AMOY PROPERTIES LTD v. THE COMMITTEE ON TAKEOVERS AND MERGERS AND COMMISSIONE FOR SECURITIES

CIVIL APPEAL NO. 121 OF 1988

IN THE SUPREME COURT OF HONG KONG

COURT OF APPEAL

(ON APPEAL FROM HIGH COURT)

MISCELLANEOUS PROCEEDINGS NO. 1054 OF 1988)

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J U D G M E N T

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Macdougall, J.

1. This is the judgment of the Court.

2. In August this year the appellant Amy Properties Ltd.("Amoy"), having been granted leave to do so, made application by originating motion for judicial review of a decision of the Committee on Takeovers and Mergers ("the Committee") of 16th May 1988.

3. The matter arose in this way. Amoy sought to takeover a public listed company, Local Property Company Limited ("Local Property"), whose authorized and issued capital was as follows:

Each of the 'A' and 'B' shares was entitled to one vote.

4. The controlling interest in Local Property was held by Bradbury Investment Company Limited ("Bradbury"), a charitable trust, which held 2,414,850 'A'. shares and 6,990,840 'B' shares.

5. Amoy expressed interest in purchasing Bradbury's controlling shareholding, and trading in Local Property's 'A' and 'B' shares was suspended on 20th April 1988. On 23 April Bradbury invited unconditional offers by way of sealed tenders from all interested parties for all its 'A' and 'B' shares. Conditions of tender were that tenderers were (a) required to tender for all Bradbury 'A' and 'B' shares in one package, (b) required to state the price offered for each 'A' share and each 'B' share and (c) allowed to pay a premium of up to 10% for the 'B' shares.

6. Amoy, whose bids were the highest received offered $120 for each 'A' share and $13.20 for each 'B'   share. These were accepted by Bradbury on 28th April and resulted in Amoy acquiring control of Local Property. The total purchase price paid to Bradbury was $382,061,088 which represented 52.25% of the votes and 43.25% of the issued share capital.

7. On 29th April Amoy announced that pursuant to the provisions of the Hong Kong Code on Takeovers and mergers ("the Code") it proposed making an unconditional general offer to purchase the remaining 'A' shares and 'B' shares of Local Property for and $13.20 each respectively

8. General Principle 3 of the Code states:

"3. When control of a company is acquired, it is normally required that, as soon as practicable thereafter; the controlling shareholder(s) should extend to other shareholders of the same class an offer on terms no less attractive than the highest price paid for shares purchased by the controlling shareholder(s) within the six months prior to acquiring control. If there is more than one class of equity share capital, a comparable offer should be made to holders of the other classes of shares. If a general offer is not made, it should be clearly demonstrated to the satisfaction of the Committee that to make such an offer would be unnecessary or unreasonable, or that there are other circumstances which would justify such an offer not being made. Reference in this regard should be made to Rule 33 hereof."

9. It is pertinent to observe that prior to its acquisition of control of Local Property, Amoy had not purchased any shares in that company.

The relevant part of Rule 33 provides:

"33.     (1) Further to General Principle (3) hereof except with the consent of the Committee, where

(a) any person acquires, whether by a series of transactions over a period of time or not shares which ….. carry 35% or more of the voting rights of a company;

(b) .....

such person shall extend an offer on the basis set out below to the holders of any clasas of share capital which carries votes and in which such person … hold (sic) shares. ..... A comparable offer shall be extended to the holders of any other class of equity share capital whether such capital carries voting rights or not.

    (2) .......

    (3) ……

    (4) The offer required to be made under the provisions of this Rule shall, in respect of each class of share capital involved, be in cash or be accompanied by alternative at not less than the highest price (excluding stamp duty and commission) paid by the offeror ..... for shares of that class within the preceding six months; ….. The committee should … be consulted where is more than one class of share capital involved.

….."

10. Complaint was then made to the Commissioner for Securities and Commodities Trading ("the Commissioner") by Wardley Corporate Finance Limited ("Wardley") on behalf of Local Property and some of its minority shareholders, and by Slaughter and May on behalf of another minority shareholders, that Amoy's general offer did not comply with the Code in that, having made an offer to purchase the 'A' shares at $13.20 each, Amoy had failed to make a comparable offer of $132 for each of the 'A' shares. No complaint was made of the price offered for the 'B' shares. The Secretary for the Commissioner fairly stated that the gist of Wardley's contention was that:

(a) it was the acquisition of the 6,990,840 'B' shares of $0.50 each representing 38.8% of Local Property's voting rights at $13.20 which triggered the general offer obligation;

(b) it was this particular acquisition which Should set the offer price;

(c) the $13.20 price paid for 'B' shares included a 10% premium;

(d) a 10% premium should also be payable for 'A' shares so that the price under the general offer should be increased from $120 to $132; and

(e) the price payable respectively for 'A' shares and 'B' shares should be in relation to their respective nominal values, and that this approach had been followed in some earlier cases.

