RE REALTY DEVELOPMENT CORPORATION LTD

HCMP 184/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 184 OF 2003

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REASONS FOR JUDGMENT

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1. I have before me an amended petition by Realty Development Corporation Limited ("the Company") seeking an order as follows:

(1) to sanction a scheme of arrangement ("the Scheme") between the Company and the holders of its ordinary shares other than those beneficially owned by New Asia Realty and Trust Co., Ltd ("NART") and Pomeroy Investments Ltd ("Pomeroy"); and

(2) to confirm a reduction of the capital of the Company involved in the Scheme.

2. At the conclusion of the hearing, I have made an order as sought by the Company and these are the reasons for my judgment.

The Company

3. The Company was incorporated on 8 October 1883 under the Companies Ordinance 1865. Its name was changed to its present name on 30 April 1964. The issued shares of the Company have been listed on the Stock Exchange of Hong Kong since 1970.

4. The business of the Company is investment holding and the principal activities of its subsidiaries are property development and investment in Hong Kong and investment in listed securities.

5. The present authorised capital of the Company is HK$300 million divided into 1.5 billion ordinary shares of HK$0.20 each. Up to 17 March 2003, which was the day before the hearing of the petition, 1,151,389,640 ordinary shares have been issued and are fully paid or credited as fully paid. NART and Pomeroy, an indirectly wholly owned subsidiary of NART, are interested in an aggregate of 72.42% of the shares in the Company.

The Scheme

6. The primary purpose of the Scheme is to privatise the Company so that it will become an indirectly wholly owned subsidiary of NART and the Company will apply to the Stock Exchange for withdrawal of the listing of its shares immediately following the effective date of the Scheme. In summary, the Scheme involves the following steps:

(1) the reduction of the share capital of the Company from HK$300 million to HK$236,496,726.60 by cancelling and extinguishing the 317,516,367 issued ordinary shares which are held by shareholders other than those holding shares beneficially owned by NART or Pomeroy ("the Minority Shareholders");

(2) the restoration of the authorised share capital of the Company to its former amount of HK$300 million by the creation of 317,516,367 new ordinary shares of HK$0.20 each of the Company, being equal to the number of the ordinary shares cancelled;

(3) the allotment and issue by the Company to NART or as it may direct of the 317,516,367 new ordinary shares so created, credited as fully paid by applying the credit which will arise in the Company's books of account as a result of such reduction of capital in paying up in full at par such new shares; and

(4) the payment by NART to each of the Minority Shareholders the sum of HK$3.20 in respect of each cancelled share formerly held by them.

The reasons for the Scheme

7. The reasons for the Scheme, as given in the explanatory statement of the Scheme document, would appear to be as follows.

8. The shares of the Company have habitually traded at a substantial discount to their attributable net asset value. The Company has not raised money from the equity capital market since 1972. In view of the substantial discount of the market price to the net asset value per share of the Company's shares, it would be difficult for the Company to raise capital through the capital market without significant dilution to the adjusted net asset value per share, even though the Company has no urgent requirement for capital. The Scheme will enable NART to eliminate the listing of a subsidiary which has not raised any money from the equity capital market for over 30 years and will have no ability or need to do so for the foreseeable future. It will also allow NART to increase its interest in the businesses of the Company and its subsidiaries and this, the management of NART believes, will contribute positively towards the shareholder value for NART.

9. As regards the Minority Shareholders, the Scheme will allow them to realise their investments at a significant premium to the prevailing market price without the constraint caused by the low liquidity of the Company's shares.

Function of the court in sanctioning a scheme

10. I was referred by Mr Poon, SC to Buckley on the Companies Act, 15th ed., Vol. II, paras. [425.53] and [425.54] on the approach of the court in sanctioning a scheme of arrangement. These passages have been cited with approval in a number of decisions. In short, the court is likely to sanction a scheme as long as (1) the provisions of the statute have been complied with; (2) the class was fairly represented by those attending the meeting and that the statutory majority was acting bona fide and are not coercing the minority in order to promote interests adverse to those of the class whom they purport to represent; and (3) the arrangement is such that an intelligent and honest man, as a member of the class concerned and acting in respect of his interest, might reasonably approve. Whilst the court has an unfettered discretion, it will be slow to differ from the meeting, unless either the class has not been properly consulted, or the meeting has not considered the matter with a view to the interests of the class which it is empowered to bind, or there is some blot in the scheme.

Compliance with statutory provisions

11. I turn to consider first if the statutory provisions have been complied with. There are four requirements (Re China Light & Power Co. Ltd & Anr. [1998] 1 HKLRD 158 at 168D to F).

