RE CITIC INTERNATIONAL FINANCIAL HOLDINGS LTD

HCMP 1686/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1686 OF 2008

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REASONS   FOR   JUDGMENT

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1.  This is an amended petition brought by CITIC International Financial Holdings Limited (“the Company”) on 20 October 2008 seeking firstly, sanction of a scheme of arrangement dated 16 September 2008 made between the Company and such holders of the ordinary shares of HK$1.00 each in the Company (“the Minority Shareholders”), other than those of such shares beneficially owned by Gloryshare Investments Limited (“the Offeror”) or Banco Bilbao Vizcaya Argentaria, S.A (“BBVA”), under section 166 of the Companies Ordinance, Cap. 32; and secondly, confirmation for the proposed reduction of its share capital for the implementation of the scheme, under section 59 of Cap. 32.

The Company

2.  The Company was incorporated in Hong Kong on 17 December 1924 under its former name, as a public company limited by shares.  Its name was changed to CITIC Ka Wah Bank Limited on 30 July 1998 and to its present name on 25 November 2002.

3.  The Company is an investment holding company with interests in commercial banking as well as other non-bank financial services businesses.  Its main operating business is conducted through its wholly owned subsidiary, CITIC Ka Wah Bank Limited, a company incorporated in Hong Kong and an authorised institution under the Banking Ordinance, Cap. 155.

4.  The present authorised capital of the Company is HK$8,000,000,000.00 divided into 8,000,000,000 ordinary shares of HK$1.00 each, of which 5,759,172,916 ordinary shares have been issued and are fully paid or credited as fully paid and the remainder are unissued.

5.  At present, there are outstanding options for the subscription of 8,792,000 ordinary shares of the Company which have been vested and outstanding options for the subscription of 25,260,000 ordinary shares which have not yet been vested and will not be exercisable prior to the scheme of arrangement becoming effective.  Further, the Company has in issue and outstanding convertible bonds in the principal amount of US$1 million convertible into 1,816,116 ordinary shares of the Company.

6.  The issued shares of the Company are listed on The Stock Exchange of Hong Kong Limited (“the Stock Exchange”).  Upon the scheme of arrangement receiving the sanction of the court and becoming effective, it is intended that the listing of the shares will be withdrawn from the Stock Exchange.

7.  At present, the Company is beneficially owned by the Offeror as to 3,176,395,029 ordinary shares of HK$1.00 each and by BBVA as to 835,717,967 such ordinary shares, representing approximately 55.15% and 14.51% respectively of the issued capital.  The Offeror is a wholly owned subsidiary of CITIC Group, a state-owned enterprise established under the laws of the People’s Republic of China (“the PRC”).  BBVA is a leading bank incorporated in Spain with worldwide interests.

8.  The Company is the Hong Kong and offshore financial services flagship of CITIC Group, which conducts its PRC banking operations principally through China CITIC Bank Corporation Limited (“CNCB”).  The Company and BBVA have respective interests of 15% and 4.83% in CNCB.  The domestic shares of RMB 1.00 each of CNCB (“CNCB A Shares”) are listed on the Shanghai Stock Exchange and its overseas listed foreign shares (“CNCB H Shares”) are listed on the Stock Exchange.

9.  The purpose of the scheme is that the Company shall be wholly owned by the Offeror and BBVA and the Minority Shareholders shall cease to be shareholders of the Company in return for the transfer to them of one overseas listed foreign share of RMB 1.00 each of and in CNCB and the payment to them of HK$2.16 in cash for every share of the Company held by them.

The scheme of arrangement

10.  The scheme of arrangement involves the following principal steps:

(1)     the reduction of the authorised and issued share capital of the Company by cancelling and extinguishing all of the issued ordinary shares of HK$1.00 each in the capital of the Company held by the Minority Shareholders;

(2)     the restoration of the authorised capital to its former amount of HK$8,000,000,000.00 by the creation of such number of new ordinary shares as is equal to the number of the ordinary shares cancelled;

(3)     the application by the Company of the credit arising in its books of account as a result of the reduction of capital in paying up in full at par the new ordinary shares to be created, which shall be allotted and issued, credited as fully paid, to the Offeror or such other parties as the Offeror may direct; and

(4)     in consideration of the cancellation and extinguishment of the ordinary shares the Offeror shall transfer or procure the transfer of one CNCB H Share and pay to the Minority Shareholders the sum of HK$2.16 in cash for every ordinary share cancelled.

11.  Any of the vested and unvested options for the subscription of ordinary shares of the Company which remains unexercised five days before the scheme of arrangement becomes effective will be cancelled a cash payment will be offered to their holders, the amount of which will be calculated by reference to the exercise price and the notional value of HK$7.60 as the consideration to be received by the Minority Shareholders for cancellation of an ordinary share under the scheme; or failing the acceptance of such offer, the Company will pay to the relevant holders an amount to be determined by the board after consultation with Company’s auditors or an independent financial adviser.  Similarly, the convertible bonds which remain outstanding five days before the scheme becomes effective will be acquired by the Offeror at HK$7.60 for each ordinary share convertible or redeemed by the Company pursuant to the terms for the issuance of the bonds.

12.  The proposal for the privatization of the Company is an integral part of the overall strategy of CITIC Group, to restructure its commercial banking business.  CITIC Group believes the successful implementation of the proposal will enable it to better align its onshore and offshore commercial banking businesses, which are currently operated through CNCB and CITIC Ka Wah Bank Limited respectively.  The equity structure of the Company after privatization will simplify the regulatory environment for future transactions involving the Company, BBVA and CNCB or between any of them under the listing rules of the Stock Exchange and the Shanghai Stock Exchange, and will in turn facilitate co-operation between these companies.

