14 Asian Legal Business | December 2024 The Briefs Regulatory advisory in demand as HK rides take-private wave Hong Kong’s capital markets have witnessed a significant surge in take-private deals in recent years, as geopolitical tensions and China’s soft economic outlook dampen fundraising appetite in what was once Asia’s premier financial hub. The privatisation trend in Hong Kong reflects a broader recalibration of corporate strategies in response to evolving market realities. In 2022 and 2023, the Hong Kong Stock Exchange saw 16 and 12 completed take-private deals, respectively, with the current year having seen 13 so far. Lawyers say that the take-private wave may continue to reshape Hong Kong’s ailing capital markets in the near future with increasing legal demand for cross-jurisdictional regulatory advisory, as listed companies seek to adapt to challenging market conditions and optimise their corporate structures. These transactions predominantly utilise schemes of arrangement, a courtapproved procedure allowing companies to restructure their capital, assets, or liabilities with shareholder approval. Janney Chong, corporate finance partner at Robertsons, notes that most of these transactions involved companies incorporated in overseas jurisdictions, primarily the Cayman Islands and Bermuda, giving rise to potential legal challenges due to discrepancies in takeprivate regulations in different jurisdictions. The example offered by L’Occitane International has illustrated the complexities of the market. After a 14-year run on the Hong Kong Stock Exchange, the French cosmetic giant exited the public market, citing rising competition in the luxury goods market and sky-rocketing operational costs as a listed company. Initially attracted by the booming Chinese market, L’Occitane International was grappling with challenges as the country’s consumer demands shrunk, draining the company’s share prices. But its take-private journey was far from plain sailing, underscoring the technical difficulties involved, particularly for companies incorporated outside Hong Kong. To go private, L’Occitane International had to jump through the hurdles of navigating complex regulatory requirements in both Hong Kong and Luxembourg, its place of incorporation. This process involved winning over regulators in both jurisdictions and using an alternative method based on the company’s articles of association to squeeze out remaining shareholders. In general, lawyers note that companies pursuing take-private deals could face numerous challenges, including regulatory barriers across different jurisdictions, high thresholds for shareholder approval, potential legal risks from dissenting shareholders, and significant time and cost investments. They must also carefully consider the long-term benefits of delisting against the loss of visibility and access to capital markets. One of the major tests of the takeprivate procedures for companies in Hong Kong is the headcount test, especially those incorporated in certain offshore territories, notably Bermuda. As the UK overseas territory with strong commercial ties with Hong Kong, many Bermuda companies are listed on the Hong Kong Stock Exchange. Chong points out that “although the take-private regulations between Hong Kong and those of the Cayman Islands and Bermuda are largely similar, the most notable difference among them includes the headcount test applicable to a Bermuda members’ scheme of arrangement.” A Bermuda members’ scheme of arrangement requires the scheme to be approved by a majority representing three-fourths in nominal value of the scheme shareholders voting at the requisite meeting convened at the order of the court, notes Chong. This test was abolished in Hong Kong in 2014 and the Cayman Islands in 2022. “However, the technical challenge of headcount test remains applicable to Bermuda members’ scheme of arrangement and continues to have implications for take-private deals involving companies incorporated in Bermuda and listed on the Exchange,” she adds. Nonetheless, despite the discrepancies in take-private regulations in different jurisdictions, Chong believes companies still primarily consider privatisation for a variety of other reasons. Those include significant disparity between share price and underlying value, lack of liquidity, inactive trading, and limited refinancing opportunities. Looking ahead, Chong anticipates that “take-private deals will remain active in the next 12 to 18 months in Hong Kong if market environment continues to be volatile and uncertain.”
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