RE LAWE WILLIAM ENTERPRISES LTD.

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HEADNOTE

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An application for judicial review by a public listed company against a decision of the Stock Exchange of Hong Kong Limited td cancel its listing was refused on the grounds that the decision was not contrary to the rules of natural justice.

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

MISCELLANEOUS PROCEEDINGS

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JUDGMENT

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1. This is a motion for judicial review pursuant to leave granted by Barnes J. on the 10th July 1989 for an order of certiorari to quash a decision made by the Stock Exchange of Hong Kong Limited ("the Stock Exchange") on the 10th April 1989 when it was decided to cancel the listing of the applicant company, Lawe William Enterprises Limited, ("the applicant"). Although the company was not completely inactive, it had suffered losses for several years and its business had declined considerably. The company could therefore justifiably be described as a shell company.

2. The grounds upon which relief was sought are two fold : first the Stock Exchange had acted contrary to the rules of natural justice and second the decision was unreasonable. However, the second ground was abandoned before me, so that the argument has been restricted to the issue of breach of the rules of natural justice.

3. The Stock Exchange is governed by a set of rules which where relevant are as follows:-

                "Introduction:-

The Stock Exchange of Hong Kong Limited ("the Exchange") provides an efficient market place for the trading of securities. Sufficiency of public interest, marketability of securities, proper disclosure and communication of information to enable a fair and timely assessment of the affairs of a listed company, are regarded as essential for the continuation of listing and generally for the maintenance of such a market place.           Much of the information required to be disclosed and the methods of furnishing such information are contained in the Securities (Stock Exchange Listing) Rules 1986 ("the Statutory Rules") made by the Securities Commission under section 14 of the Securities Ordinance.           The non-statutory listing rules devised by the Exchange governing admission of securities to Listing ("the Exchange Listing Rules"), which must be observed by all listed companies, complement the Statutory Rules.  They are divided into two main parts. The general principles are set out in Chapter 2, while all other applicable details are set out in the ensuing chapters and appendices. The Exchange Listing Rules, the Statutory Rules and the provisions of the Companies Ordinance should be read an considered together as constituting the requirements to be observed by public companies seeking or having access to the capital markets of Hong Kong.           The Listing Committee and the Listing Department have been established by the Exchange to administer and supervise compliance with the Exchange Listing Rules, which are laid down in accordance with currently acceptable standards in the market place. They should not be regarded as exhaustive and may be rescinded, amended, added to, modified or waived by the Exchange, either generally or in any particular case according to circumstances. Any amendment to the Rules is subject to the approval of the Securities Commission under section 35 of the Stock Exchanges Unification Ordinance.           The Listing Committee shall have the power to interpret these Rules and to issue practice notes in interpreting the same. Application for listing shall be approved by the Listing Committee at its absolute discretion."

The name of the Listing Department since the Rules were originally published has been changed to the Listing Division. Chapter 2 sets out the general principles governing admission of securities to listing. Under the heading Introduction, Rule 2.01 reads :-

Under the heading "Qualifications for Listing" the following rules are relevant :-

4. Under Mergers and Acquisitions, Rule 2.34 reads :-

The powers of the Listing Committee to suspend or cancel a listing are set out in Rule 2.35 which reads as follows:-

5. The applicant under its original name Luen On Investment Company Limited, was incorporated as a private company on the 3rd October 1962. The applicant became a public company in December 1972. On the 4th July 1973, the applicant changed its name from Luen On Investment Company Limited to MAF Credit Limited, and on the 20th October 1981, it was changed to its present name of Lawe William Enterprises Limited. Trading in the applicant's shares on the Far East and Kam Ngan Stock Exchanges was suspended at its own request on the 4th August 1977 following the appointment of an inspector by the Financial Secretary under section 142 of the Companies Ordinance to make an investigation into the affairs of the company. An interim report, which later became the final report, was made but no further action was taken by the authorities. When the unification of the. four stock exchanges took place in April 1986 and also upon an order being made for the reorganisation of the applicant in July 1988, applications for the listing of the applicant's shares was approved by the Stock Exchange, but trading in its shares on the Exchange remained suspended.

