RE ENICE HOLDING CO LTD

HCMP 2705/2017

[2018] HKCFI 1736

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2705 OF 2017

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R E A S O N S  F O R  D E C I S I O N

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Introduction

1.  This is an application by Enice Holding Company Limited (“Company”) under sections 673 and 674 of the Companies Ordinance, Cap 622 (“Ordinance”) for the sanction of a scheme of arrangement for the privatisation of the Company which, though incorporated in Hong Kong, is listed on the Australian Securities Exchange (“ASX”).

2.  While privatisation schemes are commonplace, this scheme contains some novel features because the Company has only one shareholder which holds all the issued shares on trust for the underlying investors.

3.  When the Company sought the court’s leave to convene a shareholders’ meeting to consider and vote upon the proposed scheme of arrangement, the Company proceeded on the basis that it would be a conventional privatisation scheme, despite the Company’s unique shareholding structure.

4.  The court will not make an order with no substantive effect and accordingly, to sanction a scheme, the court needs to be satisfied that the scheme will be effective in practice.[1] Thus I asked to be addressed on three issues: (a) the court’s scheme jurisdiction in relation to a single‑member company; (b) why the Company needed the scheme as there was only one shareholder; and (c) the practical implications of the scheme. 

5.  The court then undertook independent research, asked the Company to address a number of consequential issues, and provided guidance to the Company on the structure and feasibility of the scheme. After the Company revised the scheme document in accordance with the court’s guidance, on 26 February 2018 I granted the Company leave to convene a meeting of shareholders to consider the scheme (“Court Meeting”).

6.  Before considering the legal issues, I shall first set out the Company’s shareholding structure and the principal features of the scheme.

Company’s Shareholding Structure

7.  The Company was incorporated as a private company limited by shares in 2014 and became a public company limited by shares in 2015.

8.  By October 2015, the Company had issued 259,300,000 ordinary shares. On 30 October 2015, the Company was listed on ASX.

9.  Because the Company is incorporated in Hong Kong, its shares could not be directly traded on Australia’s financial markets using Australia’s electronic clearing and settlement systems. Thus, in order to facilitate electronic trading on ASX, the Company’s shareholding structure had to be altered as follows:

(a)  On 26 October 2015, all the Company’s issued shares (ie 259,300,000 shares) were transferred to CHESS Depositary Nominees Pty Ltd (“CHESS”).

(b)  Corresponding to the 259,300,000 shares it held, CHESS issued 259,300,000 Chess Depositary Interests (“CDIs”) to the holders of CDIs. CDIs were developed by ASX to facilitate the clearing and settlement of transactions in securities through CHESS where the listed entity is incorporated outside of Australia.

10.  The legal effect of these changes to the Company’s shareholding structure is as follows:

(a)  CHESS became the only shareholder of the Company.

(b)  CHESS holds all the issued shares on trust for the CDI holders, with one CDI unit representing the beneficial ownership of one share.

(c)  CDIs (as opposed to the issued shares) will be listed and traded through the ASX trading platform.

(d)  The CDI holders’ rights and obligations are governed principally by the ASX Settlement Operating Rules (“ASX Rules”). The key features for present purposes are these:

(i) Although there is no trust deed governing the trustee‑beneficiary relationship between CHESS and the CDI holders, the ASX Rules in effect supply the terms of the trust.

(ii) The CDI holders will enjoy all the economic benefits of the issued shares.

(iii) Although the CDI holders, not being the legal owners, cannot vote at the Company’s general meeting, they can direct CHESS on how to vote.

(iv) Because CDIs are derived from the shares, the CDI holders’ rights vis-à-vis the Company are parasitic on CHESS’ rights as the legal shareholder vis-à-vis the Company.

(v) CDI holders may request CHESS to transfer the shares underlying the CDIs to them in order for them to qualify to attend and vote at general meetings. Article 59A of the Company’s Articles of Association also contains terms to the same effect.

Principal Scheme Features

11.  In order to achieve the privatisation goal, the scheme contains the following key steps:

(a)  The Company’s issued share capital will be reduced from 259,300,000 to 219,700,000 ordinary shares by cancelling and extinguishing 39,600,000 ordinary shares (“Scheme Shares”) beneficially held by the CDI holders who are not connected with Tech World Limited (“Offeror”).

(b)  In consideration of the cancellation and extinguishment of the Scheme Shares, the Offeror will pay CHESS a cancellation price of AUD0.44 for each Scheme Share so cancelled and extinguished. CHESS will hold the cancellation price received from the Offeror on trust for the CDI holders.

