SANYUAN GROUP LTD v. THE STOCK EXCHANGE OF HONG KONG LTD

HCAL 25/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTITUTIONAL AND ADMINISTRATIVE LAW

LIST NO. 25 OF 2007

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J U D G M E N T

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I.       INTRODUCTION

1.  Sanyuan was a listed company on the Hong Kong Stock Exchange. Sanyuan and its subsidiaries (the Group) had previously been engaged in transportation, property investment and pharmaceutical/ health care businesses. 

2.  The transportation business was discontinued in the last quarter of 2002.  The Group's investment properties were disposed of between 2001 and 2003 to repay bank borrowings.  Since 2004 the Group has been primarily engaged in biotechnology through a subsidiary, GenePro Medical Biotechnology Ltd.

3.  Shortly after April 2005 the Group entered into a joint venture with Jin Shun Branch Company (Jin Shun).  The Joint Venture Company so established was Tianjin Jinshun Pharmaceutical Company Ltd.  Jin Shun was the business of Tianjin Shi Yi Yao Company, a Mainland state enterprise engaged in the sale and distribution of pharmaceutical products in Tianjin.

4.  On 12 May 2004 Sanyuan applied to the Exchange for the suspension of trading in its shares.  The suspension took effect from the following day.

5.  The Exchange then informed Sanyuan that trading in its shares would not be allowed to resume unless Sanyuan could show compliance with Listing Rules (LR) 13.24.  That provides that:-

"An issuer shall carry out directly or indirectly, a sufficient level of operations or have tangible assets of sufficient value and/or intangible assets for which a sufficient potential value can be demonstrated to the Exchange to warrant the continued listing of the issuer's securities."

6.  This meant that, in order to forestall eventual de-listing, the Exchange required Sanyuan to submit a viable proposal for the resumption of trading of its shares.  Sanyuan consequently presented a resumption proposal on 18 November and 2 December 2005.

7.  By letter dated 9 December 2005 the Listing Committee (LC) of the Exchange’s Listing Division told Sanyuan that its resumption proposal did not satisfy the requirements of LR 13.24.  The letter warned that Sanyuan's listing would be cancelled on 28 December 2005.

8.  Sanyuan requested a review of the LC's decision to de-list its shares.  The review took place on 13 June 2006 before the Exchange's Listing Review Committee (LRC).  By letter dated 22 June 2006 to Sanyuan, the LRC upheld the LC's decision.

9.  Sanyuan applied for a review of the LRC's decision by the Exchange's Listing Appeals Committee (LAC).  Hearings took place on 22 November 2006 and 15 February 2007.  By letter dated 23 February 2007 the LAC upheld the LRC's decision and rejected Sanyuan's application.

10.  By these proceedings Sanyuan seeks judicial review of the decisions of the LC, LRC and LAC.

II.      BACKGROUND

11.  The LC's 9 December 2005 letter gave the following reasons for refusing to re-list Sanyuan:-

"Sufficient level of operations or have tangible assets of sufficient value and/or intangible assets

3.      Rule 13.24 requires an issuer to carry out, directly or indirectly, a sufficient level of operations or has tangible assets of sufficient value and/or intangible assets for which a potential value can be demonstrated to the Exchange to warrant the continued listing of the issuer's securities.

4.      The Proposal essentially comprises of the continuation of the business operation of GenePro Medical Biotechnology Limited (GenePro), the commencement of business operation of JV Company as detailed in the Company's [Sanyuan's] announcement of 3 June 2005 and a proposed rights issue to raise HK$15 million for the Group's working capital.

5.      GenePro is a wholly owned subsidiary of the Company, and specializes in DNA diagnostics, of which it develops and sells clinical diagnostic kits and provides clinical laboratory services. The business operation of GenePro has been incurring losses since its commencement in late 2001, which is largely due to the high research & development expenditure. GenePro business development was seriously stalled by the lack of funding due to the Group's heavy indebtedness.  The GenePro business is still at a preliminary stage and would not be considered a sustainable business for the purpose of Rule 13.24 due to its low level of operation and continued operating loss.