6. On the 15th July 1988, Mr Ng Mok Yuen obtained a controlling interest in the applicant when he acquired 46.59% of the issued share capital. As he had exceeded the trigger point of 35%, he was required by Rule 33 of the Code on Takeovers and Mergers to make a general offer to the minority shareholders of whom there are approximately 2,000.  However, Mr Ng did not immediately comply with this rule. On the 21st July 1988,  Mr Ng, through his financial advisers, Morgan Grenfell (Hong Kong) Limited ("Morgan Grenfell") wrote to the commissioner of Securities ("the Commissioner") stating that it was his intention to seek a lifting of the suspension in trading of the applicant's shares and that he intended to inject new assets into the company. Morgan Grenfell went on to contend that it was not necessary to make a general offer under Rule 33 because the shares of the company had been suspended since 1977. However, the Commissioner disagreed and stated that until the obligation was fulfilled or waived, no application could be entertained for the proposal to reactivate the applicant.

7. Subsequently there was correspondence between the Commissioner and Morgan Grenfell and Mr Ng's solicitors Stevenson, Wong & Co. with regard to various matters, and in particular to the applicant's share register that had been causing problems for several years. Later, Mr Ng agreed to make a general offer in compliance with the Code and stated that he would put forward his plans for the reactivation of the company which was to be treated as a shell company in the same document that contained the offer to the shareholders. On the 25th August 1988, the Commissioner wrote to Morgan Grenfell repeating that Mr Ng should not delay in making a general offer and to announce that he had acquired a controlling interest and that the issue relating to the scrip should be resolved before trading could be resumed in the applicant's shares. Attention was also drawn to the possibility of applying sections 166 to 168 of the Companies Ordinance with regard to a restructuring of the applicant.

8. On the 13th September 1988, a joint announcement was made by the Stock Exchange and the Securities Commission that included a reference to listed companies which are no longer suitable for listing which where relevant reads:-

"2. Listed Companies which are no longer suitable for listing

 

The Exchange has identified a number of listed companies, trading in whose securities is currently suspended, which are no longer suitable for listing because of the size or nature of their existing businesses and/or because an insufficient number of their securities are in the hands of the public. The names of these companies are listed below. These companies have been notified by the Exchange that, subject to the consent of the Commissioner for Securities, the listing of their securities on the Exchange will be cancelled unless they have, within six months from the date of this announcement, a business which is able to satisfy the Exchange's normal requirements for listing or have finalised proposals in writing which are acceptable to the Exchange and the Commissioner for Securities to acquire such a business and/or have adequately increased the number of their securities in the hands of the public, as appropriate.   The directors and substantial shareholders of these companies have also been notified that any such proposals must be made by the existing shareholders of the company, failing which the controlling shareholders have been requested to 'privatise' the company by making a cash offer to the minorities rather than incur a cancellation of the listing.   Any application to resume trading in the securities of these companies will be treated as a new application for all purposes and they will be required (inter alia) to issue a full prospectus, pay the initial listing fee and execute a new Listing Agreement.   In future where the Exchange identifies that a listed company is no longer suitable for listing it will suspend trading in the securities of that company and the above provisions will be applied, as appropriate."

The announcement contained the names of nine companies that were considered unsuitable for listing including that of the applicant. No doubt the action was taken following a report made by two members of the International Stock Exchange of London Messrs. Dixon and Becher after conducting a review of the Exchange Listing Rules and the practices and procedures of the Listing Division which recommended inter alia that the use of shell companies to obtain a back door listing was unacceptable. The report recommended that the listing of any company which ceased to trade should be cancelled and if such a company was acquired by a purchaser and a major change of business was intended, full listing requirements should be imposed. Although the applicant had not actually ceased trading and it was submitted by Mr Ching that the application did not amount to a back door listing, the company in effect is a shell for, as I have said, it had suffered losses for several years and business had considerably declined. The applicant in any event was accepted by Mr Ng to be a shell although the Stock Exchange were not required to make an express finding that it was in order to determine the present application.

