RE LUKS INDUSTRIAL CO. LTD.

HCMP 504/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 504 OF 2001

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REASONS FOR JUDGMENT

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1. In this petition brought by Luks Industrial Company Limited ("the Company"), the Company seeks an order to sanction a scheme of arrangement between the Company and its members ("the Scheme") under section 166(2) of the Companies Ordinance, Cap. 32 ("the Ordinance") and to confirm a reduction of the capital of the Company involved in the Scheme under section 58(1) of the Ordinance.

2. On 6 February 2001, I made an order under section 166(1) of the Ordinance for a meeting of the holders of ordinary shares of HK$0.50 each in the capital of the Company to be held for the purpose of considering, and if thought fit, approving the Scheme proposed to be made between the Company and such shareholders. I further ordered that the notice convening the meeting be advertised in two newspapers and a copy of the composite document containing a notice convening the meeting, the details of the Scheme and the explanatory statement required under section 166A of the Ordinance with a form of proxy be served on each of the shareholders by post.

3. On 12 March 2001, the meeting of the shareholders as ordered by the court was held. Those who voted in favour of the resolution approving the Scheme without modification represented 99.99% of the value of the shares of the members who were present and voting in person or by proxy.

4. On 20 March 2001, I ordered that the settlement of a list of the creditors of the Company be dispensed with under section 59(2) of the Ordinance, having been satisfied that the proposed reduction of share capital would not involve either the diminution of any liability in respect of unpaid share capital or the payment to any shareholder of any paid-up share capital. I further ordered that the petition for sanctioning the Scheme and for confirming the reduction of share capital be listed for hearing on 3 April 2001.

The Scheme and the reasons therefor

5. The Company was incorporated on 25 July 1975 under the Ordinance as a private company. Shortly after its incorporation, the Company commenced and has continued to carry on the business of investment holding. The subsidiaries of the Company are engaged in the manufacture and sale of cement, electronic products, property development and investment holding in Hong Kong and elsewhere. The Company ceased to be a private company by a special resolution which took effect on 30 December 1986. Its present capital is HK$380,000,000.00 divided into 760,000,000 ordinary shares of HK$0.50 each, of which 336,096,964 ordinary shares have been issued and are fully paid or credited as fully paid. All the issued ordinary shares of the Company are listed on the Stock Exchange of Hong Kong Limited.

6. Since 1999, the sale of cement in Vietnam has become the major source of revenue of the Company and its subsidiaries ("the Group"). In view of the fact that a predominant portion of the Group's revenue is derived from operations outside China and Hong Kong and in view of the Group's overseas expansion plan, coupled with concerns over the degree of autonomy in Hong Kong 50 years from 1997, the directors of the Company have considered it appropriate that the Company, as the holding company of the Group, should be replaced by an overseas incorporated company to be effected by the Scheme. As a result of the Scheme, there would be two parallel chains of companies under the new holding company. One chain would be confined solely to the operations in China and Hong Kong and the other would be for the holding of investments and operations overseas, especially in Vietnam and Laos. The new corporate structure is designed to enable the Group to operate more effectively as it is to emphasise separate lines of reporting and independent cost centres in respect of investments in China and Hong Kong as opposed to those overseas, thus providing flexibility and autonomy to the formulation and application of different corporate policies and strategies to the two chains of operations.

7. In summary, the object of the Scheme is for the Company to become an indirect wholly-owned subsidiary of a new holding company incorporated in Bermuda with limited liability and for the shareholders of the Company to become shareholders of such new holding company.

8. On 16 November 2000, Luks Industrial (Group) Limited ("LIGL") was incorporated under the laws of Bermuda as an exempted company for the purpose of becoming the ultimate holding company of the Company in accordance with the terms of the Scheme. The authorised capital of LIGL is HK$100,000.00 divided into 10,000,000 ordinary shares of HK$0.01 each, all of which have been issued nil paid and are registered in the name of the Company. Pursuant to the terms of the Scheme, LIGL would increase its authorised share capital to HK$7,600,000.00 by the creation of an additional 750,000,000 ordinary shares of HK$0.01 each upon the Scheme becoming effective.

