Acquisition of London Metal Exchange Ltd by HKEX Investment - Essay Example

? Acquisition of London Metal Exchange Ltd by HKEX Investment Module: Legal Issues in Mergers and Acquisitions (LLM7011) BY HUMAID ALSINANI Business and Management Studies Department Cardiff School of Management LLM International Business STUDENT ID: 20035628 Proposal for Capital Reduction Dawson notes that selective reduction of capital has long provided and alternative means of achieving a takeover or compulsory acquisition.1 It will be noted that capital reduction could be applied in the London Metal Exchange Ltd by HKEx Investment in such a way that existing shareholders would have had to compete with returning shareholders for a place on the acquired business. This is because capital reduction “ is a capital re-organisation that has the effect of allowing the return to shareholders of capital would otherwise not be distributable.”2 In light of the situation, it could be said that though capital reduction could have impacted positively on pre-existing shares by raising the value of the share, it would have also brought about increased competition especially for existing shareholders. The market would therefore have been a highly competitive one with fewer shares to be traded among several shareholders. The case of survival of the fittest would have therefore arisen. In their bid to acquire London Metal Exchange Ltd, Honk Kong Exchange Investment was mandated to satisfy the provisions of the scheme of arrangement under Part 26 Companies Act 2006, which addresses the issue of legislation to loans and debt. This procedure was necessitated for a number of legal reasons and interpretations. Commonly, it is noted that the need of scheme of arrangement arises for companies such as Hong Kong Exchange Investment to make compromise with its key stakeholders on issues regarding solvent company’s reconstruction. This is said because Part 26 Companies Art 2006 as noted by Julain is an “amendments to insolvency legislation around Europe are focusing on introducing or improving the legislative framework to allow debt restructuring”3. In the present situation, Hong Kong Exchange Investment was making such arrangement with its partnering component, HK Investment (UK) Limited. Though scheme of arrangement is effected as an amendment to bankruptcy and solvency Act4, it is very important to stress the fact that the scheme of arrangement is not in place to conceptualize a company’s scheme to become insolvent. With this said, the analysis can well continue on the provisions of the scheme of arrangement involved in the case of Hong Kong Exchange Investment as it would now be known that the scheme of arrangement was entered only as a cost shedding strategy and not as a means of announcing the company’s likelihood to become insolvent. Outcome and implications of the court approval for stakeholders Even though back in July 2012 the United Kingdom Financial Services Authority had exercised its powers under the European Union Markets in Financial Instruments Directive under the 2004/39/EC of the Markets in Financial Instruments Directive (MiFID) to approve Hong Kong Exchange Investment’s acquisition of London Metal Exchange Ltd, the process was somewhat put in a limbo as a court petition was undertaken for the court to sanction the Scheme that had been started and to give a legislative confirmation to the related capital reduction5. This court petition was in reaction to the approved purchasing capital of ?1.39 billion that had been granted earlier. This court case was heard on 5 December 2012 and the issues of the court had it that Hong Kong Exchange Investment was cleared to main its capital base for the acquisition. As part of the issues considered by the court was the remaining conditions to the transaction that had been set out in the Scheme Document. Earlier, the purchasing company, which was Hong Kong Exchange Investment, had fully satisfied condition 1(a) found in Part III of the scheme document that touches on the transaction that had taken place far back on 9 July 2012. Completion of the transaction thereof was confirmed in a letter to shareholders by the Chairman of the Company6. To this effect, part of the issues to be considered by the court was inter alia. Provisions of the scheme of arrangement Because the completion of the transaction was subject to the satisfaction of all other conditions that were spelt out in the Transaction that was awaiting judgment from the court, the court’s resolution and the provisions of the scheme of arrangement were very significant to success of Hong Kong Exchange Investment in acquiring London Metal Exchange Ltd because until such a time that the provisions of the scheme of arrangement were fully known and heeded to, the transaction could not be said to be complete7. One of the most significant provisions of the scheme of arrangement that highlighted the fortunes of the acquisition therefore had to do with the legitimization of the reconstruction process, which in the present case was for the acquisition of London Metal Exchange Limited. The analysis of this situation has it that “If the Scheme has not become unconditional and effective by the Longstop Date, the Scheme will lapse and the Framework Agreement may be terminated, in which case the Acquisition will not proceed.”8 This means that under a neutral provision or application, chances are that Hong Kong Exchange Investment would not have been permitted within the scope of the scheme of arrangement to benefit from the acquisition that was taking place; especially as it was being used as restructuring strategy. The provision of the scheme of arrangement therefore cleared the purchaser on the grounds that it was acting on behalf of its subsidiary company, HK Investment (UK) Limited, which was of English origin. What is more, the