Hong Kong

Overview of Reverse Takeovers (“RTOs”) With the prevalence of backdoor listings in recent years whereby investors acquire control of a listed issuer primarily for its listing status, the Hong Kong Stock Exchange (“HKEX”) has highlighted the associated risks of market manipulation, particularly when new businesses are commenced after a takeover but insufficient information is disclosed publicly, particularly in relations to its business sustainability. This may lead to increased risks for existing minority shareholders and undermine investors’ confidence in Hong Kong’s capital markets. Although the SFC’s Takeovers Code already provides detailed provisions requiring new controlling shareholders, as offerors, to make a mandatory general offer, issues arise post-acquisition when the listed issuer commences a new area of business or carry out a substantial acquisition on a new business area initiated by the new controlling shareholder. In these cases, HKEX may consider the transaction as RTO by the listed issuer, the consequence of which is that the listed issuer must re-issue a listing document containing disclosure information matching that required for a new listing application, as well as the requirement to appoint a sponsor to conduct due diligence. The procedure must be approved by the HKEX Listing Committee, and the RTO must be conditional on shareholders’ approval at a general meeting. This article explores the key rules and cases on RTO to assist investors as new controlling shareholders as well as listed issuer to understand the legal implications of changing listed companies’ principal businesses and launching new operations. What constitutes RTO? Bright Line Test Generally, HKEX views the following transactions as RTOs ("Bright Line Test"): Transactions that involve a change in control (i.e. 30%) of the listed issuer (except at the subsidiary level); and a very substantial acquisition (i.e., acquisition where the applicable percentage ratio of the size test is 100% or more) occurs at the time of, or within 36 months of the change in control of the listed issuer. Principle-Based Test In addition to the Bright Line Test, if HKEX considers that the transaction is one or a series of transactions intended to achieve the listing of acquired assets while circumventing the new listing requirements (“Principle-Based Test”), it will also be treated as RTO even if there has not been a change in control. In assessing the Principle-Based Test, HKEX will consider the following factors: Size of acquisition relative to the issuer: Whether after the issuer undertakes an acquisition of significant size, its existing principal business will become immaterial after the transaction; Acquisition resulting in a fundamental change in the issuer’s principal business: Whether the issuer acquires a target business that is completely different from its existing business and that target business is substantially larger than its existing business; Fundamental change refers to acquisitions that are not part of the issuer’s business strategies or is unrelated to the issuer’s existing business, (i.e. transactions that do not involve expansion or diversification of existing businesses, or acquisitions that are inconsistent with the issuers’ size and resources); Nature and scale of the issuer’s business before the acquisition: Whether the scale of the issuer’s existing business is small, and the issuer would in substance be changed to operating the new target business after acquisition; Quality of the acquisition targets: Whether the target business is itself suitable for listing, such as acquisitions of early exploration companies or businesses that contravene laws and regulations; Change in control or de facto control of the listed issuer: Whether there is a change in the controlling shareholder, single largest substantial shareholder who is able to exercise effective control, directors and/or senior management; and Events and transactions which together with the acquisition form a series of transactions and/or arrangements to circumvent the RTO Rules: Whether the transactions and arrangements form a part of the series by taking place in reasonable proximity to each other (normally within a 36-month period) or are otherwise related. Restrictions on Disposal The Listing Rules also impose restrictions on disposal or distribution in specie (or a series of disposals or distributions) that involves all or a material part of the issuer’s existing business at the time of, or within 36 months from the change in control. The restrictions on disposal are intended to supplement the Bright Line Test to prevent investors from re-sequencing RTO transaction by acquiring a new business before disposing its original business, thereby circumventing the Bright Line Test. Additionally, the Listing Rules impose prohibitions on large-scale issuances of securities for cash that involve or lead to a change in control or de facto control of the listed issuer, when the proceeds are used for acquisitions and/or to launch new businesses that are expected to be significantly larger than the issuer's