6.      The JV Company had only commenced operation in November 2005.  The JV Company is run by Jin Shun Yi Yao Company, Jin Shun Branch ('Jin Shun')'s previous management and that Jin Shun's customer base is expected to be transferred to the JV Company.  The Company has endeavoured to use the track record of Jin Shun as an indication of how the JV Company will perform in the future.  The Listing Committee is of the view that Jin Shun's track record may not be indicative of the JV Company's scale of operations.

7.      There is no confirmed order or sufficient track record to support the sustainability of its business run by the JV Company.  It is noted from the Company's submission that 99 drugs have been approved to be used by the government-run hospitals in Tianjin in 2006 under the centralized tendering system in China.  However, the tenders were awarded to Jin Shun and not to the JV Company.

New business of which the Company has no track record or management experience

8.      Jin Shun commenced operation in August 2003 and it traded pharmaceutical products principally in Tianjin and Beijing, PRC.  The JV Company took over Jin Shun's business in November 2005.  The Listing Committee however notes with concern that the Group effectively has no financial or management track record in the trading of pharmaceutical products and there is no evidence provided that the business can be sustained by the JV Company.  The business operated by the JV Company is considered a new business and thus a fundamental change in the nature of the Company's business.

9.      Based on the analysis of the Group's business for the three years ended 31 December 2004 and six months ended 30, June 2005, turnover was generated from transportation services, rental of properties and laboratory testing services. There was no turnover generated from distribution of pharmaceutical products.  Despite the Company's representation that one of its two principal activities is in the pharmaceutical healthcare business, GenePro is not considered to be engaged in the pharmaceutical business.  The pharmaceutical business would require the preparation and (especially medicinal) dispensing of drugs.  Based on the Group's financial records, the Group has never engaged in the pharmaceutical business contrary to the description in the annual report.  The Listing Committee does not consider the Company's failed attempts to invest in two joint venture companies with an intention to carry out pharmaceutical business as relevant.

Financial forecasts

10.    The Company forecasted a profit attributable to shareholders of HK$300,000 for the year ending 31 December 2006 and HK$2.3 million for the year ending 31 December 2007.  As the profit forecast has not been reviewed by auditors and the assumptions are without reasonable basis, it was considered that the information provided by the Company was not adequate to substantiate the profit and cash flow forecasts prepared.

11.    The inclusion of the 99 drugs on the approved list used by the government-run hospitals in Tianjin in 2006 under the centralized tendering system in China did not provide a sufficient level of comfort on the sustainability fo the sale and profit forecast a the hospitals and other customers would order the drugs on an 'as-needed' basis.  Historical orders alone may not provide a good basis for forecast on sale of these drugs under such circumstances.

Financial position

12.    The Group currently has limited working capital even after taking into consideration the proposed rights issue of HK$15 million.  It was noted that the Group forecasted a net cash outflow from the operations for the year ending 31 December 2006.  There was no clear information given in support as to the sufficiency of the Group's working capital and viability of the business model of the JV Company.

Regulatory licence

13.    The JV Company has not obtained the Good Supply Practice [GSP] certificate.  There is a real risk that the JV Company may need to cease its business operation in the future if such certificate was not obtained for whatever reason.

The Group's outstanding legal proceedings

14.    The Company has not addressed its outstanding litigations with Core Pacific-Yamaichi International (HK) Limited and China Energy Promotion Limited.  Taking into account the tight cash flow of the Company, the outstanding litigations if they were to proceed and the judgments were to be made against the Company would have an adverse impact on the Company's financial position and its operations would be greatly affected.

Experience of the Company's senior management

15.   The Board only has one director who is experienced with the Company's new business, that is, the JV Company's operations.  This was not considered sufficient as the JV Company's operation is the Company's only principal business."

