Re Cable & Wireless HKT Ltd.

HCMP 2316/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2316 OF 2000

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J U D G M E N T

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1. By an order of this court made on 23 May of this year, it was directed that a meeting take place pursuant to section 166(1) of the Companies Ordinance, Charter 32 ('the Ordinance') to consider a scheme of arrangement proposed between Cable & Wireless HKT Ltd ('HKT') and the holders of its shares of 50 cents each. In this regard, section 166(1) reads:

" Where a compromise or arrangement is proposed between ... the company and its members or any class of them, the court may, on the application in a summary way of the company ... order a meeting of the ... the members of the company or class of member, as the case may be, to be summoned in such manner as the court directs."

2. The meeting ('the court meeting') took place on 3 July. At that meeting the required majority of shareholders in both number and value approved the scheme of arrangement. It was then incumbent upon HKT to secure the sanction of this Court to the scheme. In this regard, section 166(2) of the Ordinance reads:

" If a majority in number representing three-fourths in value of the ... members or class of members ... present and voting either in person or by proxy at the meeting, agree to any ... arrangement, the ... arrangement shall, if sanctioned by the court, be binding on all the ... members or class of members, as the case may be, and also on the company ..."

3. It was an integral part of the scheme of arrangement that there be a reduction of the capital of HKT and, in terms of section 59 of the Ordinance, HKT has also sought an order from this Court confirming the reduction.

4. HKT's application was heard on 1 August. It was not formally opposed although, as I shall deal with later in more detail, an anonymous faxed letter was received by the Court prior to the hearing which contained a number of criticisms of the scheme.

5. At the hearing of the application, I granted the relief sought, sanctioning the scheme of arrangement and confirming the reduction of capital integral to the scheme. However, because of the size and importance of the scheme, I said at the time that my reasons would follow in due course. They are now contained in this judgment.

Background to the scheme.

6. HKT has for many years been Hong Kong's leading provider of telecommunications services. Its shares have been listed on the Hong Kong Stock Exchange. Prior to the present revolution in communication technologies and the liberalisation of the communications market, HKT was able (in most years) to pay shareholders a relatively high proportion of its profits by way of dividends. It appears, however, that a rapidly changing market environment can no longer guarantee such an income to shareholders.

7. ING Barings Asia Ltd, in a letter of advice made available to shareholders, recorded the fact that HKT's 'overall financial performance' has been deteriorating since the 1998 financial year. In part, ING Barings explained this in the following terms:

"...HKT's operating environment is changing rapidly due to global developments in liberalisation, an increasingly competitive market, the introduction of new technologies and growing customer demand for new services. These developments are expected to result in limited growth prospects for basic telecommunications services within Hong Kong but expanded opportunities, particularly in IP-based services, for business and residential customers within Hong Kong and the Asia region. In this connection, we recognise that the recent financial performance of HKT as discussed below was consistent with the aforesaid developments. Over the past several years, HKT has been positioning itself for future growth by making substantial investments in broadband infrastructure and by developing Internet, multimedia and e-commerce businesses."

8. As to the threat to HKT's past ability to award dividends, the letter of advice records the following:

"...the Board of HKT believes that it would be difficult, if not impossible, for HKT to sustain its existing policy of paying a high proportion of its profits as dividends to HKT Shareholders in the short to medium term. The reasons for this are the rapid changes in its operating environment, particularly in the markets for basic telecommunications services in Hong Kong, such as international and mobile voice services, and HKT's expected requirements to fund substantial investments in new businesses and in new markets to capture growth."

9. HKT has itself advised shareholders that its ultimate holding company, Cable and Wireless plc (C&W), a company incorporated in England and listed on the London Stock Exchange, wished to reduce its investment in HKT in order to further its business ambitions in other geographical areas. In a letter to shareholders this was conveyed in the following terms:

"...C&W, has adopted a strategy which is focused on delivering data and IP based services to business customers in the United States, Europe and Japan. C&W is concentrating its financial and management resources on this strategy and has stated its intention to reduce its investment in HKT..."

