RE HO YUEN KI, WINNIE AND ANOTHER

CACV 186/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 186 OF 2008

(ON APPEAL FROM HCAL NO. 73 OF 2008)

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J U D G M E N T

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Hon Ma CJHC :

Introduction

1.  On 9 July 2008, Reyes J dismissed an application by the Applicants for leave to apply for judicial review of a number of decisions made by the putative respondents (the Stock Exchange of Hong Kong Limited (“the SEHK”) and the Securities and Futures Commission (“the SFC”)), all in relation to the listing of the shares of SJM Holdings Limited on the Stock Exchange.  This listing was originally to take place on 10 July 2008.  It is now scheduled for tomorrow (16 July 2008).  The application for leave to apply for judicial review was made on 7 July 2008 in relation to decisions made last month (with the exception of one of the relevant decisions of the SFC which was made on 7 July 2008).  Given the dates of the listing (both original and revised), the application has been brought at the last possible hour and this has necessitated the matter being dealt with by Reyes J on 8 July and by this Court today.

2.  SJM Hong Kong, whose listing is opposed by the Applicants, carries on business operating casinos in Macau.  The actual operator of the casinos is a joint stock company called Sociedade de Jogos de Macau (“SJM Macau”) which is the holder of a concession from the Macau Government for the operation of casinos there.

3.  The corporate structure of the organization is as follows : -

(1) SJM Hong Kong holds 90% of the shareholding in SJM Macau.

(2) The shares of SJM Hong Kong will, if the listing goes through, be held by the public to the extent of 25%.  Of the other shareholdings, 61% will be held by a company called STDM Investments, with another 7.625% held by Dr Stanley Ho.

4.  The gambling business in Macau was, prior to 2001 when the Government of the Macau SAR opened up the casino industry there, monopolized by Sociedade de Turismo e Diversoes de Macau S.A.R.L. (“STDM”), another joint stock company incorporated in Macau.  The 1st Applicant, Winnie Ho, is a shareholder of that company.  The 2nd Applicant, Moon Valley Inc., is alleged by the 1st Applicant also to be a shareholder but this has appeared not to have been recognized by the company itself (and this has led to court proceedings in Macau).

5.  After the Macau Government’s decision to allow more participants in the casino business, STDM decided in 2001 to incorporate a new company as the vehicle to apply for a gambling licence.  That company was SJM Macau and a gambling licence was granted to it in February 2002 for a period of 18 years.  The shares of SJM Macau were originally held by STDM (as to some 80%) through its wholly owned subsidiary STDM Investments, with the balance held by the other shareholders including Dr Ho.

6.  Then on 31 March 2006 and 25 September 2006 came two meetings of STDM’s General Assembly (equivalent to a general meeting of shareholders) which the Applicants say have a direct bearing on the decision to incorporate a company in Hong Kong to hold the shares in SJM Macau, with a view to the Hong Kong company being listed on the Stock Exchange here.  This, according to the Applicants, constituted a major company reorganisation.  The validity of these meetings has been challenged by the Applicants in various proceedings instituted in Macau.  These actions are relevant when considering some of the challenges made in the present application for leave to apply for judicial review.

7.  The Hong Kong company that was incorporated (following the two STDM General Assembly meetings) was SJM Hong Kong.

8.  It is noteworthy that in the Macau proceedings, the Applicants have attempted to obtain interim injunctions to restrain STDM from putting into effect the reorganisation that the Applicants assert to be the effect of the two meetings.  These have been refused by the Macau courts and there is accordingly no interim injunction in place in relation either to the company reorganisation or to the proposed listing.

The challenges in the application for judicial review

9.  The challenges to the decisions of the SEHK and the SFC are contained in the Form 86A and are conveniently summarized in the written submissions before us : -

(1)        It is not in the public interest for SJM Hong Kong to be listed, as its sole business is gambling and it is against the public policy of Hong Kong to allow involvement in such activities.  As the SEHK and the SFC are required by statute to operate in the public interest, their decisions are accordingly illegal.