12.  In addition to the above, the Listing Committee noted that Sanyuan's proposal amounted to "an attempt to achieve a listing of the business acquired [from Jin Shun] and a means to circumvent the requirements for new applicants set out in Chapter 8 of the Listing Rules".  Thus, even if the proposal for re-listing had been viable under LR 13.24, the Exchange would still have required Sanyuan to meet the specific requirements for new listings in LR Chapter 8.

13.  In its letter dated 22 June 2006, refusing Sanyuan's application for re-listing, the LRC stated the following:-

"1.     The Review Committee endorsed the points set out in paragraphs 3 to 6 of the First Decision Letter [that is, the LC's 9 December 2005 letter].

2.      Even with the benefit of the unaudited financial information of the JV Company for the three months ended 31^st March 2006 which was submitted by the Company at the Review Hearing, the Review Committee was not satisfied that the Company had complied with Rule 13.24 of the Listing Rules.

3.      Taking the above factors as a whole, together with the other facts and circumstances of this case, the Review Committee was not persuaded that the [LC's] decision was incorrect."

14.  In its letter dated 23 February 2007 the LAC rejected Sanyuan's appeal stating the following:-

"The Appeals Committee arrived at its decision for the following reasons:-

1.      despite the passage of time over which this review has been pursued, the Appeals Committee was not satisfied on the basis of the submissions made that the Company’s level of activities complies with Rule 13.24; and

2.      the Company has failed to demonstrate that its business could be sustained or generate profits for the future."

15.  Sanyuan makes the following broad complaints:-

(1)     The decisions of the LC, LRC and LAC were wrong in law.

(2)     The 3 decisions were contrary to and inconsistent with LR 13.24 and 14.06(6).  LR 14.06(6) relates to "reverse takeovers," that is, acquisitions by listed companies of businesses in an attempt to achieve the listing of substantial assets so acquired in circumvention of the requirements for new applicants in LR Chapter 8.

(3)     The LC, LRC and LAC failed to determine Sanyuan's applications according to law.

(4)     The 3 committees failed to act judicially in making their determinations.

(5)     The 3 decisions were irrational.

(6)     The 3 committees failed to take account of relevant considerations.

(7)     The 3 committees took account of irrelevant considerations.

(8)     The 3 decisions were contrary to natural justice.

16.  In this Judgment, I shall consider the decisions of the LC, LRC and LAC.  However, Sanyuan's application for judicial review was only in time for the LAC decision.  Nonetheless, since later decisions expressly or implicitly refer to earlier ones and the former are arguably intertwined with the latter, I am prepared to look at all 3 determinations.  In so proceeding, I should not be taken to accept that Sanyuan is entitled to a review of the decisions by the LC or LRC.

III.     DISCUSSION

17.  Sanyuan's broad complaints overlap. Sanyuan's more specific criticisms fall within one or more of the broad complaints just listed.  For the analysis in this Section, I have classified the specific criticisms under one or more broad grounds in such a way as to avoid repetition in exposition.  I have also organised the grounds in what I believe to be a logical sequence.

A.      Grounds 1 and 2: Decisions wrong in law in relation to LR 13.24

18.  Sanyuan argues that under LR 13.24 the committees should have restricted themselves to considering whether Sanyuan:-

(1)      had a sufficient level of operation; or,

(2)      had tangible assets of a sufficient value; or,

(3)      had intangible assets of sufficient potential value.

19.  But the committees (Sanyuan says) did not attempt to quantify (whether precisely or roughly) the level of operations or assets (tangible or intangible) which Sanyuan needed in order to be listed.  The committees (Sanyuan submits) instead proceeded on a broadbrush and subjective impression of Sanyuan's operations and assets.  The committees’ decisions, especially that of the LAC, then simply asserted that Sanyuan did not meet the requisite level of operations or assets without identifying what that was.

20.  Mr. Denis Chang SC (appearing for Sanyuan) submits that this was procedurally unfair.  It is also unfair (Mr. Chang says) in that the committees’ reasons for their decisions are inadequate.  At no point, whether at the hearing stage or in the committees’ decisions, was Sanyuan ever told what level of operations or assets it had to demonstrate in order to obtain a re-listing.  This meant in effect (Mr. Chang says) that Sanyuan was constantly being presented with an ever-moving target. 

