RE CHONG HING BANK LTD

HCMP 968/2021

[2021] HKCFI 3091

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 968 OF 2021

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R E A S O N S    F O R    J U D G M E N T

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1.  At the hearing of the petition presented by Chong Hing Bank Limited (“Company”), I sanctioned the scheme of arrangement dated 30 July 2021 between the Company and all the “Scheme Shareholders” (as defined in §8 below) (“Scheme”) pursuant to ss.673 and 674 of the Companies Ordinance (Cap. 622) (“Ordinance”) and confirmed the reduction of capital in connection with the Scheme pursuant to s.229 of the Ordinance. These are the reasons for my judgment.

A. Background

2.  The Company was incorporated on 17 March 1955 under the former Companies Ordinance (Cap. 32) as a private company limited by shares. Since 11 July 1994 the shares of the Company have been listed on the Main Board of The Stock Exchange of Hong Kong Limited (“HKEx”).

3.  In May 2021, Yue Xiu Enterprises (Holdings) Limited[1] (“Offeror”) requested the Board of the Company to put forward a proposal for the privatisation of the Company by way of the Scheme and withdrawal of the listing of the shares on HKEx on the terms set out in the “Scheme Document” (as defined in §9 below) (“Proposal”).

4.  By the joint announcement dated 18 May 2021 issued by the Offeror and the Company pursuant to Rule 3.5 of the Code on Takeovers and Merger (“Takeovers Code”), the Proposal was announced.

5.  The Offeror’s wholly owned subsidiary, Yuexiu Financial Holdings Limited (“SPV Entity”), is the single largest shareholder, holding 74.97% of the issued shares in the Company.

6.  As at the date of the Scheme Document, the issued share capital of the Company is HK$9,980,883,687.60, comprising 972,862,220 ordinary shares which were (and still are) held by the following shareholders:

Shareholder	Number of shares	Shareholding %
(1) SPV Entity	729,394,500	74.97%
(2) Concert Parties	87,137,421	8.96%
- Guangzhou Metro Investment[2]	70,126,000	7.21%
- Guangzhou Auto Investment[3]	16,950,000	1.74%
- Zong Jianxin[4]	42,164	0.01%
- Lau Wai Man[5]	19,257	0.00%
(3) Other shareholders (“Independent Shareholders”)	156,330,299	16.07%
Total	972,862,220	100%

7.  The Concert Parties are presumed to be acting in concert with the Offeror under the Takeovers Code for the purpose of the Proposal.

8.  The Concert Parties and the Independent Shareholders constitute the “Scheme Shareholders”, and together they hold 243,467,720 shares (“Scheme Shares”), representing approximately 25.03% of the issued shares in the Company.

9.  The details of the Scheme are set out in a composite scheme document dated 30 July 2021 (“Scheme Document”) which contains, inter alia, an explanatory statement (“Explanatory Statement”), a notice (“Notice”) of the meeting of the holders of the Scheme Shares convened at the direction of the Court at which the Scheme would be voted on (“Court Meeting”) and the Scheme.

10.  Throughout the Scheme Document, it is stipulated that the Scheme will be subject to approval by the Independent Shareholders, and that the Concert Parties will not attend or vote at the Court Meeting:

(1) In the Letter from the Board[6] and the Explanatory Statement[7] it is stated that the Scheme will be subject to approval by the Independent Shareholders who will be entitled to vote at the Court Meeting, and that the shares held by the Concert Parties “will not be voted at the Court Meeting”;

(2) Similarly, the Notice states that:

“In compliance with the [Takeovers Code], shares of the Company 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 of the Company held by the other holders of Scheme Shares as at the Meeting Record Date (as defined in the Scheme)[8] are eligible for voting thereat.”

11.  Upon the Scheme becoming effective:

(1) The Offeror shall pay HK$20.8 per share (“Price”) in cash (less Dividend Adjustment[9], if any) in exchange for each Scheme Share, which will be cancelled. The Price represents a premium of 51.2% over the closing price of the shares on 6 May 2021 (being the last trading day before the joint announcement), and a discount of 10.1% to the audited consolidated net asset value[10] of the Group of HK$23.14 per share as at 31 December 2020.

(2) The issued share capital of the Company will be reduced by cancelling the Scheme Shares, and the credit arising from such cancellation will become part of the reserve (“Reduction of Capital”). Forthwith upon the Reduction of Capital taking effect, the share capital of the Company will be increased to its former amount by issuing the same number of shares to SPV Entity and applying the credit in the reserve to pay up the amount payable on such shares.

(3) The shares in the Company will be withdrawn from listing on HKEx.

(4) The Company will thenceforth become wholly owned by SPV Entity.

