CHENG KAI MAN, WILLIAM v. THE PANEL ON TAKEOVERS AND MERGERS & THE SECURITIES AND FUTURES COMMISSION

THE JUDGE HAS AUTHORISED PUBLICATION OF THIS JUDGMENT

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

MISCELLANEOUS PROCEEDINGS NO. 226 OF 1994

________________

________________

________________

________________

J U D G M E N T

________________

1. I have before me an application by Mr. Cheng for leave to apply for Judicial Review. I heard this matter on Thursday 27th Jan ex parte on notice. Mr. Huggins appeared with Mr. McCoy for the applicant and Mr. Griffiths and Mr. Barlow appeared for the respondent.

The decisions of the Panel which it is sought to impugn are

(1) a preliminary decision dated 22nd October 1993

(2) a further decision of 9th December 1993

(3) "Revised Sanctions" dated 11th December 1993

(4) "Remedies" dated 21st December 1993 and

(5) a letter of intention to publish decisions dated 14th January 1994.

2. The matters which gave rise to the Inquiry by the Panel related to the announcement of a purchase by Royle Ltd, a company controlled by Mr. Cheng, on 6th April 1991, of a number of shares in Shun Ho Resources Holdings Ltd, a publicly listed company. The Panel, which became involved in this matter at an early stage, have now concluded that this purchase triggered a general offer obligation under the Code whereas no such offer has ever been made. The panel concluded that Mr. Cheng and others should be subject to various sanctions.

3. It is common ground that the threshold for granting leave is low. Godfrey J. (as he then was) in Director of Immigration v. Ho Ming Sai and others Civil Appeal 162 of 1993 put it thus;

"In my judgment, the question which a judge has to ask himself at the leave stage is this: "Does the material before me disclose what might on further consideration turn out to be an arguable case?" If he asks himself whether there is an arguable case, he risks pre-empting question which ought properly to be decided at the substantive hearing, not at the leave stage."

4. The White Book makes clear (p. 856/7) that the purpose of the requirement for leave is to eliminate at an early stage applications which are frivolous, vexatious or hopeless and to ensure that an applicant only goes ahead if the court is satisfied that there is a case fit for further consideration. This requirement is intended to weed out the busybodies who make trivial complaints. In the present case Mr. Cheng clearly has locus standi (the contrary not having been argued) and his complaint is not frivolous or vexatious. However it is strongly argued by Mr. Griffiths that the application is hopeless and bound to fail.

5. The application is based on a 2 pronged attack. The first is that the decision should be set aside because of the real risk of bias on the part of a member of the Panel. The second line of attack is based on what Mr. Huggins has termed a procedural muddle. This raises issues of jurisdiction, procedure and alleged irrationality.

BIAS

6. I take this issue first as it will also lead me conveniently into the question of delay upon which Mr. Griffiths relies in relation to bias.

7. On 9th April 1991 a member of the Panel whom I do not intend to name wrote to the SFC in his "capacity as the keeper of the conscience of the Chairman of the Takeover Committee." In this letter he referred to the announcement in the paper the day before wherein it was reported that Mr. Cheng's Company had purchased 100,000 shares in Shun Ho at 40 cents. He opined that this triggered a general offer and stated that the matter "has the looks of a concert party action."

8. An Inquiry duly commenced in 1991 and hearings were held. Matters became somewhat delayed but in August 1993 the executive of the SFC prepared an amended paper which was sent to Mr. Cheng inviting his observations. On 23rd August 1993 the SFC informed Carey and Lui, solicitors for Mr. Cheng, that the writer of the letter of 9th April would be a member of the Panel. Objection was taken to this but the Chairman ruled against the objection.

9. What Mr. Cheng's advisers did not know until much later was that on 27th July 1993 a company (Anglo Chinese) of which the writer of the letter was both a director and shareholder had entered into an agreement in writing with the company controlled by Mr. Cheng which had purchased the 100,000 shares. By this agreement it was agreed that if Anglo Chinese were instrumental in arranging the disposal of assets of the company they would be entitled to substantial commission. This mandate was non exclusive. The gravamen of the complaint against the member of the Panel is that he was a member of the Panel which has now purported to require Mr. Cheng to compensate shareholders of Shun Ho and if this is carried through he may well have to sell shares or assets which might result in commissions being earned by the member's company. I hasten to add that Mr. Huggins has made no allegation of actual bias against the member concerned. It is not suggested that the member was involved in entering into this agreement nor was he to be involved in the implementation of it.

10. The whole question of bias was recently considered by the House of Lords in R. v. Gough [1993] 2 WLR 883. Although the matter concerned a jury, the speech of Lord Goff on this topic is applicable to members of tribunals as well. At page 904 Lord Goff put his conclusions thus;

" ... I think it unnecessary, in formulating the appropriate test, to require that the court should look at the matter through the eyes of a reasonable man, because the court in cases such as these personifies the reasonable man; and in any event the court has first to ascertain the relevant circumstances from the available evidence, knowledge of which would not necessarily be available to an observer in court at the relevant time. Finally, for the avoidance of doubt, I prefer to state the test in the terms of real danger rather than real likelihood, to ensure that the court is thinking in terms of possibility rather than the probability of bias. Accordingly, having ascertained the relevant circumstances, the court should ask itself whether, having regard to those circumstances, there was a real danger of bias on the part of the relevant member of the tribunal in question, in the sense that he might unfairly regard (or have unfairly regarded) with favour, or disfavour, the case of a party to the issue under consideration by him; ..."

