PEARL SECURITIES LTD. v. THE STOCK EXCHANGE OF HONG KONG LTD.

1998 HCAL No. 39

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTITUTIONAL AND ADMINISTRATIVE LAW LIST

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J U D G M E N T

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Introduction

1. To "blackball" someone is to refuse him membership of a club or an association. The word comes from a balloting system by which electors cast their votes by placing differently coloured balls in a ballot box. A white ball indicates approval, a black ball rejection. The system calls to mind the Victorian era and gentlemen's clubs. But it has survived into modern times. It is used by the Council of the Stock Exchange to decide who should be admitted to membership of the Stock Exchange. In this application for judicial review, the use of a blackball balloting system by the Stock Exchange is the subject of a sustained legal challenge. It is said to be incompatible with modern notions of administrative law, which promote transparency and fairness.

The statutory framework

2. The Stock Exchange. The Respondent, the Stock Exchange of Hong Kong Ltd. ("the Stock Exchange"), is a private limited company registered under the Companies Ordinance (Cap. 32). By the Stock Exchanges Unification Ordinance (Cap. 361) ("the Unification Ordinance"), the Stock Exchange replaced the four pre-existing stock exchanges, and was given the exclusive right to operate a stock market in Hong Kong. Section 27A(1) of the Unification Ordinance identifies the principal duty of the Stock Exchange as follows:

"It shall be the duty of the [Stock] Exchange ... to ensure, so far as is reasonably practicable, an orderly and fair market on the Unified Exchange in securities traded through the facilities of the [Stock] Exchange."

Section 27A continues:

"(2) In performing its duty under subsection (1), the [Stock] Exchange ... shall -

(a) act in the interests of the public, having particular regard to the interests of the investing public; and

(b) ensure that where the interests referred to in paragraph (a) conflict with any other interests that it is required to serve under any other law, the former shall prevail."

3. Regulation of the Stock Exchange. The Stock Exchange is subject to statutory regulation. Its regulator is the Securities and Futures Commission. Thus, section 4(1) of the Securities and Futures Commission Ordinance (Cap. 24) requires the Securities and Futures Commission, inter alia,

(a) to be responsible for supervising and monitoring the activities of the Stock Exchange,

(b) to take all reasonable steps to safeguard the interests of persons dealing in securities,

(c) to promote and encourage proper conduct among members of the Stock Exchange, and

(d) to suppress illegal, dishonest and improper practices in dealing in securities.

The approval of the Stock Exchange's Articles of Association by the Securities and Futures Commission was required before the Stock Exchange could be recognised for the purposes of the Unification Ordinance (see sections 3(2) and 3(3)(h) of the Unification Ordinance), and any amendment to the Articles of Association must also be approved by the Securities and Futures Commission (see section 35(1) of the Unification Ordinance). The effect of this statutory regime is to vest in the Securities and Futures Commission significant powers of control over the activities of the Stock Exchange.

Membership of the Stock Exchange

4. Eligibility for membership. Section 13 of the Unification Ordinance identifies a number of conditions for eligibility for corporate membership of the Stock Exchange. Two conditions are relevant for present purposes:

(i) The company must be registered under Part VI of the Securities Ordinance (Cap. 333) as a dealer in securities.

(ii) The company must be of good financial standing and integrity.

Registration as a dealer in securities is intended to be no mere formality. The requirements are set out in section 23 of the Securities and Futures Commission Ordinance. The Securities and Futures Commission is required to refuse registration if the applicant does not satisfy the Securities and Futures Commission that he is a fit and proper person to be registered. In considering whether a corporate applicant has met that requirement, the Securities and Futures Commission must have regard, in relation to each of the company's directors and officers, to his financial status, qualifications, experience, abilities, reputation, character, financial integrity and reliability.

5. Further conditions for eligibility for corporate membership of the Stock Exchange are to be found in the Rules of the Stock Exchange. One of them is relevant for present purposes. Rule 302(1) requires a corporate member to be a shareholder of the Stock Exchange. In practical terms, therefore, if a company wishes to be a member of the Stock Exchange, it will have to purchase the "A" share of another member or be allotted an "A" share by the Council of the Stock Exchange.

6. Consideration of applications for membership. Applications for corporate membership of the Stock Exchange are first considered by the Membership Committee. If the Membership Committee considers that an applicant for membership is able to comply with the eligibility requirements for membership, it recommends that the application for membership should be approved. However, there is no evidence before me as to how thorough that vetting procedure is. I doubt whether a value judgment is made as to whether the company is of good financial standing and integrity at that stage. I am sure that I would have been told about that if that is what happens. I assume that the role of the Membership Committee is simply to check whether the formal requirements for corporate membership are satisfied, i.e.

