This article covers legal and regulatory aspects governing distressed mergers and acquisitions (“M&A”) and corporate restructuring in Hong Kong, including the process of executing a distressed M&A and corporate restructuring deal, as well as the development of the legal and commercial landscape.
K&L Gates is a fully integrated global law firm with lawyers located across five continents. The firm represents leading multinational corporations, growth and middle-market companies, capital markets participants and entrepreneurs in every major industry group as well as public sector entities, educational institutions, philanthropic organizations and individuals. For more information about K&L Gates or its locations, practices and registrations, visit klgates.com.
- What is the current economic condition of your jurisdiction and which sectors are the most vulnerable, or are affected?
Like most other places, Hong Kong’s economic growth has slowed as a result of the COVID-19 outbreak. As local infection rates have spiked and ebbed, the Hong Kong government has taken a variety of measures to disrupt the transmission of COVID-19, to provide financial support and relief, and to provide relief from bankruptcy and insolvency procedures to individuals and businesses (see the Hong Kong section of COVID-19: Overview of Asia-Pacific Measures and Reliefs (28 April 2020) and COVID-19: Reliefs and Support for Small and Medium Enterprises (“SMEs”) in Hong Kong (14 April 2020)).
These measures have impacted certain sectors more than others (e.g. retail, real estate, food, entertainment, transport and travel) and exacerbated economic slowdowns many sectors were already facing as a result of the 2019 street protests, slower Chinese economic growth (a key driver of Hong Kong’s economy) and the US-China trade tensions. The Hong Kong government predicted in August 2020 that the local economy will contract around 6 to 8 percent in 2020; however, its predictions for Q4 2020 are cautiously positive, anticipating the economy and various sectors will stabilize in Q4 2020 and marginally improve if the Mainland economy continues to open up and improve and if local infection rates can be contained to avoid the need to implement strict social distancing measures (which have resulted in business closures, event cancellations, and overall decreased consumption).
- What are the latest trends/statistics in your jurisdiction in the field of distressed M&A and corporate restructuring?
In general, there are now fewer winding-up petitions than in the last decade (e.g. 1451 petitions in 2003, versus 367 petitions in 2018) as there is a trend towards refinancing or restructuring (either through an informal workout or a scheme of arrangement), rather than liquidation.
In 2019, the Hong Kong government announced that it is preparing for legislative reform to bring about a statutory corporate rescue procedure akin to the UK’s Administration and the US’s Chapter 11, and introduce insolvency trading provisions. The most salient feature of this procedure would be the moratorium which allows companies time to come up with a solution. The government is currently in the consultative process and intends to finalize the bill for introduction in the first half of the 2020-21 legislative session.
2. Distressed M&A
- What are the laws and regulations governing M&A in your jurisdiction? Is there any special law specifically targeting distressed M&A?
A distressed M&A can take a variety of forms, and can involve common law concepts of contract and equity, as well as different ordinances, depending on the structure and industry of the target. The Companies Ordinance (“CO”) will apply to corporate transactions in general, and the Companies (Winding-up and Miscellaneous Provisions) Ordinance (“CWUMPO”) will apply in insolvent situations.
Other relevant legislation includes:
- the Conveyancing and Property Ordinance on voidable dispositions of property and the powers of a receiver;
- the Protection of Wages on Insolvency Ordinance where employees claim for payments from the Hong Kong government’s Protection of Wages on Insolvency Fund
- the Transfer of Businesses (Protection of Creditors) Ordinance (“TBO”) in situations involving the transfer of the business of a company in certain circumstances
- the winding-up of banks and insurance institutions for the Banking Ordinance and Insurance Ordinance respectively; and
- certain other sector-specific legislation
- Are there any thresholds for M&A transactions generally or sector-specific in your jurisdiction? Are there relaxations of such thresholds in case of a distressed M&A?
Acquisition of securities in Hong Kong public companies, including companies with their primary listing on the Hong Kong Stock Exchange, is subject to the Takeovers Code. Under the Code, where a transaction would result in the acquirer, together with persons acting in concert with it, holding 30% or more of the voting rights of a public company, the acquirer must make a mandatory offer to purchase equity securities from all other shareholders on terms no less favorable than those in the transaction.
