RE LIPPO LTD

HCMP 909/2025

[2025] HKCFI 5034

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 909 OF 2025

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REASONS FOR JUDGMENT

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1.  At the hearing of the petition presented by Lippo Limited (力寶有限公司) (“Company”), I sanctioned the scheme of arrangement between the Company and the “Scheme Shareholders” (as defined in §4 below) (“Scheme”) pursuant to ss.673 and 674 of the Companies Ordinance (Cap. 622) (“Ordinance”) and confirmed the reduction of the Company’s share capital in connection with the Scheme pursuant to s.229 of the Ordinance. These are the reasons for my judgment.

A. BACKGROUND

2.  The Company[1] was incorporated on 30 January 1973 as a private company limited by shares under the former Companies Ordinance (Cap. 32) (“Former CO”). On 30 July 1991, the Company changed to its present name. The Company’s shares have since 21 March 1973 been listed on the Main Board of The Stock Exchange of Hong Kong Limited (“HKEx”) (stock code: 226).[2]

3.  The Company is an investment holding company. It holds equity interests in subsidiaries and associates (together “Group”) whose principal businesses include property investment and development, food business, healthcare services, mineral exploration, and securities and treasury investment.[3] A significant part of the Group’s business is carried out by a principal subsidiary, Lippo China Resources Limited (力寶華潤有限公司) (“LCR”), whose shares are also listed on the Main Board of HKEx (stock code: 156).[4] The Company through a wholly owned subsidiary, Skyscraper Realty Limited, holds 74.99% shareholding in LCR.

4.  The Company’s issued shares are 493,154,032 ordinary shares, of which 369,800,219 shares (representing 74.98% of its issued shares) are held by its parent company, Lippo Capital Limited (“Lippo Capital”). The remaining 123,353,813 shares (representing 25.02% of the Company’s issued shares) (“Scheme Shares”) are held by other shareholders (collectively “Scheme Shareholders”) whose shares will be acquired and cancelled upon the Scheme becoming effective.

5.  On 16 May 2025, the Company and LL Capital Holdings Limited (“Offeror”), a wholly owned subsidiary of Lippo Capital,[5] jointly announced that the Offeror had requested the Board of the Company to put forward a proposal which comprises privatisation of the Company by way of the Scheme, withdrawal of listing of the Company’s shares on HKEx and distribution in-specie of the shares in LCR (“Proposal”).

6.  By joint announcement dated 28 May 2025 issued by the Offeror and the Company pursuant to Rule 3.5 of the Code on Takeovers and Mergers (“Takeovers Code”) (“Joint Announcement”), further details of the Proposal were provided.

7.  Lippo Capital and 4 individuals holding 242 Scheme Shares (collectively “Individual Concert Parties”) are parties acting in concert with the Offeror for the purpose of the Takeovers Code.[6]

8.  The details of the Proposal are set out in a composite scheme document dated 23 July 2025 (“Scheme Document”) which contains, inter alia, an explanatory statement (“Explanatory Statement”), a notice of the meeting of the Scheme Shareholders (“Notice”) convened at the direction of the court for the purpose of considering and voting on the Scheme (“Court Meeting”), a letter from the Board, a letter from the Independent Financial Adviser (“IFA”) and the Scheme. The Scheme Document has incorporated and reflected the comments made by this Court at the convening hearing held on 15 July 2025.

9.  The reasons for putting forward the Scheme are as follows:

(1) The very low trading volume of the Company’s shares (less than 0.02% of the shares in issue) has made on-market disposals and raising capital by issuing shares not attractive nor cost effective, when compared to the cost of maintaining the listing status;

(2) The dividends generated from the key subsidiaries have diminished. This led to the Company having to rely on borrowings and resulted in high gearing ratio and difficulty in securing further financing;

(3) The Scheme provides an opportunity for the Scheme Shareholders to realise their shares at a premium over the current trading price; and

(4) Upon completion of the privatisation, the Company will be able to save the costs associated with maintaining its listing and will benefit from enhanced operational and financial flexibility in the management of its business operations and liabilities.

10.  Upon the Scheme becoming effective:

(1) The Offeror shall pay HK$0.14 per share in cash (“Scheme Consideration”) in exchange for each Scheme Share, which will be cancelled.

(2) The Company will make a distribution in-specie of up to 303,289,730 shares in LCR (“Distribution”) to all the shareholders of the Company. In respect of the Distribution:

(a) The Scheme Shareholders may elect to receive 615 shares in LCR for every 1,000 Scheme Shares held (“Scrip Alternative”) or a cash payment of HK$0.564 per share[7] (“Cash Alternative”); and

(b) Lippo Capital confirmed that it will elect to receive the Scrip Alternative.[8]

(3) The Scheme and the Distribution are inter-conditional so that if any of the conditions precedent of the Scheme or the Distribution is not fulfilled, the entire Proposal will lapse.

