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Reverse takeovers in Hong Kong
Charltons has deep experience of “reverse takeovers” under the Hong Kong Listing Rules. We can advise and assist clients on structuring transactions and consult the Hong Kong Stock Exchange where appropriate for guidance as to whether a particular transaction will be treated as a reverse takeover or subject to any enhanced disclosure standard or other conditions.
Reverse takeovers transactions in Hong Kong invariably give rise to complicated legal and regulatory issues, often involving a new listing application, a very substantial acquisition and connected transactions under the Hong Kong Listing Rules, as well as whitewash waiver applications to the SFC under the Takeovers Code. Our multidisciplinary lawyers have wide experience across M&A, IPOs, capital markets, corporate finance and compliance, as well as in dealing with the SFC, the Hong Kong Stock Exchange and other regulatory and governmental bodies in Hong Kong. Julia Charlton, was a member of the Listing Committee of the Hong Kong Stock Exchange from 2012 – 2018 serving the maximum permitted continuous term of six years. Julia Charlton was also appointed to SFC’s Takeovers Panel and Takeovers Appeals Panel in October 2005 and continues to serve on these panels. This experience gives us crucial insights into the complexities of reverse takeovers under the Hong Kong Listing Rules, as well as an understanding of how regulators in Hong Kong operate. We provide an insightful and highly personalised service to clients, delivering legal advice on complex issues in plain language.
Where the Hong Kong Stock Exchange treats a listed issuer proposing a reverse takeover as if it were a new listing applicant, Charltons can also draw on its long experience of bringing companies to the Hong Kong market and guiding applicants the complex qualifications for listing on the Main Board and GEM, in order to provide high impact advice to clients.
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What is a reverse takeover?
Hong Kong reverse takeovers are broadly defined as an acquisition (or series of acquisitions) of assets by a listed issuer which in the opinion of The Stock Exchange of Hong Kong Limited (“HKEx”), attempts to achieve a listing of the acquired assets while circumventing the requirements of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (“Hong Kong Listing Rules”) for a new listing applicant. Often Hong Kong reverse takeovers involve a change of control of the listed issuer (and therefore the application of provisions of the Hong Kong Code on Takeovers and Mergers) but this is not a prerequisite. If a proposed transaction is considered by the HKEx to constitute a reverse takeover, then the HKEx would treat the listed issuer proposing the transaction as a new listing applicant and require, inter alia, that:
- the acquired assets must be suitable for listing (under Main Board Listing Rule 8.04 or GEM Listing Rule 11.06) and able to meet the financial tests and track record requirements of Main Board Listing Rule 8.05 (or 8.05A or 8.05B) or GEM Listing Rule 11.12A or 11.14;
- the enlarged group must meet all the listing requirements of Main Board Chapter 8 other than Rule 8.05 or GEM Chapter 11 other than Rule 11.12A;
- an announcement pre-vetted by HKEx must be published as soon as possible after the reverse takeover’s terms are finalised;
- the reverse takeover must be approved by the issuer’s independent shareholders in general meeting;
- the listed issuer must issue a listing document containing virtually all the information required for a new listing applicant and the information required for a VSA. It must send the listing document to its shareholders with a notice convening a shareholders’ general meeting to approve the reverse takeover;
- an initial listing fee is payable; and
- the listed issuer must appoint a sponsor to conduct due diligence.
To determine if a transaction(s) constitutes a reverse takeover, the HKEx will first apply the bright line tests. Transactions within the bright line tests will be considered a reverse takeover and be treated by the HKEx as a new listing. A transaction that falls outside of the bright line tests may still constitute a reverse takeover under the principle-based test. Under the principled-based test, the HKEx will consider a number of factors in determining whether a proposed transaction constitutes a reverse takeover, including, inter alia:
- the size of the acquisition(s) relative to the size of the issuer
- the quality of the acquired business – i.e. whether it meets the eligibility and suitability requirements for a new listing
- the nature and scale of the issuer’s business prior to the acquisition – e.g. whether it was merely a listed shell
- any fundamental alteration to the issuer’s principal business
Where a listed issuer can demonstrate that it is not seeking to list assets in circumvention of the requirements for new listings, the HKEx may regard the acquisition(s) as an extreme transaction. To qualify as an extreme transaction, the issuer must have been under the control of the same person or group of persons for at least 3 years and the acquisition(s) must not involve a change in control of the issuer or the issuer must have annual revenue or total assets of HK$1 billion. If the acquisition(s) constitute an extreme transaction, the listed issuer will be required to comply inter alia with the requirements for very substantial transactions in Chapter 14 of the Hong Listing Rules (Chapter 19 of the GEM Listing Rules) and appoint a financial adviser to perform due diligence on the assets subject to the acquisition(s).
For a detailed discussion on reverse takeovers, please see Charltons’ note on “The 10 most important things to know about Reverse Takeovers (RTOs) of Hong Kong Listed Companies.”