WISDOM WEALTH RESOURCES INVESTMENT HOLDING GROUP LTD AND OTHERS v. THE STOCK EXCHANGE OF HONG KONG LTD

HCAL 412/2024

[2024] HKCFI 1570

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTITUTIONAL AND ADMINISTRATIVE LAW LIST NO 412 OF 2024

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D E C I S I O N

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A.  Introduction

1.  In these proceedings, the Applicants seek leave to apply for judicial review to challenge the 2 February 2024 decision (“LRC Decision”) made by the Listing Review Committee (“LRC”) of the Putative Respondent (“Exchange”) in disciplinary proceedings.

2.  The Applicants are the listed company Wisdom Wealth Resources Investment Holding Group Ltd (“Company”) and 10 of its directors (“Relevant Directors”).  The disciplinary proceedings related to the Company’s reliance on and public disclosure in relation to valuations of certain land parcels (“Land”) owned by it on Donghai Island, Zhanjiang City, Guangdong Province, PRC.  The relevant events took place in 2018 and 2019.

3.  The LRC Decision partly upheld the earlier decision (“LC decision”) of the Listing Committee (“LC”), and held that the Applicants had breached Rule 2.13(2) and Rule 3.08 of the Listing Rules, and that the Relevant Directors had breached their Directors’ undertakings.  The LRC Decision decided that the Applicants should be sanctioned by a public statement involving criticism, and the Relevant Directors were required to undergo training.

4.  I gave directions for the matter to come to a rolled-up hearing on 14 June 2024.  At that hearing, the Applicants were represented by Mr Jeffrey Tam and Ms Yvonne Leung of Counsel, and the Exchange was represented by Mr Victor Dawes SC leading Mr Joshua Chan of Counsel.

5.  At the end of the hearing, I reserved my decision to be handed down.  This is my Decision.

B.  Factual Background

6.  The Company is a company incorporated in Bermuda, and listed on the Main Board of the Exchange.  Amongst its principal areas of business was property investment.

7.  On 28 February 2018, the Company completed the acquisition of the company holding the Land, from Dr Hui Chi Ming, the controlling shareholder and an executive director of the Company. The acquisition price was RMB 1.1 billion.

8.  On 26 January 2018, the Company published a Circular for the purposes of satisfying the disclosure requirements in respect of that acquisition.  The Circular included the valuation of the Land obtained from Malcolm & Associates Appraisal Ltd (“Malcolm”).  Malcolm stated that it had valued the Land using the direct comparison method and set out seven comparables it had used for the purpose of the valuation.

9.  The valuation of the Land given was RMB 1.15 billion, with a valuation date of 15 December 2017 (“1^st Valuation”).

10.  On or around 18 June 2018, the Company engaged Malcolm to provide a valuation in respect of the Land in preparation for its 2018 Interim Results.  Malcolm stated the valuation method was the market comparison approach and the income approach, with reliance placed upon the same seven comparables referred to in the 1^st Valuation.

11.  The valuation of the Land given was RMB 8 billion, with a valuation date of 30 June 2018 (“2^nd Valuation”).

12.  On 20 July 2018, the Company issued a positive profit alert.  It stated that the anticipated increase in net profits was mainly due to appreciation on the Group’s investment properties in the PRC.

13.  The 2018 Interim Results were published on 31 July 2018, following an audit committee meeting and board meeting (“July 2018 Meetings”) held on the same date.  Both the 2018 Interim Results and the 2018 Interim Report (issued on 31 August 2018) incorporated the 2^nd Valuation and stated the Land was valued at RMB 8 billion.  The “Notes to the Condensed Consolidated Financial Statements” provided that:

The fair value was determined based on the “Comparison Method” and “Investment Method”, where the value was assessed by reference to the comparable properties of sale evidence as available in the relevant market, factoring in all the respective advantages and disadvantages of each property in order to arrive at the comparison of capital value”.

14.  However, no explanation was given as to why the valuation of the Land had apparently increased by more than 7 times in the roughly 6-month period since 15 December 2017, the valuation date of the 1^st Valuation.

15.  On or around 4 March 2019, the Company engaged Malcolm to provide a valuation of the Land for the purpose of its 2018 Annual Results.  The valuation involved the same parameters and methodology, namely the market comparison and income methods.

