Hong Kong is a common law jurisdiciton and the procedures and documents for company acquisition in Hong Kong generally following the typical practice in common law jurisdiction which is different from those in Mainland China. This article introduces procedures and documents for the acquisition of Hong Kong companies limited by shares.
1. Preparation stage
After the two parties have determined that they have the intention to purchase and sell, the two parties can first sign the “Confidentiality Agreement”, “Exclusive Negotiation Agreement”, and the seller’s undertaking to provide due diligence documents and information.
By the confidentiality agreement, mainly the seller (target company) needs to ensure that the data and information about the target company provided to the buyer for this transaction will not be disseminated. Only by signing a non-disclosure agreement, the seller (target company) can safely provide the buyer with the data and information needed for due diligence.
By the exclusive negotiation agreement, the buyer must ensure that while the seller is negotiating the acquisition with the buyer, it will not negotiate with other potential buyers on the same subject at the same time. This document is not necessary for all cases, and the parties may choose to sign it according to their need.
The reason for the seller’s undertaking to provide due diligence documents and information is that the buyer need know the true situation of the target company he wants to buy, so due diligence is required. Accordingly, the seller must promise to provide due diligence documents and information.
2. Due diligence stage
Due diligence in aquisition generally includes legal due diligence and financial due diligence.
Legal due diligence is conducted by a law firm. In a nutshell, legal due diligence includes: (1) Check whether the seller’s shares in the target company are true and whether there are any encumbrance (such as mortgages) or defects; (2) Discover the potential debt risks of the target company (and accordingly request The seller makes a guarantee or indemnity promise in the share purchase and sale contract); (3) Check the legal status of the assets and property of the target company; (4) Ensure the target company’s major contracts (such as employment contracts with management, purchase contract with major suppliers) Contract, etc.) whether there are major problems; etc.
Financial due diligence is usually conducted by accounting firms. The main purpose is to check the accounting and accounts of the target company to verify whether the purchase price initially intended by the buyer and the seller matches the value of the actual assets of the target company.
There are other due diligence if the target company is involved in a special industry or asset, such as price evaluation of important assets, due diligence on patents, due diligence on mineral resources, etc.
3. Negotiation and drafting of major contract documents
After the due diligence is completed, the parties will need negotiate to agee on the terms of the main documents which usually include, (1) Sale and Purchase Agreement; (2) related documents, such as Seller’s Disclosure Letter, Seller’s Warranties, Limitation on Seller’s Liability, Deed of Indemnification, etc. These main transaction documents are explained as follows:
(1) the Sales and Purchase Agreement will contain the terms of the transaction as agreed by the seller and buyer which include consider precedent, price, completion time and procedures, and payment schedule, etc.;
(2) the Letter of Disclosure will contain information about the target company (such as potential risks and debts) that the seller want to clearly disclose to the buyer to avoid any potential liability for non-disclosure;
(3) the Seller’s Warantee will conain he seller’s wanrantee regarding the target company. Usually the seller will warantee the authenticity of the shares sold and the authenticity of the target company’s assets, debts, and the information disclosed to the buyer in the due diligence. The legal meaning is that if the buyer discovers that the seller’s warantee is untrue in the future, he can seek compensation from the seller. However, if the seller’s “Disclosure Letter” has disclosed the risks and debts, the buyer cannot seek compensation from the seller for those already disclosed;
(4) the limitation on Seller’s Liability is meant to restrict the seller’s liablity under the Warantee or under other terms. For example, the seller can request to insert a limitaion clause that for any material non-disclosure by the seller, the buyer’s right to request compensation shall be only made within three years after the completion date and afterwards the seller cannot be held accountabl. The seller may also request to insert a limit of amount of compensation;
(5) the Deed of Indemnification (Deed of Indemnification) is a deed functions as to make distributed between buyers and sellers.
In practice, the buyer’s law firm usually drafts the above transaction documents, and then sends them to the seller’s law firm for review and comments, and negotiates on the terms modification until both parties reach an agreement on the terms.
4. sign and deliver share transfer documents (Completion)
Delivery means that the seller delivers all the signed share transfer documents and company documents of the target company to the buyer. On the same time (seller’s delivery), the buyer deliver the check or cashier order for paying the seller the purchase price according to the contract (buyer’s delivery) .
The signing of the purchase and sale contract and the signing and delivery of the share transfer documents and company documents can be carried out at the same meeting but subsequently. Alternatively, the purchase and sale contract can be signed first, and the share transfer documents and other transaction documents be signed at another agreed time. Generally speaking, if there are some conditions which need to be met before completion, eg. if government approval is required, they two process then must be carried out separately.
While signing of sales and purchase agreement and completion take place separately, it is usual practice that the agreement will contain a seller’s undertaking that during this period of gap between the seller shall not do any thing to deminish the value of the target company except for its ordinary business operation, otherwise the buyer has the right to terminate the sale and purchase contract.
5. Documents to be delivered at Completion
The documents to be delivered at completion usually include:
(1) Bought and Sold Note and Instrument of Transfer, which are the main documents used by the seller to transfer the shares of the target company to the buyer;
(2) board resolution of the target company agreeing to the share transfer and agreeing to register the buyer as a new shareholder.
(3) The solicitor’s check or cashier order which the buyer delivered to the seller to pay the purchase price.
6. Procedures after completion
After the delivery of the share transfer documents, the buyer needs to send the share transfer document to the Inland Revenue for stamp duty (0.1% for each buyer and seller). Also, the target company will register the buyer in the register of shareholders and issues a share certificate to the new shareholders.
This article is only for general information purpose and it does not intend to provide legal advice for any specific case. For matters related to the acquisition of Hong Kong companies, please do not hesiatte to consult our Hong Kong lawyer of Commercial Legal Practice.