RE ALLIED PROPERTIES (H.K.) LTD

CACV 560 /2020

[2020] HKCA 973

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 560 OF 2020

(ON APPEAL FROM HCMP NO 1033 OF 2020)

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REASONS FOR JUDGMENT

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Hon Kwan VP (giving the Reasons for Judgment of the Court):

1.  This appeal is brought by the petitioner, Allied Properties (H.K.) Limited (“the Company”), against the dismissal by Linda Chan J on 9 October 2020 of its petition for the sanctioning of a scheme of arrangement (“the Scheme”) approved at the court meeting on 15 July 2020 (“the Court Meeting”). The judge exercised her discretion under section 673(2) of Companies Ordinance, Cap 622^[1] to refuse to sanction the Scheme for two main reasons. First, she had concerns that the headcount test in section 674(1)(c)(ii) might not have been met^[2]. Second, she took the view that the Scheme document did not provide sufficient information to the Scheme Shareholders to enable them to make an informed decision as to how to vote at the Court Meeting^[3].

2.  At the conclusion of the appeal, we allowed the appeal, sanctioned the Scheme and confirmed the reduction of capital.  These are the reasons of the court for allowing the appeal.

Background

3.  The relevant background matters are taken largely from the Judgment and may be stated as follows.

4.  The Company was incorporated in Hong Kong on 18 July 1960 and its shares have been listed on the Main Board of the Stock Exchange of Hong Kong Limited (“HKEx”) since 9 January 1981. Allied Group Limited (“AGL”), also a listed company in Hong Kong, is its holding company.

5.  The Company with its subsidiaries and associates (“the Group”) are engaged in the business of property investment and development, hospitality related services and provision of finance and investments in listed and unlisted securities.

6.  On 9 April 2020, Sunhill Investments Limited (a direct wholly-owned subsidiary of AGL; “the Offeror”) put forward a proposal to the Scheme Shareholders (ie holders of shares in the Company other than those held by the Offeror and the “Offeror Concert Parties”, being AGL and two of its direct wholly-owned subsidiaries) which involves (1) privatisation of the Company by way of the Scheme and (2) payment by the Company of a dividend to all the shareholders.  This was subsequently announced on 20 April 2020 by the Offeror, the Company and AGL.

7.  The reasons for putting forward the Scheme, as stated in the petition^[4], are: (1) the shares have for over two years been trading at a substantial discount ranging from 66.7% to 77.4% of the net consolidated assets of the Group, and “the Company has not been able to raise equity capital lest diluting the interests of shareholders of the Company”; (2) the listing status has become ineffective and is costly to maintain; (3) “the listing status has prevented the Company from pursuing various investments that may benefit the Company”; (4) the pessimistic view on the economy which will have a negative impact on the value of the shares in the open market, and that the Scheme provides an opportunity for the Scheme Shareholders to realise their shares at a premium over the current market price. 

8.  As at 16 June 2020, being the latest practicable date prior to the printing of the Composite Document^[5], the Company had issued share capital of HK$4,250,636,343.76 divided into 6,812,201,460 shares, of which 74.996% were held by AGL and its 3 wholly owned subsidiaries. The remaining 25.004% were held by the Scheme Shareholders.

9.  On 22 May 2020, the Company issued an ex parte Originating Summons in HCMP 657/2020 for directions (“OS”) to convene a single meeting of the Scheme Shareholders for the purpose of considering and, if thought fit, approving the Scheme. 

10.  The principal features of the Scheme are as follows:

(1)  all the shares held by the Scheme Shareholders will be cancelled in exchange for payment of HK$1.92 per share in cash. Of this amount, HK$0.42 per share is payable by the Offeror as consideration for cancellation of the Scheme Shares (“Scheme Consideration”), while HK$1.50 per share is a special dividend to be declared by the Company and payable to all the shareholders (“Special Dividend”) (but the Offeror and the Offeror Concert Parties have irrevocably and unconditionally agreed to waive and surrender their entitlements to the Special Dividend (“AGL Waiver”)). The proposal for the privatisation of the Company (“Proposal”) is defined in the Composite Document as comprising the Scheme and the Special Dividend;

(2)  the share capital of the Company will be reduced by the amount paid-up on the Scheme Shares which have been cancelled (“Reduction of Capital”);

(3)  immediately after cancellation of the Scheme Shares, the share capital of the Company will be increased to its former amount by issuing the same number of shares which have been cancelled to the Offeror, and applying the credit arising from the Reduction of Capital to pay up the amount payable on the new shares issued; and

(4)  the Offeror and the Offeror Concert Parties will thenceforth become the only shareholders of the Company.  The Company will apply to HKEx to withdraw the listing of its shares. 