(a) that the holder of an "A" share has agreed to transfer it to the applicant,

(b) that the applicant has been duly registered as a dealer in securities,

(c) that the applicant has identified which of its directors is to be its dealing director, and

(d) that the applicant has satisfied the financial requirements laid down by the Financial Resources Rules.

7. The decision as to whether the application for corporate membership should be granted or refused rests with the Council of the Stock Exchange. The Council currently has 31 members, who have been elected or appointed pursuant to Art. 87(a) of the Stock Exchange's Articles of Association. They comprise:

(a) 18 broker members, who must be either individual members of the Stock Exchange or directors of corporate members of the Stock Exchange,

(b) 9 lay members, who include representatives of listed companies, market users (for example, fund mangers and merchant banks) and professional advisers (for example, lawyers and accountants),

(c) 2 lay members, and

(d) 2 ex officio members, namely the Chief Executive of the Stock Exchange and the Chief Executive of the Hong Kong Securities Clearing Co. Ltd.

8. When considering an application for corporate membership of the Stock Exchange, members of the Council are provided with information about the applicant which has been compiled by the Membership Committee. That information is relatively brief. It consists of

(a) brief particulars relating to the company's directors and shareholders,

(b) the amount of the company's authorised, issued and paid-up share capital,

(c) brief particulars relating to the company's ultimate holding company, and

(d) the identity of the holder of the "A" share to be transferred to the company.

No other information is provided to members of the Council to enable members of the Council to determine whether the company is "of good financial standing and integrity". However, members of the Council know that the company was regarded by the Securities and Futures Commission (having taken into account matters such as its financial status and financial integrity) as being a fit and proper person to be registered as a dealer in securities. One wonders, therefore, what there is in fact for members of the Council to consider when (a) they are provided with only modest financial information about the company, (b) they are not provided with any other information about the company, and (c) the company's financial status and financial integrity has already been approved by the Securities and Futures Commission.

9. The balloting provisions. Be that as it may, an application for corporate membership of the Stock Exchange is considered at a meeting of the Council. I have not been told whether the application is debated by members of the Council. I rather doubt it, because I am sure that if a debate takes place I would have been told about it. I assume, therefore, that the matter simply proceeds to a ballot. The Stock Exchange's Articles of Association identify the balloting system. Art. 14 provides:

"(e) At each ballot seven members of the Council voting shall be sufficient to conduct a ballot and three members of the Council shall open the ballot box. Each member of the Council present may in respect of a candidate cast either a white ball to indicate his approval or a black ball to indicate his disapproval or may abstain from voting: if four or more black balls are cast in respect of any candidate, such candidate is not admitted.

(g) The decision of the Council in respect of admission or rejection shall be final and conclusive and the Council shall not be required to give any reason for its decision."

The fact that a candidate has an application pending is public knowledge, because Art. 14(b) provides:

"Notice of a candidate's application for membership shall be posted on the general notice board at the premises of the [Stock] Exchange at least seven clear days before the meeting of the Council at which the candidate's application is to be balloted for."

On the other hand, the number of dissenting votes cast for a candidate is not made public because Art. 14(f) provides:

"The number of black balls cast in respect of any candidate shall not be disclosed except to a member of the Council."

These provisions in the Articles have been reproduced in the Stock Exchange's Rules.

10. This balloting system has a number of consequences:

(a) It renders it impossible to give advance notice to the applicant of any concerns which a member of the Council may have about the applicant's membership of the Stock Exchange, thereby preventing the applicant from addressing those concerns or making representations about it.

(b) It renders it impossible to identify which members of the Council voted against the applicant, thereby denying the decision the transparency which accountability brings.

(c) It renders it impossible to give reasons for the refusal of an application for membership of the Stock Exchange, thereby preventing an applicant from knowing whether membership has been denied on valid grounds, on unjustified grounds, or on arbitrary or capricious ones.

(d) It means that a small minority of members of the Council (4 out of 31) can deny an applicant membership of the Stock Exchange, thereby denying membership to an applicant who may enjoy overwhelming (if not unanimous) support.

Mr. Gerard McCoy S.C. for the Applicant, Pearl Securities Ltd., does not argue that the consequence in (d) renders the balloting system unlawful. The question is whether the other consequences in (a), (b) and (c) do.

