RE OXFORD PROPERTIES & FINANCE LTD

HCMP1319/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO.1319 OF 2004

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REASONS FOR JUDGMENT

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1. This is an application by Oxford Properties & Finance Limited ("the Company") for sanction of a scheme of arrangement under section 166 of the Companies Ordinance, Cap.32 ("the Ordinance").

2. On 18 June 2004, after hearing leading counsel for the Company, counsel for Smart Extra Holdings Limited ("Smart Extra") and Precise Dragon Developments Limited ("Precise Dragon"), and two of the shareholders of the Company, namely, the 51st and 119th defendants in HCMP5522/2003 in person, I allowed the application. These are my reasons.

THE COMPANY

3. The Company was incorporated in Hong Kong on 14 January 1969 in the name of Oxford Garment Factory Limited. It changed to its present name on 21 February 1973.

SHAREHOLDINGS

4. At the date of its incorporation, the Company had an authorized capital of HK$50,000 divided into 50,000 shares of HK$1 each. By subsequent special resolutions, the authorized capital was increased to HK$100,000,000 divided into 100,000,000 shares of HK$1 each as at 30 January 1973.

5. The Company went public on 6 April 1973. Before floatation, the issued share capital was 42,000,000 shares divided into HK$1 each. For the purposes of floatation, 14,000,000 new shares of HK$1 each were offered to the public for subscription. The shareholdings prior to and after floatation were as follows :

6. As at the date of the commencement of these proceedings, the authorized capital of the Company remained the same, out of which 67,760,000 shares are issued as fully paid up or deemed to have been fully paid up.

7. The shareholders are described in greater detail below :

(1) Smart Extra

8. Smart Extra is a company incorporated in the British Virgin Islands with limited liability and beneficially wholly-owned by Mr William Lee, a son of Mr James Lee and an executive director of the Company.

9. Between 31 March and 11 April 2003, Smart Extra and Precise Dragon, its wholly-owned subsidiary, acquired a total of 60,406,962 shares (representing 89.15% of the Company's entire issued share capital as at 13 June 2003) at a uniform price of HK$8 each. This included the 33,000 shares transferred from Mr William Lee on 31 January 2003.

10. As will be seen in paragraph 22 below, Smart Extra is now the beneficial owner or deemed beneficial owner of 60,456,796 shares representing about 89.22% of the entire issued share capital of the Company.

(2) Precise Dragon

11. As noted, Precise Dragon is a wholly-owned subsidiary of Smart Extra. It acquired some 14,376,000 shares at a uniformed agreed price of HK$8 each on 31 March 2003.

(3) Mr James Lee

12. He holds 90,118 shares representing about 0.13% of the issued shares.

(4) Modern Aspca Development Company Limited ("MADC")

13. The Company is the legal and beneficial owner in the 50% of the entire issued share capital of MADC. The remaining 50% is held by two associated companies of Mr James Lee and Mr William Lee. MADC holds 409,400 shares of the Company representing about 0.604% of its issued shares.

(5) 16 individuals ("16 Sophisticated Investors")

14. They hold altogether 3,866,040 shares, representing about 5.71% of the entire issued share capital of the Company.

(6) Other shareholders

15. Apart from the above parties, there are over 300 registered shareholders from the public.

THE COMPANY'S FINANCIAL POSITION

16. The Company's principal activities are investment holding, property investment, property development and provision of property agency service. The Company and its subsidiaries ("the Group") derived 90% of the income from the lease of residential and commercial properties in Hong Kong. 80% of the Group's properties are commercial properties. The Group also holds properties in Guam.

17. As at 31 January 2003, the total borrowings of the Group were HK$119 million with gearing ratio at 15.4%. Its existing bankers are Wing Hang Bank Limited and the Hong Kong and Shanghai Banking Corporation.

18. The audited consolidated net profit after taxation and minority interests for the financial year ended 31 January 2003 amounted to about HK$27 million.