existing principal businesses. II. Compliance Requirements of RTO Where a transaction is ruled as RTO, the listed issuer will be treated as if it were a new listing applicant. Rule 14.54(1) requires that: The acquisition target(s) must meet the suitability listing requirements (Rule 8.04) and the new listing track record requirements (Rule 8.05, 8.05A or 8.05B); and The enlarged group must meet all the new listing requirements under Chapter 8 of the Listing Rules (except Rule 8.05). Where HKEX considers that a series of transactions and/or arrangements constitute RTO or an extreme transaction, the entire series of acquisitions should, as a whole, meet the new listing requirements of Rule 8.05. The issuer is required to provide sufficient information to HKEX to demonstrate that the acquisition targets can meet Rule 8.05, including financial information of the targets based on accountant’s report or audited financial information. RTO must be made conditional on approval by shareholders in general meeting and any shareholder and his close associates who have a material interest in the transaction will be required to abstain from voting on the relevant resolution. III. Recent Listing Decisions on RTOs Discloseable Transaction amounting to RTO (Case 1 of HKEX-GL104-19) In sample case 1 of HKEX-GL104-19, HKEX deemed a discloseable transaction to be RTO. This is contrary to the common accepted view that RTO applies only to very substantial acquisition or at least a major transaction under the Listing Rules. Company A, a hotel business operator, proposed to acquire a majority stake in the target company that was newly formed to carry out a natural gas project. The target company has signed contracts but has yet to commence operations or record revenue. The acquisition was a disclosable transaction based on the size test. HKEX considered that the acquisition was an attempt to circumvent new listing requirements under the Principle-Based Test under Rule 14.06B: i. The target company’s projected profitability would be significantly larger than Company A’s existing business; ii. The target company’s natural gas business was different from, and unrelated to, Company A’s existing business; iii. The acquisition would lead to a fundamental change in Company A’s principal business given the target company’s significant size of business; and iv. The target company had not generated any revenue. 2) Target Company Meeting New Listing Requirements (Case 15 of HKEX-GL104-19) In sample case 15 of HKEX-GL104-19, Company A operates a property leasing and education equipment business, contributing over 95% of its revenue in recent years. Company A proposed to acquire a target company from Company X (who has been Company A’s controlling shareholder for over three years). The target company primarily engages in financial leasing and factoring services in the PRC, and it is 10 to 35 times the size of Company A’s existing business. While HKEX considered the proposed acquisition would have the effect of achieving a listing of the target company’s business, it agreed to classify the transaction as an extreme transaction, rather than a RTO, as: 3) i. The target company could meet the new listing requirements (Rule 8.05(1)) and the suitability for listing requirement; and ii. Company A met the eligibility criterion set out in Rule 14.06C(1)(a) as it had been under control of Company X for more than 36 months and the proposed acquisition would not result in a change in control of Company A. 3) No Fundamental Change to Principal Business – (Case 11 of HKEX-GL104-19) In sample case 11 of HKEX-GL104-19, Company A, a listed company, operated port terminals in the PRC and proposed a merger with the target company which also operated port terminals in the PRC. The target company is controlled by Company X and Company X is the controlling shareholder of Company A. About a year ago, Company Y acquired 51% equity interest in Company X which constituted a change in control of Company A. The proposed merger would constitute RTO under the Bright Line Test as it was a very substantial acquisition from Company X (being an associate of Company Y) within 36 months of Company Y gaining control of Company A through Company X. Ultimately, HKEX agreed that the proposed merger was not a backdoor listing of new business by the incoming controlling shareholder as: The proposed merger would not result in a fundamental change to Company A’s principal business, and was in line with Company A’s strategies to expand its port terminal business; and The proposed merger represented an internal restructuring of the port-related businesses held under Company X which controlled Company A and the target company before the proposed merger and would continue to do so after the merger. There was no injection of asset or business from Company Y. 4) Conspiracy to defraud over secret backdoor listing – (HKSAR v Chim Pui-chung & Chim Kim-lun & Wong Poe-lai [2024] HKDC 2085) In July 2013, Chim Pui Chung and his son Ricky Chim, who were respectively the substantial shareholder and chairman of Asia Resources Holdings Limited (“Asia