GOLDWYN CAPITAL LTD v. THE SECURITIES AND FUTURES COMMISSION

Headnote

[(1) Where the Securities and Futures Commission has doubts about the suitability of a registered investment adviser to act as the financial adviser in a takeover, it is permitted to act upon those doubts without having first invoked the disciplinary procedure laid down by section 56 of the Securities Ordinance (Cap. 333).

(2) The requirements for the filing of skeleton arguments pursuant to the Practice Direction for cases assigned to the Administrative Law List are frequently not being complied with. They should be complied with in future.]

1997 A.L. No. 59

IN THE HIGH COURT OF HONG KONG

COURT OF FIRST INSTANCE

ADMINISTRATIVE LAW LIST

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J U D G M E N T

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INTRODUCTION

1. The Applicant, Goldwyn Capital Ltd. ("Goldwyn"), is an investment adviser. It was recently retained to act as financial adviser to a company incorporated in the British Virgin Islands ("the offeror") in respect of an offer to purchase the shares of a company whose shares had been listed on the Stock Exchange of Hong Kong. However, the Securities and Futures Commission ("the Commission") refused for the time being to process a draft announcement relating to the offer which named Goldwyn as the financial adviser to the offeror in respect of the offer. That refusal is the decision being challenged on this application for judicial review.

THE STANDARDS EXPECTED OF FINANCIAL ADVISERS

2. The standards of commercial conduct and behaviour considered acceptable for takeover and merger transactions are set out in the Code on Takeovers and Mergers ("the Code"). Para. 1.2 of the Introduction to the Code (and to the Code on Share Repurchases) provides:

"The primary purpose of the ... Codes ... is to afford fair treatment for shareholders who are affected by takeover and merger transactions and share repurchases. The Codes seek to achieve fair treatment by requiring equality of treatment of shareholders, mandating disclosure of timely and adequate information to enable shareholders to make an informed decision as to the merits of an offer and ensuring that there is a fair and informed market in the shares of companies affected by takeover and merger transactions and share repurchases. The Codes also provide an orderly framework within which takeovers, mergers and shares repurchases are to be conducted."

High standards are therefore expected by the Commission of financial advisers who act on behalf of offerors under the Code. It expects the financial adviser to possess - and in appropriate cases it expects the financial adviser to demonstrate that it possesses - the integrity, competence and relevant expertise and knowledge of the Code. These qualities are needed to ensure that the financial adviser performs its duties with a high degree of honesty and professionalism, so as to ensure that there is an informed market, that the Code is complied with, and that the interests of the investing public are properly safeguarded. Thus, para. 1.5 of the Introduction to the Codes provides that they apply to the professional advisers of persons who seek to gain control of public companies, and the importance of the role played by financial advisers is stressed by para. 1.7:

"The role and responsibility of financial and other professional advisers is of particular importance given the non-statutory nature of the Codes, and it is part of their responsibility to use all reasonable efforts, subject to any relevant requirements of professional conduct, to ensure that their clients understand, and abide by, the requirements of the Codes, and to co-operate to that end by responding to inquiries from the Executive Director of the Corporate Finance Division of the [Commission] and any delegate of the Executive Director ..."

3. The potential consequence of a failure on the part of a financial adviser to perform its duties properly are serious. Misleading information may be given, up-to-date and relevant information may not be given, and an uninformed and false market may occur to the detriment of the existing shareholders and the investing public.

4. The draft announcement submitted to the Commission on behalf of an offeror is a critically important document. It informs the public about the proposed takeover, and that the offer is being made by financial advisers on behalf of the offeror. Apart from ensuring that the financial adviser is duly registered under the Securities Ordinance (Cap. 333)("the Ordinance"), and receiving evidence supporting the statement by the financial adviser in the draft announcement that sufficient financial resources are available to the offeror to satisfy its obligations under the offer, the Commission does not normally require the financial adviser to demonstrate further that it meets the standards expected of it.

5. However, there may be cases in which the Commission is concerned about the financial adviser's ability to meet the standards expected of it. In such a case, it will take one or more of the following courses of action:

(i) it will require the financial adviser to provide such evidence as allays its concerns about the financial resources of the offeror,

(ii) it will suggest that the financial adviser be assisted by a more experienced firm of financial or legal advisers so that they may advise the client jointly with the financial adviser whose competence, integrity or expertise is in question,

(iii) it will require the financial adviser to satisfy it that the adviser possesses the necessary competence and expertise to advise clients about the Code, and that the offeror has in fact been given accurate and comprehensive advice about the Code.

