CHINA TRENDS HOLDINGS LTD v. THE STOCK EXCHANGE OF HONG KONG LTD

HCAL 818/2020

[2020] HKCFI 3045

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTITUTIONAL AND ADMINISTRATIVE LAW LIST NO 818 OF 2020

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J U D G M E N T

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INTRODUCTION

1.  This is the rolled-up hearing of an application by China Trends Holdings Limited (中國趨勢控股有限公司) (“the Company”) for judicial review of the decision of the GEM Listing (Review) Committee of The Stock Exchange of Hong Kong Limited (“the Exchange”) contained a letter dated 10 March 2020 upholding the decision of the GEM Listing Committee to suspend trading in the Company’s shares on the GEM of the Exchange.

BASIC FACTS

2.  The Company was incorporated on 7 February 2002 with limited liability under the laws of the Cayman Islands.  On 31 July 2002, it was listed on the GEM (stock code 8171).  The Company and its subsidiaries are principally engaged in (i) trading in electronic technology and related products (“the Trading Business”), and (ii) provision of low-carbon digital solutions, media and e-commerce platforms and media advertising services (“the Media Business”).

3.  For ease of understanding of the facts of this case, I shall first set out some relevant provisions of the GEM Listing Rules:

“9.01 Listing is always granted subject to the condition that, where the Exchange considers it necessary for the protection of investors or the maintenance of an orderly market, it may, at any time, halt, suspend or direct the resumption of 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.

9.04 Under rule 9.01, the Exchange may direct a trading halt or suspend dealings in an issuer’s securities regardless of whether or not the issuer has requested the same and may do so in any circumstances, including:-

(3) where the Exchange considers that the issuer does not carry on a business as required under rule 17.26 …

9.14 Pursuant to rule 9.01, the Exchange may cancel the listing of an issuer at any time and may do so in any circumstance including (but not limited to) those set out in rule 9.04 and in circumstances where the securities of an issuer have been continuously suspended for a prolonged period without the issuer taking adequate action to obtain a restoration of the listing.

9.14A (1) Without prejudice to its power under rule 9.14, the Exchange may cancel the listing of any securities that have been suspended from dealings for a continuous period of 12 months.

17.26 An issuer shall carry out, directly or indirectly, a sufficient level of operations or have tangible assets of sufficient value and/or intangible assets for which a sufficient potential value can be demonstrated to the Exchange to warrant the continued listing of the issuer’s securities.

Note: Characteristics of issuers which are unable to comply with rule 17.26 include:

(i) financial difficulties to an extent which seriously impairs an issuer’s ability to continue its business or which has led to the suspension of some or all of its operations; and/or

(ii) issuers which have net liabilities as at their balance sheet date i.e. issuers whose liabilities exceed their assets.”

In what follow, unless the context indicates otherwise, references to “Rule” shall be to the GEM Listing Rules.

4.  On 20 March 2019, the Exchange’s Listing Department[1] issued to the Company a letter (“the Show Cause Letter”) expressing its preliminary view that “the Company might have failed to maintain sufficient operations or assets as required under GEM Rule 17.26”.  In that letter, the Listing Department pointed out the following matters:

(1)     Since 2009, the Company had been engaging in the Trading Business and Media Business.

A     Scale of operations

(2)     The Company recorded net losses (ranging from HK$4.9 million to HK$18.4 million) and mostly negative operating cash flow (up to HK$8.6 million) for each of the five previous financial years ending 31 December 2018.

(3)     The Trading Business only recorded minimal profit or loss and the Company had not generated any revenue from the Media Business since 2009.

(4)     The Company had a low level of business operations for years and it does not appear to be a temporary downturn or decline.

(5)     The Listing Department was concerned that both the Trading Business and the Media Business were of no substance and not viable and sustainable for the following reasons:

(a)     In respect of the Trading Business, the profit margin of that business had been thin and the profit generated was not sufficient to cover the Company’s corporate expenses.  The Company relied on a very limited number of customers and suppliers and it appeared to operate trading on an indent basis with little value added.  There had been no sign of improvement over the last five years and the Company had not disclosed any information on how it would substantially improve the operations.

(b)     In respect of the Media Business, since 2009, it appears that none of the Company’s business plans, including the profit-sharing from operation of an internet café, use of the film library and other cooperation agreements, had materialized. No revenue had ever been generated.  The Company had not disclosed any information on how it planned to develop that business.

B     Level of assets

(6)     The Company’s total assets mainly consisted of trade receivables, cash and bank balances, intangible assets, investment in an associate, and Equity Investments.  The Equity Investments represented a 20% equity interest of an overseas private company acquired by the Company in 2011.  The Company had not generated any revenue from such investment and could not exercise any significant influence over it.

(7)     Based on the above analysis, the operation of those assets had not generated sufficient revenue and profits to ensure the Company could operate a viable and sustainable business.  Nor had the Company demonstrated that its assets would enable it to substantially improve its operations and financial performance.

5.  The Show Cause Letter concluded by stating that the Listing Department was minded to suspend trading of the Company’s shares, in which case resumption would be permitted only if and when the Company had demonstrated that it was able to comply with Rule 17.26, and invited the Company’s detailed written submission by 10 April 2019 as to why the Listing Division should not suspend trading in the Company’s shares.

6.  The Company made submissions in response to the Show Cause Letter on 10 April 2019 and 30 May 2019.  By a letter dated 10 June 2019, the Listing Department informed the Company of its decision (“the LD Decision”) that the Company had failed to maintain a sufficient level of operations or have tangible assets of sufficient value and/or intangible assets for which a sufficient potential value can be demonstrated under Rule 17.26 to warrant the continued listing of its shares.  Accordingly, the Listing Department decided to suspend trading in the Company’s shares under Rule 9.04. The Listing Department further informed the Company that:

(1)     It was required to re-comply with Rule 17.26. If the Company failed to do so by the expiry of the 12-month period (ie by 9 June 2020), the Listing Department would proceed with cancellation of the Company’s listing.

