RE PCCW LTD

HCMP 2382/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2382 OF 2008

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J U D G M E N T

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The petition

1.  I have before me a petition presented on 11 February 2009 by PCCW Limited 電訊盈科有限公司 (“the Company”) seeking sanction of a scheme of arrangement (“the Scheme”) pursuant to section 166 of the Companies Ordinance, Cap. 32, and confirmation of the reduction of its share capital involved in the Scheme pursuant to section 59. Substantial sums are at stake, whichever way the judgment goes. It is the first time the court in Hong Kong considers the practice of splitting shares with the objective of meeting the majority in number requirement in a scheme of arrangement. From a public policy standpoint, the ramifications of the decision on this question are significant. 

The Company and its share capital

2.  The Company was incorporated in Hong Kong in 1979 as a private company. It ceased to be one in 1994.  Its issued share capital has been listed on The Stock Exchange of Hong Kong Limited (“the Stock Exchange”) since 18 October 1994.  If the Scheme is sanctioned by the Court and becomes effective, it is intended that the listing of the share capital of the Company will be withdrawn from the Stock Exchange.

3.  The principal activity of the Company is to act as the holding company of a group of companies engaged in the provision of local, mobile and international telecommunications services, Internet access services, interactive multimedia and pay-TV services, the sale and rental of telecommunications equipment, and the provision of computer, engineering and other technical services, in Hong Kong, Mainland China and elsewhere in the Asia Pacific region; investments in, and development of, systems integration and technology-related businesses; and investments in, and development of, infrastructure and properties in Hong Kong, mainland China and elsewhere in the Asia Pacific region.  It is a leading telecommunications provider in Hong Kong.

4.  The present authorised capital of the Company is HK$2,500,000,000 divided into 10,000,000,000 ordinary shares of HK$0.25 each, of which 6,772,294,654 shares have been issued and are fully paid or credited as fully paid and the remainder are unissued.  All the shares currently in issue rank pari passu in all respects with each other, including, in particular, as to dividends, voting rights and capital. 

The Scheme

5.  The Scheme is between the Company and the holders of the Scheme shares, being all the shares of the Company other than those held by Starvest Limited (“Starvest”) and China Netcom Corporation (BVI) Limited (“Netcom BVI”) (together “the Joint Offerors”) and by certain of the shareholders which are parties acting in concert with Starvest (they are Pacific Century Regional Developments Limited (“PCRD”), Pacific Century Group Holdings Limited (“PCGH”), Pacific Century Diversified Limited (“PCD”) and Eisner Investments Limited (“Eisner”) (collectively “the Excluded Group”). PCD and Eisner are companies wholly owned by Richard Li Tzar Kai. He is the founder of certain trusts which wholly own PCGH, and PCGH through certain wholly-owned subsidiaries held an aggregate 75.74% interest in PCRD.

6.  The Scheme is proposed in the context of the intention of the Joint Offerors to privatise the Company. Starvest is a wholly owned subsidiary of PCRD, a public company listed on the Singapore Exchange Securities Trading Limited. Netcom BVI is a wholly owned subsidiary of China United Network Communications Group Company Limited (“Unicom”), a state-owned enterprise established in the People’s Republic of China. Each of PCRD and Netcom BVI holds an existing substantial shareholding in the Company. It is the intention of both PCRD and Unicom for the PCCW Group to maintain its existing business upon the successful privatisation of the Company. PCRD is of the belief that, in view of the relatively low trading liquidity and persistently weak performance of the shares, access to the equity capital markets does not provide the Company with an attractive fund raising avenue, and that the costs and management resources associated with the maintenance of the Company’s listing status are not warranted.

7.  The primary purpose of the Scheme is that on the date it becomes effective, all the Scheme shares would be cancelled and the credit arising in the Company's books of account as a result of the aforesaid reduction of capital would be applied to pay up in full and issue to the Joint Offerors and/or to Unicom such number of new shares as would equal the Scheme shares cancelled.  Such new shares are intended to be issued to Starvest and Netcom BVI (and/or Unicom) in the ratio of 74.27:25.73 pursuant to an agreement dated 3 November 2008 entered into in contemplation of the proposal to privatise the Company.

8.  In consideration of the cancellation and extinguishment of the Scheme shares, the Joint Offerors shall pay or caused to be paid to the holders of the Scheme shares the sum of HK $4.50 in cash for each Scheme share held (“the Cancellation Price”).  Starvest will pay 74.27% of the Cancellation Price and Netcom BVI will pay the balance, namely 25.73%. Payment is expected to be made, subject to the fulfilment of all conditions, within 10 days of the effective date of the Scheme.

9.  The Joint Offerors intend to fund the payment of the Cancellation Price by, inter alia, bridging loans. Within 20 days after the effective date of the Scheme, they will procure the Company to declare a special dividend in cash of an amount between HK$18,134 million and HK$18,783 million to the “Post-Scheme Shareholders”, who would be Starvest, PCRD, Netcom BVI, PCGH, PCD and Eisner. Starvest has entered into a loan facility agreement with HSBC to fund the payment of its proportion of the cash consideration payable in the Cancellation Price. It is intended that Starvest will use the special dividend to be distributed by the Company to Starvest and the Excluded Group after the Scheme becomes effective to pay the amounts outstanding under that loan facility. The special dividend is specific to the Scheme becoming effective. If the Scheme does not become effective, the Company has stated there is no proposal or intention to declare or pay a special dividend.

10.  As regards costs, the Scheme provides that if it becomes effective, the costs will be borne by the Company. The estimated costs of the Scheme and its implementation given in the Scheme document are HK$25 million. In the event the Scheme is either not recommended by the independent board committee or is not recommended as fair and reasonable by the independent financial adviser retained to advise the independent board committee, and is not approved at the shareholders’ meeting, all the expenses incurred by the Company in connection with the Scheme shall be borne by the Joint Offerors. In the present situation, as the Scheme has been recommended by the independent board committee and the independent financial adviser, even if the Scheme were not approved at the court meeting or sanctioned by the court, the Company would have to bear all the costs and expenses arising from the privatisation offer made by the Joint Offerors.

11.  Under section 166(2) of Cap. 32, the resolution to approve the Scheme will be passed if a majority in number representing not less than three-fourths in value of the Scheme shares held by shareholders present and voting either in person or by proxy vote in favour of the Scheme at the meeting convened with the leave of the court. There are thus two requirements to meet, the majority in number test and the majority in value test.

12.  Apart from the statutory requirements, the Scheme will only be considered to have been approved under Rule 2.10 of the Hong Kong Code on Takeovers and Mergers (“the Takeovers Code”) if (1) it is approved by at least 75% of the votes attaching to the disinterested shares that are cast either in person or by proxy at a duly convened meeting of the holders of the disinterested shares; and (2) the number of votes cast against the resolution for the approval of the Scheme at such meeting is not more than 10% of the votes attaching to all disinterested shares. The first limb of Rule 2.10 is the majority in value test under section 166. The second limb of not more than 10% of votes against is an additional safeguard for minority shareholders unique to Hong Kong.

13.  For the purpose of the majority in number or head-count test under section 166, only shareholders whose names appear in the register of shareholders and who are present and voting at the meeting in person or by proxy are counted.

14.  As the vast majority of shares in all listed companies in Hong Kong are held through the Central Clearing and Settlement System (“CCASS”), and CCASS holds those shares through a single registered shareholder HKSCC Nominees Limited, strictly speaking HKSCC Nominees Limited counts as only one member for the majority in number test under section 166. As mentioned below, HKSCC Nominees Limited cast part of its votes for the Scheme and part of its votes against the Scheme, so it was counted as one member for and one member against the Scheme in the results.

15.  The significance of the majority in number test is that a scheme of arrangement which is supported by holders of an overwhelming majority in value of the scheme shares could still be defeated by persons holding a very small number of scheme shares but who hold them numerically in a large number of registered names.

The court meeting

16.  On 5 December 2008, leave was given to the Company to convene a meeting (“the court meeting”) of the holders of the Scheme shares for the purpose of considering and, if thought fit, approving, with or without modification, the Scheme. The court meeting was originally convened to be held on 30 December 2008. Shortly before the time of this meeting, the Joint Offerors sent a proposal to the Company that the Cancellation Price be increased from HK$4.20 to HK$4.50 per share, making it necessary to adjourn the court meeting and the ensuing extraordinary general meeting and to modify the Scheme. An ordinary resolution was duly passed at each of the court meeting and the extraordinary general meeting to adjourn the same to a time, date and place of which notice would be given by the Company, being a date not less than 21 clear days after the posting and deemed delivery of a supplemental Scheme document to every registered shareholder.

17.  On 30 December 2008, the Company issued an announcement that the Joint Offerors proposed the Cancellation Price be increased from HK$4.20 to HK$4.50 and on 12 January 2009, a supplemental Scheme document was dispatched to shareholders whose names were on the register as at 9 January 2009.

18.  On 4 February 2009, the court meeting duly re-convened was held. It lasted from 2 p.m. to 9 p.m. One of the shareholders present proposed the court meeting be adjourned a second time, pending completion of an investigation into alleged attempts to affect the outcome of the shareholder vote in relation to the proposed privatisation. The motion for adjournment was submitted to a polled vote and was defeated by votes of 73.54%. The meeting went on to consider the Scheme.

19.  The resolution approving the Scheme was passed by the majority prescribed by section 166 and was not voted against in sufficient numbers to block the Scheme under the Takeovers Code. The detailed results of voting were as follows.

20.  As at the date of the re-convened court meeting, there were 6,772,294,654 shares in issue, of which the holders of the Scheme shares were interested in 3,540,779,586 (representing approximately 52.3% of the issued share capital). The other 3,231,515,068 shares in issue (representing approximately 47.7% of the issued share capital) were owned by the Joint Offerors and the Excluded Group and do not form part of the Scheme shares.

21.  Of the 3,540,779,586 Scheme shares in aggregate, votes were eligible to be cast in respect of up to 3,473,432,507 shares, the remainder being held by persons who were treated as acting in concert with one or other of the Joint Offerors. I will refer to the holders of the disinterested shares as “the Independent Shareholders”.

22.  Of the 3,473,432,507 shares, approximately 3,256 million shares (equivalent to approximately 93.7%) were held through CCASS in the name of HKSCC Nominees Limited. The remaining approximately 217 million shares, representing 6.3%, were held in the names of approximately 27,646 registered shareholders. As mentioned earlier, only registered shareholders are qualified to be counted for the purpose of the majority in number test under section 166.

23.  The total number of the Independent Shareholders who attended and voted at the court meeting, in person or by proxy, was 2,256. The total number of shares held by them was 1,628,013,122. This represented approximately 46.9% of the total of 3,473,432,507 shares. Of those 1,628,013,122 shares, 1,595,538,449 shares representing approximately 98% were held in CCASS. The remaining 32,474,673 shares, representing approximately 2%, were held in the names of 2,262 registered shareholders. That number of registered shareholders is approximately 8.2% of the total number of registered shareholders appearing in the register of shareholders of the Company.

24.  1,404 Independent Shareholders voted in favour of the Scheme either in person or by proxy. They held a total of 1,348,536,322 shares, which represented approximately 83% of the number of shares held by all the Independent Shareholders present and voting either in person or by proxy. Approximately 99% of these shares were held in CCASS and 1% was held in the names of registered shareholders.

25.  859 Independent Shareholders voted against the Scheme either in person or by proxy, holding a total of 279,476,800 shares. This represented approximately 17% of the number of shares held by all the Independent Shareholders present and voting either in person or by proxy, and approximately 8% of the number of shares held by all the Independent Shareholders whether or not present and voting. Approximately 93.7% of these shares were held in CCASS and 6.3% were held in the names of registered shareholders.

26.  HKSCC Nominees Limited, being the nominee for and on behalf of different ultimate beneficial Independent Shareholders, had voted both in favour of and against the Scheme. That is why the aggregate number of Independent Shareholders voting for and against the Scheme (2,263) was more than the number of Independent Shareholders present and voting either in person or by proxy at the court meeting (2,262).

27.  The majority in number test was achieved by 545 members voting either in person or by proxy in favour of the Scheme.