(c)  Subject to and immediately upon such reduction of capital taking effect, the Company’s share capital will be increased to its former amount by the creation of such number of new shares as is equal to the number of the Scheme Shares cancelled.

(d)  The Company will apply the credit arising in its books of account as a result of the capital reduction in paying up the newly created shares, which will be allotted and issued, credited as fully paid, to the Offeror.

(e)  On completion of the scheme, the entire issued share capital of the Company will be held by the Offeror and parties associated with it. The Company’s listing on ASX will be withdrawn accordingly.

12.  The above steps require two shareholder meetings, namely the Court Meeting and a general meeting of the Company. The general meeting is to approve the reduction of capital.

13.  The reasons for the Company’s privatisation proposal are twofold:

(a)  From the CDI holders’ perspective, the CDIs are relatively illiquid and the CDI holders can realise their investments quickly under the scheme. The cancellation price of AUD0.23 represented a premium of approximately 91.30% over the CDI closing price as quoted on ASX on the last trading day before the Company’s announcement on 5 October 2017 of the privatisation proposal.

(b)  From the Company’s perspective, privatisation will save costs associated with the Company being a listed entity.

Effect of Scheme on CDI Holders

14.  I asked to be addressed on the practical implications of the scheme, in particular how the scheme would affect the CDI holders. The position based on the Company’s Australian expert’s evidence is as follows.

15.  The scheme is solely between the Company and its shareholders, namely CHESS and any CDI holders who elect to transmute their CDIs into shares in the Company.

16.  CDI holders who do not exercise their transmutation right can participate in the scheme by instructing CHESS on how to vote at the Court Meeting and the Company’s general meeting.

17.  Regardless of whether the CDI holders give any voting instruction to CHESS, the scheme if sanctioned will affect their rights. For although the CDI holders as such are not party to the scheme, the ASX Rules will operate automatically to reflect the effect of the scheme. In particular, after the scheme becomes effective, pursuant to the ASX Rules:

(a)  the CDI holders will no longer have their transmutation rights;

(b)  in return, the CDI holders will receive the cancellation price from CHESS.

18.  Therefore, in brief, the scheme operates to bind CHESS (as the sole shareholder) and the ASX Rules operate to give reflexive effect to the scheme vis-à-vis the CDI holders such that the scheme in practice becomes binding on the CDI holders.

Outcome of Court Meeting and General Meeting

19.  The Court Meeting took place on 11 April 2018 and the scheme was approved by an overwhelming majority. Specifically, 99.82% of the voting rights of the Scheme Shareholders present and voting, in person or by proxy, were cast in favour of the Scheme. Votes cast against the scheme represented 0.18% of the total voting rights attached to all the “disinterested shares” in the Company within the meaning of section 674(3) of the Ordinance.

20.  On the same date, the Company held an extraordinary general meeting, at which members resolved the necessary special resolution approving a reduction of capital. That is an integral and necessary component of the scheme as a privatisation requires the cancellation of the Scheme Shares that represent approximately 15.27% of the total issued shares.

21.  The balance of the shareholding (approximately 84.73%) is held by the Offeror and parties associated with it. These shares do not form part of the Scheme Shares and consequently were not voted at the Court Meeting.

Jurisdiction—Single-Member Scheme

22.  As mentioned above, I asked to be addressed on the court’s scheme jurisdiction in relation to a single-member company. Although Counsel for the Company informed the court that there were precedents of single-shareholder privatisation schemes in other jurisdictions, no reported authorities could be located. The Company’s Australian expert also states in his report that he is not aware of any Australian decision involving a single-member scheme.

23.  Although there is no direct authority in Hong Kong, I am satisfied that the court has jurisdiction to sanction a scheme of arrangement between a company and a single shareholder or creditor. The key legal considerations for such scheme are (i) the statutory language, (ii) the concept of meeting, (iii) the “headcount” test, and (iv) the “majority in value” test.

Statutory Language

24.  Under section 673(1) of the Ordinance, there may be a scheme between a company and “the creditors or the class of creditors, or the members or the class of members, or both”.

25.  Thus there may be a statutory contract between a company and its members or creditors or any class of them.[2] “[I]t is inevitable from the need where appropriate to divide members or creditors into different classes for the purpose of a scheme that a class may in some cases comprise only one person”.[3]

26.  Therefore, as a matter of statutory language, it would seem permissible to have a scheme between a company and a single member or creditor because:

(a)  the statute permits the company to select any class of creditors or members to enter into a statutory contract, and that class of creditors or members may consist of only one person; and

(b)  generally speaking, the statutory use of a plural noun (“members” and “creditors”) would include the singular (section 7(2) of the Interpretation and General Clauses Ordinance (Cap 1)).