B. Directions stage

12.  There are 2 matters which warrant elaboration.

13.  The first matter concerns the form of the Court Meeting and the extraordinary meeting (“EGM”) of the Company.

14.  Directions were given for the Company to convene (1) the Court Meeting of the Scheme Shareholders to be held on 30 August 2021 at the venue proposed by the Company, and (2) the EGM to be held after the Court Meeting for the shareholders to consider and vote on the resolutions necessary to implement the Scheme, the Reduction of Capital and the withdrawal of listing on HKEx. In addition to physical attendance at the meetings, the Company was directed to provide to the overseas[11] Scheme Shareholders and shareholders (as the case may be) an option of attending and voting at the meetings online through electronic means.

15.  It seems to me that it is necessary for the Company to hold hybrid meetings to ensure that overseas shareholders would not be deprived of the right to attend the meetings owing to the prevailing travel restrictions to combat the pandemic. It is also appropriate for the Company to do so, having regard to the provision under s.584 of the Ordinance, which allows a company to hold a general meeting at 2 or more places in this way:

“(1) A company may hold a general meeting at 2 or more places using any technology that enables the members of the company who are not together at the same place to listen, speak and vote at the meeting.

(2) Subsection (1) has effect subject to any provision of the company’s article.”

16.  The second matter concerns the meaning of Rule 2.10 of the Takeovers Code which, in turn, affects the validity of the Notice convening the Court Meeting and the constitution of such Meeting. In this regard, Mr William Wong SC, counsel for the Company, drew to this Court’s attention a recent decision of Re Cosmos Machinery Enterprises Ltd [2021] HKCFI 2088 where Harris J considered the 2 alternative views on the meaning of Rule 2.10 of the Takeovers Code (at §2):

“(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 [12]:

‘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”).”

17.  The learned Judge considered that the Non-Prohibition View is the correct position for the following reasons (at §3):

“(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 [Ordinance].”

18.  The learned Judge further explained that:

(1) “If the 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”. Re Tonly is a case on point (at §6); and

(2) “… 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” (at §7).

19.  The learned Judge’s view on the meaning of Rule 2.10 is obiter as the scheme in that case has not been approved by the requisite majority of the shareholders at the Court meeting, such that the Court does not have jurisdiction to approve the scheme (UDL Argos Engineering & Heavy Industries Co. Ltd & Ors v Li Oi Lin & Ors (2001) 4 HKCFAR 358, §12, per Lord Millett NPJ).

20.  Mr Wong submitted that the Non-Prohibition View represents a departure from the prevailing view that in order to comply with Rule 2.10, the concert parties would not be allowed to vote at the Court meeting. As it is the responsibility of the Company to decide the constitution of the Court Meeting and the question whether the Meeting is properly constituted would be considered at the sanction stage (UDL, §§13-14, 27(1), (6)), it was unnecessary for this Court to rule on the issue at the directions hearing.

C. SFC’s stance and appointment of amici curiae

21.  In view of the importance of the issue concerning the meaning of Rule 2.10, by letter dated 19 August 2021, this Court directed the solicitors for the Company to draw to the attention of the Securities and Futures Commission (“SFC”) the decision in Cosmos and asked if the SFC had any view or submissions it wished to make on the interpretation of Rule 2.10 and, if so, provide written submissions to the Court by 13 September 2021.

22.  However, in its letter dated 26 August 2021, the SFC simply stated that it “concurs” with Harris J’s view that the Non-Prohibition View is the correct interpretation and did not intend to attend the hearing of the petition. In the same letter, the SFC stated that “the Executive has no objection should parties acting in concert with the offeror voluntarily undertake not to vote in the court meeting for approving the scheme of arrangement”.

23.  The response from the SFC did not contain any reasons as to why it concurred with the Non-Prohibition View. Nor did it explain why the SFC in the past did not raise any concern on the draft scheme documents which stated that the concert parties would be excluded from voting at the Court meetings. Consequently, a further letter dated 30 August 2021 was sent to the SFC requiring it to clarify a number of questions raised therein.

24.  The further response contained in the SFC’s letter dated 31 August 2021 did not shed much light on the issue. In essence, the SFC is not concerned with whether the concert parties could or would vote at the Court meeting provided that their votes would not be counted for the purpose of Rule 2.10. The relevant parts of the letter stated as follows:

“It is not the Executive’s practice to request or require an offeror to procure each of its Concert Parties to undertake not to vote at the relevant scheme meeting. However, in reviewing draft scheme documents, the Executive needs to be satisfied that Rule 2.10 will be complied with when determining whether the approval thresholds under Rule 2.10 will be met. Over the 19 years since the introduction of Rule 2.10, the scheme documents for various privatisations have included statements to the effect that the Concert Parties of the offeror would not vote (or undertake not to vote) at the scheme meeting and also statements to the effect that should Concert Parties vote at the scheme meeting, their votes would not be counted for the purposes of Rule 2.10. The Executive does not have any issue with either approach as both ensure that the requirements under Rule 2.10 would be complied with and it is the responsibility of each of the parties (including the offeror and the company in question) to ensure that it complies with any other statutory requirements under the proposed scheme.