Resources”), and businessman Ma Zhonghong agreed to a secret backdoor listing arrangement to sell Asia Resources to Ma. It was also agreed among the trio that Ma would pay Chim Pui Chung a sum of approximately HK$210 million to control 70% to 75% of the issued share capital of Asia Resources and Ricky Chim as the chairman of Asia Resources would use his powers to procure placing of HK$535.5 million convertible notes of Asia Resources to nominees of Ma, including Wong Poe Lai. In HKSAR v Chim Pui-chung & Chim Kim-lun & Wong Poe-lai [2024] HKDC 2085, Chim Pui-chung, Ricky Chim and Ma were jointly charged with two counts of conspiracy to defraud, contrary to common law and may be penalised under section 159C(6) of the Crimes Ordinance (Cap. 200). Ma and Wong were jointly charged with one count of dealing with property known or reasonably believed to represent proceeds of an indictable offence, contrary to section 25(1) of the Organized and Serious Crimes Ordinance (Cap. 455). The Court held that whilst shell acquisition transactions were common in the financial market and not inherently illegal, Ricky Chim had not disclosed the real purposes for issuing convertible bonds at two board meetings he chaired in late July and early August 2013, which eventually caused the board to pass the resolution without taking into account all relevant factors.  Further, Chim Pui Chung and Ricky Chim had also dishonestly concealed from HKEX the purpose of the capital-raising, causing HKEX to approve the publication of the relevant announcements and circulars, thereby depriving HKEX of its ability to properly perform its regulatory role. On 3 February 2025, Chim Pui Chung, Ricky Chim and Wong were sentenced to imprisonment for 34 months, 37 months and 24 months, respectively. In addition, each of Chim Pui Chung and Ricky Chim was also disqualified from being a company director for 3 years. Key Takeaways The current Listing Rules on RTO, together with enforcement actions taken by HKEX and the Securities and Futures Commission demonstrate that the Listing Rules are not intended to unduly restrict legitimate business expansion or diversification by listed issuers, provided such activities occur over a reasonable period and are accompanied by appropriate disclosure, as well as legal compliance. With the Hong Kong capital market now showing robust momentum, listed companies should exercise caution in transactions involving significant changes to shareholdings or principal businesses to avoid inadvertently triggering the RTO provisions and breaching the disposal restrictions. Early legal and regulatory advice are recommended to navigate these requirements successfully so as to balance growth initiatives with compliance obligations. For further guidance on navigating RTO and Listing Rules, contact Ince & Co to ensure compliance and strategic alignment with this evolving landscape. Feel free to contact Partner Kevin Woo for more details. email: [email protected]

Introduction In a recent decision, the Hong Kong Court examined the interplay between arbitration agreements and cross-border insolvency proceedings. This decision highlights the divergence between Hong Kong’s pro-arbitration stance, whereby winding-up proceeding will be stayed in favour of arbitration unless there is abuse (see Re Guy Kwok Hung Lam (2023) 26 HKCFAR 129) and the creditor-friendly approach in the UK and other common law jurisdictions, whereby the debtor is required to show the usual bona fide dispute on substantial grounds to compel arbitration (see Sian Participation Corp (In Liquidation) v Halimeda International Ltd [2024] UKPC 16). Facts Hyalroute Communication Group Limited (“Hyalroute”), a company incorporated in the Cayman Islands, applied to the Hong Kong Courts for an anti-suit injunction to restrain a creditor, Industrial and Commercial Bank of China (Asia) Limited (the “Bank”), from presenting any winding-up petition against it in the Cayman Islands. The dispute arose from a Term Facility Agreement (“TFA”), under which Hyalroute guaranteed a US$100 million loan to its subsidiaries. A 2021 military coup in Myanmar disrupted one subsidiary’s operations, which hindered the subsidiaries’ repayments under the TFA.  To mitigate risks, the Bank secured a MIGA Insurance, which covered war and currency restrictions, with premiums paid by Hyalroute and its subsidiaries.  Under the TFA, Hyalroute may make a Covered Risk Application to suspend its guarantee obligations.  Hyalroute claimed that it had made such application in February 2021 and its liabilities were suspended as a result.  Despite this, the Bank served a statutory demand pursuant to the Cayman law.  Hyalroute argued that the dispute fell within the TFA’s arbitration clause, which mandates that “[a]ny dispute, controversy or claim arising in any way out of or in connection with [the TFA] … shall be referred to and finally resolved by binding arbitration …” at the HKIAC. Analysis It is well-established that foreign proceedings in breach of a valid and binding arbitration agreement or exclusive jurisdiction clause will be ordinarily restrained unless strong reasons to the contrary are shown by the defendant (Giorgio Armani SpA v Elan Clothes Co Ltd [2019] 2 HKLRD 313).  