CHENG KAI-MAN, WILLIAM v. THE PANEL ON TAKEOVERS AND MERGERS AND ANTOHER

1994, No. M.P.226

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

(MISCELLANEOUS PROCEEDINGS)

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J U D G M E N T

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1. The Panel on Takeovers and Mergers was directed by the Securities and Futures Commission to inquire into dealings of shares in Shun Ho Resources Holdings Limited. I shall call them "The Panel", "SFC" and "SHR" respectively. The Panel has made determinations whereby the applicant is, inter alia, required to pay very substantial monetary compensation to the shareholders of SHR as at November 1988. Mr Stephen Edward Clark sat as a member of the Panel. Pursuant to leave granted by Kaplan J., the applicant moves this Court to quash the proceedings in and determinations of the Panel together with its consequential orders on the ground of bias. It is not suggested that Mr Clark was in fact partial. In essence, the applicant's case is that Mr Clark's alleged complaint made in April 1991 to Mr Pascutto of the Committee on Takeovers and Mergers in respect to the purchase by Royle Corporation Limited (I shall call it "Royle") of 100,000 shares in SHR, constituted or brought about a real danger of bias affecting the proceedings in and determinations of the Panel and further, that through his company Anglo Chinese Corporation Finance, Limited (I shall call it "Anglo Chinese"), Mr Clark had a direct pecuniary interest in both the subject matter and result of the inquiry.

2. The more important features are set out below :

(1) In November 1988 or March 1989, acquisition of 9.682 million SHR shares allegedly raised the applicant's effective holdings therein from 34.5% to 42.6%;

(2) On 3rd September 1990, acquisition of 5.564 million SHR shares at 63.55} per share allegedly raised the applicant's effective holdings therein from 34.5% to 36.9%;

(3) On 11th.February 1991, acquisition of 1 million SHR shares allegedly raised the effective holdings of the applicant therein from 34.97% to 35.4%, and a few days early, on 4th February 1991, there had been an alleged acquisition of 1 million SHR shares effectively for the applicant; these shares were said to have been acquired at 35}, a price below the level of the market price on the previous trading day;

(4) In early April 1991 Royle acquired 100,000 shares in SHR at 40} K per share allegedly raising the applicant's effective holdings therein from 34.5% to 35.02%.

I shall refer to them as dealing (1), dealing (2), dealing (3) and dealing (4) respectively.

3. On the press announcements placed by Royle and SHR on 8th April 1991, concerns were expressed by Mr Clark to Mr Pascutto of the Committee of Takeovers and Mergers in his letter dated 9th April 1991 and faxed to SFC. The executive arm of SFC investigated the circumstances and advised the applicant to revise the then general offer of Royle to the minority shareholders of SHR. Thereupon the executive arm's investigation, subsequent to the letter of Mr Clark dated 9th April 1991, was and was regarded by SFC as satisfactorily concluded. In a response to the paper prepared by the Panel, legal advisers for the applicant spoke of dealing (4) as a matter "first drawn to the attention of" SFC by Mr Clark. In these proceedings, counsel for the applicant described the letter as a complaint. In the opinion of SFC, Mr Clark was expected to bring these matters in the public domain "to the attention of the SFC" and he was acting "properly in drawing the attention of the SFC to the press announcements".

4. By a letter dated 21st June 1991, acting for General Nominees Limited, a wholly-owned subsidiary of Chuang's Consortium Limited, Messrs Iu, Lai and Li complained to SFC primarily on the events in dealing (2), dealing (3) and dealing (4). Dealing (4) was sought to be revived as an alleged maneuver, artificial and deliberately designed through an option to oblige a bid to be made at a price below market levels. It was further urged that the applicant should make a bid of at least 63.55? per share. An inquiry was conducted by the E Committee on Takeovers and Mergers, but on 19th November 1991, in the course of such inquiry, General Nominees Limited through its same solicitors indicated that they no longer wished to pursue the complaint. However, the Committee on Takeovers and Mergers decided on its own motion to continue with the then inquiry with respect to dealing (2) and dealing (3). In the course of the investigation, a link to dealing (1) was found. In December 1991, the nature and procedural rules of the Committee were revised for the Panel which thereupon came to be seized of the continuing inquiry in November 1992.