…

The Executive understands that, as a matter of practical convenience, offerors often ensured compliance with the requirements of Rule 2.10 by asking their Concert Parties not to vote from the outset, instead of allowing them to vote and then going through a separate exercise to disregard such votes for the purposes of calculating whether the approval thresholds have been met under Rule 2.10. This has now become an accepted practice by practitioners in the Hong Kong takeovers market.

If a Concert Party wishes to vote on the relevant resolutions, the Executive has no issue with this provided that the relevant parties (including the offeror, the offeree and those involved in counting the votes) have sufficient procedures in place to ensure that the relevant Concert Parties’ vote will not be counted when determining whether the approval thresholds under Rule 2.10 have been met.” (underlined added)

25.  Having regard to (1) the lack of meaningful response from the SFC, (2) the fact that only the Company will be appearing at the hearing of the petition, and (3) the general and public importance of the issue, which affects all persons or entities seeking to use a scheme of arrangement or capital reorganisation to acquire or privatise a company whose shares are listed on HKEx, Mr Winston Poon SC and Ms Eva Sit SC were appointed as amici curiae to assist the Court on the proper construction of Rule 2.10 of the Takeovers Code. The Court is indebted to Mr Poon and Ms Sit for their very helpful research and submissions.

D. Sanction stage

D1. General principles

26.  The Company applies for an order to sanction the Scheme pursuant to ss.673 and 674 of the Ordinance.

27.  The approach of the Court in considering whether to sanction a scheme of arrangement have been sufficiently stated by Harris J in Re China Agri-Industries Holdings Limited [2020] HKCFI 570, §4. In short, the Court will consider:

(1) Whether the scheme is for a permissible purpose;

(2) Whether members who were called on to vote as a single class had sufficiently similar legal rights that they could consult together with a view to their common interest at a single meeting;

(3) Whether the meeting was duly convened in accordance with the Court’s directions;

(4) Whether members have been given sufficient information about the scheme to enable them to make an informed decision whether or not to support it;

(5) Whether the necessary statutory majority has been obtained; and

(6) Whether the Court is satisfied in the exercise of its discretion that an intelligent and honest man acting in accordance with his interests as a member of a class within which he voted might reasonably approve the scheme (Re Dah Chong Hong Holdings Limited [2020] HKCFI 274, §4).

D2. Permissible purpose

28.  It is well established that privatisation of a listed company is an acceptable and permissible purpose for a scheme of arrangement (Re China Agri-Industries Holdings Limited, §5; Re Wheelock Properties Ltd [2010] 4 HKLRD 587, §8(a)).

D3. Sufficiently similar legal rights

29.  The Independent Shareholders hold ordinary shares in the Company. They will receive the same Price as consideration for cancellation of their shares. They have sufficiently similar legal rights and could consult together with a view on their common interest at a single meeting.

D4. Court Meeting duly convened

30.  The question whether the Court Meeting was duly convened and constituted by excluding the Concert Parties from attending and voting at such Meeting depends in part on the true meaning of Rule 2.10, which will be discussed in section E below. Subject to that, the Court Meeting was duly convened in accordance with the Court’s directions in that:

(1) The Scheme Document had been uploaded to the Company’s as well as the HKEx news’ websites on 30 July 2021.

(2) The Notice had been advertised in English and in Chinese from 30 July 2021 for a continuous period of 14 days.

(3) The Scheme Document had been dispatched to the Scheme Shareholders either by ordinary post or by courier (in respect of overseas shareholders) on 30 July 2021.

(4) Although service on 3 overseas shareholders were unsuccessful, they only hold 1,441 shares in the Company, which represent 0.0006% of all the Scheme Shares. The inability to serve the Scheme Document was the result of the relevant shareholders’ failure to provide up-to-date addresses to the Company. It is not a matter which should be held against the Company. In any event, the Company has since May 2021 announced the Scheme. It is reasonable to assume that the Scheme Shareholders would monitor the development from the further announcements and updates made by the Company on its website. Through these channels, the Scheme Shareholders would be able to have access to the Scheme Document (Cf. Re Allied Properties (H.K.) Ltd [2020] HKCFI 2624, §57(1)-(2)).

