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Hong Kong Privatisation: Headcount Test For Cayman Scheme To Be Abolished On 31 August 2022 – Shareholders

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The Companies (Amendment) Act 2021 of the Cayman Islands (Cayman
Amendment), which abolishes the ‘headcount test’ for
members’ scheme of arrangement, will come into force on 31
August 2022. The long controversy and criticism surrounding this
Cayman requirement finally comes to an end.

Members’ scheme of arrangement (scheme) is commonly used to
achieve privatisation of a company listed on the Hong Kong Stock
Exchange (HKEX). Before the Cayman Amendment, a scheme for a
HKEX-listed Cayman company must be approved by a majority in number
(the “headcount test”), representing at least 75 percent
in value, of the members who are present and voting either in
person or by proxy at the meeting. This has long been considered a
‘hurdle’ for privatisations of HKEX-listed Cayman companies
and a number of high-profile privatisations were thwarted due to
failure to satisfy this ‘headcount test’.

In 2014, a Cayman scheme was proposed to privatise New World
China Land (NWCL). Although 99.84 percent of the shares present by
value were voted in favour of the scheme, the deal failed as these
votes were cast by shareholders representing only 34.05 percent of
the shareholders present and voting in the meeting – less than the
requirement under ‘headcount test’. The result caught much
attention and criticism in that 0.16 percent of the shares by value
blocked the wishes of the majority. To get around the arcane
‘headcount test’ hurdle, a voluntary general offer to
acquire all issued shares of NWCL was made in 2016 and NWCL was
eventually privatised.

Given more than half of the HKEX-listed companies are
incorporated in the Cayman Islands, the Cayman Amendment is a
welcome move, eliminating the uncertainty or difficulty in counting
members in the ‘headcount’ test as evident in the NWCL 2014
privatisation when most of the listed shares were then held through
HKSCC Nominees Limited as custodian. This also brings in line with
the requirement for Hong Kong-incorporated companies – the
headcount test was completely abolished with the enactment of Hong
Kong Companies Ordinance (Cap 622) effective in 2014. In other
words, bearing also in mind the requirements under the Hong Kong
Takeovers Code, a scheme for a Cayman or Hong Kong-incorporated
listed company must be approved by a majority of 75 percent by
value and must not be opposed by more than 10 percent by value of
“independent” shareholder. For the Latest Legal
Development in Hong Kong Privatisation Scheme, please see our
earlier Legal Update here.

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article provides information and comments on legal
issues and developments of interest. The foregoing is not a
comprehensive treatment of the subject matter covered and is not
intended to provide legal advice. Readers should seek specific
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