21.  As part of the process for obtaining a re-listing, the Exchange repeatedly sought financial and other information from Sanyuan.  Mr. Chang does not complain about that.  Where his client (Mr. Chang suggests) had a legitimate grievance was in regularly being told by the various committees that the information provided was not enough without being informed as to what quantum of turnover, profit or asset was considered sufficient for the purposes of LR 13.24.

22.  In my view, there is merit in Mr. Chang’s submission.

23.  Mr. John Scott SC (appearing for the Exchange) responds that the Exchange is tasked with maintaining, as far as reasonably practicable, an orderly, informed and fair market. In discharging such duty, the Exchange must act in the interest of the public with particular regard to the interest of the investing public.  See Securities and Futures Ordinance (Cap.571) (SFO) s.21(1) and (2).

24.  SFO s.23 (Mr. Scott notes) authorises the Exchange to promulgate the LR for the proper regulation and efficient operation of the market, again bearing in mind the public interest, especially the investing public.  See, for example, LR 2.03 and (insofar as the LC, LRC and LAC are concerned) 2A.03.

25.  The Exchange (Mr. Scott says) is thus essentially a self-regulating body.

26.  The SFO obviously only contains broad provisions reflective of legislative policy that the stock market be regulated in an orderly, informed and fair manner.  When it comes to the day-to-day implementation of the Exchange's duties, the legislature (Mr. Scott says) defers to the Exchange's expertise, as reflected in the Exchange's power to fashion rules and procedures (such as the LR) for the detailed regulation of the stock market.  The legislature plainly intended (Mr. Scott stresses) the Exchange to have considerable latitude or discretion in formulating and enforcing its rules.

27.  Further, the LC, LRC and LAC (Mr. Scott points out) are made up of businessmen and other market practitioners (including lawyers, accountants and corporate finance advisers) with considerable experience in the operation of the Exchange.  As far as the daily operation of the market is concerned, the Courts can claim no similar expertise.

28.  Accordingly, in a judicial review, (Mr. Scott contends) the Court should be extremely slow to substitute its views for those of the experienced members of the relevant committees.  If the Court is to overturn the decision of any particular committee, it must be evident to the Court that such committee failed to comply with some legal norm or came to a decision which is wholly unreasonable.  The Court cannot review the substantive merits of an administrative decision by a committee.  It must instead confine itself to examining the legality of the decision or of the process by which the decision was reached.

29.  I fully accept Mr. Scott’s analysis which I have just summarised.  But that analysis does not answer Mr. Chang’s point.  That the Exchange is a self-regulating body and the Exchange’s Listing Committees are made up of experts in the market cannot by themselves override the need for fairness and transparency in the application of LR 13.24.

30.  An applicant must at least be entitled to know what standard of operation or what sort of asset base he is expected to have in order to qualify for re-listing.  If his resumption proposal is rejected, an applicant cannot simply be told that his turnover, profit or assets are considered insufficient.  That is tantamount to giving no reasons.  The applicant further needs to be informed in what sense his financial numbers have been deemed to be insufficient.  The applicant is entitled to know just what level of operation or asset base he has fallen below.

31.  Mr. Scott argues that, by their nature, the deliberations of businessmen and practitioners on market matters are bound to have some element of the robust and broadbrush.  Where the public interest lies, especially that of the investing public, is an abstract question.  It cannot (Mr. Scott suggests) be a decision which is capable of precise measurement in every case.  Indeed, Mr. Scott observes that there can be no “one size fits all” standard that will apply to all companies in all circumstances. 

32.  Again I am not persuaded that Mr. Scott’s submission answers Mr. Chang’s point.

33.  It may often be that a committee will have to go by its "feel" in relation to a given application. But the committee must still ground such "feel" in stated reasons.  It may be that the "feel" cannot be fully articulated in words or reduced to a neat numerical calculus.  But the membership should at least give a “ball-park” figure or guideline of what it expects from an applicant.  The strict application of that “ballpark” figure or guideline could then be left to the discretion of a committee in light of the special circumstances of a given case.

