The issue concerned the interpretation of Rule 2.10 of the Code on takeovers and mergers (the Takeovers Code), and whether it meant that offeror concert parties are prohibited from voting at the court meeting of the scheme shareholders, or rather that whilst the offeror concert parties are not prohibited from voting Their vote will not be counted.
The decision may affect the wording of offering documents going forward and prompt a change in current practice as schemes are devised.
Background
In Re Chong Hing Bank Ltd [2021] HKCFI 3091, the Honorable Madam Justice Linda Chan was asked to sanction a scheme of arrangement dated 30 July 2021 between the company and all the "scheme shareholders" pursuant to sections 673 and 674 of the Companies Ordinance (Cap. 622). The company had been listed since 1994.
In May 2021, the offeror requested the board of the company to put forward a proposal for the privatization of the company by way of scheme of arrangement and the withdrawal of the listing. The offeror's wholly owned subsidiary held 74.97 percent of the company's shares. Parties presumed to be acting in concert with the offeror and the independent shareholders (collectively the scheme shareholders) together held approximately 25.03 percent of the shares.
The court's interpretation of Rule 2.10 of the Takeovers Code (the Rule) would likely determine its finding on the validity of the notice convening the meeting and whether the meeting itself had been validly constituted.
Rule 2.10 provides that a scheme of arrangement or capital reorganisation to acquire or privatise a company may only be implemented if:
- The scheme or the capital reorganization is approved by at least 75 percent of the votes attached 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.
- The number of votes cast against the resolution to approve the scheme or the capital reorganisation at such meeting is not more than 10 percent of the votes attaching to all disinterested shares.
Counsel for the company referred to a recent decision of the Honourable Mr. Justice Harris, Re Cosmos Machinery Enterprises Ltd [2021] HKCFI 2088, in which Harris J set out two alternative views on the meaning of the rule:
- That it prohibits the offeror concert parties from voting (the prohibition view).
- That it 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 (the non-prohibition view).
Harris J had favoured the latter view, remarking that the non-prohibition view was more consistent with the natural and ordinary meaning of the rule and section 674(2) of the Ordinance.
SFC's view sought
In view of the importance of the issue, Chan J said that the court had directed the solicitors for the company to ask the Securities and Futures Commission (SFC) if it wished to make submissions. The SFC simply stated that it "concurred" with the view of Harris J that the non-prohibition view was the correct interpretation (without giving reasons) and that it had 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."
Chan J said that the SFC's response shed little light on the issue, as "in essence the SFC is not concerned 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 SFC noted 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 thresholders have been met under Rule 2.10", something which the SFC said had now become an accepted practice by practitioners in the Hong Kong takeovers market.
In view of the concern raised by the court and the SFC's stance that it agreed with the non-prohibition view, the court noted that at the request of the company, the concert parties in Chong Hing Bank had given an irrevocable undertaking to the effect that they would not vote at the court meeting irrespective of whether they were eligible to vote at such meeting.
Interpretation
In view of the response received from the SFC and the general and public importance of the issue, Winston Poon SC and Eva Sit SC were appointed as amici curiae to assist the court on the proper construction of the rule.
Mr. Poon submitted that the prohibition view was to be preferred, using the court's approach to construction of a regulatory instrument made under statute as summarised in Law Mei Mei v. Airport Authority [2018] 4 HKLRD 312.
First, it was the prohibition view that was 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 (not a meeting of holders of disinterested shares and concert parties)."
Second, the prohibition view was consistent with, and supported by the drafting history of the rule.
Third, the prohibition view would result in more coherence in the interpretation of related rules in the Takeovers Code which are aimed at the protection of minorities’ interest.
Chan J said that there were possibly 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:
- A single 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.
- 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 a single court meeting for these shareholders.
In view of her holding that the prohibition view accorded with Rule 2.10 and taking into account the undertaking given by the concert parties and the fact that they did not attend or vote at the court meeting as scheme shareholders, Chan J said she was satisfied that the requirements under Rule 2.10 were satisfied and that the scheme had been approved by the requisite majority.
A significant decision
The decision will affect all entities seeking to use a scheme of arrangement or capital reorganisation to acquire or privatise a company whose shares are listed on the Hong Kong Stock Exchange.
In view of the procedural economy provided by having one meeting of scheme shareholders rather than separate meetings, listed companies seeking privatization and de-listing should pay close attention to the wording of the circular and may wish to consider amending the wording to include an undertaking by concert parties that they will (i) neither attend nor vote on the proposed scheme, and (ii) will be bound by the terms of the scheme.
Authored by Nigel Sharman and Jeffrey Lee.