13.  The share and cash portions of the cancellation consideration will provide the Minority Shareholders an opportunity to realise their investments in the Company at a significant premium when compared to the historical trading prices of the shares, participate in the future growth of CITIC Group’s commercial banking business conducted through CNCB, and if the injection of the Offeror’s majority interest in the Company into CNCB materialises, continue to participate in the future growth of the Company through their ownership of CNCB H Shares.

14.  The proposal was also formulated to provide a solution to the Company for the repayment of loans which mature in December 2008, obtained for funding the Company’s top-up investment in CNCB and for capital injection into CITIC Ka Wah Bank Limited.  CITIC Group and BBVA have agreed that, if the scheme becomes effective, the Company would fully repay the loans and may apply part of the consideration paid by the Offeror and BBVA to cover such repayment.

The court meeting

15.  By an order made on 9 September 2008, it was ordered that the Company should convene a meeting of the Minority Shareholders for the purpose of considering and, if thought fit, approving, with or without modification, the scheme of arrangement.  The meeting was held on 16 October 2008.  The directions on the advertisement of a notice convening the meeting and service of the scheme documents have been complied with.

16.  A supplemental circular dated 23 September 2008 was sent to the Minority Shareholders to inform them of the replacement of Lehman Brothers Asia Limited (provisional liquidators appointed) (“Lehman Brothers”) by Morgan Stanley Asia Limited (“Morgan Stanley”) as the financial adviser to the Offeror on 17 September 2008.

17.  An aggregate of 45 million ordinary shares of the Company beneficially owned by Morgan Stanley and certain of its associated companies, and an aggregate of 3,802,000 ordinary shares of the Company beneficially owned by Lehman Brothers and certain of its associated companies were neither represented nor voted at the meeting, in accordance with The Code on Takeovers and Mergers issued by the Securities and Futures Commission and the undertakings given to the court.

18.  Under Rule 2.10 of the Code on Takeovers and Mergers, for a scheme to be effective, it must, notwithstanding the statutory majority for approval prescribed in section 166(2), be approved by at least 75% of the votes attaching to the disinterested shares that are cast either in person or by proxy at a duly convened meeting of the holders of disinterested shares and the number of the votes cast against the resolution for the approval of the scheme is not more than 10% of the votes attaching to all of such disinterested shares.

19.  Of the 170 Minority Shareholders who attended in person or by proxy holding 916,327,495 shares out of 1,747,059,920 shares which are subject to the scheme.  160 shareholders holding 910,676,937 shares (99.38%) voted in favour of the resolution to approve the scheme without modification, and 11 shareholders holding 5,650,558 shares voted against; one person voted some shares for and some shares against the resolution.

Sanction of the scheme of arrangement

20.  The Company has only one class of shares.  The rights attached to the shares subject to the scheme, being all issued shares other than those beneficially owned by the Offeror or BBVA, are identical and the treatment for all holders of the scheme shares is identical under the scheme.  The class of members in the scheme was properly constituted.

21.  The court meeting was duly convened in accordance with the directions given on 9 September 2008.  The members had been given a sufficient explanation of the scheme and its effects to enable them to make a reasonable judgment how to vote at the meeting.  Information was given in the scheme document of the prices for cancellation of shares in comparable privatization transactions.  A majority in excess of the statutory requirement approved the scheme at the meeting.  There are no grounds for thinking that the class of shareholders was not fairly represented at the meeting or those who voted in favour was acting otherwise than in good faith for the benefit of his interest as a member of the class.

22.  The independent board committee and the independent financial adviser have recommended acceptance of the scheme.  I am satisfied that an intelligent and honest member of the class concerned could reasonably approve the scheme.  I have therefore made an order sanctioning the scheme on the usual undertaking given on behalf of the Offeror and BBVA to be bound by the scheme.

Reduction of capital

23.  There is provision in the articles of association of the Company that it may by special resolution reduce its share capital in any manner allowed by law.

24.  At an extraordinary general meeting of the Company convened on 16 October 2008 immediately after the court meeting, a special resolution was duly passed that for the purpose of giving effect to the scheme of arrangement, on the effective date of the scheme, the authorised and issued capital of the Company be reduced by cancelling and extinguishing the scheme shares, and subject to and forthwith upon such reduction of capital taking effect, the authorised capital of the Company be increased to its former amount of HK$8,000,000,000.00 by the creation of such number of new ordinary shares of HK$1.00 each as is equal to the number of the scheme shares cancelled.  Votes in favour of the special resolution represented 99.84% of the total votes cast.

25.  The proposed reduction of the share capital does not involve either the diminution of any liability in respect of unpaid share capital or the payment to any shareholder of any paid-up share capital of the Company.

26.  At the hearing of the summons for directions on 28 October 2008, I made an order that settlement of a list of the creditors of the Company be dispensed with, having been satisfied none of the creditors of the Company would be prejudiced by the proposed reduction of capital, as the amount of cancelled paid-up capital will remain intact in the Company virtually throughout the whole reduction process so that the same amount may be applied to pay up the new shares allotted and issued to the Offeror or its nominees.

27.  Directions given for the advertisement of the amended petition have been complied with.

28.  As mentioned earlier, the treatment of all holders of scheme shares is identical in relation to the scheme, so there is equitable treatment of shareholders.  The reason for the proposed reduction of capital has been properly explained to the shareholders in the scheme document.  The reduction is for a discernible purpose as it is to give effect to the scheme.  I have been satisfied that the interests of creditors would be safeguarded.  I have confirmed the reduction of capital and made an order in terms of the draft submitted.