HO YUEN KI, WINNIE v. MOON VALLEY INC.

HCAL 73/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTITUTIONAL AND ADMINISTRATIVE LAW LIST

NO. 73 OF 2008

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D E C I S I O N

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I.       INTRODUCTION

1.  Leave to apply for judicial review of the listing of SJM Hong Kong is refused.  In my judgment, the application is not reasonably arguable and does not have a realistic prospect of success.  I briefly set out my reasons below.

II.      DISCUSSION

2.  Mr. Martin Lee SC (appearing for the Applicants) advances 4 grounds of judicial review.  These 4 grounds result from Mr. Lee’s oral submissions which combined original Grounds 2 and 3 and original Grounds 4 and 5 in the Applicants’ Form 86A Notice.

3.  First, Mr. Lee submits that the listing of SJM HK is contrary to the public interest.  That is because SJM HK’s business is solely or predominantly the operation of gambling casinos in Macau. 

4.  The Gambling Ordinance (Cap.148) (GO) in essence prohibits gambling in Hong Kong.  Mr. Lee suggests, by reference to LegCo speeches reported in Hong Kong Hansard at the time when the GO was being promulgated, that it is not Government policy to encourage gambling in Hong Kong.  He reasons from this that the promotion of gambling is contrary to the public interest.

5.  Mr. Lee concludes that, consequently, in the public interest, the Stock Exchange (SEHK) and the Securities and Futures Commission (SFC) should not have allowed the listing of SJM HK.  As an establishment which primarily operates casinos in Macau, SJM (Mr. Lee submits) is not suitable for listing.  Allowing SJM HK to list is (Mr. Lee colourfully puts it) “tantamount to allowing the general public of Hong Kong to be a ‘banker’ in a casino by taking up shares of SJM HK”.

6.  By permitting the listing of SJM HK, Mr. Lee contends that the SEHK has failed in its duty under the Securities and Futures Ordinance (Cap.571) (SFO) s.21 to “act in the interest of the public” and “ensure that the interest of the public prevails”.  Similarly, by not objecting to the listing, the SFC (Mr. Lee says) has failed in its duty under SFO s.5 to supervise the SEHK.

7.  This 1st ground is doomed to fail.

8.  Insofar as the SFO charges the SEHK and the SFC with the duty of acting in the public interest, it is for those bodies (and not the Court) to determine what is or is not in the public interest.  The Court applies the law.

9.  It is, of course, possible to challenge a statutory regulator’s conduct by judicial review where that body conducts itself in a way that no regulator could reasonably conduct itself.  If it can be shown that a regulatory body has taken the public interest to be something that no reasonable regulator could conceivably regard as being in the public interest, the Court can certainly intervene. 

10.  But we are nowhere near (or even arguably near) such scenario here.  The GO only applies to Hong Kong.  It does not prohibit gambling in Macau or anywhere outside Hong Kong.  It does not prohibit Hong Kong residents from travelling to Macau and gambling there.  There is nothing illegal under the GO in the public listing in Hong Kong of a company engaged in running casinos outside of Hong Kong.

11.  In those circumstances, it can hardly be unreasonable (or even arguably unreasonable) for a regulator to take the view that there is nothing contrary to the public interest in the flotation here of a company operating foreign casinos.

12.  Assume (as Mr. Lee posits) that it is Hong Kong Government policy to discourage gambling here.  I do not see how that logically translates into a policy against Hong Kong people reaping the benefits of gambling outside Hong Kong. 

13.  To put it starkly, if persons outside Hong Kong wish (say) foolishly to lose money by gambling outside Hong Kong and thereby generate sizeable profits for a company, why should people in Hong Kong not be entitled to share in that company’s profits from the foolishness of others?

