RE ALLIED PROPERTIES (H.K.) LTD

HCMP 1033/2020 [2020] HKCFI 2624 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE MISCELLANEOUS PROCEEDINGS NO 1033 OF 2020 ____________________ IN THE MATTER of Allied Properties (H.K.) Limited (聯合地產 (香港) 有限公司) and IN THE MATTER of Sections 670 and 671 of the Companies Ordinance, Chapter 622 of the Laws of Hong Kong ____________________ Before: Hon Linda Chan J in Court Dates of Hearing: 24, 31 August and 7 September 2020 Date of Further Evidence: 8 September 2020 Date of Judgment: 9 October 2020 _______________ J U D G M E N T _______________ This is an application made by Allied Properties (H.K.) Limited (聯合地產 (香港) 有限公司) (“Company”) by petition dated 17 July 2020 (as amended on 3 August 2020) (“Petition”) for (1) sanction of a scheme of arrangement proposed to be made between Sunhill Investments Limited (陽山投資有限公司) (“Offeror”), the Company and the “Scheme Shareholders” (as defined in §6 below) under section 673 of the Companies Ordinance (Cap 622) (“Ordinance”) for the purpose of implementing a privatisation of the Company by way of a scheme of arrangement (“Scheme”); and (2) confirmation of reduction of capital of the Company under section 229 of the Ordinance. A. Background The Company was incorporated in Hong Kong on 18 July 1960 and its shares have since 9 January 1981 been listed on the Main Board of the Stock Exchange of Hong Kong Limited (“HKEx”). The Company together with its subsidiaries and associates (“Group”) engage in the business of property investment and development, hospitality related services and provision of finance and investments in listed and unlisted securities. According to the Company’s 2019 annual report, as at 31 December 2019: The consolidated profit of the Group was HK$4,104.8 million, of which HK$2,769.3 million was attributable to the owners of the Company. The net assets of the Group were HK$49,689.6 million. The Company’s accumulated profit was HK$34,283.8 million (or HK$5.03 per share). The Company’s net asset value (“NAV”) attributable to the shareholders was HK$38,804.1 million (or HK$5.7 per share). On 9 April 2020, the Offeror put forward a proposal to the “Scheme Shareholders” which involves (1) privatisation of the Company by way of the Scheme and (2) payment by the Company a dividend to all the shareholders. This was subsequently announced on 20 April 2020 by the Offeror, the Company and its holding company, Allied Group Limited (聯合集團有限公司) (“AGL”). The reasons for putting forward the Scheme, as stated in the Petition, are: (1) the shares have for over 2 years been trading at a substantial discount ranging from 66.7% to 77.4% of the net consolidated assets of the Group, and “the Company has not been able to raise equity capital lest diluting the interests of shareholders of the Company”; (2) the listing status has become ineffective and is costly to maintain; (3) “the listing status has prevented the Company from pursuing various investments that may benefit the Company”. The pessimistic view on the economy which will have a negative impact on the value of the shares in the open market; and (4) the Scheme provides an opportunity for the Scheme Shareholders to realise their shares at a premium over the current market price. As at 16 June 2020, being the latest practicable date prior to the printing of the “Composite Document” (as defined in §22 below), the Company had issued share capital of HK$4,250,636,343.76 divided into 6,812,201,460 shares, of which 74.996% were held by AGL and its 3 wholly owned subsidiaries. The remaining 25.004% were held by other shareholders (collectively “Scheme Shareholders”). The shareholdings of AGL and its subsidiaries were as follows: Shareholder Number of shares Shareholding AGL 968,354,880 14.215% Offeror 2,121,437,331 31.141% Citiwealth Investment Limited (“Citiwealth”) 45,903,120 0.674% Capscore Limited (“Capscore”) 1,973,216,190 28.966% AGL, Citiwealth and Capscore (collectively “Offeror Concert Parties”) are parties acting in concert with the Offeror for the purpose of the Takeovers Code. The shares held by the Offeror and the Offeror Concert Parties do not form part of the “Scheme Shares” and the same could not be used to vote at the “Court Meeting” (as defined in §22 below). B. Scheme It is proposed that on the date the Scheme becomes effective: all the shares held by the Scheme Shareholders will be cancelled in exchange for payment of HK$1.92 per share in cash. Of this amount, HK$0.42 per share is payable by the Offeror as consideration for cancellation of the Scheme Shares (“Scheme Consideration”), while HK$1.5 per share is a special dividend to be declared by the Company and payable to all the shareholders (“Special Dividend”) (but the Offeror and the Offeror Concert Parties have irrevocably and unconditionally agreed to waive and surrender their entitlements to the Special Dividend (“AGL Waiver”)). The Scheme and the Special Dividend together is defined as “Proposal” in the Composite Document; the share capital of the Company will be reduced by the amount paid-up on the Scheme Shares which have been cancelled (“Reduction of Capital”); immediately after cancellation of the Scheme Shares, the share capital of the Company will be increased to its former amount by issuing the same number of shares which have been cancelled to the Offeror, and applying the credit arising from the Reduction of Capital to pay up the amount payable on the new shares issued; and the Offeror and the Offeror Concert Parties will thenceforth become the only shareholders of the Company. The Company will apply to HKEx to withdraw the listing of its shares. The Scheme and the Reduction of Capital are the subject matters of the Petition. C. Procedure: overview As Lord Millett NPJ explained in UDL Argos Engineering & Heavy Industries Co Ltd v Li Oi Lin (2001) 4 HKCFAR 358, at §§12, 27(5)-(6), there are 3 stages in the process by which a scheme of arrangement between a company and its shareholders (or creditors) may become binding on dissentients. First, there must be an application to the Court for an order that one or more meetings of the shareholders be summoned. The application is made by the company ex parte. At this stage, the Court does not address the question whether the meeting to be convened to consider the scheme would be properly constituted. The rationale underpinning this practice has been explained by Lord Millett NPJ in UDL Argos, at §14, in this way: “It might be thought singularly unhelpful to leave the question whether the meetings were correctly convened to the third stage, by which time a wrong decision by the company at the outset will have led to a considerable waste of time and money. But in my opinion the practice is a sound one. The only alternative would be to require notice of the initial application to be made inter partes and for notice of the application together with a copy of the Scheme to be given to everyone potentially affected by it, with the risk of incurring the costs of a contested hearing and possible appeals before it could be known whether the Scheme was likely to attract sufficient support in any event. The present practice ensures that those advising the company take their responsibility seriously, since an error on their part will be fatal to the Scheme. At the same time it leaves the question, which goes to the jurisdiction of the Court to sanction the Scheme, to be decided at the appropriate time, that is to say when the Court is asked to sanction it. By then the outcome of the meeting or