SANYUAN GROUP LTD v. THE STOCK EXCHANGE OF HONG KONG LTD

FAMV No. 52 of 2009

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

MISCELLANEOUS PROCEEDINGS NO. 52 OF 2009 (CIVIL)

(ON APPLICATION FOR LEAVE TO APPEAL
FROM CACV NO. 191 OF 2008)

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Between:

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D E T E R M I N A T I O N

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Mr Justice Ribeiro PJ:

1.  The applicant seeks leave to appeal against the decision of the Court of Appeal[1] which set aside the judgment of Reyes J,[2] quashing the decision of the Exchange’s Listing Appeals Committee on a judicial review application brought by the applicant company.

2.  The applicant was listed on the Exchange’s main board in November 1972. Since then, its business has changed substantially, with its transportation and property investment arms ceasing to exist. In 2004, it traded only through a subsidiary, GenePro Medical Biotechnology Limited (“GenePro”), engaged in developing and selling DNA diagnostic kits and providing laboratory services.

3.  On 4 May 2004, the Exchange wrote to the applicant expressing concerns at its turnover and capital adequacy and, on 12 May 2004, trading in its shares was suspended. The Exchange indicated that trading would not be allowed to resume unless the applicant could demonstrate compliance with rule 13.24 of the Listing Rules which provides:

“An issuer shall carry out, directly or indirectly, a sufficient level of operations or have tangible assets of sufficient value and/or intangible assets for which a sufficient potential value can be demonstrated to the Exchange to warrant the continued listing of the issuer’s securities.”

4.  The applicant submitted a proposal which involved adding to its business, a majority participation in a mainland joint venture company engaged in the trading of pharmaceutical products. The proposal was rejected as insufficient by the Listing Committee (“LC”), the Listing Review Committee (“LRC”) and the Listing Appeals Committee (“LAC”), leading to the judicial review proceedings in question.

5.  The LC’s reasons for rejecting the proposal are set out in full at §11, on pp 370-372, of Reyes J’s judgment. It pointed to GenePro’s low level of operation and continuing operating losses, together with its lack of funding due to the group’s heavy indebtedness, prompting the view that it did not have a sustainable business for the purposes of LR 13.24. In relation to the joint venture, the LC pointed to an insufficient financial and management track record in trading pharmaceutical products. The applicant’s financial forecasts were considered unsubstantiated and evidence of the sufficiency of the group’s working capital thought to be inadequate.

6.  The LRC endorsed the LC’S views regarding GenePro, adding that the additional unaudited financial information provided had not changed the position regarding the joint venture company. The LAC was of the same view, stating that the applicant had failed to demonstrate that its business could be sustained or generate profits for the future. At §35 on p 376 of Reyes J’s judgment, his Lordship sets out extracts from the affidavit filed by the LAC’s Chairman, Mr Ronald Arculli, elaborating on that Committee’s decision which was, in brief, that the then latest information continued to indicate an insufficient level of operation and assets.

7.  This process took place against the background of other provisions in the Listing Rules which are highly relevant. They make it clear that a listing is subject to the Exchange’s power to suspend or delist trading in an issuer’s shares for the protection of investors or the maintenance of an orderly market, in particular where the Exchange considers that an issuer does not have a sufficient level of operations or sufficient assets to warrant the continued listing of its securities. Under LR 13.24, sustaining such levels is a continuing obligation. And in Chapter 8, the Listing Rules set out detailed qualifications to be satisfied before a company is considered to be suitable for listing. Three alternative tests are laid down, setting out detailed requirements under each test. All the tests require demonstration of the applicant’s track record under the same management and ownership (generally for at least three years) and, to take just one of those tests (where profits are the criterion), profits of not less than $20 million in the most recent year and of at least $30 million in the two preceding years must be shown.

8.  The essential complaint underlying this leave application is that the Exchange’s committees refused a re-listing of the applicant’s shares on the basis that its proposals were insufficient but without positively identifying the standards which, if met, would enable re-listing to occur. This was said to constitute procedural unfairness. The question of law formulated involves asking whether a party appearing before the relevant committees:

“... is entitled to be informed in objective terms of the level of operation, turnover, profit and assets required by the application of LR 13.24 and/or, as the case may be, in what respect and to what extent that party’s performance and/or proposal is considered insufficient under or by the application of the said rule.”

9.  In our view, the nature and content of reasons which must be given to explain or justify a decision must vary depending on all the circumstances of the case, including the nature of the decision in question. In the present case, we are concerned with a particular company putting forward a proposal as to its intended business operations with a view to persuading the Exchange’s monitoring committees that public trading in its shares ought to be resumed. Only those responsible for that company, knowing what financial, management, technological and other resources are available to them, are in a position to formulate such a proposal and to project the level of operations, of capital assets and of profitability considered to be within their reach. It is for the Exchange, through its committees, to examine that proposal and decide whether it is realistic, sustainable and of a scale and nature which justifies permitting resumption of the public listing. It is not the Exchange’s role to propose an alternative business plan, or to specify alternative operating, capital or profitability levels to be achieved by the applicant as the basis for a re-listing. The premise of the present application is therefore unsound. It makes little sense for the Exchange to be required as a matter of law to lay down abstract “benchmarks” or standards not tied to the particular resources of the applicant company and a failure to do so cannot reasonably be regarded as procedural unfairness.

10.  We are accordingly of the view that the proposed appeal is not reasonably arguable and leave to appeal is refused with costs.