14.  Indeed, there is irony in the Applicants taking this ground at all.  Ms. Ho is resident in Hong Kong.  Moon Valley is a Panamanian company with headquarters in Hong Kong.  Ms. Ho is, and Moon Valley claims to be, a holder of shares in STDM.  The latter company derives substantial profits from gambling in Macau.  It is contradictory for the Applicants to claim by their proposed judicial review to be upholding Hong Kong public policy against gambling while themselves in Hong Kong reaping the dividends of the very gambling which they say the SEHK and SFC should have proscribed.

15.  Second, Mr. Lee submits that the SFC and SEHK failed to give reasons or adequate reasons for not objecting to the listing of SJM HK.

16.  Insofar as the Applicants say that the SFC and SEHK failed to justify a failure to object to SJM HK’s listing on policy grounds relating to gambling, such allegation must fall given my dismissal of the 1st ground.  On that score, there can have been nothing irrational in the regulators’ conduct.  So there was nothing to justify by the giving of reasons.

17.  The Applicants, however, have also mounted numerous legal proceedings in Macau. 

18.  Of particular note are 2 Macau actions by the Applicants querying the legality of STDM General Assembly meetings held on 31 March and 25 September 2006.  The March 2006 meeting was called to discuss and approve the restructuring of companies participating in STDM as well as for the creation and flotation of an STDM subsidiary in Hong Kong (SJM HK) to hold SJM Macau shares.  The September 2006 meeting was supposed to be a continuation of the March 2006 meeting and had a similar agenda.

19.  The Applicants challenge the meetings on various grounds, including that they were not properly constituted.  It is the Applicants’ case that Moon Valley should be allowed to attend STDM General Assembly meetings as a shareholder and that some alleged STDM shareholders attending STDM General Assembly meetings were not actually shareholders of STDM.  The Applicants contend that, in consequence, acts of STDM General Assembly meetings relating to the restructuring of STDM and the incorporation of a Hong Kong subsidiary (such as SJM HK) are invalid.

20.  The proceedings just mentioned have yet to be resolved by the Macau Courts.  But the Macau Courts have refused the Applicants’ request for an interim injunction on the activities of the STDM General Assembly.  The Macau Courts have so refused on the basis that the Applicants could not establish that they would suffer appreciable damage in the event that their claims are upheld.

21.  The Applicants argue that, if their Macau actions (especially the 2 just mentioned) succeed, resolutions of STDM’s General Assembly and Administrative Council may be declared invalid retrospectively.  This could (it is suggested) result in SJM HK losing the substantial assets transferred to it by the acts and resolutions of STDM.  This (the Applicants contend) would not be in the interests of the Hong Kong investor.

22.  The Applicants drew their case to the attention of the SEHK and SFC in protracted correspondence.

23.  The SEHK replied by letter from its solicitors dated 24 January 2008. 

24.  The January 2008 letter pointed out that, under the Listing Rules, the SEHK was merely tasked with assessing the eligibility and suitability of a company for listing.  The SEHK was “not in a position to determine legal disputes arising under Macau law” which were “matters which properly fall within the jurisdiction of the appropriate courts”. 

25.  Nonetheless, the SEHK (the January 2008 letter went on to state) had put the Applicants’ assertions to SJM HK, its sponsors and legal advisers.  They advised the SEHK that they had strong grounds on which to refute the Applicants’ assertions.  It was also pointed out that, in any event, no interim injunction was in place (whether in Macau or Hong Kong) against STDM, SJM HK or anyone else to stop the listing from proceeding.

26.  The SEHK concluded that there was no reason to upset the “in principle” approval of the listing.  Instead, the SEHK pointed out to the Applicants that:-

“the appropriate way of addressing the matters you raise is for SJM Holdings to make disclosures to the Exchange’s satisfaction in its listing materials.  (This is consistent with the regime provided for in the Listing Rules, which is focused upon ensuring risks are disclosed so that investors may make informed decisions.)”

27.  In my view, the reasoning in the January 2008 letter was impeccable.  I do not see how its logic can be subject to question.  There is no basis for accusing the SEHK of having provided inadequate reasons.