(5) The Company provided the overseas shareholders entitled to vote at the Court Meeting and the EGM an option to attend the meetings, cast their votes and submit questions and comments relevant to the proposed resolutions through an online platform made available by Computershare Hong Kong Investor Services Limited (the Company’s share registrar and transfer office), and the relevant details for accessing the Court Meeting were set out in the Notice.

D5. Sufficient information about the Scheme

31.  The Scheme Shareholders have been given sufficient information about the Scheme to enable them to make an informed decision whether or not to support it by the following means.

32.  In the Scheme Document, the Company (1) provided comparisons of the Price against the closing price of the shares of the Company on various trading dates as well as the audited consolidated net asset value of the Group, (2) set out the reasons and benefits for the Scheme; and (3) included an extensive analysis provided by the Independent Financial Adviser recommending the Scheme Shareholders to accept the Proposal. The Scheme Document has been made available to the Scheme Shareholders through the means described in §30(1)-(3) above.

D6. Approval by requisite majority stipulated in Ordinance

33.  Where, as here, a scheme involves a general offer or a takeover offer, s.674(2)(a) of the Ordinance requires 75% of the voting rights of the members present and voting at the Court meeting agree to the scheme, and the votes cast against the scheme at the meeting do not exceed 10% of the voting rights attached to all “disinterested shares” in the company.

34.  The meaning of “disinterested shares” is defined in s.674(3)(a) of the Ordinance. In the present case, the “disinterested shares” are the shares held by the Independent Shareholders.

35.  In view of the concern raised by this Court in correspondence and the SFC’s stance that it agrees with the Non-Prohibition View, on 27 August 2021, the Company invited the Concert Parties to confirm that they would not vote at the Court Meeting irrespective of whether they were eligible to vote at such Meeting. In response, each of the Concert Parties gave an irrevocable undertaking (in Chinese) to the effect that it/he would not vote at the Court Meeting irrespective of whether they were eligible to vote at such Meeting (“Undertaking”).

36.  At the Court Meeting held on 30 August 2021:

(1) 2 of the Concert Parties viz., Guangzhou Metro Investment and Guangzhou Auto Investment, did not attend or cast any vote at the Meeting.

(2) The other 2 Concert Parties attended the Meeting qua executive directors of the Company. They did not attend or cast any vote at the Meeting qua Scheme Shareholders.

(3) Consequently, although the Concert Parties were (and still are) Scheme Shareholders, none of them attended or voted at the Meeting.

(4) Independent Shareholders holding 99,406,357 shares attended and voted at the Meeting. Amongst them, 99,379,386 shares (representing 99.972868% of the voting rights present and voting) voted in favour of the Scheme, and 26,971 shares (representing 0.011078% of the voting rights present and voting) voted against the Scheme.

37.  In view of the Undertaking given by the Concert Parties, I am satisfied that notwithstanding the statements in the Scheme Document to the effect that the Concert Parties are not entitled to attend and vote at the Court Meeting, the Court Meeting was duly convened. I am also satisfied that the Court Meeting was duly constituted for the purpose of compliance with the requirements of the Ordinance, and that the Scheme has been approved by the requisite majority of the Scheme Shareholders as required by s.674(2)(a) of the Ordinance.

D7. Other considerations

38.  In considering whether an intelligent and honest man acting in accordance with his interests as a member of a class might reasonably approve the scheme, the Court would be slow to differ from the majority views, as normally businessmen are much better judges of what is to their commercial advantage (Re Cheung Kong (Holdings) Ltd [2015] 2 HKLRD 512, §§22-23, per Ng J).

39.  In the present case, the Independent Financial Adviser advised the Independent Shareholders to vote for the Scheme. There is nothing to suggest that in voting for the Scheme, the Independent Shareholders did not act in accordance with his interests as a member of his class.

40.  Lastly, the Offeror is neither a shareholder nor a party to the Scheme. It is therefore necessary for the Offeror to give an undertaking to the Court that it will be bound by the Scheme and will execute and do and procure to be executed and done all such documents, acts and things as may be necessary or desirable to be executed and done by it for the purpose of giving effect to the Scheme.

41.  The Offeror had given such an undertaking by its letter dated 17 September 2021, and the same was reflected in the Order made by this Court.

E. Rule 2.10

E1. Relevance to exercise of discretion

42.  I shall first deal with the relevance of Rule 2.10 in the context of the Court’s exercise of power to sanction a scheme under ss.673-674 of the Ordinance.