meetings will be known and the question, which will no longer be hypothetical, can be argued between the appropriate parties, that is to say the company on the one hand and those who object to the Scheme on the other.” (underlined added) Second, the proposals must be put to the meeting or meetings, considered and approved by a majority in number representing 75% in value of the shares (or claims) of those present and voting in person or by proxy. The Court has no jurisdiction to sanction a Scheme which does not have the approval of the requisite majority of creditors voting at meetings properly constituted in accordance with these principles. Third, if (but only if) the scheme is approved by the requisite majorities, then the Court may sanction it, though it is not bound to do so. I will discuss this further in Section D2 below. C1. Proper procedure It is necessary to set out the procedural matters in some details as it demonstrates a lack of experience and understanding on the part of the Company’s legal advisers in preparing and putting forward an application for sanction of the Scheme and confirmation of the Reduction of Capital. There are 2 principal matters which require elucidation. First, at the hearing of an originating summons for an order to convene a meeting of shareholders (or creditors) to consider a scheme of arrangement, the company should demonstrate to the Court that the form of explanatory statement and the form of the scheme are fit to be sent to members or creditors (Boyle & Marshall, Practice and Procedure of the Companies Court, 1997, §3.4). I will further discuss the requirements on explanatory statement in Section D1 below. It is the responsibility of the company (and those advising the company) to ensure that the draft composite document complies with all the regulatory and statutory requirements. It is also their responsibility to assist the Court by identifying the special features of the scheme and any possible areas of concerns and address such concerns. This is important given that at this stage, the matter is dealt with by the Court on an ex parte basis. Second, the same proceedings should be used for the purpose of seeking an order to convene a Court meeting under section 670 and for sanction of the scheme under 673 of the Ordinance. This is because the Court meeting is only the beginning of the process of seeking the Court’s sanction. After the company held the Court meeting at which the scheme was approved by the requisite majorities, the company will have to present a petition, in the same proceedings, to seek the Court’s sanction of the scheme (and, if necessary, confirmation of the reduction of capital). That the same proceedings should be used throughout the process is clear from the procedural tables and the relevant court forms on scheme of arrangement, which described the steps to be taken within the same process (see Atkin’s Court Forms, 2nd ed, Vol 9, 1987 Issue, Table 5, pp 73-84; 2nd ed, Vol 9, 1995 Issue, Table 5, pp 100-113; and 2nd ed, Vol 9(1), 2004 Issue, Table 5, pp 123-134). Specifically, in the 2004 Issue, Form 77 (the form of petition, pp 323-327), there is a specific explanation in footnote 2 that “the number allocated to the proceedings will be the same number as that allocated to the claim form seeking the convening of meeting(s) by the court”. This is reinforced by the way the learned editor of Boyle & Marshall described the contents of petition (at §3.6.2): “The petition should be entitled in the same manner as the originating summons and should start by setting out … The petition should refer to the order made on the originating summons to convene meetings and state that the meetings were convened and held in accordance with the order, giving the date, place and chairman ...” (underlined added) Aside from the settled practice of the Court, it is also necessary and desirable for the company to use the same proceedings throughout the application. This is to ensure that at the “sanction” stage, the Court will be able to refer to the documents filed and the order made at the “directions” stage, as non-compliance with the directions may invalidate the proceedings at the meeting unless it is waived by the Court (Boyle & Marsahll, §3.6.6, p 65). Moreover, any shareholders (or creditors) who have locus to appear at the hearing of the petition will be able to inspect the Court file to see what has been said by the company at the “directions” stage, which they have no right to attend. C2. First stage: hearing of originating summons In the present case, the Company’s legal advisers have failed to scrutinise the preparation of the draft Composite Document or to provide any meaningful assistance to the Court at the hearing of the originating summons. On 22 May 2020, the Company issued an ex parte Originating Summons in HCMP 657/2020 for directions (“OS”) to convene a single meeting of the Scheme Shareholders for the purpose of considering and, if thought fit, approving the Scheme (“Court Meeting”). For this purpose, the Company exhibited a draft “Composite Document” which contained the Letter from the Board, the Letter from Independent Board Committee (“IBC”), the Explanatory Statement, the Scheme, the Notice of Court Meeting and Notice of Extraordinary General Meeting (“Composite Document”) to the affirmation, and provided skeleton submissions in advance of the hearing. The Letter from Independent Financial Adviser (“IFA”) was not included in the draft Composite Document then submitted by the Company. At the directions hearing on 1 June 2020, this Court raised a number of concerns and reminded Mr Richard Leung, counsel for the Company, to go through the draft Composite Document carefully to ensure that its contents meet all the regulatory and statutory requirements in particular, the requirement that the Explanatory Statement must explain the effect of the Scheme fairly and accurately. Some of the more obvious concerns were: Of the HK$1.92 per share proposed to be paid to the Scheme Shareholders as “cash consideration required to effect the Proposal”, HK$1.5 per share would be paid by the Company in the form of a dividend. There was no explanation as to why such dividend should be treated as part of the cash consideration. If the Company considered that it was appropriate to use its own fund to assist the Offeror to acquire the Scheme Shares from the Scheme Shareholders, it should explain why the arrangement would not fall foul of the principle that a company cannot provide financial assistance for acquisition of its own shares. The Securities and Futures Commission (“SFC”) and HKEx, as part of their regulatory control over the Company, must have vetted the draft Composite Document. However, there was no indication as to whether all their comments had been addressed or whether they would have any further comment on the draft. Without such confirmation, the Court could not be sure whether the draft Composite Document would be revised further. The proposed manner and timetable for sending the Composite Document did not cater for the fact that overseas Scheme Shareholders would require more time to receive the Composite Document and, if necessary, to make arrangement for attending the Court Meeting. As the Company had not addressed the above concerns, the OS was adjourned sine die with liberty to restore. By letter dated 4 June 2020, Messrs P.C. Woo & Co, solicitors for the Company (“PCW”), requested the Court to restore the hearing of the OS on the basis that the concerns had been