CHONG KIN GROUP HOLDINGS LTD v. THE STOCK EXCHANGE OF HONG KONG LTD

HCAL 340/2022

[2022] HKCFI 1439

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTITUTIONAL AND ADMINISTRATIVE LAW LIST NO 340 OF 2022

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J U D G M E N T

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A. Introduction

1.  The applicant (“Company”) is a company listed on The Stock Exchange of Hong Kong Ltd (“Exchange”), the putative respondent to these proceedings.

2.  On 13 May 2022 – last Friday – the Company issued a Form 86 and made an urgent ex parte on notice application, seeking an interim injunction to restrain the Exchange from suspending the trading of the Company’s shares pending the Company’s judicial review application to bring a challenge against the decision dated 12 May 2022 (“LRC Decision”) made by the Exchange’s Listing Review Committee (“LRC”).

3.  The LRC Decision itself confirmed a prior decision dated 14 February 2022 (“LC’s 2^nd Decision”) made by the Exchange’s Listing Committee (“LC”) that the Company’s shares should be suspended from trading pursuant to Rule 6.01(4) of the Listing Rules.

4.  As a result of the LRC Decision, the Company’s shares were in fact suspended from trading as from 9am on 13 May 2022. The Exchange had in the meantime refused the Company’s request to delay any suspension pending the commencement and determination of these judicial review proceedings, which it notified. The ex parte on notice hearing took place at approximately 4.30pm on 13 May 2022, after the close of the trading day.

5.  At the ex parte on notice hearing, I adjourned the Company’s injunction application to be heard today, on 16 May 2022 – Monday – and I declined to order any ‘interim interim’ injunction in the meantime. I also ordered that the injunction application would be heard together with the application for leave to apply for judicial review. I gave brief reasons, which were essentially as follows:

(1)  save in exceptional circumstances, applications for interim relief may only be granted if leave to apply for judicial review has been obtained;

(2)  I was not prepared to grant leave to apply for judicial review at once, on an urgent basis;

(3)  I thought it was unattractive, where trading in the Company’s shares had already been suspended, to require the lifting of the suspension for a short period, when the suspension might be reimposed if I were either (a) to refuse to grant leave to apply for judicial review, or (b) to grant leave but decline to order any interim injunctive relief pending the substantive application;

(4)  I would be able to deal with the leave application, and if still relevant the application for interim injunctive relief, on an early date, namely today, 16 May 2022 – after only one further trading day;

(5)  to deal together with an application for leave to apply for judicial review and a related application for interlocutory injunctive relief would be in accordance with my past practice: see, for example, China Trends Holding Ltd v The Stock Exchange of Hong Kong [2021] HKCFI 2427 at §10.

6.  This hearing is, therefore, to deal with the Company’s application for leave to apply for judicial review, and (if leave is granted) the Company’s application for an interim injunction to restrain the Exchange from suspending the trading of its shares pending the substantive judicial review hearing.

7.  The Company says that leave to apply for judicial review should be granted, and so should the interim injunction. The Exchange says that leave to apply for judicial review should be refused, and that no interim injunction should be granted even if leave is granted.

8.  At this hearing, the Company has been represented by Mr William Wong SC leading Mr Tony Ko of Counsel. Mr Ko had appeared on his own last Friday, and Mr Wong adopted his skeleton submissions, to which he added orally. Therefore, I shall not differentiate between who made what submission in Mr Ko’s skeleton, but shall attribute all submissions made for the Company to Mr Wong. The Exchange has been represented today by Mr Jin Pao SC, who also filed skeleton submissions.

9.  This is my Judgment.

B.  Background

10.  As might be expected, the main factual background is set out in the LRC Decision – as well as some earlier relevant decisions. The main facts are not themselves controversial, and they can be summarised below. What appears to be controversial is the appropriate approach to consideration of those facts in the context of the Listing Rules, to which point I can subsequently return.

11.  The Company has been listed on the Main Board of the Exchange since 17 October 2016, and was engaged in a concrete placing business (“Original Business”).

12.  At the time of listing, the Company was 75% owned by Pioneer Investment Ltd (“Former Controlling Shareholder”), which was in turn 70% owned by Mr Cheung Yuk Kei and 30% owned by Mr Chan Yiu Hung. Mr Cheung was the Chairman and Executive Director of the Company, and Mr Chan was one of the founders of the Original Business.

13.  In 2017, Prestige Rich Holdings Ltd (“Current Controlling Shareholder”) acquired 75% of the Company’s shares from the Former Controlling Shareholder. The Current Controlling Shareholder is wholly owned and controlled by Mr Zhang Jinbing. Mr Zhang is the deponent to the affirmation filed in support of the Company’s current applications.