(4) If one takes into account the Distribution, the Scheme Shareholders who elect the Cash Alternative will receive HK$0.704 which represents a premium of 53.04% over the closing price of the Company’s shares on the Last Trading Date (i.e. 16 May 2025) (“Closing Price”)[9] while the Scheme Shareholders who elect the Scrip Alternative will receive HK$0.6443[10] representing a premium of 40.07% over the Closing Price.

(5) The issued share capital of the Company will be reduced upon cancellation of the Scheme Shares, and the credit arising from the cancellation will become part of the Company’s reserves (“Reduction of Capital”). Forthwith upon the Reduction of Capital taking effect, the share capital will be restored to its former amount by applying the credit arising from the Reduction of Capital to pay the new shares (of the same number as the Scheme Shares cancelled) to be issued to the Offeror.

(6) The shares in the Company will be withdrawn from listing on HKEx.

(7) The Offeror and Lippo Capital together will own all the issued shares in the Company.[11]

B. DISCUSSION

B1. Applicable principles

11.  The Company applies for an order to sanction the Scheme under s.673 of the Ordinance.

12.  The approach of the Court in considering whether to sanction a scheme of arrangement between a company and its shareholders has been summarised in Re Chong Hing Bank [2021] HKCFI 3091, §27 (citing Re China Agri-Industries Holdings Limited [2020] HKCFI 570, §4, per Harris J). In short, the court will consider:

(1) Whether the scheme is for a permissible purpose;

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

(3) Whether the meeting was duly convened in accordance with the Court’s directions;

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

(5) Whether the necessary statutory majority has been obtained; and

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

B2. Permissible purpose

13.  It is well-established that privatisation of a listed company is a permissible and acceptable purpose for a scheme of arrangement (Re Chong Hing Bank Ltd, §28; Re China Agri-Industries Holdings Limited, §5).

B3. Sufficiently similar legal rights

14.  The Scheme Shareholders hold ordinary shares in the Company. They will receive the same Scheme Consideration in exchange for their shares and will have the same right to elect between the Cash Alternative and the Scrip Alternative (except the “Non-Qualifying Shareholders” as defined in §31 above) under the Distribution. They have sufficiently similar legal rights and could consult together with a view on their common interest at a single meeting.

B4. Court Meeting duly convened

15.  The Court Meeting was duly convened in accordance with the order made at the convening hearing on 15 July 2025 (“Order”) in that:

(1) The Scheme Document had been dispatched to the Scheme Shareholders on 23 July 2025 by prepaid surface mail or by courier.[12]

(2) The Scheme Document had been published on the website of the Company and the news websites of HKEx since 22 July 2025.[13]

(3) The Notice had been advertised in English and Chinese and published on the Company and HKEx’s websites on 23 July 2025.[14]

(4) The Scheme Document sent to 5 Scheme Shareholders residing out of the jurisdiction (holding an aggregate of 10,240 shares, or 0.0083% of all Scheme Shares) at their last known address was unsuccessful. This is not a matter which should be held against the Company as it was the responsibility of the relevant shareholders to provide a valid address to the Company. In any event, the number of Scheme Shareholders affected are insignificant and would not have affected the result of the Court Meeting.[15] It is reasonable to assume that the Scheme Shareholders would be alive to the Scheme and would be able to monitor the development through perusing the announcements and updates made by the Company since May 2025.[16]

(5) Arrangements were made to permit eligible overseas shareholders to attend and vote at the Court Meeting electronically via an online voting portal, with the relevant access details set out in the Notice.

B5. Sufficient information about the Scheme

16.  The Scheme Shareholders were provided with sufficient information about the Scheme to make an informed decision whether or not to support it by the following means.

17.  In the Scheme Document, the Company provided:

(1) an explanation on the commercial reasons for the Proposal, including the Company’s recent financial losses, the low trading liquidity of the shares, and the benefits of privatisation;

(2) a distinction between the Scheme Consideration (to be paid by the Offeror) and the Distribution (to be paid from the Company’s distributable reserves), and made clear that the Distribution was separate from the Scheme Consideration payable by the Offeror;

(3) relevant comparators to enable Scheme Shareholders to assess the financial terms of the Proposal, including comparisons between the combined value of the Scheme Consideration and the Cash Alternative as opposed to the Scrip Alternative, against (a) the closing prices of the shares on various trading dates, (b) the adjusted net asset value of the Group and (c) the estimated return to shareholders in a winding-down scenario;[17]

(4) the letter from the IFA, which concluded that the Proposal was fair and reasonable, and recommended the disinterested Scheme Shareholders to vote in favour of the Scheme;[18] and

(5) the reasons why no Distribution will be made if the Scheme does not proceed, viz.:[19]

(a) the Company will need to retain its assets and cash in order to continue its business and operations as a company listed on HKEx and to service its liabilities;

(b) the loan facility to fund the Cash Alternative will be immediately repayable if the Scheme lapses, such that the Company will not be in a position to pay the Cash Alternative or any other cash dividend if the Scheme does not proceed; and

(c) even if the Company is able to implement the Distribution through a loan facility, it will increase in its borrowings and gearing ratio, which the Board considered is not a prudent course to take.