11.  The Scheme and the Reduction of Capital are the subject matters of the petition in HCMP 1033/2020.

The OS in HCMP 657/2020

12.  The ex parte OS was an application for a Court Meeting to be convened for the Scheme Shareholders to consider the Scheme.  The judge was rightly critical of the Company’s legal advisers for having failed to scrutinise the preparation of the draft Composite Document or to provide meaningful assistance to the Court at the hearing of the OS^[6].

13.  At the directions hearing of the OS on 1 June 2020, the judge raised a number of concerns with Mr Richard Leung, who was then appearing for the Company, and reminded him to go through the draft Composite Document carefully to ensure that its contents meet all the regulatory and statutory requirements, in particular the requirement that the Explanatory Statement must explain the effect of the Scheme fairly and accurately.  One of these concerns was the HK$1.92 per share proposed to be paid to the Scheme Shareholders described at the time as “cash consideration required to effect the Proposal”, of which HK$1.50 per share was stated to be paid by the Company in the form of a dividend.  The judge noted there was no explanation as to why such dividend should be treated as part of the cash consideration, and if the Company considered it appropriate to use its own fund to assist the Offeror to acquire the Scheme Shares from the Scheme Shareholders, it should explain why the arrangement would not fall foul of the principle that a company cannot provide financial assistance for acquisition of its own shares.  The judge adjourned the OS sine die for the Company to address the concerns raised^[7].

14.  When the Company sought to restore the OS by writing to the court on 4 June 2020, the judge did not think the concerns raised had been addressed in the revised draft documents and counsel’s submissions.  To avoid having to adjourn the OS again, the judge’s clerk wrote to the Company’s solicitors on 9 June 2020 setting out the concerns that should be addressed.  Among them were the following: 

(1)     The judge found it misleading to define the dividend (HK$1.50 per share) proposed to be declared and paid upon the Scheme becoming effective as “Scheme Dividend”, as it gave the impression to the Scheme Shareholders that such payment formed part of the consideration for the Scheme Shares when, in fact, only HK$0.42 per share would be paid by the Offeror as such consideration.  As observed by the judge at the hearing on 1 June 2020, the special dividend is to be paid out of the reserves belonging to the Company.  The judge suggested that the Company should consider changing the definition of “Scheme Dividend” to “Special Dividend” and mentioning in the Letter from the Board and the Explanatory Statement that such payment is not part of the “Scheme Consideration” but comes from the reserves of the Company (“the Dividend Issue”).

(2)     Counsel sought to rely on the “exceptions” under the Ordinance which enabled the Company to finance acquisition of its own shares, but failed to identify which exception the Company relied on or explain why such exception is applicable to the Scheme (“the Buy Back Issue”).

15.  In an attempt to address the Dividend Issue, the Company revised the draft Composite Document in the manner as suggested by the judge.  The OS was restored for hearing on 15 June 2020, during which the judge reiterated it is the responsibility of the Company to ensure that the Explanatory Statement complies with all regulatory and statutory requirements, which will be one of the issues considered at the sanction stage, should the Scheme be approved by the requisite majority at the Court Meeting.  On that basis, directions were given for the Company to convene the Court Meeting^[8].

16.  As the judge had made clear, it is not the role of the court at the OS stage to scrutinise the preparation of the draft Composite Document to ensure compliance with the statutory requirements in all respects before ordering a Court Meeting to be convened to vote on a scheme of arrangement.  As the judge had put it:

“It is the responsibility of the company (and those advising the company) to ensure that the draft composite document complies with all the regulatory and statutory requirements. It is also their responsibility to assist the Court by identifying the special features of the scheme and any possible areas of concerns and address such concerns. This is important given that at this stage, the matter is dealt with by the Court on an ex parte basis.”^[9]