The Commission takes these steps in view of the important regulatory role which the Commission performs. Its functions are set out in section 4(1) of the Securities and Futures Commission Ordinance (Cap. 24)("the SFCO"). They include:

"(e) to take all reasonable steps to safeguard the interests of persons dealing in securities ...;

(h) to promote and maintain the integrity of registered persons and encourage the promulgation by registered persons of balanced and informed advice to their clients and to the public generally."

GOLDWYN'S PREVIOUS CONDUCT

6. Goldwyn has been registered as an investment adviser under Part VI of the Ordinance since March 1993. In April 1995, it acted as financial adviser to another company incorporated in the British Virgin Islands in respect of an offer to purchase the shares of a company whose shares had been listed on the Stock Exchange of Hong Kong. The offer did not proceed. However, the transaction was the subject of disciplinary proceedings before the Takeover and Mergers Panel ("the Panel") pursuant to para. 12 of the Introduction to the Codes. These proceedings were brought against various parties to the transaction. In July 1995, the Panel determined that Goldwyn, amongst others, had been in breach of various provisions of the Code. For those breaches, the Panel imposed on Goldwyn the sanction of a private reprimand. However, it should be noted that more severe sanctions were imposed on other parties to the transaction.

7. As a result of Goldwyn's role in the transaction, the Commission decided to conduct a disciplinary inquiry under section 56 of the Ordinance. The inquiry resulted in the suspension of Goldwyn's registration for one year. That decision was made in September 1996. Goldwyn lodged an appeal against the suspension. The effect of that was that the suspension would "not come into operation" until the appeal had been heard and determined: see section 21(4) of the SFCO. The appeal has not yet been heard and determined. Accordingly, Goldwyn has remained registered as an investment adviser for the time being.

THE DECISION CHALLENGED

8. On 13th May 1997, Goldwyn was appointed to act as financial adviser in respect of "Project Deer", which was the name by which the offer to which the current proceedings relate was known. It prepared an announcement relating to the offer, and submitted the draft to the Commission on 3rd July. The Commission's response was commendably quick. On the same day, one of its employees told an employee of Goldwyn over the telephone that the draft announcement could not be approved because of Goldwyn's involvement in the offer as financial adviser to the offeror. By a letter written to Goldwyn's solicitors on 7th July, the Commission confirmed that Goldwyn had been told that "it would not be appropriate for [Goldwyn] to act as financial adviser for the offer described in the draft announcement". Technically, there is a difference between a decision not to approve the draft announcement (albeit because of Goldwyn's involvement) and a decision not to approve Goldwyn's appointment as financial adviser to the offeror, but in practical terms it comes to the same thing.

9. The Commission's decision was not expressed to be qualified in any way. However, the Commission subsequently decided to give Goldwyn an opportunity to deal with its concerns. Accordingly, in a second letter written to Goldwyn's solicitors on 7th July, the Commission wrote:

"The [Commission's] experience of Goldwyn in connection with the defaulted acquisition [in 1995] ..., when it acted on behalf of the Offeror [a BVI company], has left it with considerable doubts as to its fitness and properness to act in such a role and concern that the interests of the investing public may be jeopardised or put at risk if Goldwyn were to so act. The [Commission] invites Goldwyn to submit all grounds upon which it relies (if it be the case) in contending that the [Commission] can and should be satisfied of Goldwyn's integrity, fitness and properness to act and capacity to achieve the high standards of professionalism imposed by the Code in connection with Project Deer."

Goldwyn's solicitors replied on 8th July. They said that Goldwyn relied simply on the fact that it was registered as an investment adviser under the Ordinance. The Commission replied on 9th July. Its reply is important, and I propose to quote the letter in full:

"The views of the [Commission] have been arrived at after consideration of the functions of the Commission contained in section 4(1) of the Securities and Futures Commission Ordinance, the construction of the Hong Kong Code on Takeovers and Mergers (the 'Code') as a whole and the proper administration of the Code by the [Commission]. In particular, your attention is drawn to para. 1.7 of the Introduction of the Code, which requires financial advisers to have high standards of professionalism.

On the basis of your representations made on behalf of your client, the [Commission] takes the view that it has no grounds upon which to be satisfied that Goldwyn have conducted, or will conduct, itself with the high degree of integrity and professionalism required of a financial adviser under the Code. Therefore, the [Commission's] concern that the involvement of Goldwyn in Project Deer may put at risk the interests of the investing public is undiminished.