B6. Approval by requisite majority

18.  As submitted by Mr Jose Maurellet SC[20], the Scheme constitutes a takeover offer under s.674(4) of the Ordinance and, therefore, must be approved by Scheme Shareholders representing not less than 75% of the voting rights of the shareholders present and voting at the Court meeting (majority in value test) and the votes cast against the Scheme should not exceed 10% of the voting rights attached to all “disinterested shares” in the company (negative 10% test).[21] The term “disinterested shares” is defined in s.674(3)(a) of the Ordinance.

19.  In the present case, the “disinterested shares” comprise all the Scheme Shares other than the 242 Scheme Shares held by the Individual Concert Parties.

20.  As recorded in the Order:

(1) the Offeror (not being a party to the Scheme) provided an irrevocable undertaking to the Court to be bound by the Scheme and to execute and do and procure to be executed all such documents, acts, and things as may be necessary for the purpose of giving effect to the Scheme[22]; and

(2) each of the Individual Concert Parties provided an irrevocable undertaking to the Court to be bound by the Scheme and not to attend or vote at the Court Meeting.[23]

21.  The Court Meeting was convened and held on 20 August 2025:[24]

(1) Scheme Shareholders holding a total of 30,983,576 (out of 123,353,813) Scheme Shares attended and voted at the Court Meeting, in person or by proxy.

(2) Amongst them, 29,523,590 Scheme Shares (representing 95.29% of the voting rights present and voting) voted in favour of the Scheme, while 1,459,986 Scheme Shares (representing 4.71% of the voting rights attached to the Scheme Shares present and voting and 1.18% of the voting rights attached to all of the disinterested Scheme Shares) voted against the Scheme.

(3) Lippo Capital and the Individual Concert Parties did not attend or cast any vote at the Court Meeting.

22.  In the premises, the Court Meeting was duly constituted for the purpose of compliance with the requirements of the Ordinance, and the Scheme has been approved by the requisite majority of the Scheme Shareholders as required by s.674(2)(a) of the Ordinance.

B7 Discretionary considerations

23.  In considering whether an intelligent and honest man acting in accordance with his interests as a member of a class might reasonably approve the scheme, the Court would be slow to differ from the majority’s view, as normally businessmen are much better judges of what is to their commercial advantage (Re Chong Hing Bank Ltd, §38).

24.  In the present case, there are no factors which warrant the Court exercising its discretion against sanctioning the Scheme.

25.  First, Lippo Capital and the Individual Concert Parties did not attend or vote at the Court Meeting. This meets the requirements under Rule 2.10 of the Takeovers Code (Re Chong Hing Bank Ltd, §§66-67).

26.  Second, the IFA, having considered the terms of the Proposal, recommended the disinterested Scheme Shareholders to vote in favour of the Scheme. There is nothing before the Court to suggest that the Scheme Shareholders who voted in favour of the Scheme did not act in accordance with his interests as a member of the class.

27.  Third, whilst the turnout rate at the Court Meeting was modest – only approximately 25.12% of the Scheme Shares were present and voting[25] – I do not consider the low turnout rate to be a factor against sanctioning of the Scheme. There is nothing to suggest that the vote was unrepresentative of the class or that the low turnout rate was the result of any defect in the notification process or any other factor that might call the vote into question.

28.  To the contrary, the Scheme Document was duly dispatched to the Scheme Shareholders and has been published on the Company’s website since late July 2025. The Scheme Shareholders were afforded ample time and opportunity to consider the Proposal and decide whether or not to attend and vote at the Court Meeting or raise any objection at the sanction hearing.

29.  Fourth, the Offeror has provided an undertaking to be bound by the Scheme and to do all acts and things as may be necessary or desirable to give effect to the Scheme[26] (see §20(1) above).

30.  There are 2 other matters which concern the Distribution to which I now turn.

B8. Arrangement for Non-Qualifying Shareholders

31.  According to the Company, the Scrip Alternative, if made available to those Scheme Shareholders residing in the relevant jurisdictions[27], may trigger applicable legal or regulatory requirements including the requirement to issue a prospectus or to register the Distribution unless the exemptions apply[28] (collectively “Non-Qualifying Shareholders”). The Board, having considered the additional time and resources necessary to comply with such requirements, formed the view that it would be necessary and/or expedient to exclude the Scheme Shareholders in the relevant jurisdictions from electing the Scrip Alternative so that they will only be entitled to receive the Cash Alternative (“Arrangement”).

32.  The proposed exclusion of the Non-Qualifying Shareholders from having the right to elect the Scrip Alternative was an issue raised and addressed by the Company at the convening hearing. This Court expressed a reservation as to whether Rule 13.36(1)(a) of the Listing Rules is engaged.