14.  Following the change of shareholding, the Company’s board was reconstituted, and all its then existing directors resigned. However, Mr Cheung and Mr Chan remained directors of the sub-holding company and its operating subsidiaries of the Original Business.

15.  In October 2018, the Company acquired Stand East Investments Ltd, a company engaged in a business relating to new energy vehicles, road freight transport, logistics park development and warehousing services (“NEV and Logistics Business”). In December 2018, the Company further acquired 1847 new energy vehicles to enlarge its fleet portfolio, and to expand its NEV and Logistics Business.

16.  In April 2019, the Company acquired a 90% interest in Hua Yao Financing Leasing (Shenzhen) Co Ltd (“Hua Yao”), in order to develop a finance leasing business for self-employed drivers in respect of its new energy vehicles (“Finance Leasing Business”).

17.  The NEV and Logistics Business and the Finance Leasing Business have been collectively defined as the “New Businesses”, and the acquisitions of the New Businesses have been defined as the “Previous Acquisitions”.

18.  In July 2019, the Company issued new shares to the Current Controlling Shareholder under a specific mandate, raising HK$209.7 million to finance the New Businesses. Subsequently, in 2019 and 2020, the Company also commenced new businesses, such as a money exchange business in the United Kingdom, a moneylending business in Hong Kong, and a real estate development business in Grenada.

19.  On 21 January 2021, the Company announced that it would dispose of the Original Business to the Former Controlling Shareholder – still owned by Mr Cheung and Mr Chan, at 70% and 30% respectively – for the consideration of approximately HK$113.2 million (“Disposal”). The announcement also stated that the Original Business had been running at a net loss since 2019, and the Disposal would allow the Company (amongst other things) to focus on its other core businesses.

20.  The practical effect of the Disposal was that the entirety of the Original Business and the management and corporate vehicles by which it was operated ceased to be part of the Company’s operations.

21.  Indeed, in an exchange of correspondence between the Company and the Listing Division of the Exchange (“LD”) in February 2021, the Company confirmed that, following the Disposal, it had no other subsidiaries engaged in the Original Business. On 16 March 2021, the LD issued a ‘show cause’ letter to the Company, which expressed the concern that the Disposal was part of a series of transactions which amounted to a backdoor listing – or reverse takeover (“RTO”) – attempt to achieve the listing of the New Businesses.

22.  On 26 April 2021, the Company stated that it had been carrying on concrete related businesses, and that the Disposal was to streamline the concrete business (“Streamlined Business”). The Company says that the Streamlined Business is a more efficient mode of operation than the Original Business, adopting a more asset-light strategy – by means of, amongst other things (i) leasing of machinery instead of purchasing and maintaining it, and (ii) adjusting manpower to hire more short-term labour in order to cater for the concrete placing business of the Group – so as to permit the Group to attain more efficient budget control, with less expense spent on repairing maintenance of machinery and equipment owned, and with plans for staff and resources to be deployed in projects.

23.  On 14 May 2021, the LD issued another ‘show cause’ letter to the Company, leading to a further exchange of correspondence.

24.  On 4 June 2021, the LD issued its decision (“LD Decision”) that the Previous Acquisitions and the Disposal constituted an RTO under Rule 14.06B of the Listing Rules.

25.  Also in June 2021, the Company set up another company – Chong Kin Construction Engineering Ltd – to operate the Streamlined Business. On the facts, there was an interruption in the conduct of any business in the same industry after the Disposal until the commencement of the Streamlined Business.

26.  The Company sought a review of the LD Decision. By its decision dated 3 September 2021 (“LC 1^st Decision”), the LC upheld the LD Decision.

27.  On 22 October 2021, the Company announced that it would sell the New Businesses for a consideration of HK$180 million (“New Businesses Sale”). On 4 November 2021, the Company announced that the New Businesses Sale was completed.

28.  The Company sought a further review of the LC 1^st Decision by the LRC. In light of the latest developments, on 1 December 2021 the LRC remitted the matter back to the LC for reconsideration. Following a hearing on 26 January 2022, on 14 February 2022 the LC made the LC 2^nd Decision, deciding that the entirety of the relevant events should be treated as a series of transactions amounting to an RTO under Rule 14.06B of the Listing Rules.

29.  The Company sought a review of the LC 2^nd Decision, which was heard by the LRC on 27 April 2022. As already indicated, on 12 May 2022 the LRC made the LRC Decision.