11. The submission made to the Commissioner on behalf of Bradbury was that because the 'B' shares carried superior voting rights amounting to 66.78 of the total voting rights in Local Property as against 16.7% of its total equity, the 'B' shares could reasonably expect to attract a premium in excess of the pro rata price according to par value. It was on this basis that the 10% premium figure had been suggested to the tenderers. Moreover, half the tenders that had been received included a premium for the 'B' shares.

12. Wardley, and Slaughter and May further, submitted that, notwithstanding Amoy's purchase of both classes of shares the offer for the 'A' shares must be comparable with that for the 'B' shares. To achieve this result the price for the 'A' shares should be in the same ratio to the price of the 'B' shares, having regard to their respective par values. Furthermore, they contended that a premium for the superior voting rights of the 'B' shares was not justified.

13. The Commissioner referred the matter to the Committee for its determination, and the hearing was conducted on 4th May. It decided that the Code required that Amoy should extend a comparable offer to the other holders of the 'A' and 'B' shares and that accordingly Amoy's offer on the 'A' shares should be increased from $120 to $132.

14. After various complaints by Amoy, which the Committee rejected, it was agreed that the matter would be reheard on 16th May.

15. The hearing was concluded in the morning, and in the afternoon of the same day the Secretary of the Committee notified Amoy's representative by letter that "After carefully considering all the information available to it and the written and verbal representations of the various parties, a majority of the Committee determined that in the light of the $13.20 offer price for 'B' shares a comparable offer for those 'A' shares not already held price to be or controlled by Amoy required Amoy's offer $132.00 per share"

16. The letter also stated, inter alia, that "In reaching its decision the Committee also wishes to emphasise each case involving a company having more than one class of share capital is different from any other and that compatibility must be decided separately in each such case"

17. On 3rd June the Commissioner issued a press release in the following terms:

"The Takeovers Committee concluded that the price required to be offered for the 'B' shares (namely $13.20 being the amount paid under the tender and which was the highest price paid by the purchaser in the preceding 6 months) formed the basis on which a comparable offer should be made to holders.of the 'A' shares. (Note - Under Rule 33(4) of the Code, the price offered to minority shareholders of 'B' shares could not be less than the highest price paid by the offered within the preceding six months in this case $13.20. Rule 33(1) requires a comparable offer to be extended to holders of 'A' shares.)

    After carefully considering the written and verbal representations of the various parties, the majority of the Takeovers Committee determined that, in the light of the $13.20 offer price for 'B' shares, a comparable offer for those `A’ shares not already held or controlled by Amoy required, Amoy’s offer price to be increased from $120 to $132 per share. However, the minority of the Takeovers Committee took, a contrary view and contended that in essence because of the superior voting rights of 'B' shares, which were recognised and accepted as confering an advantage by the markets in Hong Kong and UK had more attraction than 'A' shares for the investing public, hence it was justifiable for premium to be attached to 'B' shares. Therefore, the minority felt, the offer for 'A' shares, at $120 already constituted a comparable offer."

18. Mr. Ogden, who with Mr. Andrew Li appears before us for Amoy, complains that, despite a request to do so, the Committee failed to give reasons for its decision. He frankly concedes that it was not obliged to do so but, in the light of the modern tendency in this regard he urges us to encourage the Committee to henceforwards provide reasons for its decisions.

19. While we do not think that the somewhat belated press release by the Commissioner can properly be described as the reasons of the Committee, it seems to us that the letter from the Secretary, notifying Amoy of its decision and the basis on which it was arrived at does not meet with the same objection.

20. Be that as it may, we are of the view that it is a matter for the Committee to decide whether it should give detailed reasons in any particular case.

21. Amoy lodged an appeal against the Committee's decision, but the Committee, while acknowledging that it had a discretion to exercise a right of review in exceptional circumstances refused to entertain an appeal on the ground that no such circumstances existed. Amoy then sought and obtained leave from Mayo, J. to apply for judicial review of the Committee's decision.

22. The application was heard by Jones, J. on 30th and 31st August. He was asked to make an order of certiorari quashing the decision of the Committee of 16th May - and, in so far as it was necessary, that of 4th May - that Amoy was required by the code to extend a general offer for the purchase of all remaining 'A' shares in Local Property at $132 per share. Amoy also sought declarations that the Committee's decisions were null and void and that the general offer proposed to be extended by Amoy for 'A' and 'B' shares in Local Property at $120 per 'A' share and $13.20 per 'B' share as announced was in accordance with the Code.

