SECTION 1: Market overview
1.1 What have been the key trends in the M&A market in
your jurisdiction over the past 12 months and what have been
the most active sectors?
Hong Kong experienced a healthy increase in M&A
activities in 2017 compared to the previous 12 months. The
increased deal flow was driven partly by mainland firms and
private equity investors buying into Hong Kong listed
companies. The most active sectors have been real estate,
financial services and energy/infrastructure, although there
has also been significant interest in the consumer and
1.2 What M&A deal flow has your market experienced and
how does this compare to previous years?
Hong Kong saw an uptick in both M&A deal volume and deal
value in 2017. We have noticed heightened interest in large cap
public M&A transactions with a value of over $1 billion.
Both regional and global private equity investors were
particularly active and participated in some of the most
notable deals in 2017 (as described below).
1.3 Is your market driven by private or public M&A
transactions, or both? What are the dynamics between the
The market in Hong Kong is driven by both private and public
M&A transactions. However, given the nature of the market,
where a large number of businesses are or become listed,
M&A activities tend to involve listed companies. In
previous years, take-private transactions were relatively rare,
but it is becoming increasingly common to see both
conglomerates and private equity-backed consortiums involved in
1.4 Describe the relative influence of strategic and
financial investors on the M&A environment in your
Both strategic and financial investors are active in the
Hong Kong M&A market. Traditionally, strategic buyers have
been more dominant in buyout transactions, whereas financial
investors have been more involved in minority investments.
However, in recent years, against a backdrop of record levels
of dry powder available to Asia-focused fund managers, we have
seen an increasing number of financial investors acquiring
control of both public and private companies and participating
in large privatisation transactions.
SECTION 2: M&A structures
2.1 Please review some recent notable M&A transactions
in your market and outline any interesting aspects in their
structures and what they mean for the market.
Notable M&A transactions include: the sale by McDonald's
Corporation of a majority stake in its Greater China business
to a consortium comprising CITIC Limited, CITIC Capital
Holdings and The Carlyle Group, which was undertaken by way of
a very competitive auction process; the take-private of Belle
International Holdings by a consortium led by Hillhouse Capital
and CDH Investments, which was one of the largest
privatisations of a Hang Seng Index constituent stock; and the
takeover of Yingde Gases Group Company by PAG Asia, which was a
rare example of a contested takeover of a Hong Kong listed
company and was implemented through a general offer and
privatisation by way of compulsory acquisition. These
transactions illustrate the continued appetite for large
acquisitions, the increased activities of private equity
investors, and the growing willingness of strategic and
financial buyers to form partnerships to pursue complex
2.2 What have been the most significant trends or factors
impacting deal structures?
We have noticed three main trends/factors: the increasing
use of leverage in public and private M&A transactions,
including the resurgence of mezzanine financing; the readiness
of private equity investors to club together with other private
equity investors or strategic players to undertake consortium
deals; and the growing appetite of fund investors to have
direct exposure to investments through co-investment
SECTION 3: Legislation and policy changes
3.1 Describe the key legislation and regulatory bodies that
govern M&A activity in your jurisdiction.
The key regulations that may be applicable to M&A
- The Code on Takeovers and Mergers (the
Takeovers Code), which is administered by the Securities and
Futures Commission of Hong Kong (SFC) and governs the
takeover of public companies and companies with primary
listing in Hong Kong.
- The Rules Governing the Listing of
Securities on The Stock Exchange of Hong Kong Limited (HKSE),
which are administered by the HKSE and are relevant when one
of the parties to a transaction is, or is proposed to be,
listed on the HKSE.
- The Companies Ordinance, which regulates
general corporate matters in respect of Hong Kong companies,
including compulsory acquisitions.
- The Securities and Futures Ordinance,
which contains, among other things, provisions on insider
dealing and disclosure requirements in respect of listed
- Sector-specific regulations, which govern
investments in certain regulated industries (e.g., banking,
insurance and communications).
3.2 Have there been any recent changes to regulations or
regulators that may impact M&A transactions or activity and
what impact do you expect them to have?
There have been no major changes in 2017.
|NB: Values may exclude
certain transactions, for example asset
3.3 Are there any rules, legislation or policy frameworks
under discussion that may impact M&A in your jurisdiction
in the near future?