If a listed company is in a distressed condition and the acquirer triggers a mandatory offer through a subscription of shares from the company, the regulator may waive an obligation of the acquirer to make the offer to other shareholders, on the condition that the waiver is approved by not less than 75% of the votes cast by independent shareholders in a general meeting. Exemptions of this nature are called “whitewash waivers”. The grant or validity of a whitewash waiver is subject to other conditions, such as the requirement that the acquirer has not dealt with any relevant securities of the company in the prior six months.
- Are there any sector-specific restrictions for such distressed M&A transactions?
In Hong Kong, there is no sector-wide merger approval regime, but M&A (including distressed M&A) involving the following types of corporates are subject to certain regulations:
- M&As involving the acquisition of a stake that puts the acquirer in the position to exercise 10% or more of the voting power in financial institutions, require the Monetary Authority’s approval. Only those deemed fit and proper by the Hong Kong Monetary Authority will obtain approval. M&As involving these types of financial entities are governed under the Banking Ordinance.
- M&As resulting in any person becoming a substantial shareholder of a corporation licensed by the Securities and Futures Commission requires the prior approval of the SFC. A “substantial shareholder” is a person who (alone or with its associate(s)) controls either 10 percent of the voting power of a licensed corporation, or 35 percent of the voting power of a company that in turn controls 10 percent of the voting power of the licensed corporation. The SFC must be satisfied that the proposed substantial shareholder is and will remain a ‘fit and proper’ person to grant the approval.
- M&As where a person becomes a substantial shareholder of a trustee approved by the Mandatory Provident Fund Schemes Authority (the “MPFA”) requires the prior approval of the MPFA, and such an approval is given to those who meet the requirement of good reputation and character.
- M&As involving insurance companies are governed under the Insurance Ordinance and an acquisition resulting in the control of 15% or more of the voting rights in such entities requires the Insurance Authority’s prior determination that the acquirer is “fit and proper”.
- M&As involving the broadcasting industry require the approval of the Communications Authority. In addition to meeting the residency requirements, no “disqualified persons” shall exercise control over a telecommunications licensee or a domestic free television programme service license. This includes the need to be “fit and proper” and not have any criminal record involving bribery, false accounting, corruption or dishonesty.
- M&As involving listed companies are subject to disclosure requirements as set out in the Securities and Futures Ordinance, the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”) and the Takeover’s Code. In particular, parties should be aware of that in the event that a transaction is seen as a reverse takeover under Listing Rule 14.06B, whereby a “shell” listed company with few actual operations acquires another company and the controlling persons of the other company will run the substantial business of the combined entity going forward, the transaction will be treated as a new listing and be required to fulfill all new listing requirements under Chapter 8 of the Listing Rules.
- What are the restrictions on foreign ownership of assets in your jurisdiction? Does the law provide for any permissible limits of foreign participation in M&A transactions? Are there any specific relaxations to this effect in the case of distressed M&A?
In Hong Kong there are generally no restrictions on foreign ownership of assets. However, in the broadcasting industry, a domestic TV service license can only be granted to those who are “ordinarily resident in Hong Kong” within the meaning of the legislation. Prior approval from the Communications Authority is required for a non-Hong Kong resident investor to hold, acquire or exercise 2 percent or more of the voting rights in a domestic free television programme service licensee. Similarly, a sound broadcasting licensee must be a Hong Kong company, and the aggregate of its voting shares held by non-resident investors must not exceed 49 percent of its total voting shares.
- Are there any restrictions from the competition law aspect governing distressed M&A?
M&As involving a telecommunications licensee are subject to the merger control regime under the Competition Ordinance, but merger filing is voluntary. However, if the parties did not complete their merger filing and a transaction has, or is likely to have, the effect of substantially lessening competition in Hong Kong, the Competition Commission and the Communications Authority may eventually apply to the Competition Tribunal for remedial measures, including unwinding the transaction.
2.1 Due Diligence
- Briefly describe the general process of legal and tax due diligence which is to be conducted on Target in case of a distressed M&A, specific risks, and mitigation?
Legal due diligence ordinarily commences with a documentary due diligence request from the acquirer’s counsel to the target. Documents are often provided in a virtual data room, and the acquirer’s counsel will raise queries with the target based on information obtained from the documents and independent searches. The scope of due diligence varies with transaction structure, nature of target and the acquirer’s preferences. Tax due diligence in Hong Kong is generally handled by accounting firms.