EVENTS LEADING TO THE OFFER

19. Complaints had previously been made by certain shareholders of the Company in respect of the comparatively thin liquidity of the shares. Other shareholders had alleged that the properties of the Company in Guam had been incorrectly classified in the Company's accounts and their values understated. These complaints were all placed before the Financial Secretary, who then appointed an inspector to investigate into the shareholdings of the Company. The inspector submitted his report on 25 April 2001. The Stock Exchange then instituted disciplinary proceedings against the Company. The Stock Exchange published its rulings on 25 September 2003. The Company disputed the findings by the Stock Exchange and applied for a review. The review is still progressing.

20. The Company had made a number of attempts and arrangements with a view to improving the public float of the shares through the facilities of the Stock Exchange. Unfortunately, trading of the shares continued to be thin, with an average of daily trading volume of abut 10,700 shares, representing a mere 0.016% of the entire issued share capital.

21. On 17 June 2003, pursuant to Rule 26 of the Hong Kong Code on Takeovers and Mergers, Smart Extra extended an unconditional general cash offer ("the Offer") to all holders of equity share capital of the Company to acquire all the issued shares in the Company (other than those already owned by Smart Extra and Precise Dragon) at the price of HK$9 each. The number of shares in respect of which the Offer was extended was 7,353,038 shares, representing 10.85% of the entire issued share capital of the Company. This included the holdings of Mr James Lee and MADC.

22. At the close of the Offer on 17 October 2003, 49,834 shares had been tendered for acceptance under the Offer. Smart Extra's holdings therefore increased from 60,406,962 to 60,456,796 shares, representing 89.22% of the entire issued share capital of the Company.

23. By letters of irrevocable undertaking all dated 21 May 2003, the 16 Sophisticated Investors indicated that they would not accept the Offer but would support the scheme of arrangement proposed by Smart Extra, to which I now turn.

THE SCHEME

24. On 6 May 2003, Smart Extra initiated a request to the Company to put forward a proposal to the holders of the equity share capital of the Company by way of a scheme of arrangement under section 166 of the Ordinance to be formulated in accordance with Smart Extra's Scheme Proposal ("the Scheme"). The following are the salient features of the Scheme :

(1) The Scheme is intended to cover shares held by the "Scheme Shareholders", defined to include all shareholders of the Company except Smart Extra and Precise Dragon. This would include Mr James Lee and MADC.

(2) The Scheme envisages that the entire issued shared share capital of the Company be reduced from HK$67,760,000 by an amount equivalent to the aggregate of the par value of all the Scheme Shares, that is those held by the Scheme Shareholders, by the cancellation of such shares. The number of Scheme Shares is 7,303,204 shares, representing about 10.77% of the entire issued equity share capital of the Company.

(3) Smart Extra will pay the Scheme Shareholders HK$15 per share. On this basis, the Scheme values the entire issued capital of the Company at HK$1,014.4 million.

(4) The share capital of the Company will be reduced by canceling the whole of the 7,303,204 Scheme Shares.

(5) The sum of HK$7,303,204 resulting from such cancellation will be applied in paying up 7,303,204 new shares of HK$1 each, which new shares will be allotted to Smart Extra or its nominee.

25. At a meeting of the board of the Company held on 10 June 2003, the board resolved to the privatization of the Company by way of the Scheme, subject to shareholders' approval in a general meeting and two undertakings by Smart Extra.

26. The Company later issued a composite circular on 3 October 2003 in respect of, inter alia, the Scheme.

THE NORMAL PROCEDURE

27. An application for sanctioning a scheme of arrangement is governed by section 166 of the Ordinance, which provides :

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

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

28. Thus, the procedure for sanctioning a scheme of arrangement normally involves three stages :

(1) There must be an application to the court for an order that a meeting be summoned pursuant to section 166(1). The application is usually made by the Company ex-parte.

(2) The scheme proposals must be put to the court meeting, considered and approved by a majority in number representing 75% in value of the claims of those present and voting in person or by proxy.

(3) If, but only if, the proposals are approved by the requisite majority, then the court may sanction them, though it is not bound to do so.