(2)     Under Rule 4.06(1), the Company had the right to have the LD Decision reviewed by the GEM Listing Committee.

7.  On 14 June 2019, the Company requested a review (“the First Tier Review”) of the LD Decision by the GEM Listing Committee pursuant to Rule 4.06(1).

8.  On 2 September 2019, the Listing Department issued a report to the GEM Listing Committee, providing, inter alia, the following updated information:

(1)     On 19 July 2019, the Company entered into a cooperation framework agreement with Shen Zhen HengKangda International Food Corp Ltd (SZH) and its controlling shareholder (Mr Li Gang) to acquire SZH’s trading business of imported food to expand the business scale of the Company’s e-commerce platforms (under the Media Business).  Both SZH and Mr Li were third parties independent of the Company and its connected persons.  As of the date of that report, the terms of acquisition had not been agreed and a formal acquisition agreement was yet to be signed.

(2)     On 9 August 2019, the Company published its interim results for the six months ended 30 June 2019.  Revenue for that period increased to HK$71 million, which was solely from the Trading Business.  In addition, the Company continued to make losses, and recorded a net loss of HK$3.2 million.

After considering the updated information, the Listing Department maintained the view that the Company’s businesses were not viable and sustainable and it had failed to comply with Rule 17.26.

9.  On 30 September 2019, the Company filed written submissions in support of the First Tier Review.

10.  On 29 October 2019, the GEM Listing Committee, comprising 7 members, heard the First Tier Review.

11.  On 13 November 2019, the GEM Listing Committee decided (“the LC Decision”) to uphold the LD Decision for essentially the same reasons given by the Listing Department in the LD Decision.

12.  On 21 November 2019, the Company requested a further review (“the Second Tier Review”) of the LC Decision by the GEM Listing (Review) Committee pursuant to Rule 4.06(2).

13.  On 12 December 2019, the Listing Department issued a report to the GEM Listing (Review) Committee recommending that the LC Decision be upheld.  In that report, the Listing Department provided, inter alia, the following updated information:

(1)     On 6 November 2019, the Company entered into a framework agreement with an independent third party, Winn Tech-Winn Technology Co Ltd (WTW), pursuant to which WTW agreed to cooperate with the Company for a ten-year period from 1 November 2019 to 31 October 2029.  WTW agreed to purchase electronic products worth approximately RMB200 million from the Company each year.  However, the actual payment amount and the expected gross profit margin of 4% were subject to actual purchase orders.

(2)     On 8 November 2019, the Company published its third quarterly results for the nine months ended 30 September 2019. The Company recorded revenue of HK$111.6 million for that period, which was solely from the Trading Business.  The Company continued to be loss-making, and recorded a net loss of HK$4.6 million.

14.  The Listing Department considered that the updated information referred to in §13 above did not affect their Rule 17.26 assessment and maintained its view that the Company had failed to comply with that rule because:

(1)     Even with the new framework agreement with WTW, the number of customers for the Trading Business was still small.  The concerns on high concentration of customers and that the business was of no substance were not addressed.

(2)     The revenue of HK$111.6 million and corresponding losses for the period ended 30 September 2019 were in line with the financial figures (based on management accounts) orally submitted by the Company at the First Tier Review hearing.  The Listing Committee had considered, amongst other matters, those financial figures and decided to uphold the LD Decision.  In any case, the actual revenue, which was solely derived from the Trading Business, did not address the concern about the viability, sustainability and substance of the business.

15.  On 13 January 2020, the Company filed written submissions in support of the Second Tier Review.

16.  On 25 February 2020, the GEM Listing (Review) Committee, comprising 5 members who had not taken part in the First Tier Review, heard the Second Tier Review.  The hearing was a de novo review on the merits, in the course of which questions were asked of, and answers given by, the Listing Department and the Company’s representatives in respect of various matters.  I shall come back to some of the issues discussed at that hearing later in this judgment.

17.  By a letter dated 10 March 2020, the GEM Listing (Review) Committee decided (“the Review Decision”) to uphold the LC Decision.  In that letter, the GEM Listing (Review) Committee stated as follows:

“Decision

Having considered all the submissions (both written and oral) made by the Company and the Division, the Review Committee was of the view that the Company failed to maintain a sufficient level of operations or have tangible assets of sufficient value and/or intangible assets for which a sufficient potential value can be demonstrated under GEM Rule 17.26 to warrant the continued listing of its shares …

Reasons

The review Committee arrived at its decision for the following reasons:

Scale of operations

[1] Over the years, the Company had only generated revenue from the Trading Business. The scale of operation for the Trading Business was limited and recorded either a loss or only a minimal profit. Since commencement of the Media Business in 2009, the Company had not generated any revenue therefrom. The Company recorded net losses (save for the minimal profit of approximately HK$1.1 million and HK$1.6 million in 2018 and 2019 respectively after excluding non-recurring expenses) and mostly negative operating cash flow for each of the last five financial years. This situation did not appear to be a temporary downturn or decline. The Review Committee was concerned that both the Trading Business and the Media Business were of no substance, not viable and not sustainable for the following reasons:

Trading Business

[2] The Trading Business, being the sole source of the Company’s revenue for years, was operated on an indent basis generating minimal segment profit or loss. Although improvement had been made in terms of revenue in 2019, the cost of sales also increased commensurately.

[3] The Company continued to rely on a limited number of customers and suppliers. The Review Committee noted from the Company’s submission dated 13 January 2020 (the ‘Submission’) that the Company entered into two master sale agreements pursuant to which the two customers agreed to purchase network products from the Company in the amount of HK$100 million and HK$80 million per annum respectively. The Company also disclosed in its announcement dated 6 November 2019 that it entered into a framework agreement with WTW pursuant to which WTW agreed to purchase electronic products from the Company in the amount of RMB200 million per annum. However, the actual payment amount from these buyers was subject to actual purchase orders and was not guaranteed. The viability and sustainability of the business remained to be a concern.