43.  In respect of a scheme involving privatisation, Rule 2.10 may feature in the directions stage in that:

(1) Where both Rule 2.10 and s.674(2) of the Ordinance are applicable, the requirements and test of s.674(2) continue to apply. This includes the test for classification of shareholders and whether it is necessary to convene separate class meeting. It is incumbent upon the company to consider whether the similarity or dissimilarity of the rights of (a) the disinterested shareholders and (b) the concert parties against the company, and the way those rights are affected by the scheme are such that these two groups can sensibly consult together with a view to their common interest as to constitute the same class, or different classes (UDL, §27).

(2) In Re SABMiller plc [2017] Ch 173, Snowden J stated (at §40) that there may be facts in a given case (e.g. the concert parties have contractual arrangements with the company such as to distinguish them as a separate class from the disinterested shareholders) as to justify the constitution of separate classes. He further recognized that that class question is ultimately a matter of judgment, and if the company out of prudence decides to separate the concert parties and the disinterested shareholders into separate classes to reduce the risk of any vote being challenged at sanction, that would be an understandable and permissible course (at §41). See also Tonly §17.

(3) Although the responsibility of deciding whether to summon a single meeting or separate meetings rests in the company, and it is not the role of the Court to scrutinize the same at the directions stage (UDL, at §27(1)), if, on the materials before the Court, it is clear that the company will not be able to implement the scheme due to inability to comply with Rule 2.10, the Court may decide not to direct a court meeting at all on the basis that such exercise of discretion will be futile. This is in line with the reasoning in Re Savoy Hotel Ltd [1981] Ch 351, 366B-D, where Nourse J (as he then was) declined to convene court meetings on the grounds that the board had withheld its approval on the scheme and the scheme did not provide for approval to be obtained from the company in general meeting, such that there was no reasonable probability that the meetings would serve any useful purpose.

44.  As for the sanction stage:

(1) Given that the Takeovers Code represents the market consensus of those who participate in Hong Kong’s financial market regarding acceptable standards of commercial conduct for takeovers and mergers[13], the failure to comply with Rule 2.10 would be a weighty consideration as to whether the class of members was “fairly represented by those who attended the court meeting and that the statutory majority are 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” (Re PCCW Limited [2009] 3 HKC 292, at §34, which in turn cited Buckley on the Companies Act, 14^th ed., p.473).

(2) While the Takeovers Code does not have the force of law[14], the Listing Rules mandate its compliance by listed companies and their directors (see Introduction §1.4; Listing Rule 14.78). In practice, the company will not be able to proceed with a scheme which breaches the Takeovers Code given that rule 6.15(2) of the Listing Rules provides that the issuer may voluntarily withdraw its listing on HKEx if it is privatised by way of a scheme and all the requirements under the Takeovers Code have been complied with. The Court will not exercise its power to sanction a scheme in vain (see for e.g. Tonly §33).

(3) In Re Expro International Group plc [2010] 2 BCLC 514, §53, the English Court in exercising its discretion in relation to a scheme took into account the equivalent of the Takeovers Code.

E2. Meaning of Rule 2.10

45.  Rule 2.10 of the Takeovers Code 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.”

46.  In so far as may be relevant:

(1) “Disinterested shares” is defined as “shares in the company other than those which are owned by the offeror or persons acting in concert with it”[15];

(2) “Acting in concert” is defined as “persons who pursuant to an agreement or understanding (whether formal or informal), actively cooperate to obtain or consolidate ‘control’ of a company through the acquisition by any of them of voting rights of the company”[16]. The definition goes on to list certain classes of persons which are immaterial for present purposes.

47.  Mr Poon and Ms Sit submit that in considering the meaning of Rule 2.10, it is necessary consider the nature and purpose of the Takeovers Code and the genesis of Rule 2.10 to which I now turn.

48.  The primary purpose of the Takeovers Code is to afford fair treatment for the shareholders affected by takeovers and mergers, by requiring equality of treatment of shareholders and an orderly framework within which such takeovers and mergers are conducted (see Introduction, §1.2 of the Takeovers Code). The Takeovers Code is to be interpreted with reference first to the General Principles, which set out standards of good conduct, and specific Rules, which expand on the General Principles. Both the General Principles and the Rules are to be interpreted to achieve their underlying purposes (Introduction §2.1; Television Broadcasts Ltd v Takeovers and Mergers Panel [2017] 5 HKLRD 541, §§33-36).

49.  The following General Principles in the Takeovers Code are particularly relevant to a scheme which affects the rights of the shareholders:

(1) GP1 provides that “all shareholders are to be treated even- handedly and all shareholders of the same class are to be treated similarly”.

(2) GP7 provides that “rights of control should be exercised in good faith and the oppression of the minority or non-controlling shareholders is always unacceptable”.