34.  Let me give an example to make clear what I am saying.

35.  The reasons stated by the LAC in its letter of 23 February 2007 are cryptic.  Mr. Ronald Arculli (who was the chairman of the relevant LAC) has amplified those reasons on affidavit as follows:-

"20.   The Applicant's Interim Report for the six months ended 30 June 2006 ('the Interim Report') was already issued before the Hearing took place.  We were able to consider the actual financial results of the Applicant as at 30 June 2006 and compared them with the forecasts of the Applicant's performance set out in the resumption proposal. We considered the Applicant's actual financial results to see if they validated or invalidated the Listing Division's arguments. The information in the Interim Report however did not support the Applicant's submissions that its level of operations and the value of its tangible and intangible assets were sufficient to satisfy Rule 13.24.

21.    Before November 2005, the Applicant's business was only conducted through GenePro ...  According to the Interim Report, GenePro's business only generated turnover of around $610,000 during the period from 1 january to 30 June 2006.  In our view, this was not a sufficient level of operation for a listed company.

22.    A joint venture company, Tianjin Jinshum Pharmaceutical Co. Ltd. ('Tianjin Jinshun') was formed by Beadle, a wholly owned subsidiary of the Applicant with three parties in Mainland China.  This was a step taken by the Applicant to restore its financial position and its level of operation by carrying out the business of Tianjin Shi Yi Yao Company Jin Shun Branch Company (Jin Shun) through the joint venture company in Mainland China.  Jin Shun engaged in the sales and distribution of drugs in Mainland China.

23.    Tianjin Jinshun's business did not have much value and had rather thin profit margins.  According to the Interim Report, the turnover generated by Tianjin Jinshun during the period from 1 January to 30 June 2006 was only around HK$73,059,000.  We did not think this level of operations was sufficient to satisfy Rule 13.24.  This is not the case where the Applicant bought assets which have significant profitability.  In any event, resumption of trading would not be granted simply because the Applicant's management injected funds into the company.  The key issue was whether the Applicant was able to demonstrate that it had a sufficient level of operation or assets of sufficient value to satisfy Rule 13.24 of the Listing Rules.

24.    We also took into account the Applicant's staff costs.  In our view, staff costs is an indicator showing whether the management of a company is dedicated to buildings its business.  The Interim Report stated that the Applicant's staff costs from 1 January to 30 June 2006 was HK$1,595,000.  The Applicant's expenditure on staff costs was only around HK$265,800 per month during the six-month period.  This indicated to us that the Applicant's management had not been putting adequate resources to build its business."

36.  Mr. Arculli’s reasons for rejecting Sanyuan’s financial figures as inadequate are on close inspection little more than assertions.  GenePro’s turnover of $610,000 is said to be insufficient for a listed company.  GenePro is in fact only a subsidiary of Sanyuan.  Its turnover cannot represent the full picture of Sanyuan’s turnover.  But even taking Mr. Arculli’s statement at face value, why is a turnover of $610,000 for a subsidiary considered an insufficient level of operation for a listed company?  What turnover is Mr. Arculli looking for? 

37.  Mr. Arculli states that a turnover of $73,059,000 for the JV Company is insufficient to satisfy LR 13.24.  But by what benchmark does Mr. Arculli come to this conclusion?  It may be that he is depending partly on his “feel”.  However, I do not think that the process of re-listing can simply be a matter of subjective assessment without reference at all to some objective standard.  The decision-maker needs to root his “feel” in something concrete.

38.  Mr. Arculli thinks that monthly staff costs of around $265,800 is inadequate.  Again one asks why?  What in Mr. Arculli’s view would be a minimum adequate figure?