C.  The LRC Decision

30.  The key reasoning of the LRC in the LRC Decision is to be found in §§34-37, which state:

Listing Review Committee’s views

34. The Listing Review Committee considered and came to the overall view that the Disposal was the final step in a series of transactions, comprising the Previous Acquisitions, which together with the Disposal constituted an RTO (applying the principles set out under Rule 14.06B). The Listing Review Committee considered that the RTO Rules were triggered and applied as at the juncture of the Disposal. The subsequent developments, including the NEV Business Sale and the development in the Streamlined Business, were not relevant to the assessment of whether an RTO had been triggered at that earlier juncture. Once the RTO was triggered it followed that Rule 14.54 should apply and that the Exchange should thereon treat the Company as if it were a new listing applicant in line with the principle-based RTO Rules. In this regard, the Listing Review Committee noted paragraph 4 of GL104-19, which provides that “the Exchange would apply the RTO Rules of discourage “shell” activities”.

35. The Listing Review Committee noted that it appeared to be common ground between the review parties that the New Businesses did not meet the relevant requirements for RTO acquisition targets set out under Rule 14.54. As a result, the Listing Review Committee considered that it was clear that the Company could be determined no longer suitable for listing and that trading in the Company’s shares should be suspended under Rule 6.01(4).

36. Notwithstanding the growth in the performance of the remaining Streamlined Business as illustrated by the Company’s recent audited financial accounts for the period from 16 June 2021 to 31 March 2022, the Listing Review Committee noted that the remaining Streamlined Business also did not in any event meet the new listing requirements, particularly the requisite three year track record period profit requirement under Rule 8.05. The Listing Review Committee therefore considered that the Company remained unsuitable for continued listing and trading should be suspended under Rule 6.01(4).

37. In these circumstances, the Listing Review Committee noted it was not strictly required to consider whether the Streamlined Business was substantially different from the Original Business or a continuation of the same for the purposes of its decision, as the Listing Review Committee agreed with the Listing Division that the transition to the Streamlined Business should not be considered part of the RTO. Nonetheless, the Listing Review Committee clarified that it did consider overall that the Streamlined Business was substantially different from the Original Business and effectively a new business (albeit in the concrete sector) for the following reasons amongst others:-

(a) The announcement made by the Company in January 2021 with respect to the Disposal made it clear that the reason for the Disposal was to allow the Company to devote more resources and efforts to focus on other core business segments for future development. The announcement did not indicate or mention the continuation of the Original Business or business streams thereunder following the Disposal whether in a varied form or otherwise.

(b) It was clear from the submissions that the business model and the management of the Streamlined Business were substantially different from those of the Original Business.

(c) It was also made clear at the hearing that the Streamlined Business and its model were conceived of and development by Mr. Zhang. By way of example it was said by the Company that the staff and management of the Original Business were let go because they were unwilling and/or unable to adapt their modus operandi.

31.  Hence, in short form, the following findings and reasoning can be found:

(1)  the Previous Acquisitions and the Disposal constituted an RTO for the purposes of Rule 14.06B;

(2)  the developments subsequent to the LD Decision, such as the New Businesses Sale and the development of the Streamlined Business, are irrelevant to whether the RTO rules were triggered at an earlier juncture;

(3)  the New Businesses did not meet the relevant requirement for RTO acquisition targets under Rule 14.54;

(4)  the remaining Streamlined Business also failed to meet the new listing requirement under Rule 8.05;

(5)  although it was not necessary to consider the Streamlined Business as part of the RTO, the Streamlined Business was nevertheless substantially different from the Original Business and was effectively a new business.

D.  Regulatory Framework

32.  Rule 2.03 of the Listing Rules provides that the Listing Rules are designed to protect the investing public, and to ensure that investors have and can maintain confidence in the market. This is consistent with section 21 of the Securities and Futures Ordinance Cap 571 (“SFO”), which imposes a duty on the Exchange to ensure, so far as reasonably practical, an “orderly, informed and fair market”. In discharging its duty, the Exchange is further required to act in the interest of the public, having particular regard to the interest of the investing public, and to ensure that the interest of the public prevails where it conflicts with the interest of the Exchange. The Listing Rules are made by the Exchange pursuant to section 23 of the SFO.

33.  Mr Wong points to Rule 6.01(4) of the Listing Rules, which states that:

Listing is always granted subject to the condition that where the Exchange considers it necessary for the protection of the investor or the maintenance of an orderly market, it may at any time direct a trading halt or suspend dealings in any securities or cancel the listing of any securities in such circumstances and subject to such conditions as it thinks fit, whether requested by the issuer or not. The Exchange may also do so where:

…

(4)  the Exchange considers that the issuer or its business is no longer suitable for listing.

