Clifford Chance
Better late than never…Hong Kong Government's proposal to abolish the headcount test
31 May 2012
In Hong Kong, takeovers by way of schemes of arrangement are subject to a number of voting thresholds. Under the Hong Kong Takeovers Code, they need to be approved at a shareholders' meeting by at least 75% of the votes attaching to the shares owned by the independent shareholders that are cast either in person or by proxy at such meeting, with no more than 10% of all independent shares (i.e. not just of those voting) voting against the scheme (the "10% Rule"). On top of that, Hong Kong company law requires that the scheme must be approved by a majority in number of the shareholders, which in turn represent 75% in value of the shareholders present and voting at the meeting. The "majority in number" threshold (also known as the "headcount test") came under spotlight when the Hong Kong Court of Appeal refused to sanction PCCW's privatisation scheme in May 2009, on the grounds that it found vote manipulation and share splitting practices were used to satisfy the "headcount test". We published a client briefing in March 2009 recommending the removal of the "headcount test". Our reasoning for this was: (1) the test runs contrary to the "one share, one vote" principle and hence may produce an inequitable and unrepresentative outcome in scheme votes; and (2) the safeguards offered under the Hong Kong Takeovers Code (in particular the 10% Rule) should suffice to protect minority shareholders' interests. In addition, as we noted in our previous client briefing, there is no equivalent of a "headcount test" for takeovers of companies in the PRC.