(2)        The Prospectus issued to investors is misleading in a number of respects, primarily in that insufficient reference was made to the litigation in Macau or to the fact that, according to the Applicants, if the litigation were resolved in their favour, SJM Hong Kong would probably have no assets (since, according to them, the decision to reorganize would be unravelled).

(3)        The SEHK and the SFC failed to give reasons for their decisions.  Included in this is also an assertion that the SFC wrongly viewed their non-objection to the listing as not constituting a decision.

(4)        The SEHK and the SFC took into account irrelevant factors and failed to take into account relevant ones.

(5)        The decisions were Wednesbury unreasonable.

10.  In my judgment, none of the challenges sought to be made in the judicial review proceedings is reasonably arguable or has a reasonable prospect of success (the test as confirmed in Peter Po Fun Chan v Winnie C.W. Cheung & Another [2008] 1 HKLRD 319.

The public interest : gambling 

11.  Both the SEHK and the SFC are required by statute to act in the public interest.  The Judge below fully recognized this (contrary to the submissions now made by the Applicants that he did not).

12.  The premise on which the Applicants seek to build their case is the fact that gambling is generally unlawful in Hong Kong.  Reference is made to the Gambling Ordinance, Cap.148 and to various debates in the Legislative Council (“LegCo”) as recorded in Hansard.

13.  However, as the Judge pointed out, the Gambling Ordinance generally prohibits gambling within Hong Kong (and this of course includes gambling on the internet here).  There is no prohibition on gambling outside of Hong Kong.  The context of the LegCo debates is the same, namely, they refer to gambling within Hong Kong.

14.  Why then would an investment in a company involved in gambling abroad be contrary to the public interest?  It is certainly not suggested that this would fall foul of the Gambling Ordinance.  Indeed, the courts of Hong Kong regularly enforce contracts connected with gambling overseas : see for example, the Court of Appeal decision in Wong Hon vSheraton Desert Inn Corporation [1995] 3 HKC 331, at 335B-G, 336G-337F.

15.  In short, there is nothing in this point based on the public interest at all.  The Applicants have therefore not shown that any statute or established Government policy has been frustrated.

16.  It is also said that the SEHK did not direct its mind to this issue at all.  Reliance is placed on a letter dated 23 January 2008 from the SEHK to the Applicants’ solicitors in which it was said that under the Securities and Futures (Stock Market Listing) Rules, Cap.571V (“the SMLR”), it was for the SFC (and not the SEHK) to object to a listing on the grounds of it being against public interest.  This is an accurate statement as far as the SMLR are concerned (which incidentally are Rules made under the Securities and Futures Ordinance, Cap.571).  The SEHK were not stating (as the Applicants appeared to submit) that they were refusing to consider the arguments based on public interest at all, and it is quite misleading therefore for the Applicants so to contend.  In fact, this (and other points) were considered by the SEHK as shown by the letter dated 24 January 2008 from its solicitors to the Applicants’ solicitors (among other correspondence).

17.  Ultimately, under the head of illegality the question to be addressed is whether the putative respondents in coming to the conclusions which are challenged frustrated such policy of the legislature that is manifested in legislation for the protection of investors and legislation against gambling.  That the decision-makers took into account the public interest seems to me manifestly clear from the correspondence before the court.  Their decisions could only be unlawful if the policy of the legislature can fairly be interpreted as demanding a total prohibition against the listing of bodies engaged abroad in gambling, no matter that gambling abroad is not rendered unlawful by the laws of Hong Kong, no matter that the activities of the issuer are lawful in the foreign jurisdiction, no matter how well regulated the activity is and regardless of the degree to which the issuer is in control of the activity.  Such an interpretation cannot, in my judgment, be reasonably advanced.  That being so, the question of where to draw the line, as a matter of policy or in a particular case, is one of judgment: that is the point to which the judge at first instance was logically driven and he, quite correctly, held that it was not arguable that the line was drawn in this case at a incorrect point.