One major risk is hidden liabilities. M&A insurance may not be available. The time for due diligence is usually short. One mitigation option is to require the seller to give extensive representations and warranties, plus indemnities, and back up these obligations with collateral. Another option is to structure the acquisition as an asset deal, such that the acquirer purchases only specific assets of the target business. Some liabilities of the business, however, will be transferred to the acquirer under the TBO unless certain requirements are met. In cases where the target is sold in a “fire sale”, the transfer of individual assets could be impracticable in an asset deal due to the tight timeframe. An asset deal may also be difficult from an economic standpoint due to the payment of additional taxes.
Another risk is validity of the distressed transaction, irrespective of whether it is structured as a share deal or an asset deal. First, if the seller commences winding-up within the applicable claw-back period, the transaction may be set aside. For a transaction in which the consideration is considered to be significantly less than the value of the target, the claw-back period is five years. For a transaction that gives unfair preference to the acquirer over creditors of the company, the claw-back period is six months if the acquirer is a related party, and two years if otherwise. Second, the target assets could be subject to security interests of third parties. If an event of default has already occurred under the security documents, the documents usually prohibit any sale of the target assets without the creditor’s consent. Third, the directors’ power ceases when an involuntary winding-up process is deemed to have commenced or when a provisional liquidator or liquidator is appointed. In such case a transaction authorized by the company’s board of directors may be declared void. This risk can be partially mitigated through public searches and bring-down due diligence, so that the buyer can confirm there is no petition for involuntary or voluntary winding-up.
Are records of company details (pending litigation, insolvency, land rights, etc.) available publicly? If such information is not available, what are the alternatives that the acquirer may consider?
The Companies Registry keeps records of all companies registered under the CO. Information concerning directors, shareholdings, registered charges, and annual returns can be obtained for free or a very small fee on their database.
Land ownership records including title deeds, maps and government leases can be obtained for a fee at the Land Registry database.
Upcoming litigation is made known via the public court lists, and further details on the dispute can be obtained by attending the court registry and requesting a search for the writ starting the claim. However, further documents such as witness statements will not be made available unless the requesting party is involved in the litigation. Judgments of past litigation are also generally available on the judiciary website and other legal databases, save for cases with privacy concerns.
Bankruptcy and winding-up petitions must be advertised in newspapers and the gazette seven days prior to the first hearing, and will also be viewable on the court list. A credit report may also give useful insights into the financial condition of counterparties.
- How assets of a company are generally valued (government monitored or market-driven) from an M&A perspective? What factors should the acquiring company consider before initiating a transaction involving distressed M&A?
Hong Kong adopts a market economy approach. No valuation is needed before a party agrees to an acquisition. If the target assets include Hong Kong real properties and/or Hong Kong shares, their market value would affect the amount of stamp duties payable.
The factors that an acquiring company should consider in a distressed M&A vary considerably, depending on the main purpose of the acquisition. A strategic buyer should consider hidden liabilities. A distressed investor should consider exit options. A creditor should evaluate the merits between litigation and restructuring.
Further discussion of structure and strategy can be found at Section 2.2 below.
- What is the level of assistance obtained from the governmental departments in cases of such transactions?
Unless transactions involve a court-sanctioned scheme of arrangement, the expected assistance or interference from governmental departments should be minimal. The Financial Institutions (Resolution) Ordinance sets out certain support and payout measures to be implemented by the Hong Kong Monetary Authority or the Securities and Futures Commissions in situations when financial institutions become insolvent. The latest measures enacted in 2017 enable Hong Kong to meet the international standards set by the Financial Stability Board.
2.2 Transaction Structuring
- What are the probable structures in case of distressed M&A permitted under the law (acquisition of asset or shares or other models)? Briefly describe the merits and demerits of each model.
Hong Kong law neither restricts “insolvent trading” nor imposes an obligation for an insolvent company to commence winding-up. An insolvent company can continue its operations, so long as there is no intent to defraud its creditors. The probable structures are set out below based on this assumption of no intention to defraud.
Financial investments in the company
A third party investor could become a stakeholder of the insolvent company by acquiring debt from existing lenders of the company. If the investor is already a significant creditor or a shareholder of the company, it may choose to support the company with “new money”, such as a fresh loan with higher interest, more stringent conditions and a debt-to-equity swap arrangement. If the insolvent company is already in a winding-up process, an investor could invest as a secured lender with the approval of the liquidator. In such a case, the investor’s interest will have priority over unsecured creditors, but will not take priority over pre-existing security holders, unless this is permitted under the relevant security documents.