9. On the 14th September 1988, the Stock Exchange wrote to the applicant in the following terms:-

"The Listing Committee of The Stock Exchange of Hong Kong Limited (the 'Stock Exchange') have decided that your company is no longer suitable for a continued listing on the Stock Exchange.

This decision has been made after careful consideration of the following points:-

 

                 i)       the size and nature of your company's existing business(es);

                 ii)      the number of. the securities of your company in the hands of the public;

                 iii)     the interests of the public; and

However, for the proper protection of the minority shareholders in your company the Listing  Committee have agreed to grant your company a period of six months from the date of this letter to rectify the position.

 

Accordingly you are hereby notified that the listing of and permission to deal in the securities of your company on the Stock Exchange will be cancelled on the 14 March 1989, pursuant to paragraph 2.35 of the Rules Governing the Official Listing of Securities, unless at that time you have either:-

Any proposals to acquire a suitable business or assets must be made by the existing shareholders of  the company and any change in control of the company in the next six months may result in the immediate cancellation of the listing.

If the existing shareholders are unable to prepare suitable proposals within the six month period then the Listing Committee strongly requests the existing controlling shareholders to make a cash offer to the minorities and thereby privatise the company rather than to incur a cancellation of the listing. The Directors and controlling shareholders of any company which has its listing cancelled would not normally be regarded as suitable to be associated with another publicly listed company in the future.

You are also hereby notified that any application for the resumption of trading in the securities of your company will be treated as a new application for all purposes and you will be required (inter alia) to issue a full prospectus, pay the initial listing fee and execute a new Listing Agreement.

We look forward to receiving your proposals as soon as possible."

 

In response to this letter Morgan Grenfell replied on the 20th September 1988 stating that Mr Ng proposed through a company named Wicksfull Holdings Limited, a company to be set up and controlled by him to enter into a scheme of arrangement with the shareholders concerning the share register, and that upon the scheme becoming effective it was his intention to reactivate the company by injecting certain assets into Wicksfull. The name of the company was later changed to NewCo. A press announcement was issued by the applicant and Mr Ng on the 10th November 1988, which where relevant reads as follows:-

"Trading in the Company's shares has been suspended since 4th August, 1977. On 14th September, 1988 the Company received a letter from The Stock Exchange of Hong Kong Limited (the 'Stock Exchange') which stated, inter alia, that listing of shares in the Company will be cancelled on 14th March, 1989 unless at that time the Company has a business which is able to satisfy the Stock Exchange's normal requirements for listing or has finalised proposals to acquire such a business which are acceptable to the Stock Exchange and the Commissioner for Securities, and at least 25 per cent of the shares of the Company are held by the public.   Mr Ng has been involved in property construction, development and investment in Hong Kong for over twenty years and is currently preparing business proposals relating to the injection into a new company ('NewCo') of certain businesses carried on by companies controlled by him (the 'Proposals'). If the Proposals are acceptable to the Stock Exchange and the Commissioner for Securities and Commodities Trading, the Company proposes to implement them by way of a scheme of arrangement under which, inter alia, shareholders of the Company will be offered shares in NewCo or approximately HK$0.1234 per share in cash, if they so elect. (The cash alternative. of HK$0.1234 per share is equivalent to HK$0.432 per share prior to the capital restructuring referred to above) Mr. Ng's bankers have confirmed that he has sufficient cash resources available to him to satisfy the cash election. Upon the scheme of arrangement becoming effective and before dealing in shares of NewCo commences, Mr. Ng will ensure that not less than 25 per cent of shares in NewCo will be in public hands.   Application will be made to the Listing Committee of the Stock Exchange for listing of and permission to deal in the shares of NewCo and for a withdrawal of the listing of the shares of the Company. Details of the Proposals will be announced in due course."

