Changing from Public Company to Private Company
- a22162
- Mar 30
- 7 min read
Updated: Jun 28
Hong Kong Company Privatization Explained
Changing from Public Company to Private Company
Changing a public company to a private company in Hong Kong, often referred to as "privatization" or "delisting," is a complex process. It generally involves a controlling shareholder or a group of shareholders buying out the shares held by minority shareholders, followed by the company's shares being withdrawn from listing on the Stock Exchange of Hong Kong (SEHK).
Here's a breakdown of the typical methods and key considerations:
Common Methods of Privatization in Hong Kong:
Scheme of Arrangement:
This is the most common method for privatizing a Hong Kong-listed company.
It's a court-sanctioned arrangement between the company and its shareholders to cancel or transfer all shares in the target company to the bidder.
Process:
The company (usually at the request of the controlling shareholder) proposes a scheme of arrangement.
An announcement is made, and a composite document is circulated to shareholders detailing the scheme, its effects, timetable, and recommendations from an independent board committee and financial advisor.
Shareholders vote on the scheme at a court-directed meeting. For Hong Kong incorporated companies, the scheme must be approved by at least 75% of the voting rights of "disinterested shares" (shares not held by the bidder or persons acting in concert with them) cast at the meeting, and the number of votes against the scheme must not exceed 10% of the total voting rights attached to all disinterested shares.
If approved by shareholders, the scheme is then submitted to the court for sanction. Once sanctioned by the court, it becomes binding on all shareholders, including dissenting ones.
After the scheme is implemented (shares are cancelled and new shares issued to the offeror), the company applies to the SEHK for voluntary withdrawal of its listing.
General Offer plus Compulsory Acquisition (Squeeze-Out):
This method involves a general offer by the controlling shareholder to acquire all the issued shares of the company (excluding those they already hold).
Process:
The offeror makes a voluntary general offer to acquire all shares from public shareholders.
If the offeror acquires at least 90% in value of the shares to which the offer relates (i.e., shares held by other shareholders) within four months of the offer's commencement, they can then exercise their right to compulsorily acquire the remaining shares from dissenting minority shareholders under the relevant company law (e.g., Section 695 of the Hong Kong Companies Ordinance).
Once 100% ownership is achieved, the company applies for delisting.
Key Regulatory Bodies and Codes:
Securities and Futures Commission (SFC): The SFC's Code on Takeovers and Mergers and Share Buy-backs ("Takeovers Code") governs the process to ensure fair treatment of all shareholders.
The Stock Exchange of Hong Kong Limited (SEHK): The Listing Rules of the SEHK govern the delisting process.
Companies Registry: The Companies Ordinance (Cap. 622 of the Laws of Hong Kong) provides the legal framework for company operations, including changes to share capital and schemes of arrangement.
Reasons for Privatization:
Companies choose to privatize for various reasons, including:
Low Valuation and Liquidity: The company's market capitalization may be significantly lower than its net asset value or business potential, and there might be low trading volume in its shares, making it difficult to raise capital through the public market.
Reduced Costs and Administrative Burden: Maintaining a public listing involves substantial administrative costs, compliance requirements, and management resources. Privatization eliminates these burdens.
Strategic Flexibility: Going private allows the company greater flexibility in making strategic decisions without the constant scrutiny and pressure from public markets and minority shareholders.
Consolidation of Control: Controlling shareholders might seek to consolidate their ownership and avoid outside influence.
Potential for Re-listing: Some companies may privatize with the intention of re-listing in the future when market conditions are more favorable or in a different jurisdiction where they believe they can achieve a better valuation.
Important Considerations:
Shareholder Approval: Achieving the required shareholder approval thresholds (especially for disinterested shareholders) is crucial and often the biggest hurdle.
Fairness of Offer Price: The offer price must be considered fair to minority shareholders. Independent financial advisors are typically appointed to provide an opinion on the fairness and reasonableness of the offer.
Legal and Regulatory Compliance: The process involves strict adherence to the Takeovers Code, Listing Rules, and Companies Ordinance, as well as the company laws of the jurisdiction of incorporation if the company is not incorporated in Hong Kong (e.g., Cayman Islands, Bermuda).
Dissenting Shareholders: While schemes of arrangement are binding on all shareholders once court-sanctioned, general offers with compulsory acquisition may still face challenges from dissenting shareholders, although their ability to block the privatization is limited if the required acceptance thresholds are met.
Timeline and Costs: Privatization can be a lengthy and expensive process, involving legal, financial, and advisory fees.
Given the complexity and significant legal and financial implications, it is essential for any public company considering privatization in Hong Kong to engage experienced legal and financial advisors.
How Professional can Help
Professional plays indispensable roles in the complex process of changing a public company to a private company in Hong Kong. Their expertise is crucial for navigating the intricate regulatory landscape, structuring the transaction, valuing the company, and ensuring compliance and fair treatment of all stakeholders.