Once a stake is acquired, the investor can attempt to take an influential role in the winding-up process, whether by participating in a restructuring steering committee or initiating a scheme of arrangement, security enforcement or winding-up proceedings. This structure gives the investor some control over the company’s winding-up process. If no winding-up petition has been filed yet, the investor can prevent creditors from initiating a compulsory winding-up of the insolvent company by repaying them, but this approach may not be commercially feasible if the list of creditors are long or the amount of liabilities significant. With the support of other stakeholders, the investor can also consider initiating a creditors’ voluntary winding-up for the company. This process can provide an opportunity for a more managed winding-up process.
Investment in an insolvent company is risky. An investor making an investment in an insolvent company may not be supported by the liquidator or other stakeholders. Unless a consensus is reached, the company may end up in liquidation. This could result in a significant loss for the investor.
Acquisition of business or assets from the company
The timeframe to complete a sale is often very tight, as the board of directors does not have the power to dispose of the company’s assests after the commencement of a winding-up proceeding. Any creditor with a claim exceeding HK$10,000 can initiate a winding-up proceeding, unless the company settles the sum within three weeks of the creditor’s statutory demand.
In contrast, secured creditors have more time to decide whether to acquire the underlying assets. There is no general moratorium on claims in respect of secured assets. Secured creditors can enforce their security pursuant to the terms of their security documents at any time during the company’s winding-up process. Enforcement of security typically involves sending a notice of enforcement, appointing a receiver and then having the receiver take possession of the security, be it through occupying the landed property or utilizing pre-signed share transfers and director’s resignations.
Restructuring of company debt
Under this model, the company and some major creditors would negotiate and agree on an arrangement that usually involves some compromise from different classes of creditors in a non-court supervised workout. If there are dissenting creditors, the parties will seek to impose their arrangement on all creditors through a “scheme of arrangement”. See Section 3.
Liquidation of the company
This model seeks to liquidate the company’s assets through a voluntary or compulsory winding-up.
The liquidator has the statutory obligation to sell the company’s assets and use the proceeds raised therefrom to repay creditors and distribute the surplus (if any) to shareholders. The likelihood and possible amount of recovery vary among stakeholders. The priority of distributions is as follows:
- Costs to collect and realize the secured assets
- Debts to held by secured creditors
- Liquidators’ fees and expenses
- Amounts due to employees
- Amounts due to creditors and other preferential unsecured creditors such as the Inland Revenue Department
- Debts to creditors with floating charges
- Debts to unsecured creditors
- Surplus for shareholders
Secured creditors may enforce their security on the basis of their contracts, irrespective of whether the company is in liquidation. A liquidator can also raise money from third parties to fund the liquidation expenses using the company’s assets as collateral. Such indebtedness would rank higher over the unsecured creditors but would not affect the priority of secured creditors in relation to the secured assets.
The liquidator may sell the assets in public auction or private contract. In Hong Kong, it is possible to credit bid – in other words, to use the cancellation of existing debt to pay for the target asset. However, in such a situation, the court may scrutinize whether accepting the bid is compliant with the liquidator’s duty to act in the best interests of the whole body of creditors.
- What are the roles and responsibilities of the stakeholders – acquirer, target, governmental departments, legal and tax advisors, etc. in case of a transaction involving distressed M&A?
The stakeholders and their respective roles in a distressed M&A transaction would depend on the transaction structure. Assuming that the transaction is a sale of business by a distressed company through an auction process, the working parties will involve the acquirer, the company, and their respective controllers and advisers.
The company’s financial advisor will conduct a valuation of the target business and advise the company on its strategic options such as the benefits or drawbacks of selling its assets or agreeing to other proposals from creditors. The company will evaluate whether it is in the company’s interest to sell the target business. This decision will be made by its board of directors. For directors’ duties when the company is in the brink of insolvency, see Section 3.3.
The company’s financial advisor will decide on a transaction structure and initiate the auction process, which is usually confidential. Potential bidders will receive an information package from the financial advisor. Interested bidders who qualify will be permitted to conduct due diligence on the target business.
The company’s counsel will prepare a purchase agreement based on the proposed transaction structure. Bidders will submit their proposed changes to the purchase agreement and their offer price. Sometimes bidders may propose variation in the structure to address their own tax considerations and due diligence findings. The company will engage in exclusive negotiation with one bidder for a limited period. If the parties cannot agree to the terms of the purchase agreement within this period, the company will invite another bidder to the process.