16.  The valuation of the Land given was RMB 7 billion, with a valuation date of 31 December 2018 (“3^rd Valuation”).

17.  When preparing the 2018 Annual Results, the Company’s auditor (“Auditor”) raised concerns about the 3^rd Valuation, including the reason for the significant increase in value of the Land from the valuation of RMB 1.15 billion given in the Circular, when there were no dramatic changes in market conditions since the previous year.  There was resultant delay in publication of the 2018 Annual Results.  In response to the Auditor’s concerns, Malcolm prepared another valuation dated 7 April 2019. The valuation methodology was stated again to be the direct comparison method, but the seven comparables relied upon were different.

18.  The valuation of the Land given was RMB 3.147 billion, with the same valuation date of 31 December 2018 (“4^th Valuation”).

19.  The Auditor accepted the 4^th Valuation, which the Company adopted in its 2018 Annual Results and the 2018 Annual Report published on 8 and 29 April 2019 respectively.

20.  The Company subsequently obtained valuations from other valuers in 2019 and 2020, where the valuations offered ranged from RMB 4 billion to RMB 5.23 billion.

C.  Investigation and Disciplinary Proceedings

21.  In around April 2020, the Listing Division (“LD”) of the Exchange commenced an investigation into the events described above.  Enquiries were made by the LD of Malcolm and the Company’s Board of Directors (“Board”).

22.  Malcolm sought to explain the fluctuations in value on the basis that the 1^st Valuation was a “valuation report” while the 2^nd to 4^th Valuations involved “calculations of value” based on the parameters and assumptions given by the client – and there were different valuation was adopted.

23.  The Board stated it disagreed with Malcolm’s submission that the 2^nd to 4^th Valuations were not valuations, and stated that it had treated all four valuations as valuations by Malcolm.  The Company’s Directors also identified what occurred during the review of the 2^nd Valuation at the July 2018 Meetings. Some Directors also gave independent, individual responses.

24.  On 5 January 2022, the LD commenced disciplinary proceedings against the Company and each of the Directors.  In response, the Company and Directors filed a joint submission on 10 May 2022, raising a number of new points not previously raised during the investigation. Therefore, on 16 June 2022, the Chairman of the LC directed a stay of the disciplinary proceedings at the request of the LD, to permit the LD to conduct further investigations.

25.  Those investigations included contacting the Auditor to enquire as to the extent of their involvement in the 2^nd Valuation. The Auditor’s solicitors responded stating unequivocally that the Auditor was not intimately involved in the 2^nd Valuation and had not given any seal of approval to it.

26.  The LC restored the disciplinary proceedings in April 2023.  Further submissions and correspondence between the parties ensued.  The LD raised a new allegation, namely that the Company and the Board had breached their obligations under, amongst other things, Rule 2.12A by failing to provide accurate and complete information during the investigation.

27.  The disciplinary proceedings were held by the LC on 5 September 2023.  By the LC Decision given on 11 October 2023, the LC found that: (1) the Company had breached Rule 2.13(2); (2) the Directors had breached Rule 3.08 and their Compliance Undertakings; and (3) the Company and the Directors had also breached Rule 2.12A and their Investigation Undertakings.  The LC imposed a public censure on the Company and the Directors, and required the Directors to undergo 17 hours of training.

D.  The LRC Decision

28.  The Company and the Relevant Directors applied to the LRC for review of the LC Decision.  Two of the Company’s directors at the time, who had also been subject to the disciplinary action, did not apply to review the LC Decision (and are not parties to these proceedings).

29.  The parties filed three rounds of submissions. The review hearing was heard by the LRC on 10 January 2024.  The LRC Decision was given on 2 February 2024.

30.  In summary, the LRC upheld those parts of the LC Decision relating to the Company’s breach of Rule 2.13(2) and the Directors breach of Rule 3.08 and their Compliance Undertakings.  But the LRC was not satisfied that the Company or the Directors had breached Rule 2.12A or their Investigation Undertakings.  The LRC also imposed a less severe sanction, namely a public statement involving criticism, instead of a public censure.  The LRC maintained the same requirement in respect of directors’ training.

31.  The detail of the LRC’s consideration is to be found in the LRC Decision.  It is helpful to set out those parts relating to the analysis and conclusions:

Discussion and Listing Review Committee’s views

43.  The Listing Review Committee noted that it had to consider two separate issues, namely whether i) the Company’s disclosures in relation to the Land’s value in the 2018 Interim Results breached Rule 2.13(2) and the Directors had breached their duties and their Undertakings to procure the Company’s Rule compliance regarding the disclosure; and ii) the Company breached Rule 2.12A and the Directors breached their Undertakings by failing to provide information in response to the Listing Division’s investigations in a timely and complete manner.