5. In early August 1993, the legal advisers of the applicant discovered Mr Clark's letter of 9th April 1991 among the papers sent to them by SFC. In the latter part of August 1993, it was categorically disclosed to the applicant that Mr Clark was to be a member of the Panel. The applicant promptly objected to Mr Clark's membership, but his objection was dismissed on 8th September 1993.

6. In February to July 1993, Anglo Chinese, through one of its directors Mr Howe, approached Royle and these approaches resulted in the signing of a Mandate dated 27th July 1993. The approaches and the signing of the Mandate were probably known to Mr Clark. These matters had subsequently been disclosed in full to the SFC before the objection of the applicant was rejected.

7. I should set out the letter of Mr Clark dated 9th April 1991 and the Mandate dated 27th July 1993 :

"9th April, 1991	BY FAX
Mr Ermanno Pascutto
The Securities and Futures
Commission 38th Floor,
2 Exchange Square
8 Connaught Place Central
Hong Kong
Dear Ermanno,

I am writing to you in my assumed capacity as the keeper of the conscience of the Chairman of the Takeovers Committee. In the newspaper, Royal Corporation Limited announced that it had purchased 100,000 shares in Shun Ho Resources at 40$ per share, thereby triggering a takeover offer. Since the shares in Shun Ho Resources have, with the exception of one day in January, traded consistently above 40? per share over the last six months (see attached chart), the E seller must have been particularly well disposed to Royle Corporation to have sold share at below the market price. Has any enquiry been made as to the identity of the party who sold these shares, as it has the looks of a concert party action.

If you look back at the press clippings, you will find that William Cheng purchased marginally less than 35% of Standard Lloyds (now Shun Ho Resources) and the Soon family's shareholding dropped from about 65% to nil, the balance of the Soon family's holding apparently being placed. It is quite conceivable that William Cheng knew the identity of the placees as it is entirely illogical for him to have control a listed pyramid on such a small shareholding base.

Best regards,

Yours sincerely,
(sd)
Stephen Clark
SEC/dy
Encl."

"27th July, 1993

Royle Corporation Limited
3rd Floor Shun Ho Tower
24-30 Ice House Street
Central
Hong Kong

Attention : Mr William Cheng

Dear Sirs,

We set out below the basis on which Anglo Chinese Corporate Finance, Limited ("Anglo Chinese") will act for you in connection with the disposal by you or persons associated with you of an interest(s) in a company, a partnership or a business, or of assets of any of them, in this letter individual and collectively called "property".

In particular we will use our reasonable endeavours :

- to identify potential purchaser(s) of the property;

- to approach on your behalf potential purchaser(s); and,

- to assist with regard to the negotiation of the commercial terms for tnecessary,he sale and purchase of the property, including, if acting as a mediator between you and the purchaser(s).

Fees

In the case only of any disposal of any interest in Shun Ho Resources Holdings Limited our fees is subject to a minimum of US$200,000 and to a flat fee of 2% of the consideration paid instead of the graduated fees set out above which shall apply in all other cases and in the case only of any disposal of any interest in Shun Ho Resources Holdings Limited our fees will also include an additional, incentive fee equivalent to 20% of the consideration paid in excess of US$12 million.

............

Details of purchases/property

We will provide you with whatever information we may be able to procure in relation to the potential purchaser(s) for the purpose of the proposed transaction which we consider appropriate under the terms of our appointment. We will provide a potential purchaser with whatever information we consider appropriate in relation to the property, if necessary, including an information memorandum in connection with the property. We will obtain a confidentiality undertaking, if appropriate, from potential purchaser(s) and will obtain your approval in relation to the identity of a purchaser prior to releasing any such information to any such purchaser. .....

