AMOY PROPERTIES LIMITED v. THE COMMITTEE ON TAKEOVERS AND OTHERS

M.P. 1988 No. 1054

IN THE HIGH COURT OF JUSTICE

HONG KONG

MISCELLANEOUS PROCEEDINGS

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JUDGMENT

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1. By a motion issued on the 21st June 1988 pursuant to leave granted by Mayo J. on the 14th June 1988 the applicant Amoy Properties Limited (Amoy), a public listed company, seeks relief by way of judicial review in respect of two decisions of the Committee on Takeovers and Mergers given on the 4th and the 16th May 1988. The respondent to the motion was originally the Commissioner for Securities and Commodities Trading. However, by an amendment that was made by consent during the hearing, the title of the respondent was changed to the Committee on Takeovers and Mergers and Commissioner for Securities sued on his own behalf as a member of the Committee and on behalf of all other members of the Committee.

2. The Committee on Takeovers and Mergers (the Takeovers Committee) is a Standing Committee of the. Securities Commission established under section 16 of the Securities Ordinance, Cap. 333. The main function of the Takeovers Committee is to provide guidelines to companies and their advisers with regard to takeovers and mergers of public companies in Hong Kong. Guidelines are set out in the Hong tong Code on Takeovers and Mergers (the Code), but the Code does not have the force of law.

3. Towards the end of April 1988, the Commissioner for Securities (the Commissioner) became aware of an intended takeover of a public listed company Local Property Company Limited (Local) by Amoy.

4. The authorised and issued capital of Local was as follows :-

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

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

6. Trading in the shares of Local on the Hong Kong Stock Exchange was suspended on the 20th April 1988 when interest was expressed in the purchase of Bradbury's controlling shareholding. This led to an invitation by Bradbury on the 23rd April 1988 for unconditional offers to be made by way of sealed tenders from all parties interested for all their 'A' and 'B' shares. It was a condition for each tender that a bid be made for all the 'A' and 'B' shares in one package. Parties interested were informed that a premium of up to 10% could be made for the 'B' shares.

7. Amoy succeeded in acquiring control of Local when its offers of $120 for each 'A' share and $13.20 for each 'B' share were accepted by Bradbury. Amoy's bids were the highest offers that were received. The total purchase price paid to Bradbury amounted to $382,061,088 which represented 52.25% of the votes and 43.25% of the issued share capital. The sale and purchase was completed on the 29th April 1988.

8. Prior to the acquisition, Amoy had not purchased any shares in Local.

9. Having obtained control of Local Amoy announced that pursuant to the provisions of the Code, it would make an unconditional offer to purchase the remaining 'A' shares of Local for $120 each and the remaining 'B' shares for $13.20 each. It will be convenient at this stage to refer to those parts of the Code and the Rules set out in the Code which apply when control of a company which has more than one class of share capital is acquired. General Principle 3 of the Code reads :-

"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."

Rule 33 where relevant provides as follows :-

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

 

such person shall extend an offer on the basis set out below to the holders of any class of share capital which carries votes and in which such person ..... hold 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.

 

        (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 a cash 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 there is more than one class of share capital involved.............."

It is pertinent to observe that Amoy did not consult the Committee under Rule 33(4) as they were obliged to do when two classes of shares are involved.

10. Wardley Corporate Finance Limited (Wardley), financial advisers to Local and to some of its minority shareholders and Slaughter & May, the legal advisers to another minority shareholder, Hong Kong Realty and Trust Company Limited complained to the Commissioner that the general offer made by Amoy did not comply with the Code for whilst they did not challenge the price of $13.20 for the 'B' shares, they argued that a comparable offer for the 'A' shares should be $132 instead of $120. The case for the minority shareholders was summarised by the Secretary to the Commissioner in the following words :-

"In essence Wardley contends that :-

 

11. East Asia Warburg Limited who acted for Bradbury in the sale submitted to the Commissioner that as the 'B' shares carried superior voting rights amounting to 66,7% of the total voting rights in Local as against 16.7% of its total equity, the 'B' shares could be expected to attract a premium over the pro rata price according to par value. The figure of 10% that was suggested to the tenderers was made on this basis. Of all the tenders that were received, half included a premium for the 'B' shares.

12. It was argued on behalf of Amoy that where 'B' shares were sold in a situation that would lead to control, a premium could be expected to be paid over the pro rata price.