44.  For the first issue, the Listing Review Committee found that the Company’s disclosure in the 2018 Interim Results was not sufficiently complete, and the Directors had failed to discharge their duties and Undertaking accordingly. For the second issue, the Listing Review Committee was not convinced that the Company and the Directors had failed to provide information to the Listing Division in a complete and timely manner and did not find a breach of Rule 2.12A and the Directors’ duties and Undertakings.

45.  The Listing Review Committee’s views are set out in more detail as follows.

Breach relating to the disclosures of the Land’s value

46.  The Listing Review Committee took the view that in breach of the requirements in Rule 2.13(2) the Company had failed to provide complete information on the sudden and significant increase in the Land’s value as set out in the 2018 Interim Results and the 2018 Interim Report.  Despite recording a significantly increased value for the Land (sevenfold) in the 2018 Interim Results and the 2018 Interim Report in a period of only six months and recording a significant fair value gain, the Company did not explain in sufficient detail how this very significant increase in value came about.

47.  The Listing Review Committee noted that the information provided in the 2018 Interim Report included the following:

(a)  The fair value of the investment properties was determined based on the “Comparison Method” and the “Investment Method” without further elaboration whether this methodology had been used for the determination of the Land’s value and if so, how applying such methodology led to the significant increase compared to the valuation which provided the basis for the acquisition of the Land.  This is particularly relevant as comparing the 1^st and 2^nd Valuation, it appears that valuation methodology used was the same and the comparable included in both valuation were identical (i.e. references to the same parcels of land / properties with the same per sqm values).

(b)  A reference to the BASF News which, however, postdated the relevant cut-off date for the 2018 Interim Results and the date of the 2^nd Valuation.

(c)  A reference to the development plan for Zhanjiang as provided by the State Council in June 2017.  While this plan may generally demonstrate a favorable development for Zhanjiang and Donghai island, the plan had already been approved at the time the 1^st Valuation was made.

48.  The Listing Review Committee found that the information provided in the 2018 Interim Results and 2018 Interim Report was insufficient and incomplete to explain the very significant increase of the Land’s value.  The valuation method used was not explained in detail and it was also not explained how the value could increase so significantly in a span of only six months if the same methodology was used for the 1^st and 2^nd Valuation. The general reference to a development plan (which already existed at the time of the 1^st Valuation) did not sufficiently explain the sudden and very significant increase either.  While the BASF News suggested future development in Donghai Island, the BASF News postdated the 2^nd Valuation and could therefore not have affected the Land’s value at the time of the 2^nd Valuation. Insofar as it was considered at the time the 2^nd Valuation was prepared as an indication of future development, it was not explained how and to what extent it would have affected the Land’s value so significantly at the time of the 2^nd Valuation.  Further, insofar reliance was placed on the Agile News which had been discussed at the July 2018 Meetings, the Listing Review Committee noted that such news was not referred to in the 2018 Interim Results and 2018 Interim Report and the relevant transaction took place before the 1^st Valuation which meant it would not explain why the Land’s value increased so significantly between the time of the 1^st and the 2^nd Valuation.  Finally, as far as the Applicants at the Hearing referred to certain development permits having been granted during the six-month period between the 1^st and 2^nd Valuation which they asserted would have led to a significantly increase in the Land’s value, this information was also disclosed in the 2018 Interim Results and 2018 Interim Report.

49.  The Listing Review Committee concluded that the Company had breached Rule 2.13(2) for failing to disclose complete information on the sudden and significant increase in the Land’s value as set out in the 2018 Interim Results and the 2018 Interim Report.

50.  As for the Directors, the Listing Review Committee noted the Applicants had explained that the Directors had taken the following steps to ensure the information provided in the 2018 Interim Results and the 2018 Interim Report as to the Land’s value was complete:

(a)  The work for preparing the 2018 Interim Results, including the valuation of the Land, had been delegated to Mr Fu, who had worked with Malcolm directly without involvement of the Directors.

(b)  The Directors had placed reliance on Malcolm as a professional adviser for the valuation of the Land.

(c)  The Directors had placed reliance on the auditors who had reviewed the 2018 Interim Results.

(d)  The Directors had been provided with several news articles and information, including the Agile News and the BASF News, which had suggested to them that there was an increase in the property value in the Zhanjiang region.