28.  It is not for the SEHK to assess the rights and wrongs of either side’s legal case in Macau.  Given that the Macau proceedings remain unresolved, the obvious reasonable way of dealing with the existence of such proceedings must be through appropriate disclosures in the listing prospectus.  That would enable an investor to make an informed decision whether or not to take up shares in light of the litigation risk.

29.  The Applicants urged the SFC, on the other hand, to object to the proposed listing under the SFC’s power under Securities and Futures (Stock Market Listing) Rules (Cap.571, sub leg V) (SMLR) r.6(2).  That provides that the SFC may object to a listing if it appears to the SFC that:-

“(a)   the application does not comply with a requirement under section 3;

(b)     the application is false or misleading as to a material fact or is false or misleading through the omission of a material fact;

(c)     the applicant has failed to comply with a requirement under subsection (1) or, in purported compliance with the requirement has furnished the Commission with information which is false or misleading in any material particular; or

(d)     it would not be in the interest of the investing public or in the public interest for the securities to be listed.”

30.  The SFC did not object to the listing as invited by the Applicants.  The Applicants pressed for reasons for the SFC’s “non-objection”.  The SFC did not give any reasons, stating that “non-objection” did not amount to a determination under SMLR r.6(2).

31.  In my view, non-objection by the SFC must plainly mean that it did not appear to the SFC that any of the grounds mentioned in SMLR rr.6(2)(a)-(d) were apposite in the present circumstances.  Given this obvious inference from the SFC’s non-objection, I do not see why the SFC was supposed to do more and justify a negative, namely, why none of the conditions listed in rr.6(2)(a)-(d) were applicable.

32.  Again, I do no think that there is any realistic prospect of the Applicants’ successfully arguing that the SFC’s response was inadequate.

33.  In oral hearing Mr. Lee suggested that at least the SFC ought to have given reasons why it did not consider objecting to the listing in light of the Macau proceedings.  This is because it could not be in the public interest (Mr. Lee stressed) for investors here to take up shares in a company which (if the Applicants were to succeed in Macau) stands to lose its principal assets.

34.  But, as the SEHK pointed out, the Macau proceedings were best dealt with through disclosures in the prospectus.  It is up to the public to assess the risk.  I do not see why the SFC should be expected to object in the public interest (and give reasons for not so doing) where a matter can readily be dealt with through appropriate disclosure in a prospectus.  If the matter can be dealt with so readily, why does the public interest require an objection by the SFC putting a halt to everything? 

35.  There is one further matter on this 2nd ground.  The SFC refused to disclose reasons to give reasons for their “non-objection” on the basis of SFO s.378.  That provision requires the SFC to maintain secrecy except in specified situations.  Mr. Lee submits that the provision does not absolve the SFC from a duty to give adequate reasons.  But in light of what I have stated above in connection with the SFC, it is unnecessary for me to discuss SFO s.378 further.

36.  Third, Mr. Lee submits that the SEHK and SFC failed to take into account all relevant factors, but instead took account of irrelevant factors.

37.  This is substantially the same ground as the 2nd ground just canvassed.  The gist of the complaint is that the SEHK and SFC failed to ascribe proper weight to the potential consequences of the Macau proceedings.  For similar reasons to those I have mentioned in relation to the 2nd ground (especially on disclosure in the listing prospectus), I think that this ground is bound to fail.

38.  Finally, Mr. Lee complains that the disclosure made in the listing prospectus was in any case either misleading or inadequate.  In particular, Mr. Lee highlights a number of passages in SJM HK’s listing prospectus.  These passages are akin (Mr. Lee suggests) to “errors on the face of the record”.

39.  Mr. Lee draws attention to the following statement (at Prospectus, p.85):-

“As at 1 April 2002, SJM [Macau] paid HK$1,160.1 million in consideration for the acquisition of gaming and gaming-related assets of STDM; the consideration was based on the net book value of such gaming and gaming-related assets.”

40.  This is said by Mr. Lee to contradict a resolution dated 6 December 2001 by the Administrative Council of STDM.  That concerned (according to Mr. Lee) the transfer of assets of SJM Macau free of charge.