(i) Class composition

12. The shares subject to the Scheme are all the ordinary shares other than those beneficially owned by NART and Pomeroy. The rights attached to all the shares in the Scheme are identical and the treatment under the terms of the Scheme of all the Minority Shareholders is the same. All the shares of the Minority Shareholders will be cancelled and an equivalent number of new fully paid up shares will be issued to NART or as NART may direct, and the consideration payable to the Minority Shareholders under the Scheme, being HK$3.20 cash for each share cancelled, is the same. There is no question that the class of members in the Scheme is not properly constituted.

(ii) Convening the court meeting

13. By an order of the court made on 21 January 2003, the court meeting of the Minority Shareholders was directed to be held. Advertisement of notices of the court meeting had been placed in various newspapers as directed. The court meeting was duly convened pursuant to the order.

(iii) Explanation of the Scheme

14. The explanatory statement as required by section 166A was sent to the Minority Shareholders in accordance with the order made on 21 January 2003 as part of the Scheme document. The reasons for proposing the Scheme were set out in the explanatory statement. Further, as required by section 166A(1)(a), there is a statement on the interests of the directors in the Scheme and the effects thereon. None of the directors was a member or creditor of the Company and the Scheme has no effect on any of the directors.

(iv) Voting at court meeting

15. The court meeting was held on 21 February 2003 and was attended in person or by proxy by 123 persons holding 60,496,308 out of 317,516,367 shares. The Scheme was approved by 91.87% in number representing 93.14% in value of those present and voting, which is far in excess of the statutory majority of a simple majority in number representing three-fourths in value of those voting.

If the class was fairly represented and there was no coercion of minority

16. On the evidence before me, and in the absence of any opposition on the hearing of the petition, there is no reason for thinking that the class was not fairly represented at the court meeting or that those who had voted in favour of the Scheme was acting otherwise than in good faith for their own benefit as members of the class.

Approval by intelligent and honest member

17. There are included in the Scheme document a letter from the board of directors setting out the background information to the proposed Scheme and the financial effects, and a letter from the financial adviser to the independent board committee setting out their recommendation and the reasons considered in arriving at the recommendation. The financial advisers recommended that the independent board committee should advise the independent Minority Shareholders to vote in favour of the Scheme. In making the recommendation, the financial advisers have considered the past results and future prospects of the Company and its subsidiaries; the assets, gearing and adjusted net asset value of the group and how the latter would compare with the cancellation price receivable by the Minority Shareholders under the Scheme; the level of discount of share price to net asset value of comparable companies and of companies in recent privatisation proposals. Thus, the Minority Shareholders were provided with a significant amount of information in the Scheme document for them to make an informed decision on the Scheme. In the light of the information provided, I am satisfied that the Scheme is such as an intelligent and honest member of the class concerned might reasonably approve of.

18. Thus, the matters that ought to be considered in deciding whether to sanction the Scheme would appear to be satisfied. I turn to consider the confirmation for reduction of capital sought by the Company to implement the Scheme. There is provision in the articles of association to enable the Company to reduce its authorised and issued capital by a special resolution and at an extraordinary general meeting of the Company held on 21 February 2003 immediately following the court meeting, a special resolution was passed to cancel all the shares of the Minority Shareholders for the purpose of giving effect to the Scheme.

Requirements for confirmation of reduction of capital

19. There are four requirements (Re Thorn EMI plc (1988) 4 BCC 698 at 701; Re Lippo China Resources Ltd [1998] 1 HKLRD 20 at 23I to 24A).

(i) Equitable treatment of shareholders

20. There is no doubt that this requirement is satisfied here, for the reasons given above.

(ii) Reduction properly explained

21. The cancellation of all the issued shares of the Minority Shareholders is an integral part of the Scheme and the explanation for this is contained in the explanatory statement in the Scheme document despatched to all the Minority Shareholders.

(iii) Interests of creditors safeguarded

22. I have made an order on 4 March 2003 to dispense with the settlement of a list of creditors, having been satisfied there will be no depletion of the assets of the Company as a result of the reduction of capital.

(iv) Discernible purpose

23. The proposed reduction is to give effect to the Scheme. I recognise that this type of cancellation is not uncommon in the schemes sanctioned by the court.

24. The requirements for confirming a reduction of capital have all been satisfied.

Orders

25. For the above reasons, I have made an order sanctioning the Scheme and confirming the reduction of capital in the draft order submitted on two undertakings given by Mr Poon. The first is a usual undertaking, given on behalf of NART and Pomeroy that these companies do undertake to be bound by the terms of the Scheme and to execute documents and do such acts as may be necessary or desirable for the purpose of giving effect to the Scheme. The second is an undertaking given on behalf of the Company not to issue any ordinary shares of HK$0.20 each in its capital until the date when the Scheme becomes effective or lapses. This undertaking is necessary because the special resolution passed did not, and could not then, set out the exact number of the shares to be cancelled.