Media Business

[4] Since 2009, it appeared that none of the Company’s business plans had materialised into a revenue-generating business. As set out in the Submission, the Company’s new media e-commerce project in April 2019 had been suspended. Regarding the cooperative framework agreement with SZH to acquire an e-commerce / convenience store business, the project had not yet been carried forward pending funds to be raised. The trial service of the Company’s ‘Wealthstorm Platform’ which was originally expected to commence by December 2019, was also postponed. In any case, the Company had not projected any material revenue or profit from this segment. It was questionable that the Media Business was viable and sustainable and of substance.

Level of assets

[5] As of 31 December 2019, the Company’s total assets were HK$124.6 million. It mainly consisted of trade receivables (HK$46.1 million) and cash and bank balances (HK$32.9 million). In light of the above, the Review Committee was concerned that the operations of these assets might not enable the Company to carry out businesses with sufficient level of operations to justify the continued listing of the Company’s shares.

[6] The Company asserted that its asset level would significantly increase if it was fully compensated from the litigation case with ATV. However, it was noted that the Company had only paid HK$3 million under the agreement with ATV and, in any event, the matter was subject to the outcome of the court proceedings.

Other points made by the Company

[7] In the Submission and at the Review Hearing, the Company submitted that it had conducted the Trading Business for more than 10 years and the Exchange had not raised any issue about it in the past 10 years, and questioned the objectivity and reasonableness of the Exchange’s ‘sudden change in policy’ to allege the Company of insufficient operation and/or tangible assets of sufficient value. The Company further submitted that its financial performance outperformed many GEM listed issuers and, additionally, it was operating without any debt.

[8] The Review Committee noted that the Exchange has issued guidance materials on its application of the Rules on sufficiency of operations of issuers in light of issues identified in backdoor listing and shell activities since 2016.  The Review Committee further noted that GEM Rule 17.26 is a qualitative test and is to be assessed based on specific facts and circumstances of individual cases. Taking into account the specific facts and circumstances of the Company (notwithstanding that the Company had no debt for the years 2018 and 2019), the Review Committee considered the Company failed to demonstrate that it had a viable and sustainable business or sufficient assets that enabled it to have a viable and sustainable business.”

APPLICATION FOR JUDICIAL REVIEW

18.  The Company made the present application for judicial review on 29 April 2020.  In the Amended Form 86 dated 28 August 2020, two grounds of judicial review are advanced:

(1)     the Review Decision was unreasonable / irrational, and the GEM Listing (Review) Committee failed to take into account relevant considerations in reaching the Review Decision; and

(2)     the history and process by which the GEM Listing (Review) Committee reached the Review Decision were deficient in applicable standards of procedural fairness including a want of adequate reasons for the decision.

REGULATORY FRAMEWORK

19.  The Exchange operates the stock market in Hong Kong pursuant to the Securities and Futures Ordinance, Cap 571 (“the SFO”). In that capacity, the Exchange acts as the frontline regulator of listed companies and their directors.

20.  Section 21 of the SFO imposes a duty on the Exchange to ensure, so far as reasonably practicable, 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.

21.  Section 23 of the SFO empowers the Exchange to make rules for such matters as are necessary or desirable for the proper regulation and efficient operation of the stock market.  The Exchange is specifically authorised to make rules for, amongst other things, the cancellation and withdrawal of the listing of, and the suspension and resumption of dealings in, securities listed on the recognized stock market operated by the Exchange.

22.  The GEM Listing Rules are made by the Exchange pursuant to s 23 of the SFO.  Each company listed on the GEM must undertake to comply with the GEM Listing Rules when the company submits its application for listing.  The GEM Listing Rules impose requirements on listed companies and their directors to ensure that investors have and can maintain confidence in the market.  The requirements are intended, amongst other things, to ensure that listed companies are suitable for listing.

THE EXCHANGE’S DECISION MAKING PROCESS

23.  The GEM Listing Rules are administered primarily by the GEM Listing Committee, which is made up of investors, representatives of listed companies, and market practitioners who have relevant knowledge and experience and are well placed to determine currently acceptable standards in the market place.

24.  Rule 3.01 provides that the Board of the Exchange has arranged for all of its powers and functions in respect of all listing matters to be discharged by the GEM Listing Committee and/or its delegates, subject to the review procedure set out in the GEM Listing Rules.

25.  Rule 3.18 provides that the GEM Listing Committee shall consist of 28 members or such greater number as the Board of the Exchange may from time to time agree, comprising at least 8 individuals who represent the interests of investors, 19 individuals who will be a suitable balance of representatives of listed issuers and market practitioners including lawyers, accountants, corporate finance advisers and exchange participants or officers of exchange participants, with the Chief Executive of the Hong Kong Exchanges and Clearing Limited acting as ex officio non-voting member.  The composition of the GEM Listing Committee and the GEM Listing (Review) Committee is intended to ensure that there is independent and specialist expertise in relation to listing-related matters including business, accounting, finance and legal/regulatory aspects.

26.  The GEM Listing Committee, whose members serve on a part-time basis and only meet to make decisions periodically, delegates the day-to-day administration of the GEM Listing Rules to the Listing Division, which is made up of full time employees of the Exchange.  Subject to certain specific exceptions (eg the power to cancel the listing of a listed issuer under Rule 3.09), the GEM Listing Committee has arranged for most of its powers under the GEM Listing Rules to be discharged by the Listing Division in the first instance (Rule 3.02).  The Listing Division will also interpret, administer and enforce the GEM Listing Rules, including directing the suspension of trading under Rule 9.01, subject to the review procedures set out in Chapters 3 and 4 of the GEM Listing Rules.

27.  Under Rule 4.01, the GEM Listing Committee retains the role of oversight of the Listing Division to ensure that they exercise their powers and carry out their day-to-day functions in a professional and impartial manner.  It acts as an independent review body and retains the right to review at any time, on its own volition, any decision of the Listing Division made under any of the powers delegated by the GEM Listing Committee and to endorse, modify, vary or reverse any such decision.