34.  Rule 14.06B of the Listing Rules defines a reverse takeover as:

an acquisition or a series of acquisitions of assets by a listed issuer which, in the opinion of the Exchange, constitutes, or is part of a transaction and/or arrangement or series of transactions and/or arrangements which constitute, an attempt to achieve a listing of the acquisition targets (as defined in rule 14.04(2A)) and a means to circumvent the requirements for new applicants set out in Chapter 8 of the Listing Rules.

35.  The Notes to Rule 14.06B explain that the provision is aimed at preventing acquisitions that represent an attempt to circumvent the new listing requirements. In applying a principle-based test, the Exchange will normally take into account a number of factors, including (a) the size of the acquisition or series of acquisitions relative to the size of the issuer; (b) a fundamental change in the issuer’s principal business; (c) the nature and scale of the issuer’s business before the acquisition or series of acquisitions; (d) the quality of the acquisition targets; (e) a change in control (as defined in the Takeovers Code) or de facto control of the listed issuer (other than at the level of its subsidiaries); and (f) other transactions or arrangements which, together with the acquisition or series of acquisitions, form a series of transactions or arrangements to list the acquisition targets.

36.  The Notes also refer to certain “bright line” situations, where transactions would normally be regarded as reverse takeovers. They include a reference to a 36-month period over which acquisitions or arrangements might be spread. It seems to me that the purpose of giving such an example is to identify that the Exchange may look at transactions or arrangements over a period of time, perhaps as long as 36 months, in determining whether or not those transactions and arrangements together form a reverse takeover.

37.  HKEX Guidance Letter 104-19 (“GL 104-19”) sets out the policy rationale of the RTO rules, and guidance as to how the Exchange exercises its discretion in determining when the RTO rules are triggered. Material for present purposes might be the following provisions:

4.  In recent years, the prevalence of backdoor listings has resulted in a substantial increase in the value of a listing status, leading to extensive activities related to investors acquiring controls of listed issuers for their listing platforms (rather than the underlying business) with a view to eventual backdoor listings, and listed issuers undertaking corporate actions (such as disposals of businesses) to facilitate the sale of their listing platforms. Such activities also led to opportunities for market manipulation and undermine investors’ confidence in our market. Where these “shell” companies subsequently enter into significant acquisitions, the Exchange would apply the RTO Rules to discourage “shell” activities.

5.  In July 2019, the Exchange published its consultation conclusions on Backdoor Listing, Continuing Listing Criteria and Other Rule Amendments. The Rule amendments are intended to apply the RTO Rules to:

·  arrangements that circumvented the then RTO Rules, for example, structuring a RTO transaction as a series of smaller acquisitions, or re-sequencing transactions to acquire a new business before disposing of the original business, or through a series of acquisitions and disposals; and

·  arrangements involving an investor acquiring control of a listed issuer and using the listed issuer as a listing platform to achieve a listing of new businesses that may have no connection with the issuer’s original business. These new businesses may be acquired by the listed issuer, or developed as greenfield operations and, following the disposal, cessation and/or curtailment of the original business operation, become the major operation of the listed issuer.

6.  In applying the RTO Rules, the Exchange has regard to the following:

·  The RTO Rules are principle based, anti-avoidance provisions designed to prevent the circumvention of new listing requirements for the assets acquired and/or to be acquired. As such, the Exchange would apply the RTO Rules purposively and the six assessment factors described in the Rules provide guidance to the market on factors that the Exchange would normally consider in a RTO assessment. The applications of these assessment factors would vary from case to case, depending on the specific circumstances of the issuer.

·  As the RTO Rules are principle based, they should provide a framework for addressing backdoor listings and sufficient flexibility to address changing RTO structures, without imposing undue restrictions on legitimate business activities of issuers.

·  The RTO Rules are not intended to restrict legitimate business activities of listed issuers, including business expansion or diversification that is part of the issuer’s business strategies related to its existing business, or is consistent with the issuer’s size and resources.

·  When applying the RTO Rules, the Exchange’s approach is targeted towards transactions that represent an attempt to circumvent the new listing requirements, particularly those involving companies engaging in “shell” activities, as indicated by the factors (a) change in control or de facto control of the listed issuer and (b) fundamental change in the issuer’s principal business.

13.  Where an issuer acquires a target business that is completely different from its existing business and that target business is substantially larger than its existing business, it may be viewed as a fundamental change in the issuer’s principal business. This is more likely the case where the issuer’s existing business is so immaterial that after the acquisition, the issuer would be substantially carrying on the target business.

