Hong Kong
Answer ... The main documents typically entered into during the initial preparatory stage of an M&A transaction are:
- a non-disclosure agreement (which may be called a confidentiality agreement);
- an exclusivity agreement; and
- a letter of intent (also known as a term sheet or memorandum of understanding).
Non-disclosure agreements restrict potential buyers in the way they hold and may use confidential information, including information which the buyer receives through its due diligence exercise and the fact of the transaction itself. They also typically include a non-solicitation clause with regard to the target and/or the seller’s key employees, customers and suppliers.
Under an exclusivity agreement, the seller agrees to discontinue marketing and to stop actively looking for other potential buyers for a prescribed period of time, during which the prospective buyer does its due diligence and seeks to conclude a deal. Often, however, the exclusivity agreement is included as a term of the letter of intent.
Letters of intent are typically not legally binding, with the exception of provisions such as exclusivity, confidentiality and governing law, which generally are binding. The key terms of the proposed transaction are set out in this document, including:
- details of the shares or assets to be acquired;
- consideration;
- other commercial terms;
- conditions precedent;
- due diligence arrangements;
- responsibility for costs and expenses;
- the timetable of the transaction;
- the governing law; and
- the dispute resolution mechanism.
Hong Kong
Answer ... Break fees are permitted in Hong Kong public M&As, subject to the board of the target and the target’s financial adviser confirming to the regulatory authority which supervises public M&A in Hong Kong, the Securities and Futures Commission (SFC), in writing that each of them believes that the break fee is in the best interests of shareholders. A break fee must be de minimis – normally no more than 1% of the offer value. The arrangement must be fully disclosed in the offer announcement and the offer document sent to all target shareholders.
Break fees are not common in Hong Kong private M&As. According to our Asia M&A deal points study 2020, a break fee appeared in only 12% of deals. The value of the break fee ranged from less than 0.01% to 6.64% as a percentage of deal value, demonstrating that the value is mostly down to commercial negotiation.
Hong Kong
Answer ... M&A transactions in Hong Kong are typically financed by debt or equity, or a combination of both. The decision depends on various factors, including:
- the availability of cash;
- the terms of any available debt package;
- potential tax issues; and
- the buyer’s own preferences.
For early stage investments, where the transaction is backed by a financial investor such as a private equity fund, the investment may take the form of convertible instruments or convertible preference shares, which give the investor some downside protection in the form of a liquidation preference and priority in the payment of dividends in the short to medium term, but also the ability to convert into ordinary shares to maximise upside potential in the medium to longer term, assuming that the target prospers.
Hong Kong
Answer ... In private M&A transactions, the buyer and seller will each engage Hong Kong legal counsel to coordinate the transaction. If the transaction involves matters governed by the laws of other jurisdictions, local counsel will be engaged. Other key advisers include accountants and tax advisers. Financial advisers may also be engaged in the context of particularly large or complex transactions, or where their transaction management skills may be beneficial. The buyer may also engage relevant industry experts during the course of its due diligence process. Additionally, an insurance broker should be engaged if the use of warranty and indemnity insurance is being considered. For management buy-out transactions, the management team will engage their own legal counsel to help protect their interests and negotiate their employment and incentive package going forward.
In public M&A transactions, the offeror must engage a financial adviser – in particular, to provide confirmation to the SFC that the offeror has sufficient resources available to implement the proposed offer in full. Occasionally the target will engage its own financial adviser too, although this is not mandatory. Pursuant to the Takeovers Code, an independent committee of directors of the target company must be established and an independent financial adviser appointed to advise the committee, among other things, on the fairness and reasonableness of the offer. As in private M&A transactions, legal advisers will be engaged; and PR consultants, accountants and tax advisers may be retained.
Hong Kong
Answer ... Financial assistance issues will arise if the target is a Hong Kong incorporated company and it, or its subsidiary, pays any adviser costs that should have properly been paid by the seller or the buyer.
This is because there is a general prohibition on a Hong Kong incorporated company, or any of its subsidiaries, giving assistance – whether directly or indirectly – which is financial and is either:
- for the purpose of acquiring shares in the target; or
- where the shares have been acquired and a resulting liability has been incurred for the purpose of acquiring those shares, for the purpose of reducing or discharging the liability so incurred.
Financial assistance is not comprehensively defined in the Companies Ordinance (Cap 622), but it can take a variety of forms, such as a gift, guarantee, waiver or loan.
Although there are exceptions from the general prohibition, specialist advice should always be sought before relying on any of them, because breach of the general prohibition could otherwise result in the target, and every responsible person of the target, committing a criminal offence.
If the exceptions cannot be, or are not, relied upon, then the target could follow one of three alternate routes to authorise the financial assistance (the ‘whitewash’ procedures). These are providing:
- assistance not exceeding 5% of the paid-up share capital and reserves of the target;
- assistance with unanimous shareholder approval; or
- assistance approved by ordinary resolution.
In each case, before the assistance is given, the directors must resolve, among other things, that:
- the assistance is in the best interests of the target; and
- the terms and conditions under which the assistance is to be given are fair and reasonable to the target.
The directors will also need to issue a solvency statement. In each case, the parties must strictly adhere to the procedures of the relevant route.