addressed by the Company in the revised draft Composite Document, the draft Letter from Pelican Financial Limited (the IFA) and the written submissions of Mr Leung. However, it was clear from PCW’s letter and the affirmations that no real attempt had been made by counsel to scrutinise the preparation of the draft Composite Document or to address the concerns which had been raised at the last hearing. To avoid having to adjourn the OS again, by letter dated 9 June 2020, this Court directed the Company to address, by reference to the relevant documents filed, the following concerns: It was misleading to define the dividend (HK$1.5 per share) proposed to be declared and paid upon the Scheme becoming effective as “Scheme Dividend”, as it gave the impression to the Scheme Shareholders that such payment formed part of the consideration for the Scheme Shares when, in fact, only HK$0.42 per share would be paid by the Offeror as such consideration (“Dividend Issue”). The Company did not propose any means to address the concern that overseas Scheme Shareholders would not be able to receive the Composite Document within a short time and would not be able to attend the Court Meeting to be held in Hong Kong (“Overseas Shareholders Issue”). Counsel sought to rely on the “exceptions” under the Ordinance which enabled the Company to finance acquisition of its own shares, but failed to identify which exception the Company relied on or explain why such exception is applicable to the Scheme (“Buy Back Issue”). The Company asserted that it was not the practice of the SFC and HKEx to provide written confirmation that they did not have any further comments on the draft Composite Document. The suggestion did not accord with the experience of this Court (“Regulators Issue”). In his supplemental submissions dated 12 June 2020, counsel sought to address the above issues in this way: Dividend Issue: The Company made further disclosures and explanations in the Letter from the Board and the Explanatory Statement, to make it clear that the HK$1.5 per share dividend will be paid out of the Company’s reserves and does not form part of the Scheme Consideration. The definition of “Scheme Dividend” was changed to “Special Dividend”. Overseas Shareholders Issue: The Company extended the proposed notice period for the Court Meeting from 21 days to 25 days and adopted courier delivery service, instead of ordinary post, in dispatching the Composite Documents to the overseas Scheme Shareholders. The notice would also be posted at the Company’s website. Buy Back Issue: The Scheme does not constitute a “share buy back”, but “falls within the category permissible reduction of capital as explained and accepted by the Court”, citing Re Cheung Kong Holdings Ltd [2015] 2 HKLRD 512; Re China Power Clean Energy Development Co Ltd [2019] HKCFI 2098; Re Joyce Boutique Group Ltd [2020] HKCFI 800. Alternatively, reliance is placed on the exceptions under sections 238 to 240 of the Ordinance. Regulators Issue: Despite the Company’s assertion that the SFC and HKEx were “unwilling” to provide written confirmation that they had no further comment on the draft Composite Document, the Company has since obtained their written confirmation. As regards the Buy Back Issue, counsel’s reliance on Re Cheung Kong [2015] 2 HKLRD 512, Re China Power Clean Energy Development Ltd [2019] HKCFI 2098 and Re Joyce Boutique Group Ltd [2020] HKCFI 800 is misplaced. In none of these cases did the company seek to use its own fund to make cash payment in exchange for cancellation of the scheme shares. By contrast, under the Proposal, the Company will use $2,554,934,909 out of its accumulated profits to pay the Special Dividend, which represents 78.1% of the “Total Price” payable to the Scheme Shareholders. At the directions hearing on 15 June 2020, this Court reiterated that it is the responsibility of the Company to ensure that the Explanatory Statement complies with all regulatory and statutory requirements, which will be one of the issues considered at the “sanction” stage, should the Scheme be approved by the requisite majorities at the Court Meeting. On this basis, directions were given for the Company to convene the Court Meeting, including the manner of giving notice of the Court Meeting to the Scheme Shareholders and the overseas Scheme Shareholders and the appointment of Chairman to conduct the Meeting. C3. Second stage: Court Meeting, EGM and Petition The Court Meeting was held on 15 July 2020 with Mr Mark Wong as Chairman. Of the 1,703,289,939 Scheme Shares, the holders of approximately 69.85% (or 1,189,718,725 Scheme Shares) attended the Court Meeting either in person or by proxy. In the Chairman’s report, it was stated that the Court Meeting had been attended by Scheme Shareholders, in person or by proxy, holding 1,189,718,725 Scheme Shares (out of 1,703,289,939 Scheme Shares), and the votes cast in favour of and against the Scheme were as follows: Present and voting For the Scheme Against the Scheme In person or by proxy 1,189,718,725 1,185,307,975 4,410,750 Total % 100% 99.629261% 0.370739% In the certificate dated 15 July 2020, Computershare Hong Kong Investor Services Limited (“Computershare”), the scrutineers appointed for the purpose of the poll taken at the Court Meeting, reported the same information stated in the above table. In addition, Computershare reported that: the number of voting forms was 43; and of the 1,703,289,939 “disinterested shares” (i.e. Scheme Shares), 4,410,750 shares or 0.258955% voted against the Scheme. Immediately after the Court Meeting, the Company held the Extraordinary General Meeting (“EGM”) at which (1) a special resolution was passed by 1,184,235,321 Scheme Shares (representing 99.72% of the shares present and voting) to approve the Scheme in the form of the Composite Document, the Reduction of Capital and the withdrawal of listing of the shares on HKEx; and (2) an ordinary resolution was passed by 6,291,694,169 shares (representing 99.93% of the shares present and voting) to approve the declaration of the Special Dividend to be paid to the shareholders of the Company (other than the Offeror and the Offeror Concert Parties, who had signed the AGL Waiver). Contrary to the proper procedure discussed in Section C1 above, on 17 July 2020, the Company presented the Petition by commencing a new set of proceedings under HCMP 1033/2020. Appended to the Petition is a copy of the final version of the Composite Document sent to the Scheme Shareholders. This was followed by a letter dated 22 July 2020 where PCW requested the Court to make an order in terms of the Summons for Directions issued on 21 July 2020, viz, (1) to dispense with settlement of a list of creditors of the Company, (2) to advertise the notice of presentation of the Petition, and (3) to fix the hearing of the Petition before 26 August 2020 so that the Scheme can become effective on 26 August 2020. PCW contended that the Reduction of Capital “is a mere technical reduction and purely for effecting the scheme of arrangement” and the Company had filed 2 affirmations to show that it is a proper case for the Court to give such directions. By letter dated 27 July 2020, this Court reminded the Company that an application for confirmation of reduction of capital is an important matter and it is incumbent upon the Company’s legal advisors to address all relevant considerations. In response, the Company issued a summons dated 30 July 2020 for leave to amend the Petition to correct certain factual mistakes and