(e)  The Directors relied on their personal knowledge and experience in relation to the property market in the PRC.

51.  The Listing Review Committee noted that on the basis of these steps and information, the Directors argued they had a reasonable basis to believe at the relevant time that the Land had appreciated significantly in value following the 1^st Valuation and that they therefore had not breached their duties in terms of the Company’s disclosure of the sudden and significant increase in the Land’s value to RMB8 billion as set out in the 2018 Interim Results and the 2018 Interim Report.

52.  The Listing Review Committee took the view that, given only six months had passed since the 1^st Valuation, it was not reasonable for the Directors to expect that the value of the Land had increased sevenfold and to procure the Company’s disclosure of such value in the 2018 Interim Results without further inquiries as to how such very significant increase was derived at and to ensure that a proper explanation for such increase was provided in the disclosure.

53.  In terms of the news and information that the Directors had received and on the basis of which they argued they had not been surprised by the sudden increase in the Land’s value, the Listing Review Committee noted the following:

(a)  The Agile News which had been referred to in the 2018 July Meetings consisted of only one paragraph describing a transaction giving only minimal details. The details that were given suggested that the Agile project involved residential land only and was located in the city centre of Zhanjiang, whereas the Company’s project was a mix of residential and commercial use located on Donghai Island.  The Agile News dated back to December 2017 and it was unclear why it was not considered for the 1^st Valuation or how it would then support the sudden increase in the Land’s value as of 30 June 2018, i.e. the time of the 2^nd Valuation. Finally ignoring the obvious differences in location and usage mix, if the average land cost of RMB7,296 per sqm from the Agile News was applied to the size of the Land, the potential value would have been RMB9.7 billion and not RMB8 billion as set out in the 2^nd Valuation, a discrepancy which was not explained in the detail but for a reference that a conservative estimate was applied by the Company.

(b)  The BASF News postdated the 2^nd Valuation and it was therefore unclear how it could have supported a significant increase in the Land’s value at the time of the 2^nd Valuation.

(c)  The general news of the development on Donghai island were known at the time of the 1^st Valuation and it was therefore unclear how they supported a sudden and very significant increase in the Land’s value only six months later at the time of the 2^nd Valuation.

(d)  The Xinmingzhu News referred to by the Directors while published in April 2018 also referred to a transaction which had already occurred in the month of December (2017) and involved an acquisition of a parcel of land for residential development in the Chikan region of Zhanjiang at an average price of RMB8,458 per sqm.  The Listing Review Committee noted that apart from the differences in usage and location of the land in the Xinmingzhu News when compared to the Land, the relevant article indicated that residential property prices in the Zhanjiang region had increased from average prices of RMB7,000 per sqm to the quoted RMB8,458 per sqm for the transaction set out in the Xinmingzhu News. Such increase, while not insignificant, did not support a sevenfold increase in property prices as the Applicants appear to have accepted when they relied upon the 2^nd Valuation produced by Malcolm.

(e)  Finally, while the Applicants had referred to the Agile News and the Xinmingzhu News and the per sqm values in these news articles in support of their submission that they were not surprised by the Land’s value as assessed in the 2^nd Valuation, the Listing Review Committee noted that neither the Agile News nor the Xinmingzhu News and the relevant properties and per sqm values were used as comparable in the 2^nd Valuation.

54.  The Listing Review Committee noted that according to the Applicants’ submission enquiries were raised with Mr Fu at the 2018 July Meetings.  These were, however, limited to the methodology used for the 2^nd Valuation and why there was a cross-check with the Residual Method.  The Applicants acknowledged that these questions were dealt with only briefly at the 2018 July Meetings.  The Applicants also submitted that Mr Fu referred to the Agile News and the BASF News at the 2018 July Meeting, but it remained unclear how based on the reference to the Agile News and BASF News and the brief inquiries with Mr Fu, the Directors concluded that the very significant increase in the Land’s value from RMB1.15 billion to RMB8 billion in only six months had been reasonably explained and the 2018 Interim Results could be approved without further clarification from Malcom on the market comparable used and how the conservative estimate was determined, and the provision of further explanations in the relevant disclosures.