Please be advised that the [Commission] takes the view that mere registration as an investment adviser is, of itself, insufficient qualification to act as a financial adviser under the Code. The [Commission] is not obliged to approve, or acquiesce in, the involvement of a financial adviser in a proposed takeover in circumstances such as the present where there are justifiable doubts as to the fitness and properness of the financial adviser to conduct itself according to the high standards of professionalism and integrity required by the Code, and where there are concerns that the interests of the investing public may thereby be put at risk.

In the circumstances, the [Commission] is unable to approve a public announcement of a takeover offer which invites the investing public to rely upon Goldwyn's claim that it is satisfied that sufficient financial resources are available to the Offeror to enable it to satisfy the acceptances of the Offer in full. In order to safeguard the interests of the investing public and to maintain the standards of market practitioners involved in takeovers as required under the Code, the [Commission] declines to process any draft announcement relating to Project Deer which involves Goldwyn acting as financial adviser to the Offeror."

Goldwyn's solicitors replied on 10th July, suggesting that the Commission's concerns could be met by "careful monitoring of Project Deer". The Commission replied on 11th July, rejecting that suggestion. The letter concluded:

"It was with a view to providing Goldwyn with the opportunity to allay the expressed concerns of the [Commission], that I invited submissions on the matter in the penultimate paragraph of my letter of 7th July 1997. Should you now wish to address those concerns, the [Commission] is prepared to give them close consideration."

Goldwyn's solicitors replied on 12th July, saying that

"... we took the invitation extended in your letter of 7th July to be of a general rather than a specific nature. This must be so in view of the fact that, other than making reference to [Goldwyn's] involvement in the [1995] defaulted transaction, you have given no other reasons for your concerns about [Goldwyn]."

They pressed the Commission for a meeting (which was something which they had already asked for in the correspondence). The Commission replied on 14th July. The material part of its letter read:

"I note that you have twice declined to address the concerns of the [Commission] though afforded every opportunity to do so. It is difficult to understand, when viewed in context, your suggestion that such invitations were of a general nature. If you remain unwilling to address the concerns of the [Commission], there appears to be little reason to hold a meeting to discuss the matter further at this point."

10. I shall refer to this correspondence later in connection with an allegation of procedural unfairness made by Goldwyn, but what the correspondence reveals is that the decision being challenged was the decision made by the Commission on 3rd July not to approve the draft announcement so long as Goldwyn remained as financial adviser to the offeror in relation to the offer. However, the Commission subsequently made it clear that it was prepared to reconsider that decision in the light of any representations made to it by or on behalf of Goldwyn that, despite the events of 1995, Goldwyn could achieve the high standards of professionalism required by the Code. No representations were made to it which altered the view which the Commission had taken on 3rd July.

SUBSEQUENT EVENTS

11. Since the grant of leave to apply for judicial review, the offeror has withdrawn its instructions from Goldwyn to act as its financial adviser on the offer. Accordingly, Goldwyn no longer seeks the quashing of the decision, nor does it seek an order requiring the Commission to process the draft announcement. Instead, it seeks declaratory relief only.

THE NATURE OF THE CHALLENGE

12. The arguments before me ranged widely, but reduced to their essentials the decision challenged was attacked on two grounds:

(i) The fact that Goldwyn continued to be registered as an investment adviser meant that it was not open to the Commission to question whether Goldwyn had the integrity, competence and expertise to act as financial adviser to the offeror in Project Deer.

(ii) The decision not to approve the draft announcement while Goldwyn continued to act as financial adviser to the offeror in Project Deer was reached unfairly, because Goldwyn had never been given an opportunity to address the Commission's real concern, which was simply whether the offeror had the financial resources available to satisfy its obligations under the offer.

THE EFFECT OF REGISTRATION

13. Goldwyn's principal argument is simple. At the time when the draft announcement was submitted to the Commission for its approval, Goldwyn was still registered as an investment adviser. The Ordinance lays down in section 56 a comprehensive regime for monitoring the conduct of an investment adviser. It empowers the Commission to inquire whether the adviser has been guilty of any misconduct in relation to its business, and whether the adviser is a fit and proper person to be registered. Accordingly, if there are doubts about whether a registered investment adviser is a fit and proper person to act as the financial adviser to an offeror involved in a takeover, those doubts can only be resolved through the mechanism of section 56. It is not open to the Commission to act upon such doubts without invoking the disciplinary procedure contemplated by section 56.

