How to Smoothly Acquire Equity of a Hong Kong Company Full Process Analysis and Key Considerations

How Can a Domestic Company Successfully Acquire Equity in a Hong Kong Company? A Comprehensive Guide and Key Considerations

As global economic integration accelerates, more and more mainland Chinese companies are choosing to go global by acquiring overseas firms to expand their business, integrate resources, and upgrade their brand positioning. Among various international destinations, Hong Kong stands out due to its strategic geographic location, mature legal system, and close economic ties with the mainland. This article provides a detailed breakdown of the entire process for domestic companies seeking to acquire equity in Hong Kong-based firms, along with recent market insights and key considerations.

1. Clarify Acquisition Objectives and Strategic Intent

Before initiating any acquisition, a domestic company must first define its strategic purpose Is it aiming to gain access to core technologies, enter new markets, or optimize resource allocation?

For example, in 2025, several mainland tech companies chose to acquire Hong Kong firms with local operational experience as a stepping stone into Southeast Asian markets. This strategy allows for rapid establishment of overseas footholds while circumventing restrictions on direct foreign investment in certain countries.

Comprehensive due diligence is essential, covering financial health, legal compliance, intellectual property rights, and employee structure. Special attention should be paid to sectors such as finance, healthcare, and education, where regulatory licenses and compliance requirements are critical.

2. Choosing the Right Transaction Structure VIE, Red Chip, or Direct Holding?

Under China’s foreign exchange and foreign investment regulations, domestic companies typically need to establish an offshore special-purpose vehicle SPV to complete overseas acquisitions. The most common structures include

Red Chip Structure Establishing an offshore holding company that acquires the target firm, often used by companies planning to list abroad.

VIE Structure Used in sectors restricted to foreign ownership, allowing control through contractual arrangements rather than equity.

Direct Holding Suitable for small-scale investments or non-sensitive industries, offering simplicity but with more regulatory constraints.

In late 2025, a mainland-based new energy company acquired a Hong Kong-registered energy storage technology firm using the Red Chip model. It established a holding company in the Cayman Islands and completed the full acquisition via this platform, laying the groundwork for future overseas financing and capital operations.

3. Approval and Filing Procedures Coordination Across Multiple Regulators

According to the Administrative Measures for Overseas Investment by Enterprises, domestic companies engaging in overseas investments must follow these main procedures

1. NDRC Filing/Approval Investments exceeding USD 300 million require approval from the National Development and Reform Commission NDRC, while smaller amounts can be filed at the provincial level.

2. MOFCOM Filing Submitting applications for an overseas investment certificate.

3. SAFE Registration Completing ODI Outward Direct Investment foreign exchange registration through banks to facilitate outbound fund transfers.

4. Additional Approvals If the transaction involves financial assets, approvals from the CBIRC or CSRC may also be required.

Notably, in early 2025, the State Administration of Foreign Exchange tightened scrutiny on the use of ODI funds, emphasizing authenticity and compliance to prevent false investments or money laundering. Companies must ensure genuine transaction backgrounds, complete contract terms, and maintain thorough documentation explaining the commercial rationale.

4. Financial Arrangements and Payment Methods

Financial structuring is a central element of the acquisition process. Common payment methods include cash payments, share swaps, or hybrid models. The choice depends on negotiation outcomes, tax implications, and liquidity conditions.

For instance, in the second half of 2025, a mainland private equity fund acquired controlling interest in a Hong Kong-listed company using a combination of cash and convertible bonds. This approach ensured immediate liquidity for the seller while preserving financial flexibility for the buyer.

Key considerations for cross-border fund transfers include

Ensuring all outbound flows comply with legal channels;

Avoiding frequent or large-scale remittances within a short period;

Implementing staged payments to mitigate transaction risks.

5. Tax Planning Avoiding Double Taxation and Optimizing Liability

Cross-border MA involves complex tax issues, particularly concerning capital gains taxation. Under the China-Hong Kong Double Taxation Agreement, eligible dividends, interest, and royalties can benefit from reduced tax rates.

Professional tax advisors should be engaged early to design optimal structures. Strategies may include leveraging offshore entities or reinvesting profits to reduce overall tax burdens. For example, some companies set up intermediate holding companies in Singapore or Luxembourg to further minimize taxes.

6. Closing the Deal and Post-Acquisition Integration

Once regulatory approvals and fund transfers are completed, the deal enters the closing phase. This includes

Shareholding changes and registration updates;

Management transition;

Asset and liability confirmation;

Updating records with relevant government authorities.

However, post-acquisition integration is often the real test of success. Key areas include cultural alignment, talent retention, business synergy, and IT system integration. It is advisable to develop a comprehensive integration plan before the acquisition and assign a dedicated team to manage implementation.

7. Common Risks and Risk Mitigation Strategies

Despite its potential, cross-border MA carries significant risks

Policy Risk Regulatory changes may delay or block approvals.

Valuation Risk Information asymmetry may lead to overvaluation.

Legal Risk Compliance standards vary across jurisdictions.

Cultural Conflict Differences in management styles and labor systems between Mainland China and Hong Kong.

To address these challenges, companies should assemble expert teams including legal counsel, financial advisors, and tax consultants to evaluate and mitigate risks from multiple angles.

Conclusion

In today’s globalized economy, it has become increasingly common for mainland companies to acquire firms in Hong Kong. With thorough pre-acquisition research, compliant mid-stage execution, and effective post-acquisition integration, companies can significantly enhance the likelihood of a successful merger or acquisition. As the regulatory environment continues to evolve, cross-border investments will likely become more transparent and efficient, providing stronger support for more Chinese enterprises to expand internationally.