Mergers and Acquisitions

How does the Exchange look at “Change in Control”?

Listing Decision 75-2

Listing Decision 75-2 involved a change in direct control between two subsidiaries of the municipal government. The simplified group structures before and after the Acquisition are:

Before the Acquisition

  1. Company A was a Main Board listed company and proposed to acquire from the Vendor its interest in the Target (the "Acquisition"). Company A and the Target had the same line of business.
  2. Since Company A would settle part of the consideration by issuing new shares to the Vendor, the Acquisition would result in a change in its shareholding structure:
    • The Holding Company's shareholding in Company A would be diluted to about 20% of the enlarged issued share capital:
    • The Vendor would hold more than 50% of Company A's enlarged issued share capital. Under the Takeovers Code, the Vendor was granted a waiver from its obligation to make a general offer for Company A as a result of the Acquisition.
    • The Acquisition was a connected transaction for Company A as the Exchange had deemed the Vendor and its associates to be Company A's connected persons since the listing of Company A. Based on the percentage ratio calculation, the Acquisition was also a VSA.
    • Company A sought the Exchange's confirmation that the Acquisition was not an RTO under the Listing Rules. It submitted that although the Acquisition would result in the Vendor acquiring a controlling interest in Company A, there would not be a change in control because:
      1. Both Entity X and Entity Y were subordinate departments of the Municipal Government and under its supervision. Through these entities, the Municipal Government had exercised control over each of the Holding Company, Company A, the Vendor and the Target, including through the exercise of voting rights.
      2. The Municipal Government had, and would continue to have, ultimate control over Company A before and after the Acquisition.

The Decision

The Acquisition was not regarded as a reverse takeover of Company A since the Municipal Government would remain Company A's controlling shareholder following the acquisition, and there would not therefore be a change in its ultimate control as a result of the Acquisition.

The Exchange also took into account the assessment of "control" under the Takeovers Code. In this case, the Takeovers Executive had granted a waiver to the Vendor from its obligation to make a general offer under the Takeovers Code. This was different from the situation where the control of an issuer changed and a whitewash waiver was granted subject to independent shareholders' approval under the Takeovers Code.

The decision has implications for the possible use of reverse takeovers to restructure organizations, as so long as the ultimate control of the organization remains with the same entity, and that entity takes an active controlling role, then the subsidiaries should be free to change their lower level control structure.

For further information on RTO in Hong Kong please see our more detailed note or our summary note "The Top 10 most important things about Reverse Takeovers".