17.  This practice is for a good reason, as borne out by these extracts:

“The present practice ensures that those advising the company take their responsibility seriously, since an error on their part will be fatal to the Scheme. At the same time it leaves the question, which goes to the jurisdiction of the Court to sanction the Scheme, to be decided at the appropriate time, that is to say when the Court is asked to sanction it. By then the outcome of the meeting or meetings will be known and the question, which will no longer be hypothetical, can be argued between the appropriate parties, that is to say the company on the one hand and those who object to the Scheme on the other.” (UDL Argos Engineering & Heavy Industries Co Ltd v Li Oi Lin (2001) 4 HKCFAR 358 at §14, per Lord Millett NPJ)^[10]

“15. The court will consider the adequacy of the explanatory statement at the convening hearing. The court may refuse to make a meetings order if it considers that the explanatory statement is not in an appropriate form. However, the court will not approve the explanatory statement at the convening hearing, and it will remain open to any person affected by the scheme to raise issues as to its adequacy at the sanction hearing.” (Practice Statement (Companies: Scheme of Arrangement under Part 26 and Part 26A of the Companies Act 2006), §15).

18.  The judge had followed the above practice in dealing with the OS.  She had repeatedly made known to the Company her concerns about the adequacy of the information to be provided to the Scheme Shareholders in light of the splitting of the total amount to be received by the Scheme Shareholders into two components, a Scheme Consideration of HK$0.42 per Scheme Share payable by the Offeror and a Special Dividend of HK$1.50 per Scheme Share to be paid out of the reserves belonging to the Company.  In allowing the Court Meeting to be convened, the judge had not approved the Explanatory Statement and its adequacy had yet to be considered at the next stage of the proceedings when the Company petitioned for a sanction of the Scheme.

The petition in HCMP 1033/2020

19.  The Court Meeting was convened on 15 July 2020, during which 46 Scheme Shareholders voted for the Scheme and 21 Scheme Shareholders voted against^[11]. More than 99% of the Scheme Shares held by the Scheme Shareholders present and voting were cast in favour of the Scheme.  The votes cast against the Scheme amounted to 0.37% of the voting rights attached to all the Scheme Shares^[12].

20.  The Company presented the petition for sanction of the Scheme and confirmation of the Reduction of Capital on 17 July 2020. However, the petition was not presented in the same proceedings as the OS (HCMP 657/2020) but in new proceedings (HCMP 1033/2020).  This is wrong in procedure and contrary to settled practice, as the judge made abundantly clear in the Judgment^[13]. The same proceedings should be used for the purpose of seeking an order to convene a Court Meeting under section 670 and for sanction of the scheme under 673.  The petition should be entitled in the same manner as the OS and should refer to the order made on the OS to convene the Court Meeting.  This is because the Court Meeting is only the beginning of the process of seeking the court’s sanction.  After the company held the Court Meeting at which the scheme was approved by the requisite majorities, the company will have to present a petition, in the same proceedings, to seek the Court’s sanction of the scheme (and, if necessary, confirmation of the reduction of capital).

21.  As the judge rightly pointed out, using the same proceedings throughout is necessary and desirable.  This is to ensure that at the sanction stage, the court will be able to refer to the documents filed and the order made at the “directions” stage, as non-compliance with the directions may invalidate the proceedings at the meeting unless it is waived by the court, and any shareholders (or creditors) who have locus to appear at the hearing of the petition will be able to inspect the court file to see what has been said by the company at the “directions” stage, which they have no right to attend. 

22.  The petition was twice adjourned, in order for the Company to adduce further evidence and make submissions to address the court’s concerns relating to some overseas shareholders who did not receive the Composite Document and to show that the headcount test was satisfied^[14]. In the end, the judge had serious concerns whether the headcount test was met in light of the obvious inconsistencies and problems in the evidence filed by the Company.  Nor was she satisfied that the Composite Document had provided sufficient explanation of the Scheme and its effects to enable the Scheme Shareholders to make an informed decision as to how to vote at the Court Meeting.

23.  On appeal, Mr John Scott, SC^[15]complained of a lack of procedural fairness in that during the three substantive hearings of the petition^[16], the judge did not indicate to counsel then appearing for the Company her concerns about the adequacy of the Composite Document or the matters canvassed in §§60 to 65 of the Judgment and so the Company was not given the opportunity to make out its case.

