Most Read Contributor in Hong Kong, September 2016
Keywords: Hong Kong, takeovers, Sino-Forest
decision, GO Obligation
A mandatory bid (or a mandatory general offer obligation)
("GO Obligation") will be triggered if a controlling
block in a listed company ("Controlling Block") changes
The chain principle summarised
A GO Obligation will also be triggered if what changes hands is
the shareholding in the up-the-chain holding company
("Holdco") that holds the Controlling Block and (1) the
value of the Controlling Block represents a significant part of the
Holdco's assets portfolio (i.e., 60 percent or more)
("Significance Test") or (2) one of the main purposes of
the transfer at Holdco level is to acquire control of the
Controlling Block. In other words, if the proportion of the
Controlling Block value to the Holdco's assets portfolio is
less than 60 percent and the main purpose is not to acquire
control, then no GO Obligation will be triggered. This is the gist
of the chain principle.
Care should be exercised
The Sino-Forest panel decision1 told us that the
chain principle will be applied strictly.
In a creditors' restructuring where a debtor company's
assets are used to settle creditors' claims, very often a new
company ("NewCo") will be established for the benefit of
the creditors to take control and ownership of the debtor
If the debtor company's assets comprise a Controlling Block,
a GO Obligation may be triggered because of the chain principle
depending on the relative value of that Controlling Block as
compared to the debtor company's assets being transferred. If
the Controlling Block's relative value is less than 60 percent
and the main purpose of the restructuring is not to acquire the
Controlling Block (but rather to restructure the ownership of the
debtor company), then no GO Obligation will be triggered - or so it
was thought, but in the Sino-Forest panel decision, it was ruled
Narrow application of the chain principle
SFC expects the chain principle to apply strictly to the very
transaction that effects the transfer of the Controlling Block
where a Holdco structure is already in place. But that was not what
happened in the Sino-Forest restructuring plan or in a typical
creditor's restructuring situation, which comprised a series of
inter-conditional transactions to effect transfers in favour of
NewCo and no existing Holdco structure was in place for the
The chain principle will not look at a series of transactions or
a larger commercial transaction (i.e., the restructuring plan in
the Sino-Forest panel decision) even where the Controlling Block
(i.e., those of Greenheart held by Sino-Forest) only represents an
insignificant part of such a series of transactions or a larger
such commercial transaction.
SFC has stated that "its focus [the chain principle] is
quite narrow and that it simply looks at a transaction, whether it
is an element of a larger one or not, in which statutory control of
one company results in the acquisition or consolidation of control,
as defined in the Takeovers Code, of a second company."
Consult SFC in advance
Market participants should consult SFC early on, before entering
into a transaction or settling on a deal structure if a GO
Obligation is to be prevented, or else they could run the risk of
triggering a GO Obligation which would not otherwise be
Originally published 25 February 2013
1 Panel Decision - In relation to a referral to the
Takeovers and Mergers Panel (the "Panel") for a ruling on
whether a Chain Principle Offer will be triggered for Greenheart
Group Limited ("Greenheart", Stock Code: 94) upon the
implementation of the restructuring of Sino-Forest Corporation
("Sino-Forest") which can be downloaded via this link.
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This article provides information and comments on legal
issues and developments of interest. The foregoing is not a
comprehensive treatment of the subject matter covered and is not
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