28.  The Scheme was approved by the required majority under section 166(2) of Cap. 32 and was not voted in sufficient numbers to block it under the Takeovers Code. Accordingly, this petition was presented on 11 February 2009.

The allegations of improper share transfers

29.  Media coverage of the privatisation after the adjournment of the court meeting on 30 December 2008 was extensive.

30.  On 15 January 2009, the Securities and Futures Commission (“the SFC”) received information regarding an anonymous complaint alleging that someone had been offering single board lots (1,000 shares) of the Company’s shares as a bonus in return for the recipients signing proxies for the donor in relation to the Scheme. Following the provision of specific information to the SFC on 29 January 2009, the SFC commenced an inquiry on 30 January 2009 pursuant to section 179 of the Securities and Futures Ordinance, Cap. 571 into the business and affairs of the Company. On 5 February 2009, the SFC commenced an investigation under section 182.

31.  An article was published on 1 February 2009 on the website of David Webb, a member of the public, regarding the allegations which concerned the voting approval required for the purposes of Cap. 32, specifically that the Scheme must be approved by a majority in number of the relevant class of members representing not less than three-fourths in value of the class of members present and voting either in person or by proxy at the court meeting. It was alleged that there was a scheme in which hundreds of insurance agents of Fortis Insurance Company (Asia) Limited (“Fortis Asia”; formerly known as Pacific Century Insurance Company Limited) would each receive one board lot of shares and that in return they would sign a form of proxy enabling the proxy-holder to vote in favour of the Scheme, thereby increasing the prospect of achieving the majority in number test. Following the publication of this article, there was significant press coverage of the allegations.

32.  On 3 February 2009, before the court meeting was held, the Company issued an announcement stating it was making enquiries into the above allegations contained in the press and media, including a review of the share register of the Company during December 2008 and January 2009. The Company offered its full co-operation to the SFC in any action the latter may take in this matter and confirmed in the announcement it had no knowledge of any improper share transfers made by any shareholders with a view to affecting the outcome of the voting. The Company also clarified it has never held any shares in Fortis Asia and that the holding company of Fortis Asia, Fortis Asia Holdings Limited (“Fortis Holdings”; formerly known as Pacific Century Insurance Holdings Limited), ceased to be a subsidiary of PCRD on 15 May 2007. After the court meeting and on 12 February 2009, PCRD and Starvest made an announcement that they and their directors had no knowledge of or involvement in any improper activities.

33.  PCRD sold its entire interest in Pacific Century Insurance Holdings Limited in March 2007 to a Belgian-Dutch financial group, Fortis Insurance International N.V. The sale was completed on 15 May 2007. On 6 August 2007, Pacific Century Insurance Holdings Limited changed its name to Fortis Asia Holdings Limited. On the same day, Pacific Century Insurance Company Limited changed its name to Fortis Insurance Company (Asia) Limited. In August 2007, following a general offer made to shareholders of Fortis Holdings, it became a private company and withdrew its listing on the Stock Exchange.

34.  Since 15 May 2007, PCRD ceased to have any interest in Fortis Holdings. Since 3 July 2007, other than Francis Yuen Tin Fan’s role as senior adviser to Fortis Insurance International N.V., none of the directors or officers of PCRD have had any involvement in the business and affairs of Fortis Holdings and its subsidiaries and associated companies including Fortis Asia. On 1 April 2008, Francis Yuen’s role as senior adviser to Fortis Insurance International N.V. ended and since then, PCRD, its directors and officers have had no further involvement in any of the business or affairs of Fortis Insurance International N.V., Fortis Holdings or Fortis Asia.

35.  Francis Yuen served as an executive director of the Company from 3 August 1999 and as the deputy chairman of the Company from 5 August 1999 and resigned from both offices with effect from 5 June 2006. He remained as an employee of the PCCW Group until 30 November 2006. Since then, he has not at any time been a director, officer or employee of the Company or any of its subsidiaries. He remains a director and the deputy chairman of PCRD. He holds 1,420,000 shares in the Company and is presumed to be acting in concert with Starvest under the Takeovers Code.

36.  The SFC applied to the court on 23 February 2009 pursuant to section 385 of Cap. 571 for leave to intervene and be heard in the petition in respect of the sanction of the Scheme. Leave was granted on 24 February 2009 in the absence of opposition from the Company and the Joint Offerors. The SFC was directed to file evidence within 21 days.

Trading in the shares after the announcement of privatisation proposal

37.  According to a CCASS participants shareholding report of 5 February 2009, there were 2,336 CCASS participants of all descriptions holding the Company’s shares, of which over 1,200 individual CCASS investor participants held 5,000 shares or less in their own names as CCASS investor participants rather than through an intermediary, and 480 of those 1,200 individuals CCASS investor participants held 1,000 shares or less in their own names as CCASS investor participants rather than through an intermediary. This would indicate a potentially large pool of small shareholders holding their shares through CCASS that could potentially move their shares in and out of CCASS at will, should they wish to participate in the court meeting as registered shareholders and to count under the majority in number test.

38.  A total of 2,120,489,926 shares (approximately 61% of the 3,473,432,507 shares entitled to be represented and voted at the court meeting) changed hands during the period between the resumption of trading in the Company’s shares (on 5 November 2008) following the announcement of the privatisation proposal and 3 February 2009 (the day before the court meeting). There was a significant increase in the daily volume of shares traded in the run up to the holding of the court meeting. The average daily trading volume for the period aforesaid was 36.56 million shares. By way of comparison, the average daily trading volume of the Company’s shares for the 12-month period prior to 5 November 2008 was 18.36 million. There was also a marked increase in the number of transfers on the register of shareholders in the period approaching the holding of the court meeting.

39.  The fact that there was such a substantial increase in the trading volume and registration of shares of the Company after the announcement of the privatisation proposal is not unusual. Increase in the trading volume and registration of shares is a common phenomenon after a scheme for privatisation is announced, especially where there is a large differential between the market price and the offer price.

40.  Christopher Howe of Anglo Chinese Corporate Finance Limited was engaged by PCRD to provide an independent expert opinion on this. According to his analysis, once an offer is announced, the make up of independent shareholders typically changes as to 70 to 90% before the transaction completes. Such characteristics are driven by a large and varied group of investors, many of whom have substantial resources and which the industry terms “the Arbs”, short for arbitrageurs who are investors specialising in takeovers and who take the difference between a share price and an offer price for that share, forming a view on the likelihood of a transaction completing. Mr. Howe said “Arbs” are very active in the Hong Kong stock market. They are made up of local investors and international funds and ultra high net worth individuals specialising in this activity.

41.  Mr. Howe further explained that it is not uncommon for “Arbs” to protect their investment when a transaction they invest in is implemented by a scheme of arrangement by splitting their shares into board lots or acquiring odd lots and registering their interests in their own name or those of their nominees to increase the number (as opposed to the value) of their votes at a meeting of shareholders held to consider a privatisation proposal under a scheme of arrangement.

42.  Mr. Howe opined that the proposed privatisation of the Company contained certain uncommon features which translated into a relatively uncommon set of circumstances. These are:

·      a certain notoriety surrounding PCRD, the Company and its major shareholders;

·      a backdrop of extreme stock market volatility; and

·      a common characteristic being an opportunistic offer price as far as the stock market was concerned combined with a share register containing many shareholders who had acquired shares in the Company at prices higher than the offer price, which meant that a smaller than normal number of the Company’s shares changed hands in the weeks following the announcement in November 2008. In other words, more investors than is usually the case thought that a higher offer would be made.

43.  As a consequence of the above circumstances, a price gap resulted, which left the Company share price significantly below the initial offer price of HK$4.20 per share and this created an uncommon opportunity for the “Arbs”. The potential returns available in this case were in the range of 23.5% to 32.4%, instead of the normal 2 to 6% arbitrage.

44.  A useful comparison is the recent privatisation of Shaw Brothers (Hong Kong) Limited. There was also a substantial increase of approximately 77% (235) in the number of registered shareholders between the date of the announcement of the scheme (on 22 December 2008) and the date of the closure of the register of members (20 February 2009). Among those newly registered shareholders, 78.8% (175) held one board lot of shares. In terms of head-count, 237 minority shareholders voted at the meeting and 231 voted for the scheme.

Results of investigation of the Company

45.  The Company has conducted inquiries into the allegations of voting impropriety, with the help of its external legal counsel and external independent auditors. They have also enlisted the support of Computershare, the Company’s share registrar and the scrutineer appointed in relation to voting at the court meeting and extraordinary general meeting.

46.  Of the 2,263 shareholders present and voting either in person or by proxy at the court meeting, 208 held less than 1,000 shares, 840 held exactly 1,000 shares, and 1,215 held more than 1,000 shares.

47.  Of the 208 shareholders holding less than 1,000 shares, 27 voted for the Scheme and 181 voted against the Scheme. Of the 840 shareholders holding exactly 1,000 shares, 777 voted for the Scheme and 63 voted against it. Of the 1,215 shareholders holding more than 1,000 shares, 600 voted for the Scheme and 615 voted against it.

48.  The Company analysed the names of individuals in the transfer records for the period between 1 December 2008 and 31 January 2009 against the register of insurance agents maintained by the Hong Kong Federation of Insurers, in order to ascertain possible matches between the names of transferees and the names of individuals in the register of insurance agents.

49.  There are inherent limitations on the above analysis. The Company does not know whether the register of insurance agents is comprehensive and completely accurate, or whether it is updated periodically and, if so, on what basis. Further, only identical name matches were taken into account. The Company does not have access to additional information which would be required to verify that apparently matching names are in fact the same individuals. It is also possible that a number of “false positives” (i.e. persons whose names appear to be matching but are not in fact the same individuals) have been included in the analysis. Chinese characters, which would enable more precise matching, do not appear in the shareholders records and the register of insurance agents.

50.  The analysis of the Company showed that of a total of 1,551 transfers on the register of shareholders in the period of 1 December 2008 to 31 January 2009, 495 transfers (approximately 32%) were to persons whose names appeared to match those of insurance agents listed in the register of insurance agents, and those persons collectively held 1,263,577 shares. Of these 495 individuals, 459 voted for the Scheme and 4 voted against it at the court meeting, and 32 did not vote.

51.  The Company also sought to identify the number of transfers of shares during the aforesaid period revealed by shareholder records which are transfers to persons appearing to match the names of insurance agents of Fortis Asia. Of the 495 individuals, 347 transferees appeared to match the names of persons listed on the register of insurance agents as having been engaged by Fortis Asia. Those 347 persons held an aggregate of 530,386 shares, and 337 voted for the Scheme, 2 voted against and 8 did not vote.

52.  Of the 495 transfers aforesaid, 392 transfers were of a single board lot of 1,000 shares, with 322 of them being to persons appearing to match the names of insurance agents of Fortis Asia. There were 8 transfers (representing 3,489 shares) of less than 1,000 shares, with one of those transfers (representing 200 shares) being to a person whose name appeared to match the name of an insurance agent of Fortis Asia. There were 95 transfers (representing 861,071 shares) of more than 1,000 shares, with 24 of those transfers being to persons appearing to match the names of insurance agents of Fortis Asia (representing 202,169 shares).

53.  Of the 392 transfers of a single board lot of 1,000 shares, 337 transfers were registered on 21 January 2009, with 297 of those transfers being to persons appearing to match the names of insurance agents of Fortis Asia. The date of 21 January 2009 falls towards the end of the last full working week (the following week included public holidays for Chinese New Year) prior to the latest time for lodging transfers of shares to qualify for attending and voting at the court meeting, which latest time was Friday 30 January 2009 (with Monday 26 January to Wednesday 28 January being public holidays in Hong Kong).

54.  Of the 459 individuals appearing to match the names of insurance agents who voted for the Scheme, 1 held less than 1,000 shares (and was not a person appearing to match the name of an insurance agent of Fortis Asia), 379 held a single board lot of 1,000 shares (of whom 315 appeared to match the names of insurance agents of Fortis Asia), and 79 held more than 1,000 shares (of whom 22 appeared to match the names of insurance agents of Fortis Asia). Of the 4 persons appearing to match the names of insurance agents of Fortis Asia who voted against the Scheme, 1 held less than 1,000 shares, 2 held a single board lot of 1,000 shares, and 1 held more than 1,000 shares.