10. Following C&W's decision to reduce its investment in HKT, the Board of HKT was agreed that, if possible, the company should align itself with a partner which shared its strategy for the growth of the local telecommunications industry; namely, by investing in an enhanced broadband infrastructure and by developing internet, multimedia and e-commerce businesses.

11. In January of this year, it was announced that Singapore Telecommunications Ltd ('Singtel') was interested in a possible merger. However, before Singtel made any formal offer, an announcement was made by a Hong Kong company, Pacific Century CyberWorks Ltd ('PCCW'), that it too had entered into negotiations which, if successful, would result in the acquisition of the entire issued share capital of HKT.

12. PCCW is involved primarily in technology businesses related to the internet. To this end, it has invested in a number of young companies engaged in 'e-infrastructure' businesses. It also has real estate interests and is developing the well-publicised Hong Kong Cyberport which is intended to be a location for high technology and internet companies. PCCW is listed on the Hong Kong Stock Exchange.

13. In respect of the scheme of arrangement, it has been made plain to shareholders of HKT that PCCW is involved in businesses which, although they may constitute the cutting edge of future communications, nevertheless - at this time - contain a high risk factor. For example, in its letter of advice (to which reference has already been made) ING Barings has said:

"Minority HKT Shareholders should note that the risk profile of PCCW's businesses is very different from that of HKT's businesses and they are advised to refer to the section entitled "Risk profile" of this letter for more details. As explained in such section, the business model of PCCW is unproven and with broadband communications and the Internet sector being relatively new markets, there is considerable uncertainty as to the future prospects of PCCW."

14. While aware of the risks, the Board of HKT has nevertheless formed the opinion that a merger with PCCW would be beneficial. In its letter to shareholders, the Board of HKT has said:

" The combination of HKT and PCCW is expected to bring together the capabilities and assets required to create a leading force in the major growth markets of Internet and telecommunications, including broadband content and distribution, global IP network services, regional mobile services and business e-commerce services, initially in Hong Kong and elsewhere in the Asia region and ultimately globally."

The nature of the scheme.

15. In essence, the scheme of arrangement sought to make HKT an indirect wholly-owned subsidiary of PCCW. The mechanism to achieve this had the following features:

(i) On the day the scheme became effective, the share capital of HKT was to be reduced by cancelling all its issued ordinary shares ('the scheme shares');

(ii) Upon that reduction taking place, the authorised share capital of HKT was to be increased to its former amount by the creation of new HKT shares equal in number to the cancelled scheme shares;

(iii) HKT would then apply the credit arising in its books of account as a result of the reduction of its capital to pay up in full, at par, the newly created shares;

(iv) these new HKT shares would then be issued to a wholly-owned subsidiary of PCCW;

(v) in consideration, HKT shareholders would, in respect of their holdings, receive either new PCCW shares or a combination of new PCCW shares and cash.

16. As a result of the scheme, HKT would, as I have said, become a wholly-owned subsidiary of PCCW and HKT shareholders would - to the extent that they received shares and not cash - become shareholders of PCCW.

17. In her judgment given in Re China Light & Power and CLP Holdings Ltd [1998] 1 HKC 170, Le Pichon J noted that schemes of arrangement involving this type of mechanism are not uncommon.

The court meeting.

18. As I have said, the court meeting took place on 3 July of this year. Prior to that a comprehensive printed document in book form (in both English and Chinese characters) had been sent to all registered holders of HKT shares. Inter alia, this document included an explanatory statement required by section 166A of the Ordinance, letters from the boards of both HKT and PCCW and a letter from a committee entitled the Independent Board Committee which had been formed to advise minority shareholders in respect of the scheme. ING Barings was appointed by that committee to be its financial advisor. The advice given by ING Barings was also contained in the document.

19. The court meeting was attended in person or by proxy by 1,704 shareholders. The shares they held represented 9,285,175,809 ordinary shares of HKT out of a total of 12,160,481,984 issued shares of 50 cents each. When voting in respect of the scheme took place, 97.36% in number and 99.9% in value voted to approve the scheme. These exceeded the minimums required under section 166(2) of the Ordinance.