The facts

11. The facts can be shortly stated. The Applicant is a company incorporated in Hong Kong. It is a subsidiary of Pearl Oriental Holdings Ltd., which is the ultimate holding company of the Pearl Group of Companies ("the Group"), and whose shares are listed on the Stock Exchange. In 1997, the Group decided to develop a stockbroking arm, and the Applicant was the company in the Group selected for that purpose. In October 1997, the Applicant agreed to purchase an "A" share in the Stock Exchange. The transfer of the "A" share to the Applicant, though, was conditional on (a) the approval of the Council for the share to be transferred to the Applicant, and (b) the registration of the Applicant as a dealer in securities. If either of these conditions was not satisfied, the agreement would become null and void, and the sum of $2m. (which the Applicant had paid by way of deposit on the signing of the agreement) would be forfeited to the vendor.

12. In November 1997, the Applicant applied for registration as a dealer in securities and for corporate membership of the Stock Exchange. In the next few months, the Membership Committee of the Stock Exchange decided to recommend that its application for membership of the Stock Exchange be approved, and the Securities and Futures Commission approved its application for registration as a dealer in securities. Eventually, on 5th May 1998, a meeting of the Council of the Stock Exchange was convened, inter alia, to consider the Applicant's application for membership of the Stock Exchange.

13. 27 members of the Council were present. After the ballot had taken place, an examination of the ballot box revealed that 22 members had cast a white ball to indicate their approval of the Applicant's application for membership, 4 members had cast a black ball (which was the minimum number required to defeat an application for membership) and 1 member had abstained. The result was that although the Applicant had the support of an overwhelming majority of the members casting votes, its application for membership failed.

14. The blackballing of an applicant for membership of the Stock Exchange is a rare occurrence. Including the Applicant's application, it has occurred only 15 times out of 1,194 applications, and 12 of those cases had been cases in which the application (unlike that of the Applicant) had been allowed to proceed by the Membership Committee subject to reservations. The blackballing of the Applicant resulted in the forfeiture of the $2m. to the vendor of the "A" share, and in the Applicant having nothing to show for the time, trouble and expense to which it had gone in preparing for the time when it hoped to have a seat on the Stock Exchange. In addition, the fact that it had been blackballed became public knowledge almost immediately, and the speculation in the press was that the Applicant's blackballing might have related to an investigation then being conducted by the Securities and Futures Commission into trading in its holding company's shares.

The decision challenged

15. Two preliminary points should be made. First, it is common ground that decisions of the Stock Exchange relating to applications for membership are amenable to judicial review. That concession was rightly made by Mr. Michael Bunting for the Stock Exchange. The Stock Exchange operates within a statutory regime. In considering applications for membership, it is exercising an important public function, namely the regulatory control of stockbroking in Hong Kong. Secondly, the decision challenged is the decision of the Council of the Stock Exchange refusing the Applicant's application for membership of the Stock Exchange. However, since the ballot was conducted in accordance with the Articles of Association of the Stock Exchange, the nature of the challenge is in truth a challenge to the balloting system itself.

The role of the court

"Whenever a public function is being performed there is an inference, in the absence of an express requirement to the contrary, that the function is required to be performed fairly": de Smith, Woolf & Jowell, "Judicial Review of Administrative Action", 5th ed., para. 8-011.

This reflects what Lord Mustill said in R. v. Secretary of State for the Home Department ex p. Doody [1994] 1 AC 531 at p.560D in relation to the exercise of powers conferred by statute:

"... where an Act of Parliament confers an administrative power there is a presumption that it will be exercised in a manner which is fair in all the circumstances."

However, the question then arises: who is to decide whether the presumption that the power must be exercised fairly has been displaced? In other words, is the decision to be made by the body exercising the power - with the result that a decision by that body that the context in which the power is exercised relieves it of the duty to act fairly can only be set aside by the court on Wednesbury grounds - or is it for the court to decide whether the duty to act fairly has been excluded? In addition, what fairness requires varies according to the circumstances of each case. As Lord Mustill said in Doody at p.560D-E:

"The standards of fairness are not immutable. They may change with the passage of time, both in the general and in their application to decisions of a particular type."

If the body exercising the power is under a duty to act fairly, who is to decide what fairness actually requires in the particular case? Is that decision also for the body exercising the power or is that a decision for the court to make?

