in re World Trade Centre Group Limited

1993, MP No. 3870

HEADNOTE

Securities (Disclosure of Interests) Ordinance - Purpose of the Ordinance to prevent significant numbers of shares in public companies being held by unidentified entities - Principles upon which Court should act in ordering sale of blocked shares - Precaution to prevent the brains behind the relevant shareholding defeating the purpose of the legislation through the sale.

1993, MP No. 3870

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

MISCELLANEOUS PROCEEDINGS

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J U D G M E N T

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1. This matter concerns a comparatively new Ordinance, the Securities (Disclosure of Interests) Ordinance, which was enacted in 1991. It follows an Act of Parliament of 1985. I have not been referred to that. I am told that there is no guidance in the cases about the matters which is relevant to any issues which I have to consider today.

2. The long title of the Ordinance is "To require certain persons holding shares in or debentures of listed companies to disclose their interest in those shares or debentures." When one reads through the Ordinance, one sees that the scheme of it is to give statutory recognition to the fact that it is not in the public interest that significant numbers of shares in public companies are held by unidentified entities. In its basic provisions it requires that a holder of 10% of the shares of a public company has to disclose its interest. It also makes provision for the disclosure of interests by directors and their families.

3. Part II of the Ordinance enables the company to investigate its own shareholding. That is amplified in Part IV of the Ordinance which empowers the Financial Secretary to investigate shareholdings. The Financial Secretary also has power to block the transfer of shares in respect of which investigations are made.

4. Turning to this particular company, there was first of all a company investigation under s.143(1)(c) of the Companies Ordinance, that was appointed on the 28th August 1992. Following that, the same inspector was appointed on the 2nd June of this year to investigate the shareholding of this company, and that was under s.33 of this Ordinance. There was a report which, of course, I have not seen and following that the Financial Secretary made an order on the 8th July, in effect freezing the shares which are the subject to this application.

5. The shares are held in 3 different names, they are nominee companies. It may or may not be that there are three blocks; the shares together total about 9.8% of the company. So far, despite the investigation ordered by the Financial Secretary on the 2nd June and the orders which have been made blocking these shares, nothing has been discovered as to the ownership of those shares.

6. Turning to the more immediate matters from which this application arises, a company by the name of Rovtec Investments Ltd. has made an Offer for all the shares of the company World Trade Centre Group Ltd. for a sum of$1.96 per share. That is conditional upon them achieving a 50% acceptance.

7. Independent merchant bankers were appointed on behalf of the minority shareholders and they gave a strong recommendation for acceptance of the Offer. It is not all together surprising that should happen, if one looks at the historical price of the shares and one also takes into consideration that in April of this year, the major asset of the company was sold, namely, the World Trade Centre in Causeway Bay and part of the arrangement behind the current transaction proposed by Rovtec is that a building called the "Top Glory Tower", which is also in Causeway Bay, is to be injected into the company as well as I believe various other assets. Therefore, the independent merchant bankers on the information that they had at the time including, as I say, the historical share price clearly considered it was in the minority's interests to accept this Offer.

8. This application arises in this way. The company considers it is an ideal opportunity to divest itself of the difficulty of having a substantial part of its shareholding as blocked shares. Since no relevant person knows or is prepared to say how this approximately 9.8% of the company is held, there is a possibility that the holders could be acting in concert, that is if there are more than one. If the 9.8% shareholding were put on the market at the same time, there would clearly be a risk of a disorderly market to say the least.

9. There is also a fear that by having a large section of the shareholding blocked and the shareholders unable to exercise their shareholders' rights, the company is limited, for example, in having a rights issue. They would not be sure of having a successful rights issue, if approximately 10% of the shareholders could not accept the rights.

10. Furthermore, the company considers that it gives a bad image to the company with such a large shareholding blocked. So, clearly here one has a situation where there is an ideal opportunity to have that blocked shareholding removed if it is possible.

11. I am told that the Offer is now open until the 25th November, although I have just been told that there may be some doubt as to whether the Offer by Rovtec has become unconditional or not. That is not a matter which I can deal with today, but I do proceed upon the basis that the Offer is unconditional until the 25th November. Hence, there is some urgency in this matter which first came before me at 3.30 last Friday and could not be concluded then and I have finished hearing the matter this morning.

12. The first thing which I have to consider is the principles upon which the Court should act in deciding whether to order a sale of shares. The sale arises in this way that once the shares are blocked, whether it be by order of the Financial Secretary or by order of the Court, application can be made to the Court under s.46(4) of the Ordinance that the shares be sold, subject to the Court's approval of the sale. Section 46(5) states that an application can be made either by the Financial Secretary or by the company. Then there are further provisions which relate to how that sale might be made namely: Under s.46(6), where an order has been made under subsection (4), the Court may on application make such further order relating to the sale or transfer of the shares as it sees fit and s.46(7) widens the persons by whom such an application can be made and it includes any person interested in the shares.