41.  I have read the December 2001 resolution.  I see no obvious conflict between the resolution and the statement being queried.

42.  By the resolution STDM’s Administrative Council guaranteed financial support to STDM-Investments (STDM-I) and SJM Macau.  The Council was to demonstrate this support by (among other things) making available STDM’s know-how and human resources, as well as equipment installed in several casinos, to STDM-I and SJM Macau.  STDM also pledged to give financing and to provide STDM-I with a sum of MOP 180 million to make up the equity capital of SJM Macau.  This sum was to be made available free of charge.

43.  There is nothing inconsistent in SJM Macau purchasing assets from STDM at an agreed consideration and STDM making available to SJM Macau and STDM-I certain other assets (including intangible assets such as know-how) and financing.  I do not see how the resolution falsifies (or even arguably falsifies) the statement.

44.  Mr. Lee then complains about a number of statements having similar effect to the following (at Prospectus, pp.137-8):-

(1)     (at p.137)

“....  None of these proceedings [filed by the Applicants in Macau] challenge the Reorganisation Acts and two of these proceedings have already been finally decided against the plaintiffs.

The Reorganisation, the objective of which was to cause 100% of the economic interest of SJM [Macau] to be held by the Company (through the ownership of 90% of SJM’s share capital), related to the reorganisation of the share capital of SJM [Macau] and the Company, and it did not involve a reorganisation of STDM or STDM-Investments. A limited number of resolutions and corporate acts were required to authorise and implement the Reorganisation …

No resolutions of shareholders or directors of STDM were required in connection with the Reorganisation.  Meetings of shareholders and directors of STDM and meetings of shareholders or STDM-Investments were held and resolutions adopted to give such shareholders and directors the opportunity to express their views on the Reorganisation and the Global Offering, and to have their views recorded.  However, under applicable Macau law, these resolutions have no operative effect insofar as the Reorganisation is concerned, and accordingly the existence, validity or invalidity of any resolution of shareholders or directors of STDM or STDM-Investments is not capable of affecting the validity of the Reorganisation or the Global Offering.”

(2)     (at p.137)

“Because the Reorganisation did not require any approval or action of STDM, no legal proceedings against any resolution of STDM can affect the validity of the Reorganisation.  Accordingly, even if all or any resolutions of STDM shareholders were ruled to be null and void by the Macau court, or any litigation is ruled in favour of Ms. Winnie Ho or MVI, the Directors believe, based on advice received from Macau counsel, that such ruling would have no adverse effect on the Reorganisation.  The plaintiffs’ motions for preliminary injunctions on these claims were denied by the Macau court.”

(3)     (at p.138)

“Ms. Winnie Ho and [Moon Valley] have brought proceedings in respect of the STDM shareholders resolution dated 30 March 2007 to re-elect the board of directors of STDM.  The composition of the board of the directors of STDM prior to 30 March 2007 has not been challenged.  In any event, as discussed above, no resolutions of directors of STDM were required in connection with the Reorganisation.  Therefore, any acts executed by any director of STDM, or by the board itself, in connection with the Reorganisation or the Global Offering, a well as any connected transactions, are not subject to challenge on these ground.  Furthermore, given that the composition of the board of directors of STDM remained unchanged after 30 March 2007, as well as the fact that, under peremptory statutory law, such directors maintain their statutory position, with all duties and powers until a court prospectively rules to the contrary, any acts executed by any director of STDM, or by the board itself, in connection with the Reorganisation and the Global Offering as well as any other connected transactions, are not subject to challenge on these grounds.”

45.  Mr. Lee criticises these and similar statements because they do not (he says) mention the contrary view of the Applicants’ Macau lawyers.  According to the latter, if the Applicants prevail in Macau, then all STDM resolutions relating to SJM Macau and SJM HK will be undone and SJM HK’s principal assets would have to be restored to STDM.  SJM HK would then be bereft of assets (it is said) to the detriment of the Hong Kong investor.

