RE COSMOS MACHINERY ENTERPRISES LTD

HCMP 601/2021

[2021] HKCFI 2088

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 601 OF 2021

________________________

________________________

________________________

D E C I S I O N

________________________

1.  On 11 May 2021 I made an order permitting the Company to convene a meeting of shareholders to consider a privatisation through a scheme of arrangement (“Court Meeting”). The necessary majority has not been obtained and the scheme will not proceed. However, the proposed scheme did give rise to one issue which it will be of assistance to practitioner that I address, namely, the undecided issue of whether the offeror concert parties should be excluded from voting at the Court Meeting as a result of the operation of Rule 2.10 of the Code on Takeovers and Mergers (“Takeovers Code”)  which provides:

“Except with the consent of the Executive, where any person seeks to use a scheme of arrangement or capital reorganisation to acquire or privatise a company, the scheme or capital reorganisation may only be implemented if, in addition to satisfying any voting requirements imposed by law:—

(a)  the scheme or the capital reorganisation is 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 the disinterested shares; and

(b)  the number of votes cast against the resolution to approve the scheme or the capital reorganisation at such meeting is not more than 10% of the votes attaching to all disinterested shares.”

2.  There appear to be two schools of thought on the meaning of Rule 2.10:

(1)  First, Rule 2.10 prohibits the offeror concert parties from voting (“Prohibition View”).  This seems to have been accepted by Mr Justice Segal in Re Tonly Electronics Holdings Limited [1]:

“Under rule 2.10 of the Hong Kong Takeovers Code only …, the Disinterested Scheme Shareholders, that is shareholders of the Company other than the Offeror and Concert Parties, are permitted to vote on the Scheme.”

(2)  Second, Rule 2.10 does not prohibit the offeror concert parties from voting as such, but their vote cannot be counted for the purposes of complying with the Takeovers Code (“Non-Prohibition View”).

3.  In my view the Non-Prohibition View is the correct position.  My reasons are as follows:

(1)  It is more consistent with the natural and ordinary meaning of Rule 2.10.  Rule 2.10 does not say in terms that the offeror concert parties cannot vote.  Rule 2.10 is only concerned with ensuring that the offeror concert parties’ votes are not counted towards the requisite majorities.

(2)  The Non-Prohibition View is also more consistent with the natural and ordinary meaning of section 674(2)  of the Companies Ordinance, Cap 622.

4.  On the basis that the Non-Prohibition View is the correct position, a scheme raises no controversy just because one of the offeror concert parties may vote at the Court Meeting, provided his vote is not counted for the purposes of complying with the Takeovers Code.

5.  A number of schemes appear to have assumed that the Prohibition View is correct (for instance, Re Dah Chong Hong Holdings Ltd [2] and Re Joyce Boutique Group Ltd [3]). I say this because the notice of shareholders’ meeting in Dah Chong and Joyce Boutique stipulated respectively that:

“In compliance with the Hong Kong Code on Takeovers and Mergers (the ‘Takeovers Code’), the shares in the Company (the ‘Shares’)  held by CITIC Pacific Limited and its direct/indirect wholly-owned subsidiaries holding the Shares, and parties acting in concert (as defined in the Takeovers Code)  with CITIC Pacific Limited may not be voted at the Meeting. Only the Shares held by the Independent Shareholders (as defined in the Scheme)  are eligible for voting thereat” (emphasis added).

“In compliance with the Hong Kong Code on Takeovers and Mergers (the ‘Takeovers Code’), Shares held by the Offeror and parties acting in concert (as defined in the Takeovers Code)  with it may not be voted at the Meeting. Only Shares held by holders of Scheme Shares (other than the Offeror and parties acting in concert (as defined in the Takeovers Code)  with it)  are eligible for voting thereat” (emphasis added).

I heard both Dah Chong Hong and Joyce Boutiques and I do not recall my attention being directed to this voting right issue in these cases.

6.  In my view the correct position is as follows:

(1)  If parties acting in concert with the offeror are part of the scheme, they must be allowed to vote as a matter of scheme law because there must be a meeting of those shareholders subject to the scheme: section 670(2)(b)  of the Ordinance.

(2)  Tonly is a case on point.  There the Cayman incorporated, Hong Kong-listed entity promoted a privatisation scheme with all its shareholders (other than the offeror).  Thus the scheme applied to two classes of shareholders, namely shareholders acting in concert with the offeror, and the remaining shareholders (“Disinterested Scheme Shareholders”).  The company requested the Cayman court to order that the scheme be treated as a scheme between the company and all its shareholders (save for the offeror), but that only a meeting of the disinterested scheme shareholders be convened in order to comply with Rule 2.10.  Segal J rejected the request and reasoned as follows:

“13. I indicated at the convening hearing … that while I had no problem with convening a single meeting of the Disinterested Scheme Shareholders, I considered that this required either that the Disinterested Scheme Shareholders be constituted as a separate class or as the only parties to the Scheme. This is because of the wording of section 86 of the [Companies Act (2021 Revision)] [in pari materia with section 670(2)(b)  of the Ordinance]…

14. The Court is therefore given the power to convene meetings either of all the shareholders who are parties to the scheme or a separate class of such shareholders. I was concerned that ordering a meeting only of the Disinterested Scheme Shareholders when they only represented a subset of the parties to the Scheme and were not treated as a separate class was impermissible.

15.    It would of course have been permissible, and in my view more orthodox, to treat the Scheme as being between all the shareholders (save for the Offeror)  and for the Court to convene a meeting of all such shareholders which the Concert Parties would agree not to attend.  They would undertake not to attend and vote at the meeting of shareholders and the chairman of the meeting would produce appropriate evidence to the SEHK that they had not attended and voted.”

7.  Therefore, if the Prohibition View were correct, a scheme may include shareholders acting in concert with the offeror only if they all undertake not to vote at the meeting of shareholders.  In my view it should not be permissible for the notice of meeting to exclude these offeror concert parties because they are also parties to the scheme.

8.  In the present case, because one offeror concert party has failed to undertake not to vote, the Scheme probably could not have proceeded if I had taken the view at the hearing to a convene a meeting that the Prohibition View is correct.  However, as I took the view that the Non-Prohibition View is the correct position it was possible for the scheme to proceed although as matters have transpired it has had to be abandoned for an unrelated reason.  Had the necessary majority been obtained the offeror concert parities shareholders’ votes would not have been counted for the purposes of determining whether or not Rule 2.10 had been satisfied.