33.  Mr Maurellet submits that Rule 13.36(1) of the Listing Rules applies to the Scrip Alternative even though it involves distribution of the shares in LCR (as opposed to shares in the Company), for the following reasons:

(1) Rule 13.36(1)(a) of the Listing Rules provides that “Except in the circumstances mentioned in rule 13.36(2), the directors of the issuer shall obtain the consent of shareholders in general meeting prior to allotting, issuing or granting”, inter alia, shares.

(2) Rule 13.36(2)(a) provides that no such consent shall be required “for the allotment, issue or grant of such securities pursuant to an offer made to the shareholders of the issuer which excludes for that purpose… (ii) any shareholder that is resident in a place outside Hong Kong provided the directors of the issuer consider such exclusion to be necessary or expedient on account either of the legal restrictions under the laws of the relevant place or the requirements of the relevant regulatory body or stock exchange in that place…”.

(3) §5.1 of the “Guide on Distribution of Dividends and other Entitlements” issued by The Hong Kong Exchanges and Clearing Limited dated 14 December 2009 (last updated in September 2024) (“Guide”) states that as regards shareholder eligibility to “Securities entitlements (including dividends paid by way of scrips…”:

“An issuer may only exclude overseas shareholders in its distribution plan on the basis that, after its enquiry on the legal restrictions under the law of the relevant place, requirements of the relevant regulatory body or stock exchange, it would be necessary or expedient to do so.

i. In such circumstances, the issuer must include an explanation for the exclusion in the circular or document containing the distribution plan. The issuer must ensure that the circular or offer document is delivered to its overseas shareholders for their information only subject to compliance with the relevant local laws, regulations and requirements.

ii. The issuer should consider distributing cash in lieu of securities entitlements to overseas shareholders excluded from securities entitlements.”

(4) Rule 13.36(2)(a) is intended not only to regulate the distribution of dividends by way of the listed issuer’s own shares, but also the shares in other entities. This can be seen from §§5.6-5.7 of the Guide which set out the guidance on distribution of “unlisted entities” and “securities listed outside Hong Kong” held by the listed issuer, which go beyond the shares in the listed issuer.

(5) For completeness, and by way of illustration, the issue of non-qualifying overseas shareholders was also discussed in Re Cheung Kong:

(a) There, scheme shareholders were to receive shares in the new holding company, CKH Holdings, except for “Non-Qualifying Overseas Shareholders”, who would receive sale proceeds of the shares that would otherwise have been allotted to them, in cash (§§5, 6).

(b) After holding that this did not preclude the offer from being a takeover offer by reason of s.674(9) of the Ordinance, Ng J held that this arrangement was fair and equitable, as “With the cash alternative, any Non-Qualifying Overseas Shareholders can purchase in the market the equivalent number of shares in CKH Holdings, if so advised, and at such time as they see fit. In this day and age when trading of stocks via internet platforms is prevalent and inexpensive, I do not see any real prejudice to these shareholders in receiving cash instead of shares under the Scheme” (§51).

(6) Similarly, here, the shares in LCR which are offered under the Scrip Alternative, are also shares listed on HKEx that can be acquired by Non-Qualifying Overseas Shareholders with the Cash Alternative.

34.  Despite the cogent submissions of Mr Maurellet, I am inclined to the view that Rule 13.36(1)(a) of the Listing Rules does not apply to the Scrip Alternative for the following reasons:

(1) Rule 13.36(1)(a) refers only to “(i) shares; (ii) securities convertible into shares; or (iii) options, warrants or similar rights to subscribe for any shares or such convertible securities”. This shows that Rule 13.36(1)(a) is directed to regulating the listed company’s allotment and issue of new shares and the grant of any new instrument which gives a right to the holder to subscribe for or convert into new shares in the listed company. There is no reference to any distribution of the listed company’s assets in any form.

(2) The above interpretation is reinforced by the sub-title of Rule 13.36 which is headed “pre-emptive rights”.

(3) It is also consistent with the rationale of Rule 13.36(1)(a) as explained in the Note which states as follows:

“Importance is attached to the principle that a shareholder should be able to protect his proportion of the total equity by having the opportunity to subscribe for any new issue of equity securities. Accordingly, unless shareholders otherwise permit, all issues of equity securities by the issuer must be offered to the existing shareholders (and, where appropriate, to holders of other equity securities of the issuer entitled to be offered them) pro rata to their existing holdings, and only to the extent that the securities offered are not taken up by such persons may they be allotted or issued to other persons or otherwise than pro rata to their existing holdings. This principle may be waived by the shareholders themselves on a general basis, but only within the limits of rules 13.36(2) and (3)”. (underlined added)

(4) Although §§5.6-5.7 of the Guide refer to “unlisted securities and “securities listed out of Hong Kong”, the relevant paragraphs appear under §5 “Securities entitlements (including dividends paid by way of scrips, bonus shares, warrants, rights issues and open offers)” which deal with a different and, indeed, wider issue than protection of pre-emptive rights of existing shareholders that is regulated by Rule 13.36(1)(a).