In a consultation paper dated January 19 2018, the SFC
proposed to amend the Takeovers Code to raise the voting
approval threshold for whitewash waivers from a simple majority
of independent shareholder votes to 75%. If this proposal is
adopted, it will be more challenging to implement whitewash
transactions (i.e., the issue of securities resulting in the
subscriber and the parties acting in concert with it holding
30% or more of the voting rights of a listed company without
triggering a mandatory offer). The consultation period will end
on April 19 2018.
In addition, the HKSE has announced its intention to allow
the listing of (i) biotech issuers with no revenue or profit
track record, and (ii) "innovative" and high growth issuers
with weighted voting right structures, subject to additional
disclosures and safeguards. These changes, which are subject to
consultation but are expected to become effective in the second
half of 2018, are likely to result in a strong IPO pipeline
with a corresponding increase in pre-IPO investments.
SECTION 4: Market idiosyncrasies
4.1 Please describe any common mistakes or misconceptions
that exist about the M&A market in your jurisdiction.
In many jurisdictions, M&A transactions may be
structured as mergers or amalgamations through a combination of
two entities into one single entity. A court-free statutory
amalgamation procedure is available in Hong Kong, but only in
respect of the amalgamation of wholly-owned Hong Kong
incorporated companies within the same group. As a result,
M&A transactions involving Hong Kong companies or assets
are implemented by way of share acquisitions or asset
acquisitions rather than through mergers or amalgamations.
4.2 Are there frequently asked questions or often
overlooked areas from parties involved in an M&A
We are often asked to advise on the utilization of warranty
and indemnity insurance (W&I insurance) in the context of
private M&A transactions. This tool is increasingly used
for bridging liability gaps between the transaction parties and
can be structured as a sell-side policy (to allow the seller to
achieve a clean break) or a buy-side policy (to allow the buyer
to be more competitive in an auction and/or get sufficient
recourse). Often, the main factors for determining whether
W&I insurance is appropriate for a particular transaction
are premiums and coverage/exclusions.
4.3 What measures should be taken to best prepare for your
Early engagement with advisors, careful transaction planning
and understanding of the Hong Kong market are key. Particularly
in a public M&A context, where it would be necessary to
navigate through the Hong Kong regulatory framework, it is
advisable to instruct experienced advisors to engage with
regulators throughout the process to avoid delays in the deal
timetable and ensure a smooth transaction.
SECTION 5(a): Public M&A
5.1 What are the key factors involved in obtaining control
of a public company in your jurisdiction?
In Hong Kong, listed companies are often controlled by
families or one or more shareholders holding 30% or more of the
voting shares. As a result, hostile offers are very rare, and
acquisitions are normally conducted on a friendly basis. Any
person acquiring 30% or more of the voting shares is also
required to make a mandatory offer for all of the target's
Takeovers are usually implemented by way of a general offer
or a scheme of arrangement. A general offer is an offer for all
of the outstanding shares of the target. If the target is a
Hong Kong company and the offer is accepted in respect of at
least 90% of the shares to which the offer relates, the offeror
has the right to compulsorily acquire the remaining shares. A
scheme is a court-approved process based on an "all or nothing"
approach – if successfully implemented, the offeror
acquires 100% of the target. A scheme relating to a company
listed on the HKSE must be approved by at least 75% of the
votes of disinterested shareholders, with no more than 10% of
the votes of the disinterested shareholders against the
proposed scheme. Additional requirements may apply depending on
the law of the place of incorporation of the target.
Other possible transaction structures include whitewash
transactions and, less commonly, partial offers. Both of these
structures require approval of the SFC and a majority of the
independent shareholder votes. They are particularly useful
where the offeror intends to acquire control while maintaining
the listing status of the target.
5.2 What conditions are usually attached to a public
Except with the consent of the SFC, all offers (except for
partial offers) must be conditional upon the offeror receiving
acceptances in respect of shares which, together with shares
acquired or agreed to be acquired before or during the offer,
will result in the offeror (and persons acting in concert)
holding more than 50% of the voting rights of the target. This
is the only condition permitted in a mandatory offer. A
voluntary offer may be conditional on a higher acceptance
threshold, as well as other conditions so long as they do not
depend on the offeror's judgment and are not within the
All conditions must be satisfied within the time limits
imposed by the Takeovers Code. If there is limited visibility
as to the timing required to satisfy certain conditions (e.g.,
anti-trust approvals), the offeror may – after
consultation with the SFC – structure the transaction
as a pre-conditional offer, whereby the offer is only made once
such conditions are satisfied.
5.3 What are the current trends/market standards for break
fees in public M&A in your jurisdiction?