16. De Smith gives a clear answer to these questions:

"Whether fairness is required and what is involved in order to achieve fairness is for the decision of the courts as a matter of law. The issue is not one for the discretion of the decision-maker. The test is not whether no reasonable body would have thought it proper to dispense with a fair hearing. The Wednesbury reserve has no place in relation to procedural propriety": op. cit., para. 8-011.

This view is supported by the authorities. Thus, in R. v. Monopolies and Mergers Commission ex p. Elders IXL Ltd. [1987] 1 WLR 1221, Mann J. (as he then was) said at p.1233D:

"What is fair in relation to a particular process, and to a particular situation which is subject to that process, is for determination by the court."

I note that in R. v. Monopolies and Mergers Commission ex p. Matthew Brown Plc [1987] 1 WLR 1235, Macpherson J. said at p.1242D:

"The question in each case is whether the commission has adopted a procedure so unfair that no reasonable commission or group would have adopted it, so that it can be said to have acted with manifest unfairness."

But Macpherson J. had already cited the observation of Mann J. without disapproval, and when the whole of Macpherson J.'s judgment is read, it is plain that he concluded that the procedure was fair, rather said simply saying that it was reasonably open to the Commission to conclude that the procedure was fair. Finally, in R. v. Panel on Take-overs and Mergers ex p. Guinness Plc [1990] 1 QB 146, Lloyd L.J. (as he then was) said at pp.183H-184E:

"... the question whether we are entitled to interfere at all is not to be answered ... by reference to Wednesbury unreasonableness ... [The contrary argument] confuses substance and procedure ... [I]n the last resort the court is the arbiter of what is fair."

17. I am satisfied that the passage which I have quoted from de Smith accurately sets out the law in the U.K., and I see no reason why it should not be applied in Hong Kong. However, in the Guinness case, Lord Donaldson M.R. pointed out at p.159F that what is or is not fair may depend "on underlying value judgments" by the decision-maker. I think that that is an important caveat which should be reflected in the principle I should apply. Thus, the court will not question, save on Wednesbury grounds, the factors which led the decision-maker to conclude that it was not required to act fairly or that the duty to act fairly was limited in some way. But the decision as to whether those factors should relieve the decision-maker of the duty to act fairly or should limit the duty to act fairly in some way rests with the court alone. This approach is consistent with passages in the speeches in Tesco Stores Ltd. v. Secretary of State for the Environment [1995] 1 WLR 759 relating to the extent to which the court can inquire into whether the decision-maker took into account irrelevant considerations - in particular, the speech of Lord Keith of Kinkel at p.764G-H.

18. In reaching this conclusion, I have not ignored two particular passages in Lord Mustill's speech in Doody relied upon by Mr. Bunting. Thus, at p.560C Lord Mustill said:

"Nor of course is it the task of the court to say how it would choose to operate the scheme if given a free hand. The only issue is whether the way in which the scheme is administered falls below the minimum standard of fairness."

And at pp.560H-561A:

"... it is not enough for [the persons affected by the decision challenged] to persuade the court that some procedure other than the one adopted by the decision-maker would be better or more fair. Rather, they must show that the procedure is actually unfair. The court must constantly bear in mind that it is to the decision maker, not the court, that Parliament has entrusted not only the making of the decision but also the choice as to how the decision is made."

I do not regard either of those passages as militating against the principle which I propose to apply. What Lord Mustill was saying was that it was for the decision-maker to decide what procedures should be adopted in the decision-making process. But that did not mean that it was exclusively for the decision-maker to decide whether the procedures which were adopted were fair.

The rule-making powers of the Stock Exchange

19. It is here that I must deal with an important argument developed by Mr. Bunting. The balloting system for the election of members of the Stock Exchange is reproduced in Rule 304 of the Rules of the Stock Exchange. The Stock Exchange's power to promulgate rules is contained in section 34(1) of the Unification Ordinance. There is no express power to make rules relating to the procedures by which applications for membership of the Stock Exchange are to be governed, though the Stock Exchange has the power in section 34(1)(c) to make rules "in respect of such ... matters as are necessary or desirable for the proper and efficient operation and management of the [Stock] Exchange". Accordingly, Mr. Bunting contended that the legal principle by which the court could declare the balloting system unlawful is the doctrine of ultra vires: were the rules which established the balloting system ultra vires the Stock Exchange's rule-making powers?

