Contemplating a listing in Hong Kong via a reverse takeover? Keep HKEx close to avoid disappointment
Hong Kong’s proximity to the PRC market, sound legal system and regulatory framework, free flow of capital and advanced clearing and settlement infrastructure have made it an attractive listing place for companies which have strong PRC connections or are planning to tap into the PRC market.
There are various ways for companies to achieve a listing in Hong Kong, including the usual means of an initial public offering (“IPO”), listing by way of introduction where shares have already been traded on an overseas stock exchange or reverse takeover.
Listing by way of an IPO is subject to market risks. For companies which do not have the pressure of raising new capital, they may consider to pursue the avenue of a reverse takeover which is less susceptible to market fluctuations. In a typical reverse takeover, a company (“Acquiree”) will normally identify a target listed company (“Listco”) and then through commercial arrangements, Listco will acquire the equity interests in a company or other assets of the Acquiree (“Target”) by issuing consideration shares (ordinary or preference shares) or convertible bonds or a combination of both, through which the Acquiree would obtain a controlling stake of Listco.
Under the Rules (“Listing Rules”) Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (“HKEx”), a “reverse takeover” is defined as “an acquisition or a series of acquisitions of assets by a listed issuer which, in the opinion of [HKEx], constitutes, or is part of a transaction or arrangement or series of transactions or arrangements which constitute, an attempt to achieve a listing of the assets to be acquired and a means to circumvent the requirements for new applicants set out in Chapter 8 of the … Listing Rules. A ‘reverse takeover’ normally refers to
(a) an acquisition or a series of acquisitions … of assets constituting a very substantial acquisition where there is or which will result in a change in control (as defined in the Takeovers Code) of the listed issuer (other than at the level of its subsidiaries; or
(b) acquisition(s) of assets from a person or a group of persons or any of his/their associates pursuant to an agreement, arrangement or understanding entered into by the listed issuer within 24 months of such person or group of persons gaining control (as defined in the Takeovers Code) of the listed issuer (other than at the level of its subsidiaries), where such gaining of control had not been regarded as a reverse takeover, which individually or together constitute(s) a very substantial acquisition…”.
Historically, companies listed in Hong Kong had been relying on the above mentioned bright line tests in structuring their acquisition transactions (for example by reducing the size of the transaction or by putting in place mechanism which prevents a change of control of Listco at/after the acquisition) such that the acquisition would not be considered a reverse takeover under the Listing Rules . Once HKEx considers that an acquisition constitutes a reverse takeover, Listco would be deemed as a new listing applicant, short of fund raising, and have to undergo the cumbersome process akin to an IPO, including the preparation and publication of a listing document and that the entire acquisition would be subject to the approval of the Listing Committee of HKEx which, in turn, may lead to some degree of uncertainty and a longer closing timetable which otherwise will be much shorter if it is not deemed as a reverse takeover.
According to the listing decisions published by HKEx on reverse takeovers in 2010, in reviewing potential reverse takeover transactions, HKEx is now adopting a purposive approach and considers whether such transactions are structured for circumventing the new listing requirements where the above mentioned bright line tests are only two specific forms of reverse takeover and are not meant to be exhaustive. In determining whether an acquisition will constitute a reverse takeover, instead of putting all its emphasis on whether there will be a change of control of Listco, HKEx would consider, among other factors:
- whether the acquisition would result in a change of principal business of Listco;
- the size of the acquisition relative to Listco;
- whether the Target would be able to satisfy the minimum new listing requirements; and
- whether the Target would be suitable for listing.
One of the popular ways used by Listco to avoid its acquisition of new assets to be regarded as a new listing application is the issue of convertible bonds to the vendor with restrictions on conversion (timing and amount of shares falling to be issued) to below the threshold which triggers off a change of control. However, subsequent to the publication of the above mentioned listing decisions which make it clear that HKEx is no longer putting all its emphasis on “change of control” in reviewing reverse takeover transactions, it is uncertain whether such arrangement would be deemed a new listing application by HKEx by today’s standard. Some recent cases where HKEx did not regard an acquisition by Listco as a reverse takeover, certain conditions were imposed, which included (1) the publication of a circular by Listco with a disclosure standard comparable to an IPO prospectus; (2) a full explanation of certain financial information of the acquired assets in the circular; and (3) the appointment of a financial adviser by Listco to conduct due diligence and perform the duties equivalent to an IPO sponsor in accordance with the Listing Rules.
In light of the above, companies listed in Hong Kong which genuinely plan to change its principal business through acquisition of new business now face uncertainties as to whether such acquisition would constitute a reverse takeover or they have to incur additional time and costs, among other things, in preparing the “enhanced disclosure circular”. Similarly, overseas companies which are planning to use Hong Kong as a listing platform also face an uphill task in structuring the deal. To avoid an acquisition by Listco to be deemed as a reverse takeover, it seems that the businesses of Listco and the Target should be substantially the same or have very strong correlation. But most importantly, the Target should be able to satisfy the minimum new listing requirements as prescribed under the Listing Rules. The fact that the Acquiree will not be in control of Listco may be one of the arguments against a reverse takeover case but is surely not a determining factor.
Therefore, companies listed in Hong Kong which are contemplating to conduct a very substantial acquisition or overseas companies which are considering to achieve a listing in Hong Kong via reverse takeover are advised to consult with HKEx at an early stage before finalising the structure of the transaction so as to avoid incurring unnecessary costs and time.
Mallesons Stephen Jaques is a leading law firm in the Asian region with offices in Australia, London, Hong Kong, Beijing and Shanghai.
Conrad Chan is a partner of Mallesons’ Hong Kong office. Mr. Chan specialises in advising on mergers and acquisitions (public and private), private equity transactions, listings and public offerings, capital market transactions, mining and energy, securities regulatory compliance, joint ventures and other commercial transactions across various jurisdictions. Conrad can be contacted on +852 3443 1012 or by email at Conrad.firstname.lastname@example.org
Vivian Tse is a solicitor of Mallesons’ Hong Kong office. Ms. Tse is experienced in various types of corporate and commercial transactions ranging from public offerings, dual listings in Hong Kong, pre-IPO investments, mergers and acquisitions, corporate restructuring and compliance and regulatory matters.