Please indicate your agreement of the above by signing and returning the endorsed copy of this letter.

Yours faithfully,

For and on behalf of

Anglo Chinese Corporate Finance, Limited

(sd)

Christopher Howe

Director"

8. The Mandate is clearly an agency agreement. Royle signed the copy and returned it to Anglo Chinese. Anglo Chinese therefore became an appointed agent for Royle on the terms and conditions contained in the said Mandate. The Mandate was a non-exclusive agency agreement subject to what I would regard as the crucial provision that Royle's prior approval of the identity of the potential purchaser must be obtained before the release by Anglo Chinese of appropriate information of the "property".

9. It stands to reason that an accuser or prosecutor, including a person who "has taken such a part in initiating" the inquiry, should be disqualified on the ground of bias. See The Queen v. Gaisford [1892]1 QB 381 at 383, per Mathew, J. By the belated amendments to the applicant's case, the applicant chose to confine himself to bias based on Mr Clark's alleged complaint and/or his alleged direct pecuniary interest. Judicial review challenges should be, whenever permissible, examined with a proper sense of balance otherwise Panel proceedings which have a vital purpose to serve would all likely be frustrated by the most trivial of the unmeritorious technical objection. In particular, objection on the ground of bias must not be allowed to be thought of as supporting "the erroneous impression that it is more important that justice should appear to be done than that it should, in fact, be done". See R. v. Gough [1993]2 WLR 883 at 907 Court, per Lord Woolf. More emphatic advice on perceived weakness of an intended application and the risk of its failure had to be encouraged if recourse to judicial review were to be kept readily open to the long list of palpable mistreatments by officialdom and bureaucracy.

10. Mr Clark's letter of 9th April 1991 focused on the acquisition of 100,000 shares by Royle below the then market levels with a hark back to the applicant's 1988 purchase of "marginally less than 35%". For the purpose of this application, I accept that the subject matter of the Panel inquiry and its result provided a link between the core matters examined and the press releases in April 1991 for the 100,000 shares favourably acquired by Royle and the applicant's control of SHR through his 1988 modest acquisition of less than 35%. The link lay in the alleged on-going manipulation to stealthily acquire, in breach of the Code on Takeovers and Mergers, more than 35% without a general offer. The applicant did not dispute that Mr Clark had a duty to report his own observations on the events referred to in his letter of 9th April 1991, but Mr Clark was accused of having assumed a policing role and expressed views, not wholly non-committal, on the very issues with which the Panel, finally returning the same determinations, had to grapple. The danger of subconsciously nurturing and, so to speak, clinging to Mr Clark's alleged pre-formed opinion was said to be real. In particular, it was pressed upon me that by noting such 100,000 shares acquisition in April 1991 as having "the looks of a concert party.

action", Mr Clark made a pre-determination with which the factual findings of the Panel converged. That clearly cannot be correct. The charge of a concert party action is serious. All Mr Clark had were the press releases and his own market statistics. It would be ludicrous to suggest that on such scanty material Mr Clark could feel comfortable to make any deduction. He had not even begun to try to identify the parties. He recognised the need for an investigation. All he did was to give his first impression of the events, viz. the looks of a concert party action. Mr Clark was apparently unaware of the option agreement claimed to have been negotiated at arm's length between the applicant and Mr Danny Chan, under which the 100,000 SHR shares were later sold to Royle at a price below market levels in April 1991. It would be, in those circumstances, utterly irresponsible to form any fixed view. Irresponsibility and gullibility were no part of the criticisms levelled against Mr Clark. There was no pre-determination. That is not the way, I think, the 1st paragraph should be read. Even if that paragraph could, in some way, obliquely connote the meaning suggested by Mr McCoy, counsel for the applicant, the residual doubt of such a possibility has been removed by the firm affidavit evidence of Mr Clark that he made no pre-determinations and had at no stage been less than wholly impartial.