55.  The Company has noted certain media reports claiming that family members of insurance agents might also have shares in the Company. To test such reports, the Company examined the list of names of the 495 individuals, and tried to match the address and/or telephone number of those persons to those of other shareholders.

56.  213 registered shareholders appearing on the register of shareholders as at 4 February 2009 appeared to have an address and/or telephone number which is the same as that of one or more transferees during the aforesaid period of 1 December 2008 to 31 January 2009 that appear to match those of insurance agents listed in the register of insurance agents. Of those 213 persons, 193 voted for the Scheme and 20 voted against. 

57.  Of the 495 transfers to persons who appeared to match the names of insurance agents listed in the register of insurance agents, 489 transfers were made by HKSCC Nominees Limited. Of those 489 transfers, 337 were transfers of one board lot of 1,000 shares made on 21 January 2009, and 297 of those transfers were made to persons appearing to match the names of insurance agents of Fortis Asia.

58.  Because a large proportion of the shares are held through CCASS and HKSCC Nominees Limited, it is not possible for the Company to identify the transferors, the beneficial owners, or the consideration for the transfers.

Results of investigation of the SFC

59.  Pursuant to the directions made earlier, the SFC filed a main affidavit by Mark Robert Steward, who is the Executive Director, Enforcement, of the SFC. Mr. Steward exhibited 32 bundles containing the records of interviews conducted by the SFC or transcripts of audio-taped interviews. He set out salient matters arising from the interviews in his affidavit, with his observations. In the time available, it is not possible for me to read extensively into the records of interviews. I have read the essential parts of the interviews referred to in Mr. Steward’s affidavit and the submissions of the SFC and of PCRD, as well as the whole of the unredacted transcript of the interview with Francis Yuen.

60.  The investigation of the SFC into the voting allegations is part of a wider and ongoing investigation into the affairs of the Company and whether there has been misconduct or the commission of offences under Cap. 571. So far, the SFC has been able to interview 95 persons, potential witnesses in the matter may exceed 700. Notwithstanding this, it is the submission of counsel for the SFC that the evidence obtained at this stage is more than sufficient to enable the court to draw meaningful and pertinent inferences therefrom.

61.  The voting results were analysed against the register of members. Of the 859 Independent Shareholders who voted against the Scheme, 829 (96.5%) were registered as shareholders prior to 30 October 2008, prior to the announcement of the privatisation proposal. Of the 1404 Independent Shareholders who voted for the Scheme, 1,288 (91.7%) were registered as shareholders after the Scheme was announced. Of these 1,288 shareholders, 940 (67%) were registered after 30 December 2008 (the day the court meeting was adjourned). Of the 1,288 shareholders, 772 only held one board lot of shares each and 726 only became registered shareholders after the adjournment of the court meeting. The SFC has been focussing its investigation into the circumstances relating to the 726 persons who became members of the Company between 30 December 2008 and 30 January 2009 each holding one board lot of shares and voted in favour of the Scheme. Later, the SFC extended the investigation to persons who had transferred into their names one to three board lots of shares during the said period through Kingston Securities Limited (“Kingston”).

62.  The transfers of the vast majority of the 726 shareholders (711 in number) were handled by these five CCASS participants, of which the first four are brokers:

(1)     494 originated from Newpont Securities Limited (“Newpont”);

(2)     38 were from Kingston;

(3)     132 were from Chung Nam Securities Limited (“Chung Nam”);

(4)     29 were from Success Securities Limited (“Success”); and

(5)     18 were from Radland International Limited (“Radland”), a related company of Chung Nam.

63.  In addition to the above, two persons one through each of Kingston and Success became members of the Company holding two board lots during the period between 30 December 2008 and 30 January 2009 and voted for the Scheme. Furthermore, 142 persons became members during this intervening period and voted for the Scheme held three board lots each, of which 136 persons acquired their shares through Kingston.

64.  The total number of votes cast in favour of the Scheme through the proxy votes of members in relation to the five sources identified above came up to 849. It would be noted that the majority in number test was met by 545 votes at the court meeting.

65.  In respect of Newpont, 500,000 shares were purchased by Lam Hau Wah Inneo, a regional executive director of Fortis Asia, on 5 January 2009, and they were withdrawn in single board lots, of which 494 newly registered shareholders voted in favour of the Scheme by proxy. Of these 494 persons, 335 were agents of Fortis Asia, 101 are unidentifiable, 9 were clerks, receptionists or secretaries, 12 were spouses of agents of Fortis Asia and 37 were friends, relatives or acquaintances.

66.  Inneo Lam’s secretary, who is his sister Lam Hau Yuk Herea, had obtained from Francis Yuen’s secretary, Lesley Wai, 500 to 600 proxy forms for distribution together with the share certificates. The SFC has not been able to interview Lesley Wai, who applied for long leave on 11 February 2009. She went on leave from 18 February 2009 and her leave period is to end on 9 April. Attempts to contact her in Hong Kong and Canada were not successful.

67.  Francis Yuen had known Inneo Lam since 1994. In November 2008, he had a meal with Inneo Lam and another regional executive director of Fortis Asia, Paul Ng. There was telephone contact between Francis Yuen and Inneo Lam in December 2008, January 2009 and 4 February 2009. There were nine telephone calls between 30 December 2008 and 4 February 2009. The longest call, on 30 December 2008, lasted for almost 7.5 minutes. There were five calls between them on 5 January 2009. Francis Yuen sent two SMS messages to Inneo Lam on 4 February 2009, shortly before the commencement of the court meeting.

68.  Eugene Chuang Yue Chien is a common shareholder of Chung Nam and Radland. Between 4 and 17 December 2008, a corporate client of Chung Nam, Smart Jump Corporation (“Smart Jump”), acquired 14,037,000 shares in the Company. Smart Jump is an indirect principal subsidiary of Willie International Holdings Limited, a company listed on the Stock Exchange, of which Eugene Chuang’s brother Henry Chuang is chairman and a major shareholder. Between 5 and 15 December 2008, another corporate client of Chung Nam, Main Purpose Investments Limited (“Main Purpose”) acquired 27,300,000 shares in the Company. Main Purpose is a subsidiary of GR Vietnam Holdings Limited, also a company listed on the Stock Exchange, some of whose directors are friends of Eugene Chuang.

69.  Between 13 and 21 January 2009, 132 single board lot buy orders were executed by Chung Nam. Eugene Chuang claimed he had been actively encouraging his employees, friends and clients to purchase the shares so they could vote for the privatisation of the Company. Each of the 132 board lots was registered into names of different clients and Chung Nam assisted in effecting the transfers, supplied the proxy forms and collected them.

70.  Kingston is owned by its managing director Chu Li Yuet Wah and her mother. She is also the managing director and majority shareholder of Golden Resorts Group Limited (“Golden Resorts”), a company listed on the Stock Exchange. On 13, 14 and 22 January 2009, she bought 2.3 million shares in the Company. On 20 January 2009, her company Best China Limited bought 100,000 shares in the Company. Many employees of Kingston and Golden Resorts and their family members bought one to three board lots of shares in the intervening period before the court meeting. 11 of them were from Macau and an accounts executive of Kingston was sent to Macau to attend to the opening of accounts for them and their purchase of one board lot each. 175 persons acquired one to three board lots of shares through Kingston.

71.  Ma Kam Wah is the manager and an account executive at Success. On 12 January 2009, he bought 15,000 shares and withdrew them in single board lot certificates. He kept one certificate himself and gave 14 certificates to his relatives and acquaintances with proxy forms. A client of his, Chan Yin Yuk Ender, bought one board lot of shares on 9 January 2009 and another six board lots on 13 January 2009. The six board lots of shares were registered in the names of her friends and family members, who did not pay for the shares.

72.  It was submitted on behalf of the SFC that the 849 votes mentioned above cast in favour of the Scheme can be inferred to be infested by manipulative practices in that:

(1)     Inneo Lam, with the assistance of his team heads, implemented a scheme whereby single board lots of the Company’s shares would be transferred to insurance agents of Fortis Asia and their friends and relatives, with such transferees being prevailed upon, whether implicitly or explicitly, to sign proxy forms in favour of the Scheme. The purpose of this was to increase the prospects that the majority in number test would be achieved at the court meeting.

(2)     Inneo Lam, at the request of Francis Yuen, alone or together with Francis Yuen, had devised the above scheme, which Inneo Lam implemented, to assist Starvest in the privatisation proposal.

(3)     Eugene Chuang orchestrated a plan to procure that single board lots of shares were purchased in the names of clients and employees of Chung Nam and Radland, and that the shares were withdrawn, transferred and registered in the names of the new shareholders, and proxy forms in favour of the Scheme were signed by the new shareholders. This was done to increase the head-count in favour of the Scheme at the court meeting, to ensure that the holders of two sizeable blocks of shares in the Company, Smart Jump and Main Purpose, would not suffer loss and would reap a substantial profit from the privatisation.

(4)     Chu Li Yuet Wah contrived a plot whereby employees of Golden Resorts, employees of Kingston, friends and relatives of such employees and other clients of Kingston would be induced to purchase one to three board lots of shares and then to sign proxy forms in favour of the Scheme. In view of her personal interest in the privatisation, the purpose of this plot was plainly to increase the head-count in favour of the Scheme at the court meeting.

(5)     Ma Kam Wah devised a method to create as many registered members in the Company as possible using the 15,000 shares he purchased. This method was copied by one of his clients, Ender Chan. The purpose of this was to increase the head-count in favour of the Scheme at the court meeting.

73.  Before I consider whether inferences should be drawn in the manner as submitted by the SFC, it is pertinent to remind myself of the relevant legal principles.

74.  The Privy Council in Tay Bok Choon v. Tahansan Sdn Bhd [1987] BCLC 472 was concerned with a petition for winding up on just and equitable grounds. What Lord Templeman said at 476f to h would apply equally to a petition for the sanction of a scheme of arrangement:

“In civil proceedings the trial judge has no power to dictate to a litigant what evidence he should tender. In winding-up proceedings the trial judge cannot refuse to read affidavits which have been properly sworn, filed and produced to him unless some opposing party has applied for the attendance for cross-examination of the deponent and that application has been granted and the deponent does not attend. The court cannot give a direction about evidence unless one of the litigants desires such direction to be made. Of course a judge may indicate to a petitioner that unless he calls oral evidence or applies to cross-examine the deponents of the opposition so as to prove a disputed fact, his petition is likely to fail. The judge may equally indicate to a respondent that unless he calls oral evidence or applies to cross-examine the petitioner's deponents for the purposes of disproving an allegation made by the petitioner, then the petitioner is likely to succeed. At the end of the day the judge must decide the petition on the evidence before him. If allegations are made in affidavits by the petitioner and those allegations are credibly denied by the respondent's affidavits, then in the absence of oral evidence or cross-examination, the judge must ignore the disputed allegations. The judge must then decide the fate of the petition by consideration of the undisputed facts.”

75.  The above statements of Lord Templeman were applied by the Privy Council on appeal from Hong Kong in Silver Mountain Ltd. v. A-G of Hong Kong [1994] 1 WLR 925 at 934F.

76.  The present proceedings are summary proceedings, with evidence given on affidavit. No one has sought leave to cross-examine any of the deponents. Besides, the majority of those interviewed by the SFC did not provide affidavits to this court. What were made available were the records of their interviews, not given on oath. Some of the allegations by some of the interviewees, which have been put by the SFC to others, were denied by them. In other instances, allegations made by some interviewees were not put by the SFC to others, so they had no opportunity to respond to allegations concerning them. It would be very difficult, not to say generally inappropriate, for this court to attempt to resolve disputed allegations and make findings.

77.  As for drawing inferences of fraud or serious misconduct, Sir Anthony Mason NPJ made these observations in HKSAR v. Lee Ming Tee (2003) 6 HKCFAR 336, which were applied by the Court of Final Appeal in Nina Kung v. Wang Din Shin (2005) 8 HKCFAR 387 at 443A to C, para. 187:

“… that conclusion was not to be reached by conjecture nor, as the respondent submitted, on a mere balance of probabilities. It was to be plainly established as a matter of inference from proved facts.”