In a distressed M&A situation, timing is of essence. The winning bidder may not be the highest bidder. Bidders with cash immediately available and are willing to complete the transaction within the shortest timeframe will have a competitive advantage.
2.3 Tax Consideration
- What are the general tax exemptions and reliefs for such distressed M&A transactions? Is the requirement to pay any tax or fees to the government?
Generally speaking, ad valorem stamp duty is payable for the transfers or sales of shares or immovable property. Stamp duty is assessed on a sliding scale and can be up to 8.5% for commercial property transfers. For a sale of residential property, corporate buyers pay 15% ad valorem stamp duty and 15% buyer stamp duty. Residential properties are also subject to special stamp duty for short term holdings below 36 months. The stamp duty rate for shares is 0.2% of consideration or market value of the shares, whichever is higher, together with a fixed amount of HK$5 on the instrument of transfer. Intragroup stamp duty relief in a share transaction can be granted under certain conditions.
In a liquidation, taxes are paid out of the unsecured assets of the company, and rank behind payments to secured creditors, the costs and expenses of liquidation and payment to employees.
Stamp duty is exempt if the seller is a company being wound up by the court or under a creditors’ voluntary winding-up as provided in s. 281 of the CO.
- What are the key documents that need to be prepared to give effect to distressed M&A?
This would depend on the transaction structure. For example, the terms of a sale of business or shares are reflected in a sale and purchase agreement, or in the terms of the auction. The terms of a scheme of arrangement are reflected in the scheme document and the related court orders. No new documents are needed in a security enforcement, as the terms are set out in the original security documents. The original security document, however, may require the delivery of notices and completion of transfer forms and (in the case of publicly traded securities) trigger filing requirements.
How are negotiations entered into between relevant parties?
Before the commencement of a winding-up process, voluntary or compulsory, the board of directors has the power to represent the company in the negotiation. The directors’ power in relation to the company ceases after a provisional liquidator is appointed or a winding-up order is made. Hong Kong does not technically have the concept of a “light touch” liquidation, in which the directors retain much of their power under the supervision of a provisional liquidator, but some concessions have been made in recent years. See Section 3 for more information.
The winding-up process commences with the filing of a winding-up petition or the initiation of a voluntary winding-up. If a provisional liquidator is appointed at this stage, his term will end upon the appointment of a liquidator. The power of the provisional liquidator is limited to the preservation of the assets during the interim period. Unless it can be shown that the assets are likely to deteriorate in value if not disposed of on a timely basis, the provisional liquidator does not have the power to dispose of the assets.
Creditors can continue to negotiate the terms of a restructuring. As creditors often have competing interests, they can be divided into different groups, with each consisting of creditors sharing a common interest.
If the winding-up process moves forward, the court will make a winding-up order, and a liquidator will be appointed. The liquidator has the power to investigate the affairs of the company and its directors, to dispose of the company’s assets and to terminate the liquidation. Creditors can continue their negotiation, but the liquidator may decide to sell assets of the company at any time. Once a liquidator is appointed, the parties interested in the company’s assets should negotiate with the liquidator.
In the case of a compulsory winding-up, after the appointment of a provisional liquidator or the issue of a winding-up order, other creditors are prohibited from initiating proceedings against the company without the leave of court. At any time during the winding-up process, any stakeholder may apply to the court for a stay of proceedings. This would prevent other creditors from initiating proceedings. Secured creditors, however, can still enforce their security in respect of secured assets.
- Is there a requirement to obtain any consent or approval from the relevant government department for such distressed M&A transactions?
There are some extra requirements for M&As in banking, insurance, securities and futures, mandatory provident funds, telecommunications or broadcasting sectors as described in the beginning of Section 2. These requirements apply irrespective of whether the transaction is a distressed one.
- What considerations should be factored in before concluding the final close of the deal?
The acquirer should verify that the counterparty has the power to transfer the target assets and the target assets contain no unknown liabilities. These can be achieved to a limited extent through public searches and other bring-down due diligence work.
The directors’ power in relation to the company ceases when a winding-up order against the company is made by the court. Unless accompanied by a court order, any disposition of the company’s property subsequent to the winding-up order is void. The winding-up order applies retroactively to the time of the presentation of the winding-up petition. It is possible to search for whether a winding-up order has been granted against a company at the Companies Registry.
An up-to-date search of the company’s registered charges with the Companies Registry is needed to identify secured creditors of the target assets. Not all charges are registrable, however, and registered charges could appear in the registry as late as four weeks after their initial grant. An up-to-date search of the company filings is therefore important.