14.  For the avoidance of doubt, a “fundamental change in the issuer’s principal business” does not refer to acquisitions that are part of the issuer’s business strategies related to its existing business, including business expansion or diversification, or are consistent with the issuers’ size and resources. This may involve an issuer expanding upstream or downstream into new business segments, or an issuer acquiring businesses as part of the issuer’s expansion strategy as illustrated in the following examples:

·  technology companies in the new economy sector making acquisitions of businesses in mature industries as part of their business strategies, where the acquisitions formed part of their expansion strategies.

·  A listed issuer engaging in financial advisory and other financial services proposing to acquire an app-based retail banking services business, where the acquisition is part of the issuer’s strategy to expand its business into the fintech sector.

27.  The “series of transactions and/or arrangements” factor is normally applied in conjunction with other assessment factors such as the relative size of the transactions to the issuer, and whether the series of transactions and/or arrangements would lead to a fundamental change in the issuer’s principal business.

38.  Rule 14.54 provides that:

The Exchange will treat a listed issuer proposing a reverse takeover as if it were a new listing applicant.

(1)  The acquisition targets must meet the requirements of rule 8.04 and rule 8.05 (or rule 8.05A or 8.05B). In addition, the enlarged group must meet all the new listing requirements set out in Chapter 8 of the Listing Rules (except rule 8.05).

(2)  Where the reverse takeover is proposed by a listed issuer that has failed to comply with rule 13.24, the acquisition targets must also meet the requirement of rule 8.07 (in addition to the requirements for the acquisition targets and the enlarged group set out in rule 14.54(1)).

(3)  The listed issuer must comply with the requirements for all transactions set out in rules 14.34 to 14.37.

E.  Intended Grounds of Review

39.  In the Form 86, the Company puts forward two intended grounds for review, which to an extent overlap:

(1)  first, the LRC misinterpreted the Exchange’s policy in its finding that the RTO rules continue to apply when the business alleged to be the subject matter of the RTO was no longer part of the Company (“Misinterpretation of Policy Ground”); and

(2)  second, the LRC Decision to suspend the trading of the Company’s shares was a disproportionate punitive measure, and is inconsistent with the preventive policy of the RTO rules (“Preventive Nature Ground”).

40.  As is evident from that summary, the essence of the argument underpinning the Company’s application for leave to apply for judicial review – and the related interlocutory injunction application – is that, following the New Businesses Sale (being the businesses for which it is said the Company sought to achieve backdoor listing status), the New Businesses have been disposed of, so that the RTO rules should not be triggered. It is said that suitability concerns cannot arise over a business no longer operated by the Company.

41.  I also note, as Mr Pao suggested is appropriate, that the Company only challenges whether the RTO rules in the Listing Rules, and in particular Rule 14.54, should be applied in light of the New Businesses Sale. There is no challenge to the other findings made by the LRC.

42.  Whilst Mr Wong submits that the proposed grounds for review meet the test for the grant of leave to apply for judicial review, Mr Pao submits that the intended grounds have no real prospect of success, so that leave ought to be refused.

F.  Misinterpretation of Policy Ground

43.  I do not think there is, or could be, any real contest as to the approach in public law to questions of misinterpretation or misapplication of established policy. It is settled that such a situation gives rise to a standard public law ground for challenging the relevant decision. A misinterpretation or misapplication of policy may render the relevant decision just as flawed as if the policy had been overlooked and ignored altogether.

44.  It is also settled that interpretation is a matter for the Court. A policy is not to be construed in the way in which a statutory provision would be construed, by application of fine legal rules of construction. Rather, it is construed in the way in which an educated person, acquainted with the factual context, would construe it, by giving to it a common sense meaning and without resort to any such legal rules: see Tong Wai Ting v Secretary for Education (unreported, HCAL 73/2009, 24 August 2009) at §96.

45.  Mr Wong submits that the LRC Decision is premised solely on the ground (at §34) that the Previous Acquisitions and the Disposal formed a series of transactions, which constituted an RTO under the principles set out under Rule 14.06B.

46.  However, Mr Wong submits, the New Businesses Sale meant that:

(1)  any perceived benefit that could conceivably be gained by the Company’s RTO involving the Disposal and the Previous Acquisitions had already been disgorged;

(2)  the original basis for the finding of RTO is gone, because the very business which is said to have been “backdoor listed” is no longer part of the Company’s operation.