13. Section 47 deals with what will happen to the proceeds of the sale and it, in effect, provides that the proceeds must be paid into Court and can be paid out of Court on application by persons who are beneficially interested.

14. Under what principles should the Court act in deciding whether to order a sale under s.46(4)? As I have indicated I am told that there is unfortunately no body of decisions to which I can refer. It seems to me that the Court must first of all be satisfied that it is in the public interest that the shares are sold. Secondly, I consider that looking at the scheme of the Ordinance which is to prevent the existence of large significant shareholdings by unidentified persons, the Court must be satisfied that adequate steps have been taken to ascertain the identity of the shareholders. Thirdly, because this Ordinance is, again as I have indicated, directed to preventing the existence of a body of unidentified shareholders it is in that respect that the Court must act, because the sale should not be a penalty on those shareholders over and above the fact that their shares are being sold. So the Court must have some regard to the protection of the shareholders and their interests. By those shareholders, of course, I am talking about the particular shareholders whose interests have been blocked and are being overridden by the sale.

15. First of all, in this case, I am satisfied that it is in a public interest that these shares be sold. In this respect I have regard first to the fact that the Financial Secretary. does not oppose this application. He does however ask that any Order that I make should include a provision that notice of any application for payment out of the proceeds should be served on the Attorney-General on his behalf. This seems to me to be correct. The whole purpose of the legislation is to force information as to shareholding to be revealed. The Financial Secretary and ultimately the public at large have a right to know who are the real owners of the shares. It would defeat the purpose of the legislation if the fruits of the secret shareholding could be spirited away by those whose identity the Ordinance is designed to reveal without them having to disclose full details. The Court must also be vigilant to see that the mechanism of a Court ordered sale is not used as a method of "laundering" the shares by the brains behind the relevant shareholding.

16. In considering the public interest, I take into account that there is clearly on foot some kind of reconstruction of the company and some kind of re-organization. Taking into account the public policy represented by this Ordinance that there should not be a large body of unidentified shareholders, it is in the public interest that at an appropriate time, if nothing else could be done, that body is dissolved.

17. Secondly, as regards to the question of whether adequate steps have been taken to ascertain the shareholders, I consider they have. In all probability nothing more can be done effectively than has been done by the inspector who has been appointed by the Financial Secretary.

18. I take into account the following factors: that the entities in whose names the shares are held are nominee companies; that it appears that the clients of those nominee companies on whose behalf the shares are held appear to be British Virgin Island companies; that the details of the shareholding of British Virgin Island companies can not ??? unless persons volunteer information; that the shareholding of British Virgin Island companies could be through bearer shares and even if they are not bearer shares, it is, as I understand it, impossible to discover the identity of the shareholders. In the circumstances of this case I consider that adequate steps have been taken. A significant period of time has elapsed since the blocking orders were made and still nothing further has come out. I also take into account that the person making those enquiries also investigated the affairs of the company generally from August of last year. I think it would be futile for the Court to require any further investigative steps to be made.

19. I turn then to consider what steps should be taken to protect the shareholder's interest. This becomes of particular significance in this case, because although this application was launched only at the end of last week, the price at which the shares were trading on the stock market rose significantly above the offer price made by Rovtec. What is more the turnover of the shares on the market seems to have also risen significantly. On my calculation, the turnover approached approximately 2% which, although it may not be enormously high by comparison with other companies, in relation to this company is significantly high, because, as it was pointed out not only in the Offer document but in the affidavits as well, the turnover of this company has been low. So it seems to me that any order must not simply be that the shares be tendered to Rovtec in accordance with their public Offer, since the shareholders may well, in the particular situation of this case, be able to attain more on the open market than they could from Rovtec.

20. Having discussed this matter this morning with Counsel and Counsel having taken instructions, a form of order has been devised which gives the Registrar power to sell the shares on the open market, if that is feasible, within the next 7 days and if it is not feasible, the shares are to be tendered to Rovtec and if their Offer still remains unconditional no doubt they will be transferred to Rovtec at the Offer price of $1.96.

21. There is one further matter which I should deal with which has troubled the Offeror, Rovtec, and that is whether they will be obtaining good title to the shares if sold, in accordance with the order which I am about to make. In my view, they will obtain good title and there can be no doubt about it. The Court has as I have indicated under s.46(4) a blanket power to order sale. As Mr. Poon has pointed out the proceeds of sale are then dealt with by the Court and can be applied for by the persons who are beneficially interested in them. There is no doubt, in my mind, that once the Court ordered sale takes place, good title to those shares passes. In that respect provided there is nothing further, I cannot see how that sale as a sale can be set aside.

22. In those circumstances, I propose to make the order prayed for, as sought by Mr. Poon in accordance with the draft amendment as has been proposed and discussed prior to this judgment.