11. In the second paragraph of Mr Clark's letter of 9th April 1991, another observation was made in these terms : "It is entirely illogical for (the applicant) to have controlled a listed pyramid on such a small holding base (marginally less than 35% of SHR)". The fact that the Panel inevitably expressed the same spontaneous curiosity would not ipso facto turn the natural reaction of Mr Clark into a factual pre-determination. Mr Clark did not have before him, when he wrote that letter, more than bare incidents. In both paragraphs, Mr Clark was just being openly inquisitive in the hope of evoking the interest of SFC. At most, he was merely suggesting the areas into which the Corporation Finance Division of SFC ought to look. Mr Clark did not act or give the appearance of acting as an informer, less a prosecutor. Mr Clark's letter, in substance and tenor, was not even close to a complaint. Much of the scenario, evidently imbued with imponderables, had yet to be explored. Fully cognizant of the want of full information, Mr Clark was far from seeking to present a prima facie case of any wrong doing. He was drawing attention to incidents which, if subjected to further investigation, might or might not disclose a or a potential breach for an inquiry. I need not enlist counsel's assistance on the relevance of the views expressed in the context of malicious prosecution by the English Court of Appeal as to what complaint would set the law in motion. Martin v. Watson, Times 27th January 1994. In my view, Mr Clark was not making a complaint. There was no or no real danger of bias concerning his participation in the proceedings and decision making process of the Panel. I am applying, of course, the recent test laid down in R. v. Gough, [1993]2 WLR 883.

12. Next I turn to consider the legal submissions advanced on behalf of the applicant. In the Gough case the nature of a charge of bias was finally settled. Having recounted the historical development of the concept of bias, of the two rival tests "a reasonable suspicion" and "a real likelihood" of bias, the Appellate Committee of the Privy Council rejected the reasonable suspicion test. Lord Goff favoured the real likelihood test in terms of possibility and not probability. The Law Lord concluded at p.900 A/B that "such a reading (made) the real likelihood test very similar to a test requiring a real danger of bias". Lord Woolf also preferred to put it as "a real danger of bias". See p.904 B. He regarded the test of a real likelihood of bias in the sense of a real possibility as "the equivalent of the real danger test". See p.905 bottom line. The test is now one of real danger of injustice, having regard to all the relevant circumstances. In considering the question, "in a sense (whether the tribunal) might unfairly regard (or have unfairly regarded) with favour, or disfavour, the case of a party to the issue under consideration", "the court (should give) effect to the maxim that justice must not only be done but seen to be done". See p.904 E and p.906 G/H. The Gough case exempted one special category of cases from the need of inquiring into whether there was any real likelihood of bias. That is the class of cases "where a person acting in a judicial capacity has a direct pecuniary interest", but in the Gough case the Appellate Committee was not called upon to closely examine the decisions on pecuniary interests. Of the test and its exception, Lord Goff and Lord Woolf spoke in general terms : "a pecuniary interest in the outcome of the proceedings" "any direct pecuniary interest, however small, in the subject of the enquiry, does disqualify person from acting as a judge in the matter" (quoting from R. v. Rand, (1866) LR1 QB 230, 232) p.895 G-H; "an interest in the outcome of the proceedings", "in the case of a pecuniary interest" p.896 E; "an interest in the outcome of the civil proceedings" p.897 G; "any interest in the outcome" p.898 H; "a direct pecuniary interest in the outcome of the proceedings" p.899 A/B; "an active interest in the schools" p.901 D/E; "direct pecuniary or proprietary interest ... in the subject matter of the proceedings" (quoting from Dimes v. Proprietors of Grand Junction Canal, 3 H.L. Cases 759) p.906 H; "any direct pecuniary or proprietary interest in subject matter of a proceeding" (quoting from R. v. Camborne Justices, ex parte Pearce, [1955]1 QB 41) p.907 A and "a pecuniary or proprietary interest in the subject matter of the proceedings" (quoting from the Dimes case) p.907 D.