28.  Under Rule 4.06(1): “Where the Listing Division makes a decision on the listed issuer, the listed issuer may request the decision be referred to the GEM Listing Committee for a review by the GEM Listing Committee”.

29.  Under Rule 4.06(2): “Subject to rule 4.04, where the GEM Listing Committee endorses, modifies or varies the Listing Division’s decision or makes its own decision, the listed issuer may request the decision be referred to the GEM Listing Review Committee for a further and final review.”

30.  Under Rule 4.11(2), the quorum necessary for the transaction of any business by the GEM Listing Committee or the GEM Listing (Review) Committee shall be 5 members present in person.

31.  Under Rule 4.11(4): “At any meeting to review an earlier decision of the GEM Listing Committee, subject to the facts and circumstances arising in the earlier meeting(s) in each case and subject further to the absolute discretion of either the Chairman of the GEM Listing Committee or the GEM Listing (Review) Committee, as the case may be, all the members present at the review hearing shall be persons who were not present at the earlier GEM Listing Committee meeting.”

32.  All reviews by the GEM Listing Committee and the GEM Listing (Review) Committee are heard de novo.  The relevant Committee rehears the case and decides it afresh.

GEM LISTING RULE 17.26

33.  Rule 17.26 is set out again for ease of reference -

“An issuer shall carry out, directly or indirectly, a sufficient level of operations or have tangible assets of sufficient value and/or intangible assets for which a sufficient potential value can be demonstrated to the Exchange to warrant the continued listing of the issuer’s securities.

Note: Characteristics of issuers which are unable to comply with rule 17.26 include:

(i) financial difficulties to an extent which seriously impairs an issuer’s ability to continue its business or which has led to the suspension of some or all of its operations; and/or

(ii) issuers which have net liabilities as at their balance sheet date i.e. issuers whose liabilities exceed their assets.”

34.  According to Ms Bonnie Yiting Chan, Head of Listing of the Exchange, the purpose of Rule 17.26 (and its equivalent under Main Board Listing Rules, Rule 13.24), as well as guidance on the application of the said rule, are set out in (amongst other places) a number of previous decisions of the Listing Committees and Listing Division of the Exchange, in particular, Listing Decisions Nos 116 of 2017, 117 of 2017 and 118 of 2018.  The relevant principles can be summarized as follows:

(1)     Rule 17.26 requires issuers to maintain a sufficient level of operations or assets of sufficient value to warrant the continued listing of their securities.  Without quantitative criteria for sufficiency, this rules calls for a qualitative test and is assessed based on the specific facts and circumstances of individual cases.

(2)     Rule 17.26 is intended to maintain overall market quality.  Issuers that fail to meet this rule may be “blue sky companies’ that would attract speculation on their possible acquisitions in the future and lead to opportunities for market manipulation, insider trading and unnecessary volatility in the market which are not in the interest of the investing public.

(3)     To balance public shareholders’ ability to access the market to trade in the securities with the need to maintain market quality, the Exchange will only suspend trading in an extreme case.  When making the assessment, the Exchange takes into account the current regulatory concerns and acceptable standards in the market.

(4)     Cases with the following characteristics are treated as extreme cases warranting suspension -

(a)     a very low level of operating activities and revenue; for example the issuer’s business does not generate sufficient revenue to cover its corporate expenses, resulting in net losses and negative operating cashflow;

(b)     the current operation does not represent a temporary downturn, and the issuer has been operating at a very small scale and incurring losses for years;

(c)     the assets do not generate sufficient revenue and profits to support a continued listing.

In these cases, the issuers are not operating substantive businesses, and the value of the businesses (excluding the listing status) is minimal, if any.  It is questionable whether the requirement to carry on a sufficient level of operations or have assets of sufficient value is met.

(5)     Rule 17.26 does not merely involve a “counting exercise” under which the assets and revenue of the issuer are measured against a quantitative or comparative benchmark.  Instead, the touchstone is whether the issuer can demonstrate, by reference to its level of operations or assets, that it has a viable and sustainable business so as to warrant continued listing.  This is a qualitative assessment which must be carried out based on the specific facts and circumstances of each issuer.

(6)     The fact that an issuer’s assets exceed its liabilities does not mean that an issuer automatically complies with Rule 17.26.  Likewise, the fact that the issuer’s business (or part of its business) turned a net profit is also not necessarily sufficient.

(7)     Once suspended, the issuer would be given a remedial period to submit a resumption proposal to demonstrate that it has a viable and sustainable business to re-comply with Rule 17.26 (or the equivalent Main Board Listing Rule 13.24).  If the issuer fails to do so, it may be delisted according to the delisting procedures under Rules 9.14 and 9.14A.

35.  Main Board Listing Rule 13.24 was considered by the Court of Appeal in Sanyuan Group Ltd v The Stock Exchange of Hong Kong Limited, CACV 191/2008 (unrep, 21 July 2009), which concerned a challenge to a decision to cancel the listing of the shares of the applicant for its failure to comply with the said rule.  At first instance, Reyes J upheld the challenge on the ground that the Exchange should have informed the applicant what quantum of turnover, profit or assets was considered sufficient for the purpose of that rule -

“An applicant must at least be entitled to know what standard of operation or what sort of asset base he is expected to have in order to qualify for re-listing. If his resumption proposal is rejected, an applicant cannot simply be told that his turnover, profit or assets are considered insufficient. That is tantamount to giving no reasons. The applicant further needs to be informed in what sense his financial numbers have been deemed to be insufficient. The applicant is entitled to know just what level of operation or asset base he has fallen below.”