55.  Finally, insofar as the Directors asserted they relied on the Company’s auditors to bring any issue to their attention, the Listing Review Committee noted that the auditors’ scope of work for the review of the 2018 Interim Results was limited and did not involve any assurances as would normally be given by auditors involved in the preparation of the annual audit as the Applicants also acknowledged.  The Listing Review Committee noted that the Applicants in their submissions had referred to queries raised by the auditors when Malcolm (through Mr Fu) about the comparables used in the 2^nd Valuation and the allocation of the commercial and non-commercial portion of the value of the Land during the auditors’ review of the 2018 Interim Results.  In relation to those queries, the Listing Review Committee considered that at the Hearing, the Applicants were not able to provide satisfactory answers that indicated that the Directors had been aware of such queries and the responses given by Malcolm (if any).  The Listing Review Committee found that the Directors could not have taken the absence of objections to the release of the 2018 Interim Results by Company’s auditors as a sign that the significant increase in the Land’s value had been confirmed or otherwise checked by the auditors.

56.  The Listing Review Committee found that the Directors had not demonstrated that they had discharged their duties under Rule 3.08 and their Director’s Undertakings when presented with the significant increase in the Land’s value and procure the Company’s compliance with Rule 2.13(2) for the purpose of the disclosures made in the 2018 Interim Results.

Breach relating to provision of complete and timely information

57.  The Listing Review Committee noted that Rule 2.12A required that issuers provide information or explanations to the Exchange during an investigation of a suspected breach to verify such issuers’ compliance with the Rules.  In the circumstances of this case, the Listing Review Committee was not convinced that the Listing Division had made out a case that the Company had failed to provide such information and explanations or that information or explanations provided were incomplete, misleading and/or deceptive as found by the Listing Committee in the LC Decision.

58.  While the Listing Review Committee noted that the Applicants’ submissions as to what their understanding was in terms of the methodology applied by Malcolm appear to have evolved from the submissions made during the investigation to the submissions at the Listing Committee stage, the Listing Review Committee did not find that the submissions made were necessarily contradictory or incorrect.  The Listing Review Committee noted that the 2^nd Valuation described the methodology used as being based on “the market comparison approach and income approach” which in the Listing Review Committee’s view left it unclear as to which exact methodology was applied.  The Listing Review Committee noted that it was therefore possible that the Applicants’ submission of the application of the Comparison Method and a cross-check through the Residual Method was correct and represented a good faith attempt to explain what they were told by Malcolm at the relevant times.  Similarly, for the involvement of the Company’s auditors in the review of the 2018 Interim Results, the Listing Review Committee viewed the submission of such information at the Listing Committee stage as an attempt by the Applicants to clarify the relevant circumstances.  The Listing Review Committee noted in that context, as listed issuers were not required to have interim results reviewed by auditors, it may not have immediately occurred to the Applicants to clarify the auditors’ involvement at the investigation stage.

59.  While the Listing Review Committee agreed that respondents in disciplinary investigations should ensure that their responses are clear and complete and avoid any potential for a misunderstanding, the Listing Review Committee also noted that once the disciplinary process had commenced, parties to the disciplinary process should have sufficient opportunity to submit all evidence and make submissions that help clarify any point which they may previously have failed to articulate clearly.  The Listing Review Committee did not agree that it could conclusively find that the Applicants’ submissions regarding Malcolm’s valuation method or the failure to clarify the auditors’ involvement during the Listing Division’s investigation constituted a breach of the Company’s duties under Rule 2.12A.  Accordingly, the Listing Review Committee also did not find that the Directors had breached their Undertakings.

60.  In summary, while the Listing Review Committee shared the Listing Division and Listing Committee’s concerns that some of the information provided by the Applicants could have been clearer and submitted in a timelier manner, on balance it did not agree that the Applicants failed to provide complete and timely information in response to the Listing Division’s investigation warranting the finding of a breach of Rule 2.12A (Company) or the Directors’ Undertakings accordingly.

Sanctions

61.  In considering the Applicants’ sanctions, the Listing Review Committee had taken particular note of the Applicants’ submissions as to the various factors which they had asserted should be taken into account when considering appropriate sanctions, including the Applicants’ background and compliance history, the Applicants’ intentions at the relevant times, the nature of the misconduct, the absence of a personal advantage or loss to the Company / investors, the corporate culture at the Company and any reputational impact of the sanctions on the Applicants.  The Listing Review Committee considered that complete, accurate and meaningful disclosures are an essential part of providing investors with the information they need, and ensuring a high-quality, fair, and orderly market.  On that basis, the Listing Review Committee found that notwithstanding the various factors identified by the Applicants, the Applicants’ breaches were sufficiently severe to warrant the imposition of public sanctions.