23. On 5th September the judge delivered a written judgment in which he ordered that the motion be dismissed with costs. It is against that order that the appellant now appeals.

24. The essence of Mr. Ogden's submission to us is that both the Committee and the judge erred in their interpretation of General Principle 3 and Rule 33. He suggests that the Committee may have been led into error as a consequence of advice that had been received from the Secretary to the Panel on Takeovers and Mergers in London in response to a request from the Commissioner that, inadvertently, may have misled the Secretary.

25. In setting out the factual background on which the Secretary was expected to base his advice, the Commissioner stated that "the financial advisers to the minority interest of [Local Property] now submit to the Takeovers Committee that as the mandatory bid was triggered by the acquisition of the 'B' shares from [Bradbury] (representing 38.3 per cent [Local Property's] total voting rights), in accordance with Rules 22(1) and 33(1) and (4) and General Principle 3 of our Code a "comparable" offer should be made to the remaining 'A' shareholders." (emphasis supplied)

26. Had the words used been "submit to the Takeovers Committee that the mandatory bid was triggered …" instead of "submit to the Takeovers Committee that as the mandatory bid was triggered ..."), the matter would have been accurately stated. The words actually used implied that it was accepted that the mandatory bid had been triggered off by the acquisition of the 'B' shares and not that this was simply Local Property’s contention. In fact the mandatory bid had been triggered by the acquisition of both the 'A' shares and the 'B' shares.

27. In his reply to this request the Secretary stated that he assumed the matter in issue was one of comparability of the offers. Moreover, in referring to the possibility of the purchase of shares having triggered a mandatory offer he referred to rule 9 of the 1987 City, Code on Takeovers and Mergers, which rule is not in pari materia with Rule 33 of the Hong Kong Takeovers Code Rule 33 was taken from Rule 34 of the 1976 City Code of Takeovers and Mergers and in all respects relevant to the present issue is couched in the same terms as Rule 34. However Rule 34 has now been supplanted by the materially different Rule 9 of the 1987 City Code on Takeovers and Mergers.

28. Whatever part, if any, the Commissioners request and the advice given in response to it may have played in the Committee's decision, the issue before us is whether the Committee erred in law in deciding that in the high of the $13.20 offer price for the 'B' shares, the issue of comparability arose. and required that Amoy make an offer price of $132 for the 'A' shares not already held or, controlled by it. This, as Mr. Ogden correctly submits requires us to construe both General Principle 3, which has no counterpart in either the current or former City Code on Takeovers and Mergers and Rule 33.

29. Paragraph 2 of the Introduction-of the Code states:

"2. The Code sets out the General Principles which constitute acceptable standards of commercial behaviour and which should govern takeovers and mergers in Hong Kong. The rules are, in some cases, no more than examples f the application of the General Principles, and, in other cases, rules of procedure designed to govern specific forms of takeover and merger transactions."

General Principle 1 provides:

"1. Any person engaged in takeover or merger transactions should observe the spirit as well as the precise wording of the General Principles and the Rules. Since it is impracticable to cover all devise detailed rules circumstances, the spirit will apply in areas or circumstances not explicitly covered by any General Principle or Rule."

30. On a reading of General Principle 3 set out earlier, it is clear to us that the word "class" in the passage "the controlling shareholder(s) should extend to other shareholders of the same class an offer on terms no less attractive than the highest price paid for shares purchased by the controlling shareholder(s) within the six months prior to acquiring control.",  imports the plural as well as the singular. It follows that the word "other" in the ensuing sentence "If there is more than one class of equity share capital, a comparable offer should be made to holders of the other classes of shares." refers to classes of shares that did not form the subject of the purchase that triggered the compulsory takeover.

31. Moreover, when General Principle 3 is read in conjunction with Rule 33, as we think it is plain that it should be, we find reinforcement of this interpretation. The wording of paragraph (a) of sub rule (1) with reference to the acquisition of "shares which carry 35% or more of the voting rights of a company" clearly does not limit the meaning of "shares" to shares of one class. The thrust of the Rule is directed at the acquisition of 35% or more of the voting rights of the company irrespective of the class or classes of the acquired shares which comprise the 35% or more of the voting rights.

32. Once that occurs the person who acquired the relevant shares is required to extend an offer to the holders of any class of share capital in the company which carries votes and in which that person holds shares. Having provided that the offer shall be not less than the highest price paid by that person for shares of that class within the preceding six months, sub rule (4) then goes on to provide that "A comparable offer shall be extended to any other class of equity share capital whether such capital carries voting rights or not."

