Privatisation of Companies Listed on The Stock Exchange of Hong Kong Limited

There is an increasing trend of companies listed on the Stock Exchange of Hong Kong Limited (the “Stock Exchange”) going private recently. One common phenomenon is that the listed company’s market capitalization is much lower than its net asset value or business potential, and the trading volume in the company’s shares is low. Thus, the company finds it difficult to raise funds by utilizing its listing status. As financial institutions are ready to extend privatization loans, controlling shareholders will find it commercially sensible to take their listed companies private.

This article discusses the privatisation process of a Hong Kong listed company incorporated outside Mainland China.  The rules for privatizing an H-share company are quite different and the author may cover that in a subsequent article.

A privatisation is proposed by an offeror (the controlling shareholder of a listed company in most cases) to acquire the shares held by the other shareholders and cancel the company’s listing status on the Stock Exchange. Privatisation is usually effected by either (i) a voluntary general offer or (ii) a scheme of arrangement. The consideration of privatisation offer may be cash or securities with or without a cash option.

Both privatisation methods are subject to the Hong Kong Code on Takeovers and Mergers (the “Takeovers Code”), the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited, and the laws of jurisdiction in which the listed company is incorporated. 

Comparison of the Two Methods

Based on the public information on the Stock Exchange website, from January 2019 to September 2020, a total number of 33 privatisation offers has been announced by companies listed on the Stock Exchange (excluding those made by H-share companies), among which all the 11 privatisations announced in 2019 were completed and the shares were delisted. For the 22 offers announced during the nine months ended 30 September 2020, one offer closed without being privatised, seven were successfully completed, one is pending listing withdrawal, while 13 are ongoing. Out of the 33 privatisation offers, only three were made through voluntary general offers while the remaining 30 were made by way of schemes of arrangement.

Both privatization methods share one common feature - the chance of success rests with the other shareholders even if the controlling shareholder as offeror already holds a large amount of shares in the listed company.

Privatisation by a voluntary general offer requires the other shareholders to take the steps to accept the offers to the extent of at least 90% of the shares subject to the offer – which is a very high threshold. Some shareholders may find the offer price unattractive while others simply do not pay attention to the offer. That is one reason why this privatization method is less appealing.

A scheme of arrangement requires super majority votes by scheme shareholders but does not impose the minimum number of votes cast at the shareholders’ meeting. So even if a small number of votes cast at the meeting fulfils the super majority requirement, the scheme may proceed because the Court is unlikely to object if the scheme passes through the shareholders’ approval.

This article has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, legal or other professional advice. Please refer to your advisors for specific advice.