RE LEI SHING HONG LTD

HCMP 84/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 84 OF 2008

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REASONS  FOR   JUDGMENT

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1.  This is a petition for sanction of a scheme of arrangement under section 166 of the Companies Ordinance, Cap. 32 proposed to be made between Lei Shing Hong Limited (“the Company”) and the minority shareholders who hold about 4% of the issued shares in the Company (“the Minority Shareholders”), and for confirmation of a reduction of the share capital of the Company under section 58 of Cap. 32.

The Company

2.  The Company was incorporated in Hong Kong on 13 June 1972 under its former name as a private company. It ceased to be a private company by a special resolution passed on 20 February 1973. Its issued shares were listed on the predecessor of The Stock Exchange of Hong Kong Limited (“the Stock Exchange”) on 6 March 1973 and have been listed on the Stock Exchange since 1 September 1988. Trading in such shares has been suspended since 5 November 2007, due to the fact that less than 25% of the issued shares is held by the general public. If the scheme of arrangement is sanctioned by the court, it is intended that the listing of the shares will be withdrawn from the Stock Exchange.

3.  The Company is a holding company and its subsidiaries are principally engaged in the trading of motor vehicles, heavy equipment, spare parts and the provision of product support services, property development and investment, general trading and financial services.

4.  The present authorised capital of the Company is HK$2,000,000,000 divided into 2,000,000,000 ordinary shares of HK$1 each, of which 1,063,324,288 ordinary shares have been issued and are fully paid or credited as fully paid and the remainder are unissued.

The purpose of the scheme of arrangement

5.  As at the date of issue of the scheme document, an aggregate of 1,019,947,189 ordinary shares, representing 95.9206% of the issued capital of the Company, are held by those parties particularised in the schedule to paragraph (b) of the scheme of arrangement (collectively “the Consortium”). The Consortium has, through Best Star Group Limited (“Best Star”), a company incorporated in the British Virgins Islands for this purpose, proposed to buy out the Minority Shareholders who hold the remaining 4.0794% of the issued shares by means of the scheme of arrangement, with the result that the Company will be wholly owned by members of the Consortium and Best Star and the listing on the Stock Exchange will be withdrawn. Upon the scheme of arrangement becoming effective, all members of the Consortium will subscribe for shares in Best Star so that the present percentages of their respective shareholdings in the Company will be reflected in their shareholdings in Best Star.

6.  The trading volume of the shares has been thin for the past years. The average daily trading volume over the period from 21 July 2006 up to and including 20 July 2007, being the last full trading day before the suspension of the shares pending publication of the announcement dated 24 July 2007 issued by the Company in relation to the proposed privatisation by the scheme of arrangement, was just over 2,600 shares.

7.  In addition, there has been a high concentration of shareholding in the Company in the hands of members of the Consortium, who, in total, held approximately 95% of the issued share capital.

8.  The directors of the Company believe that the proposal would provide an opportunity for the Minority Shareholders to realise their investments at a premium over the prevailing average market prices of the shares.

The scheme of arrangement

9.  The scheme of arrangement involves the following principal steps:

(1)     the reduction of the authorised and issued share capital of the Company by cancelling and extinguishing all of the 43,377,099 ordinary shares of HK$1 each in the capital held by the Minority Shareholders;

(2)     the restoration of the authorised capital of the Company to its former amount of HK$2,000,000,000 by the creation of such number of new ordinary shares as is equal to the number of the ordinary shares cancelled;

(3)     the application by the Company of the credit arising in its books of account as a result of the reduction of capital referred to in (1) above in paying up in full at par the new ordinary shares to be created as aforesaid, which shall be allotted and issued, credited as fully paid, to Best Star; and

(4)     in consideration of the cancellation and extinguishment of the shares held by the Minority Shareholders, Best Star shall pay or cause to be paid to the Minority Shareholders the sum of HK$10 in cash for every ordinary share cancelled.

10.  The cancellation consideration represents a premium of approximately 89% over the closing price of the shares as quoted on the Stock Exchange on 20 July 2007, and a premium of 104% and 119% over the average closing price of the shares as quoted on the Stock Exchange for the one month and three months ended 20 July 2007.

