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3 things to watch out for in Privatisation Schemes

25 May 2021

The statutory regime for privatisation schemes is contained in sections 670 to 674 of the Companies Ordinance (Cap. 622) (“CO”). Below are 3 points worth considering in carrying out a privatisation scheme:

1. Identify the disinterested shares

In the case of takeover offers, a company needs to satisfy what is known as the “negative 10% test” as contained in s.673(2) of the CO, namely that the votes cast against the arrangement at the meeting do not exceed 10% of the total voting rights attached to all disinterested shares in the company. This requires the application of the rules set out in s.673(3) of the CO on which shares are considered to be “disinterested shares”.

For example, in Re China Power Clean Energy Development Company Limited [2019] HKCFI 2098, consideration was given to whether three shareholders were disinterested as they, like the offeror, were ultimately held by the State-owned Assets Supervision and Administration Commission of the State Council of the People’s Republic of China (“SASAC”). Applying s.673(3) of the CO, which in turn required an application of s.667(1)(b) and s.2 of the CO, this ultimately turned on whether SASAC was a “body corporate” within the meaning of the CO. On the facts, the issue was ultimately academic as the “negative 10% test” could be met in any event.

2. Ensure that the explanatory statement is adequate

s.671 of the CO not only requires explanatory statements to be issued or made available to creditors or members when a scheme meeting is summoned, it also stipulates requirements as to its contents. In particular, under s.671(3), an explanatory statement must explain the effect of the arrangement or compromise, and must state (i) any material interests of the company’s directors, whether as directors or as members or as creditors of the company or otherwise, under the arrangement or compromise, and (ii) the effect of the arrangement or compromise on those interests, in so far as the effect is different from the effect on the like interests of other persons.

Whether the members are given sufficient information in the explanatory statement to make an informed decision whether to support the scheme of arrangement is one of the factors the Court may take into account in deciding whether to sanction a scheme of arrangement: see Re China Power Clean Energy Development Company Limited (supra.) at §8. Care must be taken in preparing this important document.

3. Consider the appropriate form of the scheme meeting, especially in times of Covid-19

Public health regulations on how physical meetings can be held in times of Covid-19 may pose challenges to the convening of physical scheme meetings. In this regard, the Court has power to summon such meetings in any manner as it directs under s.670(1)(a) of the CO. Consideration should be given to whether alternative means of holding meetings, such as with the aid of telephone or video conference facilities, would be necessary, and if so, how it can be ensured that those who attend the scheme meeting remotely can effectively listen, speak and vote at the meeting.

Ultimately, much will depend on the circumstances, including the size of the scheme, the number of shareholders, the location of shareholders etc…, as well any relevant requirements contained in the company’s articles of association.

José-Antonio Maurellet SC and Jasmine Cheung acted for the Company in Re SHK Hong Kong Industries Ltd [2021] HKCFI 1165Re Joyce Boutique Group Ltd [2020] HKCFI 800Re China Agri-Industries Holdings Limited [2020] HKCFI 750Re Dah Chong Hong Holdings Limited [2020] HKCFI 274Re China Power Clean Energy Development Company Limited [2019] HKCFI 2098 and Re Hong Kong Aircraft Engineering Company Limited [2019] HKCFI 64