78.  In Nina Kung v. Wang Din Shin, supra., where the court was asked to draw inferences of forgery or fraud from circumstantial evidence, Ribeiro PJ stated as followsat 441I to J, para. 185:

“The court guards against indulging in conjecture under the guise of drawing an inference where the primary evidence does not logically and reasonably justify the particular inference in question.”

79.  Ribeiro PJ also made reference at 442A to J to various dicta of the High Court of Australia in the unreported decision of Bradshaw v. McEwans Pty. Ltd. (delivered on 27 April 1951) and in Jones v Dunkel (1958) 101 CLR 298. I set out the relevant extracts as follows:

“In questions of this sort, where direct proof is not available, it is enough if the circumstances appearing in evidence give rise to a reasonable and definite inference: they must do more than give rise to conflicting inferences of equal degrees of probability so that the choice between them is mere matter of conjecture … But if circumstances are proved in which it is reasonable to find a balance of probabilities in favour of the conclusion sought then, though the conclusion may fall short of certainty, it is not to be regarded as a mere conjecture or surmise …” (Bradshaw v. McEwans Pty. Ltd.)

“But the law which this passage [the above passage in Bradshaw v. McEwans Pty. Ltd.] attempts to explain does not authorise a court to choose between guesses, where the possibilities are not unlimited, on the ground that one guess seems more likely than another or the others. The facts proved must form a reasonable basis for a definite conclusion affirmatively drawn of the truth of which the tribunal of fact may reasonably be satisfied.” (Jones v Dunkel, supra. at 305, per Dixon CJ)

“One does not pass from the realm of conjecture into the realm of inference until some fact is found which positively suggests, that is to say provides a reason, special to the particular case under consideration, for thinking it likely that in that actual case a specific event happened or a specific state of affairs existed.” (Jones v Dunkel, supra. at 305, per Kitto J).

80.  Where serious allegations of impropriety are made, as have been made by the SFC in this case, there is the need for a disciplined approach to the drawing of inferences. 

81.  With that, I turn to consider the evidence presented by the SFC.

Recipients of Inneo Lam’s shares

82.  Inneo Lam bought 2.4 million shares in the Company in the first two weeks of January 2009, when the price dropped to HK$3.50 per share. This included the purchase of 500,000 shares through Newpont on 5 January 2009 withdrawn in 500 certificates of one board lot each. He had not bought shares in the Company for about 10 years. Fortis Asia had promised him a bonus of HK$5 million subject to adjustment, he received HK$2.5 million in November 2008, and the balance of HK$1.9 million in February 2009. He had 1,000 agents under him. Fortis Asia did not prohibit agents like Inneo Lam giving bonus to their subordinates.

83.  He issued a memo on 7 January 2009 to five veteran team heads in Fortis Asia, explaining that he had learned from public information the Company was going to be privatised at HK$4.50 a share, he had bought some shares and would like to give one board lot of shares to each insurance agent. The team heads were to exercise their discretion which of the agents should receive a gift of shares. He also mentioned they should respect the agents’ wishes whether they wanted to accept his gift as well as their voting intention.

84.  Herea Lam distributed the share certificates with the proxy forms to the five team heads and each received a different quantity. The remaining board lots were distributed by her to the sales team directly under Inneo Lam.

85.  Some of the team heads asserted that if there were any shares left after distributing to subordinates, they could dispose of them in whatever manner they liked. They gave or sold a sizeable number of the shares, almost without exception in one board lot each, to family members and friends who had no connection with Fortis Asia. When giving or selling one board lot of shares each to selected family members and friends, these team heads also provided proxy forms for signature. When the team heads distributed the shares and proxy forms, they generally made the point that the recipients would get a few hundred dollars more if the Scheme were approved. The SFC has so far interviewed 26 of the recipients. Not a single one of the recipients have been given their share certificates.

86.  A regional director, Tse Yiu Hei Ricky, whose immediate supervisor is Tang Ka Kit Davy, one of the five team heads, received 30 share certificates of one board lot each. Ricky Tse was told by Davy Tang they were from Inneo Lam and Davy Tang did not ask him to give the shares to his subordinates. Ricky Tse transferred one board lot into his own name and the remaining 29 board lots were transferred on a temporary basis to 29 of his friends and relatives. He had asked the recipients to vote for the privatisation and he would ask them to give back to him the money they received if the Scheme was approved. 

87.  Herea Lam collected the share certificates endorsed with the transferees’ signature and the completed proxy forms from the five team heads and from those agents directly under Inneo Lam. She notified Newpont which collected all the documents from her on 20 January 2009.

88.  On behalf of the SFC, it was submitted that Inneo Lam’s explanation for purchasing and distributing the 500,000 shares to give his subordinate agents a bonus in the form of a gift of shares is incredible, and there are compelling reasons to infer that he had implemented a scheme to transfer single board lots to the agents and their friends and relatives, and to prevail upon them, implicitly or explicitly, to sign proxy forms in favour of the Scheme, so as to increase the prospects of satisfying the head-count test for privatisation. These reasons were:

(1)     A bonus of shares in another company to the subordinate agents would be highly unusual.

(2)     A significant number of board lots were distributed to persons who had no connection with Fortis Asia at all.

(3)     The board lots were only given to those agents who were in Hong Kong at the material time before the court meeting. Those who were on vacation or medical leave were not offered the shares.

(4)     There was also apparently an initial deadline of 16 January 2009 for accepting the bonus of a gift of shares, which was ten working days before the deadline of 30 January 2009 for the lodging of transfers of shares to qualify for voting at the court meeting.

(5)     Not a single one of the transferees interviewed by the SFC has received his share certificate so far since signing the transfer and proxy forms.

(6)    At least 16 transferees interviewed by the SFC had their own securities trading accounts, but none of them were given the opportunity to deposit the board lot into their own accounts.

(7)     The veracity of Inneo Lam’s memo dated 7 January 2009 to the five team heads is dubious, having regard to the comments on this memo to the SFC by Charles Stuart Fraser, the chief executive officer of Fortis Asia, and the inconsistent statements of one of the five team heads to the SFC whether he did receive it.

(8)     Active steps were taken by Herea Lam to provide the transferees with proxy forms, without regard to whether they had requested for the forms, and to ensure the collection of all completed forms to be transmitted to Computershare on time.

(9)     On receiving the shares, the transferees were told on most occasions that the price offered for cancellation of each share (at HK$4.50) was higher than the market price and the transferees would stand to reap greater financial benefit if the Scheme was approved.

89.  In his oral submission, Mr. Poon, SC for the SFC drew attention to the fact that Inneo Lam had bought another 1.9 million shares and would gain HK$1.9 million if the privatisation were to succeed. However he had incurred expenses of about HK$1.75 million in buying 500,000 shares which he gave away as well as brokerage and transfer fees. Mr. Poon queried if Inneo Lam would really have made much profit in this exercise. He suggested this was not done for the economic gain of Inneo Lam and the circumstances pointed to a scheme on Inneo Lam’s part to assist the privatisation in increasing the head-count of votes in favour. In other words, Inneo Lam was not even an arbitrageur.

90.  But is this a reasonable basis for a definite inference to be affirmatively drawn that the whole exercise was just a scheme to assist the privatisation in boosting the head-count? Or are there conflicting inferences of equal degrees of probability so that the choice between them is mere matter of conjecture?

91.  Mr. Yu, SC submitted for PCRD and Starvest that it is the latter. He pointed to these matters in the records of interviews produced by the SFC:

(1)     Inneo Lam explained that the purpose of buying 500,000 shares and withdrawing them in single board lots was to give them to agents working under him, to keep the group of persons under him happy and to diminish strong frustration. It was common practice of the trade for seniors to give bonus or incentive to sales agents under them. Such incentive is not limited to cash, and may take the form of a trip and a lot of things. He had given away shares in the past, being the shares of the insurance company in which he worked. He explained why he chose to give shares instead of cash, that it would make subordinate agents remember him and increase their loyalty to him.

(2)     He explained why he had picked the shares of the Company. He had considered a gift of the shares in PICC Property and Casualty Co. Ltd., but the price of one board lot of shares in this company (2,000) was such that it would cost him close to HK$4 million to acquire 500 board lots, which would not suit his budget. He had only intended to give half of the bonus he received from Fortis Asia to his agents. The whole equity market was not stable, he had lost a lot of money in the market in October 2008. The proposal to privatise the Company was announced at the time. He considered the chance of privatisation not succeeding was not high and the chance of succeeding was high. In giving out one board lot, the agents would each receive a benefit of HK$3,000 odd and if privatisation should succeed, they would get HK$4,000 odd.

(3)     In giving out the shares to the five team heads, he left it to them entirely to decide how to distribute the shares. He told them the shares were given as bonus. Three of the team heads mentioned to the SFC that Inneo Lam said nothing about voting for or against privatisation. Each of the team heads proceeded in his own way to distribute the shares. In the case of Davy Tang, he treated all the shares as Inneo Lam’s gift to him and only gave some to his senior members and, because he needed money, he sold some. Another team head, Chow Sin Chuen Kenny also sold some of the shares.

(4)     Contrary to the suggestion in Mr. Steward’s affidavit that the shares were apparently only given to agents who were in Hong Kong at the material time, which was derived from the interview of Kenny Chow, Kenny Chow did not say he would not consider offering the shares to those who were not temporarily in Hong Kong. He had said if the staff was on vacation and he did not know when the staff would be back, he could not give the shares to that staff. He clarified he would not exclude people on normal vacation. He denied the suggestion put to him there was a pre-requisite that the person to receive the shares had to stand by at the time the shares were given out.

(5)     Herea Lam said Inneo Lam did not impose any condition that the agents would have to sign proxy forms when shares were distributed to them. She gave out the proxy forms as she had discussed with two of the team heads, Cheng Chi Kwong Stephen and Chan Shui Chung Freddy, and considered it would be in their own interest to support the privatisation. When distributing the shares, she had asked the recipients whether they required the forms, and the responses she got were yes.

(6)     About 30 persons who were offered the shares as bonus were interviewed and many confirmed they voted in favour of the Scheme because they could make more money by agreeing to privatisation, which was widely publicised. They also said their receipt of the shares was not in any way conditional upon their agreeing to vote. One interviewee said she felt she had the obligation to sign the proxy form, as the shares were given by the boss free of charge; she also said she was supportive of privatisation as it would be quicker for her to get the money if it was successful. Another said he ticked a vote in favour on his form because he asked his superior Kenny Chow how he should vote and Kenny Chow said he would vote in favour, he did so as he had much confidence in his superior. Not a single interviewee said he or she was prevailed upon to sign proxy forms in favour of the Scheme.

(7)     Some of the shares were sold by Davy Tang and Kenny Chow. It would be very odd if they were selling shares with the condition that the buyers must sign proxy forms in favour of the Scheme.

(8)     The reference to an initial deadline of 16 January 2009 was said by Kan Pui Ha, Wong Chi Kwong and Sin Pui Lam, who were working directly or indirectly under Kenny Chow. Kenny Chow did not mention there was any deadline in his interview for accepting the shares as bonus. At most, the deadline was Kenny Chow’s idea.

(9)     Herea Lam received the new share certificates on 16 February 2009. She gave Davy Tang 110 new certificates for the shares allocated to him. She has only kept the new certificates in respect of the shares distributed to the other team heads. She said she would keep them until the outcome of the privatisation is known.

92.  Inneo Lam has not given evidence in this court. He was not given an opportunity in his interview with the SFC to respond to contrary material statements made by others, such as an allegation of Wong Tim Cheung Alvin, a senior regional director, that Kenny Chow had encouraged a group of agents to purchase one board lot of shares each and said if they should suffer any loss, Inneo Lam would compensate them (this allegation was not put to Kenny Chow either). The SFC has sought to undermine his credibility on the basis of what Stuart Fraser had said about his memo, notwithstanding what he did was corroborated by the agents interviewed. He has denied in his interview he had any discussion with Francis Yuen about the privatisation. I am unable to agree with Mr. Poon that Inneo Lam’s version is “strikingly contrary to probabilities”. Mr. Poon proceeded on the basis that what Inneo Lam did would bring him little or no economic advantage. But that was to disregard entirely Inneo Lam’s version that he wanted to benefit his subordinate agents by giving them a bonus in this form. I have no sufficient reason to reject Inneo Lam’s account here.