62.  As the Listing Review Committee found that the Company had breached Rule 2.13(2) in respect of its failure to disclose complete information regarding the significant increase in the Land’s value and the Directors had breached their duties under Rule 3.08 and their Directors’ Undertaking to comply with the Rules to the best of their ability and to procure the Company’s compliance with Rule 2.13(2), the Listing Review Committee agreed, in accordance with the Listing Division’s recommendation and the findings of the Listing Committee, that these breaches warranted the imposition of a public statement involving criticism against all Applicants.

63.  However, as the Listing Review Committee considered the Company did not breach Rule 2.12A and the Directors did not breach their Undertaking regarding the Company’s compliance with Rule 2.12A, it did not find the Applicants had committed a breach which the Listing Committee had concluded would warrant the imposition of a public censure.

Decision and Sanctions with respect to the Applicants

64.  For the reasons given above and having considered all the submissions (both written and oral) presented by the Applicants and the Listing Division, the Listing Review Committee found that the Company had breached Rule 2.13(2) in respect of its failure to disclose complete information regarding the significant increase in the Land’s value and the Directors had breached their duties under Rule 3.08 and their Directors’ Undertakings to comply with the Rules to the best of their ability and to procure the Company’s compliance with Rule 2.13(2) consistent with the LC Decision.  As a result, the Listing Review Committee found that the Applicants’ breaches warranted the imposition of a public statement involving criticism.  The Listing Review Committee upheld the Listing Committee’s directions as to trainings as applicable to the Applicants.  The Listing Review Committee, however, overturned the Listing Committee’s finding of the Company’s breach of Rule 2.12A and the Directors’ breach of their Undertakings concerning the failure to provide complete and timely information.

E.  Grounds of Review

32.  The Form 86 identifies three intended grounds of review, being:

(1)  Ground 1: The LRC failed to take into account material relevant considerations.

(2)  Ground 2: The LRC Decision to impose a public statement involving criticism is a disproportionate sanction.

(3)  Ground 3: The LRC Decision to impose a public statement involving criticism is oppressive and, therefore, irrational in the public law sense.

33.  In his written submissions, Mr Tam (who had not drafted the Form 86) recognised that all intended grounds of review faced the high threshold of Wednesbury unreasonableness.  Mr Tam also recognised that Grounds 2 and 3 are essentially the same complaint, namely that the LRC Decision on sanctions is disproportionate and, as a result, irrational in the public law sense.  The two grounds were addressed in submissions in one go, and will similarly be addressed together by me.

F.  Ground 1: Failure to take into account material considerations

34.  This Ground 1 has been presented against various legal principles which are not controversial, and which can be found, for example, touched on in my own previous decisions in Tenwow International Holdings Ltd (In Provisional Liquidation) v The Stock Exchange of Hong Kong Ltd [2020] HKCFI 2982 at §52; and Fan Ren Da Anthony v The Stock Exchange of Hong Kong Ltd [2023] HKCFI 2932 at §76:

(1)  A decision-maker should take into account material relevant matters.

(2)  If a decision fails to have taken material relevant matters into account, it is liable to be set aside by the Court.

(3)  The relevancy of a particular consideration is a matter for the decision-maker, but the Court will intervene to quash a decision if no reasonable decision-maker would have failed to take such a matter into account.

(4)  It is permissible for a company’s board of directors to have a proper degree of delegation and division of responsibilities, with each individual director retaining a residual duty of supervision and control.

(5)  Non-executive directors are entitled to place reliance on a highly experienced chairman who has had far greater involvement with the company.

(6)  Business cannot be carried on upon principles of distrust, so that persons in responsible positions must be trusted until there is reason to distrust them.

(7)  Whether or not a director is culpable for misconduct should not be judged by hindsight.

35.  Though the Form 86 covered more ground, Mr Tam brought his usual more focused approach to his submissions, and focused on two matters which he said were material relevant considerations which the LRC failed to take into account:

(1)  The Applicants’ submissions made to the LRC on the economic and political situations in the PRC, where the property market can be highly volatile.

(2)  The Applicants are not expected to micro-manage, and whether or not a director is culpable for misconduct should not be judged by hindsight.

36.  As to the first point, Mr Tam submitted that the volatility of the PRC property market is well known, and had been addressed in submissions as potentially explaining such a significant increase in the property value between the 1^st and 2^nd Valuations. But, Mr Tam said, that factor was not listed at §50 of the LRC Decision, and not addressed.