27.  Indeed, there are English and Australian authorities permitting a scheme between a company and its single member, eg Re TSB Nuclear Energy Investment UK Ltd; [4] Barrick (Lawlers) v Barrick Mining Company (Australia); [5] and SGIC Insurance v Insurance Australia.[6]

Concept of Meeting

28.  At least one meeting is a necessary prerequisite to the sanction of a scheme of arrangement.[7]

29.  The fact that there is only one person in the class of creditors or members does not preclude the holding of a meeting:

“It is now well established that where there is only a single member of the relevant class there can still be a valid meeting within the meaning of the relevant legislation, even though as a matter of normal usage, and in other statutory contexts, a meeting normally connotes that there are at least two people who are in a position to communicate with each other.”[8]

Headcount Test

30.  Subject to certain exceptions including under section 674(2) of the Ordinance, there are under section 674(1) two pre-conditions to the court sanctioning a scheme of arrangement. First, a majority in number of the class of members or creditors present and voting must agree to it (“headcount” test), and secondly, 75% in value of the class of members or creditors present and voting must agree to it (“majority-in-value” test).

31.  When the single member or creditor subject to the scheme is in fact a nominee or trustee, the treatment of the headcount test may differ according to whether that nominee or trustee is a member or creditor.

32.  Case-law has established two analytical possibilities. The first is that, depending on the beneficiaries’ wishes, the trustee’s vote will be counted as (i) one vote for, (ii) one vote against, or (iii) zero, for headcount purposes:

“[R]eviewing the section [on scheme of arrangement] in the context of the widespread practice of nomineeship and trusteeship, both for debt, for example bonds, and rights under policies, many of which are held by trustees, for example under group pension schemes and, likewise, in respect of shares, especially in an increasingly paperless securities world, it seems to me that it would be inappropriate to construe these general words as not permitting a particular member or creditor to cast different parts of the value of his claim or his membership rights in different ways.

That does, in a sense, produce an oddity, because if you had, let us say, in an extremely simple case, ten members, one of whom wished to cast a split vote, you would really have to count that person on the headcount both for and against. So you would have on the face of it 11 members voting. But since that person would be on both sides of the head count, both in the ‘yes’ and the ‘no’ lobbies, that makes no difference to the calculation of the majority in number, whereas it permits an appropriate way to achieve and calculate the true majority in value.

For those reasons it seems to me that it is possible and would be right to permit split voting.” [9]

“[T]he vast majority of shareholders in publicly listed companies hold their shares through CCASS, and therefore would not be entitled to vote, as they would not be the registered holders of their shares. The effect of this is that CCASS would vote shares registered in its name in accordance with the instructions (if any) received from its market participants. Such market participants generally seek instructions from the beneficial owners of the shares held through them with CCASS. The result is that CCASS will vote a certain number of the shares registered in its name in favour of the resolution, and a certain number against it, according to such instructions as it may receive. This does not affect the number of shares voted for and against the resolution in value terms. However, in terms of headcount, CCASS will be counted as one vote in favour and one vote against the resolution, thereby cancelling itself out. This, it is said distorts the position in terms of the desires of the beneficial owners of the shares held by it.” [10]

33.  The second possibility, which applies only to a trustee creditor who holds a single global note, is that the beneficiaries can vote themselves as contingent creditors on the basis that under some circumstances the beneficiaries can request to be registered as creditors. [11]

34.  In this case, however, the headcount test is inapplicable because the scheme is a “takeover offer” within the meaning of section 674(2) of the Companies Ordinance: see Re Cheung Kong Holdings Ltd.[12] Section 674(2) provides that, where a scheme involves a takeover offer, only the majority-in-value test is relevant, subject to the proviso that the votes cast against the scheme do not exceed 10% of the total voting rights attached to all disinterested shares.

Majority-in-Value Test

35.  When a trustee is permitted to do a split vote to cater for the wishes of different beneficiaries, the value for and against will be calculated accordingly:

“[T]he general terms of [the scheme legislation] permit the court to direct that in calculating the majority by value, the proportion represented by the value of the claims of the creditors voting in favour, the court can direct that a particular creditor may vote both for and against, or may vote in part one way and abstain as regards the balance of the debt and that the same could apply logically to members, if the scheme were promoted in respect of members.” [13]

36.  In this case, the requirements under section 674(2) of the Ordinance—that the scheme be approved by shareholders representing at least 75% of the voting rights of the shareholders present and voting, in person or by proxy, at the Court Meeting and that the votes cast against the scheme at the Court Meeting do not exceed 10% of the total voting rights attached to all disinterested shares in the Company—are satisfied.

