Please give us an overview of the current legal market in Hong Kong and how any recent developments have impacted your practice?
The recent changes to the Hong Kong Listing Rules allow biotech issuers who do not meet the financial eligibility tests to be listed, and permit the listing of companies with “weighted voting right” structures, whereas previously mainland Chinese businesses such as Alibaba may have chosen to list in the United States given the dual listing availability there. This change is likely to make Hong Kong a more attractive listing venue to such issuers.
As a result of this recent change, we expect to see an increase in technology companies and Chinese corporate groups with complex governance structures utilising Cayman Islands and other offshore listing vehicles in order to effect a listing on the Stock Exchange of Hong Kong.
What significant trends exist in the M&A market presently? Are you seeing these just domestically or internationally as well?
M&A activity in Hong Kong is directly linked to outbound M&A activity from mainland China. In early 2017, the markets globally witnessed a general decline in volume and deal flow and China’s outbound investment fell due to tighter capital outflow. However, we expect that deals involving Chinese buyers in 2018 will increase compared to 2017 and one of the key drivers of this uptick will undoubtedly be the ‘One Belt, One Road’ initiative of the Chinese government.
The search for advanced technologies and established brands would mean that developed markets in the United States and Europe, together with some parts of Asia, are the most popular destinations for Chinese buyers. However, Hong Kong continues to retain its appeal in connection with inbound and outbound M&A activities. One of the significant trends we are seeing in M&A activities involves mainland Chinese companies buying listed companies in Hong Kong, and subsequently using that listed status as a platform for further fundraising.
The top sectors for Hong Kong M&A targets in 2017 and the first half of 2018 included:
- Real estate and construction/building;
- Insurance; and
- Financial services.
What are the three biggest challenges to practising M&A in Hong Kong at the moment?
It has become more difficult for Chinese and other regional businesses which are active in the technological advancement and other deemed-sensitive industries to acquire assets in the United States that are subject to review and approval by the Committee on Foreign Investment in the United States (CFIUS). Similar concerns arise in the European Union and Japan, among other major economies.
In addition, there has been continuing uncertainty regarding the application by the relevant authorities of capital controls in China and other regulatory procedures to outbound transactions.
Last but not least, the size and scope of the Chinese market together with rapid technological advancement would require offshore law practitioners resident in Asia to account for their clients’ language preferences, location and preferred communication methods with advisers (including using social media channels if and where appropriate) in designing legal services offerings relevant to an increasingly diverse Chinese client base that uses Hong Kong, and offshore vehicles in particular, to access the global M&A markets.
What advice would you give to the next generation of M&A lawyers?
Drafting and negotiating documents are integral parts of the M&A practice. Junior lawyers and trainees intending to practise as M&A lawyers should develop their written and negotiation skills, in particular the skills needed to express their points persuasively. In addition to developing technical legal expertise, an effective M&A practitioner must also have an in-depth understanding of the business world, and the sectors and jurisdictions in which key clients operate, in order to provide strategic legal advice. As such, keeping up to date with financial, economic and business developments is crucial. Finally, in order to effectively deliver an M&A transaction from a legal perspective, project management skills – and in particular the ability to coordinate multiple advisers and often regulatory and other approval processes in a variety of jurisdictions – are key. All of these are required as much to practise as an offshore lawyer as compared to a locally qualified lawyer in Hong Kong.
What are your predictions for M&A in Hong Kong over the next five years?
With the recent changes to the Hong Kong Listing Rules, we expect to see a surge of mega-size, secondary and dual-class listings involving offshore vehicles. This would mean more pre-IPO investment activities, and those issuers which successfully raise large sums of funds are likely to seek large investment opportunities. M&A activities in Hong Kong should therefore remain strong over the next five years.