20. Consistent with that approach, Mr. Bunting went on to explore the extent of those powers. Those powers were limited to what was "necessary or desirable" for the proper and efficient operation of the Stock Exchange. He did not accept that that equated to fairness, but he conceded that that did not matter, because of the principle (articulated in Doody) that an administrative power conferred by statute must be exercised fairly. The significance of all that is that if, as Mr. Bunting contended, the appropriate legal principle is ultra vires, so that the court's function is to decide whether the rules relating to the balloting system were intra vires, it is not for the court to substitute its own view of what is fair for that of the Stock Exchange, except on Wednesbury grounds.

21. I cannot go along with this beguiling argument for two reasons. First, the source of the balloting system which is challenged is not the Rules of the Stock Exchange. Its source is the Stock Exchange's Articles of Association, namely Art. 14, even though Art. 14 was reproduced in its entirety in Rule 304. Thus, the issue is not whether the balloting system reproduced in Rule 304 was ultra vires the Stock Exchange's rule-making powers, but whether the balloting system created by Art. 14 is unlawful. Secondly, even if the issue is whether the balloting system reproduced in rule 304 was ultra vires the Stock Exchange's rule-making powers, it was conceded by Mr. Bunting that it would be ultra vires that power if the system was not a fair one, having regard to all the relevant circumstances. There is no reason why, simply because fairness has to be decided in the context of the doctrine of ultra vires, the question of fairness should not be determined by the court, subject to the caveat which I have mentioned.

The requirements of fairness

22. Strictly speaking, there are two questions to be decided. First, has the presumption that the balloting system must be fair been displaced? Secondly, if not, what are the precise requirements of fairness in the present case? However, I think that it would be over-technical to treat these two questions separately, because in the final analysis both come down to the same thing: to what extent, if at all, does the balloting system fail to meet the requirements of fairness, having regard to all the circumstances of the case? In this case, that involves balancing competing interests: the interests of applicants for membership in knowing what may be troubling members of the Council, in being able to address those concerns and in being told why their applications failed, and the interests of the public in ensuring that members of the Council are provided with all relevant information to enable them to cast their votes freely and in accordance with their consciences with a view to preventing unsuitable persons and companies from being able to act as stockbrokers in Hong Kong. As Lord Woolf M.R. said in the well-known case of R. v. Secretary of State for the Home Department ex p. Fayed [1998] 1 WLR 763 at p.777A:

"The courts are well capable of determining public interest issues of this sort in a way which balances the interests of the individual against the public interests of the state."

23. I have already referred to two of the six principles articulated by Lord Mustill in Doody, but I should for completeness refer to the other four. At p.560E-G, he said:

"(3) The principles of fairness are not to be applied by rote identically in every situation. What fairness demands is dependent on the context of the decision, and this is to be taken into account in all its aspects.

(4) An essential feature of the context is the statute which creates the discretion, as regards both its language and the shape of the legal and administrative system within which the decision is taken.

(5) Fairness will very often require that a person who may be adversely affected by the decision will have an opportunity to make representations on his own behalf either before the decision is taken with a view to producing a favourable result; or after it is taken, with a view to procuring its modification; or both.

(6) Since the person affected usually cannot make worthwhile representations without knowing what factors may weigh against his interests fairness will very often require that he is informed of the gist of the case which he has to answer."

24. There is one other topic I should mention. In McInnes v. Onslow-Fane [1978] 1 WLR 1520, Megarry V.-C. distinguished the following situations:

(a) "forfeiture" or "deprivation" cases where a vested interest (such as a license to trade) had been withdrawn,

(b) "application" cases, where no interest yet existed, but was merely being sought (such as an application for a licence, a passport or a council house), and

(c) "expectation" cases, where there was a reasonable expectation of the continuation of an existing benefit but which fell short of a right to have that benefit continued.

He held that the requirements of fairness are far less stringent in an "application" case than in "forfeiture" and "expectation" cases. On Megarry V.-C.'s classification, the Applicant's application for membership of the Stock Exchange is an "application" case. However, it is important to remember that Megarry V.-C. did not go so far as to say that in "application" cases there was no duty to act fairly. He was saying that the fact that the case was an "application" case was a factor to be taken into account in deciding what fairness required in the particular case.

25. I have not discerned a significant change in the law since McIness. Take the case of Fayed. At p.776B-C, Lord Woolf M.R. said:

"The days when it used to be said that a person seeking a privilege is not entitled to be heard are long gone. In R. v. Gaming Board for Great Britain ex p. Benaim and Khaida [1970] 2 QB 417 it was argued as the applicants for a gaming licence were seeking a privilege there was no obligation to be fair but this court (which included Lord Wilberforce as a member) rejected that contention. Lord Denning M.R. in his judgment, with which the other members of the court agreed, did however accept, as would still be the position today, 36 years later, that the fact that the applicant did not have an entitlement could affect the content of what was required in order to be fair."