13. By their argument in opposition, Wardley and Slaughter & May contended that the offer for the 'A' shares had to be comparable with the offer for the 'B' shares despite the fact that Amoy had bought both classes of shares. Accordingly, 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. They also submitted that a premium was not justified for the superior voting rights of the 'B' shares.

14. The issue was then referred by the Commissioner to the Takeovers Committee which heard the application on the 4th May 1988. The members who sat on the Committee were the Acting Commissioner of Securities, two members of the Securities Commission, a representative of the Stock Exchange and a representative of a financial institution. The Committee decided that the Code required that a comparable offer be extended by Amoy to the other holders of the 'A' and 'B' shares and ruled that having regard to the offer of $13.20 made for the 'B' shares, a comparable offer required Amoy's offer price for the 'A' shares to be increased from $120 to $132.

15. Amoy expressed dissatisfaction with the Committee's decision and complained that they were deprived of the opportunity to deal with certain matters which breached the requirements of natural justice. The Committee rejected the complaints but agreed to a rehearing which took place on the 16th May 1988. This hearing was to supersede, in all respects, the previous hearing on the 4th May 1988.

16. At the rehearing, the Committee members again included the Acting Commissioner of Securities and three of the members who had sat on the previous Committee with the addition of the Acting Deputy Commissioner, three representatives from financial institutions and a representative nominated by the Unit Trusts Committee. After considering the written and verbal submissions from the interested parties, the Committee by a majority came to the same decision that was made at the previous hearing. No reasons were given by the Committee for their decision on either occasion.

17. An appeal was lodged against the Committee's decision by Amoy to the Securities Commission. The Securities Commission accepted that although no right of appeal is prescribed by the Code, they have a discretion to exercise a right of review in exceptional circumstances. However, the Securities Commission considered that there were no exceptional circumstances in this case, so that Amoy's request was refused.

18. The motion is now confined to the following relief:-

19. Mr Strawbridge, counsel for the respondent conceded that a decision of the Committee can be the subject of judicial review.

20. I shall now deal with two subsidiary submissions, neither of which are relied upon as substantive grounds, which were made by Mr Ogden, Q.C. who appeared for Amoy, relating to bias and lack of reasons. In respect of bias, he argued that it should be taken into account where a prima facie case has been shown. Bias arises because four members who sat on the first Committee also formed part of the second Committee. It is too late to raise this matter as a substantive issue for the complaint should have been made at the hearing by Amoy. In any event, there was no evidence to show that any one of the four members was biased nor was their integrity impugned. The hearing was properly and fairly conducted. In all the circumstances, I do not accept that bias is a factor to be taken into consideration.

21. The second ground relates to the Committee's failure to give reasons for their decisions. In fact, although the Committee did not deliver a written decision setting out its reasons, the Commissioner for Securities made reference to the decision in a press release on the 3rd June 1988 which reads as follows :-

22. My attention was drawn by Mr Ogden to Norton Tool Co. Ltd. v. Tewson⁽¹⁾; Alexander Machinery (Dudley) Ltd. v. Crabtree⁽²⁾; Wade on Administrative Law, 5th Ed. and Jackson on Natural Justice, 2nd Ed., upon the desirability for a tribunal to give reasons. Although certain tribunals are required to give reasons, the Takeovers Committee is under no statutory duty to do so. There may be cases where reasons should be given such as a case that involves a point of law, but if the issues are purely factual, I do not consider that the Committee need give reasons. I am of the opinion that it should be left to the Committee's discretion and good sense to determine whether reasons should be given in a particular case.

23. Although Mr Ogden levelled criticism at the press release, encompassing the Committee's decision I do not find that it is merited for what is stated encapsulates the views that were taken by the Committee both by the majority and the minority.

24. I now turn to the substantive ground argued on behalf of Amoy that the Committee erred in law by misconstruing the Code. The thrust of the argument is that the comparable provisions referred to in General Principle 3 and Rule 33(1) do not apply so that Amoy is only required to offer the minority shareholders of the 'A' and 'B' shares, the same prices that were paid to Bradbury, being the highest price paid within the preceding six months. As the prices paid were actual figures, no issue of comparability arose for Ahoy had not, prior to the acquisition, traded in the shares of Local. It was also contended by Amoy that as the package was for 'A' and 'B' shares, one class could not be purchased without the other with the result that the word "other" referred to in Rule 33(1) was interpreted to mean that the comparable offer provisions are only applicable to classes other than those for which the mandatory offer must be made. However, that interpretation, in my judgment, is clearly wrong with the result that it is rejected.