(5) In Re Cheung Kong, the Court was dealing with a scheme designed to change the domicile of the listed issuer from Hong Kong to the Cayman Islands, and the existing shareholders were given a right to exchange their shares in the Hong Kong company (existing listed issuer) to the Cayman company (new listed issuer). In those circumstances, Rule 13.36(1)(a) was engaged and it was incumbent upon the company (the existing listed issuer) to ensure that the pre-emptive rights of the existing shareholders were protected and the exemption under Rule 13.36(2) only applied to the Non-Qualifying Overseas Shareholders for the reasons stated.

35.  If, contrary to my view, Rule 13.36(1)(a) applies to the Arrangement, Mr Maurellet submits that the Company is entitled to rely on the exemption in Rule 13.36(2)(a) given that:

(1) The Board had considered the legal opinions on the applicable legal or regulatory requirements regarding the Scrip Alternative and formed the view that it was necessary and/or expedient to exclude the Non-Qualifying Shareholders from having the right to opt for the Scrip Alternative[29];

(2) The Company included an explanation on the Arrangement for the Non-Qualifying Shareholders in the Scheme Document[30]; and

(3) The Cash Alternative is in any event likely to be more valuable than the Scrip Alternative and thus, the Non-Qualifying Shareholders are not prejudiced from a value perspective under the Arrangement[31].

36.  I agree with Mr Maurellet that if Rule 13.36(1)(a) applies to the Scrip Alternative, the Arrangement comes under the exemption in Rule 13.36(2)(a), which permits the Company to exclude the offer of the Scrip Alternative to “any shareholder that is resident in a place outside Hong Kong provided the directors of the issuer consider such exclusion to be necessary or expedient on account either of the legal restrictions under the laws of the relevant place or the requirements of the relevant regulatory body or stock exchange in that place”.

B9. Prohibition on Financial Assistance

37.  Finally, there remains for consideration a distinctive feature of the Proposal – the Distribution – which is inter-conditional with the Scheme. At the convening hearing, the Company very fairly drew to the Court’s attention that the Distribution may raise a concern as to whether it offends the principle that a company cannot provide financial assistance for acquisition of its own shares.

38.  To address this issue, the Company has placed before the Court a legal opinion from independent counsel, Mr John Scott SC and Mr Han Sheng Lim (“Opinion”). The Opinion analyses whether, in the context of the Proposal, the Distribution constitutes financial assistance by the Company and, if so, whether any statutory exception is engaged.

39.  Mr Maurellet adopts the analysis in the Opinion and submits that:[32]

(1) The Distribution prima facie constitutes financial assistance primarily because (a) the commercial reality is that it forms part of the overall returns received by the Scheme Shareholders under the Proposal, and (b) it very likely reduces the price that the Offeror would otherwise have had to pay for the Scheme Shares, since the Scheme Shareholders will take both the Distribution and Scheme Consideration into account when deciding whether to vote in favour of the Scheme.

(2) However, on the basis that the Distribution is declared out of the distributable reserves of the Company in accordance with the Ordinance and the Articles, it falls within the exception in s.277(a)(i) of the Ordinance (“Dividend Exception”) and should be excepted from the prohibition on financial assistance under the Ordinance.

40.  As I explain below, I accept the analysis set out in the Opinion insofar as it concludes that the Distribution prima facie constitutes financial assistance for the reasons there articulated.

41.  However, I am unable to accept the contention that the Board’s declaration of a special distribution out of distributable reserves, without more, suffices to bring the Distribution within the Dividend Exception. In my view, the phrase “dividend lawfully made” in s.277(a)(i) of the Ordinance, as a matter of both ordinary company law principles and the legislative intent underpinning the Dividend Exception, requires the relevant organs vested with the power to declare a dividend to pass the requisite resolutions in accordance with the requirements of the Ordinance and the articles of association before the company can rely on the Dividend Exception.

B9.1 Statutory Framework

42.  The statutory prohibition against a company providing financial assistance for acquisition of its own shares is contained in ss.274 to 289 of the Ordinance.

43.  S.275(1) of the Ordinance provides that:

“If a person is acquiring or proposing to acquire shares in a company, the company or any of its subsidiaries must not give financial assistance directly or indirectly for the purpose of the acquisition before or at the same time as the acquisition takes place, except as provided by this Division.”

44.  S.274(1) sets out non-exhaustive forms of “financial assistance”, including financial assistance given by way of gift, guarantee, security, indemnity, release or waiver, and relevantly, “any other financial assistance given by a company if the net assets of the company are reduced to a material extent by the giving of the assistance”.