47.  Mr Wong submits that the misinterpretation of the Listing Rules was because:

(1)  Rule 14.54 should be interpreted consistently with the policy that the RTO rules are preventive, but not punitive, in nature.

(2)  This means that if the business alleged to be the subject matter of an RTO is no longer part of the Company, then the RTO rules cease to apply.

(3)  It is a misinterpretation of the RTO rules to take the view that, once the RTO rules are triggered, then the only way the company could remain listed is to satisfy Rule 14.54 in meeting all the new listing requirements or, alternatively, that once the RTO rules were triggered at a point in time, then an issuer’s trading shall be suspended notwithstanding that what triggered the RTO rules was effectively removed.

(4)  If there can be a view of transactions and arrangements over a 36-month period to decide whether or not they amount to an RTO, then it is only appropriate to look at such a period to decide whether after what might seem to have been an RTO is affected by subsequent events so that the proper view to take is that there was no RTO (because the mischief aimed at does not exist by the end of the period). This is in effect to look at might be called the “net effect” of the overall events, which may indicate that there was no relevant acquisition which would offend the vice of backdoor listing.

(5)  The policy underlying Rule 14.06B must be applied with common sense, and it must have been an error for the LRC specifically to hold that events subsequent to the Disposal must be irrelevant. That approach is overly mechanistic.

48.  In response, Mr Pao makes the following broad submissions:

(1)  The LRC was entitled to find that the Previous Acquisitions and Disposal should be treated as one transaction, and that they constituted an RTO under Rule 14.06B. Indeed, that was plainly correct on the principle-based system approach: the issuer fundamentally changed its business, its controller, and acquired a new business with no proven track record.

(2)  The fact that the New Businesses were later disposed of does not mean that an RTO never occurred. An RTO did take place, and there is nothing under Rule 14.06B which entitles an issuer to “erase” the effects of an RTO, to exempt itself from the requirements under Rule 14.54. Hence, it was correct for the LRC to conclude that the developments subsequent to the Previous Acquisitions and Disposal were not relevant to the assessment of whether an RTO had previously taken place.

(3)  At best, the later sale of the New Businesses might be seen as an attempt by the issuer to remedy its non-compliance with the Listing Rules. But, on the basis that Rule 14.54 was triggered, the unchallenged evidence is that the current business of the issuer does not satisfy the requirements for new issuers, and that non-compliance has not been remedied. It remains open to the issuer to seek to comply with the Listing Rules within the 18-month remedial period.

49.  I agree with those points.

50.  Further, I think that Mr Wong’s submission about disgorging potential benefit from the RTO misses the point of the rules. The RTO rules exist, as Mr Wong himself submits for the second ground, so as to prevent an RTO. If an issuer has acted in breach of the rules by engaging in an RTO, the consequence is to trigger the requirement to comply with the Listing Rules by reference to treating the backdoor acquisition of business as a new listing. Further, even if one were to look at disgorging, the RTO is comprised of both the Previous Acquisitions and the Disposal, and the latter has not been reversed. Despite the later Streamlined Business, it is simply not possible to return to the pre-RTO position (though I am not sure that even that would enable one to pretend nothing happened).

51.  Overall, I think the combined effect of the Previous Acquisitions and the Disposal are obvious. Though that obvious effect does not depend upon the chronology, it is perhaps instructive to consider the position if the chronology were reversed. If the Disposal had been made at the same time as or before the Previous Acquisitions, it must be quite clear that there would have been an RTO. That would not have changed simply because what was acquired was subsequently disposed of, and replaced by a different business, even if the replacement were in the same broad industry as the Original Business disposed of earlier.

52.  In answer to a direct question, Mr Wong confirmed that as at the date of the Disposal, there had been an RTO. His submission was really that it would not be appropriate to “stop the clock” at that point, when subsequent events arose. He relies on the fact that the LRC itself remitted the matter to the LC, in the knowledge that events had occurred subsequent to the LC 1^st Decision. But, he says, those subsequent events were nevertheless ignored both by the LC in the LC 2^nd Decision and in the LRC Decision. However, I do not think that is an entirely fair way of describing what happened. Rather, the LRC remitted the matter so that the LC could take into account the subsequent events to see whether that might affect its previous decision. The LC held that it did not. The LRC also agreed with the analysis, acknowledging the subsequent events had happened, but thinking them ultimately irrelevant to the analysis of whether there had been an RTO, which was completed by the transactions and arrangements upon the Disposal.

