August 30, 2022

Hong Kong Privatisation: Headcount Test for Cayman Scheme To Be Abolished on 31 August 2022


The Companies (Amendment) Act 2021 of the Cayman Islands (Cayman Amendment), which abolishes the 'headcount test' for members' scheme of arrangement, will come into force on 31 August 2022. The long controversy and criticism surrounding this Cayman requirement finally comes to an end.

Members' scheme of arrangement (scheme) is commonly used to achieve privatisation of a company listed on the Hong Kong Stock Exchange (HKEX). Before the Cayman Amendment, a scheme for a HKEX-listed Cayman company must be approved by a majority in number (the "headcount test"), representing at least 75 percent in value, of the members who are present and voting either in person or by proxy at the meeting. This has long been considered a 'hurdle' for privatisations of HKEX-listed Cayman companies and a number of high-profile privatisations were thwarted due to failure to satisfy this 'headcount test'.

In 2014, a Cayman scheme was proposed to privatise New World China Land (NWCL). Although 99.84 percent of the shares present by value were voted in favour of the scheme, the deal failed as these votes were cast by shareholders representing only 34.05 percent of the shareholders present and voting in the meeting - less than the requirement under 'headcount test'. The result caught much attention and criticism in that 0.16 percent of the shares by value blocked the wishes of the majority. To get around the arcane 'headcount test' hurdle, a voluntary general offer to acquire all issued shares of NWCL was made in 2016 and NWCL was eventually privatised.

Given more than half of the HKEX-listed companies are incorporated in the Cayman Islands, the Cayman Amendment is a welcome move, eliminating the uncertainty or difficulty in counting members in the 'headcount' test as evident in the NWCL 2014 privatisation when most of the listed shares were then held through HKSCC Nominees Limited as custodian. This also brings in line with the requirement for Hong Kong-incorporated companies – the headcount test was completely abolished with the enactment of Hong Kong Companies Ordinance (Cap 622) effective in 2014. In other words, bearing also in mind the requirements under the Hong Kong Takeovers Code, a scheme for a Cayman or Hong Kong-incorporated listed company must be approved by a majority of 75 percent by value and must not be opposed by more than 10 percent by value of “independent” shareholder. For the Latest Legal Development in Hong Kong Privatisation Scheme, please see our earlier Legal Update here.

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