Jurisdiction—Sanction Issues

37.  The function of the court at the hearing of a petition to sanction a scheme is to consider:

(a)  whether the scheme is for a permissible purpose;

(b)  whether members who were called on to vote as a single class had sufficiently similar legal rights that they could consult together with a view to their common interest at a single meeting;

(c)  whether the meeting was duly convened in accordance with the court’s directions;

(d)  whether members have been given sufficient information about the scheme to enable them to make an informed decision whether or not to support it;

(e)  whether the necessary statutory majority has been obtained; and

(f)  whether the court is satisfied in the exercise of its discretion that an intelligent and honest man acting in accordance with his interests as a member of the class within which he voted might reasonably approve the scheme.

See Re Dorman, Long & Co Ltd;[14] Re China Light & Power Co Ltd;[15] Re Cable & Wireless HKT Ltd;[16] Re PCCW Ltd;[17] Re Wheelock Properties Ltd ;[18] Re Cheung Kong Holdings Ltd;[19] and Re China Assets (Holdings) Ltd.[20]

38.  First, it is well-established that privatising a listed company is a permissible purpose for a scheme of arrangement: see Re Wheelock Properties Ltd [21]and Re China Assets (Holdings) Ltd.[22] 

39.  Secondly, there is here only one class of Scheme Shares.

40.  Thirdly, the requirements in the Order relating to the convening of the Court Meeting have been complied with.

41.  Fourthly, the CDI holders were given sufficient information in the explanatory statement to exercise their judgment to instruct CHESS on how to vote at the Court Meeting and the Company’s general meeting.

42.  Fifthly, the requisite statutory majority of shareholders have voted in favour of the scheme at the Court Meeting.

43.  Sixthly, I am satisfied that the scheme is such as an intelligent, honest person acting in respect of his interest might reasonably approve.

44.  The reduction of capital to which I have referred earlier is technical in nature.  I am satisfied that it was approved by the requisite special resolution of members, that it treats all shareholders equitably, and that the reasons for it were properly explained.  For the reasons I have already given, the reduction was for a discernible purpose and, given its technical nature, the interests of creditors were safeguarded: see generally the discussion in Re Cheung Kong Holdings Ltd.[23]

45.  Accordingly, I am satisfied that the scheme should be sanctioned and the reduction of capital approved.

46.  I will make an order in the terms of the draft that has been presented to me.

Listing of Applications relating to Schemes

47.  I would end with making some observations about the listing of proceedings such as the present.  Practice Direction 3.1, Part II, [5.5] provides that an originating summons to convene a meeting to consider a scheme pursuant to section 673 of the Companies Ordinance, Cap 622, shall be listed on Tuesdays at 10am and the bundles and skeleton shall be filed the preceding Tuesday.  The conventional practice has been for a solicitor, who has been instructed to proceed with a scheme promptly to contact the Companies Judge’s clerk to fix dates.  The court will normally try and accommodate a proposed timetable if given sufficient notice and it is common for hearings to be heard on days other than a Tuesday.  The solicitors should then work to the dates that have been allocated. 

48.  I have noticed in recent years an increasing tendency for solicitors not to proceed as I have described, but to leave fixing dates to well after formulation and drafting of a scheme has commenced and then expect the court to accommodate what is described as an “urgent’ application.  In the more extreme cases not only are dates sought within a few weeks of the court being approached, but solicitors request that the dates are fixed in accordance with their counsel’s diary and in apparent ignorance of PD3.1.  The present case was an example.  When the court informed Dentons that their preferred dates were simply not available, the court received complaints that if the hearing to convene the meeting did not take place promptly this would be inconsistent with the Australian practice and expectation; a complaint that looked increasingly lame as the matter proceeded and the Company required substantial time to address various questions the court had about the structure of the scheme that it became apparent neither Dentons nor the Company’s legal advisers in Australia had identified nor readily answer.

49.  I would emphasise that the Companies Court expects solicitors to proceed as follows when acting for parties introducing schemes or capital reductions.  As soon as they are instructed to proceed with a scheme or capital reduction they should approach the Companies Judge’s clerk to obtain dates, which it is reasonable to expect the company to meet.  Counsel should be instructed who are available on the allocated dates and the Company should work towards those dates.  The Companies Court should not be expected to fit in with the convenience of companies and solicitors should make this clear to those instructing them.