Cayman headcount test abolishment to benefit Hong Kong privatisations

The Companies (Amendment) Act, 2021 of the Cayman Islands (Cayman Amendment), which came into force on 31 August 2022, abolished the ‘headcount test’ for a Cayman Islands members’ scheme of arrangement under section 86 of the Companies Act (2022 Revision) of the Cayman Islands (Cayman Companies Act).

The Cayman Amendment ends a longstanding technical challenge that the ‘headcount test’ has brought to schemes which are often used for the privatisations of Cayman Islands-incorporated companies listed on the Hong Kong Stock Exchange (Exchange). Previously, section 86(2) of the Cayman Companies Act required a members’ scheme of arrangement to be approved by the shareholders representing no less than 75% of all voting rights of the shareholders present and voting (majority in value test) and the majority in absolute number of the scheme shareholders present and voting (headcount test).

The Cayman Amendment also aligns the position for Cayman Islands-incorporated companies with that for Hong Kong-incorporated companies, whereby the headcount test was abolished with the commencement of the then new Companies Ordinance (Cap. 622) of Hong Kong back in March 2014.

The Cayman Amendment is expected to be welcomed by the market and is positively considered to be a significant development for Hong Kong privatisations.

• Firstly, a majority of companies listed on the Exchange are incorporated in the Cayman Islands (1,234 out of 2,219 as of end of 2021¹). The headcount test ceased to be a concern for take-privates of Hong Kong-incorporated companies since March 2014 as mentioned above.
• Secondly, a vast majority of public shares in Hong Kong-listed companies traded on the Exchange are beneficially held within the Central Clearing and Settlement System (CCASS) through a nominee, namely HKSCC Nominees Limited. It acts as the common nominee for the listed company shares held in the CCASS Depository operated by Hong Kong Securities Clearing Company Limited. It is also often a single registered shareholder for a large number of shares in listed companies. Investors holding shares beneficially through CCASS were therefore disenfranchised from being counted towards the headcount test. This had meant that beneficial owners would have to withdraw their shareholdings from CCASS and register shares under their own names if they wish to be counted individually for the purposes of the headcount test, which involved considerable processing time and cost.
• Thirdly, under Rule 31.1 of the Hong Kong Takeovers Code, offerors unsuccessful in privatising an offeree company cannot make another offer for at least 12 months after the offer is withdrawn or expired. Therefore, the impact of failing to fulfil the headcount test was enduring and had hindered the desire of offerors to initiate take-private deals.

In the past, due to the headcount test, some privatisation schemes of Hong Kong-listed Cayman Islands-incorporated companies had failed (eg Glorious Property Holdings Limited (SEHK:845) in January 2014, whereby 58 shareholders holding 96.62% of the shares present and voting voted in favour of, and 62 shareholders holding 3.08% of the shares present and voting voted against, the privatisation scheme²) or marginally passed (eg Dorsett Hospitality International Limited (SEHK:2266) in September 2015, whereby 42 shareholders holding 97.78% of the shares present and voting voted in favour of, and 39 shareholders holding 2.22% of the shares present and voting voted against, the privatisation scheme³). In some other cases, controversies have arisen where share splitting and vote-rigging had or was alleged to have taken place for want of passing the headcount test requirement.

The Cayman Amendment provides certainty going forward for proposed members’ scheme of arrangements with the offeree company only needing to satisfy the majority in value test (ie 75% in nominal value of the members, or class of members, who are present and voting either in person or by proxy at the shareholders’ meeting). Together with the requirements under the Hong Kong Takeovers Code, a members’ scheme of arrangement for a Cayman Islands or Hong Kong-incorporated company listed on the Exchange would need to be approved by a majority of 75% in value and must not be opposed by more than 10% in value of independent/disinterested shareholders.

The headcount test however remains applicable to creditors’ scheme of arrangements in the Cayman Islands, which are often used to facilitate rescue and restructuring of distressed companies.

¹ Source: HKEX Fact Book 2021
² Source: Glorious Property Holdings Limited announcement dated 17 January 2014
³ Source: Dorsett Hospitality International Limited announcement dated 29 September 2015