In considering, therefore, what fairness requires in the present case, I have borne that in mind.

The giving of advance notice

26. The Stock Exchange's case is as follows. Members of the Council often receive information about individuals or companies. As active participants in the stock market in Hong Kong as most of them are, you would not expect otherwise. If the giver of that information knew that it would have to be declared to the company applying for corporate membership of the Stock Exchange (if the information was going to be relied upon by the recipient of it), the giver of the information may be reluctant to impart the information at all. In these circumstances, members of the Council will be denied information which could be highly relevant to whether the company applying for membership has the necessary financial standing and integrity.

27. Moreover, the recipient of the information may come by it in confidence, i.e. on terms that, although the recipient can use it for such purposes as he chooses, he cannot disclose it to anyone. Again, even if the information is not confidential, it may be that the accuracy of the information, though from a reliable source, cannot be established. If a member of the Council is required to disclose any information upon which he relies in reaching his decision - which had been imparted to him in confidence and whose accuracy could not be established - he would simply not rely on that information. If he felt that he could not ignore the information he had received, he would have to abstain from voting. The effect of that would also be that decisions on whether a company should be admitted to corporate membership of the Stock Exchange would be made without highly relevant information being taken into account.

28. I do not think that these considerations justify denying to applicants for corporate membership of the Stock Exchange what fairness would otherwise require. I do not see how the flow of information, and the use to which it is put, would be jeopardised by the gist of that information being relayed to the company applying for membership. If information is given to a member of the Council with the view to the member using the information to vote against a particular applicant for corporate membership, it would be very surprising if the giver of that information was not also permitting the member to disclose it to other members. Indeed, I would not have expected the giver of the information to object to it being disclosed to the applicant for membership, provided, of course, that his identity as the source of the information is not disclosed. I do not, of course, question for one moment the evidence of Alec Tsui, the Chief Executive of the Stock Exchange, that information may have been given to members of the Council in confidence. But I suspect that in the vast majority of cases what is to be kept confidential is not so much the information but its source.

29. Again, I do not see why the inability to establish the accuracy of information which comes from an unidentified (though said to be reliable) source should prevent the gist of that information being given to the company applying for corporate membership. The disclosure of the information may result in the company withdrawing its application. If it proceeds with the application, it is likely to assert that the information is not true. It may or may not give reasons for that assertion. But what members of the Council will then have to do is to assess the weight which they should attach to the information in the light of whatever the company says about it. That assessment may result in some members of the Council deciding not to attach any weight to the information, and deciding to cast their votes on the application as if the information had not been received. It may result in other members of the Council deciding to attach some weight to the information, and to reflect that in the votes that they actually cast. It may result in some members of the Council deciding to abstain from voting on the footing that they thought that the information should be ignored but that they did not trust their ability to put it out of their minds. In short, I do not see why an initial belief that the accuracy of the information cannot be established should prevent the gist of that information being given to an applicant for corporate membership.

30. For these reasons, I do not think that the interests of the public require an applicant for corporate membership to be denied what fairness would otherwise require. In my view, where at least four Council members are thinking of voting against the admission of a corporate applicant for membership, the company should be informed why those members are minded to take that course. Those members do not, of course, have to be identified, and the information does not have to be detailed. All that is necessary is for the company to be informed of the nature of the members' concerns, and the gist of any information on which those concerns were based (without identifying the source of that information), though with sufficient particularity to enable the company to address those concerns if it wants to. To the extent that the current system for determining applications for corporate membership of the Stock Exchange does not allow for that, the current system is unlawful and the challenge to it succeeds.

31. In reaching this conclusion, I have not overlooked Art. 14(g) of the Stock Exchange's Articles of Association which provide that the Council shall not be required to give any reasons for its decision. I shall come later to whether that provision is lawful, but even if it is, it does not affect my view of the need to give advance warning to applicants for corporate membership of concerns which members of the Council may have. I appreciate that if such advance warning is given, and if the Council eventually decides to reject the application for membership, it may well be easy to infer what the reason for the decision was. Requiring the Council to give such advance warning could therefore be said to be tantamount to obtaining by the back door what could not be obtained by the front. That argument was expressly rejected, for reasons with which I agree, by a majority of the Court of Appeal in Fayed.