11.  As at 31 December 2006, the audited consolidated net tangible assets of the Company amounted to approximately HK$4,837 million, or approximately HK$4.56 per share. The cancellation consideration represents a premium of 119% over the audited consolidated net tangible asset per share as at the date aforesaid.

The court meeting and the extraordinary general meeting

12.  On 24 January 2008, leave was granted to the Company to convene the court meeting in Hong Kong for the purpose of considering and if thought fit approving the scheme of arrangement. Directions were given for the service and advertisement of the notice of the meeting in one English and one Chinese newspaper circulating in Hong Kong. In addition, it was directed that the scheme document with an explanatory statement and a notice of the meeting be served personally or sent by post to the shareholders at their registered addresses.

13.  The court meeting was held on 25 February 2008. Three parties who are deemed to be parties acting in concert with Best Star and other members of the Consortium were not represented and did not vote at the meeting. 32 shareholders attended the meeting in person or by proxy. The scheme of arrangement was approved by an overwhelming majority of 27,784,651 out of 27,785,651 votes cast at the meeting.

14.  Immediately after the court meeting, an extraordinary general meeting of the Company was held for the purpose of considering and, if thought fit, passing a special resolution for the implementation of the scheme, including the reduction of the share capital by cancelling the shares held by the Minority Shareholders. The special resolution was duly passed.

15.  Under the scheme of arrangement, the entire reserve arising as a result of the proposed reduction will immediately be capitalised in full in the form of fully paid ordinary shares to be created and allotted to Best Star. The amount of cancelled paid-up capital of HK$43,377,099 will remain intact in the Company virtually throughout the whole reduction process. The proposed reduction does not involve the diminution of any liability in respect of unpaid share capital or the payment to any shareholder of any paid-up share capital. As the assets of the Company will not be depleted despite the cancellation of the shares in the scheme, none of the creditors of the Company should be prejudiced by the proposed reduction.

16.  An order was made on 4 March 2008 that the settlement of a list of creditors of the Company be dispensed with and directions were given for the advertisement of a notice of the petition.

Sanction of the scheme of arrangement

17.  For the court to sanction the scheme, it must be satisfied that the statutory requirements have all been complied with.

18.  Here, the class of members was properly constituted in the scheme of arrangement. The Company has only one class of shares. The shares subject to the scheme are all the ordinary shares of HK$1 each but excluding those held by the parties particularised in the schedule to paragraph (B) of the scheme of arrangement. The rights attached to the shares subject to the scheme are identical and their treatment under the scheme is identical.

19.  The court meeting was duly convened in accordance with the directions given on 24 January 2008.

20.  The members have been given a sufficient explanation of the scheme and its effects in the explanatory statement required by section 166A to enable them to make an informed decision how to vote at the court meeting.

21.  Lastly, as mentioned earlier, the requisite majority at the court meeting has passed the resolution in favour of the scheme of arrangement in that there was a majority in number representing not less than three-fourths in value of the members present and voting in person or by proxy.

22.  The voting at the court meeting was overwhelmingly in favour of the scheme. There are no grounds for thinking that the class of members was not fairly represented or any of those voting was acting otherwise than in good faith for the benefit of his interest as a member of the class.

23.  I am satisfied that the scheme of arrangement is such that an intelligent and honest man, being a member of the class concerned and acting in respect of his interest, might reasonably approve. I have had regard to the recommendations to the Minority Shareholders by the independent financial adviser and the independent board committee.

24.  I have therefore exercised my discretion to sanction the scheme of arrangement. Leading counsel has given the usual undertaking to the court on behalf of the parties referred to in the schedule to paragraph (B) of the scheme of arrangement to be bound by the scheme of arrangement.

Confirmation of reduction of capital

25.  The conditions for confirmation of reduction of capital, which is an integral part of the scheme of arrangement, have all been satisfied.

26.  The shareholders are treated equitably in the proposed reduction. The proposals for reduction have been properly explained to them and it is for a discernible purpose. I am satisfied that the interests of creditors would be safeguarded and have ordered that the settlement of a list of creditors be dispensed with at the hearing of the summons for directions on 4 March 2008. The directions for advertisement of a notice of the petition have been complied with.

27.  I have confirmed the proposed reduction of capital from HK$2,000,000,000 to HK$1,956,622,901 as per the draft order and approved the draft minute for reduction of capital.