to add 2 paragraphs relating to the purpose of the Reduction of Capital and the means offered to protect the creditors. C4. Reduction of Capital: dispensation with settlement of list of creditors In his written submissions for the hearing of the Summons for Directions, Mr Leung contends that the Reduction of Capital is integral to the Scheme and, as such, is a “technical reduction of capital”, citing Re Joyce Boutique (§12). Although all the shares in issue (including the Scheme Shares) have been fully paid-up, he submits that the Reduction of Capital “will involve the extinguishment of the Scheme Shares which an equivalent amount will be issued and allotted to the Offeror credited as fully paid”. On this basis, he asks for a direction to dispense with settlement of a list of creditors on the basis of section 227 of the Ordinance. Leaving aside the fact that Mr Leung’s contention is contrary to the Company’s statement that the Reduction of Capital does not involve either “the diminution of liability in respect of unpaid share capital” or “the payment to a shareholder of any paid-up share capital” (at §39 of the Petition), it seems to me that counsel has not given consideration as to whether section 227 applies to the Reduction of Capital. The starting point is section 226 of the Ordinance, which provides as follows: “Special resolution and application to Court for confirmation of reduction of share capital A company may pass a special resolution for reduction of share capital under this Subdivision and apply by petition to the Court for an order confirming the reduction. Unless the Court directs otherwise, section 227 (creditors entitled to object to reduction of share capital) applies if the proposed reduction of share capital involves either— the diminution of liability in respect of unpaid share capital; or the payment to a shareholder of any paid-up share capital. The Court may direct that section 227 is not to apply to any class or classes of creditors if the Court thinks it proper to do so, having regard to any special circumstances of the case. The Court may direct that section 227 is to apply in any other case.” As this Court observed at the hearing on 3 August 2020, section 227 (which governs settlement of a list of creditors entitled to object to a reduction of capital) only applies if (1) the proposed reduction of capital involves either “the diminution of liability in respect of unpaid share capital” or “the payment to a shareholder of any paid-up share capital” (under section 226(2)) or (2) the Court directs that section 227 is to apply to such reduction (under section 226(4)). In the present case, all the Scheme Shares have been fully paid-up and, as such, there will not be any diminution of liability in respect of unpaid share capital in respect of such Shares. As the Scheme Shares will be returned to the Company and, thereafter, cancelled, there is no basis to believe that the paid-up capital in respect of the Scheme Shares will be returned to the Scheme Shareholders either. Unless there is any reason to believe that the Court will direct section 227 to apply to the Reduction of Capital (none has been suggested), there is no basis to think that section 227 applies to the Reduction of Capital. It was unnecessary for the Company to seek a direction to dispense with settlement of a list of creditors as required by section 227, and no such direction was given. D. Court’s sanction: applicable principles In considering whether to sanction a scheme, the Court will need to be satisfied that the provisions of the statute have been complied with, and that the scheme is fair (Buckley on the Companies Acts, Issue 38 [219]-[232]). As this case concerns a scheme of arrangement between the company and its shareholders, I will in the following sections refer to the shareholders whose rights will be altered by the scheme as “scheme shareholders” and the scheme as “shareholders scheme”. D1. Compliance with statutory requirements As to compliance with statutory requirements, there are 4 separate considerations: (1) the classes of scheme shareholders must be properly constituted; (2) the meetings were duly convened in accordance with the directions given by the court hearing the originating summons; (3) the scheme shareholders have been given sufficient explanation of the scheme and its effects and sufficient information to enable them to make a reasonable judgement as to how to vote at the meeting; and (4) the requisite majorities have voted in favour of the scheme (Re China Light & Power Company Ltd. [1998] 1 HKLRD 158 at 168, per Le Pichon J). As regards sufficient information, the starting point is section 671(3) of the Ordinance which requires, amongst other things, the explanatory statement to explain the effect of the scheme. Even before the enactment of the English equivalent provision of our section 671, Maugham J in In re Dorman, Long & Co [1934] Ch 635 at 657 already said that it was the responsibility of the company to provide a fair explanatory circular to the shareholders: “... It is perhaps not unfair to say that in nearly every big case not more than five per cent of the interests involved are present in person at the meeting. It is for that reason that the Court takes the view that it is essential to see that the explanatory circulars sent out by the board of the company are perfectly fair and, as far as possible, give all the information reasonably necessary to enable the recipients to determine how to vote.” (underlined added) As to how the explanation should be made, in Re Heron International NV [1994] 1 BCLC 667 (in the context of a creditors scheme) Sir Donald Nicholls V-C said this: “An explanation of the effects of the schemes requires an explanation of how the schemes will affect a bond holder or creditor commercially. He needs to be given such up to date information as can reasonably be provided on what he can expect if the group were to go into liquidation and as to what he can expect under the schemes.” (underlined added) Where, as here, the purpose of the scheme is to privatise a listed company, it is incumbent upon the company to provide a fair and complete explanation on how the scheme will affect their rights commercially. For this purpose, it is not sufficient for the company to inform the scheme shareholders the total price they will receive in exchange for their shares. The company should also explain the source from which the total price will be paid to the scheme shareholders and the ramifications thereof. If, as in this case, a substantial part of the total price will be paid out of the accumulated profits of the company, the company should highlight this matter to the scheme shareholders and provide a relevant comparison of value for their consideration. This is because an intelligent and honest scheme shareholder would give consideration to a comparison between the likely, or even probable, future of the company should there be no scheme and should there be the scheme proposed (Re Marconi plc [2003] EWHC 1083 (Ch) §§13-14). A relevant comparison of value, in this context, would be a comparison between what the scheme shareholders can expect if they remain as shareholders and what they can expect under the scheme. As to the former, the company should inform the scheme shareholders that if they remain as shareholders, they can expect the company to be able to declare and pay dividend out of its accumulated profits in future unless there are valid reasons not to do so. I say “valid reasons” because