Anonymity

32. The balloting system currently in place preserves the anonymity of those members of the Council who vote against the application for corporate membership. Not only does the applicant not know which members of the Council "blackball" the application. The other members of the Council do not know their identity either.

33. I do not think that fairness requires the identity of those members of the Council who blackball the application to be made known to the applicant for corporate membership. Mr. McCoy acknowledged that. Collective decision-making could be undermined by such a requirement, and it was not suggested that the Council of the Stock Exchange is a body whose members may have interests of their own to serve.

34. However, the question whether fairness required the identity of the members who blackball the application to be made known to other members of the Council is academic in view of what I have already found. If an applicant for corporate membership has to be informed why members of the Council are thinking of blackballing the application, those members of the Council will have to be identified internally and will have to explain what is concerning them, so that their concerns can be relayed to the applicant. And those members of the Council who blackball the application will have to be identified internally so that the Council can be sure that there are no other members who blackball the applicant whose reasons for being minded to do so had not been relayed to the applicant.

35. The various reasons advanced by Mr. Tsui in his affirmation to justify anonymity relate, in my view, to the justification for keeping the names of dissenting members of the Council from the applicant for membership. I do not read any of them as seeking to justify anonymity vis-a-vis other members of the Council. For example, Mr. Tsui relies on the need for members of the Council to "be able to vote entirely freely and according to his conscience". I do not see how that could be said to justify anonymity - at any rate, from other members of the Council. Nor, incidentally, do I see how the need to vote freely and according to one's conscience is jeopardised by knowing that information imparted to members which might result in an applicant being blackballed will be disclosed to the applicant (provided, of course, that the applicant is not told of either the source or the recipient of the information). However, since the issue has become academic, I do not need to decide whether the current system for determining applications for corporate membership of the Stock Exchange is unlawful to the extent that it prevents members of the Council knowing which of their number blackball an applicant.

Reasons

36. I have already referred to Art. 14(g) of the Stock Exchange's Articles of Association which provide that the Council is not required to give any reasons for its decision. The question is whether that is lawful. The beneficial effects of a duty to give reasons are described in de Smith, op. cit., para. 9-042, as follows:

"To have to provide an explanation of the basis for their decision is a salutary discipline for those who have to decide anything that adversely affects others. The giving of reasons is widely regarded as one of the principles of good administration in that it encourages a careful examination of the relevant issues, the elimination of extraneous considerations, and consistency in decision-making. Moreover, if published, reasons can provide guidance to others on the body's likely future decisions, and so deter applications which would be unsuccessful. Further, the giving of reasons may protect the body from unjustified challenges, because those adversely affected are more likely to accept a decision if they know why it has been taken. In addition, basic fairness and respect for the individual often requires that those in authority over others should tell them why they are subject to some liability or have been refused some benefit."

In addition, reasons enable a body aggrieved by a decision to know whether it has grounds of appeal (where a right of appeal exists) or whether it can maintain an application for judicial review. However, the arguments are not all one way (para. 9-045):

"There are, however, some significant objections which can be raised to the courts extending a general requirement to provide reasons and findings of fact to all administrative bodies that are in any case obliged by the duty of fairness to inform those whom they may prejudicially affect of the case that they have to meet and to offer them an opportunity to submit representations. These include the possibility that reasons, especially if published, will unduly increase 'legislation' and the formal nature of the decision making process, place burdens upon decision makers that will occasion administrative delays, and encourage the disappointed to pore over the reasons in the hope of detecting some shortcoming for which to seek redress in the courts. In addition, a reluctance to given reasons perhaps because they may occasion harm (by, for example, causing personal distress, revealing confidences, or endangering national security) could discourage the making of difficult or controversial decisions or result in the production of anodyne, uninformative and standard reasons."

However, de Smith concludes:

"... apart from the exceptional case, the advantages of providing reasons so clearly outweigh the costs that fairness requires that the individual be informed of the basis of the decision."

These considerations weighed heavily with the Court of Final Appeal when it recently concluded in Oriental Daily Publisher Ltd. v. Commissioner for Television and Entertainment Licensing Authority [1998] 2 HKLRD 857 that the Obscene Articles Tribunal was required to give reasons for its decisions.

37. In Doody, Lord Mustill said at p.564E:

"I accept without hesitation, and mention it only to avoid misunderstanding, that the law does not at present recognise a general duty to give reasons for an administrative decision. Nevertheless, it is equally beyond question that such a duty may in appropriate circumstances be implied, and I agree with the analyses by the Court of Appeal in R. v. Civil Service Appeal Board ex p. Cunningham [1991] 4 All E.R. 310 of the factors which will often be material to such an implication."