93.  The matters argued in favour of the inference sought to be drawn by the SFC could be countered and explained by the matters put forward by Mr. Yu. The existing information gives rise to no more than conflicting inferences of equal degrees of probability. This court is not authorised to choose between guesses. In my judgment, we have not moved from the realm of conjecture to the realm of legitimate inference.

94.  I decline to infer that Inneo Lam had implemented a scheme in splitting up his 500,000 shares to assist in the privatisation of the Company. He did not even vote at the court meeting. What Inneo Lam had devised was hardly ingenious or complex as submitted by Mr. Poon. Stripped of the media frenzy surrounding this, what was done here by Inneo Lam was done quite openly, with no secrecy and it would be naïve to expect such an exercise could possibly be kept a secret among so many people in the office, considering that 500 single board lots were to be given out, and particularly in view of the notoriety of this case and the extensive media coverage on the privatisation after the adjourned court meeting on 30 December 2008.

Alleged involvement of Francis Yuen

95.  It was submitted on behalf of the SFC an inference should be drawn that Francis Yuen was involved in the alleged scheme of Inneo Lam. Francis Yuen is presumed to be acting in concert with Starvest under the Takeovers Code. If he were indeed involved, and if there was a scheme of Inneo Lam as alleged, the 494 votes cast in favour of the Scheme that originated from Inneo Lam would be excluded, as those shares were held by persons regarded as acting in concert.

96.  It is strictly unnecessary to consider this, as I have declined to find there was any scheme of Inneo Lam to assist in the privatisation of the Company. Nevertheless, I will do so, as there has been extensive media reporting of the alleged involvement of Francis Yuen disclosed in this hearing.

97.  The basis for the allegation of the SFC rests largely on coincidental telephone contacts between Francis Yuen and Inneo Lam on critical dates, being 30 December 2008, 5 January and 4 February 2009.

98.  Francis Yuen has given his explanation at his interview with the SFC and through his solicitors subsequently and has made an affirmation in these proceedings denying any suggestion or insinuation of wrongdoing. He has had a long career in investment banking and financial regulatory affairs, having served as the chief executive of the Stock Exchange from 1988 to 1991. He knows very well the regulatory requirements of Hong Kong. He stated that he had business reasons to contact both Inneo Lam and Paul Ng at the time because of the expression of interest by an old acquaintance in the management buyout of Fortis Asia, to find out how its business was doing. He also met Dennis Ziengs, the top person at the Asian operations of Fortis Asia, for the same purpose in December 2008. He cannot recall the contents of all the telephone conversations he had with Inneo Lam. Paul Ng was not interviewed by the SFC.

99.  If this explanation on oath of Francis Yuen is to be rejected, there must be proved facts that would give rise to a reasonable basis for this course to be adopted.

100.  To bolster its case for drawing such an inference, the SFC relied on these matters:

(1)     Fung Chi Ho Johnny, the chief agency officer of Fortis Asia who was directly under Stuart Fraser, said in his interview with the SFC that he was asked by his superior in February 2009 about a press report concerning Fortis Asia agents who had received shares in the Company to support its privatisation. He informed his superior he was told by many colleagues in the office before Christmas in December 2008 that Paul Ng and the subordinates of Paul Ng had been making numerous telephone calls to the agents, asking them to support the privatisation of the Company by buying one board lot of shares and voting in favour of the Scheme to support Francis Yuen. However, Johnny Fung cannot recall the identity of any of those colleagues who had said this. He also told the SFC he cannot confirm if it was true or false.

(2)     Witness A, whose identity the SFC wishes to protect, informed the SFC that Francis Yuen called him in December 2008 before the court meeting to lobby his support for the Scheme. He told Francis Yuen he would support the Scheme. Francis Yuen then said they had been considering an increase in the offer price, it was most likely an announcement would be made the following Monday and he would call Witness A personally bearing the good news. When no announcement was made the following week, Witness A felt annoyed and began to sell several tens of millions of his shares. Then Francis Yuen called him around 12 January 2009 (this should probably be 13 January) and told him of the increased offer price. Witness A told Francis Yuen he was annoyed as he had already sold his shares. Francis Yuen said the Company would incur liability of HK$30 to 40 billion on the privatisation and to have the Scheme approved, sufficient votes and sufficient head-count were required.

101.  No credence can be given to what was said by Johnny Fung, who was unable to give any indication of the source of the multiple and unsubstantiated hearsay.

102.  Francis Yuen has given a very different account of his two telephone contacts with Witness A on 20 December 2008 and 13 January 2009. He was asked by Loh Chan Stephen, the head of Now TV, to telephone Witness A. Loh Chan had learned from his former colleague that Witness A, who was a significant shareholder in the Company, wanted to talk to Francis Yuen. Francis Yuen did not know Witness A but the latter claimed to be acquainted with him. In their first telephone contact, Witness A told him without his asking that Witness A would support the Scheme. On 13 January 2009, Francis Yuen received a message Witness A was upset and wanted him to call, so he did. Witness A was upset that the offer price had increased to HK$4.50 as he and his friends had sold most of their shares before the announcement about the increase. He said they would vote against the Scheme. Francis Yuen pointed out that was irrational, if they had supported the Scheme at HK$4.20, they should support it at HK$4.50. At the end, Witness A said he would just abstain. Francis Yuen denied he had initiated the calls to Witness A or that he had breached his confidentiality obligation and disclosed a probable increase in offer price or that he had talked to Witness A about the requirement for enough votes for head-count.

103.  Loh Chan has filed an affirmation supporting Francis Yuen’s version that it was Witness A who had initiated the telephone call from Francis Yuen.

104.  Mr. Poon submitted Witness A’s version is logical and should be accepted whereas Francis Yuen’s version is illogical. I am unable to agree. I cannot see any reasonable basis for preferring Witness A’s version. As pointed out by Mr. Yu, a closer examination of the record of interview would reveal some basic problems in Witness A’s account. He resiled from his earlier statement to the SFC that Francis Yuen had said, during their telephone conversations, something about “doing head-count”. He alleged Francis Yuen had told him that for the Scheme to pass, it required 90% of the shareholders to vote in favour. Francis Yuen could not have made such a mistake, he knows very well the Scheme would only require the approval of 75% in value. Moreover, as Witness A had already told Francis Yuen at the outset he would support the Scheme, there would be no need to entice him by disclosing information of a probable increase in offer price.   

105.  I decline to infer from the coincidence of timing of telephone communications and SMS messages that Francis Yuen had anything to do with, or had any knowledge of, what Inneo Lam did. There is merely suspicion, wholly unsubstantiated by evidence. Inference must be distinguished from conjecture or speculation, and the court must guard against indulging in conjecture under the guise of drawing an inference where the primary evidence does not logically and reasonably justify the inference in question (Caswell v Powell Duffryn Associated Collieries Ltd. [1940] AC 152 at 169 to 170; Nina Kung v. Wang Din Shin, supra. at 441I to J).

Chung Nam and Radland

106.  In the case of Chung Nam, the SFC has pointed to these matters for an inference to be drawn that the purchase of 132 single board lots of shares through it was not a case of investors acting independently and on their own initiative but was a coordinated plan by those in control of Chung Nam with the objective of bolstering head-count in favour of the Scheme:

(1)     The orders for the 132 single board lots were not input to the market individually, but were grouped into orders of 5,000 or 10,000 shares and later allocated between individual clients. Such grouping of orders is highly suspect: it was neither part of Chung Nam’s normal practice nor standard industry practice. It is extraordinary there was no audio recording for any of these 132 purchase or confirmation orders.

(2)     Records provided by Chung Nam showed that 125 of the 132 single board lot orders were purportedly settled by cash payments of exactly HK$4,000 each, even though the purchase price of the single board lots was in fact in the region of HK$3,840 to HK$3,910 each. The alleged cash payments were segregated from Chung Nam’s normal cash deposits. Eugene Chung personally withdrew exactly HK$500,000 in cash on 15 January 2009. He has not given a satisfactory account where this money went.

(3)     Chung Nam is still holding the share certificates for all of the 132 clients who purchased single board lots of shares. Such retention or custody of share certificates was not part of Chung Nam’s ordinary operations.

(4)     The purchasers of shares were given assistance in signing proxy forms and Chung Nam collected the completed forms from them. This was not its normal practice.

(5)     A fair number of those who purchased single board lots of shares through Chung Nam and signed proxy forms in favour of the Scheme were inexperienced investors with little or no understanding of the Scheme, the concept of privatisation or how proxy forms worked. Wong Sau Chun, an elderly and totally illiterate lady who purportedly signed a proxy form, did not know she had opened an account at Chung Nam.

(6)     Employees of Chung Nam were told by Eugene Chuang to buy only one or two board lots in the Company, and that it was unnecessary to purchase many shares.

(7)     If the privatisation of the Company is successful, Smart Jump and Main Purpose would stand to make profits to the tune of HK$40 million.

107.  For the purchase of 18 single board lots through Radland, a company also controlled by Eugene Chuang, it was submitted that similar inference may also be drawn.

108.  Eugene Chuang held strong views on the CCASS voting system. He considered it unfair that HKSCC Nominees Limited could only cast one vote even though it held a majority of the shares. He said all his staff wanted the Scheme to succeed so they could make some money. He claimed he had urged many people, including employees, friends and clients to buy the Company’s shares to take advantage of the privatisation and they were bound to reap profits. He admitted he had urged between ten to twenty people to buy single board lots.

109.  I agree with the submission of the SFC that there are sufficiently cogent reasons to infer that the 132 and 18 persons in whose names the single board lots were acquired through Chung Nam and Radland did so as a result of a plan devised by Eugene Chuang, and this was done to boost the head-count in favour of the Scheme so as to protect the investments by Smart Jump and Main Purpose. The purchase of 125 of single board lots would appear to have been financed by Eugene Chuang.

Kingston

110.  A total of 175 clients of Kingston became shareholders in the Company by acquiring one to three board lots during the relevant period and all voted in favour of the Scheme.

111.  An informant whose identity the SFC wishes to protect, Witness B, had been employed by Golden Resorts. She was instructed by her superior to open an account at Kingston and buy one to three board lots of shares. Her superior told her after purchasing the shares, the voting right would be transferred to them by signing proxy forms which would be taken away and that Chu Li Yuet Wah would buy the shares back from her at HK$4.50 each later, regardless of the market price. As to the quantity to buy, Witness B was told that buying one lot was to show support for the boss but buying three lots would earn a purchaser more money. According to Witness B, seven or eight of her colleagues bought shares as a result. Witness B refused to buy any shares saying she did not have enough money. Her superior offered to lend her money. She still refused. After that, her job performance became an issue and she was asked to leave her employment.

112.  Chu Li Yuet Wah denied the allegation of Witness B. She claimed the purchases made by Kingston’s clients were their own investments and had nothing to do with her.

113.  Three employees from Golden Resorts who were interviewed denied they were told to buy shares or that they had heard of a buy-back offer of Chu Li Yuet Wah. Two Kingston account executives who were interviewed denied knowing about a buy-back offer. Another account executive, Chu Kong Wing, who bought one board lot, recommended the stock to his family and friends as he thought they could make a profit and 14 of his clients purchased single board lots. Chu Kong Wing’s wife and son received gifts of single board lots from Ma Kam Wah, an account executive at Success.

114.  Some of the clients of Kingston who bought the shares have little formal education and little disposable income. There were inconsistencies in the accounts they gave to the SFC.

115.  The SFC submitted there was a strong motive for Chu Li Yuet Wah to take steps to boost the head-count in favour of the Scheme, as she would make a profit of HK$1.5 million if it was passed. It was submitted there are sufficient grounds to infer that she had set in place a plan to induce employees of Kingston and Golden Resorts, their friends and relatives, and clients of Kingston to purchase one to three board lots of shares and to sign proxy forms in favour of the Scheme. These grounds are:

(1)     All the Kingston account executives interviewed admitted to handling transfer and proxy forms for their clients, friends and family members.

(2)     A substantial number of those who purchased board lots in this way and signed proxy forms were inexperienced investors with little formal education. Unless they had been given inducement and assistance to fill in the proxy forms, it is unlikely that all of them would have done so.