36.  The Court of Appeal disagreed.  Rogers VP (with whom Le Pichon JA and Stone J agreed) explained the meaning, operation and effect of Main Board Listing Rule 13.24 in the following passages:

“[15] On this appeal, Mr Scott SC, who appeared on behalf of the respondent, emphasised that the appeal was brought because of the respondent’s concern that the decision in the court below imposed an impractical and undesirable requirement upon the respondent. Each company had to be considered individually. It would be impossible for the respondent to set a benchmark which would apply to all companies and, in any event, even if an attempt were made to set a benchmark there would be ample scope for disagreement and challenge.

[16] In my view, the respondent’s objections are well founded. The provisions of Listing Rule 13.24 in themselves demonstrate that there is a great deal of flexibility in their application … it was for the members of those committees, who were experienced professionals in various aspects relevant to the operations of the respondent, to give the matter proper consideration and to determine whether or not the applicant should be relisted.

[17] In paragraphs 36-38 the judge made reference to statements made by the chairman of the LAC in an affidavit filed for the purposes of these proceedings. In the affidavit it was stated that the LAC did not consider that the turnover of around $610,000 was a sufficient level of operation. That was in respect of the only operating subsidiary of the applicant. Likewise it was stated that the LAC did not consider that the turnover of the Tianjin Jin Shun joint-venture of around HK$73,059,000 was sufficient to satisfy Listing Rule 13.24 which in any event fell short of the applicant’s own projections by a significant margin. It was also stated in the affidavit that the expenditure on staff costs of only around HK$265,800 per month during a six-month period indicated to the LAC that the applicant’s management did not have sufficiently adequate resources to build its business. In each of those respects the judge rhetorically asked the question as to what level of resources the LAC considered would be an adequate figure. In my view it is not for the court to challenge the conclusion which the three committees, culminating with the LAC, reached. As a matter of fairness or propriety the decision would be the same whether a figure was given or not. As a practical matter I do not see how the various committees could, with accuracy, give the various figures. It was their duty to exercise their judgment and decide whether or not, given the provisions of Listing Rule 13.24, the applicant should be relisted.

[22]     The second point is that, quite apart from anything else, the second paragraph of the LAC decision shows that the LAC was not satisfied that the applicant had demonstrated that its business could be sustained or that profits could be generated for the future. In other words, the LAC was not satisfied that the applicant had put forward a credible proposal. That, in itself, is a qualitative decision which the LAC was perfectly entitled to take and no grounds had been shown impugning that decision …”

37.  In short:

(1)     There is a great deal of flexibility in the application of Main Board Listing Rule 13.24 or its equivalent, GEM Listing Rule 17.26.

(2)     The question of whether the obligation under Main Board Listing Rule 13.24 has been satisfied involves a qualitative, not quantitative, assessment which is fact and company specific.  No universal benchmark applicable to all companies can be set.

(3)     The assessment of whether the obligation under of Main Board Listing Rule 13.24 has been satisfied is primarily a matter for the relevant committees of the Exchange, which comprise experienced professionals in various aspects relevant to the operations of the Exchange.  This approach is in line with the general principle that the court should accord a wide margin of discretion to the decision of a professional body where the decision in question is based on an exercise of professional judgment and expertise, and should not interfere in such decision save in a compelling case.

GROUND 1 - IRRATIONALITY AND FAILURE TO TAKE INTO ACCOUNT RELEVANT CONSIDERATIONS

38.  Under this ground, Mr Philip Dykes, SC (on behalf of the Company) argues that:

(1)     the GEM Listing (Review) Committee incorrectly applied Rule 17.26 as requiring the Company to both (i) carry out a sufficient level of operations, and (ii) have tangible assets of sufficient value and/or intangible assets for which a sufficient value can be demonstrated to the Exchange, to warrant the continued listing of its shares, whereas the obligation under Rule 17.26 is satisfied if the Company can satisfy either requirement (Ground 1(1))[2]; and

(2)     the GEM Listing (Review) Committee failed to into account a number of relevant matters, in particular -

(a)     whether the Company’s assets, in case of tangible assets, were of sufficient value;

(b)     whether the Company’s assets, in case of intangible assets, were of demonstrably sufficient potential value;

(c)     assets of value do not necessarily mean that they must enable the Company to carry out businesses with sufficient level of operations, eg real property or cash;

(d)     the question to be asked is why the Company’s total assets of HK$124.6 million, consisting mainly of trade receivables (HK$46.1 million) and cash and bank balances (HK$32.9 million), were not treated as “tangible assets of sufficient value”;

(e)     the Company experienced no financial difficulties;

(f)     the Company’s liabilities were insignificant compared with its assets;

(g)     the Company was not a “blue sky company”;

(h)     the Company was not an extreme case for trading suspension; and

(i)     the Company had an operation and met the continuing disclosure obligations, and its shares should be allowed to continue to trade (Ground 1(2))[3].

39.  In respect of Ground 1(1), it is not in dispute that the two requirements under Rule 17.26 are disjunctive, and satisfaction of either requirement by an issuer suffices for the purpose of that rule[4].  However, the two requirements are tied to the ultimate question of whether the continued listing of the issuer’s securities is warranted.  In other words, under Rule 17.26, the level of operations or the assets of an issuer should not be looked at in isolation.  They should be assessed by asking whether the “level of operations” or the “assets” of the issuer are sufficient to warrant the continued listing of the issuer’s securities.

40.  In the present case, the decision which the GEM Listing (Review) Committee came to, as stated in its letter of 10 March 2020, was that “the Company failed to maintain a sufficient level of operations or have tangible assets of sufficient value and/or intangible assets for which a sufficient potential value can be demonstrated under GEM Rule 17.26 to warrant the continued listing of its shares” [emphasis added].  Further, as can be seen from that letter, the GEM Listing (Review) Committee came to the said decision after considering:

(1)     the scale of operations of the Company’s Trading Business and Media Business and expressed the view that they “were of no substance, not viable and not sustainable”; and

(2)     the level of assets of the Company (total assets of HK$124.6 million as at 31 December 2019, comprising mainly trade receivables of HK$46.1 million and cash and bank balances of HK$32.9 million) and expressed the view that “the operations of [those] assets might not enable the Company to carry out business with sufficient level of operations to justify the continued listing of the Company’s shares”; and

concluded that the Company “failed to demonstrate that it had a viable and sustainable business or sufficient assets that enable it to have a viable and sustainable business” [emphasis added].