10. On the 11th November 1988, the Stock Exchange informed Morgan Grenfell, inter alia, that the application procedure set out in Chapter 4 of the Listing Rules must be fully complied with and that the specific requirements referred to in the letter were not necessarily exhaustive and that additional requirements would be imposed if circumstances warranted. Proposals for the reactivation of the applicant were submitted by Morgan Grenfell to the Stock Exchange on the 6th December 1988 which set out the principal activities of the company which included property investment, other investment business, insurance agency business and the manufacture of pressure lanterns. Details of the proposed directors and various properties to be injected by Mr Ng into NewCo which was described principally as a property company were also supplied. It was further stated that NewCo would seek new opportunities for business development in related fields such as property construction and management, the supply of materials and services to the construction industry and the manufacture and distribution of home and office furnishings and furniture. On the 19th December 1988, the Commissioner wrote to Morgan Grenfell, reminding them that Mr Ng should make an offer to the minority shareholders, pointing out that he had been in control of the applicant for more than five months and raised the following queries on the reactivation proposals set out in the letter from Morgan Grenfell of the 6th December 1988 which were as follows:-

              " (1)     the track record requirements

                (2)      the solutions to LWE's SCRIP problems

                (3)      the feasibility to place NeWCO's shares

                (4)      the earning ability and the future prospects of NewCo."

Further information was also requested by the Stock Exchange on the same date. In response to a query from the Commissioner concerning the inadequacy of the proposed management for NewCo an additional director was proposed. Despite the advice that he had received to make a general offer, Mr Ng declined to do so on the grounds that he was negotiating with the Commissioner and the Stock Exchange with regard to his reactivation proposals. In fact Mr Ng did not make a general offer until the 12th June 1989.

11. At a meeting on the 10th February 1989, Mr Hanson, the head of the Listing Division and Secretary of the Listing committee, and Mr H. Chan, another member of the Listing Division, commented that the applicant's application, referring to the acceptability of NewCo for listing, was marginal, but said that the matter would be referred to the Listing Committee for hearing. However, when the matter came on for hearing before the Listing Committee on the 2nd march 1989, the application was adjourned in view of Mr Ng's failure to comply with Rule 15 of the Code on Takeovers and Mergers for the despatch of an offer document to the shareholders. An application was then made for an extension of time which was granted by the Stock Exchange on the 14th March 1989 for a period of one month. The proposals for reactivation were considered by the Listing Committee on the 6th April 1989 when the application was rejected. In a letter dated the 10th April 1989, Morgan Grenfell were informed by the Stock Exchange of the Listing Committee's decision and that the applicant would be delisted on the 10th April 1989.

12. The Listing Committee for the meeting held on the 6th April consisted of Mr Francis Yuen, the Chief Executive of the Stock Exchange and Mr C.Y. Kwan, a Vice-Chairman of the Exchange and a member of both the Council and the Listing Committee. Another member of the Council, Mr Marvin Cheung, who was also a member of the Listing Committee, but absent on the day of the meeting had sent a letter to the Listing Committee that set out his views on the applicant's proposals.

13. Although the Listing Committee did not provide reasons for the decision and it is clear and has not been argued that it is required to do so it is apparent from the evidence that the Listing Committee considered that the properties injected into NewCo by Mr Ng did not constitute a business while the company being a new company did not have a five year track record as required by the Listing Rules. In the absence of a track record the Committee considered the suitability of the proposed management, but decided that although there was some experience in real property, it was not sufficient to outweigh the lack of a track record. In coming to their decision the Committee disregarded the immediate earnings potential of NewCo as a crucial factor, the sufficiency of shares in the hands of the public, and the problem relating to the scrip issue of the applicant.