14. I agree that registration of a company as an investment adviser amounts to an acceptance by the Commission that the company is a fit and proper company to act as financial adviser to an offeror involved in a takeover. That is because (a) the Commission is obliged to refuse to register a company as an investment adviser if the Commission is not satisfied that it is a fit and proper company to be registered (see section 23(1) of the SFCO), and (b) to act as financial adviser to an offeror involved in a takeover comes within the definition of investment adviser in section 2(1) of the Ordinance - "any person who ... (c) ... undertakes on behalf of [a] client ... the arranging of purchases ... of securities".

15. However, what cannot be overlooked is the Commission's role as the statutory regulator of the securities industry. Its role as a public watchdog in the financial services sector would be emasculated if it could not give effect to any doubts it may have about the integrity, competence or expertise of an investment adviser when it acts as financial adviser to an offeror involved in a takeover without having first instituted disciplinary proceedings under section 56. The Commission's need to act quickly to prevent the possibility of the investing public being misinformed would be completely frustrated if it was first obliged to invoke a procedure which could take many months to complete. In any event, in this case, such proceedings had been instituted. In those proceedings, the Commission had found that Goldwyn and two of its directors had been guilty of "serious misconduct" in connection with the transaction to which the proceedings related, and that Goldwyn's "fitness and properness to remain registered [as an investment adviser had] been seriously impugned". If the doubts which the Commission had about Goldwyn's suitability to act as the financial adviser to the offeror in Project Deer could only be resolved through the mechanism of section 56, the fact is that (subject to the appeal) the facts which had given rise to those doubts had been adjudicated upon.

16. Mr. Neville Sarony S.C. for Goldwyn relied on what he contended to be was the renewal of Goldwyn's registration in March 1997. If there were doubts about Goldwyn's suitability to act as a financial adviser to an offeror involved in a takeover, with the result that Goldwyn was not a fit and proper company to continue to be registered as an investment adviser, the occasion of the renewal of the registration was the time when those doubts should have been resolved. The fact that its registration was renewed then meant that Goldwyn was regarded by the Commission as continuing to be a fit and proper company to be an investment adviser, and for that reason suitable to act as a financial adviser to an offeror involved in a takeover.

17. I cannot accept this argument, because I do not accept the premise on which it was based. Goldwyn's registration was not renewed in March 1997. Once a certificate of registration is issued, it continues indefinitely, unless revoked or suspended under sections 55 or 56 of the Ordinance, provided that the appropriate annual fee is paid, pursuant to the Securities and Futures Commission (Fees) Rules, "on or before each successive anniversary of the date of ... registration". Since no renewal takes place, the anniversary in March 1997 of Goldwyn's date of registration was not an occasion on which the Commission re-visited, or could be expected to have re-visited, the question of whether Goldwyn was to be regarded as continuing to be a fit and proper company to be registered.

18. Mr. Sarony sought to meet that argument by relying on the requirement on registered bodies, contained in the Securities and Futures Commission (Annual Returns) Rules, to submit annual returns to the Commission "on or before each successive anniversary of the date of ... registration", setting out the information contained in the Schedule to the Rules. I do not see how this requirement is of any assistance in the present case. Information in the annual returns (which the Commission was unaware of beforehand) may cause the Commission in an appropriate case to invoke sections 55 or 56 of the Ordinance, but the facts which gave rise to the Commission's doubts about Goldwyn were already known to the Commission, and had already been the subject of the disciplinary inquiry under section 56.

19. Finally, Mr. Sarony drew my attention to para. 12.1 of the Introduction to the Codes which relates to disciplinary proceedings. It includes the following sentences:

"A disciplinary case is one the sole or main purpose of which is to propose that disciplinary action should be taken. Disciplinary action is to be distinguished from requiring compliance with, or requiring that action be taken to remedy a breach of the Code or of a ruling of the Executive or the Panel."

He contended that this limited the use to which findings by the Panel in disciplinary proceedings can be put. Such findings cannot be used for any purpose other than for determining what disciplinary action, if any, should be taken. Accordingly, to the extent that the Commission's doubts about Goldwyn arose from the Panel's findings in the disciplinary proceedings in 1995, the Commission took into account irrelevant matters.

20. I disagree. The Codes "are framed so far as possible in non-technical language and should not be interpreted as if they are statutes" (para. 1.3 of the Introduction to the Codes). I do not read para. 12.1 as narrowly as Mr. Sarony asks me to. I read it as saying that disciplinary proceedings may only be instituted for the purpose of determining what, if any, disciplinary action should be taken, but that does not prevent the findings made in those disciplinary proceedings from being used by the Commission for some other purpose. In any event, even if the Commission could not rely on the findings made in the disciplinary proceedings in July 1995, there was nothing in para. 12.1 which prevented it from relying on the findings made in the statutory disciplinary proceedings in 1996.