39.  In fact, the LC, LRC and LAC simply rejected Sanyuan’s financial figures as “insufficient” without any attempt to articulate any objective reference by which their conclusions were reached.  I do not think that can be right.  An objective standard has to be identified.  That standard may or may not be deviated from due to particular reasons as a matter of discretion.  But it cannot be enough for the purposes of transparency merely to assert that what has been profferred is insufficient as far as the experts are concerned.

40.  Mr. Scott suggests that it is not always possible in a given case to articulate a standard.  But that argument seems self-defeating.  If it was impossible to articulate an objective benchmark applicable in the case of Sanyuan, how could Mr. Arculli dismiss particular financial figures as insufficient or inadequate?  One asks rhetorically: if there is no identifiable benchmark, how could the LAC possibly have ever formed a view?  I note that, certainly in the case of new applicants for listing, the Exchange has been able to define in LR Chapter 8 specific benchmarks that need to be met.

41.  Finally, Mr. Scott argues that, by any reckoning the numbers shown in 2006 Sanyuan’s Interim Report are on the low side.  Those figures could not conceivably qualify Sanyuan for re-listing so that, whether or not objective standards should have been incorporated into the committees’ decisions, there is no point in allowing this review.

42.  I am unable to accede to this submission.  As I repeatedly pointed out to counsel in the course of oral submission, the Court is not in the position of a market practitioner.  Bereft of expertise in the affairs of the stock market, I should be wary of expressing any view as to what quantum of turnover or profit is or is not so obviously low as to disqualify a company for re-listing. 

43.  Accordingly, it seems to me that Sanyuan is entitled to have the LAC’s decision quashed for procedural unfairness and inadequacy of reasons.  I would remit the matter to the LAC (differently constituted) for reconsideration in accordance with the law.   

B.      Grounds 3, 4, 5 and 6: Decisions did not take account of relevant matters

44.  Sanyuan alleges other egregious errors in the committees' reasoning.  In light of my conclusion above, it is strictly not necessary to deal with these other grounds.  However, for completeness I should briefly comment on the other matters raised by Sanyuan.

45.  First, Sanyuan argues that, objectively, there was no basis for the committees to contend that the business of the JV Company constituted a "fundamental change" in the Group's business. 

46.  In particular, the statement by the LC that "pharmaceutical business would require the preparation and (especially medicinal) dispensing of drugs" is said by Sanyuan to be pure assertion.  The Group (Sanyuan suggests) operated "within the broader 'healthcare' industry and pharmaceuticals are derived using a variety of methods".  Sanyuan submits that, through GenePro, the Group had been "involved in medicinal diagnostics, diagnostic pharmaceuticals and bio-pharmaceuticals derived from biotechnology".

47.  Second, insofar as they held that the Group had no relevant management experience, the committees (Sanyuan says) wrongly dismissed the biographies of the Group's senior management.  Sanyuan points to at least 6 persons who "have substantial relevant pharmaceutical experience". 

48.  Third, Sanyuan complains about the committees' finding of a lack of confirmed orders.  The JV Company (Sanyuan notes) was an exclusive supplier of a substantial number of products prescribed for common medical conditions. 

49.  Fourth, there was (Sanyuan argues) no basis for the committees' conclusion that the JV Company had no track record given Jin Shun's revenues for the year ended 31 December 2004 (over $110 million) and for the 4 months ended 30 April 2005 ($50 million).  By the time Sanyuan's proposal had been considered by the LC, all dealership arrangements with relevant drug manufacturers and supply contracts between Jin Shun and its customers had been novated to the JV Company.  Thus, the committees could and should have judged the JV Company by reference to Jin Shun’s track record.

50.  Fifth, there was no justification for the committees' belief of a real risk that the JV Company would not obtain a GSP certificate.  By the time of the LAC hearing, a GSP certificate had in fact been obtained by the JV Company.

51.  Sixth, at the relevant time, many listed companies on the Stock Exchange's Main Board had turnovers of less than $5 million, had experienced losses during recent financial years and had experienced minimal turnover.  The committees (Sanyuan complains) failed "to take any note of these companies as objective comparison" even though Sanyuan had a higher turnover.