24.  It is apparent from the Judgment and the transcripts of the hearings of the petition that the judge did not raise with the Company again her concerns about the Composite Document in respect of the two components that made up the total price of what the Scheme Shareholders would receive.  As mentioned earlier, the focus at the petition hearings was on other matters.  The Company did not provide this court with the transcripts of the hearings of the OS.  But it is clear from the Judgment that the judge had, on more than one occasion at the OS hearings, made clear her concerns whether sufficient information had been provided in this regard in the Composite Document, albeit she had not made explicit what she regarded as lacking as mentioned in §§61 to 62 of the Judgment.

25.  It may have been helpful for the judge to make known to the Company, whether at the directions stage or the sanction stage, what specifically she had found lacking in the explanation given about the effects of the Scheme. But it could not be said that the Company was not given the opportunity to make proper submissions that the Scheme Shareholders had been given sufficient information in the Composite Document regarding the two components that made up the total price.  The Company ought to know that in ordering the Court Meeting to be held, the judge had not approved the Composite Document, nor had she ruled on the adequacy of the document.  To the contrary, the judge reiterated at the second OS hearing that it is the responsibility of the Company to ensure that the Explanatory Statement complies with all regulatory and statutory requirements and that this would be one of the issues to be considered at the sanction stage.

26.  We have reservations whether the complaints of procedural unfairness are made out.  We turn to consider the two substantive complaints raised in this appeal.

The headcount test

27.  The Scheme involves a “takeover offer” within section 674(5). And where a scheme involves a takeover offer, by virtue of section 674(2) the headcount test in section 674(1)(c)(ii) is replaced by the requirement that the votes cast against the scheme of arrangement do not exceed 10% of the total voting rights attached to all disinterested shares in the company (“the negative 10% test”).  In other words, for schemes involving a takeover offer, the dual requirements as stated in section 674(2) consist of a 75% majority in value of the voting rights of the members present and voting (“the 75% test”) and the negative 10% test.  See Re Cheung Kong (Holdings) Ltd [2015] 2 HKLRD 512 at §§37 to 39; Re Enice Holding Co Ltd [2018] 4 HKLRD 736 at §34; Company Registry’s Briefing Notes in January 2013, §§5 to 14.

28.  The headcount test is not applicable in this situation.  The judge had erred in considering that the court might not have jurisdiction to sanction the Scheme if the headcount test was not met.  On the evidence, the dual requirements of the 75% test and the negative 10% test are met. There is no jurisdictional obstacle in that regard.

The adequacy of the Composite Document

29.  The judge held that the Composite Document did not provide sufficient information to the Scheme Shareholders for three main reasons:

(1)  Although a comparison of value was provided in the Composite Document with inter alia the closing share prices over a six-month period, the comparison was made with the “total price” of HK$1.92 per Scheme Share.  There was no comparison between the closing share prices with the Scheme Consideration of HK$0.42 per Scheme Share^[17].

(2)  The Composite Document did not explain the alternative scenario on what the Scheme Shareholders could expect if the Scheme is not implemented^[18].  Instead, the Letter from the IFA only focussed on the reasons and benefits of the Scheme stated by the Company^[19].

(3)  More importantly, the Composite Document did not inform the Scheme Shareholders that given that the Company has proposed to use HK$2,554,934,909 out of its accumulated profits (“Relevant Reserve”) to pay the Special Dividend upon the Scheme becoming effective, it would be fair and reasonable to expect the Company to use the same amount to declare and pay a dividend to all the shareholders if the Scheme falls through, such that the shareholders will have the right to receive dividend at HK$0.375 per share in the near future (being the Relevant Reserve of HK$2,554,934,909 divided by total issued shares (6,812,201,460 shares)), and the right to receive further dividends out of the accumulated profits of the Company as and when the Company has sufficient cash fund to do so, or to realise their shares at the prevailing trading prices.  This is because the board of directors has already considered the financial position of the Company and decided that it is appropriate to use the Relevant Reserve to pay the Special Dividend.  It would be unreasonable, if not perverse, for the board to refuse to use the Relevant Reserve to declare and pay a dividend to all the shareholders if the Scheme is not implemented^[20].