Contractual anti-suit injunctions, as sought in this case, focus on enforcing the parties’ agreement to arbitrate. In non-contractual anti-suit injunctions, where no contractual breach is involved, the focus would then be shifted to whether the foreign proceedings are vexatious, oppressive, or inconsistent with the principles of forum non conveniens. The arbitration clause in the TFA imposes (1) a positive obligation on the parties to have disputes within the scope of the clause (i.e. dispute, controversy or claim arising in any way out of or in connection with the TFA) finally resolved by arbitration; and (2) a negative obligation on the parties to preclude them from having disputes finally resolved in a non-contractual forum. The critical issue is, whether the Cayman winding-up proceedings would have the effect of finally resolving the dispute on Hyalroute’s indebtedness, thereby breaching the arbitration clause.  The concept of “final resolution” of a dispute means that the process is capable of giving rise to an estoppel in relation to the precise issues decided. The Bank contended that in considering this issue, the Court should consider Cayman law; and under Cayman law, winding-up proceedings do not resolve the substantive debt dispute.  Therefore, the Bank’s intended presentation of the Cayman winding-up petition would not breach the TFA. In contrast, Hyalroute argued that as Hong Kong law is the governing law under the TFA, Hong Kong law should take precedence over Cayman law regardless of the position under Cayman law; and under Hong Kong law (Re Guy Lam), winding-up proceedings determine parties’ rights and obligations, which could have the effect of “finally resolving”. Therefore, the Bank’s intended winding-up proceedings in the Cayman Islands would be in breach of the TFA. The Hong Kong Court decided that the Bank’s contention is correct and accord with common and commercial sense.  Lacking expert evidence on Cayman law, the Hong Kong Court directly considered the relevant materials on Cayman law and applied its own knowledge and reasoning of the common law to analyse the position.  The Hong Kong Court found that under Cayman law, the Cayman Court in winding-up proceedings only determine the threshold question of whether a debt is bona fide disputed on substantial grounds, but not the substantive dispute itself. Thus, such proceedings do not “finally resolve” the dispute within the meaning of the arbitration clause. The Bank’s intended presentation of a Cayman winding-up petition would not amount to any breach of the TFA. Additionally, the defence relied by Hyalroute about the suspension of its guarantee obligations under the TFA were found to be frivolous and abusive. There was no finding that any formal Covered Risk Application was made, and there were only informal discussions.  The MIGA insurance policy was also terminated in 2022 due to unpaid premiums, hence there could not be any suspension of guarantee obligations. As such, the Hong Kong Court dismissed Hyalroute’s application for an anti-suit injunction, as there was no breach of the arbitration agreement, and Hyalroute failed to demonstrate any strong reasons for granting the injunction. Key Takeaways The Hyalroute decision offers critical insights for navigating arbitration and insolvency in cross-border contexts: Foreign Law Considerations: The ruling clarifies that Hong Kong courts will not automatically apply Re Guy Lam’s pro-arbitration stance to foreign winding-up proceedings. When assessing whether foreign proceedings breach an arbitration agreement, Hong Kong courts may consider the foreign jurisdiction’s law to determine the proceedings’ effect, even if the arbitration agreement is governed by Hong Kong law. Drafting arbitration clauses: Parties are reminded to draft arbitration clauses with precision.  In this case, the phrase “finally resolved” was pivotal, limiting the clause’s application to proceedings that determine disputes with res judicata or estoppel. Explicit references to “insolvency proceedings” should be included if so intended, especially in cross-border contexts involving offshore jurisdictions. Ambiguities may limit enforceability of such clause against winding-up petitions. If you have any inquiries, please feel free to contact us for more information Managing Partner: Ian Lo Email: [email protected] Partner: Anderson Siu Email: [email protected]