if a company is able to pay substantial dividends or has substantial reserves but refuses to pay dividend or pay unreasonably low dividends, such conduct is capable of constituting unfair prejudice to the shareholders (Quinlan v Essex Hinge Co Ltd [1996] 2 BCLC 417, at 427d; Re Sam Weller & Sons Ltd (Re a Company No 823 of 1987) [1990] BCLC 80 at 88b-d). It is reasonable to expect the directors to act in accordance with their duties and cause the company to declare and pay dividend to the extent that it has sufficient accumulated profits and cash for that purpose. D2. Discretionary matters The Court is not bound by the decision of the meeting. As Chadwick LJ explained in Re BTR plc [2000] 1 BCLC 740, at 747: “… the court is not bound by the decision of the meeting. A favourable resolution at the meeting represents a threshold which must be surmounted before the sanction of the court can be sought. But if the court is satisfied that the meeting is unrepresentative, or that those voting in favour at the meeting have done so with a special interest to promote which differs from the interest of the ordinary independent and objective shareholder, then the vote in favour of the resolution is not to be given effect by the sanction of the court.” Similarly, in UDL Argos Engineering, Lord Millett NPJ said at §27(6): “The Court will decline to sanction a Scheme unless it is satisfied, not only that the meetings were properly constituted and that the proposals were approved by the requisite majorities, but that the result of each meeting fairly reflected the views of the creditors concerned. To this end it may discount or disregard altogether the votes of those who, though entitled to vote at a meeting as a member of the class concerned, have such personal or special interests in supporting the proposals that their views cannot be regarded as fairly representative of the class in question.” The discretionary matters which the Court will consider at the sanction stage include whether (1) the class was fairly represented by those who attended the meeting; (2) the statutory majority are acting bona fide and are not coercing the minority in order to promote the interests adverse to those of the class whom they purport to represent; and (3) the arrangement is such that an intelligent and honest man, a member of the class concerned and acting in respect of his interest, might reasonably approve (Buckley on the Companies Acts, Issue 38 [219]-[232]). In Re Wheelock Properties Limited [2010] 4 HKLRD 587, at §8, Harris J summarised the applicable principles and devised a convenient checklist of the matters which the Court has to consider in deciding whether to sanction a scheme between the company and the shareholders as follows: “(a) Whether the scheme is for a permissible purpose. It is generally accepted that privatisation of a public company is a permissible purpose: Re Savoy Hotel Ltd [1981] Ch 351; Re Shaw Brothers (Hong Kong) Limited (unrep., HCMP 67 of 2009 [2009] HKEC 448) judgment of Kwan J); Re PCCW Ltd [2009] 3 HKC 292, per Rogers V-P para. 77 and Lam J paras. 154-155. (b) Whether members who are called on to vote as a single class have sufficiently similar legal rights so that they can consult together with a view to their common interest at a single meeting: UDL Argos Engineering & Heavy Industries Co. Ltd. v Li Oi Lin (2001) 4 HKCFAR 358. (c) Whether the meeting was duly convened in accordance with the Court’s directions: Re China Light & Power Co Ltd. [1998] 1 HKLRD 158, per Le Pichon J at p.168E-F. (d) Whether members have been given sufficient information about a scheme so as to enable them to make an informed decision whether or not to support it: Re China Light & Power Co Ltd, per Le Pichon J at 168E-F. (e) Whether a majority in number representing 75% in value of the members present and voting agree to the arrangement: Re China Light & Power Co Ltd, per Le Pichon J at p.168E-F. (f) The discretionary element of the sanctioning process and in particular whether the Court is satisfied that a scheme is one that an intelligent and honest man acting in respect of his interests as a member of the class within which he votes, might reasonably approve: Buckley on the Companies Acts (14th ed., 1981) p 473; Re PCCW Ltd, paras. 33-38.” E. Analysis The Petition was listed to be heard on 24 August 2020 (“First Hearing”). As a result of the failure on the part of the Company to address all the matters relevant to the Court’s consideration of the Scheme at the sanction stage, the hearing of the Petition was adjourned to 31 August 2020 (“Second Hearing”) and further to 7 September 2020 (“Third Hearing”). E1. Permissible purpose The purpose of the Scheme is to implement a privatisation of the Company, which is an acceptable and permissible purpose for a scheme of arrangement between the company and the shareholders (Re Dah Chong Holdings Limited [2020] HKCFI 274, §5; Re Wheelock Properties Ltd, §8(a)). E2. Classification of Scheme Shareholders There is only one class of Scheme Shareholders, all of them hold ordinary shares issued by the Company. As holders of ordinary shares, they have the same legal rights in the Company. I am satisfied that the Scheme Shareholders have sufficiently similar legal rights so that they can consult together with a view to their common interest at a single Court meeting. E3. Compliance with Court’s directions Pursuant to the directions given on 15 June 2020, copies of the Composite Document were sent to all Scheme Shareholders whose registered addresses are within and outside of Hong Kong by mail and by courier respectively 25 days before the date of the Court Meeting. Amongst the 93 overseas Scheme Shareholders, the delivery to 6 of them were unsuccessful. At the First Hearing, Mr Leung contended that the percentage of unsuccessful delivery is “minuscule” and that these Scheme Shareholders “would not have made any impact on the approval of the Scheme”. As there was no evidence on how many shares were held by these 6 overseas Scheme Shareholders, and the Company did not adduce any evidence to show that the headcount test had been satisfied (as discussed in Section E5 below), the Petition was adjourned to allow the Company to adduce further evidence to address the issues. At the Second Hearing, Mr Leung referred to the new evidence filed by the Company, which showed that the 6 overseas Scheme Shareholders only held 32,396 shares in total, which represented 0.0004756% of the Company’s issued shares and 0.001902% of the Scheme Shares. He submitted that even if all these 6 overseas Scheme Shareholders had voted against the Scheme, it would not have any impact on the results of the Court Meeting. In my view, the fact that 6 overseas Scheme Shareholders did not receive the Composite Document would not render the Court Meeting to become not properly convened for the following reasons: It is the responsibility of the shareholders to provide correct or up to date addresses to the Company. Their failure to provide updated addresses to the Company is not a matter which should be held against the Company. The Company has since April 2020 announced the Proposal. It is reasonable to assume that the Scheme Shareholders would monitor the development from the further announcements and update made by the Company at its website. Through these channels the Scheme Shareholders would be able to have access to the Composite Document. The possibility of non-receipt of the Composite Document by some Scheme Shareholders was foreshadowed