14. One objection made by Mr Ching, counsel for the applicant, that the Listing Committee was inquorate can be dealt with right away. Although this ground did not form part of the application for leave and was therefore not strictly available to be argued, it is in any event without merit. This objection arose on the grounds that Mr Yuen, in his capacity as Chief Executive of the Listing Committee, was disentitled to vote by virtue of Rule 217 of the Rules of the Exchange which reads :-

"217. Unless the Council, otherwise fixes, one member of a sub-committee shall constitute the quorum necessary for the transaction of business. Provided that where a quorum is formed of less than two members, any decisions at such a meeting shall require the ratification of the Committee. The Chief Executive shall also be entitled to attend meetings but shall not be counted for the quorum nor be allowed to vote."

 

15. Mr Yuen explained in his affirmation that the council have not otherwise fixed as allowed by Rule 217 so that the last line of Rule 217 has no application. Accordingly as two members of the Listing Committee were present, it was fully quorate.

16. Mr Law, a director of the applicant, stated that it was the established practice of the Listing Committee to have an oral hearing, but this conflicts with the evidence of Mr H. Chan of the Listing Division who said that there is no such established practice, and in fact for the period from the 5th February 1988 until the 5th April 1989, there were only 16 cases out of 52 where oral hearings took place before the Listing Committee.

17. In respect of his submission that an oral hearing should have been given by the Listing Committee, Mr Ching relied upon rules 2.11 and 2.12 of the Listing Rules which read :-

However, I agree with the argument presented by Mr Mills-Owens, counsel for the Stock Exchange, that the application had not reached the stage of submitting a prospectus. In any event, neither rule makes any reference to a requirement for an oral hearing.

18. Mr Ching further contended that the applicant believed that the issue that had caused the Listing Committee concern was the problem with regard to the share register and had not directed its attention to the proposed directors. In the absence of being told by the Committee about those fears, Mr Ching expressed the view that further information could have been given to the Committee for them to consider at the meeting and that an oral hearing for this purpose should have been given by the Committee so that this further information could have been taken into consideration. He also submitted that the Listing Division, to whom all correspondence had been directed and with whom meetings had been held, was a completely different body from that of the Listing Committee, and whilst factors may have been brought to the Listing Division's attention, they were not necessarily before the Listing Committee.

19. However, it is quite clear that the Listing Division forms an integral part of the Stock Exchange which does all the preparatory work for consideration by the Listing Committee when it comes to decide upon an application. The Listing Division and the Listing Committee cannot be isolated into two separate compartments, but must be looked at as a whole.  Mr Hanson as head of the Listing Division and secretary of the Listing Committee forms an essential link between the two. However there was no evidence nor was it raised that the decision making process is made other than by the Listing Committee. From the meetings that had been held and the lengthy correspondence, the Listing Division had obtained sufficient information to place before the Listing Committee for the hearing of the application.

20. As there is no statutory or contractual right for an oral hearing I have to determine whether the failure by the Listing Committee to hold an oral hearing amounts to a breach of the rules of natural justice. Whilst the applicant complained that it did not have an opportunity to put forward further information to the Listing Committee, no suggestion has been made as to what additional facts they wished to bring to the Committee's notice. Further the complaint that the Listing Committee was only concerned with the problem of the share register is not borne out by the evidence. No reference in fact was made to the share register in the letter of the 14th September 1988 from the Stock Exchange. Over a period of several months with the advice of Morgan Grenfell as financial advisers and solicitors, Stevenson, Wong & Co., the applicant had brought to the attention of the Listing Division full details of the information in support of their application and had answered many questions raised by the Commissioner and the Stock Exchange. When the applicant had been informed that the application would be placed before the Listing Division, no application was made by either Morgan Grenfell or Stevenson, Wong & Co. for an. oral hearing. Indeed if an oral hearing had been requested, there is no reason to believe that it would not have been granted. However, the applicant, as I have said, put forward no reasons why an oral hearing was necessary. In my judgment, there was no necessity to grant an oral hearing so that there was no breach of the rules of natural justice. However, even if there had been a breach the uncontradicted evidence shows that the applicant is unsuitable for listing whilst NewCo, a company that was not in existence could not have a track record as required by the rules. The rejection by the Committee of the management put forward by the applicant cannot be described as unreasonable nor was such an argument canvassed.