Misleading Prospectus

18.  A number of points are made by the Applicants to support the submission that the SEHK and the SFC had failed to take any or any sufficient account of the allegedly misleading statements or omissions in the Prospectus of SJM Hong Kong that was provided to the public under the proposed listing.

19.  Chief among the complaints here was a recurring theme : that the SEHK and the SFC simply failed to take sufficient account of the importance of the litigation in Macau in which the Applicants sought to invalidate key resolutions of STDM which, according to them, might reverse the company reorganisation I have referred to earlier.  In other words, the effect of the Macau litigation, if the outcome is in favour of the Applicants, may be to reverse the decision to list SJM Hong Kong.

20.  The Applicants identified in the From 86A those parts of the Prospectus that are said to be misleading.  The learned Judge also set out the offending parts in his judgment.  In their written submissions, the Applicants identify the misleading nature of the Prospectus in the following way : -

“(1)     Misleading statements that ‘no shareholders or directors of STDM were required in connection with the Reorganisation’;

   (2)      Non-disclosure of (a) nature, and (b) potential adverse effect of the legal proceedings in Macau (for example, SJM Hong Kong may end up without any assets at all or the assets in the form of the Casino Business may remain vested in STDM in the Macau SAR; and

   (3)          Misleading statements as to the lack of power of STDM’s General Assembly and/or the Administrative Council before its Shareholders Registration Book is properly reconstituted.

Most importantly, there is nothing in the disclosure section of the Prospectus that remotely warns a would-be subscriber for shares in SJM Hong Kong, that if the courts in Macau were to rule against STDM in one or more of the pending actions in Macau, the successful subscriber for shares may end up owning shares in a company which has no assets at all.”

21.  It is the Applicants’ case that the SEHK and the SFC ought not to have approved the listing or objected to it, on account of the Macau litigation and the possibility that, if the Applicants succeed, SJM Hong Kong could end up with no assets at all.  At the very least, they ought to have considered these points.

22.  In my view, the SEHK and the SFC clearly have considered these points.  For its part, the SEHK (in the said letter dated 24 January 2008 from its solicitors) emphasized the point (rightly) that its role was to ensure that investors (or potential investors) were given sufficient material to make an informed decision.  It was stressed also that the SEHK was not in a position to determine disputes that were the subject matter of court proceedings.  That was the province of the courts.  The letter stated this : “the Exchange is not in a position to determine legal disputes arising under Macau law”.  It was also noted that there was no injunction from any court to stop the listing.  The letter stated : -

“No injunction to stop SJM Holdings proceeding with the proposed listing has been issued, albeit your clients have apparently applied for injunctions in connection with the issues raised in your correspondence in the past without success, and your clients remain at liberty to seek an injunction now.”

23.  The learned Judge found the reasoning in the 24 January 2008 letter “impeccable”; with respect, so do I.

24.  As far as the Prospectus is concerned, given that there is no obligation on the part of either the SEHK or the SFC to arrive at a view of the merits of the issues in the Macau proceedings, but only to ensure that the Prospectus was not misleading, there is nothing in the Applicants’ objections at all.  Rule 3 of the SMLR requires particulars and information to be provided to an investor to enable him to make an informed assessment of the activities, assets, liabilities and financial position of the company to be listed.  Rule 6(2) allows the SFC to object to a listing if any misleading material is provided, or if relevant material is omitted to be provided, to an investor.  However, the Prospectus clearly referred to the existence of the Macau proceedings and their potential damaging effect : -

(1)   At page 9, reference is made to the fact there were lawsuits

“seeking to challenge the validity of certain resolutions connection with the Reorganisation and the Global Offering and passed by STDM.  Plaintiffs in these lawsuits have also filed a number of lawsuits in Macau and Hong Kong (i) relating to alleged unpaid debts and other financial entitlements and the exercise of alleged specific rights as shareholders of STDM and (ii) claiming that STDM and its directors, officers and shareholders and SJM have committee libel in certain statements.  In addition, Ms Winnie Ho and MVI have filed lawsuits in Macau seeking to challenge the identity of shareholders and the composition of the board of directors of STDM.”