Here's a breakdown of how they assist:
Professional provides comprehensive guidance on all legal aspects of the privatization, ensuring compliance with relevant laws and regulations in Hong Kong and the company's jurisdiction of incorporation (which is often offshore like the Cayman Islands or Bermuda for Hong Kong-listed companies).
Their key roles include:
Regulatory Compliance:
Takeovers Code: Advising on strict adherence to the Hong Kong Takeovers Code, which governs takeovers, mergers, and share buy-backs to ensure fair and equal treatment of all shareholders. This includes advising on trigger thresholds, offer terms, and required disclosures.
Listing Rules: Guiding the company through the delisting process according to the Stock Exchange of Hong Kong (SEHK) Listing Rules, including requirements for shareholder approval and exit offers.
Companies Ordinance (and Offshore Company Law): Ensuring compliance with the Hong Kong Companies Ordinance for Hong Kong-incorporated companies, or the relevant company law of the jurisdiction of incorporation (e.g., Cayman Islands Companies Act, Bermuda Companies Act) for red-chip companies. This is critical for procedures like schemes of arrangement and compulsory acquisition.
SFC and HKEX Filings: Preparing and reviewing all necessary documents to be submitted to the Securities and Futures Commission (SFC) and the HKEX.
Structuring the Transaction:
Method Selection: Advising on the most appropriate privatization method (e.g., Scheme of Arrangement vs. General Offer + Compulsory Acquisition) based on the company's specific circumstances, shareholder structure, and legal implications.
Documentation: Drafting and negotiating all transaction documents, including the scheme document, offer document, independent board committee circular, and any related agreements (e.g., financing agreements, support agreements from major shareholders).
Shareholder Meetings: Advising on the convening and conduct of shareholder meetings, including voting thresholds, "disinterested shareholder" definitions, and potential challenges from dissenting shareholders.
Risk Management and Due Diligence:
Legal Due Diligence: Conducting thorough legal due diligence on the target company to identify any potential legal risks, liabilities, or issues that could impact the privatization.
Litigation Risk: Assessing and advising on the risk of litigation from minority shareholders, particularly those who may challenge the fairness of the offer price or the process.
"Certain Funds" Provisions: For debt-financed privatizations, legal advisors play a crucial role in negotiating "certain funds" provisions in loan agreements to ensure funding certainty, which is a key requirement of the Takeovers Code.
Court Processes (for Schemes of Arrangement):
Court Applications: Preparing and submitting all necessary applications to the relevant court (e.g., Hong Kong High Court or offshore courts) for convening shareholder meetings and sanctioning the scheme of arrangement.
Court Hearings: Representing the company in court hearings related to the scheme.
Advising the Independent Board Committee (IBC):
Providing legal advice to the independent board committee of the target company, ensuring they fulfill their fiduciary duties to protect the interests of minority shareholders and make an informed recommendation on the offer.
Professional provides critical financial expertise, valuation, and strategic advice throughout the privatization process.
Their key roles include:
Valuation and Offer Price:
Fairness Opinion: For privatization by way of scheme of arrangement or voluntary delisting, an independent financial advisor (IFA) is mandatory. The IFA provides a "fairness opinion" on whether the offer consideration is fair and reasonable from a financial point of view to the minority shareholders. This opinion is a cornerstone for the independent board committee's recommendation.
Valuation Analysis: Conducting extensive valuation analyses (e.g., discounted cash flow, comparable company analysis, precedent transactions) to determine an appropriate offer price for the shares.
Structuring the Financial Aspects:
Financing Strategy: Advising the offeror on the optimal financing structure for the privatization, including debt financing, equity contributions, or a combination.
Cash Confirmation: Providing the SFC with a "cash confirmation letter" (for the offeror's financial advisor) confirming that the offeror has sufficient financial resources to complete the offer, a critical regulatory requirement.
Consideration Options: Advising on the form of consideration (cash, shares, or a combination) and its implications for both the offeror and the target shareholders.
Negotiation and Strategy:
Offer Terms: Assisting the offeror in formulating the initial offer terms and strategy.
Negotiations: Advising and assisting in negotiations with the independent board committee, major shareholders, and potential lenders.
Market Sounding: Discreetly sounding out key institutional shareholders to gauge their receptiveness to a potential offer before a public announcement.
Market Intelligence and Communication:
Market Conditions: Providing insights into current market conditions, investor sentiment, and potential impacts on the privatization.
Shareholder Communications: Assisting in drafting and reviewing financial aspects of shareholder communications, including press releases, circulars, and offer documents, to ensure clarity and compliance with disclosure requirements.
Timetable Management: Helping to manage the overall transaction timetable, coordinating with legal advisors and other parties.
Independent Board Committee (IBC) Advisor:
For the target company, the Independent Financial Advisor (IFA) advises the Independent Board Committee on the financial aspects of the offer, helping them to discharge their duties to minority shareholders.
In essence, Professional ensures the privatization is conducted lawfully and compliantly, minimizing legal risks, while ensuring the transaction is financially sound, properly valued, and adequately funded, providing confidence to both the offeror and the shareholders.
Comments