The function of the court.

20. In Re Dorman, Long & Co. Ltd [1934] Ch 635 Maughan J defined the duties of the court in matters of this nature when he said (at page 655):

"It is plain that the duties of the court are two-fold. The first is to see that the resolutions are passed by the statutory majority in value and number ... at a meeting or meetings duly convened and held. The other duty is in the nature of a discretionary power...

21. In respect of the second duty, he said (at page 657):

"In my opinion, then, so far as the second duty is concerned what I have to see is whether the proposal is such that an intelligent and honest man, a member of the class concerned and acting in respect of his interest, might reasonably approve."

22. As to the first duty; that is, to ensure statutory compliance, in Re China Light & Power (supra) Le Pichon J said that there appeared to be 4 separate considerations; namely:

"(i) the classes of members or creditors must be properly constituted;

(ii) the meetings were duly convened in accordance with the directions given by the court hearing the originating summons;

(iii) members or creditors have been given a sufficient explanation of the Scheme and its effects and sufficient information to enable them to make a reasonable judgment as to how to vote at the meeting; and

(iv) the requisite majority (ie a simple majority in number representing three quarters in value of those present and voting in person or by proxy at the meeting) has voted in favour of the Scheme.

See generally Boyle and Marshall on Practice and Procedure of the Companies Court (1997 Ed) at para 3.6.6."

23. In respect of the first consideration; namely, to ensure that the classes of members must be properly constituted, all the members of HKT who have been involved have held ordinary shares of 50 cents each. Mr Richards QC, who appeared on behalf HKT, submitted that there was only one class of members; namely, the holders of those ordinary shares as they held identical rights in respect of those shares and were entitled to equal benefits under the scheme.

24. There was, of course, one major shareholder; that is C&W which (through a wholly-owned subsidiary) owned some 54% of HKT's shares. Mr Richards spoke of 4 matters in respect of C&W to allay any concern that, because of its unique position, it should properly have been constituted as a separate class.

(i) The size of the shareholding.

25. I agree with Mr Richards that the size of a shareholding per se is no reason to exclude a member from a class or to compel it to form its own class.

(ii) Directorships.

26. As a result of the merger C&W will become a major holder of PCCW shares, holding between 10% and 19% of the issued shares. In recognition of this, PCCW has indicated that it will invite representatives of C&W to sit on its Board. This, however, as Mr Richards has emphasised, does not constitute a binding agreement. It is recognised by C&W to be no more than a statement of intent given by PCCW in recognition of the commercial practicalities of the matter. I accept that to be the case.

(iii) Restriction on the sale of its shares.

27. While C&W has made it known that it intends to sell a certain percentage of its shares in PCCW in an orderly placing, it has agreed - in order to ensure some stability in the market after the completion of the scheme - that it will hold the balance of its shares for a period of up to one year. This is a voluntary restriction not binding on other shareholders. This self-imposed restriction springs purely from the size of C&W's shareholding and is motivated by a desire to reduce future, short-term volatility.

(iv) The agreement of support.

28. At an early date in the proceedings, C&W gave an undertaking to vote in favour of the scheme of arrangement. But, as Mr Richards emphasised, this undertaking was subject to the broad condition that C&W would be free to either abstain from voting or to vote against the scheme if it was considered that to vote for it would be inconsistent with the fiduciary duties of C&W's directors. In other words as Mr Richards expressed it, C&W was free to be guided by its best interests and was therefore, at the court meeting, to all practical intents in the same position as other HKT shareholders.

29. I have spoken earlier of an anonymous faxed letter sent to the court prior to the hearing. There was, of course, no indication that the author of the letter had any legitimate interest in the scheme of arrangement and in other circumstances I would not have given it any credence. But in this instance, in light of the fact that the court does not act as a 'rubber stamp' in sanctioning schemes of arrangement, certain of the contents of that letter were raised with counsel.

