New Hong Kong Companies Ordinance: Court-free amalgamation of companies within a group

01 Nov 2013 | Newsletter/briefing

WHEN IN FORCE: 3 March 2014

COMPANIES AFFECTED: Hong Kong companies limited by shares within the same group

NEW PROVISIONS: Part 13, Division 3 of new CO

SUMMARY OF CHANGES

  • amalgamation is the legal process by which the undertaking, property and liabilities of two or more companies merge and their shareholders become the shareholders of one amalgamated company
  • under the existing legislation, companies that wish to amalgamate may only use a court-sanctioned scheme of arrangement. The process is costly and used infrequently in practice

The new amalgamation process

  • the new CO introduces a court-free regime for amalgamations of wholly-owned companies within the same group
  • the conditions to be satisfied in order to use the new amalgamation process are as follows:
    • each amalgamating company must be a Hong Kong incorporated company limited by shares
    • each amalgamating company must be part of the same wholly-owned group of companies
    • each director of an amalgamating company who voted in favour of the amalgamation must make a specified solvency statement
    • each amalgamating company must be solvent, and the amalgamated company must be able to pay its debts for the following twelve months after the amalgamation takes place
    • if any amalgamating company has created a floating charge, each person entitled to that security must give written consent to the amalgamation proposal. In unusual circumstances, the consent of other beneficiaries of security may also be required
    • no creditor of an amalgamating company will be prejudiced by the amalgamation
    • secured creditors must be notified in writing of the proposed amalgamation. Directors of each amalgamating company must also publish in an English newspaper and a Chinese newspaper a notice of the proposed amalgamation
    • the amalgamation must be approved by each amalgamating company’s shareholders. The shareholder approval process must be in accordance with the procedures set out in the articles of association of each amalgamating company (which, typically, will be the procedures for voting on ordinary resolutions)

Objections by creditors, etc.

  • until the amalgamation becomes effective, a shareholder, creditor or other person to whom an amalgamating company is under an obligation may object by making an application to the Court of First Instance and delivering a notice of the Court application to the Companies Registry
  • when hearing the objection, the Court of First Instance will make such order as it thinks fit in relation to the amalgamation proposal

Timing

  • assuming that meetings are held and notices are sent promptly, no objections are made and the Registrar of Companies registers the amalgamation in a timely manner:
    • a vertical statutory amalgamation may be effected in around 25 days
    • a horizontal statutory amalgamation may be effected in around four days. The timing difference reflects the fact that different procedures must be followed for each type of amalgamation

Assumption of rights and obligations

  • the amalgamated company succeeds to all property, rights and privileges, and all liabilities and obligations, of each amalgamating company

IMPLICATIONS FOR PRACTICE

  • although not specifically referred to in the legislation, we expect that an amalgamation may be used to create realised profits in the amalgamated company
  • before proceeding with an amalgamation, issues to consider include the following:
    • the amalgamation process may trigger events of default in commercial and financing documents of an amalgamating company. In particular, loan document often prohibit amalgamations. Due diligence should be carried out on key commercial and financing documents
    • uncertainty about the Hong Kong tax treatment on, for example, accumulated losses of an amalgamating company. Tax advice should be sought
    • uncertainty about foreign tax issues, including whether any foreign tax/gain or loss will be 'crystallised', and whether there will be a 'transfer' for the purpose of the relevant foreign tax legislation. Foreign tax advice should be sought in key foreign jurisdictions
    • the amalgamation may not be recognised under foreign law. Foreign advice should be sought in key foreign jurisdictions where assets are located or whose laws govern key contracts


For related publications, see also: New Hong Kong Companies Ordinance Tool Kit.

Contacts

Peter Brien (partner), Lisa Chung (partner), Peter Lake (partner)


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