In Re Success Lane Development Limited [2025] HKCFI 1121, the Companies Court considered whether a company could resist a winding-up petition presented based on outstanding interlocutory costs orders (payable forthwith or within 14 days upon summary assessment) by relying on a cross-claim for damages in ongoing legal proceedings. Background The dispute between the Petitioner and the debtor Company  arose over a "Long Stay Room Contract" under which the Company rented a hotel room for storage purposes.  In the District Court, the Petitioner alleged that the Company had damaged various items stored in the hotel room, and claimed against the Petitioner for damages in the sum of at least HK$3,000,000. The Petitioner had obtained various costs orders against the Company as a result of interlocutory applications in the District Court proceedings.  The costs orders are all payable forthwith in the total sum of HK$697,534.66 plus judgment interest (the “Costs Orders”). Based on the unpaid Costs Orders, the Petitioner served a Statutory Demand on the Company.  Shortly after the expiry of the Statutory Demand, the Company applied to set aside and stay the Costs Orders by commencing a separate set of District Court proceedings.  Yet, the said applications were also dismissed. As of the date of the Petition hearing, the Costs Order were either orders not appealed against, or orders against which leave to appeal had been refused by the Court of Appeal.  The main issue at the hearing was whether the Company could resist the Petition (based on Costs Orders payable forthwith) with a cross-claim (for damages in the sum of at least HK$3,000,000 in the ongoing District Court proceedings, the “Cross-claim”). The Court’s Reasons The Companies Court held that the Company could not resist the Petition with the Cross-claim for the following reasons:- (1) The underlying policy of making costs orders payable forthwith is to deter parties from commencing unmeritorious interlocutory applications. To uphold this policy, the Court should regard such costs orders as free-standing, and though such costs orders are not equivalent of cash, it should be as readily enforceable almost as readily cash-able as cheques.  In this case, the Company should not be allowed to use the Cross-claim to resist the Petition. (2) There could be no injustice done to the Company if it is to be wound up, because if the Company has a valid claim against the Petitioner, the Company in liquidation could still pursue it. (3) On the contrary, it would be unjust if the Company could resist the Petition based on the Corss-clam, as (a) it would in effect confer a right on the Company to retain the Petitioner’s money as a security for its Cross-claim, and (b) the Costs Orders, being free-standing and supposed to be readily enforceable, have nothing to do with the Cross-claim, in the sense that even if the Company eventually succeeds in its claim in the District Court, the Company would still have to pay the Costs Orders. Having said that, the Companies Court also indicated that its decision was made based on the present facts, and that there may be different considerations if, e.g. the District Court main proceedings are not ongoing but finally concluded, or the receiving party may be to blame for not enforcing any immediately payable costs orders earlier. In view of this case, company debtors should note that the existence of a cross-claim against the petitioner generally would not constitute a valid ground to oppose a winding-up petition presented based on costs orders payable forthwith.  As such, it is advisable for company debtors to settle any costs orders payable forthwith as soon as possible to avoid winding-up petitions being presented against them.  In case of any doubt, legal advice should be sought. If you have any inquiries, please feel free to contact us for more information Managing Partner: Ian Lo Email: [email protected] Partner: Anderson Siu Email: [email protected]

On 27 June 2025, the Hong Kong government unveiled two transformative consultation papers proposing comprehensive licensing regimes for virtual asset (VA) dealers and custodians, marking the next phase in the city’s evolution toward becoming a globally competitive yet responsibly regulated digital asset hub. These proposals signal Hong Kong’s commitment to the principle of “same activity, same risks, same regulation”, ensuring that VA businesses face the same rigorous oversight as their traditional financial counterparts. The strategic rationale To appreciate why Hong Kong is tightening its VA regulatory framework, it is essential to understand the broader context. VAs operate in a unique space where traditional financial safeguards can appear ambiguous. Previous regulatory initiatives, including the 2022 policy statement on VA development and the 2023 licensing regime for VA trading platforms, laid the groundwork, but gaps remained. The new proposals fill those gaps by addressing two critical functions: the buying and selling of VAs and the safekeeping of the VAs once purchased. For people entering the VA space, this regulatory tightening offers reassurance. It means that when they deposit cryptocurrency with a licensed custodian or trade tokens through a regulated dealer, there are now measurable standards, capital requirements and compliance obligations are in place to protect their interests. The VA dealing regime The proposed VA dealing regime targets a broad spectrum of market participants, including cryptocurrency exchanges, over-the-counter brokers, block traders and digital asset advisers. Importantly, it captures all dealing services, whether conducted through brick-and-mortar outlets, digital-only platforms or hybrid