53.  The Original Business was formed, substantially owned and controlled, and operated by Mr Cheung and Mr Chan. After the change of ownership at the listed Company level, Mr Cheung and Mr Chan remained in management control at the sub-holding company and operating company level. Upon the Disposal, the Original Business was purchased and in effect taken back by Mr Cheung and Mr Chan, using the same vehicle as was originally used by them, presumably to be carried on by them essentially as before. Not least in the context of the Disposal, the Previous Acquisitions do not seem to me sensibly capable of being considered as expansion or diversification of the business. The commencement of the Streamlined Business (after the Disposal, and through a new subsidiary) does not change that position. That the Streamlined Business was not disposed of when the New Businesses were sold, also does not change the overall picture.

54.  Further, I do not think the LRC can be faulted on any public law grounds for the unchallenged finding – although expressly not strictly necessary for its decision – that the Streamlined Business was substantially different from the Original Business, and effectively a new business. It was at least properly open to the LRC to form the view that it was not a continuation of the Original Business, and it does not meet the requirements of a new listing.

55.  On the factual circumstances I have identified and which are not controversial, I do not think it fair to describe the Streamlined Business as a “continuation” of the Original Business. Though in the same industry as the Original Business, the Streamlined Business was effectively commenced after the Disposal, using a different business model, different management, and was as a result of a business idea conceived by Mr Zhang. I acknowledge that it may be proving to be more profitable than the Original Business, which was apparently loss-making at the time of its Disposal. But, that does not seem to me to avoid the consequences of there having been an RTO – though it may indicate the real possibility of complying with any resumption conditions within the remedial period.

G.  Preventive Nature Ground

56.  Mr Wong begins his submission in this regard by pointing out that it was effectively common ground before the LRC that the policy underlying Rule 14.06B was preventive in nature. Indeed, §6 of GL 104-19 says in terms that the RTO rules are principle-based, anti-avoidance provisions designed to prevent the circumvention of new listing requirements.

57.  Therefore, Mr Wong submits, to say that an issuer is unsuitable for listing because of a “past” RTO which no longer exists is inconsistent with the underlying objectives of the RTO rules. To suspend the trading of the Company’s shares on the basis of the RTO in relation to the NEV and Logistics Business (which no longer exist within the Company) would be only punitive, and indeed disproportionately punitive.

58.  The submission continues that, because the RTO rules are not punitive in nature, this cannot mean that a company is not allowed to rectify the position when a possible issue under the RTO rules occurs. The rules against RTO have the paramount balance to strike between allowing legitimate business activities (such as business diversifications, combinations and expansions) and the need to maintain market quality.

59.  Suspension is a drastic measure to be implemented, and should be used only as a matter of last resort. But here, Mr Wong submits, suspending the Company’s trading does not protect the investing public. Rather, it hampers their right to trade in the Company’s shares and punishes the Company and the Company’s shareholders disproportionately. In short, the trading of the Company’s shares should not be suspended when the NEV and Logistics Business which was found to be an RTO no longer forms part of the Company.

60.  In response, Mr Pao makes the following submissions:

(1)  The case has all the hallmarks of the mischief that Rule 14.06B was designed to prevent.

(2)  It is contrary to the policy rationale underlying Rule 14.06B to permit an undisputed backdoor listing, so long as the issuer is capable at an unspecified future time to dispose of the newly acquired business after the Exchange raises an RTO concern. This would undermine the provisions against backdoor listings, and dilute the preventive effect of the RTO rules.

(3)  In this case, as was accepted by Mr Wong, there was an RTO once the Previous Acquisitions and the Disposal had been completed. For at least some period of time thereafter, the Company’s shares were traded – and that is precisely the mischief intended to be avoided by the RTO rules.

(4)  There was no “punishing” the issuer in this case. However, it is important to deter the approach of the issuer, which would only encourage backdoor listings if issuers were able to escape the consequences of Rule 14.54 by later disposing of its newly acquired business.

61.  I agree with all of those points. But, as to the second point, it might be added that it cannot be right for the Exchange to wait after an RTO to see what else might happen before it takes action. Further, as to the last point, it is also important to distinguish between (a) requirements triggered by the operation of the Listing Rules and (b) punishment. They are not synonymous.

62.  I also agree – relevant to both grounds of intended review – that the Decision comprising the determination that the issuer remained unsuitable for continued listing, and that trading of its shares should be suspended under Rule 6.01(4), was collectively made by the LRC based on its overall evaluation of the facts, evidence and submissions. That was the product of an exercise of professional judgment by a specialist committee with a broad array of relevant expertise and experience. In the absence of an error of law, or failure in taking into account relevant matters, or taking irrelevant matters into account, the Court should not intervene in such professional judgments.

