Introduction

In recent years, Hong Kong's capital markets have experienced a remarkable surge in take-private deals, driven by geopolitical tensions and a slowing Chinese economy that have reduced the appetite for fundraising in what was once Asia's leading financial hub. This trend signals a broader shift in corporate strategies as companies adapt to the turbulent market landscape.

Take-Private Transactions Statistics

Statistics reveal a striking pattern: the Hong Kong Stock Exchange recorded 16 take-private transactions in 2022, followed by 12 in 2023, and an impressive 13 in just the first few months of the current year. The legal community is bracing for continued demand for cross-jurisdictional regulatory advisory services, as listed firms endeavor to navigate these challenging waters while reorganizing their corporate frameworks.

Schemes of Arrangement

A notable feature of these take-private transactions is the frequent reliance on “schemes of arrangement.” This court-approved procedure enables companies to restructure their assets, capital, or liabilities with approval from shareholders, which proves crucial for companies hoping to solidify their market position.

Case Study: L'Occitane International

The case of L'Occitane International serves as a prime example of the intricacies involved. After being listed on the Hong Kong Stock Exchange for 14 years, the French cosmetics company made headlines by opting to go private, attributing its decision to soaring operational costs and fierce competition in the luxury goods sector. Initially drawn by the booming Chinese market, L’Occitane ultimately struggled as consumer demand shifted, leading to declining stock prices.

The Challenges of Privatization

Diving deeper into L’Occitane's privatization journey, it faced the daunting task of navigating complex regulations in both Hong Kong and Luxembourg, its country of incorporation. Successful navigation required cooperation from regulators in both jurisdictions and an innovative use of the company’s articles of association to facilitate the buyout of remaining shareholders.

Legal Hurdles

Lawyers warn that firms pursuing take-private deals must be prepared for an array of hurdles, including navigating regulatory landscapes between different jurisdictions, meeting high thresholds for shareholder support, and facing risks from dissenting shareholders. Moreover, companies must balance the long-term advantages of delisting against potential downsides, such as reduced visibility and access to capital markets.

The Headcount Test

Among the intricacies of the take-private process, the "headcount test" poses a significant challenge, especially for companies incorporated in Bermuda. In that jurisdiction, a members’ scheme of arrangement must receive approval from at least three-fourths of shareholders by nominal value voting at a court-convened meeting. This requirement stands in stark contrast to the simplified arrangements seen after Hong Kong and the Cayman Islands abolished similar tests in recent years.

Looking Ahead

Despite the regulatory minefield, Chong acknowledges that companies continue to pursue privatizations for various reasons, including disparities between share prices and intrinsic value, lack of liquidity, and an overall inactive trading environment.

Conclusion

Looking toward the future, Chong predicts that "take-private deals will remain prevalent over the next 12 to 18 months in Hong Kong, particularly if the market continues to grapple with volatility and uncertainty." With each transaction, one thing becomes clear: as firms adapt to a rapidly changing financial landscape, regulatory advisory services will be in high demand. Stay tuned, as the next wave of privatizations in Hong Kong could reshape the entire investment landscape!