The authorities were subjected to what de Smith described (op. cit., para. 9-047, footnote 99) as a "penetrating analysis" in R. v. Higher Education Funding Council ex p. Institute of Dental Surgery [1994] 1 WLR 242. In delivering the judgment of the Divisional Court, Sedley J. (as he then was) identified at p.263A-C two classes of cases where a duty to give reasons arose. One such class is "where the subject matter is an interest so highly regarded by the law (for example, personal liberty), that fairness requires that reasons, at least for particular decisions, be given as of right". The second class which he identified is "where the decision appears aberrant". In such a case, "fairness may require reasons so that the recipient may know whether that aberration is in the legal sense real (and so challengable) or apparent", though Sedley J. added that "this class does not include decisions which are themselves challengable by reference only to the reasons for them". These observations were cited without disapproval by the Court of Appeal in R. v. City of London Corporation ex p. Matson [1997] 1 WLR 765 at p.776D-E.

38. A decision will have the appearance of being aberrant if it is markedly out of line with decisions which the decision-maker regularly makes on the topic. Such a decision will normally require reasons to be given for it. In my view, a decision of the Council of the Stock Exchange refusing to approve an application for corporate membership of the Stock Exchange is an absolutely classic example of that. The factors which have brought me to that conclusion are

(a) the rarity of the occasions on which an application for corporate membership of the Stock Exchange has been blackballed in the past, and

(b) the fact that the blackballing occurs despite the conclusion of the Securities and Futures Commission, after considering, inter alia, the financial status, the financial integrity and the reliability of each of the company's directors and officers, that the company is a fit and proper person to be regarded as a dealer in securities.

In addition, I have not felt able to ignore the facts in the present case that

(a) the blackballing occurred after the Membership Committee had concluded that the Applicant was able to comply with the eligibility requirements for membership, and

(b) no material adverse to the Applicant was produced by the Membership Committee to members of the Council on the issue whether the Applicant was of good financial standing and integrity.

39. I was not addressed on the standard of the reasons required. They must, of course, be genuine and intelligible. But I think that the standard of reasons which the Council of the Stock Exchange is required to give when it refuses an application for corporate membership of the Stock Exchange could well differ depending on what the reasons are in each case. But if the reason is that some members of the Council are not satisfied that the company is of good financial standing and integrity, the reasons should indicate the facts which are said to give rise to that concern. That is not something which I can or should elaborate on in the present case, which as I have said is a challenge to the balloting system itself rather than an attack on the particular circumstances which gave rise to the Applicant's application being blackballed. For present purposes, it is sufficient for me to state that, to the extent that the current system for determining applications for corporate membership of the Stock Exchange does not require the Council to give reasons when an application is refused, the current system is unlawful and the challenge to it succeeds.

The role of the Securities and Futures Commission

40. In reaching these conclusions, I have borne in mind the stress which Mr. Bunting invited me to place on the regulatory role of the Securities and Futures Commission. The Securities and Futures Commission approved the Stock Exchange's Articles of Association, and must therefore be taken to have been satisfied that the current balloting system is in the public interest. There are, I believe, two answers to that. First, while I acknowledge the important regulatory role played by the Securities and Futures Commission, and while I must give its views on the current balloting system due deference, it is ultimately for the court to decide, balancing the competing interests, whether the requirements of fairness in the particular circumstances have been met. Secondly, there is no evidence before me that in approving the Articles of Association the Securities and Futures Commission addressed the question whether the balloting system provided for by Art.14 was consistent with the requirements of fairness. For all I know, the Securities and Futures Commission's approval of the Articles might not have addressed that question at all.

Conclusion

41. I have in this judgment identified the features of the current balloting system which render the system unlawful. The only relief which is sought is declaratory relief. A draft of the declaration sought was produced by Mr. McCoy, but he did not know at that stage what features of the current balloting system would be held to render the system unlawful. I propose therefore to adopt the course suggested by Mr. Bunting, namely to leave it to the parties to attempt to agree the appropriate declaration in the light of this judgment. I give the parties liberty to restore the Motion in the event of a suitable draft not being agreed. At present, I see no reason why costs should not follow the event, and the order nisi which I propose to make is that the Stock Exchange pays to the Applicant its costs of this application for judicial review, to be taxed if not agreed.