Investments in private companies take two main forms: equity or debt.
We have considerable experience in advising companies on transactions which are neither mergers and acquisitions, startup fundraising or joint ventures. A typical example of a transaction looked at here is an individual or company considering the purchase of 5-30% equity stake in a Hong Kong company (1. Equity) or a Hong Kong company borrowing funds among its directors, members or third parties (2. Debt). We highlight the main features of these types of transactions and how we approach them for our clients.
1. EQUITY INVESTMENTS (SHARE PURCHASES)
The transaction stages should be the same as for mergers and acquisitions except for one fundamental difference that there is no change of control of the target company, for more information visit here. This influences our approach of the key stages of the transaction.
LOI OR IOI
Since the investor will not have the power to change the management of the company after its investment, it should ensure beforehand that it is satisfied with the current situation and management of the company and the results of the due diligences. If the investor means any change to actually happen after its investment, we provide legal input to ensure the investment terms (LOI – letter of intention – or IOI – Indication of interest letter) are clear on such changes.
Suitable due diligence must be performed in any event. As a bare minimum, we recommend checking the general tax and compliance situation of the company. It is also advisable to meet with the management and key staff on-site, at the company’s place of business, to have a first-hand view of the reality of the company.
The shares to be acquired may be purchased from the founders or other existing shareholders of the company or new shares may be issued. In an exit scenario, the price for the acquired shares is paid to the seller, that is, an existing shareholder. In case of share issue, the consideration for new shares is paid to the company. The difference is fundamental. If funds are meant to finance specific projects or growth of the company, we work closely with auditors and accountants to identify the company’s cash-flow needs and liabilities during the financial due diligence. Our experience shows that, if such needs are not already covered, chances are the investment will fully or partially be diverted to fill in urgent needs of the company.
For minority stakeholding, a seat on the board may not be an enviable position, except if the investor intends to fully assume the role and dedicate time and resources to perform its duties as director. An observer role or the participation to a supervisory/advisory committee – more or less formal – may be more suitable. We help our clients navigate provisions such as reporting, access to information, transfer of shares provisions and liquidity, bearing in mind the risk for the investor to lose its investment by investing in equity.
COMPLETION & POST-COMPLETION
Our track record of advising on share purchases in Hong Kong shows that both stages must be carefully planned. What’s at stake for the investor is to ensure the company will be able to proceed to the share transfer registration before the consideration is paid. The payment of the stamp duty to the Inland Revenue Department (IRD) shall be anticipated, as the company secretary will not proceed to the registration of the shares transfer until it receives a stamped instrument of transfer and bought and sold notes. We work with the parties to ensure documents required by the IRD are readily available, in particular audited financial statements and management accounts with a cutoff date of less than 3 months (for details, visit the government website:https://www.ird.gov.hk/eng/pdf/pn04a.pdf).
The same documents are not required to issue new shares but both parties must ensure that consideration is paid and the Form NSC1 is properly completed and filed with the Companies Registry.
The investment shall only be considered completed when the investor has received its share certificate.
We provide our clients with guidance throughout the completion and post-completion process and liaise with other professionals such as company secretary officers and accountants to ensure a smooth finalisation of the transaction.
2. CORPORATE LENDING
Corporate lending may take many forms. Convertible note agreements, which are currently popular with startups for funding (check Startups fundraising page), are versatile, but certainly not the only option. Our practice covers loans, credit facility agreements or facility letters and their collaterals.
Some jurisdictions have a regulatory framework restricting non-banking money loans to companies by their directors and members (subject to a minimum threshold). Hong Kong is not one of them but investors should be aware of the Money Lenders Ordinance (Cap. 163) and the banking regulations. We regularly advise clients on Hong Kong regulations relevant for their specific projects, including taking collaterals (charges or mortgages).
As lawyers with extensive experience in investments and share purchases, we assist our clients in designing the structure of their corporate lending project (structuration memorandum) and drafting the legal documentation involved. We offer integrated solutions where we coordinate with lawyers in other jurisdictions for investment or collaterals overseas. Our firm follows up on the transaction until post-completion, ensuring the proper annotations, registrations or else are made timely for the security to have the anteriority negotiated.
Pricing will depend on the complexity of the project. From fixed fee for a straightforward equity investment (shareholders’ agreement review) or shareholders’ loan agreement with no security to hourly rate for more sophisticated projects, especially if negotiations are involved. Preliminary advice on structuring (memorandum to address various questions beforehand) can be agreed on a fixed fee for most projects.