25. General principle 3 provides that where there is more than one class of equity share capital, a comparable offer be made to the holders of the other class of shares on terms no less attractive than the highest price paid by the controlling shareholder within the six months prior to acquiring control. Assistance as to the meaning of applicability and comparability was obtained by the Committee from the London Panel on Takeovers and Mergers whilst they had before them an extract from the book of Sir Alexander Johnston, "The City Take-over Code", where he discussed the predecessor provision to Rule 14 of the City Code that relates to companies having more than one class of share capital. Rule 14 of the Takeover Code in England reads where relevant :-

"Where a company has more than one class of equity share capital, a comparable offer must be made for each class whether such capital carries voting rights or not; the Panel should be consulted in advance."

26. According to the notes to the City Code, a comparable offer need not be identical, but it must be capable of being justified to the panel. Sir Alexander Johnston's commentary reads as follows :-

"The question whether an offer made for one class of equity share is 'comparable' with that made for another class of equity share can raise difficult problems. It usually arises in connection with voting and non-voting ordinary shares. The obvious yardstick is the market price of the two classes of shares, though it is sometimes argued that the market for one class (usually the voting shares) is restricted or distorted by special factors. If individuals, other than the offeror, have been buying voting shares at the market price, that suggests that the price is acceptable. Fortunately; an offeror usually wants the profits of the company as well as control and if he has made purchases of voting and non-voting shares at market prices these prices may be acceptable as a guide to comparability."

27. The object of the Code is to ensure that the minority shareholders are not placed at a disadvantage and are treated fairly. In this case, Amoy did not make any purchase of Local's shares during the six month period prior to obtaining control. While Amoy contend that there is an in-built premium of 10% included in the price of $13.20 for the 'B' shares, the actual price paid for each share was $13.20 and not $12 plus 10% as was submitted by Mr Strawbridge. Those parties who tendered could put forward such offers as they thought fit for the 'A' shares and the 'B' shares subject to a maximum premium of 10% for the 'B' shares. If a higher price was offered for the 'B' shares because of their superior voting rights, it was a matter for the offeror's commercial judgment. As I have said only half of the tenderers decided to offer a premium.

28. There was evidence that a premium had been paid for 'B' shares in other takeover cases both in Hong Kong and in England, but it is not an invariable practice. Unless there is a situation involving control, the evidence shows that 'B' shares are no more valuable than 'A' shares. Indeed if Amoy had purchased Local shares within the six months before the takeover, they would have paid for the 'A' and 'B' in a ratio of about 10 to 1, for the shares had traded in the market in this ratio during that period. No premium would of course have been payable for the 'B' shares during that time. As a result a comparable offer on that basis would be $132 for each 'A' share to $13.20 for every 'B' share.

29. While Mr Ogden submitted that the Committee's decision would act unfairly upon Bradbury, that is a matter which I do not consider to be relevant for they are now out of the picture. They exercised their right to sell their entire shareholding in both 'A' and 'B' shares at the prices offered by Amoy. Bradbury were not obliged to accept the offers but having done so, were obviously satisfied with the prices that they received as trustee for their beneficiaries.

30. 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.

31. Mr Ogden submitted that the Committee's decision was contrary to common sense and unreasonable in the Wednesbury sense, see Associated Provincial Picture Houses, Limited v. Wednesbury Corporation⁽³⁾, for they failed to take into account that there was no evidence to show that a premium for the 'B' shares was justified and there was no reason why minority 'A' shareholders should be paid more than the majority. However, there was evidence that half of the parties that put forward tenders did not include a premium in their offers for the 'B' shares.

32. It forms no part of my function to speculate how the Committee arrived at its decision. Whether a premium was paid for the 'B' shares and was justified was a matter for the Committee. What was a comparable figure for the 'A' shares was again solely within their province. Further, I accept Mr Sirawbridge's submission that the Committee is not bound to accept the actual figures offered by Amoy to Bradbury for those prices may not reflect the true value of each class of share as perceived by the general public.

33. Unless it is clear that the decision of the Committee was unreasonable, irrational or contrary to common sense as was submitted by Mr Ogden, the Court will not interfere. In my judgment the decision of the Committee does not fall within any of those categories nor can it be impeached on any of the other grounds that were advanced before me. The motion is therefore dismissed with costs.

(1)    (1973)1 W.L.R. 45.

(2)    (1974) N.I.C.R. 120.

(3)    (1948)1 K.B. 223.