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Legal Update

The Proposed Acquisition of a Company by a Listed Issuer from its Controlling Shareholder - a Reverse Takeover?

13 April 2012
Mayer Brown JSM Legal Update

Quick Read

On 30 March 2012, Hong Kong Exchanges and Clearing Limited ("HKEx") issued its listing decision "HKEx-LD29-2012" to decide whether the proposed acquisition of a company ("Target Company") by a listed issuer ("Listco A") from its controlling shareholder ("Shareholder B") would amount to a reverse takeover under the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited ("Listing Rules").

Background

At the relevant time:

  • The Target Company was a wholly-owned subsidiary of Shareholder B and was engaging in property business.
  • Shareholder B was engaging in various business activities including certain property projects held through the Target Company.
  • The principal business of Listco A was also property business.
  • Around a year before the relevant time, Shareholder B acquired a controlling interest in Listco A. Listco A became a subsidiary of Shareholder B after then.

Proposed Transaction

It was proposed that Listco A would acquire the Target Company from Shareholder B and to settle the consideration, new shares would be issued by Listco A to Shareholder B ("Transaction").

The Transaction would amount to a very substantial acquisition for Listco A according to the Listing Rules. Since it was made within 24 months after a change in control of Listco A, it might also be classified as a reverse takeover under the Listing Rules.

However, Listco A submitted that the Transaction should not be classified as a reverse takeover due to the following reasons:

  • Listco A had been engaging in the property business for many years. It had substantive business operations and was not a shell company.
  • The Target Company and Listco A were engaging in the same line of business.
  • The purpose of the Transaction was to reorganize the group to consolidate Shareholder B's property business into Listco A and not to list the business of the Target Company.
  • The Target Company's business could meet the profit requirement for new listing applicants under Rule 8.05(1) of the Listing Rules.

Issue

Whether the Transaction would amount to a reverse takeover for Listco A under Rule 14.06(6) of the Listing Rules.

Rule 14.06(6)

Rule 14.06(6) of the Listing Rules defines a “reverse takeover” as:

"an acquisition or a series of acquisitions of assets by an issuer which, in the opinion of the Exchange, constitutes, or is part of a transaction or arrangement or series of transactions or arrangements which constitute, an attempt to achieve a listing of the assets to be acquired and a means to circumvent the requirements for new applicants set out in Chapter 8 of the Exchange Listing Rules. A “reverse takeover” normally refers to:

  1. an acquisition or a series of acquisitions (aggregated under rules 14.22 and 14.23) of assets constituting a very substantial acquisition where there is or which will result in a change in control (as defined in the Takeovers Code) of the listed issuer (other than at the level of its subsidiaries); or
     
  2. acquisition(s) of assets from a person or a group of persons or any of his/their associates pursuant to an agreement, arrangement or understanding entered into by the listed issuer within 24 months of such person or group of persons gaining control (as defined in the Takeovers Code) of the listed issuer (other than at the level of its subsidiaries), where such gaining of control had not been regarded as a reverse takeover, which individually or together constitute(s) a very substantial acquisition. … …”

Listing Decision

HKEx decided that the Transaction would amount to a reverse takeover for Listco A as:

  • it was a very substantial acquisition; and
  • the Target Company was to be acquired by Listco A from Shareholder B within 24 months after it gained control of Listco A.

Although Listco A submitted that the Transaction was only a group reorganization and its purpose was not to achieve a listing of the Target Company's business, the Target Company was of a very significant size to Listco A. HKEx was of the view that the Transaction, together with the change in control of Listco A, was a means to list the Target Company's property business.

You can download copies of the listing decision via the link below:

http://www.hkex.com.hk/eng/rulesreg/listrules/listdec/Documents/ld29-2012.pdf

Previously in July 2010, HKEx published three other listing decisions "HKEx-LD95-2", "HKEx-LD95-4" and "HKEx-LD95-5". In each case, it had decided that the proposed acquisition of the listed issuer would constitute a reverse takeover under the Rule 14.06(6) of the Listing Rules. You can download copies of the listing decisions via the links below:

HKEx-LD95-2:
http://www.hkex.com.hk/eng/rulesreg/listrules/listdec/Documents/ld95-2.pdf

HKEx-LD95-4:
http://www.hkex.com.hk/eng/rulesreg/listrules/listdec/Documents/ld95-4.pdf 

HKEx-LD95-5:
http://www.hkex.com.hk/eng/rulesreg/listrules/listdec/Documents/ld95-5.pdf 

For inquiries related to this Legal Update, please contact Jeckle Chiu, , or your usual contacts with our firm.


Learn more about our Hong Kong officeCorporate & Securities practice.


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