at the time of the hearing of the OS, and §5 of the directions provided that the non-receipt of the Composite Document shall not invalidate the proceedings at the Court Meeting. I am satisfied that the Court Meeting was duly convened and held in accordance with the directions given by the Court. E4. Explanation on the Scheme The Explanatory Statement ran to 25 pages and contained many matters beyond what is required by section 671(3)-(4) of the Ordinance. It contained lengthy descriptions of (1) the transactions under the Proposal and the Scheme; (2) the conditions of the Proposal; (3) the dividends declared by the Company from 2015 to 2019 and the Special Dividend to be paid upon the Scheme becoming effective; (4) the shareholding structure and effect of the Proposal and the Scheme; (5) the relevant statutory provisions and binding effect of the Scheme; (6) the reasons and benefits of the Proposal for the Scheme Shareholders, the Company and its shareholders; (7) the intention of the Offeror with regard to the Group; (8) if the Scheme is not approved or the Proposal lapses; (9) information on the Offeror, the Company, AGL, interests of the AGL directors and the Company’s directors, (10) withdrawal of listing of the Company’s shares; (11) registration and payment; (12) overseas shareholders; (13) taxation and independent advice; (14) Court Meeting and General Meeting; (15) actions to be taken by the shareholders; and (16) further information set out in the appendices, which ran to another 55 pages and consist of financial information of the Group, property valuation report and general information (being responsibility statement, share capital of the Company and trading prices of the shares on the Last Trading Date and backward to 31 October 2019). Despite its length, when it came to essential information such as “comparisons of value”, the only comparison provided by the Company was a comparison between the “Total Price” of HK$1.92 per Scheme Share against the following parameters: Parameter Closing Price / NAV per share Premium / (Discount) Last Trading Date 9.4.2020 HK$1.43 34.3% Average 5 trading days to Last Trading Date HK$1.41 36.2% Average 30 trading days to Last Trading Date HK$1.38 39.1% Average 60 trading days to Last Trading Date HK$1.44 33.3% Average 180 trading days to Last Trading Date HK$1.56 23.1% Audited consolidated NAV attributable to shareholders as at 31.12.2019 HK$5.70 (66.3%) Adjusted unaudited NAV attributable to shareholders as at 30.4.2020 HK$5.62 (65.8%) Latest Practicable Date 16.6.2020 HK$1.89 1.6% In my view, the above “comparison of value” is not a perfectly fair or complete comparison, given that the Total Price is not the consideration payable by the Offeror for the Scheme Shares. At the very least, the Company should provide a “comparison of value” between the Scheme Consideration and each of the parameters set out in the above table. Such comparison, if provided, would show that the Scheme Consideration represent a substantial discount against all relevant parameters as follows: Parameter Closing Price / NAV per share Premium / (Discount) Last Trading Date 9.4.2020 $1.43 (70.6%) Average 5 trading days to Last Trading Date $1.41 (70.2%) Average 30 trading days to Last Trading Date $1.38 (69.6%) Average 60 trading days to Last Trading Date $1.44 (70.8%) Average 180 trading days to Last Trading Date $1.56 (73.1%) Audited consolidated NAV attributable to shareholders as at 31.12.2019 $5.70 (92.6%) Adjusted unauditedNAV attributable to shareholders as at 30.4.2020 $5.62 (92.5%) Latest Practicable Date 16.6.2020 $1.89 (77.8%) More importantly, given that the Company proposed to use $2,554,934,909 out of its accumulated profits (“Relevant Reserve”) to pay the Special Dividend upon the Scheme becomes effective, it would be fair and reasonable for the Company to inform the Scheme Shareholders that they can expect the Company to use the same amount to declare and pay a dividend to all the shareholders if the Scheme falls through. This is because the board of directors has already considered the financial position of the Company and decided that it is appropriate to use the Relevant Reserve to pay the Special Dividend. It would be unreasonable, if not perverse, for the board to refuse to use the Relevant Reserve to declare and pay a dividend to all the shareholders if the Scheme is not implemented. To this end, it was incumbent upon the Company to inform the Scheme Shareholders the alternative scenarios on what they can expect if they remain as shareholders and what they can expect under the Scheme: If Scheme is not implemented: Scheme Shareholders will have the right to receive dividend at HK$0.375 per share in near future (being Relevant Reserve (HK$2,554,934,909) divided by total issued shares (6,812,201,460 shares)), and the right to receive further dividends out of the accumulated profits of the Company as and when the Company has sufficient cash fund to do so, or to realise their shares at the prevailing trading prices. If the Scheme is implemented: The Scheme Shareholders will have the right to receive Special Dividend (HK$1.5 per share) plus the Scheme Consideration (HK$0.42 per share). As the IFA was appointed to advise the IBC and the Scheme Shareholders in respect of the Scheme, one would expect it to provide all relevant comparisons and alternative scenarios as discussed above. However, the IFA did not provide any such comparisons and scenarios. Instead, in its Letter to the IBC and the Scheme Shareholders, the IFA only focussed on the reasons and benefits of the Scheme stated by the Company as follows: “The Proposal gives Disinterested Scheme Shareholders an opportunity to receive the Total Price (comprising both the Scheme Consideration and the Special Dividend) for their Scheme Shares at a premium over the current market price. The Total Price is 48.8% higher than the lowest closing price of APL Shares and 1.1% higher than the highest closing price of APL Shares in the past two years up to and including the date of the Joint Announcement. The Proposal would also allow Disinterested Scheme Shareholders to switch investment of their holding in APL Shares into securities of other companies with better prospects or higher trading volume, which they might not be able to do so currently because of the thin trading volume of the APL Shares. In addition, the COVID-19 virus outbreak in 2020 is having a significant adverse impact on global economy, and the APL Group expects to see further headwinds affecting its business activities. Accordingly, for some Disinterested Scheme Shareholders, given the current status of the economy and the uncertainty on the timing of a recovery, they may find the Proposal particularly timely.” Similarly, in concluding that the Proposal is fair and reasonable to the Scheme Shareholders, the IFA cited the same reasons and benefits given by the Company: “Having considered that (i) the Proposal provides the Disinterested Scheme Shareholders with an attractive opportunity to realise their investments in APL in cash at a premium over the current market price, which normally would not be available through the market, especially given the relatively low level of liquidity of the APL Shares in the past one year as discussed in the below section of this letter; (ii) the Proposal allows Disinterested Scheme Shareholders to switch investment of their holding in APL Shares into securities of other companies with better prospects or higher share trading volume, and (iii) the APL