WINNIE HO YUEN KI v. THE SECURITIES AND FUTURES COMMISSION

cacv 37/2006

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 37 of 2006

(on appeal from HCAL NO. 113 of 2005)

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J U D G M E N T

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Hon Rogers VP:

1.  This was an appeal from a decision of Reyes J given on 16 January 2006 whereby the judge refused leave to apply for judicial review of a decision of the Securities and Futures Commission (“the SFC”) dated 26 May 2005 whereby the Commission refused to consider the applicant’s complaints concerning Shun Tak Holdings Ltd (stock code: 242) (“STH”).  At the conclusion of the hearing of this appeal, judgment was reserved which we now give.

Background

2.  By letter dated 15 October 2004 the applicant’s solicitors made a formal complaint to the SFC concerning the conduct of the affairs of STH.  Those complaints centred upon two matters.  The first was a rights issue in 2002 which followed a prospectus dated 29 April 2002.  The second matter concerned the application for a gaming licence by a new company in Macau: Sociedade de Jogos de Macau S.A. (“SJM”).

3.  Initially, on 14 December 2004, the SFC replied that the issues raised involved commercial decisions among the parties concerned and the operations and management of private companies outside the SFC’s jurisdiction.  Some three months later, the solicitors replied that they were treating the letter 14 December as a decision letter for the purposes of applying for judicial review.  That then prompted the SFC to consider the matter further and it withdrew the conclusion that the issues raised were outside its jurisdiction.  It was in those circumstances that the SFC ultimately wrote the letter of 26 May 2005.

The rights issue

4.  The applicant holds 717,594 shares in STH and was previously a director.  STH is a public listed company in Hong Kong and its business includes operating ferry services to places close to Hong Kong including Macau, investing in hotel services in Macau, developing commercial, residential and retail properties in both Hong Kong, Macau and it seems at least on occasions elsewhere.  It has a 5% shareholding in Sociedade de Turismo e Diversoes de Macau SARL (“STDM”).  STDM has been operating gaming establishments in Macau for a very long time.

5.  The prospectus for the rights issue stated that upon completion the rights issue would raise immediate funds of not less than $382 million net of expenses.  It was said that the company intended to use the net proceeds from the rights issue for repayment of the group’s debts.  The rights issue was priced at one dollar per share.  One of the complaints made in respect of that was that the price constituted a 73% discount to STH’s net asset value per share.  It was said that STH did not need the funds from the rights issue as apart from the fact that its gearing was only 14.6%, at the time it had adequate credit facilities and, indeed, extended those by some $2.5 billion shortly thereafter.  Then the complaint was made that a major shareholder in STH, namely Shun Tak Shipping Company Ltd (“STS”) had transferred its entitlement to participate in the rights issue to two of the directors, who were daughters of a major shareholder of STH, namely the applicant’s brother.  The price for transfer was $.01 per right although the rights were trading on the market at $.50.  It may be noted that the applicant was a director of STH at the time although she did not attend the relevant board meeting concerning the rights issue.

6.  The letter of 26 May 2005 from the SFC pointed out that the price of the rights issue in relation to the average closing price for the STH shares in the 10 days prior to the announcement was better in percentage terms than approximately three quarters of the other rights issues which had taken place in 2002.

7.  The SFC’s letter went on to say that there was no indication or evidence that the rights issue had been for any ulterior purpose.

8.  The SFC’s letter went on to indicate that the nub of the applicant’s complaint centred on the transfer of the rights from STS to the two directors of STH.  That, as the SFC’s letter pointed out, was a matter which concerned the shareholders and directors of STS, which was a private company.  Since the full price had been paid under the terms of the rights issue there was no impact on STH or any of the other members.

9.  The SFC then went on to consider the allegations of nondisclosure in the prospectus for the rights issue.  The SFC did not consider that any grounds had been made out that there had been nondisclosure of matters which should have been disclosed in the prospectus.  In the circumstances it did not consider that there was any ground whereby it could require the production of records and documents under the provisions of section 179 of the Securities and Futures Ordinance (Cap. 571).

10.  In this respect the judge below could see no fault in the SFC’s reasoning or approach.  On this appeal Mr Dykes SC, who appeared on behalf of the applicant, relied heavily on the submissions which had been made to the SFC and upon the arguments raised in the skeleton argument.  Having considered the documents again since the hearing, I still do not consider that there are grounds for judicial review of the SFC’s decision to decline to exercise jurisdiction.

11.  I would add that a decision of directors to raise capital by the issue of shares is a very different matter from a decision to borrow money.  Share capital and loans are very different.  One has to be repaid whereas the other cannot be repaid except in special circumstances.  One bears interest and the other does not.  The distinction between the two types results in markedly different consequences in the balance sheet and accounts of a company.  It is therefore idle to argue that the company directors could have chosen to continue to borrow money instead of raising capital.  In this respect, as has already been noted, the applicant was not present at the relevant board meetings despite the fact she was a director.

SJM

12.  The complaint in respect of SJM was that the resources, assets and infrastructure of STDM were used by SJM for the purposes of gaining a new gaming licence in Macau.  SJM was not a wholly owned subsidiary of STDM, which only owned 80% of SJM’s shareholding.  The remaining 20% of SJM’s shares were owned by the applicant’s brother and two other persons who were also directors of STH.  It was said that there was nondisclosure of the SJM transaction to the STH shareholders.

13.  In relation to the question as to whether there had been any defalcation, fraud, misfeasance or other misconduct towards the members of STH, the SFC pointed out that STDM and SJM were Macanese companies over which it had no jurisdiction.  Since STH had only a 5% shareholding in STDM, any potential impact on STH’s revenues and net profit was minimal.  Furthermore, it also had to be borne in mind that after SJM had been established, STH more than doubled its shareholding in STDM.

14.  As regards the nondisclosure of the SJM transaction, the SFC pointed out that under the Listing Rules of the Hong Kong Stock Exchange no disclosure of these transaction was required.

15.  The letter from the SFC concluded under the heading “Other matters”:

“We must tell you that your client’s complaints are far from the most egregious cases that we assess.  Currently, we are handling cases where the allegations of corporate misconduct made or concerns uncovered by our own surveillance work are more serious and have more serious potential consequences for the investing public as a whole and for the integrity of the Hong Kong securities market than the issues your client now raises.  We have chosen to apply our resources to these more significant cases and will continue to do so in the future.  In our assessment, your client’s complaints do not justify our expending our limited resources on matters which we consider either do not come within our jurisdiction or, if they do, arise in circumstances where, owing to the practical limitations of our powers, based on our experience, we would not be able to obtain sufficient evidence to take any regulatory action.  We have therefore exercised our discretion not to proceed to investigate your client’s complaints.”

16.  If the SFC’s reply had consisted only of that paragraph the effect of its letter might have been different.  In those circumstances that paragraph might have been read as meaning that the SFC considered that there was a legitimate complaint but it was not prepared to deploy its resources to investigate it.  It is therefore an unfortunate paragraph.  Nevertheless, the letter, taken as a whole and read fairly, demonstrates clearly that the SFC had considered the complaints and for justifiable reasons considered that they were in many respects unmeritorious and in some respects outside its jurisdiction.  In so far as the SFC exercised a discretion as to whether to pursue an enquiry, I can see no grounds for a court to interfere with that exercise of discretion.  I would therefore dismiss this appeal.

Hon Le Pichon JA:

17.  I agree.