SECURITIES AND FUTURES COMMISSION v. CHINA UNITED HOLDINGS LTD

HCMA921/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

(Appellate Jurisdiction)

MAGISTRACY APPEAL NO.921 OF 2002

(ON APPEAL FROM WSS4912-13 OF 2002)

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REASONS  FOR  JUDGMENT

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1. These are my reasons for dismissing the appellant’s appeal.

2. The appellant, China United Holdings Limited, was summoned before the magistracy on two summonses for failure to perform, within the proper period, a duty of disclosure, contrary to sections 3(1)(a), 4(5)(a) and 7(1) of the Securities (Disclosure of Interests) Ordinance, Cap.396 (“the Ordinance”) of the Laws of Hong Kong.  The summonses alleged that the appellant had on 9 March 2001 disposed of an interest in 90 million shares of GR Investment International Ltd (“GR”) but failed to disclose such disposal to the exchange company and GR within the proper period.  The 90 million shares represents slightly more than 10% of the issued capital of GR.

3. The magistrate found both summonses proved and convicted the appellant thereon.

4. Under section 3(1)(a) the Ordinance, a seller of 10% of the shares of a listed company is under a duty to make notification to the company and the Stock Exchange of Hong Kong (“SEHK”) if the person :

“… ceases to be interested in shares so comprised in a listed company’s share capital.” (whether or not retaining an interest in other shares are so comprised) 

5. Section 4 provides :

“…

(5)   The duty also arises under section 3(1) where —

(a)  the person had a notifiable interest immediately before the relevant time, but does not have such an interest immediately after it; or

(b)   he had a notifiable interest immediately before that time, and has such an interest immediately after it, but the percentage levels of his interest immediately before and immediately after that time are not the same.”

6. Section 13 defines “interest” as :

“(2)   A reference to an interest in shares is to be read as including an interest of any kind whatsoever in the shares; and accordingly there are to be disregarded any restraints or restrictions to which the exercise of any right attached to the interest is or may be subject.”

7. Pursuant to section 7(1) of the Ordinance, the person is required to make the written statutory notification within 5 days next following the day on which that duty arises.

8. At the trial, the magistrate found that the date on which the appellant ceased to be interested in the shares was 9 March 2001.  Statutory notice was served only on 16 May 2001 and the appellant was therefore in breach of the statutory provisions.

9. The entire prosecution case at the trial was not in dispute.  The relevant facts as admitted by the parties are :

(i)      The appellant company is a company listed on the SEHK.

(ii)      Simply Best Limited (“Simply Best”) is a wholly owned subsidiary of the appellant company.

(iii)     On 20 July 2000, the appellant acquired up to 96.65 million shares in GR.  The block of shares amounted to some 10.74% of the issued share capital of GR.

(iv)    On 26 February 2001, the board of directors of the appellant resolved to enter into a sale and purchase transaction with March Match Limited (“March Match”).  The agreement involved the transfer of the legal and beneficial interest of 90 million shares in GR to March Match.

(v)     On 5 March 2001, Simply Best entered into an Agreement with March Match.  Under the agreement Simply Best would transfer, among other stocks, 90 million shares in GR to March Match for acquisition of a property portfolio.

(vi)     Completion of the agreement between the parties took place on 14 May 2001.

(vii)    Statutory notice pursuant to section 7(1) of the Ordinance was given on 16 May 2001 to SEHK and GR.

10. It is the appellant’s case at the trial and on appeal that the date when the appellant ceased to be interested in those shares was on 14 May 2001 when the agreement was completed.  Since notice was given two days thereafter on 16 May, there was no breach of the statutory provisions.

11. However, this contention must be looked at in the light of the events in March.  It is not in dispute that on 6 March 2001, the appellant executed a Securities Settlement Instruction to Chung Nam Securities Limited (“Chung Nam”) in performance of the Share Sale Agreement.

12. Three days later, on 9 March 2001, Simply Best executed a Securities Settlement Instruction to Chung Nam pursuant to its obligations under the Share Sale Agreement.  The block of 90 million shares in GR was received by March Match through Chung Nam on the same day.

13. At the trial the magistrate found that the appellant had disposed of all its interest in the shares and was therefore under an obligation to notify GR and SEHK.  This was what he found :

“I found that it was the time when the 90 millions GR shares were actually transferred from Simply Best account’s to March Match’s account and that was the 9 March 2001.  This was evident by the Securities Settlement Instruction given by Simply Best to Chung Nam Securities Ltd. dated 9 March 01 as well as the related Bought & Sold Notes.

It’s clear beyond doubt that on 9 March 01, after these 90 millions GR shares were transferred to March Match, March Match could therefore dispose of these 90 millions shares in whatever way they like.  Therefore both the legal and equitable interest had passed to march Match.”

The magistrate did not elaborate his reasons on how and why he came to the conclusions as he did.

14. He went on to say :

“Therefore, on 9 March 01, when these 90 millions GR shares were transferred to March Match, Simply Best ceased to have any interest in these shares and the duty of disclosure arose, i.e. Defendant had to notify SEHK and GR within the following 5 days.  This was not done until the 16 May 01, therefore Defendant was guilty of both summonses.”

15. Mr Harris who appeared for the appellant at the trial contends that the appellant through Simply Best, retained an interest in the shares between 9 March 2001 and completion of the agreement on 14 May 2001.  The appellant had not disposed of its entire interest in the shares prior to completion of the agreement on 14 May 2001.  Further, the appellant did not dispose of its equitable interest in the shares until such time (if any) as the agreement became specifically enforceable.  At any point of time before 14 May 2001, March Match could not have lawfully disposed of the shares in its account.  The magistrate was therefore wrong in finding that the appellant had ceased to have any interest in the shares on 9 March 2001.