Shares have been trading at a steep discount to its consolidated NAV attributable to APL Shareholders in the past two years, implying that the Disinterested Scheme Shareholders might not be able to profit from their investments soon despite that APL Shares have been undervalued, we are of the view that the Proposal is fair and reasonable so far as the Disinterested Scheme Shareholders as concerned.” In the absence of all relevant comparisons and alternative scenarios in the Explanatory Statement and the IFA Letter, I am not satisfied that the Company has provided sufficient explanation of the Scheme and its effects which are necessary to enable the Scheme Shareholders to make a reasonable judgement as to how to vote at the Court Meeting. E5. Approval by requisite majorities Section 674(1)(c)(i)-(ii) of the Ordinance provides that the scheme must be approved by the scheme shareholders representing not less than 75% of the voting rights of the shareholders present and voting (majority in value test) and the majority in number of the scheme shareholders present and voting (headcount test). Where the scheme involves a takeover offer, section 674(2)(a) of the Ordinance requires (1) the agreement at the Court meeting of members representing at least 75% of voting rights of the members present and voting; and (2) the votes cast against the scheme at such meeting do not exceed 10% of the voting rights attached to all disinterested shares. In the Chairman’s report and Computershare’s certificate, only the voting results stated in §§31-32 above was provided. At the First Hearing, Mr Leung relied on the same results and submitted that the Scheme had been approved by 99.63% of the Scheme Shareholders present and voting and, as the votes against the Scheme only constituted 0.37% of the voting rights attached to all the Scheme Shares, the requirement of section 674(2)(a) was also met. No evidence was adduced by the Company on the headcount test. Without such evidence, the Court does not have jurisdiction to consider whether or not to sanction the Scheme (UDL Argos, §27(5)). At the Second Hearing, the Company produced an Appendix B prepared by Computershare which described, inter alia, the results of the Court Meeting as follows: Method No. of voting papers Present & voting For the Scheme Against the Scheme No. of shareholders (headcount) No. of shares represented No. No. of shares represented No. No. of shares represented In person 33 33 1,035,767 16 323,017 17 712,750 By proxy 7 7 56,576 7 56,576 0 0 Proxies appointed by HKSCC 2 0 22,412 0 22,412 0 0 Chairman 1 30+1 1,188,603,970 27+1 1,184,905,970 3+1 3,698,000 Total 43 70+1 1,189,718,725 50+1 1,185,307,975 20+1 4,410,750 Relying on the above results, Mr Leung submitted that the headcount test was satisfied in that of the 71 votes cast at the Court Meeting, 51 votes were for the Scheme while 21 votes were against the Scheme (with HKSCC voted both for and against the Scheme for the purpose of the headcount test). There was no explanation on why the total number of votes cast (71) was more than the number of voting papers received by the Company (43). Unlike the EGM of which attendance lists were produced by Computershare showing the names and the number of shareholders attending the meeting, no attendance list was produced in respect of the Court Meeting. It was impossible to know whether for the purpose of the headcount test, one should use 71 or 43 as the number of Scheme Shareholders present and voting at the Court Meeting. This was significant given that the number of votes cast against the Scheme was 17 (for those voting in person) and 4 (for those voting through the Chairman). As Mr Leung was unable to explain the difference between the number of voting papers and the number of votes cast at the Court Meeting, the Petition was further adjourned. It was made clear by this Court that the Third Hearing would be the last opportunity for the Company to satisfy the Court that the Scheme is one which should be sanctioned, and the Company should provide all relevant evidence to show that the headcount test was met including the voting papers and proxies used at the Court Meeting to explain the difference. At the Third Hearing, Mr William Wong SC relies on a letter from Computershare dated 3 September 2020 (“3/9/2020 Letter”) which stated, inter alia, that: The Court Meeting was attended by 122 “shareholders/their proxies/corporate representatives of the Company”. Amongst them, 54 attended in person and 68 attended by proxies. Of the 54 shareholders attended in person, only 33 of them casted a valid vote at the Court Meeting. (The remainder either did not cast a valid vote or left without submitting any voting papers at the Court Meeting.) Of the 33 valid votes, 16 were “for” the Scheme and 17 “against” the Scheme. In respect of the 68 shareholders attended by proxies, only 38 casted a valid vote at the Court Meeting and the Chairman was appointed as proxy for 31 of them. Of these 38 valid votes, 35 were “for” the Scheme and 4 were “against” the Scheme. In counsel’s second supplemental submissions, Mr Wong SC refers to the 43 voting papers and submits that “on the assumption that each voting paper constitutes one vote, there were 27 voting papers ‘for’ the Scheme and 16 ‘against’ the Scheme”. This point is not pursued at the Third Hearing. Instead, the focus is on the number of votes cast, in person and by proxy, at the Court Meeting. The evidence adduced by the Company gives the Court considerable discomfort as to whether the votes at the Court Meeting were properly accounted for and whether the headcount test was met. According to Computershare, 31 proxies appointed the Chairman to vote on their behalf. These consist of: 8 signed proxy forms with voting instructions (Appendix F) (including one forms lodged by HKSCC appointing Chairman to vote both “for” and “against” the Scheme); and 62 signed proxy forms without voting instruction (Appendix G). However, the majority of them were lodged by the same shareholders. For example, Chan Ka Wai lodged 28 forms, Chan Hau Yin lodged 7 forms and Yuen Miu Har lodged 7 forms. It appears that not all the proxy forms were produced by the Company. For example, in the document entitled “Holder Represented by Chairman” (Appendix D) (“Appendix D”), Ho Jung Pong appeared twice, under 2 different “Holder ID”, but only one proxy form was produced under Appendix G. In the 3/9/2020 Letter, Computershare stated that the duplicated proxy forms were “treated as 1 proxy form and therefore 1 vote per lot of shares registered with the Company for the purpose of headcount”. However, no attempt is made by the Company to demonstrate that the duplicated proxy forms have been eliminated in the manner suggested by Computershare. To the contrary: In Appendix D, Computershare still listed the names of the shareholders appointing the Chairman as their proxy and some of their names appeared multiple times. In §14 of the 3/9/2020 Letter, Computershare stated that “[i]n respect to [sic] the names that appear multiple times in the ‘Holder Represented by Chairman’, such shareholders were counted for the purpose of headcount in accordance with unique ‘Holder ID’ which indicates 1 shareholder account with the Company and thus 1 shareholder for the purpose of headcount”. This suggests that Computershare counted the votes casted by the same shareholders more than once on the basis of the “shareholder account” or “Holder ID” (whatever they mean). Despite the obvious inconsistencies and