13. In R. v. The Manchester. Sheffield and Lincolnshire Railway Company, (1867) LR2 QB 336, an attempt was made to more cogently explain the term "a direct pecuniary interest" used in Rand (1866) for the special situation to which, we now understand, the Gough test need not be applied. At p.339, Mellor J. had this to say : "The interest, however, which disqualifies at common law must be direct and certain, and not remote or contingent". Camborne (1955) came after. But one hundred years later, the same approach was adopted in Metropolitan Properties Company (F.G.C.) Limited v. Lannon and Others, [1969]1 QB 577. At p.598 G, Lord Denning spoke of the interest of a solicitor member in the Rent Assessment Committee thus : "I think this is too remote. It is neither direct nor certain. It is indirect and uncertain." It is interesting to note that in Lannon at p.587 G Lord Slynn who was a member of the Appellate Committee in the Gough case submitted as counsel, relying on Rand, that "the interest must be direct and not remote or tenuous and in the subject matter of dispute". Lannon was referred to in Gough, though in a different context, without any adverse comment. See Gough, supra. at p.900 B/C & 901 G. This universal concept was not departed from even in 1982. See R. v. Holyhead General Commissioners, ex parte Roberts (1982)56 TC 127 at 130 G/H. The same view is shared by Supperstone, Q.C. and Goudie, Q.C. in their publication "Judicial Review" (1992) at p.220. Professor de Smith in "Judicial Review of Administrative Action" 4th Edition at p.77 footnote 76 cited the Manchester, Sheffield and Lincolnshire Railway case. Professor Wade also refers to Lannon under the rubric of "The Rule Against Bias" in his Administrative Law, 6th edn. p.477. The meaning of the term as analysed in its proper context has stood the test of time.

14. A member of a firm of estate agents sitting in the Rural District Council was held to have a direct pecuniary interest in R. v. Handon R.D.C. ex parte Chorlev [1973]2 KB 696 at p.698. A managing director of a building company was also held to have a direct pecuniary interest in a related matter deliberated by the local council in which he sat as a member. Rands v. Oldroyd, [1959] 1 QB 204. Tracing it further back to In the Matter of Hopkins, (1858) E1.B1. & E1. 101, for the shareholders of a railway company interested in the justices' decision and to R. v. Cheltenham Commissioner, (1841)1 QB 467 for the partners of a company which owned the property under rate assessment. They are all cases of a direct pecuniary interest.

15. It would be quite unproductive to embark on any distinction between the subject matter and the outcome of the proceedings. Without the full facts, I have assumed that both are sufficiently linked to the April 1991 dealing (4) and the 1988 dealing (1). Mr Clark through the Anglo Chinese Mandate had a direct interest in the agency appointment. The questions for my consideration are : was his interest in the agency appointment a pecuniary interest and was his pecuniary interest direct and certain or indirect and uncertain? Had everything been dependent solely on the appointment of Anglo Chinese under the Mandate, itself an agency agreement, Mr Clark might arguably have a potential financial or pecuniary interest. The agency appointment had been secured, but would the appointment alone bring a pecuniary interest? If it would necessarily bring some pecuniary interest, the interest could be claimed to be direct and certain. It would not matter that little was expected to be reaped. As Blackburn J. observed in R. v. J.L. Hamman, (1863) The New Reports 140 : "An interest even less than a farthing will disqualify". But the agency appointment would not yield a benefit until a commission was earned. If no commission could, in reality, be expected to be earned, there was no certain pecuniary interest, nor would it be logical to speak of it as a direct interest. Conversely, if any pecuniary interest of Mr Clark was indirect, it would be futile to proceed to examine whether it was certain within the proper meaning of that word.