3. Corporate Restructuring
What are the legal and regulatory requirements governing corporate restructuring in your jurisdiction?
Corporate restructuring can be implemented either via an informal workout or via a scheme of arrangement. Unlike some other common law jurisdictions such as the UK, Hong Kong does not currently have a regime for administration.
As part of an overall restructuring deal, certain assets may be traded. There are no particular rules or formats for a typical workout or restructuring deal, and it is all a matter of private negotiation between the parties. See also Section 2.2.
Scheme of arrangement
Hong Kong’s court-sanctioned creditor-company compromise mechanism is known as a scheme of arrangement. The legislative provisions are contained in s. 669 of the CO. An application is made to court by either the company or any creditor (or, where relevant, the liquidator) for an order that a meeting of creditors be summoned.
If the proposed scheme affects different groups of creditors in varying ways, the creditors will be divided into classes such that the way their interests are affected within that class are aligned. Separate meetings will then take place within each class. The usual way of determining a class is to put together “those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest” (see: Sovereign Life Assurance Company v Dodd  2 QB 573). A common division would be a class of secured creditors and a class of unsecured creditors.
The proposal scheme must be approved by 75 per cent in value and the majority in number of each class of creditors present and voting, and sanctioned by the court. The court will not sanction a scheme unless it is one that an intelligent and honest person, a member of the class concerned, and acting in his or her best interests might reasonably approve.
Creditors can challenge the scheme on the grounds that the meetings were improperly constituted, the creditors were not given sufficient information, or the scheme is unfair.
During the implementation of a scheme of arrangement, there is no moratorium for the company from its creditors. Secured creditors may still enforce their security and dissenting parties can petition for winding-up or take other actions. As such, the parties attempting to implement the scheme of arrangement may seek the appointment of a provisional liquidator, as that will stay all proceedings until the scheme is complete or rejected.
However, this reason for appointment was doubted in Legend International Resorts Limited  2 HKLRD 192, which stated that appointing provisional liquidators solely to facilitate a corporate rescue is not permissible. More recently, where the company structure had holding companies in other jurisdictions, provisional liquidators have been appointed in those jurisdictions in order to bypass the Legend restrictions (see: Z-Obee Holdings Limited  1 HKLRD 165). Harris J clarified the position Re China Solar  HKCFI 555, when he ruled that while the main justification for appointing provisional liquidators is that the company is insolvent, its assets are in jeopardy and need to be preserved, a provisional liquidator can also be granted powers to facilitate a restructuring, and should be allowed to stay on to complete those duties even if the assets preservation aspect has already been resolved. In 2020, Hong Kong courts have also recognized the power of foreign provisional liquidators on a soft-touch basis in Re Joint Provisional Liquidators of Moody Technology Holdings Ltd  HKCFI 416.
It is not uncommon for Hong Kong companies to be part of more complex international group structures with offshore parent companies and hence sometimes Hong Kong courts are asked to deal with schemes for foreign companies. In terms of schemes for foreign companies, a company must have a sufficient connection to Hong Kong. What constitutes ‘sufficient connection’ depends on the facts, and the concept was considered in Re LDK Solar Co, Ltd (In Provisional Liquidation)  1 HKLRD 458 and Re Winsway Enterprises Holdings Ltd  1 HKLRD 1.
What are the general trends seen in your jurisdiction in the field of corporate restructuring?
What are the companies preferring in relation to corporate restructuring? Are companies considering internal restructuring – labor or financial restructuring or an overall restructuring of the entire business?
How does the competition law regime play out in respect of corporate restructuring? Are there any sector specific restrictions for corporate restructuring?
3.1 Approvals corporate restructuring
- What are the legal and regulatory compliances, filings required to give effect to a corporate restructuring?
- Are there any tax incentives that a company may claim owing to corporate restructuring? Is the requirement to pay any tax or fees to the government?
3.3 Other Factors
- How are the duties of directors affected due to the corporate restructuring?
Directors must act in the best interest of the creditors rather than the shareholders, if the company is insolvent or about to become insolvent: Re Peregrine Investments Holdings Ltd  HKCFI 644. In Hong Kong, there is no “wrongful trading” or “insolvent trading” prohibition, unlike the UK, although reform is currently being discussed. There is, however, a provision prohibiting fraudulent trading in s. 275 of the CWUMPO. The directors’ powers will be suspended once a liquidator or provisional liquidator is appointed.