I also note Lord Woolf's reference in Gough to the Cambourne Justices case [1955] 1 Q.B. 41 at 47 where it was said;

"any direct pecuniary or proprietary interest in the subject matter of a proceeding, however small, operates as an automatic disqualification. In such cases the law assumes bias."

Having considered these passages and having considered the evidence placed before me as well as the helpful written and oral submissions and also taking into account the low threshold that Mr. Cheng has to meet I am quite satisfied that this is an appropriate case to give leave on the allegation of bias. As this matter will now go further I do not propose to say anymore on this topic. It will be for the judge hearing the substantive application to apply these principles to the facts of this case as they appear to him. All I need to conclude is that the low threshold has been met.

DELAY

11. Mr. Griffiths did submit that Mr. Cheng was out of time in complaining about the bias because he did raise it more than three months ago and it was rejected. Mr. Griffiths submits that Mr. Cheng should have sought leave within 3 months of that decision. I disagree. The three months must run from the date of decision which is said to be affected by bias. It would be strange if Mr. Cheng had been obliged to seek leave to apply for judicial review before any decision adverse to him on the merits had been made. I am quite satisfied that the three months runs from the date of the complete decision which was 21st December 1993. Prior to that the decision had been given in a piecemeal fashion. If I had concluded that Mr. Cheng was out of time I would have concluded that this was an appropriate case in which to exercise my discretion to extend time.

THE PROCEDURAL/JURISDICTIONAL GROUND

12. As Lord Donaldson remarked in both R. v. Panel on Take-overs Ex parte Datafin Plc [1987] Q.B. 815, 842 and R. v. Panel on Take-overs Ex parte Guinness [1990] 1 Q.B. 146 the "panel is a truly remarkable body". There is no doubt that the Panel is amenable to Judicial Review. In Datafin the Master of the Rolls said;

"The only circumstances in which I would anticipate the use of the remedies of certiorari and mandamus would be in the event, which I hope is unthinkable, of the panel acting in breach of natural justice - in other words unfairly."

In the same case Woolf L.J. (as he then was) explained that;

"On the application for Judicial Review it is appropriate for the court to focus on the activities of the panel as a whole and ask with regard to those activities, in the words of Lord Donaldson of Lymington M.R., " whether something has gone wrong" in nature and degree which requires the intervention of the courts. Nowadays it is more common to test decisions of the sort reached by the panel in this case by a standard of what is called "fairness". I venture to suggest that in the present circumstances in answering the question which Lord Donaldson of Lymington has posed it is more appropriate to use the term which has fallen from favour of "natural justice". In particular in considering whether something has gone wrong the court is concerned as to whether what has happened has resulted in real injustice. If it has, then the court has to intervene, since the panel is not entitled to confer on itself the power to inflict injustice on those who operate in the market which it supervises."

13. I have given very careful consideration to all points raised by both sides in both their written and oral submissions. As these points are clearly set out in the documents placed before me no useful purpose will be served by repeating them in this judgment which I am giving as a matter of urgency in the light of the circumstances of the case. At the end of the day I am left in no doubt that the Panel acted fairly. Although Mr. Huggins was able make some points about procedural problems I am still left quite unpersuaded that there is sufficient material before me to meet the threshold for a case based on unfairness, lack of jurisdiction, or procedural irregularity. I do not accept that Mr. Cheng or his advisers were, in the ultimate analysis, misled by the Panel. Mr. Cheng was at all times legally represented and was made aware of his potential exposure to disciplinary sanctions or other orders. Nothing was done behind his back and he was given every opportunity to respond to allegations. He elected to give evidence and was disbelieved. Further, he was given an opportunity to make written submissions after he had given evidence. Both Mr. Cheng and his advisers were made aware that the Panel were considering imposing sanctions. I am satisfied that jurisdiction did exist to undertake the very enquiry undertaken in this case. I am also unconvinced that the Panel were in some way restricted in imposing sanctions by what might or might not have been done in other cases at different times. The analogy drawn with sentencing in criminal cases is wholly inappropriate in a case such as this. I should note that no attack, on Wednesbury grounds, has been made against the factual decision that this was a concert party situation.

14. In these circumstances I propose to refuse leave to apply for judicial review on the grounds of lack of jurisdiction or procedural irregularity. Leave will be limited to the ground of bias.

SHOULD I GRANT AN INJUNCTION RESTRAINING PUBLICATION?

15. Mr. Cheng seeks an injunction that I restrain publication of the report until after the substantive application for Judicial Review has been heard and determined. Mr. Griffiths strongly opposes the grant of any injunction.