This is repeated at page 137 as well.

(2)   As the Applicants has pointed out, at pages 137 and 138 of the Prospectus, it is stated that even if the relevant shareholder resolutions of STDM were successfully invalidated, this would not affect the validity of the reorganisation.  Given the Applicants’ basic position, these statements are said to be misleading.  However, they are put into perspective when at page 139, the following is said : -

“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 the resolution, create uncertainties or have other material adverse effects on the Global Offering, as well as on the trading price of our Shares.

……..

The Directors believe, based on advice received by the Company as set out above, that regardless of how such cases are adjudicated by the courts, none of the proceedings, taken alone or together, will have a material adverse impact on the shares or assets of SJM, the validity or legality of its Reorganisation and/or the listing of the Company or the interests of its Shareholders.  However, the claims referred to in (a) through (c) above, regardless of their merits, could harm SJM’s and our reputation, corporate image and, ultimately, our Share price.”

25.  The gist of the Applicants’ complaints is that the Prospectus did not adequately set out the contrary views of the Applicants.  With respect, all that was required of the SEHK and the SFC was to be satisfied that the Prospectus did not mislead.  It is true that it did not in terms state that if the Applicants were to succeed in the Macau proceedings, the effect may be to reverse the company reorganisation and listing.  However, this omission (if this be the right way of analysing this point) did not render the Prospectus misleading.  Reference was made to the harm that could be caused by the proceedings.  Further, the statement that the directors of SJM Hong Kong believed that the proceedings would not have an effect on the validity or legality of the reorganisation or the listing, must have carried with it an implicit warning that if they were wrong, these could possibly be the effects.

26.  Another aspect of the Prospectus that was alleged to be misleading was the passage at pages 84 and 85 : -

“As at 1 April 2002, SJM 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.”

The Applicants say that this is misleading in that on 6 December 2001, the Administrative Council of STDM (effectively the board of directors) resolved to provide financial support to STDM Investments and SJM Macau, including providing STDM Investments with the sum of MOP 180 million to enable it to make up the equity capital of SJM Macau and that “such grant would not need to be repaid”.  Like the Judge, I see nothing misleading in the statement in the Prospectus.  In any event, it is not material.

Failure to give reasons

27.  I assume but do not decide for present purposes that reasons were required to be given to the Applicants.  However, as Stock JA said in Capital Rich Development Ltd & Anor v Town Planning Board [2007] 2 HKC 542 at 572 : -

“Reasoning must be examined with reality and contextual common sense.”

I would also refer to the decision of the Court of Final Appeal in Oriental Daily Publisher Ltd v Commissioner for Television and Entertainment Licensing Authority [1998] 2 HKLRD 857 where reference was made to the need to provide reasons.  At page 867, it was said by the Chief Justice : -

“Where there is a duty to give reasons, it must be discharged by giving adequate reasons.  What would amount to adequate reasons for a decision would depend on the context in which the decision maker is operating and the circumstances of the case in question.”

The reality and context are that in the present case, the SEHK (and their solicitors) and the SFC have been engaged in a lengthy exchange of correspondence with the Applicants and their solicitors over the very questions raised in this appeal.

28.  The learned Judge focused on the letter dated 24 January 2008 from the SEHK’s solicitors to the Applicants’ solicitors and, as I have observed earlier, found that the reasoning was “impeccable”.  In this letter the SEHK went to some trouble to summarize the grounds upon which the Applicants objected to the proposed listing on the Stock Exchange and explained its response as follows : -

(1) that it was not in a position to determine the strength or otherwise of the legal proceedings in Macau;

(2) that it was for the courts, not the SEHK, to resolve disputes between third parties and proposed issuers;

(3) that it had, nonetheless, put the Applicants’ assertions to those acting for the company and that the explanations provided indicated that the company had strong grounds on which to refute the assertions;

(4) that no injunction had been sought or issued in relation to the proposed listing even though the Applicants had “apparently applied for injunctions in connection with the issues raised in your correspondence in the past without success.”