52.  Moreover, Sanyuan's level of operation (it is said) was no less than 2 of the 3 companies (Shanghai Merchants Holdings Ltd., Great Wall Cybertech Ltd. and Hong Kong Pharmaceutical Holdings Ltd.) that the Exchange had recently allowed to resume trading. 

53.  Sanyuan reasons from all this that the Exchange was applying different standards among listed companies.

54.  I am not persuaded by Sanyuan's criticisms.

55.  First, there must plainly have been some change in Sanyuan's business.  As at 2004 it had ceased its property and transportation businesses and focused on biotechnology through GenePro.  Even then GenePro was a relatively young business at the time of Sanyuan's application to re-list, having only been started in 2001. 

56.  Further, the resumption proposal relied to a great extent on the JV Company.  However widely or narrowly one defines pharmaceutical business, I am unable to say that it was wholly unreasonable for the committees to treat GenePro's business (relating to the development of specific and exploitation of technologies) as significantly different in nature from that of the JV Company (relating to the supply of drugs and other medicinal products).

57.  I therefore do not think that it was irrational to characterise the transition in Sanyuan's business as constituting a "fundamental" (as opposed to a merely "minor") change.

58.  Second, it is one thing to say that 6 individuals have had separate experiences on pharmaceutical matters.  It is another thing to say that the individuals have had experience working together as a well-integrated management team on a pharmaceutical company's board. 

59.  Thus, for instance, the Listing Division in its Report to the LRC dated 26 January 2006 stated (at §32):-

"Save for the former management of Jin Shun who now forms the senior management of the JV Company, the Group has no financial or management track record in the trading of pharmaceutical products.  Given the short period of time that the former staff of Jin Shun has been transferred to the JV Company, the Company [Sanyuan] has yet to demonstrate that the management team, as a whole, has the ability and expertise to execute the new business initiatives of the JV Company.  We also note that none of the former senior management members of Jin Shun are on the Company's board of directors."

60.  I am unable to say that such evaluation is so unreasonable that no rational committee could have so concluded.

61.  Third, I do not think that the LC's concern about the lack of confirmed orders can be described as irrational.  The mere fact that the JV Company was a distributor of a substantial number of drugs used for common ailments does not necessarily mean that it would have a significant volume of sales.

62.  Fourth, I doubt that one can legitimately deduce anything about the JV Company from Jin Shun's track record.  As pointed out in the Report by the Listing Division to the LRC, the senior executive or management environment of the JV Company was not identical to Jin Shun's.  It does not follow from the fact that Jin Shun's staff worked well under the senior management of Jin Shun that they would function as smoothly under the different aegis of the JV Company.

63.  Fifth, it does not seem on the evidence that the GSP Certificate played any significant part in the LAC's decision.  Thus, whatever the LC and LRC may have thought, I do not see how this matter remains relevant.  In any event, before the GSP Certificate was acquired, a committee may legitimately have concerns that for whatever reason the Certificate might not be obtained.

64.  Sixth, I do not think that there is much point in blindly comparing the turnovers of various listed companies out of any context. 

65.  As Mr. Arculli points out in his evidence, much depends on the particular circumstances of a given corporation, especially its business model.  Mr. Arculli further notes that the LAC "did not consider it appropriate to adopt a 'lowest common denominator' approach by reference to the least well-performing listed company still on the Exchange".  The Exchange's duty was to assess Sanyuan's resumption proposal in light of the circumstances relevant to Sanyuan.

C.      Grounds 3, 4, 5 and 7: Decisions took account of irrelevant matters

66.  Sanyuan criticises the LAC for considering the following matters in the course of hearing oral submissions from Sanyuan's representatives:-

(1)     A Feedback Statement dated 7 February 2005 prepared in connection with the Stock Exchange's Consultation on Continuing Listing Criteria and Related Issues.

(2)     The use of Cefpiroml Sulphate.