16. Fortunately the principles upon which a court should act in circumstances such as these have recently been stated by the House of Lords in R. v. Secretary of State for Transport Ex parte Factortame Ltd and others [1991] 1 A.C. 603. The first part of the holding reads as follows;

"(1) that in considering whether interim relief should be granted the court had to consider first, the availability to either plaintiff or defendant of an adequate remedy in damages and secondly, if no such adequate remedy existed, the balance of convenience, taking all the circumstances of the case into consideration; that where a public authority seeking to enforce the law was involved, an adequate remedy in damages would not normally be available to either party, and in considering the balance of convenience the court had to take into account the interests of the public in general to whom the authority owed duties; that there was no rule that the party challenging the validity of the law sought to be enforced had to show a strong prima facie case that it was invalid, and the matter was one for the discretion of the court; but that the court should nevertheless not restrain the public authority from enforcing the law unless it was satisfied that the challenge to its validity was sufficiently firmly based to justify that exceptional course being taken."

Lord Goff turned to the applicable principles at pp. 671-673. He began by stating that the principles upon which a court grants an interim injunction are those set out in American Cyanamid [1975] A.C. 396. These principles are too well known to require repetition. The test is whether there is a serious issue to be tried which I take to be a higher threshold than that required for the grant of leave to apply for Judicial Review. Once the first hurdle has been crossed then the court has to consider whether it is just or convenient to grant the relief. Clearly the present case is not one which can be decided on the basis that damages are an adequate remedy.

17. It is now necessary as it was in Factortame to throw into the balance the public interest. In Smith v. Inner London Education Authority [1978] 1 AER 411 Browne L.J. in a public authority case said "one must look at the balance of convenience more widely, and take into account the interests of the public in general to whom these duties are owed.". Lord Goff thought that the public interest was one of the "special factors" referred to by Lord Diplock at p. 408 in American Cyanamid. As Lord Reid emphasised in Hoffman La Roche [1975] A.C. 295,"... it is for the person against whom the interim injunction is sought to show special reason why justice requires that the injunction should not be granted or should be granted only on terms".

18. Lord Goff went on to say that a party seeking an injunction in these circumstances should show a strong prima facie case that the law is invalid (that was the issue in that case) In the present case it means that Mr.

Cheng must show a strong prima facie case that he will succeed at the substantive hearing for judicial review. I think I also have to ask myself whether Mr. Cheng will suffer such serious and irreparable harm if the Panel's findings are published before the determination of his application for Judicial Review. Lord Goff concluded his analysis of the appropriate principles thus;

"In the end, the matter is one for the discretion of the court, taking into account all the circumstances of the case. Even so, the court should not restrain a public authority by interim injunction from enforcing an apparently authentic law unless it is satisfied, having regard to all the circumstances, that the challenge to the validity of the law is, prima facie, so firmly based as to justify so exceptional a course being taken."

19. In Factortame the House was satisfied that there were in fact strong grounds for challenging the validity of the law in question and that in those circumstances an interim injunction was appropriate.

20. I accept that I am dealing with a non statutory body but I am satisfied that Lord Goff's approach in Factortame is the one I have to apply in this case. I have given this matter very careful consideration. I do not find it possible to conclude that Mr. Cheng has strong enough grounds to justify me in granting interim relief. As I have pointed out the thresholds for granting leave to apply for Judicial Review and granting interim relief are different. I do not wish to say too much about the strengths of the case but I am bound to observe that even if the decision(s) are set aside on the grounds relied upon there is a very real possibility that a second Panel acting properly will come to the same conclusion certainly in relation to the general offer point even if not in relation to sanctions. I have seen some of the evidence upon which the Panel relied and I have seen their conclusions on it. The public interest requires that I do not grant interim relief. There are many shareholders who are entitled to know what has happened. I hope that the substantive application can come on very quickly so that if Mr. Cheng were to succeed he could soon set the record straight. Mr. Cheng may refuse to comply with the sanctions until the determination of his application and if this is the case the damage he will suffer by publication will be reduced. If he succeeds at the hearing his reputation will be restored and he will be free to fight any subsequent complaint that he is asked to meet. In coming to this decision I have not ignored Mr. Cheng's offer to undertake, if an injunction is granted, not to sell any Shun Ho shares in the meantime. This offer does not persuade me to exercise my discretion.

EXPEDITED HEARING

21. Clearly it is in the interests of all parties, including the public, for this matter to be determined as soon as possible. I propose to order that this matter be heard as soon as possible. I doubt if much more material is needed to be placed before the court but even if it is I cannot think that this would take much time to arrange. As this matter is very urgent the convenience of counsel should not be the most important factor in fixing dates although I hope they can be accommodated as they are all fully acquainted with the facts and could presumably be ready for an early hearing.

22. As I do not propose to grant an injunction publication may take place before the hearing can be arranged. In those circumstances I will hear counsel on whether it is still sought to have the substantive hearing in chambers. I will, of course, hear counsel now on any consequential matters arising from this judgment.

POSTSCRIPT

23. Having heard counsel I reserved costs to the judge hearing the substantive application which I understand will be Liu J. who is available to hear the case on Wednesday 2nd February 1994. The application to hear the substantive application in chambers was withdrawn. In view of possible public interest in this matter I gave leave for this judgment to be published.