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Key Messages:

  • Privatisation is proposed by the controlling shareholder to buy out the shares held by minority shareholders. Upon successful privatisation, an application will be made to the Stock Exchange of Hong Kong Ltd for the shares to be withdrawn from listing.
  • As a minority shareholder, it is important for you to exercise your right to vote, because it can give you, together with a sufficient number of other shareholders, a say on the privatisation proposal.

In most cases, a privatisation is proposed by the controlling shareholder to buy out the shares held by minority shareholders. The offer might be for cash or for securities with or without a cash option. Upon successful privatisation, an application will be made to the Stock Exchange of Hong Kong Ltd (SEHK) for the shares to be withdrawn from listing.

Reasons for privatisation can be varied. For instance, inactive trading or trading at a significant discount to the net asset value per share; inability to meet public float requirements; or cost required to maintain listing status.

A listed company may be privatised by way of a "General Offer" or a "Scheme of Arrangement".

How to effect a privatisation via a General Offer?

A controlling shareholder may make a general offer to all other shareholders to buy their shares. If the target (usually known as the "offeree company") is incorporated in Hong Kong, once the controlling shareholder (including persons acting in concert with him) has obtained acceptances which in aggregate represent 90% in value of the shares for which the offer is made, he may opt to compulsorily acquire the remaining shares. If the target is incorporated overseas, the privatisation exercise will have to be conducted in compliance with the laws of the relevant jurisdiction.

Is there any difference if privatisation is by way of a Scheme of Arrangement?

The controlling shareholder requests the company to propose to its shareholders a scheme of arrangement to cancel all the shares held by the minority shareholders in accordance with the company law of the jurisdiction in which the company is incorporated. The scheme must be voted upon by shareholders. If the scheme is approved, it is binding on all shareholders and the shares held by minority shareholders will be cancelled, resulting in the controlling shareholder holding 100% voting rights of the company.

An announcement must be made of a proposed privatisation. Minority shareholders then receive a circular (normally within 21 days) explaining the effects of privatisation on them, the expected timetable, the recommendation of the independent board committee, advice from the independent financial advisor as well as financial information of the company. If a company is to be privatised by way of a scheme of arrangement, the circular must also be accompanied by notices of meeting to be held.

Then, the offeree company should comply with the voting requirements stipulated in the Code on Takeovers and Mergers (Takeovers Code) as well as the company law of the jurisdiction in which it is incorporated. Take a Hong Kong listed company as an example, in addition to satisfying any voting requirements imposed by law, the Takeovers Code requires the scheme to be approved by at least 75% of the voting rights attached to the disinterested shares (i.e., shares other than those held by the controlling shareholder and his concert parties) that are either cast in person or by proxy at a shareholders' meeting, and the number of votes cast against the resolution is not more than 10% of the voting rights attached to all disinterested shares.

After obtaining approval at the shareholders' meeting, the scheme is still subject to approval of the court of the country in which the company is incorporated. An application can be made to the SEHK for withdrawal of listing once such approval is obtained.

Can I object to a privatisation proposal after it has been approved?

If a privatisation proposal by way of a general offer has reached the stage of a compulsory acquisition, or if a privatisation proposal by way of a scheme of arrangement has been approved by both the shareholders and the court, you will have to accept the proposal as it is binding on all shareholders. Your shares will be automatically cancelled and you will receive consideration in accordance with the terms and conditions of the privatisation proposal.

As a minority shareholder, it is important for you to exercise your right to vote, because it can give you, together with a sufficient number of other shareholders, a say on the privatisation proposal.