21. A further argument that the contents of the letter of the 14th September 1988 indicated a two stage approach so that there would be one stage to enable proposals to be submitted by the applicant and thereafter further time would be available to privatise the company cannot be accepted on the plain reading of the letter. The applicant received clear advice from the Stock Exchange in that letter so it had ample time in which to get its tackle in order, but has failed to do so by placing a wholly unsustainable interpretation upon the contents.

22. My attention was drawn by counsel to McInnes v. Onslow-Fane (1978) 1 W.L.R. 1520 where Megarry V.-C. considered the categories when a court is entitled to intervene in order to ensure that the rules of natural justice have not been broken when he said at p.p. 1528,1529: -

"...... where the court is entitled to intervene, think it must be considered what type of decision is in question. I do not suggest that there is any clear or exhaustive classification; but I think that at least three categories may be discerned. First, there are what may be called the forfeiture cases. In these, there is a decision which takes away some existing right or position, as where a member of an organisation is expelled or a licence is revoked. Second, at the other extreme there are what may be called the application cases. These are cases where the decision merely refuses to grant the applicant the right or position that he seeks, such as membership of the organisation, or a licence to do certain acts. Third, there is an intermediate category, which may be called the expectation cases, which differ from the application cases only in that the applicant has some legitimate expectation from what has already happened that his application will be granted. This head includes cases where an existing licence-holder applies for a renewal of his licence, or a person already elected or appointed to some position seeks confirmation from some confirming authority: see, for instance, Weinberger v. Inglis [1919] A.C. 606; Breen v. Amalgamated Engineering Union [1971]2 Q.B. 175, and see Schmidt v. Secretary of State for Home Affairs [1969]2 Ch. 149, 170, 173 and Reg. v. Barnsley Metropolitan Borough Council, Ex parte Hook [1976]1 W.L.R. 1052, 1058."

 

Mr Ching submitted that the first category of forfeiture applied in as much as the applicant has been deprived of its listing on the Stock Exchange. However, as the unchallenged evidence is to the effect that the applicant was, in any event, unsuitable for listing, there could be no legitimate expectation that it would not be delisted and the application for the listing of NewCo would inevitably have resulted in the applicant being delisted. In the alternative, Mr Ching submitted that the facts in the present case involving a scheme of arrangement and a reverse takeover is in a category of its own. That the consequences between a voluntary delisting and a compulsory one may well result in those associated with the applicant being forever disqualified from being directors of a public fisted company in the future. Whether or not that is the case is entirely the fault of the applicant which is the author of its own misfortune. Mr Mills-Owens on the other hand submitted that the second category, that of the application cases applies, for NewCo was in the position of making an application for a listing. However, again there can be no legitimate expectation on the part of the applicant that the application would succeed.

23. The Listing Committee's task, with the assistance of the Listing Division in preparing the case for consideration is to interpret the rules and to decide which companies shares should be listed on the Stock Exchange at its own absolute discretion. The Listing Division, in the meantime, is responsible for processing the application and ensuring that the applicant has complied with the rules. Again, the Listing Committee has an absolute discretion to cancel the listing of a company where it is, in the public interest, or there are insufficient shares in the hands of the public. In considering an application, the question of management is obviously a factor of importance to be taken into account, and there is no reason to believe and it has not been suggested in this case, that the decision made to reject the application was not made other than honestly and without bias. Upon the evidence, the applicant cannot complain that it has been treated unfairly. The allegation of breach of natural justice therefore fails.

                If there had been a breach of the requirements of natural justice, I would in any event, in the exercise of my discretion have refused the application for I am satisfied that it would not be in the public interest to grant the relief that has been sought. Accordingly the motion will be dismissed and there will be an order nisi for costs to the Stock Exchange.