45.  The term “financial assistance” is not defined in the Ordinance. As the Opinion correctly observes, it is necessary to have regard to English authorities, given the common legislative lineage and close textual similarity between s.275(1) of the Ordinance and the equivalent provisions found in s.151(1) of the Companies Act 1985 (“CA 1985”) which has since been replaced by s.678(1) of the Companies Act 2006 (“CA 2006”). Where local and foreign legislation are in pari materia, case law on the foreign legislation is material (Mansion House Securities Ltd v Chong Chi-Yan [1987] HKLR 60, at 63H, per Clough JA).

46.  S.275(1) of the Ordinance is derived from s.47A(1) of the Former CO, which in turn was modelled upon the now-repealed s.151(1) of CA 1985. S.151(1) provided in materially identical terms that:

“Subject to the following provisions of this Chapter, where a person is acquiring or is proposing to acquire shares in a company, it is not lawful for the company or any of its subsidiaries to give financial assistance directly or indirectly for the purpose of that acquisition before or at the same time as the acquisition takes place.”

47.  S.151(1) CA 1985 (insofar as it applied to private companies) was repealed with effect from 1 October 2009,[33] inter alia, on the basis that shareholders and creditors were adequately protected by other aspects of company law and that the prohibition produced arbitrary outcomes.[34] The prohibition was retained for public companies in s.678(1) CA 2006 in terms materially similar to s.151(1) CA 1985. In these circumstances, s.275(1) of the Ordinance, s.151(1) of CA 1985 and s.678(1) of CA 2006 are properly to be regarded as in pari materia for the purposes of construction.[35]

B9.2 Distribution prima facie constitutes financial assistance

48.  The modern approach to identifying financial assistance was considered in Chaston v SWP Group plc [2003] BCC 140, where Arden LJ (as she then was) explained that the words “financial assistance” have no technical meaning and that the Court must look to the commercial realities of the transaction as a whole. The ultimate question is whether, as a matter of commercial reality, the transaction in question “smoothed the path to the acquisition of shares” (§§32, 38, 39).

49.  This fact-sensitive and commercial approach builds upon the earlier decision of Charterhouse Investment Trust v Tempest Diesels Ltd [1986] BCLC 1, in which Hoffman J (as he then was) held that financial assistance can be constituted by “a net transfer of value” which reduces the price a purchaser would have to pay for the shares “if the transaction as a whole had not taken place”.

50.  Applying these principles to the present case, the Court must look beyond the separate provision of the Scheme Consideration (to paid by the Offeror) and the Distribution (to paid by the Company) under the Proposal and consider whether, as a matter of commercial reality, the Distribution operates to assist the Offeror’s acquisition of the Scheme Shares. I agree with the Opinion that it does.

51.  Although the Distribution is structurally distinct from the Scheme Consideration, the commercial reality is that the Distribution forms an integral and inseparable part of the overall return the Scheme Shareholders will receive under the Proposal. The Scheme Document makes it clear that “there will not be a situation where the Scheme Shareholders will only receive one but not the other”, and invites Scheme Shareholders to assess the premiums by reference to the combined value of the Scheme Consideration and the Distribution. That being the position, the Scheme and the Distribution should be regarded as a composite offer when assessing the commercial substance of the transaction.

52.  I agree with the Opinion[36] that the following factors, taken together, lead to the conclusion that the Distribution prima facie constitutes financial assistance.

53.  First, the Distribution will reduce the net assets of the Company. As the Scheme Document provides, the Distribution will be funded out of the Company’s distributable reserves,[37] which will be available for distribution to the shareholders by way of dividend if they remain as shareholders of the Company. The payment of the Distribution thus falls within the category of “any other financial assistance given by a company if the net assets of the company are reduced to a material extent by the giving of the assistance” under s.274(1)(d)(i) of the Ordinance.

54.  Second, the Distribution constitutes “a net transfer of value” of the type envisaged by Hoffman J in Charterhouse, in that it reduced the price the Offeror would otherwise have to offer to acquire the Scheme Shares. Both the Joint Announcement and the Scheme Document (rightly) presented the Distribution as part of the overall consideration, and shareholders were invited to vote by reference to premiums calculated on the combined entitlement. Viewed in that way, the Company’s Distribution enabled the Offeror to acquire the Scheme Shares at a price materially lower than what the Offeror would have to pay if the Proposal had not been structured to include the Distribution. Putting it in another way, the Distribution “smoothed the path” to the Offeror’s acquisition of the Scheme Shares in the sense articulated in Chaston. By substantially enhancing the total value receivable by Scheme Shareholders, the Distribution made the Proposal commercially attractive and facilitated its approval by the requisite statutory majorities.

55.  Finally, the Distribution is assistance given “before or at the same time as the acquisition takes place” within s.275(1). As stated in the Scheme Document:

(1) The Board had approved the conditional distribution under the Distribution, subject to its conditions precedent being satisfied;[38] and

(2) The Company “will be legally bound to and will pay the Scrip Alternative and Cash Alternative at or around the date that the Scheme Consideration is paid to the Scheme Shareholders and in any event within seven (7) business days” following the date the Scheme becomes effective.[39]

56.  Accordingly, at the time the Scheme becomes binding and effective, the Company comes under an obligation to make the Distribution.