16. Mr Harris’s argument is based on the assumption that the agreement dated 5 March 2001 between Simply Best and March Match was for the sale of 90 million shares by Simply Best to March Match.  This was however not the case.  It is an admitted fact that the agreement was for Simply Best to acquire from March Match the legal and beneficial interest of the one and only share in one Golden Clip Limited (“Golden Clip”), to be registered in Simply Best’s name.  The acquisition was in consideration for the transfer by Simply Best to March Match of the legal and beneficial interest in a block of shares which included the 90 million shares in GR.

17. Clause 4.01 of the agreement stipulates that a portfolio of shares, the 90 million GR shares included, were to be transferred to March Match on 5 March 2001.  Pursuant to this clause the transfer of the portfolio of shares except for a block of shares in Prestige Properties Holdings Limited (Share Code 75) was completed by 9 March 2001 the latest.  The completion date of 14 May 2001 was relevant only to the transfer of the property portfolio held by Golden Clip.

18. The event which occurred on 14 May 2001 was that Simply Best executed a Securities Settlement Instruction to Chung Nam to deliver, pursuant to the Simply Best’s obligations under the Share Sale Agreement, 40 million shares in Prestige Properties Holdings Limited.  This has nothing to do with the transfer of the 90 million GR shares which had already taken place earlier in March.  It is therefore not open for the appellant to argue that 14 May 2001 was the date of completion of the agreement for transfer of the GR shares when in fact it was not.  So far as the GR shares are concerned, the appellant’s interest in those shares through Simply Best had ceased by 9 March 2001.

19. The argument that the appellant nevertheless retained an equitable interest in the GR shares until the agreement was completed on 14 May 2001 does not stand up to scrutiny.  If the agreement had not completed and become null and void, the recourse for the appellant would be for the company to recover the shares or their equivalent value if March Match no longer had those shares.

20. Further, the shares in question were at all material times, held in the name of HKSCC Nominees Limited (“HKSCC”).  This is the nominee of HKSCC in whose name all shares in the Central Clearing and Settlement System (“CCASS”) are registered.  HKSCC is the legal owner of all securities in Hong Kong publicly listed companies that have entered the CCASS trading system.  The appellant never had a legal interest to dispose of.  My observation is based on the case of In re CA Pacific Finance Ltd (in liquidation) and another [2000] 1 BCLC 494 in which  Yuen J (as she then was) observed at p.501 :

“Since all scripts in CCASS are registered in the name of HKSCC or its nominees, HKSCC is the legal owner of the securities.  However it has asserted quite clearly that it has no beneficial interest in the securities deposited into CCASS.”

21. The logical question that follows in this case is : As between the appellant through Simply Best and March Match, who had the beneficial interests in the GR shares on or after 9 March 2001?  Based on the documents dated 7 March and the two settlement instructions from Simply Best and March Match to their common stockbroker Chung Nam, I have no difficulty in concluding Simply Best had delivered the shares and March Match had received those shares latest by 9 March.  The appellant had divested himself all interests in the GR shares and ceased to be interested in them.  The appellant was therefore caught by the statutory provisions when March Match had taken delivery of those shares on 9 March 2001.  The appellant duty to disclose under section 7(1)(a) starts to run from that day.

22. One of the arguments advanced by Mr Harris was that until March Match’s name is registered in the register of GR, the appellant still retained some interest in the shares.  This line of reasoning must have been made without the proper understanding of the CCASS system.  Under that system, all brokers on SEHK are required to be participants in the system and Chung Nam in this case is no exception.  For securities brought through the CCASS system, HKSCC acts as the custodian of the securities, which are registered in the name of HKSCC or its nominees.  The scripts of the shares are kept by the depositaries of HKSCC.  A client wishing to hold the actual share script, may however, instruct the broker to deliver to him the certificates representing his share holdings in his name.  (P501b-c, g-h, In re CA Pacific Finance Ltd, supra).  The position is thus this : unless a client (shareholder) gives instruction to the broker for delivery of the share script, his name may never appear in the share register of the particular listed company.

23. This being the case, the name of the actual owner of the shares may never even be registered at all in a listed company’s share register.  If the argument by Mr Harris is correct, the seller of shares in a company may never be able to divest his interests in the shares until the buyer’s name is registered in the company’s register.

24. The following passage in Company Law, Pennington, 7^th Edn, at page 443 may put the line of argument advanced by Mr Harris to rest :

“On registration, the transferee acquires those legal rights against the company, but it does not follow that the legal title to the shares has not already passed from his transferor to the transferee by virtue of the executed share transfer and the transferor’s share certificate being delivered to him, so making his right to the shares effective against all interested persons except the company.  Historically it appears more likely that the legal title to shares passed at common law by delivery of the executed instrument of transfer by the transferor to the transferee.  Registration was required by companies as a measure for their own protection, and the requirement was embodied as a contractual condition in deeds of settlement in terms similar to the Companies Act 1948, Table A, art 22.  But such requirements seemingly have only a contractual effect, and have no bearing on the question when the legal title to the shares vests in the transferee.”

25. Finally, suffice it to say that the object of the Ordinance was to promote transparency of share dealings in listed companies so that investors and other interested members of the public can be better informed.  This is to provide for better understanding by investors as to the controlling interest in public companies and of any significant change thereon.  Any change should be disclosed expeditiously.  The intent of the legislation is clear : the legislation provides a five-day time frame for notifications.  The appellant in this case failed to disclose within the prescribed period counting from 9 March 2001 and is therefore in breach of the provisions.

26. For the reasons given, the appeal is dismissed.