problems in the evidence filed by the Company, in their written submissions, counsel still rely on the figures provided by Computershare and submit that 51 out of 71 votes were casted in favour of the Scheme, such that the headcount test (as required by section 674(1) of the Ordinance) was met. It is only when this Court questions the reliability of the Company’s evidence including the matters set out in §§78-79 above that Mr Wong SC accepts that for the purpose of the headcount test, it is wrong for Computershare to count the votes casted by the same shareholders more than once. He submits that the Court should look at Appendix D (as verified by the proxy forms under Appendix G) and discount the duplicated votes casted by the same shareholders. If this is done, (1) the total number of proxies appointing the Chairman to vote on their behalf would be reduced from 31 to 27; and (2) the number of proxies which gave the Chairman the discretion to vote on their behalf (i.e. those without voting instruction) would be reduced from 22 to 18. On this basis, the headcount test would still be met. I do not see why the Court should be burdened with the task of going through all the documents when the Company has chosen not to do so. At the end of the Third Hearing, Mr Wong SC says the Company will lodge further evidence to address the concerns of the Court with reference to the supporting documents. As it transpires, when the Company makes references to the underlying documents, further error in the vote counting is revealed. In Wong 6th filed on 8 September 2020, a letter from Computershare dated 8 September 2020 (“8/9/2020 Letter”) and a table (“Table”) are exhibited. In the 8/9/2020 Letter, Computershare confirms that: The Table is accurate and based on the underlying documents provided. 7 nominated proxies attended and casted a vote at the Court Meeting. 17 nominated proxies with no voting preference were casted by the Chairman “for” the Scheme. “The Chairman’s voting papers are treated as one voting paper for the purpose of vote casting”. All voting papers submitted by HKSCC were counted as 1 vote “for” and 1 vote “against’ the Scheme for the purpose of headcount. In the Table, it is stated that for the purpose of headcount test: 16 shareholders voting in person; 7 voting by proxy (not through Chairman). In footnote 1, it is stated that Ho Ka Wai also nominated the Chairman as his proxy and, therefore, his vote through the Chairman is a duplicated and is eliminated; 17 voting by proxy through Chairman “with discretion and eliminating duplicates”; and 5 voting by proxy through Chairman with specific instructions to vote “for”. The extent of the duplicated proxy forms and the votes and the manner in which they were revealed leaves the Court with considerable unease as to whether the results of the votes were properly accurately for. For this additional reason, I do not think the Scheme is one which should be sanctioned by the Court. E6. View of intelligent and honest man The IBC recommended the Scheme Shareholders to approve and implement the Proposal including the Scheme and the Special Dividend, having been advised by the IFA that the Proposal are fair and reasonable so far as the Scheme Shareholders are concerned. The IBC drew the attention of the Scheme Shareholders to the Letter from the Board, the Letter from the IFA and the Explanatory Statement which set out the factors and reasons having been taken into account in arriving at its recommendation. In view of my conclusion on the deficiencies of the Explanatory Statement and the IFA Letter, I do not think that the recommendation of the IBC was well founded. E7. Representation of Scheme Shareholders A substantial number of the votes casted in favour of the Scheme were casted by the Chairman using proxy forms without any voting instructions. I have considered whether this would affect whether the class was fairly represented by those who attended the meeting but decided that it should not have such effect given that the proxy form did state, in note 4, that “failure to tick the box will entitle your proxy to cast your votes at his or her discretion or abstain for the relevant resolutions”. It is reasonable to assume that the Scheme Shareholders who signed their proxy forms in this way had decided to defer to the Chairman to vote in the way he thought fit. While it may be more convenient for the same proxy form to be used by the scheme shareholders with or without specific instructions, in the context of a shareholders scheme where the Court will consider whether the class was fairly represented by those who attended the meeting and whether the statutory majority are acting bona fide, it would be advisable for the company to require the scheme shareholders to state whether they vote “for” or “against” the scheme in the proxy forms so that there can be no doubt as to their view on the scheme. F. Reduction of Capital As I do not consider that the Scheme is one which should be sanctioned, it is unnecessary to consider whether the Reduction of Capital, which will only take place upon the Scheme becomes effective, is one which should be confirmed. If, contrary to my conclusion above, the Scheme is one which should be sanctioned, I consider that the Reduction of Capital is one which should be confirmed by the Court. As stated by Ng J in Re Cheung Kong, at §57, the Court will confirm a reduction of capital pursuant to section 229 of the Ordinance which has been approved by a special resolution of members if the following requirements are satisfied: The shareholders are treated equitably; The reasons for the reduction are properly explained; The interests of creditors are safeguarded; and The reduction is for a discernible purpose. In the present case, this Court is satisfied that all the shareholders of the Company are treated equally and equitably in that they were entitled to vote on the resolution to approve the Reduction of Capital at the EGM. The reasons for the Reduction of Capital have been explained to the shareholders in the Explanatory Statement. The Reduction of Capital is an essential feature of the Scheme and will only be implemented upon the Scheme becomes effective. So far as creditors are concerned, I am satisfied that their interests are safeguarded given that: The Reduction of Capital will only last for a very short time between the cancellation of the Scheme Shares and the issue of the same number of new shares to the Offeror, which will take place within the same day. The Company has obtained the agreement of all its subsidiaries and AGL not to seek repayment of the amounts owed to them until the amounts owed to the trade creditors as at the date the Scheme becoming effective (“Trade Creditors”) have been paid in full. In addition, the Company offered an undertaking to the effect that it will set aside in a designated bank account an amount equivalent to the total amount owed to the Trade Creditors which will only be applied to pay the amount owed to such Creditors until they are paid in full. G. Conclusion For the above reasons, I decline to sanction the Scheme. If, contrary to my conclusion, the Scheme is one which should be sanctioned by the Court, I consider that the Reduction of Capital is one which should be confirmed by the Court. (Linda Chan) Judge of the Court of First Instance High Court Mr William Wong SC leading Mr Richard Leung and Mr Ronald Pang, instructed by P.C. Woo & Co, for the Company (Mr William Wong SC only appeared in the hearing of 7 September 2020)