50.  When Rule 2.10 was first introduced in March 1992, it provided that a scheme of arrangement must be approved by a “majority in number representing 90% in value of those shares that are voted either in person or by a proxy at a duly convened general meeting by shareholders other than the person seeking to privatise the company and persons acting in concert with him” (underlined added) (Consultation Paper on a Review of the Hong Kong Code of Takeovers and Mergers (February 1998) (“1998 Consultation Paper”), Appendix 2, p. 77).

51.  The Rule was amended in 1998 by adding a requirement that the scheme not be disapproved by more than of 2.5% of the total voting rights of the company (1998 Consultation Paper, pp. 6-7).

52.  Rule 2.10 was enacted in its current form in 2002 following a public consultation in 2001 (Consultation Paper on a Review of the Codes on Takeovers and Mergers and Share Repurchases (April 2001) (“2001 Consultation Paper”), pp. 9-11; Consultation Conclusions on a Review of the Codes on Takeovers and Mergers and Share Repurchases (undated), pp. 1 and 6).

53.  The 2002 amendments to Rule 2.10 were introduced to bring in line the level of protection given to minority shareholders in all cases where their shares may be compulsorily acquired (2001 Consultation Paper, p.2, §(f)). For the positive vote requirement, the threshold was changed from 90% to 75%, but there was no change to the form of the meeting save to substitute the previous description of “shareholders other than offeror and concert parties” with “holders of disinterested shares”.

54.  It is pertinent to note that the 2001 Consultation Paper recognized the Takeovers Code could apply levels of minority shareholder protection that exceed the legal requirements, and that there might be a difference between the SFC’s determination of concert parties and the court’s determination of an eligible class (see p.10, §§6-7).

55.  I turn to the construction of Rule 2.10.

56.  The Court’s approach to construction of a regulatory instrument made under statute has been sufficiently summarized in Law Mei Mei v Airport Authority [2018] 4 HKLRD 312, §§50-54, per Anderson Chow J (as he then was).

57.  Mr Poon submits that Harris J’s holding that the Non-Prohibition View is more consistent with the natural and ordinary meanings of Rule 2.10 and s.674(2) of the Ordinance cannot be supported. On the contrary, the Prohibition View accords with Rule 2.10 for the following reasons:

(1) Rule 2.10(a) comprises 2 requirements: (a) a duly convened “meeting of the holders of the disinterested shares”, and (b) the scheme is “approved by at least 75% of the votes attaching to the disinterested shares.”

(2) Rule 2.10(b) then imposes a negative condition in respect of the number of votes cast against the resolution to approve the scheme “at such meeting”, i.e. the meeting referred to in Rule 2.10(a).

(3) In order to ensure that their discussions are unhampered by the presence of others who may have a different interest, Rule 2.10 clearly mandates a meeting (a) constituted only by holders of disinterested shares, and (b) at which only holders of disinterested shares are entitled to attend and vote. This is consistent with the essential condition governing the conduct of a separate meeting of a class which consists only of members of that class, as discussed in Carruth v Imperial Chemical Industries Ltd [1937] AC 707, 756-757 & 761; In re Hellenic & General Trust Ltd [1976] 1 WLR 123, 125H-126H.

(4) The distinction between meeting of the holders of the disinterested shares and general meeting of the shareholders is clearly shown in the Takeovers Code. For example, Rule 2.2 refers to meeting of offeree company’s shareholders and meeting of holders of disinterested shares; Rule 4 refers to shareholders in general meeting, and Notes 3 and 4 to Rule 25 distinguish between general meeting of shareholders and general meeting of shareholders at which the votes must be those of independent shareholders.

(5) While there does not appear to have been any argument directed at this specific point in the authorities, the Prohibition View was accepted by Kwan J (as she then was) in Re China Netcom Group Corporation (Hong Kong) Ltd, HCMP 1452/2008, 16 October 2008, §§10-11.

58.  Similarly, Mr Wong submits that the Prohibition View should be adopted for 3 main reasons.

59.  First, the ordinary and natural meaning of Rule 2.10 prohibits concert parties from voting at the Court meeting because:

(1) Rule 2.10 specifically requires the 75% of votes attaching to the disinterested shares approving the scheme to be cast at a meeting “of the holders of the disinterested shares”.

(2) In other words, Rule 2.10 plainly envisages that the Court meeting shall only be a meeting of holders of disinterested shares (not a meeting of holders of disinterested shares and concert parties).

(3) As concert parties should not even be a party to the Court meeting in the first place, they should not be entitled to cast their vote either.

60.  Second, the Prohibition View is consistent with, and supported by the drafting history of Rule 2.10 as discussed in §§50-54 above. In particular:

(1) The current version of Rule 2.10 was introduced following the 2001 Consultation Paper.