(3)     It would be an extraordinary coincidence that all 175 persons who acquired one to three board lots through Kingston in the relevant period did separately, independently and simultaneously decide to go to the trouble of withdrawing the shares, having themselves registered as members, and completing and lodging proxy forms in favour of the Scheme.

116.  I see the force of the combination of factors. There was a denial of Chu Li Yuet Wah but I do not regard this as credible. I do not think it pertinent that some of the 175 persons had bought their shares before she and her company bought theirs. The objectively established facts are sufficiently strong. Notwithstanding her denial and the denials of some of the interviewees, I accept the submission of the SFC and infer that a scheme was devised by her as stated above. The 175 shareholders are the beneficial owners of the shares, but their shares are subject to a buy-back offer.

Success

117.  Ma Kam Wah had purchased 50,000 shares on 29 December 2008 just before the court meeting but never bothered to register them in his own name. He bought another 15,000 shares on 12 January 2009 and a further 20,000 shares on 15 January. He withdrew 15,000 shares in single board lot certificates on 12 January and gave them to 14 relatives and acquaintances, keeping one for himself. He claimed he did so as Chinese New Year was near and to cheer them up. He obtained the proxy forms for the recipients because he wanted them to vote and to support the privatisation proposal so he could make a profit. One of his clients, Ender Chan copied his method. She said there was consensus with her friends to split the shares to have more voting rights.

118.  I agree with the SFC that it is fairly clear Ma Kam Wah and Ender Chan had decided to split up some of the shares they bought to increase the head-count in support of the Scheme to profit themselves.

119.  The shareholders who received shares from Ma Kam Wah and Ender Chan are donees. The SFC has not alleged they are nominees.

Findings on arbitrageurs

120.  As Mr. Howe had observed, arbitrageurs are very active in the Hong Kong stock market and it is not uncommon for them to adopt the device of splitting their shares into board lots or acquiring odd lots and registering them in the names of others to boost the number of their votes for the head-count requirement. This practice of splitting shares is to counter the fact that the vast majority of shareholders by number and by value in nearly all publicly listed companies in Hong Kong normally hold their shares through one legal owner, HKSCC Nominees Limited (in the case of the Company, 93.7% of the shares of the Independent Shareholders), and all the votes cast by it in favour of a scheme would only count as one member for the head-count test.

121.  In summary, I find that Eugene Chuang, Chu Li Yuet Wah, Ma Kam Wah and Ender Chan had engaged in the activity of arbitrageurs as described above. They did so to protect an investment made by them or by a client of them. I decline to find that Inneo Lam had engaged in such activity. It is ironic that it was due to the open way he had split up and distributed his shares that the activities of arbitrageurs were investigated, even very small ones like Ma Kam Wah and Ender Chan.

122.  I now proceed to consider the applicable law.

The function of the court

123.  The starting point on the function of the court in a petition for the sanction of a scheme of arrangement is the classic exposition in Buckley on the Companies Acts, 13^th ed. (1957) p. 409, cited with approval by Plowman J in In re National Bank Ltd. [1966] 1 WLR 819 at 829B to E:

“In exercising its power of sanction the court will see, first, that the provisions of the statute have been complied with, secondly, that 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 thirdly, 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.”

124.  The above statements have been followed in Hong Kong, see for instance, Re Sharp Brave Co. Ltd. [1999] 4 HKC 79 at 83G to H. The crucial words in the above statements much debated on in the present proceedings are: “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”. I will come back to this requirement.

125.  The court is given the “widest possible discretion” to approve any sort of arrangement between a company and its members under section 166 (In re National Bank Ltd., supra. at 829F). Sanction is by no means a formality (Kempe v. Ambassador Insurance Co. [1998] 1 WLR 271 at 276E). The court is not bound by the decision of the court meeting and a favourable resolution at the meeting is just a threshold which must be surmounted before sanction of the court can be sought (Re BTR plc [2001] 1 BCLC 740 at 747g). The court holds the ring between different interests and looks at all the circumstances of the case (Re BTR plc, supra. at 748b; Ex parte Strawbridge; In re Hickman (1883) 25 Ch D 266 at 277 and 278).

126.  It is necessary to clarify one matter regarding Ex parte Strawbridge, as Mr. Poon and Mr Fung, SC, who appeared for three of the Independent Shareholders, have relied on this case to emphasise that the court in approving a scheme should have regard to “the moral aspect” of the case. It is correct that in the judgment of Fry LJ at 278, he did say the court is “bound to look at the moral aspect of the case”, and is not bound to approve an arrangement merely because it is “the most beneficial for the pecuniary interest of the creditors”. It is important to note the context in which this was said, as a court of law is “distinguished from a court of morality or conscience, if such a court exists” (Pender v Lushington (1877) 6 Ch D 70 at 75).

127.  The scheme in Ex parte Strawbridge was proposed to be made between a bankrupt and his creditors. A major creditor voting in favour of the resolution was the bankrupt’s father. He issued a writ against his son for an alleged debt after a creditor had sued the son. The father’s writ was not defended and he seized the son’s goods and attached his book debts as a judgment creditor. The circumstances gave rise to “very grave suspicions”. The transactions between the father and son would require investigation whether there was a fraudulent preference of the father. The way in which the notice of the meeting was framed would seem to enable the bankrupt and his father to draw off the attention of the creditors and to hide the transactions (at 276 and 278). The Court of Appeal refused to approve the scheme. In Lindley LJ’s words, if the resolution is “tricky or fraudulent, or in any way discreditable”, it is the duty of the court to decline to approve it (at 277).

128.  I do not understand Mr. Poon or Mr Fung to be advocating an approach that this court should look into the morality of privatisation proposal of the Joint Offerors in deciding whether to sanction the Scheme.

129.  Re Brian Cassidy Electrical Industries Pty Ltd. (1984) 9 ACLR 140 is to the same effect as Ex parte Strawbridge, as pointed out by Mr. Todd, QC, who appeared for the Company, and by Mr. Yu. In that case, there was likewise a need for a thorough investigation of possible misconduct by a liquidator of an insolvent company which had failed spectacularly in its short trading life (at 142). It is in that light that the statement of McLelland J at 143 (that “the court is given an independent discretionary role in approving a scheme and must take into account not only commercial considerations, but among other things questions of public policy”) should be understood. As submitted by Mr. Chang, SC, who also appeared for PCRD and Starvest, the wide discretion of the court in giving sanction is to be exercised judicially. If the court is asked to refuse sanction of a scheme on the ground of public policy, the court must be very clear what that public policy is and act with great care in seeking to give effect to it. 

130.  The public policy which Mr. Poon has invoked has two related aspects. The first relates to the majority in number requirement under section 166. The second is the device of share splitting. I will consider them in that order.

The majority in number requirement under section 166

131.  Mr. Poon and Mr. Lam, SC, who also appeared for the SFC, gave a thorough account and analysis of the origin and purpose for the majority in number requirement in section 166, and the legislative development of this requirement in the United Kingdom and Australia.

132.  The purpose of the three-fourths majority in value requirement under section 166 is “to prevent a numerical majority with a small stake outvoting a minority with a large stake” (In re NFU Development Trust Ltd. [1972] 1 WLR 1548 at 1553F). The requirement for a majority in number originated when the procedure applied only to compromises or arrangements with creditors, presumably to place a check on the ability of creditors with large claims to carry the day. When the statutory provision in the United Kingdom was extended to compromises with members in 1900, the composition of the required majority remained unchanged.

133.  The position was best put by Brooking J in the Supreme Court of Victoria in ANZ Executors and Trustees Ltd. v. Humes Ltd. [1990] VR 615 at 622:

“And so the result is achieved that mere numbers on a count of heads will not carry the day at the expense of amount invested and on the other hand that the weight of invested money may not prevail against the desires of a sizeable number of investors. A balance is struck between the notion that one is simply to count heads and the notion that one is simply to tot up the amounts invested. When the vote is taken, there must be both a preponderance of investors and a preponderance of investment in favour if the resolution is to be carried, a bare preponderance in the case of the former and a three-fourths preponderance in the case of the latter. This is, as I say, a fair and sensible formula, and one well known in company and insolvency law.”

134.  The majority in number requirement has been retained in the United Kingdom. In 2006, the government resisted an amendment to abolish this. The Attorney General noted that while the abolition would facilitate schemes for companies and large creditors and members, this would be at the expense of the interests of small minority members and creditors and the government was not persuaded that the amendment “strikes the right balance” (House of Lords Hansard, 28 March 2006, column GC326).

135.  There was a second attempt to move the amendment on the grounds that “the majority in number, focusing on a majority of registered holders, is an anachronism, now that most retail holders hold through the CREST nominees, where one registered holder may represent many thousands of beneficial owners. It is also open to abuse by shareholders who could subdivide their holding through a number of nominee companies.” The Attorney General responded that removal of this requirement would mean that “larger creditors and members could impose their will unfairly on smaller creditors and shareholders” and the “theoretical possibility” of “a picture of abuse taking place, with people splitting their shareholdings up into a series of nominee companies” was not a good enough reason to do away with the protection provided by the requirement (House of Lords Hansard, 16 May 2006, column 217).

136.  In Australia, under the Clearing House Electronic Subregister System (CHESS), shareholders whose shares are held under this system are entitled to be registered as legal owners of the shares, unlike CCASS in which all the shares are registered under a single shareholder, HKSCC Nominees Limited. Hence, investors who hold shares through CHESS will not be disenfranchised by the majority in number requirement for a court meeting, unlike those who hold their shares through CCASS.

137.  There is a statutory regime which empowers the Australian Securities and Investments Commission to modify or vary the provisions for takeover schemes so as to disregard the votes created as a result of share splitting so that the offeror would not have to satisfy the majority in number test. The statutory provisions include the court granting relief to allow the Commission to aggregate the shares which have been split into smaller holdings, see a discussion of these provisions in Peninsula Gold Pty Ltd. v. ASC (1996) 19 ACSR 703 and Peninsula Gold Pty Ltd. v. ASC (1996) 21 ACSR 246. There are publicly available statements of government policy, see the first cited decision at 705 to 706 and Re Prudential Investment Co. of Australia Ltd. (2003) 49 ACSR 147 at 155, paras. [45] and [46].

138.  Further, under the amendment to the Corporations Act in December 2007, the court is given discretion under section 411(4) to make an order that the requirement for a majority in number of members present and voting be dispensed with, if a members’ scheme is approved by a 75% majority in value. The reasons for the amendment as stated in the Explanatory Statement to the Exposure Draft Corporations Amendment (Insolvency) Bill 2007 in November 2006 were as follows:

“A members’ scheme could be defeated by parties opposed to the scheme engaging in ‘share splitting’, which involves one or more members transferring small parcels of shares to a large number of other persons who are willing to attend the meeting and vote in accordance with the wishes of the transferor. By splitting shares to increase the number of members voting against the scheme, an individual or small group opposed to the scheme may cause the scheme to be defeated. This may occur even though a special majority is achieved in terms of voting rights attaching to share capital, and if the share split had not occurred, the majority of members were in favour of the scheme. … It is intended that the court would only exercise the discretion to disregard the majority vote … in circumstances where there is evidence that the result of the vote has been unfairly influenced by activities such as share splitting.” (paras. 4.170 and 4.172)

139.  In Hong Kong, the majority in number test is the majority in number of registered shareholders. In the case of the Company, approximately 3,256 million shares were held through CCASS and 217 million shares (6.3%) were held in the names of 27,646 registered shareholders. Mr. Poon submitted that the court should disregard this phenomenon, as such shareholders could have withdrawn their shareholdings from CCASS and registered the shares in their names but chose not to do so. He argued that the majority in number test is not out of date or unfair, notwithstanding the disenfranchisement of shareholders holding through CCASS.

140.  The protection of the majority in number requirement is thus given to only 6.3% of the shares of the Independent Shareholders. The balance to be struck between those with large economic interests (the majority in value requirement) and those with much smaller interests (the majority in number requirement) is only to have regard to 6.3% of the shares of the Independent Shareholders. This seems to me to have an element of unreality, not to mention the lack of even-handed treatment and a level playing field. Mr. Poon said that is a matter for the legislature, there is nothing the court can or should do about this.