- How is the general mode of treatment of employees of the restructured entity? Are there any mandatory provisions under the law for compensation or re-employment in case employees are retrenched or severed owing to restructuring?
In a compulsorily liquidation, employment contracts will terminate automatically and employees can get their wages (up to a limit) paid as a preferential debt under s. 265 CWUMPO. In a voluntary liquidation, contracts will not terminate automatically. Employees either submit their claims to the liquidator as a preferential debt as in the case of a compulsory liquidation or, in a case in which the business is sold, the acquirer of the business will be liable for debts owing to employees under the TBO.
4.0 Other Relevant Considerations
Are there any restrictions under the anti-bribery, anti-corruption provisions of the law in your jurisdiction that may affect the transactions involving distressed M&A or corporate restructuring?
Locally, the Prevention of Bribery Ordinance governs matters to do with corruption. The Independent Commission Against Corruption (ICAC) is the body which investigates such matters.
The case of HKSAR v Kwok Ping-kwong Thomas (2017) 20 HKCFAR 264, which involved one of the largest local property developers in Hong Kong, demonstrated that even offering gifts to a public official without a specific quid pro quo deal could lead to the official being “favourably disposed” to the originator of the gift, offending the Prevention of Bribery Ordinance.
In transactions involving US counterparties, there will be a need to comply with Foreign Corrupt Practices Act (“FCPA”), which has extra-territorial jurisdiction. There may be a heightened due diligence process if the purchaser is a US entity, as violations can result in criminal sentences and fines, or heavy settlements, historically up to US$800 million.
In transactions with UK counterparties, the Bribery Act 2010 also has similar long-arm effect and is in some ways even more stringent than the FCPA. For example, the UK Act has strict liability offences, while the FCPA requires criminal intentions for bribery. Therefore enhanced due diligence precautions will need to be taken in order to avoid or assess the risk of entering into transactions with companies that have potentially violated these laws. The resulting prosecution may need to be dealt with by the acquirer, even if the violation occurred before acquisition.
- How far is the legal and regulatory scenario conducive to permit distressed M&A transactions and corporate restructuring in your jurisdiction?
Currently, restructurings either take place as a matter of private dealings or schemes of arrangement. See Section 3 for potential legislative changes.
- Any unique features in the jurisdiction which are generally not seen in other jurisdictions or are not mentioned above?
Hong Kong, like other international hubs, frequently sees complex corporate structures involving several layers of holding companies in various jurisdictions with assets distributed across different special purpose vehicles. As a result, enforcement of security or any restructuring efforts will often require legal advice and action in more than one jurisdiction.
While Hong Kong has not adopted the UNCITRAL Model Law on Cross-Border Insolvency, Hong Kong courts nonetheless show a willingness to recognize and support cross-border insolvency in pragmatic ways, for example in the cases of Re Supreme Tycoon Ltd  1 HKLRD 1120 (BVI liquidation) and Re Kaoru Takamatsu  HKCFI 802 (Japanese bankruptcy).
Virginia Tam, Partner, Hong Kong
Virginia Tam focuses on outbound acquisitions and private equity investments for corporate and financial institution clients in Greater China. A lawyer experienced in U.S. securities laws and Hong Kong Listing Rules, she has worked on a broad range of matters within this practice area, including private and public acquisitions, private investment in publicly traded equities (PIPEs), pre-IPO investments, joint ventures, capital market exits, and privatizations.
Sacha Cheong, Partner, Hong Kong
Sacha Cheong is a partner in the firm’s Hong Kong office. He has practised in Hong Kong since 2001 and focuses on litigation before the Hong Kong courts, international arbitration, and mediation. His practice covers a broad range of areas, including complex commercial cases, white collar crime, employment, and construction/infrastructure. He has also been involved in various anti-trust/competition matters and anti-corruption investigations, as well as environmental and telecommunication disputes. Sacha is dually qualified in law and civil engineering. He achieved the status of Chartered Civil Engineer in 2000 and worked on a number of prominent construction projects in Hong Kong between 1994 and 1998.
Victoria Yue, Associate, Hong Kong
Victoria Yue is an associate in the firm’s Hong Kong office. Her practice involves insolvency-related matters in and out of court, as well as other aspects of asset recovery and debt restructuring. She also focuses on commercial litigation, arbitration, and other civil claims. She was formerly a barrister and a judicial assistant to the Court of Final Appeal.