33. This, in our view, clearly refers to classes of shares if any in the company which the person does not hold. It does not relate to the class or classes or classes of shares that the person. acquired, and there by triggered the mandatory offer. The offer that must be made to shareholders of the same class or classes of shares as that or those acquired by the person triggering the offer is readily ascertained since it is directly referable to the price or prices at which the person acquired the shares. There is no necessity to, ascertain what would be a comparable price offer. Such an exercise is only necessary where the shares are of a class different from that from which the offeror made his acquisition.

34. Nothing has been said to us that leads us to believe that what we understand to be the plain meaning of General Principle 3 and Rule 33 in any way violates the spirit of the Code.

35. Mr. Marshall contended on behalf of the respondent that the application of what he termed "the linguistic approach" to General Principle 3 and Rule 33 could in certain circumstances produce inequitable results, and in seeking to support the decision of the majority of the Committee, as upheld by Jones J., he quoted extensively from Weinberg and Blank on Takeovers and Mergers 4th edition.

36. We do not find that anything said by the authors of that work is of assistance to us in resolving this matter.

37. We note the words of paragraph 4 of the Introduction to the Code:

"4. The Code may be amended or extended from time by the Committee on Takeovers and Mergers in The light of experience. From time to time Practice notes may be issued and will be available from the office of the Commissioner for Securities. The Practice Notes should be read in Conjunction with the particular section of the Code to which they refer and are intended to serve as a guide only, being subject to amendment in the light of experience."

38. Those who are engaged in the securities market are entitled to rely on the Code. If the^, position were otherwise business life would be intolerable.

39. There may well be circumstances in which the Rules do not provide clear guidance as to what course of action is correct; and it is then that the Committee may have to resolve the problem by reference to the spirit of the Code. In the present case however we are of the view that the offer made by Amoy was clearly in accordance with General Principle 3 and Rule 33.

40. If the Committee is of the view that the Code should be amended in order, to ensure that offerors in circumstances similar to those in which Amoy found itself be required to make an offer to the remaining shareholders of the 'A' shares, it should amend the Code accordingly. Until then those who seek to gain control of public companies should be free to base their business strategy on compliance with. the existing provisions of the Code.

41. Although Mr. Marshall contended that Rules 14.1 and 9.1 of the 1987 City Code on Takeovers and Mergers were brought into existence in order to "remove ambiguities" in Rule 34 of the earlier Code, we note that the Committee has left the corresponding local Rule 33 untouched.

42. The Committee was established by the Securities Commission in pursuance of the power conferred on it by section 16 of the Securities Ordinance (Cap. 333) for the purpose referred to in section 13(d), of taking reasonable steps to safeguard the interests of persons who invest or propose to invest in securities. Although the code does not have the force of law, counsel for both parties agree that the decisions of the Committee have a strong element of moral compulsion and are susceptible to judicial review.

43. In referring to the Panel on Take-overs and "Mergers, Sir John Donaldson M.R. in Regina v. Panel on Take-overs and Mergers Ex-parte Datafin PLC [1987] 1 QB 815 observed at page 841:

"When it comes to its own rules, it must clearly be given considerable latitude both because, as legislator, it could properly alter them at any time and because of the form which the rules take, i.e. laying down principles to be applied in spirit as much as in letter in specific situations. Where there might be a legitimate cause for complaint and for the intervention of the court would be if the interpretation were so for removed from the material and ordinary meaning of the words of the rules that an ordinary user of the market could reasonably be misled."

44. In upholding the decision of the Committee Jones, J. said:

"In my judgment, it is plain that a comparability situation had arisen in this case so that the committee were required under the Code to decide what offers should be made to the minority Shareholders. I am therefore quite satisfied that the Committee did not misinterpret the terms of the Code. Having interpreted the provisions of the Code correctly, it was entirely a matter for the Committee to determine upon all the evidence placed before them, including whether any premium had been paid for the 'B' shares, what offers should be put forward by Amoy for the minority shareholders by way of a comparable offer."

45. For the reasons we have given we find ourselves unable to agree. In our view the Committee did misinterpret the Code. Its interpretation was so far removed from the natural and ordinary used of the words of General Principle 3 and Rule 33 that an ordinary user of the market could reasonably be misled. Accordingly it is not necessary for us to consider for Ogden's fallback submission that, had the Committee properly interpreted the Code, its decision was unreasonable in the sense given to that word by Lord Greene M.R. in Associated Provincial Picture Houses Ltd. v. Wednesbury Corporation [1948] 1 KB 223.

46. Accordingly we make an order of certiorari the decision of the Committee that Amoy is by the Code to extend a general offer for the of all remaining 'A' shares in Local Property 'A' share we declare that the general offer to be extended by Amoy for 'A' and 'B' shares quashing required purchase $132 per proposed Local Property at $120 per 'A' shares and $13.20 per 'B' share as announced on 19th April 1988 is in compliance with the Code.