57.  For the reasons set out above, I hold that the Distribution prima facie constitutes financial assistance within the meaning of ss.274 and 275 of the Ordinance.

B9.2 Dividend Exception

58.  Notwithstanding a transaction constitutes financial assistance, it may fall outside the statutory prohibition if it comes within any of the exceptions contained in ss.277 to 282 of the Ordinance.

59.  For present purpose, the relevant provision is s.277(a)(i) of the Ordinance, which provides that:

“This Division does not prohibit any of the following transactions—

(a) the distribution of a company’s assets—

(i) by way of dividend lawfully made”

60.  Mr Maurellet, adopting the Opinion, argues that the Distribution falls within the Dividend Exception on the following basis:[40]

(1) The legislative materials underlying the Dividend Exception, in particular the Report of the Company Law Committee dated June 1962 (“Jenkins Report”), reveal that (a) the financial assistance prohibition was intended to address the mischief of speculative acquisitions made at the expense of the company’s creditors and minority shareholders;[41] and (b) a properly declared dividend does not engage that mischief because it discharges a lawful liability and, if lawfully made, does not prejudice creditors while conferring a benefit on all shareholders.[42]

(2) “On the basis that the Distribution will be made in accordance with the Ordinance and the Company’s articles”, the Distribution would fall within the intended purpose of the Dividend Exception, as the Company’s creditors and minority shareholders would be sufficiently protected under existing law and the Company’s Articles.

(3) “The Distribution is declared out of the distributable reserves of the Company, following a capital reduction passed by way of a special resolution of the Company on 23 June 2025. The capital reduction is supported by the solvency statement by the directors and effected out of Court in accordance with ss.215-216 of the [Ordinance]”.

(4) The Distribution out of the distributable reserves should qualify within the Dividend Exception even without a formal declaration of a dividend given that:

(a) The Distribution should constitute a “dividend” because it is paid out of the distributable profits of the Company and, therefore, is akin to a dividend declared out of accumulated profits and losses of the Company; and

(b) In line with the spirit of the Dividend Exception, which is to ensure equality of treatment among shareholders, there is sufficient safeguard in the present case given that the Scheme would only proceed upon sanction by the Court.

61.  I agree that “dividend lawfully made” comes within the legislative intent underpinning the Dividend Exception and, therefore, should not fall foul of the prohibition against financial assistance. The rationale was explained in the Jenkins Report in this way:

“The payment of a dividend properly declared is no more than the discharge of liability of the company and we cannot see why the discharge by a company of a lawful liability should be regarded as giving financial assistance to the creditor. Such a payment cannot prejudice the rights of the creditors, while minority shareholders will directly benefit from it”.

62.  However, I am unable to agree that the Distribution, without more, can be regarded as “dividend lawfully made” within the meaning of s.277(a)(i) of the Ordinance. While a distribution from distributable reserves may take the form of a declaration of dividend, it cannot without more be treated as a “dividend lawfully made” unless and until the organs having the power to declare a dividend (in this case, the Board and the general meeting) have in fact passed the resolutions to that effect. There are 2 main reasons for this.

63.  First, s.277(a)(i) itself mandates that the Dividend Exception only applies to “dividend lawfully made”. This must be a reference to a declaration of dividend made in accordance with the requirements of the Ordinance and the articles of association of the company concerned:

(1) The lawfulness of the dividend declared depends on its compliance with the Ordinance, including whether the dividend was declared out of distributable profits and by reference to the appropriate statutory accounts (see, for eg., Toone v Robbins [2018] EWHC 569 (Ch), §49).

(2) As Lord Mackay of Clashfern observed in his speech in the House of Lords on 27 October 1981, the reference to “dividend lawfully paid” ensures not only the protection of creditors, “but also ensures that any funds distributed are paid as a dividend in compliance with the provisions of a company’s articles, which will normally safeguard the interests of any minority shareholders by ensuring equality of treatment between holders of the same class of shares”.[43]

64.  Second, it is well established that without a declaration of dividend by the organs having the power to do so, a dividend cannot be said to have been made to the shareholders, and the shareholders acquire no enforceable right to claim it. A dividend is only made when it has been declared in accordance with the company’s articles, and confirmed or approved by the shareholders in general meeting:

(1) As Lord Millett observed in Inland Revenue Comrs v Laird Group plc [2003] 1 WLR 2476, §40, “[t]he right to receive a dividend does not arise until the conditions laid down in the company’s articles of association are satisfied.”

(2) No action can be brought for recovery of dividends until they have been declared. This principle was established in Bond v Barrow Hermatite Steel Co [1902] 1 Ch 353, where Farwell J held at 362 that[44]:

“The necessity for the declaration of a dividend as a condition precedent to an action to recover is stated in general terms in Lindley on Companies, 5th Ed p. 437, and, where the reserve fund article applies, it is obvious that such a declaration is essential, for the shareholder has no right to any payment until the corporate body has determined that the money can properly be paid away”.

