WINNIE HO YUEN KI v. THE SECURITIES AND FUTURES COMMISSION

HCAL 113/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTITUTIONAL AND ADMINISTRATIVE LAW LIST

NO. 113 OF 2005

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D E C I S I O N

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I. Introduction

1.  Madam Ho says that the SFC has failed to investigate possible anomalies in the affairs of Shun Tak Holdings Ltd.  Madam Ho drew these possible anomalies to the SFC’s attention by letter dated 15 October 2004.  On 26 May 2005 the SFC replied that, having examined Madam Ho’s complaints, it had decided not to proceed with further investigations.  Madam Ho now seeks leave for judicial review against that refusal by the SFC.  She contends that the SFC has acted unreasonably and so failed to perform its statutory duty.

II. Discussion

2.  Madam Ho’s letter of 15 October 2005 identifies 2 matters of concern.

3.  First, Madam Ho alleges that a 2002 rights issue by Shun Tak was not in the company’s interest.  She contends that the rights issue was primarily carried out to increase the shareholdings of Pansy and Daisy Ho in Shun Tak.

4.  In this connection, Madam Ho criticises Shun Tak Shipping Company Limited (STS) for transferring its entitlement in the rights issue to Pansy and Daisy Ho at a price of 1% of the rights transferred.

5.  Second, Shun Tak has a shareholding in Sociedade de Turismo e Diversoes de Macau SARL (STDM).  STDM in turn has an 80% shareholding in Sociedade de Jogos de Macau SARL (SJM).  The remaining 20% is held by 3 Shun Tak directors (Stanley Ho (Madam Ho’s brother), Ambrose So and Cheng Yu Tung).  SJM was established in 2002 to obtain a new gaming licence in Macau. 

6.  Madam Ho asserts that STDM’s assets have been used by SJM to obtain its new licence.  But (Madam Ho alleges) STDM has not made full disclosure to Shun Tak about the arrangements between STDM and SJM regarding the use of STDM’s assets. 

7.  Madam Ho says that there is “a material difference between expected results of STDM based on SJM results, from those disclosed to the media by Stanley Ho”.  Madam Ho suggests that “there may be a material problem in this regard that ultimately could be costing [Shun Tak] over HK$30 million per annum in benefits transferred to Stanley Ho, Ambrose So and Cheng Yu Tung strictly at the expense of [Shun Tak].”

8.  By its letter dated 26 May 2005 the SFC declined to investigate further. 

9.  On the 2002 rights issue, the SFC noted the following:-

(1)	The SFC was unable to identify circumstances indicating that Shun Tak’s business had been conducted in a manner which was oppressive to any of its members.
(2)	There was no evidence of fraud by the managers of Shun Tak towards its members.
(3)	As far as the SFC could see, Shun Tak’s shareholders had been provided with all information about Shun Tak’s affairs that the shareholders might reasonably expect to receive.
(4)	There was nothing out of the ordinary about the 2002 rights issue. There was no external indication or evidence that the 2002 rights issue had some ulterior motive.
(5)	Insofar as complaint was being made about STS, that was “a matter exclusively between shareholders of STS, a private company, and the company itself which does not affect [Shun Tak] or its minority shareholders”.
(6)	Even if the alleged rights transfer was not in the interests of STS’ shareholders, such transaction could not have affected Shun Tak or its members.  Indeed, the latter would not have been able to purchase STS’ rights, because as a major shareholder STS undertook that it would accept or procure acceptance of its entitlement to the rights shares.
(7)	There was adequate disclosure about the rights issue (including its reasons) in the relevant prospectus.

10.  On the relationship among Shun Tak, STDM and SJM, the SFC noted the following:-

(1)	The complaint essentially involved a transaction between 2 private companies (STDM and SJM) and individuals in Macau.
(2)	The transaction was only remotely connected with Shun Tak, which at the time only had a 5% shareholding in STDM (later increased to 11.48%).  The impact of the transaction on Shun Tak’s revenue would have been no more than between 0.06% and 1% (depending on whether one uses a 5% or 11.48% shareholding base).
(3)	By any objective yardstick, the transaction “does not appear to be a matter of great significance to the operation of Hong Kong’s securities and futures market or to the protection of investors as a whole”.
(4)	The SFC has no power to inspect the records and documents of STDM or SJM or ask its employees or officers any questions.  This is because the 2 companies are Macau-based and beyond the SFC’s jurisdiction.
(5)	The disclosure required under the Hong Kong Exchange Listing Rules did not apply to STDM.
(6)	Since STDM was not a Shun Tak subsidiary, a joint venture between STDM and 3 Shun Tak directors was not a connected transaction.
(7)	Any agreement entered into by the 3 Shun Tak directors relating to the joint venture with STDM would not constitute a contract of significance between the directors and Shun Tak.  No disclosure was required in Shun Tak’s annual report.
(8)	The arrangement between STDM and SJM would only have had a negligible impact on Shun Tak’s investment in STDM.  In any event, it was reasonable for Shun Tak to form such a view and conclude that no further disclosure about the arrangements with STDM and SJM was required.
(9)	As for the use by SJM of STDM’s assets, since STDM is neither a subsidiary nor an associated company of Shun Tak, no disclosure is required in Shun Tak’s accounts relating to such arrangements.

11.  The SFC’s May 2005 letter concluded as follows:-

“We must tell you that your client’s complaints are far from the most egregious cases that we assess.  Currently, we are handling cases where the allegations of corporate misconduct made or concerns uncovered by our own surveillance work are more serious and have more serious potential consequences for the investing public as a whole and for the integrity of the Hong Kong securities market than the issues your client now raises.  We have chosen to apply our resources to these more significant cases and will continue to do so in the future.  In our assessment, your client’s complaints do not justify our expending our limited resources on matters which we consider either do not come within our jurisdiction or, if they do, arise in circumstances where, owing to the practical limitations of our powers, based on our experience, we would not be able to obtain sufficient evidence to take any regulatory action.  We have therefore exercised our discretion not to proceed to investigate your client’s complaints. Finally, although we appreciate that your client may be disappointed with our decision, we note that your client has rights and remedies available to her as a shareholder that she may consider exercising to right any wrongs or losses that she believes she may have suffered as a consequence of the two transactions she has raised with us.”

12.  In my judgment, the SFC’s handling of Madam Ho’s complaints and its reasons for declining to pursue them further are impeccable.  As far as I can see looking at matters as a whole, the SFC has properly and reasonably exercised its discretion on whether or not to pursue a case.  There has been nothing fragmentary in its approach.  The SFC’s conduct can in no way be characterised as irrational.

III. Conclusion

13.  The proposed judicial review is unarguable.  It is bound to fail.  Leave is refused.