H.  Leave to Apply for Judicial Review Refused

63.  Therefore, I refuse the Company leave to apply for judicial review as sought in its Form 86. Neither intended ground for review is reasonably arguable.

I.  Interim Injunctive Relief

64.  Once leave to apply for judicial review has been refused, any application for interim injunctive relief simply falls away.

65.  For the sake of completeness, I would go on to identify why I would in any event have refused to grant the interim injunctive relief sought by the Company, even had I granted leave to apply for judicial review.

66.  The principles applicable on an application for interim injunctive relief in the context of judicial review cases are well-settled, and there need not be reference to any authority, save perhaps to the useful summary in Re Leung Chung Hang Sixtus [2018] HKCFI 1869 at §§12-14. In short, the ordinary American Cyanamid principles apply, subject to necessary modifications to take into account the public law context.

67.  In this case, the proposed injunctive relief would have the effect of undoing what the Exchange, as the primary regulator, has in good faith determined is necessary on its assessment of the facts and evidence and by reference to the public interest. In such a situation, the Court will be slow to intervene.

68.  I also agree with Mr Pao that decisions made by the Exchange as to suspension of trading are similar or analogous to delisting decisions, where it has been held that the grant of an interim injunction would have an adverse impact on the effectiveness of the delisting regime and the reputation of the Hong Kong stock markets: see Cai Zhenrong v The Stock Exchange of Hong Kong [2021] HKCA 1179 at §12. Whilst I note that what was said by Kwan V-P in the second part of that paragraph was in part in direct response to the submission noted in the first part of that paragraph, however the analogy still holds good to the situation where the regulator in good faith thinks there ought to be a suspension.

69.  Further, I do not accept Mr Wong’s submission that, if the injunction were not granted, the Company would suffer irreparable damage. Whilst it may be correct that suspension is a serious penalty, which may sometimes be regarded as a blemish on the record of a company and its directors, suspension is a temporary process. Trading can resume once the Company satisfies the Exchange’s conditions for resumption.

70.  Further, as I held in the China Trends case at §62, echoing a point I made in the Cai case at first instance at §§39-40, any investment in shares in a listed company bears a risk, including the potential that the value of the shares can go down as well as up, and value might go down for a variety of reasons including that the company has acted in a way which gives rise to suspension, or that the shares remain suspended from trading for a period of time pending compliance with resumption guidance or conditions.

71.  I also agree that, in circumstances where the fact of suspension of trading is not uncommon, there is no actual evidence in this case (above a bare assertion) that suspension would cause reputational harm to the Company, and certainly not any reputational harm not already caused by the previous decisions announced to the market. I also accept Mr Pao’s submission that the Company has not identified why the Company’s listing status is relevant to its ability to operate its substantive business, nor shown by evidence any impact on ability to borrow.

72.  I also take into account that the fact of suspension is already in the public domain, and it is not attractive that a decision taken by the regulator to suspend trading of shares should appear to be on an ‘on again off again’ basis. That would be undesirable, not least as to the potential market volatility that may arise.

73.  Mr Wong makes the submission that the grant of the injunction would restore the status quo ante, where the Company’s shares have until 12 May 2022 continued to be traded without any suspension, despite the alleged existence of the RTO since the Disposal on 21 January 2021. He points also to the fact that public investors have been informed by various Company announcements as to the Exchange’s decisions. However, the continued trading without suspension, and the announcement of the various decisions, was during the process of reviews provided for under the Listing Rules. It seems to me that the position has changed now that the LRC Decision has been made, where such a decision shall be conclusive and binding on the listed issuer: see Rule 2B.06(3). I have already referred to Mr Pao’s submission, which I accept, that the very trading of the shares after the RTO completed upon the Disposal is part of the vice which the RTO rules seek to prevent.

74.  I acknowledge that no reliance is placed by the Exchange in this case on any particular allegation of intended market manipulation or the like.

75.  However, overall, it seems to me that the balance of convenience points firmly against the grant of any injunction against suspension. Put another way, and by reference to the modified principles applicable in judicial review cases, my assessment is that the risk of injustice would be greater upon the wrong grant of the injunction than upon its wrong refusal.

J.  Result and Costs

76.  The Company’s application for leave to apply for judicial review is dismissed.

77.  The Company’s application for interim injunctive relief is also dismissed, and would have been dismissed even had leave to apply for judicial review been granted.

78.  I see no reason why costs should not follow the event. Therefore, the Company shall pay the Exchange’s costs, payable forthwith upon a summary assessment which shall be conducted on paper.