models. The one exception is peer-to-peer trading between private individuals, which remains unregulated. Eligibility and governance requirements. The regulatory framework demands substantial corporate discipline. Applicants must be locally incorporated or registered in Hong Kong, ensuring accountability within the jurisdiction. The “fit-and-proper” test applies not just to the corporation itself, but to substantial shareholders and individuals performing VA dealing functions. This multi-layered governance approach recognises that regulatory compliance fails when responsibility diffuses among parties who lack proper incentives or qualifications. A novel requirement mandates at least two responsible officers for anti-money laundering and counter-terrorist financing (AML/CFT) compliance. This dual-officer model prevents a single individual from cutting corners or succumbing to conflicting pressures. Capital and compliance obligations. The regime imposes financial thresholds: HKD5 million in minimum paid-up capital, plus liquid capital requirements ranging up to HKD3 million depending on the business model and scale, along with excess liquid capital equivalent to at least 12 months of actual operating expenses. These figures create a financial cushion to protect clients in case of failures. AML/CFT obligations align with Hong Kong’s existing Anti-Money Laundering and Counter-Terrorist Financing Ordinance. Customer due diligence and meticulous record-keeping become non-negotiable. For large dealers, regulatory knowledge qualifications are mandatory, meaning compliance personnel must demonstrate competency through formal assessment. Token admission and investor safeguards. Not all tokens qualify for trading. The regime establishes token admission criteria mirroring the requirements for VA trading platforms, restricting retail investors to high-liquidity tokens and HKMA-licensed stablecoins. This gatekeeping function protects investors from highly speculative or illiquid assets. Enhanced due diligence on client suitability, risk assessment and asset segregation further shields the public from predatory practices. The VA custodian regime If dealers represent the marketplace, custodians represent the vault. Defining the custodian landscape. The regime targets entities safeguarding VAs or managing private keys and authentication credentials on clients’ behalf. This expansive definition captures traditional banks diversifying into digital assets, fund managers accepting crypto allocations, and specialist VA custodians. Notably, certain entities are exempt from licensing: technical service providers offering generic security solutions, bank vaults storing encrypted key backups and HKMA-licensed stablecoin issuers maintaining only their own assets. Operational and technical requirements. Private key storage must employ advanced cryptographic techniques, multi-party computation, key sharding, or equivalent measures to prevent single points of failure. Client assets must be segregated, preventing custodians from co-mingling or misusing customer holdings. Cybersecurity measures are raised to institutional standards, with explicit requirements to prevent breaches. Financial thresholds and accountability. Capital requirements for custodians exceed those for dealers: HKD10 million minimum capital, plus up to HKD3 million in required liquid capital. This distinction reflects custodians’ heightened responsibility as they hold people’s wealth. Non-bank custodians must publish audited accounts, ensuring transparency and enabling regulators to continuously monitor financial health. Enforcement and the cost of non-compliance Both regimes carry serious sanctions. Operating without a licence risks a fine of up to HKD5 million and seven years’ imprisonment. Fraudulent or deceptive conduct in VA transactions escalates to a HKD10 million fine and ten years’ imprisonment. These penalties deliberately match or exceed sanctions for traditional financial fraud, establishing a clear principle of enforcement equivalence for VA offences. Looking forward The consultation period represents a critical opportunity for industry participants, technology providers, and compliance professionals to engage constructively with regulators, raising practical concerns while demonstrating commitment to responsible growth. Well-calibrated feedback can refine provisions that may inadvertently impede innovation or create unintended compliance burdens. For market participants, preparation is vital. Organisations currently operating without licences must chart a path toward compliance. Those seeking new VA business lines must integrate licensing requirements into their planning. Legal advisers should familiarise themselves with the detailed criteria, as licensing applications will demand meticulous documentation and governance structuring. These proposed regimes, if thoughtfully refined through consultation, position Hong Kong as a jurisdiction where investors feel secure, and innovators can flourish responsibly.   Sam Wu is a Partner and Beverly Fu is an Associate at YYC Legal LLP [email protected] [email protected]