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Privatisation Schemes: Not Just for Hong Kong-Incorporated Listed Companies?

8 Apr 2020

For a number of reasons, in recent months there has been a spate of privatisations of Hong Kong listed companies by way of schemes of arrangement sanctioned by the Court under sections 673 and 674 of the Companies Ordinance (Cap. 622) (“Cap. 622”): see, for example, Re Hong Kong Aircraft Engineering Co Ltd [2019] HKCFI 64, Re China Power Clean Energy Development Company Limited [2019] HKCFI 2098 and Re Dah Chong Hong Holdings Limited [2020] HKCFI 274.

These Hong Kong listed companies were all incorporated in Hong Kong, but is the statutory regime restricted to those listed companies which are incorporated in Hong Kong?

Which companies can be subject to sections 673 and 674 of Cap. 622?

The answer lies in section 688 of Cap. 622, which stipulates that a “company” in the relevant Division means “a company liable to be wound up under the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32)(“Cap. 32”)”. In other words, section 673 and 674 of Cap. 622 can apply to companies liable to be wound up under Cap. 32.

What does “liable to be wound up under Cap. 32” mean?

Needless to say, a Hong Kong incorporated company can be wound up under Cap. 32 and would thus fall within section 688 of Cap. 622. As for foreign companies, including registered non-Hong Kong companies, insofar as these are considered as “unregistered companies” under s.326 of Cap. 32, the jurisdiction to wind up these companies is derived from section 327 of Cap. 32. This provides that any unregistered company may be wound up under Cap. 32 with certain specific exceptions.

It is also well-established that the court’s jurisdiction to wind up an unregistered company will not be exercised unless three core requirements are satisfied (the “3 Core Requirements”), namely:

(a)        ​There must be a sufficient connection with Hong Kong;

(b)​        There must be a reasonable possibility that the winding-up order would benefit those applying for it; and

(c)​     One or more persons interested in the distribution of the company’s assets must be persons over whom the court is able to exercise jurisdiction.

See: ​Re Yung Kee Holdings Ltd [2014] 2 HKLRD 313 (CA) at §38; [2012] 6 HKC 246 (Harris J) at §70

This begs the question: in deciding whether a company is liable to be wound up under Cap. 32 within the context of section 688 of Cap. 622, do the 3 Core Requirements need to be satisfied?

The question was answered in Re LDK Solar Co., Ltd (in provisional liquidation) [2015] 1 HKLRD 458 at §§33-36 (albeit in the context of a creditors’ scheme), where, following the approach of Lawrence Collins J (as Lord Collins of Mapesbury NPJ then was) in Re Drax Holdings Ltd [2004] 1 BCLC 10, G Lam J held that companies liable to be wound up under Cap. 32 include unregistered companies pursuant to sections 326 and 327 of Cap. 32. On the other hand, the 3 Core Requirements go to the exercise of discretion rather than existence of jurisdiction.

As such, the 3 Core Requirements do not limit the Court’s jurisdiction under sections 673 and 674 of Cap. 622. Indeed, as explained at §27 of Re Drax Holdings (supra.), any other result would lead to very odd and artificial consequences, since schemes of arrangement are used in many circumstances having nothing to do with insolvency. One such example is privatisation schemes.

Are there other requirements for foreign-incorporated companies to invoke sections 673 and 674? 

The above, however, does not mean that any unregistered company within the meaning of Cap. 32 can automatically invoke sections 673 and 674 of Cap. 622.

Like the jurisdiction to wind up a foreign company which often used to be described as an “exorbitant” jurisdiction , the Hong Kong court’s jurisdiction to sanction a scheme of arrangement in relation to a foreign company can only be exercised where there is sufficient justification for the Hong Kong court to do so.

In this context, the test formulated by the Courts is not the 3 Core Requirements as applied in winding up cases but simply whether is a “sufficient connection with Hong Kong”: see Re LDK Solar (supra.) at §44.

What is necessary to establish sufficient connection in Hong Kong?

The short answer is “it depends”. In the words of G Lam J in Re LDK Solar (supra.) at §46, “it is a matter of judgment to be made in the light of the evidence presented to the court in a particular case… in the light of the object and purpose of the jurisdiction invoked”.

For example, in the context of a creditors’ scheme, factors include the governing law of the relevant debt, the domicile of creditors and whether the foreign company is registered in Hong Kong: see Re LDK Solar (supra.) at §63.

It was also held in Re Winsway Enterprises Holdings Limited [2017] 1 HKLRD 1 at §32 by Harris J that the fact that a foreign company is listed in Hong Kong constitutes a material connection with Hong Kong, as do various other ancillary matters such as the existence of a registered office, staff, books and accounts, shareholders and shareholder meetings in Hong Kong.

While it is expected that the fact that a foreign company is listed in Hong Kong would be a factor of even greater significance in the context of a privatisation scheme, much will depend on the circumstances, such as perhaps the proportion of shares held by shareholders domiciled in Hong Kong.

It would appear to be the case that no attempt has yet been made to privatise through a Hong Kong scheme a company not incorporated in Hong Kong. There is therefore some uncertainty of course as to how if at all the Courts would approach such a scheme. Based on the authorities which pertain to creditors’ scheme it would seem that in principle this is something which can be considered in appropriate circumstances. One factor to consider might be the effectiveness of such a scheme in particular under the laws of the place of incorporation of that company and perhaps also the law where some of the shareholders are located.

Key takeaway

All in all, this tends to suggest that privatisation schemes under sections 673 and 674 of Cap. 622 are arguably not restricted to companies incorporated in Hong Kong: many foreign-incorporated Hong Kong listed companies might well be able to take advantage of the statutory scheme provided they have a sufficient connection to Hong Kong , assuming that the approach taken by the Hong Kong courts in relation to the creditors’ schemes is adopted in privatisation schemes.

This article was authored by José-Antonio Maurellet SC and Jasmine Cheung