9. On 2 May 2000, Luks Holdings (BVI) Limited ("LH(BVI)") was incorporated under the laws of the British Virgin Islands as a company limited by shares for the purpose of becoming the intermediate holding company of the Company in accordance with the terms of the Scheme. The authorised capital of LH(BVI) is US$50,000.00 divided into 50,000 ordinary shares of US$1.00 each, of which one ordinary share has been issued and is fully paid and is registered in the name of LIGL. LH(BVI) is accordingly a wholly owned subsidiary of LIGL.

10. The Scheme would involve the following principal steps:

(1) the cancellation of all the issued ordinary shares of HK$0.50 each of the Company;

(2) the restoration of the authorised share capital of the Company to its original amount of HK$380,000,000.00 by the creation of such number of new ordinary shares of HK$0.50 each as is equal to the number of the ordinary shares cancelled;

(3) the application by the Company of the credit arising from its books of account as a result of the cancellation of the issued ordinary shares in (1) in paying up in full the new ordinary shares created in (2);

(4) the allotment and issue to LH(BVI) and its nominees of all the new ordinary shares of the Company created and fully paid up as described in (2) and (3);

(5) the allotment and issue by LH(BVI) to LIGL such number of its ordinary shares of US$1.00 each as may be agreed between them; and

(6) the allotment and issue by LIGL of its new ordinary shares of HK$0.01 each, credited as fully paid, and the transfer by the Company of its entire holding of LIGL ordinary shares of HK$0.01 each, also credited as fully paid, to the shareholders of the Company on the basis of one ordinary share in the Company for one LIGL ordinary share held by them.

11. As I understand from Mr Winston Poon, SC, who appeared for the Company, this type of cancellation of share capital is "not uncommon" in transfer schemes.

The function of the court

12. The function of the court in an application for sanction of a scheme of arrangement is as described in the following passage in Buckley on the Companies Acts, 15th ed, paras [425.53] and [425.54] which has been cited with approval in a number of cases:

"Once the meetings have approved the scheme, the sanction of the court must be sought. The sanction of the court is not a formality. The court has an unfettered discretion as to whether or not to sanction the scheme, but it is likely to do so, as long as: (1) the provisions of the statute have been complied with, (2) the class was fairly represented by those who attended the meeting and that the statutory majority are acting bona fide and are not coercing the minority in order to promote interests adverse to those of the class whom they purport to represent, and (3) that the arrangement is such as an intelligent and honest man, a member of the class concerned and acting in respect of his interest, might reasonably approve....

The court does not sit merely to see that the majority are acting bona fide and thereupon to register the decision of the meeting, but, at the same time, the court will be slow to differ from the meeting, unless either the class has not been properly consulted, or the meeting has not considered the matter with a view to the interests of the class which it is empowered to bind, or some blot is found in the scheme. Consequently, the court will not sanction a scheme if it appears that the majority had regard to their own interests when casting their votes, rather than the interests of the class as a whole to which they belong...."

Compliance with the statutory requirements

13. There appear to be four separate considerations regarding the compliance with statutory requirements as stated by Le Pichon J (as she then was) in Re China Light and Power Co. Ltd & Anr [1998] 1 HKLRD 158 at 168E-F:

"(i) the classes of members or creditors must be properly constituted;

(ii) the meetings were duly convened in accordance with the directions given by the court hearing the originating summons;

(iii) members or creditors have been given a sufficient explanation of the scheme and its effects and sufficient information to enable them to make a reasonable judgment as to how to vote at the meeting; and

(iv) the requisite majority (ie a simple majority in number representing three-quarters in value of those present and voting in person or by proxy at the meeting) has voted in favour of the scheme."