37.  As to the second point, Mr Tam submitted that the LRC accepted that the Directors had made enquiries with the CFO of the Company, even if not directly through Malcolm.  In those circumstances, their conduct should not be judged with the benefit of hindsight, where (without the benefit of hindsight) it was reasonable for the Directors to place trust and reliance on the expertise of the CFO, Malcolm and the Auditor.  Further, the Applicants had made enquiries at the July 2018 Meetings, and the 2^nd Applicant had asked about the significant increase in the fair value of the Land in the 2^nd Valuation, and was told that the valuation was affected by a list of factors.  The 11^th Applicant had also made specific enquiries.

38.  Mr Dawes criticised these points as being in effect merits challenges, where this Court is not exercising any appellate function.  Whilst recognising that this is not a case where the Relevant Directors were acting dishonestly, the focus should be on the LRC’s finding that they ought to have made proper disclosure, but failed to do so.

39.  In that regard, I accept Mr Dawes’ submission that the Applicants’ intended challenge is based upon a misunderstanding or misreading of the LRC’s reasoning and analysis.  There, the critical concern was with disclosure, and in particular (1) whether the Company had provided sufficient disclosure of the reasons for the significant increase in the purported value of the Land, and (2) whether the Directors had taken adequate steps to ensure that sufficient disclosure was made.  This is clear from the LRC Decision, in particular at §§43-44, 46, 48-49 and 52 – where §§46-56 were under the heading ‘Breach relating to the disclosures of the Land’s value’ (see above).

40.  As Mr Dawes has correctly submitted, Mr Tam’s submission focuses on whether there were grounds for the Directors to form the view that the 2^nd Valuation was reasonable, but those arguments do not directly address or answer – or show to be irrational – the findings made in the LRC Decision that (1) the disclosure by the Company was inadequate because it failed to provide an explanation for the significant increase in value, and (2) the Directors had failed to conduct proper enquiries into how the increase was derived, and to ensure that a proper explanation for the increase was disclosed.

41.  The core of the concern leading to the LRC Decision and its conclusion is that there ought to have been a proper and sufficient explanation to the investing public as to how the sudden and enormous increase in value had occurred, or was justified (not least in the context of the positive profit warning which had been given because of it).  On that basis, precisely what individual Applicants did in the July 2018 Meetings in perhaps reaching their own state of satisfaction is of less relevance.

42.  It also seems to me that it is probably obvious – rather than irrational – to require further information to have been provided as to the reasons for the more than seven-fold increase in the roughly only 6-month interval between the 1^st and 2^nd Valuations. I also accept that the fact that the Applicants (when responding to the investigation) did not speak with one voice shows that the valuation of the Land was not such a straightforward matter, emphasising the need and importance for public investors to understand the basis for the valuations and the highly significant variation in them.  It was not irrational for the LRC to form the view that the various factors relied upon by the Applicants were not all so obvious such that no public disclosure was necessary to the investing public.

43.  Proper disclosure is of fundamental importance to the investing public.  Without that information, investors cannot ascertain the basis of the figures put forward, leading to an inability to assess whether and to what extent they accept or can rely upon the sudden and significant increase in value.

44.  Further, as Mr Dawes has submitted, it is to be noted that the Auditor has denied that it gave any seal of approval in respect of the 2^nd Valuation.  (Indeed, the Auditor’s later concerns about the slightly lower 3^rd Valuation is what led to obtaining the 4^th Valuation – at less than half of the value of either the 2^nd or 3^rd Valuations.)  But, even if the Auditor had approved the 2^nd Valuation, that is not itself an explanation for the sudden increase in value of the Land, and formed no part of what was disclosed.

45.  There is no arguable irrationality in the view that mere market volatility is insufficient explanation or disclosure for the 2^nd Valuation.

46.  Nor is there any merit in the Applicants’ suggestion that the LRC Decision somehow identified an expectation that they would micro-manage the Company’s business or that their conduct has been judged by hindsight.  The enormous difference between the 1^st and 2^nd Valuations – on their faced reached adopting the same methodology – was absolutely clear at the time, and the need to have obtained and then disclosed more information should also have been obvious.  That is not requiring micro-managing; it is simply requiring the proper exercise of powers to obtain and then disclose the appropriate information which was missing.

47.  Ground 1 is not reasonably arguable with any realistic prospect of success.

G.  Grounds 2 and 3: Disproportionate/Irrational Sanction

48.  Obviously, these two intended grounds of review only arise if the Court refuses Ground 1.  As already identified, these grounds seek to raise a Wednesbury unreasonableness challenge.  Mr Tam invited the Court to intervene on the settled principle that a Court will intervene in a sanction if it is irrational: see, for example, the Fan Ren Da Anthony case at §§110-170.

