a company to a value of 5% or more of its capital base at the time of the acquisition.

Author biographies

Roger Denny Clifford Chance Roger Denny is a partner of Clifford Chance and head of M&A, Asia. He has been based in Hong Kong since 1990, before which he was in London. Denny has extensive experience advising corporations, private equity houses and other investors in relation to their activities in Hong Kong and the rest of Asia, including on cross-border mergers and acquisitions, takeovers, disposals, reorganizations, joint ventures and strategic alliances and investments. With a team of over 80 M&A lawyers in Asia with extensive international and local experience, Clifford Chance is often chosen to advise on transactions of significance and has advised on some of the most high-profile deals in the region. Transactions Clifford Chance has advised on have received awards as M&A Deals of the Year and the firm has regularly been identified as Asia's M&A Law Firm of the Year. Clifford Chance was ranked No 1 in the Global, European and Asian M&A League Tables published by Thomson Financial for 2005. Amy Lo Clifford Chance Amy Lo has over 17 years' experience in cross-border M&A, strategic investments and alliances, takeovers, private equity and securities transactions in Hong Kong, the PRC and the rest of Asia. Lo is particularly experienced in advising international companies investing in China and, more recently, Chinese corporations investing overseas. Lo led the China team advising Lenovo Group Ltd on its acquisition of the global personal computer business of IBM and on the subsequent private equity investment led by Texas Pacific Group and Newbridge Capital in Lenovo. She also advised a strategic investor on its investments for an aggregate of $5.5 billion in the China Construction Bank and Bank of China. Lo is fluent in Cantonese, Mandarin and English. Clifford Chance has advised international companies investing in China and Chinese corporations investing overseas for decades. Transactions Clifford Chance has advised on have received awards as M&A Deals of the Year and the firm has regularly been identified as Asia's M&A Law Firm of the Year. Andrew Whan Clifford Chance Andrew Whan has extensive experience advising corporations, private equity houses and hedge funds in relation to investments in Hong Kong and the rest of Asia. He has particular experience of mergers and acquisitions, takeovers and private equity investments and exits in London, Hong Kong and across the rest of Asia. Transactions Clifford Chance has advised on have received awards as M&A Deals of the Year and the firm has regularly been identified as Asia's M&A Law Firm of the Year. Clifford Chance is also recognized as having a leading team of experienced private equity lawyers based in Asia, backed by the resources and experience of an established market leader in London and the rest of Europe. Clifford Chance was ranked No 1 in the Global, European and Asian M&A League Tables published by Thomson Financial for 2005. Emma Davies Clifford Chance Emma Davies is a partner of Clifford Chance and head of the firm's M&A practice in Shanghai. She has been in Asia since 1996 and spent over six years working in China. Davies specializes in mergers and acquisitions, private equity and general corporate and foreign direct investment work. She has practised in London, Hong Kong, Beijing and now in Shanghai. Davies has represented buyers and sellers on a range of share and asset acquisitions in China, including high-profile privatization projects, buyouts of privately owned companies and venture capital funding for companies in the technology sector. Davies' experience involves a wide range of business sectors, including logistics, chemicals, distribution, financial services, real estate, pharmaceuticals, electronics products and telecommunications. Davies is fluent in English and Mandarin.