30.  Mr Scott submitted that the judge’s above hypothesis on dividend is illegitimate for two reasons.  First, it ignores and contradicts the Composite Document.  Second, it amounts to substituting the judge’s own view on dividend policy for the Company’s dividend policy.  It is not for the court to ‘second guess’ the directors’ reasoning in their exercise of discretion regarding the declaration of dividends, or to substitute the court’s own view of what the directors ought fairly to have done.

31.  These are valid submissions.

32.  It is not right to hypothesise that if the Scheme were not implemented, the Scheme Shareholders can expect the Company to use the Relevant Reserve (for paying the Special Dividend at HK$1.50 per Scheme Share) to pay a dividend to all shareholders at HK$0.375 per share in the near future.  In the Explanatory Statement, it was stated that “the Scheme and the Special Dividend are inter-conditional”.  It was further stated that: “For the avoidance of doubt, [the Company] would not be in the position to pay the Special Dividend to the Scheme Shareholders if not for the AGL Waiver.  The reason is without the AGL Waiver, in addition to the payment of the Special Dividend to the Scheme Shareholders holding approximately 25.004% of the total number of [the Company’s shares] in issue, [the Company] would also have to pay the Special Dividend of approximately HK$7.66 billion in cash to the Offeror, AGL [and two of its direct wholly-owned subsidiaries] (which in aggregate hold approximately 74.996% of the total number of [the Company’s shares] in issue as at the Latest Practicable Date), thereby demanding approximately in four times the cash outflow of the Special Dividend with total amount of approximately HK$10.22 billion …, whereas [the Group] only has approximately HK$6.13 billion cash and cash equivalents as at 31 December 2019.”  This does not bear on the point because obviously the Special Dividend is higher than the dividend the judge referred to of HK$0.375 payable to all shareholders.

33.  The crucial point is that the Explanatory Statement also set out the dividend history of the Company in the last five years, from the year ended 31 December 2015 to the year ended 31 December 2019.  For the year of 2015, a total dividend of HK6 cents was declared.  For each of the subsequent years, a total dividend of HK8 cents was declared.  It was stated that if the relevant resolutions regarding the Proposal are not approved, no Special Dividend of HK$1.50 will be paid out of the distributable reserves of the Company and, “in such event, the APL Board will continue to adhere to its existing dividend policy while regularly reviewing the dividend policy and make necessary amendments and/or modifications to such policy if and when necessary or appropriate.”

34.  The Explanatory Statement has made it abundantly clear that the alternative to the Scheme would be reversion to the existing dividend policy of the Company and in that scenario no Special Dividend would be paid.  It could not be said that the intention to revert to the existing dividend policy must be unreasonable, if not perverse, if the board of directors in the exercise of their commercial judgment considered this to be in the best interests of the Company.

35.  As for the failure to make a comparison of the closing share prices with the Scheme Consideration of HK$0.42 per Scheme Share, it does seem that any Scheme Shareholder interested in making such a comparison has all the available information in the Composite Document to enable them to do this should they wish to do so, and the more important consideration for the Scheme Shareholders is the total price they will get under the Scheme for the cancellation of their shares and what their shares are worth in the market.  

36.  The judge was wrong to take the view that adequate explanation had not been given to the Scheme Shareholders.  This vitiates the exercise of her discretion in refusing to sanction the Scheme.

37.  The statutory requirements for sanction of the Scheme have been met.  The fairness test is also satisfied as we are satisfied that the Scheme is such that an intelligent and honest person, a member of the class concerned and acting in respect of his interest, might reasonably approve.  The privatisation has the overwhelming support of the Scheme Shareholders, who would have considered the information provided in the Composite Document on the commercial impact of the Scheme.  The court should be slow to differ from the majority views, as it normally acts on the principle that businessmen are much better judges of what is to their commercial advantage than the court could be (UDL Argos Engineering & Heavy Industries Co Ltd v Li Oi Lin at §25; Re Cheung Kong (Holdings) Ltd at §§22 to 23; Re Inmarsat plc [2019] EWHC 3470 (Ch) at §§30 to 34).  We have therefore exercised our discretion to sanction the Scheme.

38.  The judge had indicated in the Judgment^[21] that the Reduction of Capital is one which should be confirmed by the court if the Scheme should be sanctioned. Accordingly, we have confirmed the Reduction of Capital.

Hon Yuen JA:

39.  I agree.

Hon Barma JA:

40.  I agree with the Reasons for Judgment of Kwan VP.