See Re Hawk Insurance Co. Ltd [2001] EWCA Civ 241, per Chadwick LJ at p.242, UDL Arogs Engineering & Heavy Industries Co. Ltd v. Li Oi Lin & Others [2001] 3 HKLRD 634, (CFA), per Lord Millett NP at para.12 at p.640.

29. The rationale for the practice of making an ex-parte application at the first stage was explained by Lord Millett NP in UDL Arogs Engineering & Heavy Industries Co. Ltd v. Li Oi Lin & Others, at para.14 at p.640 thus :

"...[In] my opinion, the practice is a sound one. The only alternative would be to require notice of the initial application to be made inter-partes and for notice of the application together with a copy of the Scheme to be given to everyone potentially affected by it, with the risk of incurring the costs of a contested hearing and possible appeals before it could be known whether the Scheme was likely to attract sufficient support in any event. The present practice ensures that those advising the company take their responsibility seriously, since an error on their part will be fatal to the Scheme. At the same time it leaves the question, which goes to the jurisdiction of the Court to sanction the Scheme, to be decided at the appropriate time, that is to say when the Court is asked to sanction it. By then the outcome of the meeting or meetings will be known and the question, which will no longer be hypothetical, can be argued between the appropriate parties, that is to say the company on the one hand and those who object to the Scheme on the other."

SEPARATE MEETINGS OF SHAREHOLDERS

30. The Scheme envisages separate court meetings of different classes of shareholders to be convened to approve the Scheme. Thus, a meeting is to be attended by Mr James Lee and MADC. Another meeting of the shareholders other than Smart Extra or any person acting in concert with Smart Extra including Mr James Lee and MADC ("the Independent Shareholders") is to be convened at the direction of the court for approving the Scheme. The Independent Shareholders must approve the Scheme by a majority representing 75% in value of the shares that are voted by them. The Scheme must not be disapproved by shareholders attending at the meeting holding more than 10% in value of the shares held by the Independent Shareholders.

31. Any shareholders who have tendered their shares for acceptance of the Offer will not be entitled to attend or vote at the court meeting.

HCMP5522/2003

32. On 23 December 2003, the Company commenced HCMP5522/2003 for directions for the court meetings to be held under section 166(1) for two classes of the shareholders, namely, Class A comprising Mr James Lee and MADC and Class B comprising the Independent Shareholders.

33. Contrary to the normal practice described above, the application was made by the Company inter-partes. The basis of departing from the usual practice is that the Company anticipated that the constitution of the classes of the shareholders under the Scheme might give rise to an issue. It considered that all shareholders should be served and the classification could then be made with full opportunity being given to all shareholders to address the court on that particular issue.

34. The application was heard by Barma J. Apparently, he was satisfied that there are sufficient reasons to warrant an inter-partes application. For on 11 March 2004, Barma J gave directions for the separate court meetings for Class A and Class B shareholders to be convened. Further, he must have been satisfied that the Scheme could reasonably be supposed by sensible business people to be for the benefit of the class concerned : see Re Dorman Long & Co. Ltd [1934] 1 Ch 635.

THE COURT MEETINGS

35. Pursuant to Brama J's order of 11 March 2004, separate meetings for Class A and Class B shareholders were convened on 28 April 2004. The Scheme was duly approved at the meetings with the requisite majority.

REDUCTION OF CAPITAL

36. On 28 April 2004, the Company also held an EGM in which the resolution for reducing its share capital pursuant to the Scheme was duly passed. The reduction of 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. The purpose of the reduction is to give effect to the Scheme.

HCMP1319/2004

37. By petition dated 25 May 2004 in HCMP1319/2004, the Company applied to court for sanction of the Scheme and the reduction of capital.

38. The petition first went before Barma J on 1 June 2004. He found everything in order and gave various directions. These directions have all been complied with. The petition eventually came before me on 18 June 2004 and it fell upon me to sanction the Scheme and the reduction of capital.