Break fees in public M&A transactions are uncommon. The
Takeovers Code provides that break fees payable by the offeree
should be de minimis (normally no more than 1% of the
deal value) and the offeree's board of directors and financial
adviser must confirm to the SFC that the break fee is in the
best interest of the shareholders. Reverse break fees are not
subject to these limitations.
SECTION 5(b): Private M&A
5.4 What are the current trends with regard to
consideration mechanisms including the use of locked box
mechanisms, completion accounts, earn-outs and escrow?
The completion accounts mechanism is still the most common
pricing model, particularly in transactions involving a
carve-out element. However, we have noticed an increasing use
of the locked box mechanism, which reflects the seller friendly
nature of the M&A market. Earn-out structures are
relatively uncommon, including in the context of venture
capital and growth investments, given the uncertainties such
structures create for the parties involved. Escrow arrangements
and signing deposits are sometimes featured, usually to secure
the payment of a reverse break fee where the buyer is an
onshore Chinese entity.
5.5 What conditions are usually attached to a private
Closing conditions vary depending on the circumstances of
each transaction. However, in Hong Kong, there is a general
movement towards the US approach to conditionality, which means
that we are seeing conditions beyond regulatory approvals.
Prospective buyers may be able to negotiate more extensive and
bespoke closing conditions, including no material breach of the
seller's representations and warranties and/or pre-closing
covenants and no material adverse change.
5.6 Is it common practice to provide for a foreign
governing law and/or jurisdiction in private M&A share
Purchase agreements relating to Hong Kong targets are
typically governed by Hong Kong law. However, where one of the
parties to the transaction is foreign, it would not be uncommon
to see the purchase agreement governed by the laws of New York,
England or another common law jurisdiction depending on the
home jurisdiction or preference of such party. Increasingly,
private equity and other investors are designating Hong Kong
or, occasionally, Singapore arbitration (rather than Hong Kong
courts) as the preferred form of dispute resolution.
5.7 How common is warranty and indemnity insurance on
private M&A transactions?
Parties are increasingly considering the use of W&I
insurance in private M&A transactions, particularly in
competitive auctions or private equity deals. Some of the most
notable deals completed in 2017 involved the use of buy-side
W&I insurance. Hong Kong is generally viewed as a low risk
jurisdiction, which means that insurance underwriters are
typically able to offer competitive terms (e.g., premiums are
typically 1% to 1.5% of the insured amount).
5.8 Discuss the exit environment in your jurisdiction,
including the market for IPOs, trade sales and sales to
IPOs and subsequent block trades remain the preferred exit
options in the Hong Kong M&A market, while trade sales and
sales to financial sponsors are less common.
SECTION 6: Outlook 2018
6.1 What are your predictions for the next 12 months in the
M&A market and how do you expect legal practice to
As noted above, with the greenlight for listing of
pre-revenue companies and dual-class share structures and the
Hang Seng Index reaching its all-time high in January 2018, we
expect a strong IPO pipeline in 2018 and consequently robust
pre-IPO investment activities. We also expect that M&A
activity will remain strong in 2018 and private equity
investors, particularly those who completed successful mega
fundraises in the last year, will continue to seek large
Partner, Cleary Gottlieb Steen &
T: + 852 2532 3701
F: + 852 2845 9026
Gabriele Antonazzo is a partner based in the Hong
Kong office of Cleary Gottlieb. Antonazzo's practice
focuses on mergers and acquisitions, joint-ventures,
private equity transactions and early stage
investments, with an emphasis on pan-Asia transactions.
He has extensive experience representing private equity
funds and corporates in a broad range of M&A
transactions in various sectors, often involving
complex multijurisdictional issues.
Counsel, Cleary Gottlieb Steen &
T: + 852 2532 3766
F: + 852 2845 9026
Raymond Lam is a counsel based in the Hong Kong
office of Cleary Gottlieb. Lam's practice focuses on
public and private mergers and acquisitions, private
equity, joint-ventures, corporate restructurings and
IPOs on the Hong Kong Stock Exchange.
Associate, Cleary Gottlieb Steen &
T: + 852 2532 3718
F: + 852 2845 9026
Grace Yuen is an associate based in the Hong Kong
office of Cleary Gottlieb. Yuen's practice focuses on
mergers and acquisitions and corporate finance,
particularly pan-Asia private equity transactions. Yuen
regularly advises Asian and international clients on a
broad range of domestic and cross-border M&A,
joint-venture, growth capital and private equity