16. In Rands v.Oldroyd [1959]1 QB 204 and Bostock and Others v. Kay and Others (1989)153 JR 549, reference was made simply to "a direct pecuniary interest". In Rands at p.218, Streatfeild J. discussed "a direct pecuniary interest" in terms of a hope of the grant of a tenancy and a potential income from an existing one. The judge was dealing with Borough Council members who had been or would have on application only a hope of being allotted a council house. The Council was considering building contracts. The debate was : whilst the council members who had a council tenancy and thus enjoyed a potential sub-letting income, had a direct pecuniary interest, council members who had yet to apply for a council house should not be regarded as having any direct pecuniary interest. Clearly in Rands, the question of certainty was very much in the forefront. In Bostock, the five procedural steps were held not to have rendered the pecuniary interest too remote, but at p.555 H, Glidewell L.J. reached his conclusion on the clear evidence of "a very real chance that (the resolution to convert the school into a city technical college after five procedural stages) would be adopted." Again, "a very real chance" concerns degrees of certainty. The word "very" was probably an over emphasis.

17. In my view, the question as to whether or not Mr Clark had a certain pecuniary interest in the matter must be examined in the light of possibility. See also R. v. Burton, ex parte Young [1897]2 QB 648 where at 674, Collins J. observed : "As objection on the ground of pecuniary interest, though I agree that, however small the interest may be, if it exists, it will disqualify, still it must not be a purely speculative chance, as it is here, depending on an event which could not with any probability happen in Mr Burton's life time, namely, the dissolution of the incorporated law society," (Emphasis added). Differently put, the question is whether there is "a real chance" that Mr Clark would stand to gain through the agency appointment.

18. It must be assumed from the inception that the Panel would make, as it eventually did, the adverse findings and orders which now burden the applicant with heavy financial liability. The Mandate or agency agreement was a non-exclusive agreement. Even with all the self confidence of Anglo Chinese, much would depend on the market conditions, the possibility of locating a willing buyer of the "property" of Royle or persons associated with Royle, and the offered terms and price. Anglo Chinese would no doubt face competition. The stronger the market, the higher the reward, the fiercer the competitors would be. Not only would Anglo Chinese have to come by a buyer with the most favourable terms, it would have to successfully compete with all the other forces in the property market. Therefore, it would seem to be at least debatable as to whether Mr Clark had in fact any real chance of securing a certain pecuniary interest through his company Anglo Chinese on the non-exclusive Mandate. I would turn then to the more decisive factors : it is hard to tell whether the applicant, though having the control of Royle, would need to sell "property" or at all. It is not possible to rule out all his other alternatives. It is a difficult scenario for making any prediction in the case of a man with the applicant's many interests. It is a fact that the Mandate was not renewed on 27th January 1994 after the expiration of its six months' term. Anglo Chinese would have, as the agent, to obtain the approval of Royle "in relation to the identity of a purchaser prior to releasing any such information (as would be appropriate in relation to the "property") to any such purchaser". The very fact that Mr Clark was a member of the Panel which had, in the eyes of the applicant, brought upon him such endless trouble, would practically shut Anglo Chinese out of any hope to earn commissions under the Mandate. With findings and orders of such ramifications, it would be naive to expect Anglo Chinese to be able to obtain approval for the release of material information to potential purchasers under the Mandate. The nature of the Mandate, a non-exclusive agency agreement, was designed to preserve the benefit of first-made contacts so that once a potential buyer was approached with appropriate information, Royle would continue to respect the efforts of Anglo Chinese. Clearly, the Mandate, with Mr Clark on the Panel and, worse still, with the Panel having now delivered its adverse findings and stringent orders, was as good as a dead letter, even if renewable. It was and must have been understood by all to be an empty appointment. I would adopt the logical approach of Mellor J. in R. v. The Manchester. Shedfield and Lincolnshire Railway Company, supra, at p.339 by holding that Mr Clark had, at the material time, no certain or direct interest in the subject matter before the Panel and in its result. On a true analysis, Anglo Chinese had a futile agency appointment from at least the time when objection to Mr Clark's membership failed and had thus no pecuniary interest, direct or tenuous. It goes without saying that in all the circumstances, guided by the test in Gough, there was no real danger of injustice in this case.

19. For all the reasons I have given, I dismiss the application with, subject to what counsel have to say, an order for costs against the applicant.