scheme of arrangement that was used in the present case permitted for a clear definition of the stakeholder base of the purchasing company as well as the company that was being purchased. In this case, reference is being made to the stakeholders of Hong Kong Exchange Investment and London Metal Exchange Limited respectively. This provision of the scheme of arrangement is made known through the press release issued in a letter by the Chairman of the company, Chow. This is because according to the report, had been offered the opportunity to identify shareholders of LME Holdings as part of the stakeholder group that was approving of the purchase of LME Holdings and that through the approval given by these shareholders, “all the resolutions required in connection with the Transaction” had been formalized (Heywood, 2012). It would be observed that shareholder clearance is a very important exercise in the administration and execution of major multinational companies such as the one in the current case. To this effect, in order that the provisions of the scheme of exchange will not be abused to be turned into an insolvency instrument, section 301G (3) of FSMA 2000, which makes provisions for Treasury changes provides that such clearance from stakeholders be sought first. Power and Role of UK FSA The United Kingdom Financial Services Authority acts as an agency that functions as a quasi-judicial body in that it operates independently from the government. Mention of the UK FSA is relevant to the present discussion as it has as part of its statutory objectives, the need to market confidence and reduction of financial crime. Meanwhile, initial news of the acquisition of London Metal Exchange Ltd by HKEx Investment brought about legal tussle in court; raising questions of possible financial malfeasance were reported in process, that could subsequently lead to reduced market confidence and a possible financial crime. The outcome of the court hearing and the provisions of the scheme of exchange had so many implications for the stakeholders involved in the acquisition of London Metal Exchange Limited. As a matter of fact, stakeholders from both sides, that is the purchasers and the sellers all had implications of the decisions and provisions that affected them and the transaction in one way or the other. For example the chairman of Hong Kong Exchange Investment, CHOW Chung Kong noted in his address to the shareholders that As we announced on 15 June 2012, HKEx, through its wholly owned subsidiary HKEx Investment (UK) Limited proposed to acquire all of the shares in LMEH by way of a scheme of arrangement and a capital reduction. Following the satisfaction of all the conditions, the scheme became effective on 6 December 2012 and the acquisition has now formally completed.9 This means that the purchaser needed clearance on the issue before the transaction could be completed. The eventual completion of the transaction that took place on 6 December 2012 was therefore dependent on the court hearing and the provisions of the scheme of arrangement. This particular implication could be said to be the most immediate short term implication of the approval that was issued by the court. On a long term basis, legal experts have said that Hong Kong Exchange Investment has consolidated its partnership with its United Kingdom counterpart, HK Investment (UK) Limited by virtue of the two forms of clearance that took place ahead of the acquisition. There are thus two particular merits that this carries. First, this will be a consolidation of locus standii that the company has that even though it is not an English Origin company, it would have the right to use the proceeding of the court to seek legal redress on any future litigations that might arise from the acquisition. Secondly, with its affiliation with the United Kingdom counterpart being consolidated, Hong Kong Exchange Investment would now become a beneficiary of any English business and investment regulations that makes access to external funding possible and easier. If for nothing at all, by the affiliation, if in the nearest future the need for debt restructuring arises as a result of the acquisition, the schemes of arrangement would be the best legislation to fall unto for redress. This is not however without the caution that “schemes are not insolvency proceedings for the purpose of the EC Regulation on Insolvency Proceedings.10 REFERENCE LIST Dawson B, 2011. Selective Capital Reduction: a better way to take over or mop-up? Online http://www.ashurst.com/doc.aspx?id_Content=7058 [March 8, 2013] Futures, 2012, HKEx completes acquisition of LME. Online. http://www.futuresmag.com/2012/12/06/hkex-completes-acquisition-of-lme [March 8, 2013] Heywood, M. Update in relation to the recommended offer for the acquisition of LME Holdings Limited by Hong Kong Exchanges and Clearing Limited. Online. http://www.lme.com/en-gb/news-and-events/press-releases/press-releases/2012/11/update-in-relation-to-the-recommended-offer-for-the-acquisition-of-lme-holdings-limited/ [March 8, 2013] Julian G, 2012. Schemes of Arrangement under the Companies Act 2006 for Foreign Companies. Online. http://www.olswang.com/articles/2012/10/schemes-of-arrangement-under-the-companies-act-2006-for-foreign-companies/ [March 6, 2013] Kong C. C, 2012. LME part of the HKEx Group. Online. http://www.hkexgroup.com/eng/invest/circulars/Documents/121207_shareholderletter_e.pdf [March 7, 2013] Turner J, 2012, Schemes of Arrangement under the Companies Act 2006 for Foreign Companies. [February 14, 2013] http://www.olswang.com/articles/2012/10/schemes-of-arrangement-under-the-companies-act-2006-for-foreign-companies/ [Online] LEGISLATION TABLE Bankruptcy and Insolvency Act R.S.C., 1985, c. B-3 Section 301G (3) of FSMA 2000 2004/39/EC of the Markets in Financial Instruments Directive (MiFID Read More