(2) Prior to the amendment, the former Rule 2.10 (“Old Rule 2.10”) provided that the scheme needs to be approved “by a majority in number representing 90% in value of those shares that are voted either in person or by proxy at a duly convened general meeting by shareholders other than the persons seeking to privatize the company and persons acting in concert with him”[17].

(3) There are 2 material distinctions between the Old Rule 2.10 and the current Rule 2.10 in that:

(a) The Old Rule 2.10 only referred to a duly convened general meeting of the shareholders. It did not refer to a meeting “of” holders of disinterested shares.

(b) The Old Rule 2.10 implicitly recognized that concert parties might vote as long as the requisite majority was “voted … by shareholders other than the persons seeking to privatize the company and persons acting in concert with him”[18].

(4) Whilst the drafting materials did not specifically state that the amendment of Rule 2.10 was supposed to adopt the Prohibition View, the contrasting language between the Old Rule 2.10 and the current Rule 2.10 embodies a plain intention that Rule 2.10 was intended to be prohibitory in nature.

61.  Third, the Prohibition View would result in more coherence in the interpretation of related rules in the Takeovers Code which are all aiming at the protection of minorities’ interest:

(1) Rule 2.2 of the Takeovers Code sets out the requirements for a voluntary delisting of an offeree company and contains an express prohibition on the casting of votes by the concert parties:

“If after a proposed offer the shares of an offeree company are to be delisted from the Stock Exchange, neither the offeror nor any persons acting in concert with the offeror may vote at the meeting, if any, of the offeree company’s shareholders convened in accordance with the Listing Rules. The resolution to approve the delisting must be subject to:–

(a) approval 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;

(b) the number of votes cast against the resolution being not more than 10% of the votes attaching to all disinterested shares; and

(c) the offeror being entitled to exercise, and exercising, its rights of compulsory acquisition.” (underlined added)

(2) The Takeovers Code goes on to state that Rule 2.2 and Rule 2.10 stem from similar policy concerns of the protection of minorities. As stated in Note 7 to Rule 2 of the Takeovers Code:

“The purpose of Rule 2.2 is to apply similar requirements as those set out in Rule 2.10 to a delisting proposal which is related to a proposed offer. This prevents the delisting proposal from being used to coerce independent shareholders into accepting the offer.” (underlined added)

(3) In other words, whereas Rule 2.10 is intended to offer direct protection to minority shareholders in the face of a privatisation, Rule 2.2 is intended to prevent the circumvention of the requirements under Rule 2.10 where a delisting proposal is used to coerce independent shareholders into accepting the offer.

(4) Given the similar policy concerns embodied in Rule 2.10 and Rule 2.2, there is no reason why Rule 2.10 should be construed in a more relaxed way than Rule 2.2. As Rule 2.2 expressly prohibits voting by concert parties, the same must be true of Rule 2.10.

62.  I agree with the submissions of Mr Poon and that of Mr Wong and consider that for the reasons set out in §§57 to 61 above, the Prohibition View is correct.

63.  Mr Poon SC makes another point. He submits that Harris J’s view that the Non-Prohibition View is more consistent with the natural and ordinary meaning of s.674(2) of the Ordinance cannot be sustained either, as the learned Judge’s reliance on s.670(2)(b) of the Ordinance in support of his conclusion (at §6(1)) that the concert parties “must be allowed to vote” at “a meeting of those shareholders subject to the scheme” cannot be right.

(1) Applying the approach of Re SABMiller plc, §49 for interpretation of similar provisions in the Companies Act 2006, the Court should construe ss.670(1) and 674(2) of the Ordinance “flexibly and purposefully so as to coincide with the legislative intention to promote compromises and arrangements …”.

(2) The Court is empowered under s.670(1) of the Ordinance to order a meeting “specified in subsection (2)(a) or a meeting specified in subsection (2)(b), or both (as the case may be) to be summoned in any manner that the court directs”[19]. The Court has a wide discretion to summon meetings and is not bound to summon only one meeting of all the members subject to a scheme (cf. Re SABMiller §§47-50; Tonly §§2, 3, 13, 14, 18).

(3) In holding that under s.670(2)(b), concert parties must be allowed to vote at a meeting of all the shareholders subject to the scheme although their votes cannot be counted, Harris J has not considered the difference in the wordings between s.674(2) and Rule 2.10.

(4) Whilst Rule 2.10 prescribes that the scheme must have been approved by “at least 75% of the disinterested votes” cast “at a duly convened meeting of the holders of the disinterested shares,” sub-paragraphs (a)(i) and (b)(i) of s.674(2) only require the approving votes to represent “at least 75% of the voting rights of the members present and voting” or “of the class of members present and voting”[20]. By the word “members” instead of disinterested members, the statutory percentage for approval of the scheme may well embrace votes of concert parties cast at a general meeting of the members as opposed to a meeting of the disinterested shareholders.