41.  It is clear that the GEM Listing (Review) Committee considered the two requirements under Rule 17.26 disjunctively and was of the view that the Company failed to satisfy either requirement.  Further, it would appear that the GEM Listing (Review) Committee assessed whether the continued listing of the Company’s shares was warranted by asking whether the level of operations or the assets of the Company were sufficient to enable it to have a “viable and sustainable business”.  In my view, the GEM Listing (Review) Committee was entitled to regard the sufficiency of a company’s level of operations or assets to enable the carrying out of a viable and sustainable business as the criterion for determining whether the continued listing of the company’s shares was warranted.  It is, in my view, obviously inappropriate to permit a company’s shares to be listed on a stock exchange if the company does not in fact have operations or assets to enable a viable and sustainable business to be carried out.

42.  That the Company’s business was not viable or sustainable is clear, having regard to the following matters:

(1)     The Trading Business was the sole source of the Company’s revenue.

(2)     That business was operated on an indent basis which, over the years from 2014 to 2019, recorded either a loss or only minimal profit.

(3)     While there was improvement in terms of revenue in 2019, the costs of sales also increased commensurately.

(4)     The Trading Business continued to rely on a very limited number of customers or suppliers (with only 3 customers and 2 suppliers as at 30 June 2019).

(5)     The Company had not demonstrated how its plans to expand its customer base and increase funding could secure a significant number of new customers, increase the scale of operations or improve the overall profitability of the Trading Business.

(6)     Although the Company had entered into two master sale agreements and a framework agreement, the payment amounts from the buyers under those agreements were subject to actual purchase orders and were not guaranteed.

(7)     As for the Media Business, it had never materialized into a revenue-generating business since its inception in 2009.

43.  As to the question of whether the Company’s level of operations, or assets, were sufficient to enable a viable and sustainable business to be carried out, that is a matter of professional judgment which the GEM Listing (Review) Committee is in a much better position than the court to assess.  The GEM Listing (Review) Committee’s qualitative assessment on this issue is one which it was entitled to make.  There is no valid or sufficient basis for the court to interfere with the GEM Listing (Review) Committee’s assessment, or substitute its own assessment for that of the committee.

44.  In short, the GEM Listing (Review) Committee did not incorrectly apply Rule 17.26 as imposing on the Company an obligation to satisfy both the requirements of having (i) a sufficient level of operations, and (ii) assets of sufficient value, to warrant the continued listing of the Company’s shares.  The GEM Listing (Review) Committee considered the two requirements disjunctively, and found that the Company failed both of them.  Ground 1(1) is accordingly rejected.

45.  As regards Ground 1(2) - failure to take into account relevant considerations - the applicable principles are stated in the judgment of Au J (as he then was) in Chan Ka Lam v The Country and Marine Parks Authority, HCAL 54/2014 (unrep, 27 April 2017), at §§109-112:

“[109] As this court has stated in Pagtama v Director of Immigration (HCAL 13, 45 and 56/2014, 12 January 2016) at paragraph 194, it is now well established that when it is alleged that a decision-maker failed to take into account a relevant consideration in the exercise of a statutory discretion, it is important to distinguish between:

(1) matters which are clearly identified in the relevant legislation (expressly or implied) as considerations to which regard must be had;

(2) matters clearly identified by the relevant legislation as considerations to which regard must not be had; and

(3) matters to which the decision maker may have regard if, in its judgment and discretion, it thinks it right to do so (‘discretionary considerations’) and the decision-maker’s choice in this regard is subject only to Wednesbury unreasonableness challenge in a judicial review.

[110] Further, in relation to the discretionary considerations to the extent that the decision-maker has decided to take into account any particular factor as being relevant to the exercise of his discretion, the weight that should be given to that factor is likewise a matter for him, not for the court, subject to Wednesbury irrationality: Fok Chun Wa (2012) 15 HKCFAR 409 at paragraph 97, per Ma CJ, citing with approval Tesco Stores Ltd v Secretary of State for the Environment [1995] 1 WLR 759 at 780F - G; R (Al Rawi) v Secretary of State for Foreign and Commonwealth Affairs [2008] QB at paragraph 131, per Laws LJ; BH, supra, at paragraph 65.

[112]    Hence, under these principles, save for what have been prescribed by statute, it is for the decision-maker to decide what are the relevant or irrelevant considerations subject only to Wednesbury unreasonableness challenge.”

46.  In respect of the individual matters relied upon by Mr Dykes referred to in above §38(2) above:

(1)     The above discussion under Ground 1(1) is sufficient to dispose of sub-paragraphs (a) to (d).

(2)     In so far as sub-paragraphs (e) to (i) are concerned, they fall within the category of “discretionary considerations” referred to by Au J in Chan Ka Lam.  The weight to be accorded to any of them as against other relevant factors was entirely a matter for the GEM Listing (Review) Committee, and not the Court, subject only to Wednesbury unreasonableness.

(3)     In the Amended Form 86 (at §§34-43) and in Mr Dykes’ Skeleton Submissions (at §§35-43), the Company has sought to repeat the arguments which it advanced before the GEM Listing (Review) Committee[5] as regards its financial position by reference to its “assets”, “revenue” and “profit” in support of the contention that no rational decision-maker could reasonably have made the Review Decision[6]. This is, in my view, an impermissible attempt to re-argue the case that was rejected by the GEM Listing (Review) Committee, and turn the present application for judicial review into a merits review.  Anyhow, as early mentioned, the critical question is whether the Company’s level of operations or assets were such as were sufficient to warrant the continued listing of its shares on the GEM, and not whether the Company had some assets, or revenue (in fact, the Company had mostly negative cashflow for the 5 years from 2014 to 2018), or made some profits (as a matter of fact, over the years from 2014 to 2019 the Company made net losses ranging from HK$4.9 million to HK$18.4 million, although it made small adjusted profits of HK$1.1 million and HK$ 1.6 million in 2018 and 2019 respectively after excluding non-recurring expenses).