30. It was suggested in the faxed letter that C&W should not have been allowed to vote or should at least, in voting, have constituted a separate class of membership. This, said the fax, was because of the size of its shareholding and because of the 'right' it had secured to a place on the board of PCCW.

31. I am satisfied, however, that C&W secured no such right; indeed, C&W confirmed that in writing.

32. I have considered whether all of the matters touched upon by Mr Richards, when taken together, should properly have resulted in C&W constituting a separate class from the other shareholders. But I can find no good grounds for so holding. The rights of C&W in respect of the shares held by it were no different from the rights of other shareholders under the scheme. C&W took steps to ensure that the interests of other shareholders were not jeopardised subsequent to the scheme becoming effective. I fail to see how it could be argued that the position of C&W made it impossible to consult with other shareholders with a view to their common interests. C&W no doubt did wish to see the scheme approved but 'motive' is not, except in exceptional cases, a basis for classification. No doubt many other shareholders, large and small, wished to see the scheme approved. But that, on its own, did not prohibit them from consulting with other shareholders in the same class with a view to securing their common interests.

33. As to the remaining statutory considerations, I am satisfied that the court meeting was convened in accordance with the directions given by the court and that members were given a sufficient explanation of the scheme to enable them to make a reasonable judgment as to how to vote. Indeed, as mentioned earlier, the risks were plainly spelt out. I am further satisfied that the requisite majority voted in favour of the scheme.

34. It should be mentioned, however, that the author of the anonymous faxed letter criticised the scheme of arrangement on the basis that it was in essence a 'take-over bid' which required a 90% acceptance rate and that it had been dressed up as a scheme of arrangement in order to 'lower the threshold to 75%'. That is not a criticism which, in my opinion, has merit in law. In this regard, for example, see Re Hellenic & General Trust [1975] 4 All ER 382 where (at page 387) Templeman J said:

"The fact that an arrangement under s 206 produces a result which is the same as a takeover under s 209 is not necessarily fatal. It is not always so unfair as to preclude the court from exercising its discretion in favour of the scheme."

35. The learned judge found his authority for that proposition in Re National Bank Ltd [1966] 1 WLR 819 in which Plowman J in considering whether a scheme should have been treated as a take-over requiring a 90% majority had earlier said:

"... I cannot accede to that proposition. In the first place, it seems to me to involve imposing a limitation or qualification either on the generality of the word "arrangement" in s. 206 or else on the discretion of the court under that section. The legislature has not seen fit to impose any such limitation in terms and I see no reason for implying any. Moreover, the two sections, s. 206 and s. 209, involve quite different considerations and different approaches. Under s. 206 an arrangement can only be sanctioned if the question of its fairness has first of all been submitted to the court. Under s. 209, on the other hand, the matter may never come to the court at all. If it does come to the court then the onus is cast on the dissenting minority to demonstrate the unfairness of the scheme. There are, therefore, good reasons for requiring a smaller majority in favour of a scheme under s. 206 than the majority which is required under s. 209 if the minority is to be expropriated."

The overall merits.

36. The onus lies on HKT to establish the fairness of the scheme. The court has an unfettered discretion in the matter. However, a court is unlikely to refuse to sanction a scheme when the statutory provisions have been met, when the class of members entitled to vote has been fairly represented, when the majority have acted bona fide and not merely to promote their own interests and when it can be said that the scheme is one which an intelligent and honest man acting in respect of his interest might reasonably approve (see Buckley on the Companies Act, 15th ed. 2000, volume 11, Division 1 at paragraph 425.53). Certainly the scheme has its risks but communications technology is moving at a rapid pace: those who become laggards may never catch up. The scheme received strong voting support. Nobody felt sufficiently aggrieved by the manner in which the scheme was presented, explained and voted upon to appear in court to oppose any order of sanction. I could not at the time of hearing find any good reason to refuse to sanction the scheme or to refuse to confirm the reduction in capital that constituted an integral part of the scheme. I therefore deemed it appropriate to make the requested orders of sanction and of confirmation.