The splitting of shares

141.  I agree with Mr. Yu that the notion of share splitting mentioned by the legislature in the United Kingdom and the courts in Australia would appear to refer to cases where there was no transfer of beneficial interest and the transferees held the shares as mere nominees. However, Mr. Poon did not confine himself to that situation in advancing his argument on the relevance of share splitting to the exercise of the discretion whether to sanction the Scheme. He said it would not be necessary or appropriate to confine it to that situation, as the abuse to get around the head-count requirement in share splitting could be done in many ways. It would make no difference to his argument if the transferees held as nominees or beneficial owners, whether they took their shares as donees (as in the case of the Fortis Asia agents) or subject to a buy-back offer (as in the case of those who acquired their shares through Kingston), whether the shares were split into a single or small number of board lots or odd lots, or whether the number of shares transferred is big or small.

142.  The splitting of shares is not prohibited activity in Hong Kong. At common law, a shareholder is entitled to transfer some of his shares to nominees to increase his voting power at a meeting (In re Stranton Iron and Steel Company (1873) LR 16 Eq 559; Pender v Lushington, supra.). There is no legal provision or regulatory rule in Hong Kong which prohibits share splitting for that purpose.

143.  In Re Direct Acceptance Ltd. (1987) 5 ACLC 1,037, the Supreme Court of New South Wales held that the votes arising from share splitting should be counted in an application for the approval of a scheme of arrangement between a company and its members under section 315(4) of the Companies Code. McLelland J had this to say at 1,041:

“Regardless of the purpose of these transfers, it is quite clear that the transferees were members of the company at the time of the meeting and entitled to vote. Accordingly their votes had to be counted. It is true that the ability of a majority shareholder or a group of shareholders to split shares among nominees renders the condition that there be a 50% majority in number as well as a 75% majority in value of those present and voting, of little practical significance in a case such as the present where there is a large number of issued shares which are readily transferrable in small parcels. But this is no reason to introduce some implied qualification to the operation of sec. 315(4) inconsistent with its terms.”

144.  Mr. Poon and Mr. Fung accepted that for the purpose of considering if the majority in number test was satisfied under section 166, the votes which came from the splitting of shares may be taken into account, to meet the threshold requirement for an application to the court for the sanction of a scheme. Their position is that such votes ought to be disregarded by the court when it comes to exercise its discretion whether to give sanction. They submitted that the above passage in Re Direct Acceptance Ltd. was merely to the effect that the votes of the transferees had to be counted to give the court jurisdiction in the first place, this did not mean that the votes should be considered at the stage of the exercise of discretion whether to approve the scheme.

145.  The reason for this, as contended by Mr. Poon, was encapsulated in paragraph 42 of his submission, which reads as follows:

“A most important function of the court is to see whether the majority were acting bona fide and were not coercing the minority in order to promote interests adverse to those of the class. Where persons receive shares on the basis they sign a proxy form to vote in favour of a scheme, there is a real concern that shares voted through these proxies are not bona fide decisions and do not fairly represent the interests of the members of the class as a whole. Where a person transfers shares for no financial consideration or procures shares to be registered in others’ names essentially as nominees and their completed proxy forms in support of the transferor’s position are then lodged, concern arises that the by-number vote of the transferor is amplified through an artifice designed to distort the true intention of the class.”

146.  In paragraph 73 of his submission, he developed the above argument in this way:

“It is one thing for independent persons acting on their own volition to purchase shares shortly before a scheme meeting in order to vote. It is another thing if persons by some artificial devices procure others to get registered as members with a view to securing their support to overcome the statutory majority in number requirement. As such, share splitting operates to distort the membership make-up at the approval stage of the scheme and creates unfairness.”

147.  The reasoning seems to me to be circular and is premised on the supposition that additional votes cast as a result of the splitting of shares would not be bona fide decisions and do not fairly represent the interests of the members of the class as a whole. Besides, it is not apparent if this approach is workable at all. Mr. Poon would appear to argue that any kind of share splitting done to increase the head-count at a class meeting would be manipulative and thereby objectionable and should be disregarded at the stage when the court is to exercise its discretion whether to approve a scheme. It matters not whether 132 board lots were split by Chung Nam or only six board lots were split by Ender Chan. As Mr. Todd has asked, how is the company or the court to inquire into the reasons for the splitting of shares every time, with none of the investigatory powers of the SFC? Is the SFC to investigate all transfers of single or small board lots or odd lots between the announcement of a scheme and the court meeting in every proposal for privatisation in future? And if such an investigation is to be expected, with the attendant uncertainty involved, is it not likely to deter or hinder the transfer of shares in a free market once there is an announcement for proposed privatisation?

148.  I do not agree with Mr. Poon and Mr. Fung that the relevant extract in Re Direct Acceptance Ltd. should be read in the restrictive way they contended in that the judge was dealing only with the jurisdiction and not the discretion aspect when he held that the split shares should be counted for the majority in number test. I am more inclined to agree with the reading of Mr. Todd. When McLelland J stated that the ability to split shares renders the numerical condition of little practical significance and this did not provide a reason to introduce an implied qualification to the statutory provision, the judge was dealing with both jurisdiction and discretion.

149.  Mr. Poon referred to various dicta in other Australian decisions to support his argument –Peninsula Gold Pty Ltd. v. ASC (1996) 21 ACSR 246 at 249 to 250; Peninsula Gold Pty Ltd. v. ASC (1996) 19 ACSR 703 at 715, para. (27); Re MIM Holdings Ltd. (2003) 45 ACSR 559 at 561, para. [21]; and Re Prudential Investment Co. of Australia Ltd., supra. at 155, para. [44]. Both Mr. Poon and Mr. Fung placed reliance on Re MIM Holdings Ltd. in which Ambrose J said at para. [21]:

“Undoubtedly had vote splitting occurred to such an extent as to make it likely or even possible that a majority in number voting either for or against adoption of the scheme had been achieved by share splitting that may arguably at least have been a reason to decline to approve the scheme. It seems difficult to envisage how share splitting to achieve merely a numerical advantage in the voting could have had much effect on the value of the shares held by the shareholders who became entitled to vote only by reason of the share splitting exercise.”

150.  I do not propose to set out the dicta in the other cases cited. I do not think the dicta in the cases cited above would assist the argument of Mr. Poon and Mr. Fung for these reasons:

(1)     There are fundamental differences between share splitting as described by the Australian courts and the wide and nebulous concept of share splitting advanced by Mr. Poon. In the Australian cases, the transferor retained throughout the process the voting right in each of the small shareholdings registered in the names of nominees and would receive the benefits of the scheme. In the catch-all position put forward by Mr. Poon, this will include the situation of a gift of shares, in which the donor parts with all his rights in the shares and the donees are in every sense shareholders of the company and whose rights are identical with other shareholders. I agree with Mr. Chang and Mr. Yu it would be wrong to extend the misgivings discussed in share splitting in the Australian decisions to the situation of donees who are shareholders with real rights and financial interests in the company. There is no dissimilarity of rights between the donees and the other shareholders.

(2)     The statements in the Australian cases are not applicable and should not be imported as an additional requirement for the sanction of a scheme under section 166. As mentioned earlier, the Australian regime is very different from that in Hong Kong by virtue of the holding of shares in CHESS, the statutory power of the Australian Securities and Investments Commission to modify or vary statutory provisions for takeover schemes to disregard votes created as a result of share splitting, the statutory discretion of the court under section 411(4) the Corporations Act to order that the requirement for a majority in number of members present and voting be dispensed with, and clear and publicly available statements of policy laid down by the regulatory authority on share splitting. We have none of that.

(3)     As for the dicta in Re MIM Holdings Ltd., they were obiter. Ambrose J simply decided the case on the basis that the small number of votes produced by the alleged share splitting would have had “any but the slightest effect on the outcome of the voting and certainly insufficient to impinge upon proper compliance with the constraints imposed by s 411(4)(a) [of the Corporations Act]” (at 562, para. [22]). He did not discuss if the alleged share splitting was truly a transfer between a principal and nominees.

151.  There is no discernible public policy in Hong Kong regarding share splitting in the context of a scheme for privatisation of a company. Share splitting is not new in Hong Kong. Arbitrageurs have been very active in the stock market here. No mention of any abuse in the practice of share splitting was made in the Takeovers Code, which “represent a consensus of opinion of those who participate in Hong Kong’s financial markets and the SFC regarding standards of commercial conduct and behaviour considered acceptable for takeovers, mergers and share repurchases” (para. 1.3 of the Takeovers Code). If Hong Kong is to introduce a policy on this, there should be a publicly available statement by the regulatory authority, after proper and informed consultation. A line must first be drawn between acceptable and unacceptable practice. As submitted by Mr. Chang and Mr. Yu, it would be unfair and wrong for the SFC to ask the court to lay down, for the first time, a policy on what should or should not be followed with regard to share splitting in a scheme, and to apply the policy to the Scheme on a retrospective basis. This would only lead to chaos.

152.  It must also be borne in mind what is sauce for the goose is sauce for the gander. Neither the court nor any other body in Hong Kong has the power to disregard any vote properly cast against a scheme, which may have the result of defeating the resolution such that the court will have no jurisdiction to sanction the scheme. In the absence of such a power, it would not be fair if the court were to start disregarding shares which are voted in favour of a scheme.

153.  I reject the submission of Mr. Poon and Mr. Fung that the court should, in the exercise of its discretion, exclude all votes in favour of the Scheme as a result of share splitting in the wide sense contended by Mr. Poon.

154.  I turn to consider if my discretion should be exercised to refuse sanction of the Scheme on the basis that the statutory majority at the court meeting were coercing the minority in order to promote interests adverse to those of the class whom they purport to represent.

If the statutory majority had been acting bona fide

155.  There was only one class meeting for the Scheme shareholders. There is no suggestion that the class was not properly constituted. The Scheme shares as defined are shares held by the shareholders on the “Record Date”, being the business day immediately preceding the “Effective Date”, and the “Effective Date” is the later of (i) the date on which the court orders have been filed with the Companies Registry required by sections 166 and 61; and (ii) the date on which the Companies Registry issues the relevant certificate of registration pursuant to section 61. For the purpose of determining the entitlement of Independent Shareholders to attend and vote at the court meeting, the register of members of the Company was closed shortly before the holding of the court meeting.

156.  Thus, the definition of Scheme shares contemplates that the make-up of shareholders will remain fluid up to the court meeting.

157.  Independent Shareholders who acquired their shares at different times might well be motivated to vote in different ways. That is a fact of life.

158.  If those voting in favour of the Scheme have done so with a special interest to promote which differs from the interest of the ordinary independent and objective shareholder, the vote in favour is not to be given effect by the sanction of the court (Re BTR plc, supra. at 747h). Much reliance was placed by Mr. Poon and Mr. Fung on the decision of the Privy Council in British America Nickel Corporation, Ltd. v. M J O’Brien Ltd. [1927] AC 369, where it was stated at 373 as follows:

“It has been suggested that the decision in these two cases on the last point [North-West Transportation Co. v. Beatty (1887) 12 App Cas 589 and Burland v. Earle [1902] AC 83] is difficult to reconcile with the restriction already referred to, where the power is conferred, not on shareholders generally, but on a special class, say, of debenture holders, where a majority, in exercising a power to modify the rights of a minority, must exercise that power in the interests of the class as a whole. This is a principle which goes beyond that applied in Menier v. Hooper’s Telegraph Works (1874) LR 9 Ch 350, inasmuch as it does not depend on misappropriation or fraud being proved. But their Lordships do not think that there is any real difficulty in combining the principle that while usually a holder of shares or debentures may vote as his interest directs, he is subject to the further principle that where his vote is conferred on him as a member of a class he must conform to the interest of the class itself when seeking to exercise the power conferred on him in his capacity of being a member. The second principle is a negative one, one which puts a restriction on the completeness of freedom under the first, without excluding such freedom wholly.”