(4)     Mr Dykes has also sought to compare the Company’s financial figures with those of other companies listed on the GEM or companies against whom Gem Listing Rule 17.26 or Mainboard Listing Rule 13.24 were previously invoked by the Exchange, and contends that the Company’s financial figures compare favourably or are better than many of such companies.  It is not with disrespect that I do not propose to analyse the Company’s figures and the comparative figures of those other companies, for this would, in my view, be a futile and meaningless exercise.  As earlier mentioned, whether a company has satisfied the obligation under Rule 17.26 involves a qualitative assessment which is company and fact specific.  In other words, the situation of each company must be considered on its own facts and circumstances.  In any event, even if, for the sake of argument, some of those companies were in a worse financial position and their shares ought not to be permitted to continue to trade, it does not follow that the continued listing of the Company’s shares is warranted.

(5)     In all, Ground 2(2) is rejected.

GROUND 2 - PROCEDURAL IMPROPRIETY

47.  Under this ground, Mr Dykes argues that the Review Decision is unfair given that the Company had a legitimate expectation that trading in its shares would continue when there had been no drastic changes in its financial position and the listing criteria remained the same[7].  Mr Dykes also complains that the GEM Listing (Review) Committee failed to give adequate and intelligible reasons for the Review Decision[8].

48.  In support of the argument on legitimate expectation, Mr Dykes submits that:

(1)     The Company’s level of assets, revenue, and profits had remained stable for the past 10 years or so, and its financial performance was in fact improving at the time when the Review Decision was made.

(2)     Prior to the Show Cause Letter dated 20 March 2019, the Exchange had never intimated that it might need to suspend trading in the Company’s shares or cancel its listing.  Nor had there been any suggestion in the past 10 years that the Company was or would be in breach of Rule 17.26.

(3)     In these circumstances, and in view of the continuity of the Company’s listed status, the Company was entitled to regard the Exchange as having been of the view that the Company had complied with Rule 17.26 and that its financial performance had been sufficiently satisfactory to warrant its continued listing.

(4)     Absent any significant negative changes in the Company’s financial performance assessed as at December 2019, the Review Decision appears to run contrary to the Exchange’s settled practice with regard to the Company’s legitimate expectation.  Not only has the Review Decision prejudiced the Company’s position, it also reflects a lack of concern for shareholders’ interests[9].

49.  The complaint of breach of legitimate expectation can be disposed of shortly:

(1)     There was never any representation made to the Company that it did not have to comply with Rule 17.26, or that the Exchange would permit its shares to continue to be listed notwithstanding a failure to comply with Rule 17.26.

(2)     On the contrary, Rule 9.04(3) provides that the Exchange may direct a trading halt or suspend dealings in an issuer’s securities where it considers that the issuer does not carry on a business as required under Rule 17.26.

(3)     Further, the obligation under Rule 17.26, as made clear by the title of Chapter 17 (Continuing Obligations), is a continuing one to be observed by the Company.

(4)     As to why action was not taken action against the Company earlier, it would appear that the Exchange had observed the Company’s financial performance for a number of years and took the view that the situation was not temporary and further that its assets were not sufficient. Eventually, when the Exchange found that there was no improvement in the Company’s financial performance up until March 2019, the Exchange decided that it was appropriate time to take action and issue the Show Cause Letter on 20 March 2019[10]. In my view, the Exchange’s failure to take action against the Company earlier is justified.

(5)     In any event, the highest that may be said is that the Exchange should or could have taken action against the Company earlier for breach of Rule 17.26, but that cannot be translated into a legitimate expectation on the Company’s part that its shares will be allowed to continue to be listed notwithstanding a breach of Rule 17.26.

(6)     Mr Dykes also submits that the Company ought to have been given a “grace period” of 12 months to improve its operations rather than the Exchange commencing the “delisting procedures” without a warning[11].

(7)     This submission involves a misunderstanding of the Exchange’s delisting procedures.  Up to now, the only decision that has been made against the Company is that trading in its shares has to suspend. The delisting of the Company under the procedures contained in Rules 9.14 to 9.18 of the GEM Listing Rules has not yet commenced[12].

(8)     As a matter of fact, before action was taken under Rule 17.26, the Exchange had sent to the Company the Show Cause Letter dated 20 March 2019 drawing its attention to the Exchange’s preliminary view that the Company might have failed to maintain sufficient operations or asserts as required by Rule 17.26, and giving the Company an opportunity to respond to the Exchange’s view.  What then followed was a lengthy process of submissions, decisions and reviews, cumulating in the GEM Listing (Review) Committee’s decision on 10 March 2020.  Effectively, the Company had about a year to put its house in order before its shares were suspended from trading.  Further, in the decision letter from the GEM Listing (Review) Committee, the Company was told that it was required to re-comply with Rule 17.26, and that should it fail to do so by the expiry of the 12-month period, the Exchange would proceed with the cancellation of the Company’s listing.  It is thus clear that the Company has been given a “grace period” of no less than 12 months to improve its operations and assets before the delisting process will commence.

(9)     In passing, I should mention that the Company’s suggestion that other listed issuers in a similar position have been given a grace period of 12 months by the Exchange to improve their operations[13] is incorrect.  The Exchange does not have any such practice[14].

50.  Finally, as regards the complaint that the GEM Listing (Review) Committee failed to give adequate and intelligible reasons for the Review Decision, the applicable principles on the sufficiency of reasons for an administrative decision have recently been summarized by Au J (as he then was) in Ng Shek Wai v Hong Kong Institute of Certified Public Accountants [2019] HKCFI 2439, at §41:

“(1) The duty to give reasons for administrative decision can be required expressly or implied by the relevant statute or can arise in common law out of the requirement of fairness.