46.  As the SEHK pointed out, it is not for the regulator to decide between the competing views of Macau law. 

47.  On the other hand, if the real question is whether a regulator (such as the SEHK or SFC) may reasonably believe disclosure in SJM HK’s prospectus to be adequate in relation to the Macau suits instituted by the Applicants, then it seems to me that the answer must be “yes”.  I do not think that the contrary is arguable.

48.  This is especially so since the prospectus itself warns (at p.139):-

“The Directors believe, based on the advice of Macau legal advisers, that the proceedings described above under ‘Legal Proceedings’ will have no effect on (i) the status, standing or activities of SJM [Macau]; (ii) the validity, efficacy, substance, nature or content of the Reorganisation; (iii) the validity of the Global Offering or the listing of the Shares on the Stock Exchange or (iv) the position of third parties acquiring Shares in the Global Offering.

While we believe, based on the advice received by the Company as set out above, that any challenge to the validity of the Reorganisation and the Global Offering will not have any effect on the validity thereof, we cannot assure you that any such challenge would not, pending its resolution, create uncertainties or have other material adverse effects on the Global Offering, as well as on the trading price of our Shares.”

49.  A regulator can reasonably take the view that, read in context, the above disclaimer in the prospects gave a sufficiently balanced view of the risks involved.  Different people may have queries over precise wording, the inclusion of specific matters, or shades of emphasis.  But such differences alone cannot render the regulator’s acceptance of the listing prospectus irrational.  One must read the prospectus as a whole in context.

50.  It is true that there may be no express reference to SJM HK losing its key assets in the event the Applicants win in Macau.  But there is explicit mention of a potential adverse effect on the trading price of the company’s shares due to the Macau litigation.

51.  A share constitutes a holder’s right to participate in the net assets of a company following dissolution.  If a company loses all or most of its assets for whatever reason, a share would entitle the holder to nothing or next to nothing.  The share price is likely to gravitate to zero.  Therefore, it must be reasonable for a regulator to treat the warning on share price as equivalent to the warning (which Mr. Lee thinks ought to be made) about SJM HK possibly losing all or most of its assets depending on the outcome of the Macau litigation.

52.  Accordingly, this last ground of review based on the text of the prospectus has no realistic chance of success.  It is not reasonably arguable.

III.     CONCLUSION

53.  All 4 grounds relied upon by the Applicants being unarguable, leave is refused.

54.  I have so far assumed that the Applicants have locus to bring judicial review.  I should not, however, be taken to have accepted that they have sufficient standing.

55.  The Applicants claim locus on the basis of their shareholding or (in the case of Moon Valley) claimed shareholding in STDM.  But this judicial review is ostensibly being mounted to safeguard the interests of potential investors in SJM HK, as opposed to the interests of STDM or its shareholders.

56.  If the Applicants succeed in their several Macau proceedings and if they are right in their contentions as to the effect of such a victory, STDM will obtain its assets back from SJM HK whether or not the listing goes ahead.  The effect of the Macau litigation on potential SJM HK investors could not be any particular concern of the Applicants in their capacity as shareholders in STDM. 

57.  The Applicants may be generally concerned that investors do not buy into what the Applicants regard as a bad investment.  But if such concern for the public welfare is all that there is, the Applicants’ interest would be no more than that of any other member of the general public.  I doubt that would be enough to found this judicial review.  For instance, I doubt that any member of the public could simply bring a judicial review against the SFC or SEHK challenging the wording of the prospectus of a proposed listing.

58.  I have previously mentioned the irony of the Applicants claiming to champion a public interest against gambling when the Applicants themselves reap the profits of STDM’s gambling business.  That gives me all the more reason to doubt the Applicants’ standing in law for the purposes of this judicial review said to be brought in the public interest.

59.  It is therefore far from self-evident to me that the Applicants have sufficient standing to bring this judicial review.  But given my decision on the substantive grounds alleged in this judicial review, it is unnecessary for me to come to a concluded opinion on the issue of standing.