New Hong Kong Companies Ordinance: Schemes of arrangement and headcount test

01 Dec 2013 | Newsletter/briefing

WHEN IN FORCE: 3 March 2014

COMPANIES AFFECTED: All Hong Kong incorporated companies

NEW PROVISIONS: Part 13, Division 2 of new CO: ss668-677

SUMMARY OF CHANGES

  • this practitioner alert summarises the implications of the key changes to the rules on schemes of arrangement, including the applicability of the traditional headcount test
  • the requirements for approving a scheme of arrangement differ depending on the type of scheme

Takeover and privatisation schemes

  • a members’ scheme involving a takeover offer or a general offer (i.e. a share buy-back offer) requires:
    • approval by shareholders representing at least 75% of the voting rights present and voting at the shareholders’ meeting
    • the votes cast against the scheme not exceeding 10% of the total voting rights attached to all disinterested shares (the "10% Objection Test")
  • a major change for privatisation schemes is that the 10% Objection Test replaces the traditional Headcount Test (see below)
  • if a shareholder applies to court to challenge a scheme involving a takeover offer or a general offer, the court may only order costs against that shareholder if the opposition is frivolous or vexatious. The court has discretion to require the company to indemnify an opposing shareholder for its costs

Other members’ schemes

  • a members’ scheme not involving a takeover offer or a general offer requires:
    • approval by shareholders representing at least 75% of the voting rights present and voting at the shareholders’ meeting
    • unless the court orders otherwise, approval by a majority in number of the shareholders present and voting (the "Headcount Test")
  • the Headcount Test is therefore retained for members’ schemes (other than privatisation schemes) but the court now has the discretion to dispense with the Headcount Test requirement

Creditors’ schemes

  • a creditors’ scheme requires:
    • approval by creditors representing at least 75% in value present and voting at the creditors’ meeting
    • the Headcount Test to be satisfied
  • the court has no discretion to dispense with the Headcount Test for creditors’ schemes

Jurisdictional comparison

  • the changes to the approval requirements of schemes of arrangement set Hong Kong apart from other jurisdictions including Bermuda, the Cayman Islands and the BVI, where the Headcount Test applies generally to schemes of arrangement

IMPLICATIONS FOR PRACTICE

  • the approval requirements for schemes of arrangement are no longer uniform across different types of schemes
  • the Headcount Test no longer applies to privatisation schemes
  • the 10% Objection Test puts the veto power in the hands of the disinterested shareholders and is in line with the requirement set out in the Code on Takeovers and Mergers (the "Takeovers Code") for approving takeover and privatisation schemes
  • the definition of "disinterested shares" under the new CO is largely similar, but not identical, to that under the Takeovers Code. In determining whether a scheme has been approved, care should be taken to assess whether the requirement of not more than 10% of votes attaching to all disinterested shares voting against the scheme is satisfied for the purposes of both the new CO and the Takeovers Code
  • for other members’ schemes, the court may exercise its discretion to dispense with the requirement to pass the Headcount Test. This may be relevant where the court considers that the relevant processes have been unfairly administered or where the result of the Headcount Test has been affected by share manipulation

Contacts

Neil Hyman (partner), Lisa Chung (partner), Peter Lake (partner)


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