(2) If there is a duty to give reasons, the adequacy of the reasons given would depend on the context in which the decision maker is operating and the particular circumstances of the case in question.

(3) The reasons given should show to the objective reader that the decision maker has addressed the substantial issues (but not necessarily every single issue) before it and why it has come to its decision.

(4) Depending on the circumstances of each case, the reasons may not require great elaboration and they may be brief.  It is only when they are defective in substance that they should be considered inadequate.  Ultimately, what are adequate reasons in the circumstances of a particular case has to be approached sensibly.”

51.  Mr Dykes complains that the “guidance materials” referred to by the GEM Listing (Review) Committee in the Review Decision (“The Review Committee noted that the Exchange has issued guidance materials on its application of the Rules on sufficiency of operations of issuers in light of issues identified in backdoor listing and shell activities since 2016”) were neither identified in the Review Decision nor relied upon in the LD Division or LD Decision[15]. He also says that the relevant Listing Decisions were not “materials” published specifically in light of issues identified in backdoor listing and shell activities, and those Listing Decisions have been published since 1999, not since 2016[16]. My views on these points are as follows:

(1)     The argument that the “guidance materials” were not identified in the Review Decision is a hollow one, because the Company was fully aware that the relevant materials referred to by the GEM Listing (Review) Committee were previous Listing Decisions published by the Listing Department -

(a)     In the Show Cause Letter, the Listing Department informed the Company that “Listing Decision (LD155-2017) describes the purpose behind Main Board Rule 13.24 (or its equivalent GEM Rule 17.26) and provides guidance on the application of that Rule …”.

(b)     In the Company’s submissions to the GEM Listing Committee dated 30 September 2019 (at p 3), and again in the Company’s submissions to the GEM Listing (Review) Committee dated 13 January 2020 (at p 3), the Company itself referred to the relevant Listing Decisions, namely, LD115-2017 and LD118-2017, in support of its submissions that the Company’s situation was not an “extreme case” which would justify the suspension of trading in its shares.

(c)     During the oral hearing before the GEM Listing Committee on 29 October 2019, the Listing Division’s representative (Ms Lau), in answer to a question raised by the Chairman (Mr Roberts), stated that the Listing Department “[had] been issuing a number of listing decisions to the market, telling the market that we will put the company that failed to maintain a sufficient operation to suspension.  And especially in -, since 2017 we have issued quite a number of decisions saying that, if the company has low level of operation, if they have been sustained loss and also operating outflow, cash outflow, and also the situation is not temporary and also the asset is not sufficient, if they exhibit this kind of features, we will put them to suspension.  So, it is very clear to the market and that was since 2017”[17].

(d)     During the oral hearing before the GEM Listing (Review) Committee on 25 February 2020, the Listing Division’s representative (Ms Lau), in answer to a question raised by the Chairman (Mr Brien), stated that the Division “[had] been publishing listing decisions to the market, telling the market that under what circumstances we will consider the company failed to comply with the Rule … And these listing decisions had been in the market for -, since-, since 2015, 2016 and 2017 so it has been known to the market that is the approach from the Division”[18].  The Company’s Secretary was then specifically asked by a committee member whether he was aware of “the Rules published between 2015 and 2017” referred to by Ms Lau, and he answered “聯交所會有一些新的一些規則在發佈, 就公司的運營呀, 對上市公司的運營有一些新的一些規則, 我們一直在跟進”[19].

(e)     The fact that the precise Listing Decisions were not identified in the Review Decision is, in my view, immaterial.

(2)     The relevant Listing Decisions were published since around 2016 after the Exchange had identified issues arising from backdoor listing and shell activities, and not since 1999 as alleged.

52.  In his Skeleton Submissions, Mr Dykes also referred to some other miscellaneous matters[20] to contend that the reasons given by the GEM Listing (Review) Committee were inadequate.  Those matters were not pressed at the hearing, and are effectively the same points raised under other grounds of judicial review (which have already been dealt with above) but put in another way.  It is not necessary to deal with them again in the context of the reasons challenge.

53.  In my view, the GEM Listing (Review) Committee’s letter dated 10 March 2020 informed the Company of the essential reasons for the Review Decision in a clear and intelligible manner.  The two substantive questions which required determination, namely, (i) whether the Company carried out a sufficient level of operations, and (ii) whether the Company had tangible assets of sufficient value and/or intangible assets for which a sufficient potential value can be demonstrated to the Exchange, to warrant the continued listing of the issuer’s securities, were succinctly addressed. The reasons given were sufficient to allow the Company to understand why the GEM Listing (Review) Committee reached the conclusion that the Company failed to satisfied the obligation under Rule 17.26.  It is not necessary for the GEM Listing (Review) Committee to deal with each and every point of detail raised by the Company.  Neither would that be practical or helpful, bearing in mind the composition and functions of that committee.  The giving of reasons for a decision on only the essential issues to be determined by a domestic tribunal like the GEM Listing (Review) Committee in a brief and succinct manner has, I consider, much to recommend.  Overall, I am of the view that the reasons given by the GEM Listing (Review) Committee are adequate in the circumstances of the present case.

54.  Ground 2 of judicial review is rejected.

55.  In the Amended Form 86 and/or Mr Dykes’ Skeleton Submissions, the Company has raised some other minor points in support of the present application which I do not propose to deal with them individually. They do not add anything of substance to the application and could not affect the outcome of this application.

DISPOSITION

56.  The application for leave to apply for judicial review is granted on the basis that the intended application for judicial review is reasonably arguable and has a realistic prospect of success.  The substantive application is dismissed upon full consideration of the merits. The parties are agreed that costs should follow the event.  I therefore make an order that the Company shall pay the costs of the Exchange (including all reserved costs), to be taxed if not agreed, with certificate for 2 counsel.