49.  Mr Tam also invited the Court to keep in mind that the focus of attention – when considering oppression, and therefore irrationality, in the public law sense – will principally be on the impact of the decision upon the affected person.  The outcome or end-product of the decision-making process will thus be assessed, rather than the way the decision was reached: see ‘De Smith’s Judicial Review’ 9^th ed at §6-050.

50.  Further, Mr Tam referred to my recent decision in Tam Yuk Fun Toffee v Secretary for the Civil Service [2024] HKCFI 1020, a case in which I was satisfied that the relevant sanction imposed in that case was, in all the circumstances of that case, oppressive.  Mr Tam submitted that he relied on that case for the approach taken in it.  However, that case was on very different facts from the present case, and in a different context.  I do not think the discussion in it significantly adds to the analysis necessary for present purposes.

51.  It is well-settled that the question of appropriate sanction is a matter for the LRC, comprised as it is by a range of individuals with experience and expertise in matters relating to the Listing Rules.  It can also be noted that the LRC overturned the LC’s decision to publicly censure the Applicants, and instead imposed the lesser sanction of a public statement involving criticism.

52.  In essence, Mr Tam’s submissions echoed the submissions made by then Counsel to the LC (and, indeed, those submissions were essentially rehearsed in Mr Tam’s skeleton argument for these proceedings).  But there is no reason to think that the LRC had not done what it said it had in the LRC Decision at §61, namely taking particular note of the Applicants’ submissions as to the various factors which they had asserted should be taken into account when considering appropriate sanctions, including the Applicants’ background and compliance history, the Applicants’ intentions at the relevant times, the nature of the misconduct, the absence of a personal advantage or loss to the Company / investors, the corporate culture at the Company and any reputational impact of the sanctions on the Applicants.

53.  Further, the LRC went on to explain why it nevertheless considered the sanctions imposed to be the appropriate sanctions to impose.  Amongst its reasons were that: (1) complete, accurate and meaningful disclosures are an essential part of providing investors with the information they need, and ensuring a high-quality, fair, and orderly market; (2) notwithstanding the various factors identified by the Applicants, the Applicants’ breaches were sufficiently severe to warrant the imposition of public sanctions; and (3) but finding of no breach of Rule 2.12A and the Directors’ Investigation Undertakings meant the Applicants had not committed a breach which would warrant the imposition of a public censure.

54.  As is common ground between the parties, the only potential lesser sanction than that was a private reprimand.  Mr Tam has emphasised the “most critical distinction” (his words) between the public or private nature of the sanctions, and submitted that the most distinctive feature between them was not simply whether the sanction is known to the public, but the long-lasting effect that only exists as regards a public sanction.  Hence, the Applicants only advocated for the private reprimand option that was available, because it has a material difference from the rest of the other (public) options available.  Mr Tam submitted that the LRC Decision must be viewed against the unintentional misconduct which had no or minimal bearing or potential to damage the reputation of the Exchange and/or the integrity of the market.  On the other hand, the public sanction would have serious ramifications to the Applicants, especially as they are well-known businessmen and public figures.

55.  With respect, on the settled applicable principles, I do not think those submissions identify any reasonably arguable irrationality or Wednesbury unreasonableness in the LRC Decision relating to sanctions.  The rationality is evident from the LRC Decision itself.  The fact that the decision might have been to impose the lesser and private sanction option does not seem to me to make it arguably irrational to have imposed the next more serious sanction, where part of its very purpose was to ensure bringing to public attention the importance of the public disclosure requirements, which is a clear and obvious enforcement objective.

56.  Grounds 2 and 3 are not reasonably arguable with any realistic prospect of success.

H.  Result

57.  In the circumstances, I refuse the Applicants’ application for leave to apply for judicial review.  Even had I granted leave on any ground, I would have dismissed the substantive application.

58.  I see no reason why the costs should not follow the event.  Therefore, the Applicants shall pay the Exchange’s costs of these proceedings, to be summarily assessed if not agreed.

59.  The Exchange has already provided a statement of costs for summary assessment, and the Applicants shall have 14 days within which to file any list of objections.  Thereafter, if costs cannot be agreed between parties within the further following 14 days, I shall perform the summary assessment on the papers.