14. I am satisfied that each of the above requirements has been complied with. There is only one class of shares in the capital of the Company, being ordinary shares of HK$0.50 each. Thus, the rights attached to all the shares are identical. Under the Scheme, the treatment of all the shares and the shareholders is identical. All the issued shares of the Company would be cancelled and an equivalent number of new fully paid-up shares would be transferred to the intermediate holding company, LH(BVI), and the consideration payable to the shareholders under the Scheme, being one share of the ultimate holding company, LIGL, for one share transferred, is the same as regards all shareholders. Thus, the class of members was properly constituted in the Scheme.

15. As mentioned earlier, the meeting of the members as directed to be held by the court was duly convened in accordance with the order made on 6 February 2001. The notice of the meeting was advertised in two newspapers as directed.

16. An explanatory statement of the Scheme, which complied with the requirements of Section 166A(1)(a) of the Ordinance, was sent to the shareholders pursuant to the order made on 6 February 2001.

17. The meeting of the shareholders as directed to be held by the court was attended in person or by proxy by 19 persons holding 143,300,936 shares representing 43.83% of the issued capital. As mentioned earlier, the Scheme was approved by 99.99% of those present and voting in person or by proxy which was far in excess of the statutory requirement of a simple majority in number representing three-fourths in value of those present and voting.

Other considerations of the court

18. Next, I turn to consider whether the class of shareholders was fairly represented by those who attended the meeting and that the statutory majority were acting bona fide and not coercing the minority to promote interests adverse to those of the class whom they purported to represent. The meeting on 12 March 2001 was well attended with the shareholders of almost half of the issued shares present in person or by proxy. There is only one class in the Scheme and all members are treated in the same way under the Scheme. There are no grounds for thinking that the class 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.

19. I have already mentioned the reasons for the Scheme. Applying the test of whether an intelligent and honest man acting in respect of his interest might reasonably approve the Scheme, I am satisfied that such a member might have done so and that the Scheme should be sanctioned by the court to pave way for the group reorganisation to fulfil the declared purposes of overseas expansion and improvement of efficiency of the operations of the Group.

Confirmation of reduction of share capital

20. Article 44(d) of the Articles of Association of the Company enabled it to reduce its authorised and issued share capital by a special resolution. At an extraordinary general meeting held on 12 March 2001 immediately following the conclusion of the meeting as directed by the court, a special resolution was passed to cancel all the issued shares for the purpose of giving effect to the Scheme.

21. The principles upon which the Court would act in confirming a reduction of capital was summarised by Harman J in Re Thorn EMI plc (1988) 4 BCC 698 at 701 as follows:

"The requirements are (1) that shareholders are treated equitably, (2) that the reduction proposals are properly explained (that means in the circular summoning the meeting), (3) that the creditors are safeguarded and (4) that the reduction is for a discernible purpose. 'Discernible' means, in my view, something which is demonstrated by evidence to the court and is something sufficiently solid and near in expectation to be a real prospect."

22. I am satisfied that the shareholders of the Company are treated equitably in the reduction of capital. There is only one class of shares and the mechanics of the Scheme is for all the issued shares of the Company held by the shareholders to be cancelled and, in exchange, all such shareholders would receive shares of LIGH on a one to one basis. The reduction proposals were properly explained in the explanatory statement in the scheme document despatched to all the shareholders pursuant to the order of 6 February 2001. I had been satisfied that there would be no depletion of the assets of the Company as a result of the reduction of capital and that was why I made an order on 20 March 2001 dispensing with the settlement of a list of the creditors of the Company. As for a discernible purpose, the reduction of share capital was to give effect to the Scheme. The exact number of the issued paid-up shares to be cancelled was confirmed in the 3rd affirmation of the chairman of the board of directors of the Company filed the day before the hearing of the petition and he confirmed that the Company has issued no further shares between the filing of the Amended Petition and the day before the hearing of the petition and that the Company has no intention to issue any further shares until after the Scheme has become effective.

23. I have therefore made an order confirming the reduction of share capital as per the draft submitted and I approved the draft of the minute for the reduction of capital. The order was made on the undertaking of leading counsel on behalf of LIGL and LH(BVI) to be bound by the Scheme.