159.  I was referred to statements to similar effect in In re Wedgwood Coal and Iron Company (1877) 6 Ch D 627 at 636 to 637; Re Chevron (Sydney) Ltd. [1963] VR 249 at 255; Re Landmark Corporation Ltd. [1965] 1 WLR 759 at 766 and 767; Re Jax Marine Pty. Ltd. [1967] 1 NSWR 145 at 147 and 148; In re Holders Investment Trust Ltd. [1971] 1 WLR 583; and Re International Harvester (Aust) Ltd. (Receivers and Managers appointed) (1983) 7 ACLR 796 at 799 to 801.

160.  On the findings I have made above, most of the 849 votes cast in favour of the Scheme which the SFC sought to impugn were held by shareholders who are beneficial owners of their shares. They include most of the 494 shareholders that were handled by Newpont (being donees of shares that originated from Lam Hau Wah) with the exception of the 29 shareholders who took their shares from Ricky Tse, the 175 shareholders handled by Kingston (their shares are subject to a buy-back offer), the 30 shareholders handled by Success (some are donees of Ma Kam Wah and Ender Chan, others purchased their shares). Shareholders who might not have beneficial interest in their shares would be those who took their shares from Ricky Tse (being his nominees) and 125 shareholders whose purchases were financed by Eugene Chuang.

161.  In voting in favour of the Scheme, were most of the 849 votes cast by these shareholders in the bona fide belief that they were acting in the interests of the general body of the class of Independent Shareholders? Were they “honestly endeavouring to decide and act for the benefit of the class as a whole, rather than with a view to the interests of some of the class and against that of others” (In re Holders Investment Trust Ltd., supra. at 586, per Megarry J)? Should they be considered as having “such personal or special interest as to render [their] view a self-centred view rather than a class-promoting view” (Re Jax Marine Pty. Ltd., supra. at 148, per Street J)?

162.  It is well established that a shareholder is entitled to vote with regard to his special individual interests, even though the interests may be peculiar to himself and not shared by other persons of the same class, so long as he exercises his power bona fide for the purpose of benefiting the class as a whole, or that he keeps the interests of the class as dominant (Goodfellow v. Nelson Line (Liverpool) Ltd. [1912] 2 Ch 324 at 333). Subject to this general principle, the power is unrestricted and he may vote as his interests direct (British America Nickel Corporation, Ltd. v. M J O’Brien Ltd., supra. at 373).

163.  An allegation that a voting shareholder had a collateral interest is a serious allegation and must be proved by strong and cogent evidence before a court would consider disenfranchising a member of a class who was entitled to vote (Re Linton Park plc [2005] All ER (D) 174 (Nov), Lewison J).

164.  I am inclined to agree with Mr Yu there is a lack of evidence, let alone strong and cogent evidence, to show that any particular Independent Shareholder who voted at the court meeting was not acting bona fide for the benefit of the Independent Shareholders as a class, namely, to ensure that they can realise their investment in the Company’s shares at a premium. Other than the wish to attain the return of HK$4.50 a share, which would go to benefit the whole class, I am unable to discern any collateral interest on the part of those who had voted in favour of the Scheme.

165.  The agents of Fortis Asia are shareholders in every sense of the word. They voted out of their interest as shareholders, that the return of HK$4.50 a share should be better than the market price. Their interest is for the benefit of the class as a whole. Other shareholders with beneficial interest in the shares were in the same position. I reject Mr. Fung’s submission that a donee of shares or those who held their shares subject to a buy-back offer of HK$4.50 a share would have an interest different from the rest of the class. No benefit was conferred on these shareholders by the Company or the Joint Offerors. Nor do I think there is any basis for saying that the interest of arbitrageurs who acquired their shares after the announcement of the Scheme in betting on the ultimate privatisation is different from the rest of the class. Where a vote is cast by a nominee, the interest of the nominee is that of the principal.

166.  For the above reasons, I reject the submission of Mr. Poon and Mr. Fung that the votes impugned should be disregarded in the exercise of my discretion on the basis that they were not bona fide for the purpose of benefiting the class as a whole.

If there are any other reasonable objections to the Scheme

167.  I turn to deal with the other objections raised.

168.  The SFC has pointed out there were a number of unsophisticated investors among the 849 votes cast in favour of the Scheme and those who were registered as shareholders after 9 January 2009 had not received the Scheme document or the supplemental Scheme document and so had no or no adequate understanding of the Scheme. Reliance was placed on dicta in In re English, Scottish, and Australian Chartered Bank [1893] 3 Ch 385 at 409, Re Dorman, Long and Co., Ltd. [1934] 1 Ch 635 at 657 to 658, and Re China Light & Power Co. Ltd. [1998] 1 HKLRD 158 at 168J that the votes cast in favour of the Scheme must be done out of informed consent.

169.  The Company had done all that was reasonably necessary to dispatch the Scheme document and supplemental Scheme document to all registered shareholders at the relevant cut-off dates before the court meeting on 30 December 2008 and the re-convened meeting on 4 February 2009. As mentioned earlier, the list of registered shareholders remained fluid up to the close of the register before the holding of the court meeting. The supplemental Scheme document was dispatched on 12 January to all those whose names were on the share register as at 9 January. There is no evidence to suggest that any of the persons who had voted in favour of the Scheme on 4 February 2009 did not know the Cancellation Price was HK$4.50 a share. The mere fact that some shareholders who became registered at the eleventh hour and did not receive the Scheme document or the supplemental Scheme document is not a reason to refuse sanction.

170.  Mr. Fung submitted that the proxy forms signed by those who had not yet become registered shareholders at the time they executed the forms were invalid. This would include most if not all of the 849 votes cast in favour of the Scheme. I reject this submission. I agree with Mr. Todd. The proxy forms were signed in escrow. The persons who executed them would be estopped from denying the appointment of the proxies as their agents. And not one of those who executed proxy forms in this way has come forward to dispute the authority of the proxy he had appointed. According to the interviews of the SFC, only one proxy form might be invalid as it was doubtful whether it was indeed executed by an elderly and illiterate lady.

171.  Some shareholders claimed they were not given notice of the reconvened court meeting by their securities brokers and were deprived in exercising their rights in voting at the meeting. Complaints were lodged with the SFC regarding this. If there were any misconduct of the brokers, it would be a disciplinary matter for the SFC to take up. I cannot see what the Company has to do with this. The Company had complied with the directions of the court in advertising in newspapers a notice of the meeting and notices of the meeting were dispatched to registered shareholders on 12 January 2009. The supplemental Scheme document, with the notice of the court meeting and proxy form, were uploaded to the Company’s website of the Stock Exchange on the same day. In the supplemental Scheme document and the joint announcement of the Company and the Joint Offerors on 12 January 2009, beneficial owners whose shares were held by a registered owner were specifically advised to contact the registered owner or their broker.

172.  Other shareholders complained that the proceedings of the court meeting on 4 February 2009 were confusing in that they were given voting papers of different colours with little or no explanation regarding the contents. Others also complained the vote counting process was dragged out and some shareholders had to leave before the meeting was over. I reject these complaints. I am satisfied on the evidence adduced by the Company that the shareholders were given an adequate explanation in English and Chinese of each kind of voting paper (there were three kinds and printed in different colours for easy identification) each time the relevant voting paper was used as well as the procedures for the poll. The staff of Computershare, the share registrar and scrutineer, also assisted Independent Shareholders with voting procedures and answered questions in relation to the filling out of the voting papers. Due to the unusually large number of participants at the meeting, time was taken up to verify their eligibility to vote, to answer their questions on voting and to count the votes. There were no procedural irregularities.

173.  A number of shareholders complained they were not given an opportunity to voice their opinion at the meeting. Due to the large number of shareholders who attended, it was not practicable for each and every one who wanted to speak to have a chance to speak. A small number stood on chairs and shouted down other shareholders or the speakers from the podium. The chairman of the meeting, Sir David Ford, had done his best to control the proceedings to allow a fair exchange of views of those at the meeting notwithstanding the disruptive behaviour of a few. The meeting was conducted in a fair manner. Reasonable attempts were made to deal with the concerns of the shareholders present. There is nothing in this complaint.

174.  Lastly, there is the special dividend proposed to be declared to the Post-Scheme Shareholders that is specific to the Scheme becoming effective, for the purpose of enabling Starvest to pay the amounts outstanding under a loan facility obtained so as to finance the payment of the Cancellation Price to the Independent Shareholders. Adequate information was given about this in the Scheme document and supplemental Scheme document. The documents were analysed by two international proxy advisory firms, ISS Governance Services and Glass Lewis & Co. They are independent third party proxy advisers providing advice and voting recommendations to their finance industry clients in relation to proposed transactions. They did not make any adverse comment about the special dividend when they advised voting in favour of the Scheme after the Cancellation Price was increased. N M Rothschild & Sons (Hong Kong) Limited, the independent financial adviser retained to advise the independent board committee of the Company, did not think the cash distribution to the Post-Scheme Shareholders should affect its analyses of the Cancellation Price. Further, it made the point that the Post-Scheme Shareholders will be bearing the risks of an investment in a highly-geared company after the effective date of the Scheme and dividend distribution, as the net debt of the PCCW Group is expected to increase substantially.

If the Scheme should be sanctioned

175.  I have jurisdiction to sanction the Scheme as the statutory provisions have all been complied with.

176.  The class of members under the Scheme has been properly constituted.  Directions given by the court to ensure that such a member was provided with sufficient information so that he could make an informed decision how to vote have been complied with. The Scheme was approved by the requisite majority at the duly convened court meeting.

177.  For the reasons given earlier, I have concluded that the statutory majority who voted for the Scheme were acting bona fide and were not coercing the minority in order to promote interests adverse to those of the class whom they represented. I have also dealt with the other objections raised to the Scheme and rejected them.

178.  The privatisation proposal is to provide Scheme shareholders an opportunity to realise their investment in the Company for cash during sustained poor market conditions. The independent financial adviser is of the view that the Cancellation Price offers a reasonable premium and that the terms of the proposal are fair and reasonable to the Independent Shareholders. On the advice of the independent financial adviser, the independent board committee recommended to the Independent Shareholders to vote in favour of the Scheme.

179.  The fact that a large majority in value of the Independent Shareholders approved the Scheme is a major factor in considering whether an intelligent and honest man might reasonably approve (Re Equitable Life Assurance Society [2002] 2 BCLC 510 at 543b, para. [109]).

180.  The function of the court in this petition is not to decide how it would have voted on the Scheme, but to consider whether an intelligent and honest member of the class could reasonably approve it. On the evidence before me, I am satisfied that the Scheme is one as to which an intelligent and honest man, a member of the class concerned and acting in respect of his interest, might reasonably approve.

181.  I therefore exercise my discretion to sanction the Scheme.

Reduction of share capital

182.  The Scheme involves a reduction of the share capital for which confirmation of the court is sought under section 59.  There will be a cancellation of all the Scheme shares followed by an issue of the same number of shares to Starvest and Netcom BVI (and/or Unicom), which will be paid up by a capitalisation of the reserve resulting from the reduction. The reduction is an integral part of the Scheme and a common feature of schemes of arrangement of this type.

183.  There is provision in the articles of association that the Company may, by special resolution, reduce its share capital in any manner authorised and subject to any conditions prescribed by law.

184.  At the extraordinary general meeting duly re-convened and held on 4 February 2009 immediately after the court meeting, a special resolution was passed that the Scheme be approved and for the purpose of giving effect to the Scheme, on the effective date of the Scheme, (1) the authorised and issued share capital shall be reduced by cancelling and extinguishing the Scheme shares; (2) subject to and forthwith upon the said reduction of capital taking effect, the authorised share capital shall be increased to its former amount by the creation of such number of new shares as is equal to the number of Scheme shares cancelled; and (3) the Company shall apply the credit arising in its books of account as a result of the said reduction of capital in paying up the new shares in full at par.

185.  As 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 of the Company, at the hearing of the summons for directions on 24 February 2009, an order was made that the settlement of a list of creditors of the Company be dispensed with. Directions given for the advertisement of the hearing of the petition have been complied with.

186.  I am satisfied that the shareholders are treated equitably in the reduction, that the proposals for reduction were properly explained, and that the reduction is for a discernible purpose. As the issue of new shares immediately restores the paid-up capital to its former amount, no prejudice would be caused to the creditors.

187.  Accordingly, I confirm the proposed reduction of share capital.