RE HUAWEI-3COM CO LTD

HCMP 1580/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

Miscellaneous Proceedings NO. 1580 OF 2006

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J U D G M E N T

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1.  This petition for confirmation of reduction of share capital was presented by Huawei-3Com Co., Ltd. (“the Company”).

2.  The Company was incorporated on 29 October 2003. It is 51% owned by Shenzhen Huawei Investment Holding Co., Ltd (“Shenzhen Huawei”), a company incorporated in the People’s Republic of China, and 49% owned by 3Com Technologies, a public company incorporated in the state of Delaware of the United States of America. Its principal activities are the research, development, manufacturing and sales of datacom equipment products.

3.  The present authorised and issued share capital of the Company is US$9,705,000.00 divided into 9,705,000 shares of US$1.00 each, and there is only one class of shares in issue.

4.  There is at present standing to the credit of the share premium account US$365,782,953.74, which has arisen as a result of contributions of additional capital into the Company by the shareholders, made up of cash and non-cash assets injection.

5.  Shortly after its incorporation, the Company commenced business and has since continued to carry on business.

6.  There is provision in the articles of association for the reduction of share capital including the share premium account by special resolution.

7.  By the resolutions of the Company passed on 1 August 2006 in accordance with section 116B of the Companies Ordinance, Cap. 32, it was resolved as follows:

(1)     by special resolution, the amount standing to the credit of  the share premium account of the Company be reduced from US$365,782,953.74 to US$285,813,753.74, such reduction being effected by returning to the shareholders US$8.24 per share in cash in respect of each of the 9,705,000 issued ordinary shares in accordance with their respective shareholdings as on 21 October 2005; and

(2)     by ordinary resolution, the excess capital of the Company not exceeding US$80 million be returned to the shareholders by way of reduction of the amount standing to the credit of the share premium account from US$365,782,953.74 to US$285,813,753.74; further, notwithstanding that Shenzhen Huawei transferred its 194,100 ordinary shares in the Company to 3Com Technologies on 27 January 2006, the amount of the share premium account so reduced will be distributed to the shareholders according to their respective shareholdings as on 21 October 2005.

8.  The directors are of the opinion that the sum of US$80 million proposed to be repaid to the shareholders is in excess of the wants of the Company and cannot any longer be usefully employed in its business.

9.  At the time of incorporation of the Company, there was a plan to fund the operation and expansion of a subsidiary in the Mainland (Hangzhou Huawei-3Com Technology Co., Ltd.; “the Mainland subsidiary”) and other future operations. Accordingly, the shareholders injected US$165 million odd as capital reserves into the Company over and above the authorised and issued share capital.

10.  It transpired subsequently that only US$80 million was required to be invested in the Mainland subsidiary and another US$1 million was used to set up new subsidiaries in Japan, Thailand, South Korea and the United States of America. The Mainland subsidiary is currently profitable and has a positive cash flow, and in the foreseeable future it would appear to have more than sufficient funds to fund all its operational needs without requiring additional capital injection from the Company. At the end of 2005, the Mainland subsidiary even paid a US$10 million dividend to the Company. As a result, there has been an excess of US$80 million odd sitting in the Company’s accounts since its incorporation in 2003.

11.  According to the audited financial statements of the Company for the year ended 31 December 2005, as at that date, the cash at banks and on hand stood at US$90,681,152.00. There were account receivables of US$18,458,443.00 which were expected to be recovered within one year and goods inventories of the value of US$12,590,247.00. Current liabilities stood at US$28,576,534.00.

12.  According to the management accounts from January to May 2006, as at 31 May 2006, the cash at banks and on hand stood at US$97,185,590.00. Account receivables amounted to US$23,889,774.00 and goods inventories were of the value of US$18,477,117.00. Total current liabilities stood at US$42,415,185.00.

13.  As at 14 August 2006, the bank balances of the Company stood at US$104,367,100.98, HK$1,784,939.04 and €17,005.76.

14.  The current liabilities consist predominantly of amounts payable to the Mainland subsidiary, or to one of the parent companies, 3Com Corporation. As of 4 August 2006, of the total liabilities of US$37,977,248.80, the aggregate amount owed to the Mainland subsidiary and to 3Com Corporation amounted to US$37,940,978.48. Letters of consent to the proposed reduction of the share premium account from the Mainland subsidiary and 3Com Corporation were produced. It is anticipated that such liabilities will be paid in the ordinary course of business on a regular basis. In any event, the Company should still have bank balances and cash of about US$70 million on a consolidated basis with US$15 to 17 million odd in the Company’s own account after reduction of the share premium account. Excluding the amounts due to the Mainland subsidiary and 3Com Corporation, the Company would have enough cash to cover its liabilities and that would still leave a margin of about 70% of such liabilities. There are clearly sufficient assets to satisfy any debts due to creditors.

15.  The working capital requirements have remained at between US$2 to 3 million. Since most of the Company’s business is to act as sales agent for the Mainland subsidiary, it is expected that the working capital demand should remain low in future. Further, as most of the business would be done vis-à-vis either its parent company or the Mainland subsidiary, the amount owed to third party creditors would remain very small.

16.  The financial position of the Company is apparently sound. The Company has been able to generate cash flow of US$520,000.00 in 2005 and of US$6.5 million in 2006 so far. There is no material change in the financial position at the hearing of the petition.

17.  At the hearing of the summons for directions on 5 September 2006, I made an order dispensing with the settlement of a list of creditors and that section 59(2) shall not apply as regards any class of creditors, having been satisfied that there are sufficient liquid assets to make the proposed return of capital, pay all the liabilities and leave a sufficient margin. The proposed reduction of share premium account does not involve either diminution of liability in respect of unpaid share capital or the payment to any shareholder of paid-up share capital.

18.  The jurisdictional requirements for a reduction of capital are satisfied. The two shareholders of the Company were well aware of the purpose for reduction, which is a discernible one. I am satisfied that the position of creditors would not be prejudiced. It would be appropriate to confirm the proposed reduction and I have made an order in terms of the draft submitted.