29.  The SEHK explained further that it was not in a position to disclose confidential information to third parties because “to do so may undermine the confidentiality of the listing process and cause unwarranted delay or prejudice, which may compromise the integrity of the SEHK is process”; a statement which, in my view, is unobjectionable.

30.  The Applicants’ criticism of the SFC falls into two parts : -

(1) First, that the SFC were wrong to insist that its not objecting to the listing, was not a decision.

(2) Secondly, that in any event, no reasons were given by the SFC.

31.  On the first point, I am of the view that the decision not to object was nonetheless a decision, despite what the SFC seemed to intimate in correspondence.  However, this does not conclude the matter because in my view, it is, in the circumstances, not of significance.  If it could be said that the SFC either did not make any decision at all when it should have or if it did, its decision was somehow untenable, then this point may be of some substance but none of these arguments is available in the present case.  It did make a decision (it did not object) and this decision was far from being untenable.

32.  On the second point, on a fair reading of the correspondence, I think that the SFC did provide adequate reasons.  The SFC provided relatively detailed reasons in its letter to those acting for the Applicants in a letter dated 23 June 2008.  These included the fact that there were proceedings ongoing in Macau, which it was not possible for the SFC to determine; that the existence of the Macau proceedings was to be disclosed in the Prospectus; and that the SFC had carefully studied the opinions of the company’s legal advisers and underwriters as well as the Applicants’ legal advice, and that the SFC had sought its own advice.  The clear implication was that in its judgment, the balance was such that disclosure in the Prospectus of the fact of the proceedings sufficed to protect the interests of prospective investors.  As for the allegation of money laundering, the SFC addressed this as well, noting that neither the company nor any of its employees, officers or shareholders were a party to the cases to which attention had been drawn.

33.  On the key issue of public interest, this too was addressed by the SFC in that letter of 23 June 2008.  The SFC referred to the SEHK press release dated 11 March 2003, which had been endorsed by the SFC, as well as a report of the listing committee in 2006 which set out the criteria for considering whether or not the listing of a particular gambling business would be contrary to the public interest.  Extracts of both documents were provided.  Amongst the considerations there evidenced was whether the gambling activity of the proposed issuer violated applicable laws in the jurisdiction; whether that jurisdiction embraced a system of authorization and regulation; and whether the issuer would have control over the relevant gambling activities.

34.  In my view, these reasons were in the circumstances adequate.  By circumstances, I refer to those matters which have already been canvassed.

35.  Finally, under this head, I am of the view that even if the SEHK or the SFC can be said to have failed in some duty to provide adequate reasons, this by itself would not in the circumstances necessarily entitle the Applicants to the relief sought (which are orders to quash the relevant decision).  As the Chief Justice said in the Oriental case at 871 : -

“Whether this is the appropriate relief where there is a failure to discharge the duty to give reasons would depend on the circumstances.”

The failure to take into account relevant reasons and take into account irrelevant ones

36.  The real argument here is that the decisions of the SEHK and the SFC were so bizarre or irrational that either they had failed to take into account relevant reasons or they took into account irrelevant ones.  The absence of reasons, as submitted by the Applicants, exacerbated this.

37.  This point can be dealt with briefly.  In my judgment, the decisions were not bizarre or irrational at all.  In fact, quite the opposite.  As to the adequacy of reasons, I have already dealt with this facet.

Wednesbury unreasonableness

38.  There is nothing in this point at all.  I repeat the observation that the decisions were not bizarre or irrational at all.

Conclusion

39.  For the above reasons, I am satisfied that it is not reasonably arguable that the SEHK and the SFC have acted contrary to law, improperly or in a bizarre or irrational manner.  The courts must be astute not to be drawn into determining the wisdom or propriety of a company listing.  These are matters best left to the SEHK and the SFC, and for good reason.

40.  In my judgment, the appeal should be dismissed.

Hon Tang VP :

41.  I agree.

Hon Stock JA :

42.  I also agree.