Nov 2026
Many of the companies listed on the Stock Exchange of Hong Kong are incorporated in the Cayman Islands. When a take-private transaction is proposed for such an issuer, the scheme of arrangement under the Companies Act (2026 Revision) (the “Act”) is one of the most commonly used mechanisms.
The Statutory Framework
The power of the Grand Court of the Cayman Islands (the “Court”) to sanction a scheme of arrangement is found in section 86 of the Act. Where a compromise or arrangement is proposed between a company and its members (or any class of them), the Court may, on the application of the company, any member, or a restructuring officer, order a meeting of the relevant members to be summoned in such manner as the Court directs.
For a privatisation scheme to be approved at the scheme meeting, it must receive the support of 75 per cent in value of the members (or class of members) present and voting either in person or by proxy. If the threshold is met at the scheme meeting, the compromise or arrangement may be submitted to the Court for sanction. The sanctioning order takes effect upon its delivery to the Registrar of Companies of the Cayman Islands (the “Registrar”) for registration.
Capital Reduction and Maintenance of Capital Schemes
Historically, Cayman privatisation schemes were structured as “capital reduction” schemes, under which scheme shares were cancelled by way of a reduction of capital under section 14 of the Act. That approach required court confirmation and carried the risk of creditor objections.
Market practice has moved away from capital reduction schemes in favour of maintenance of capital schemes, which remain the predominant structure today. Under this structure, the scheme shares are cancelled, but the company simultaneously (or contemporaneously) issues to the offeror (or its nominee) such number of new shares as equals the scheme shares cancelled, in consideration for the offeror funding the scheme consideration. Because issued share capital is maintained throughout, this structure avoids the capital reduction provisions and offers a more streamlined process.
Key Procedural Steps
The process begins with the company petitioning the Court for an order convening the scheme meeting. At this convening hearing, the Court considers whether the company has correctly identified and distinguished any classes of shareholders.
A scheme document setting out the terms of the scheme and proposal is then prepared in accordance with the Hong Kong Takeovers Code and despatched to shareholders. The scheme meeting is then held.
If the requisite majority is obtained, the company returns to the Court for the sanction hearing. The Court must be satisfied that the statutory requirements have been met, that classes were fairly represented, and that the scheme is one a reasonable person could approve. If satisfied, the Court will grant an order sanctioning the scheme.
The scheme becomes effective and binding on all scheme members once the sanctioning order is delivered to the Registrar for registration.
Coordination with Hong Kong Requirements
In practice, the Court process must be coordinated to comply with the SFC Codes on Takeovers and Mergers and the Hong Kong Listing Rules. The Court is typically petitioned for a directions order while the scheme document is being reviewed by the SFC Executive. Once SFC clearance is obtained, the scheme document is despatched to shareholders. The application for withdrawal of listing is the final step following the sanctioning order being delivered to the Registrar.
Hong Kong practitioners should note the interaction between the Cayman statutory test under section 86 (a value-only test for members’ schemes) and any additional disinterested shareholder requirements imposed under the Hong Kong Takeovers Code.
Conclusion
The Cayman scheme of arrangement remains a well-established tool for privatisations of Hong Kong-listed issuers. Its principal advantage is that, once sanctioned, it binds all scheme members, including those who voted against the scheme or did not vote at all, and can provide for the orderly cancellation of shares and delisting of the company. For Hong Kong practitioners advising on these transactions, familiarity with the Cayman statutory procedure and an appreciation of how it dovetails with the local regulatory regime will help clients to manage timetables and ensure smooth execution.
This article was originally published in the October 2026 edition of Hong Kong Lawyer by The Law Society of Hong Kong.