(5) Rule 2.10 states that “the scheme … may only be implemented if, in addition to satisfying any voting requirements imposed by law”[21]. As the wording suggests, the Rule imposes an additional criterion on the voting requirements specified in s.674(2) of the Ordinance.

(6) In the circumstances, unless the 75% of the votes approving the scheme are cast at a meeting of the disinterested shareholders as dictated by Rule 2.10, the privatization scheme will not be effective (and the sanction of it by the Court will be futile) even if the requirements under s.674(2)(a)(i) and (b)(i) of the Ordinance are satisfied.

(7) Lastly, when opining that “there must be a meeting of those shareholders subject to the scheme” (at §6(1)) and “it should not be permissible for the notice of meeting to exclude these offeror concert parties because they are also parties to the scheme” (at §7), Harris J only focussed on Tonly §§13-15 but not §16 in which Segal J drew a distinction between (a) having a separate meeting for the concert parties, but dispensing with the need for an actual meeting on the basis that all concert parties have undertaken to vote in favour of the scheme, and (b) having a single meeting of disinterested shareholders when they only constitute a sub-set of the class (being ordinary shareholders). Segal J rightly pointed out that while (a) is wholly acceptable, (b) is not. That, however, is not to say that there cannot be separate meetings of concert parties and disinterested shareholders, or that there is a single meeting of concert parties and disinterested shareholders but the concert parties agree not to attend and vote thereat, in which case this single meeting effectively becomes a “meeting of the holders of the disinterested shares” as stipulated in paragraph (a) of Rule 2.10.

64.  In light of the foregoing discussions particularly the requirements under Rule 2.10, there are possibly 3 types of meetings ordered by the Court for approval of privatisation or takeover schemes involving parties acting in concert with the offeror:

(1) One Court meeting for all the shareholders to be bound by the scheme with the concert parties undertaking to the Court not to attend and vote at the meeting (Tonly §15; China Netcom §11).

(2) Two Court meetings for the disinterested shareholders and the concert parties respectively. The Court, however, may dispense with ordering the second meeting if the concert parties have agreed with the company or given an undertaking to the Court at the time when the company sought an order to convene meetings that they will be bound by the terms of the scheme (Tonly §§2, 5 & 16).

(3) If the concert parties have agreed with the company or the offeror to be bound by the terms of the scheme or the offer, then the scheme may simply be entered into between the company and the disinterested shareholders, in which case there is only one Court meeting for these shareholders (Re Citic International Financial Holdings Ltd, HCMP1686/2008, 6 November 2008, §1).

65.  I agree with the submissions of Mr Poon on the construction of ss.670(1)-(2) and 674(2) of the Ordinance and the interplay between the requirements under s.674(2) and Rule 2.10.

E3. Compliance with Rule 2.10

66.  In view of my holding that the Prohibition View accords with Rule 2.10, there can be no issue on the validity of the Notice, despite the statements in the Scheme Document to the effect that the Concert Parties are not entitled to attend and vote at the Court Meeting.

67.  In any event, taking into account the Undertaking given by the Concert Parties and the fact that they did not attend or vote at the Court Meeting qua Scheme Shareholders, I am satisfied that the requirements under Rule 2.10 are satisfied.

F. Confirmation of reduction of capital

68.  As regards the Reduction of Capital, it is well established that under s.229 of the Ordinance, the Court will confirm a reduction which has been approved by a special resolution of members if the following requirements are satisfied:

(1) The shareholders are treated equitably;

(2) The reasons for the reduction are properly explained;

(3) The interests of creditors are safeguarded; and

(4) The reduction is for a discernible purpose.

69.  A technical reduction which is integral to a scheme satisfies the above criteria (Re China Power Clean Energy Development Company Limited [2019] HKCFI 2098, §10).

70.  I am satisfied that this is a case where the Reduction of Capital should be confirmed for the following reasons:

(1) At the EGM held immediately after the Court Meeting, 99.91% of the shareholders present voted in favour of the Reduction of Capital.

(2) The shareholders were treated equitably; they had been provided with detailed explanation about the Reduction of Capital through the Scheme Document. All the Scheme Shareholders will receive the Price for each of their share being cancelled.

(3) The creditors’ interests will not be prejudiced as the Reduction of Capital only exists for a brief moment and will be restored to the same level upon the Company issuing the same number of new shares as the Scheme Shares to the Offeror.

(4) There is a discernible purpose for the reduction of capital since it is an integral part of the Scheme.