(3)     The discrepancy between the figures forecast in Sanyuan's resumption proposal for pharmaceutical product inventories, trade and other receivables, and trade and other payables (respectively, $7.4 million, $40 million and $42 million) and the actual figures for the same period stated in Sanyuan's Interim Report (respectively, $4.8 million, $15.5 million and $18 million).

(4)     The credit period of 3 to 6 months given to purchasers of pharmaceutical products.

(5)     GenePro and a valuation report of GenePro's business by City University.

67.  I am not persuaded by the matters advanced by Sanyuan.

68.  The fact that a tribunal dwells on an irrelevant matter at (possibly) some length during a hearing does not mean that the tribunal's eventual decision is automatically invalid.  At the end of the day, despite the length of time spent on an irrelevant matter, it may play little or no part in the tribunal's substantive reasoning and eventual determination.  It would be wrong in such situation to say that the final decision was irregular on the ground of irrelevant consideration.

69.  Now, consider each item objected to by Sanyuan.

70.  The Feedback Statement.  Complaint is made about a reference by Ms. Christine Kan of the Listing Division of the Stock Exchange in the course of making submissions to the LAC.  She stated that, as far as the Listing Division was concerned:-

"resumption is best achieved if the applicant can present a clear, plausible and coherent proposal which meets or is close to the qualitative standards required for a new listing applicant under Chapter 8 of the Main Board Listing Rules".

71.  Sanyuan says that this was an attempt to impose more stringent requirements than those in LR 13.24.  Sanyuan claims that Ms. Kan's submission originates from the Feedback Statement which is simply a consultation document and on its own terms did not change LR 13.24.

72.  But Ms. Kan's words were merely a submission to the LAC.  It is far from clear that the LAC accepted her submission. 

73.  Cefpiroml Sulphate.  Although Mr. John Strickland of the LAC asked questions of the Group Chairman about this product, the evidence is that the response (or lack of it) to his question did not play any significant part in the LAC's decision.

74.  Discrepancies in figures.  This was a matter of concern to the LAC.  But I do not see how such was in any way an irrelevant or misplaced concern.  If there was a discrepancy between projected and actual figures for whatever reason, a committee member must clearly be entitled to explore the matter.

75.  Credit period.  On the evidence this matter did not play any significant part in the LAC's final decision.

76.  GenePro.  Sanyuan says that GenePro constitutes an insignificant part of its business.  That may be the case.  But I do not see why it was irrelevant to raise GenePro with Sanyuan during the hearing before the LAC.  Among other things, the LAC was concerned that Sanyuan's experience with GenePro was not substantial enough to guide Sanyuan’s management of the JV Company.

D.      Grounds 1 and 2: Decisions had no basis for invoking LR 14.06(6)

77.  Sanyuan says that, prior to the LC's decision, the Stock Exchange never indicated that it considered the acquisition of the JV Company as equivalent to a "reverse takeover".  There was no justification then (Sanyuan argues) for the LC’s view that the acquisition of the JV Company should be treated as a "reverse takeover".

78.  LR 14.06(6) in fact did not play any part in the decisions of the LRC and LAC.  It is therefore a moot point to consider whether the LC was right to think that, even if LR 13.24 had been met, there would still be a problem in relation to LR 14.06(6).  In light of my conclusions on a lack of objective assessment as far as LR 13.24 is concerned, I do not consider this complaint further.

IV.     CONCLUSION

79.  Sanyuan's judicial review application succeeds.  The LAC’s decision is quashed.  The question of Sanyuan’s re-listing is to be remitted to the LAC (differently constituted) for reconsideration.

80.  Although Sanyuan has succeeded, much of these proceedings concerned issues on which I have found against Sanyuan.  I consequently do not think that Sanyuan should have all its costs. There will be an Order Nisi that Sanyuan is to have 50% of its costs.  There will also be an Order Nisithat the Exchange is to have the costs of and occasioned by Sanyuan’s application to adduce further evidence (that is, the Affirmation of Yeung Kai Cheung Patrick and the Affidavit of Yip Ki Chi Luke).  All costs are to be taxed if not agreed.