M&A – Main differences between Share Deals and Asset Deals in Hong Kong

The share purchase agreement is a bespoke document, tailored to align with the agreed deal parameters. However, the main features of a share purchase agreement documenting the terms and conditions of the transfer of shares of a Hong Kong private company limited by shares are set out below.

• Corporate authorisations - The transfer is subject to approval by the board of directors of the target company whose shares are being transferred. In case the parties are corporate entities, appropriate internal authorisations (board resolutions or powers of attorney) must be obtained to approve the transaction and the execution of the share purchase agreement.
• Continuity of contracts – Existing contracts entered into between the target entity and third parties do not need to be assigned or novated. If such contracts contain change of control provisions, relevant notification and/or authorisations requirements must be complied with before closing.
• Signing and completion – The share transfer transaction may be structured either with simultaneous signing and completion, or with split signing and completion (for instance in the case of earn out mechanism or where regulatory approvals are required).
• Ancillary changes – The share purchase agreement addresses any other changes that must take place simultaneously to the completion of the share transfer, such as changes of directors, company secretary, registered office, signatories authorised to operate the company’s bank accounts, etc.
• Warranties and indemnities – It is customary for the share purchase agreement to contain warranties and indemnities, which are usually limited in an intragroup restructure scenario, and extensive and more heavily negotiated where the parties are unrelated.
• Restrictive covenants – In case the parties negotiate restrictive covenants placed on the seller, such covenants must be carefully drafted and narrowly tailored to maximise enforceability.
• Disclosure letter – It is market practice for the seller to deliver a letter disclosing any limitation, qualifications or exceptions to the warranties given under the share purchase agreement to the seller at closing, thus limiting the seller’s liability.
• Stamp duty – It is customary for the stamp duty on the share transfer to be borne in equal proportions by each of the buyer and the seller, but the share purchase agreement should include a clause specifying the apportionment mechanism.
• Signing formality – If the share transfer is not supported by consideration, the share purchase agreement must be executed as a deed.

An asset transfer agreement allows the buyer to selectively acquire specific assets and liabilities. Although the agreement is tailored to align with the deal parameters, its key features are set out below.

• Precise asset and liabilities identification – The agreement clearly identifies and lists the assets subject to the transfer and any specific liabilities being transferred.
• Corporate authorisations – The articles of association and other internal organisational documents of the parties should be reviewed to confirm whether authorisations must be obtained from their respective board of directors and shareholders.
• Warranties and indemnities – The asset transfer agreement can contain specific warranties and indemnities, which are tailored to the type of assets transferred. There are typically no or limited warranties and indemnities in an intragroup restructure scenario, whereas their scope is usually wider where the parties are unrelated.
• Disclosure letter – It is market practice for the seller to deliver a letter disclosing any limitation, qualifications or exceptions to the warranties given under the asset transfer agreement to the seller at closing, thus limiting the seller’s liability.
• Documents deliverable – The asset transfer agreement typically contains a list of documents deliverable by the parties at completion, in particular to effect the transfer of specific types of assets (application to register transfer of intellectual property rights, delivery of title deeds for real estate assets, etc.).
• Signing formality – If the asset transfer is not supported by consideration, the asset transfer agreement must be executed as a deed.

In practice, the transfer of the shares of a Hong Kong private company limited by shares is implemented as follows.

• Preliminary due diligence – The buyer conducts legal, tax and financial due diligence on the target company whose shares are being transferred.
• Deal structure – Depending on the deal parameters, the transaction can be structured with simultaneous or split signing and completion. The terms of payment of the share transfer consideration must be determined.
• Documenting the transfer – Although the entry into of a share purchase agreement is not a statutory requirement, the transfer must be documented by an instrument of transfer and bought and sold notes which must be signed by the seller and the buyer with handwritten signatures.
• Corporate authorisations - The transfer is subject to approval by the board of directors of the target company whose shares are being transferred. In case the parties are corporate entities, appropriate internal authorisations (board resolutions or powers of attorney) must be obtained to approve the transaction and execution of the share purchase agreement.
• Stamping the transfer – The share transfer documents (instrument of transfer, bought and sold notes and share transfer agreement, if any) must be submitted to the Hong Kong Inland Revenue Department for stamping, alongside supporting documents (latest audited financial statements, management accounts made up to a date within the three-month period preceding the transfer, confirmation as to whether the target company holds any immovable property, etc.). The deadline for stamping is two days after completion for transfers executed in Hong Kong and 30 days after completion for transfers executed overseas.
• Post-completion formalities – It is not required to notify the Hong Kong Companies Registry of the share transfer. However, the company must update its register of members and, in case of change of ultimate beneficial owner as a result of the transfer, its significant controllers register. In addition, the company must cancel the share certificate(s) of the transferor(s) and issue new share certificate(s) to the transferee(s). The professional company secretary service provider is typically in charge of these post-completion formalities.

The key features of a transfer of assets depend on the type of asset being transferred.

• Preliminary due diligence – The buyer conducts legal, tax and financial due diligence on the assets being transferred.
• Deal structure – The transaction can be structured as a transfer of specific assets and liabilities, or as the transfer of the entire business as a going concern. Depending on the deal parameters, the transaction can be structured with simultaneous or split signing and completion. The terms of payment of the asset transfer consideration must be determined.
• Documenting the transfer – In addition to the asset transfer agreement, additional documents may be required to document the transaction. For instance, notices of transfer may need to be submitted to the relevant Hong Kong Intellectual Property Department in case of transfer of intellectual property rights. In case of transfer of employees, the consent of relevant employees must be obtained and the transfer must be appropriately documented.
• Corporate authorisations – Depending on the articles of association and other internal organisational documents of the parties, corporate authorisations may be required to effect the asset transfer.
• Stamping the transfer – In case of transfer of real estate asset(s), the asset transfer documents must be submitted to the Hong Kong Inland Revenue Department for stamping. The deadline for stamping is 30 days after completion.
• Post-completion formalities – The post-completion formalities depend on the type of assets being transferred. For instance, in case of transfer of intellectual property rights, there may be notification requirements with the Hong Kong Intellectual Property Department.
  

A transfer of shares of a Hong Kong private company limited by shares is generally subject to stamp duty levied at the rate of 0.2% of the higher of (i) the share transfer consideration or (ii) the net asset value of the shares being transferred, plus a fixed duty of HK$5 per instrument of transfer.

Exemptions are available for transfers of shares in an intra-group context between associated companies

Transfer taxes depend on the type of assets being transferred.

A transfer of real estate asset is generally subject to stamp duty. The stamp duty rate depends on the type of property being transferred (residential or non-residential) and the amount of the consideration.