(3) Similarly, Kitto J of High Court of Australia observed in Federal Commissioner of Taxation v Newton (1957) 96 CLR 577 at 581 that distributions from the company in question were made as dividends at the respective dates on which dividends were declared.

(4) In BM Electrical Solutions Ltd, DHCJ Lance Ashworth QC rejected a director’s attempt to justify certain payments made to himself as dividends even though they had been recorded as such in the company’s books, holding that:

“45. For a dividend to become payable it must be declared. Once it is declared it becomes a debt due by the company to the member. However, unless formally declared there is no liability on the company to pay it (Bond v. Barrow Hermatite Steel Co. [1902] 1 Ch 353 at 362).”

46. Accordingly, if [the director] cannot point to a dividend having actually been declared, it is not open to him to say now that payments he has received should be treated as having been declared as dividends. However, even if he could do so, he would have to go on to show that any such dividend was lawfully declared in accordance with Part 23 of the Companies Act 2006 by reference to the last relevant accounts or some interim accounts. If he cannot do that, any distribution to him would be unlawful and he would be liable to pay it back to the Company”. (emphasis added)

65.  In my view, the safeguard contemplated by the legislature in enacting the Dividend Exception is that the dividend must be properly declared in compliance with the provisions of the Ordinance and the company’s articles. It is only upon such declaration that the company’s liability to pay the dividend arises, and the payment of the dividend becomes the discharge of a lawful liability; and it is only upon the declaration of a dividend in accordance with the provisions of the company’s articles that equality of treatment between holders of the same class of shares is ensured.

66.  In light of the foregoing, while I accept that the nature and economic substance of the Distribution is akin to a distribution of a dividend (as Mr Maurellet puts it), I am unable to accept that it qualifies as a “dividend lawfully made” for the purposes of s.277(a)(i) in the absence of the requisite resolutions passed by the Board and the general meeting approving the Distribution as a declaration of dividend. To treat the Distribution as “dividend lawfully made” in the absence of the requisite resolution would, in my view, be inconsistent with the wordings of s.277(a)(i) of the Ordinance and would undermine the legislative safeguards that the Dividend Exception was designed to preserve.

67.  For the same reason, while I agree that the Court’s scrutiny of the Scheme provides a significant safeguard to the Scheme Shareholders, that is not the safeguard contemplated by the Dividend Exception, which was crafted on the basis that the statutory requirements for declaring a dividend provides the necessary protection.

68.  In the present case, the power to declare dividends are conferred on the Board and the general meeting in that (1) article 154 provides that “the Company in general meeting may declare dividends in any currency, but no such dividends or distributions shall exceed the amount recommended by the Board”;[45] (2) article 155(A) provides that “the Board may from time to time pay to Members such interim dividend as appear to the Board to be justified by the profits of the Company”; and (3) article 156 provides that “No dividend, distribution or other moneys payable by the Company on or in respect of any share shall bear interest against the Company nor be payable except out of the profits of the Company lawfully available for distribution of the Company in accordance with the Companies Ordinance”.

69.  To address the issue, Mr Maurellet upon taking instructions from the Board, provides an undertaking to the Court that the Board would pass the requisite resolutions so as to bring the Distribution within the Dividend Exception, and to submit the minutes recording resolutions to be passed by the Board within the same day of the sanction hearing. I am satisfied that, upon such undertaking, the Distribution will fall within the Dividend Exception.

B10. Confirmation of Reduction of Capital

70.  As regards the Reduction of Capital, under s.229 of the Ordinance, the Court will confirm a reduction which has been approved by a special resolution of members if the following requirements are satisfied:

(1) The shareholders are treated equitably;

(2) The reasons for the reduction are properly explained;

(3) The interests of creditors are safeguarded; and

(4) The reduction is for a discernible purpose.

71.  A technical reduction which is integral to a scheme satisfies the above criteria (Re Chong Hing Bank Ltd, §69; Re China Power Clean Energy Development Company Limited [2019] HKCFI 2098, §10).

72.  This is a case where the Reduction of Capital should be confirmed for the following reasons:

(1) At the EGM held immediately after the Court Meeting,[46] 99.64% of the shareholders present voted in favour of the Reduction of Capital.[47]

(2) The shareholders were treated equitably; they had been provided with detailed explanation about the Reduction of Capital through the Scheme Document. All the Scheme Shareholders will receive the Scheme Consideration for each of their share being cancelled.

(3) The creditors’ interests will not be prejudiced as the Reduction of Capital only exists for a brief moment and will be restored to the same level upon the Company issuing the same number of new shares as the Scheme Shares to the Offeror.

(4) There is a discernible purpose for the reduction of capital since it is an integral part of the Scheme.