COURT'S DUTIES IN SANCTIONING THE SCHEME

39. The court's duties in sanctioning a scheme of arrangement under section 166 of the Ordinance are two-fold. The first is to see that the resolutions are passed by the statutory majority in value and number at meeting or meetings convened and held. The other duty is in the nature of a discretionary power to consider the overall merits of the scheme : Re Dorman, Long & Co. Ltd [1934] Ch 635, per Maugham J at p.655; followed in Re China Light & Power Co. Ltd & Another [1998] 1 HKLRD 158.

40. On compliance with statutory requirement, there are four considerations :

(a) the classes of members or creditors had to be properly constituted;

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

(c) members or creditors had been given sufficient explanation of the scheme and its effect and sufficient information to enable them to make a reasonable judgment as to how to vote at the meeting; and

(d) the requisite majority had voted in favour of the scheme.

See Re China Light & Power Co. Ltd & Another, above, per Le Pichon J (as she then was) at p.168A-F.

41. On overall merits of the scheme, the test was whether the proposal was such that an intelligent and honest man, a member of the class concerned and acting in respect of his interest, might reasonably approve: Re Dorman, Long & Co. Ltd, above, at p.657; Re China Light & Power Co. Ltd & Another, above at p.170C.

COMPLIANCE OF STATUTORY REQUIREMENTS

42. On the evidence before me, I am satisfied that all the requisite statutory requirements have been fully complied with.

43. I proceed to consider how I should exercise my discretion.

SANCTIONING THE SCHEME

44. The rationale for the Scheme is in brief this. The trading volume of the Company's shares listed in the Stock Exchange has always been thin. Indeed the independent financial advisers engaged to advise on the Scheme takes the view that the trading of the shares is very illiquid. The Company's board therefore considers that an opportunity would be created by the Scheme to enable the shareholders to make an informed decision as to whether they should realize their respective investment in the Company. It is an exit, as it were, for those investors whose funds have been locked up in the Company because of the illiquidity of the shares.

45. The Stock Exchange has already stated that it may, upon failure of Smart Extra to privatize the Company, suspend the trading of its shares until after viable arrangements are made and implemented, so that a sufficient level of public float will have been attained. Smart Extra may or may not be able to swiftly make and implement any viable arrangement, or at all. In other words, if the Scheme fails, it will be very unlikely that the investors whose funds are locked in the Company because of the illiquidity of the shares will be able to realize their investment in the near future or at all.

46. The price of HK$15 offered by Smart Extra represents a premium of about 31.58% over the audited consolidated net asset value per share as at 31 January 2003 and 29.65% over the un-audited adjusted net tangible assets value per share as at 30 June 2003. It also represent a discount of about 37.2% to the highest trading price per share and a premium of about 154.2% over the lowest trading price per share over a review period of between 19 April to 21 November 2002.

47. I also note that the Company's bankers have raised no objection to the Scheme.

48. On the evidence before me, I am satisfied that the Scheme is such that an intelligent and honest man, a member of the class concerned and acting in respect of his interest, might reasonably approve.

49. The two individual shareholders (the 51st and 119th defendants in HCMP5522/2003) who appeared before me opposed the Scheme. They essentially took the view that the price of HK$15 was too low. On the undisputed evidence before me, the figure of HK$15 was not arrived at arbitrarily. It was arrived at after full consideration being given to all relevant circumstances, including the financial position of the Company and its properties portfolio, and with the advice of the independent financial advisers. They have not adduced any evidence to support a higher figure. In the circumstances, I find their objection unmeritorious.

50. For the above reasons, I approve the Scheme.

REDUCTION OF CAPITAL

51. The requirements for sanctioning a reduction of capital are :

(1) the shareholders are treated equitably;

(2) the reduction proposals are properly explained;

(3) the creditors are safeguarded;

(4) the reduction is for a discernible purpose.

See Re Lippo China Resources Ltd [1998] 1 HKLRD 20.

52. On the evidence before me, I am satisfied that all these requirements are met. I will therefore sanction the reduction of capital as well.