Introduction
In the past few years, Hong Kong has seen a series of privatisations of listed companies, and a considerable amount of which have been carried out by way of scheme of arrangement. In this article, we will discuss the recent Hong Kong High Court judgement in Chong Hing Bank Limited (HCMP 968/2021, [2021] HKCFI 3091) (“Chong Hing”), which could draw potential implications for parties using court sanctioned schemes of arrangement to privatise Hong Kong listed companies or reductions of capital. Indeed, the way of dealing with concert parties’ votes on a privatisation scheme at a court-convened shareholder meeting may affect its validity. Furthermore, this High Court decision could affect the drafting of the scheme documents and notice of court meeting going forward.
Background
The case concerned a petition hearing presented by Chong Hing Bank Limited (the “Company”) regarding the court’s sanctioning of the scheme of arrangement dated 30 July 2021 (the “Scheme”) between the Company and all the scheme shareholders (i.e. the Concert Parties (as defined below) and independent shareholders) (the “Scheme Shareholders”) pursuant to sections 673 and 674 of the Companies Ordinance (Cap. 622) (the “Ordinance”) and the reduction of capital pursuant to section 229 of the Ordinance.
The Company was a listed company on the Main Board of The Stock Exchange of Hong Kong Limited (the “Hong Kong Stock Exchange”). In May 2021, the offeror, the single largest shareholder of the Company, requested the board of directors of the Company (the “Board”) 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 Hong Kong Stock Exchange (the “Proposal”). There were also a few concert parties (the “Concert Parties”) that were presumed to be acting in concert[1] with the offeror under the Code on Takeovers and Mergers (the “Takeovers Code”) for the purpose of the Proposal. [1]
It was stipulated in the scheme document that the Scheme would be subject to approval by the independent shareholders, and that the Concert Parties would not attend or vote at the meeting of the Scheme Shareholders convened at the direction of the Court (the “Court Meeting”). The Court Meeting was then convened for the purpose of approving the Scheme and the Concert Parties did not attend nor vote at the Court Meeting.
In sanctioning the Scheme, the Honourable Madam Justice Linda Chan considered, among other things, the Company’s compliance with Rule 2.10 of the Takeovers Code.
Rule 2.10: Disinterested Shareholders’ Approval Requirement in relation to the Scheme
Rule 2.10 of the Takeovers Code provides that:
“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[2]; 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.”
The Court’s interpretation of Rule 2.10 of the Takeovers Code was relevant to the case in determining: (i) the validity of the notice convening the Court Meeting; and (ii) if the Court Meeting was validly constituted. In particular, the question whether the Court Meeting was duly convened and constituted by excluding the Concert Parties from attending and voting at such Court Meeting depended partly on the true meaning of Rule 2.10.
Interpretation of Rule 2.10
Previous High Court Decision
Prior to Chong Hing, in Re Cosmos Machinery Enterprises Limited (HCMP 601/2021, [2021] HKCFI 2088) (19 July 2021), the Honourable Mr Justice Jonathan Harris suggested two schools of thought regarding the meaning of Rule 2.10:
i. the offeror and his concert parties are prohibited from voting on the relevant resolution (the “Prohibition View”); and
ii. the offeror and his concert parties are not prohibited from voting, but their votes cannot be counted for the purposes of complying with the Takeovers Code (the “Non-Prohibition View”).
The learned Judge concluded that the Non-Prohibition View is the correct position as it is more consistent with the natural and ordinary meaning of Rule 2.10 and section 674(2) of the Ordinance. An offeror’s concert parties who are part of a scheme must be allowed to vote as a matter of scheme law.
Position adopted in Chong Hing
Chan J considered Mr Justice Harris’ views in Re Cosmos Machinery, which she considered to be obiter dicta as the scheme in the case was not approved by the requisite majority of shareholders. She then concluded that the Prohibition View is the correct interpretation of Rule 2.10 based on the following reasons:
- The Prohibition View is more consistent with the ordinary and natural meaning of Rule 2.10 as it plainly envisages that the Court Meeting shall only be a meeting of holders of disinterested shares (i.e. not a meeting of holders of disinterested shares and concert parties) in order to ensure that their discussions are unhampered by the presence of others who may have a different interest.
- The Prohibition View is consistent with the drafting history of Rule 2.10. The current Rule 2.10 was enacted in 2002 following the Consultation Paper in April 2001. In contrast with the old Rule 2.10, the current Rule 2.10 embodies the plain intention for Rule 2.10 to be prohibitory in nature.
- The prohibition view would result in more coherence in the interpretation of related rules in the Takeovers Code which are all aims at protecting the minority interests.
Chan J further concluded that in view of the undertaking provided by the Concert Parties and that they did not attend the Court Meeting of the Scheme, the requirements under Rule 2.10 were fulfilled and the Scheme was sanctioned accordingly.
Her Ladyship additionally set out three types of meetings that could be ordered by the Court for approval of privatisation or takeover schemes involving parties acting in concert with the offeror:
- 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.
- Two court meetings for the disinterested shareholders and the concert parties respectively. The court may, however, 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.
- 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.
Analysis and Takeaways
In light of the ruling in Chong Hing, offerors should be mindful when seeking to use a scheme of arrangement to privatise a company listed on the Hong Kong Stock Exchange. To avoid complications in future privatisation schemes and to avoid two court meetings for a privatisation scheme (one for concert parties only), offerors should ensure that concert parties subject to the scheme irrevocably undertake that they will (i) neither attend nor vote on the proposed court meeting and (ii) be bound by the terms of the scheme. Wordings relevant to the attendance, voting and irrevocable undertaking on the scheme documents, as well as notice of meeting should also be carefully constructed to ensure compliance with the court’s ruling.
Please contact our Partner Mr. Rodney Teoh and associate Ms. Angela Lau for any enquiries or further information.
This news update is for information purposes only. Its content does not constitute legal advice and should not be treated as such. Stevenson, Wong & Co. will not be liable to you in respect of any special, indirect or consequential loss or damage arising from or in connection with any decision made, action or inaction taken in reliance on the information set out herein.
[1] Acting in concert is defined as persons who pursuant to an agreement or understanding, actively cooperate to obtain or consolidate “control” of the company by acquisition through voting rights.
[2] Disinterested shares are shares in the company other than those which are owned by the offeror or persons acting in concert with it.