PROCEDURAL UNFAIRNESS

21. It is unfortunate that the Commission made its initial decision - not to approve the draft announcement so long as Goldwyn remained as the financial adviser to the offeror in connection with the offer - without first giving Goldwyn an opportunity to address the Commission's concerns. However, that omission was quickly remedied, and the only allegation of procedural unfairness which remains is whether Goldwyn was informed what the Commission's actual concerns were.

22. The affidavit of Ms. Laura Cha, the Executive Director of the Corporate Finance Division of the Commission, sets out what the Commission's actual concern was. That concern was that there might be a repetition of Goldwyn's failings in the 1995 transaction. Like the offeror in 1995, the offeror in the present transaction was a company incorporated in the British Virgin Islands. That meant that financial and other corporate information about it was less easy to come by, and that made it all the more important for the financial adviser to scrutinise with particular care the financial strength of such a company, and to satisfy itself that it had sufficient financial resources available to satisfy full acceptance of the offer. Moreover, the offeror in 1995 had been uncertain as to whether it would actually proceed with the offer, but Goldwyn had failed to make that clear both to the Commission and to the public. Mr. Sarony argues that these concerns were never spelt out in the correspondence, and that Goldwyn was therefore never alive to them.

23. I cannot accept this argument. The Commission's second letter of 7th July shows that the Commission's concerns stemmed from what had been perceived to be Goldwyn's shortcomings in the 1995 transaction. Goldwyn did not have to be told what had been perceived to be its failings in that transaction. It knew them already. Goldwyn should have appreciated that what it was being asked to do in the correspondence was to provide the Commission with such evidence as it could to show that those failings were unlikely to occur again. Apart from anything else, the Commission's letter of 9th July (which I quoted in full) made clear in its last paragraph that its particular concern about the draft announcement was that it was one

"... which invites the investing public to rely upon Goldwyn's claim that it is satisfied that sufficient financial resources are available to the Offeror to enable it to satisfy the acceptances of the Offer in full."

It should have been apparent to Goldwyn that it was being asked to provide to the Commission evidence either (a) of the offeror's financial standing and its ability to satisfy full acceptance of the offer, or (b) of the steps which Goldwyn had taken to satisfy itself of those matters.

24. In the interests of completeness, I should add that technically it was not open to Goldwyn to mount this argument. That was because the allegation of procedural unfairness was not made in the Notice of Application. That was understandable, because Goldwyn's advisers only became aware of the point when they read Ms. Cha's affidavit. An application for leave to amend the Notice of Application to allege this procedural unfairness was withdrawn by Mr. Sarony when Mr. John Griffiths S.C. for the Commission told me that if the amendment was permitted an adjournment would be necessary for the filing of further evidence. However, I have addressed the argument, because I have come to the conclusion that the Commission succeeded on it even without the benefit of the further evidence.

CONCLUSION

25. For these reasons, this application for judicial review must be dismissed. At present, I see no reason why costs should not follow the event, and I make an order nisi that Goldwyn must pay to the Commission its costs of this application, to be taxed if not agreed.

THE SKELETON ARGUMENTS

26. Finally, I wish to add a few words about the skeleton arguments in this case. The skeleton argument from counsel for one of the parties was faxed to the Registry shortly before 5:00 p.m. on the day before the hearing, and it only reached my clerk at 9:45 a.m. on the day of the hearing. The result was that I had not read it before the hearing began. Para. 2.10.1 of the Practice Direction relating to the Administrative Law List reads:

"Every party who proposes to make submissions on the substantive hearing must ensure that a skeleton argument, drafted by counsel who is instructed to argue the case, is received by the judge's clerk by 9:30 a.m. on the working day before the date of the hearing excluding Saturday."

The time for the submission of skeleton arguments in cases assigned to the Administrative Law List is shorter than for other cases. The reason for that is that when the Practice Direction was drafted, it was recognised that the preparation of a skeleton argument comes relatively late in counsel's preparations for the hearing, and there is no need for a skeleton argument to be lodged long before the judge is likely to want to read it. In addition, the reference to the time by which skeleton arguments are to be received by the judge's clerk was intentional. It was designed to avoid the problem which happened in this case, which is that it inevitably takes some time for documents filed or received in the Registry to be in the hands of the clerk to the judge who is to hear the case.

27. The provisions of the Practice Direction are meant to be complied with. They are not simply "targets to be aimed at or expressions of pious hope". In my experience, the direction relating to the time for the lodging of skeleton arguments has been more honoured in the breach than in the observance. I trust that it will not be ignored in the future.