IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION … · 2011-03-07 · IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION ... On 13 October 2008 the

CACV 85/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 85 OF 2009

(ON APPEAL FROM HCMP NO. 2382 OF 2008)

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IN THE MATTER of PCCW LIMITED

（電訊盈科有限公司）

and

IN THE MATTER of the Companies Ordinance, Chapter 32

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Before: Hon Rogers VP, Lam and Barma JJ in Court

Dates of Hearing: 16-18 & 20-22 April 2009

Date of Judgment: 22 April 2009

Date of Handing Down Reasons for Judgment: 11 May 2009

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REASONS FOR JUDGMENT

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Hon Rogers VP:

1. This was an appeal from a judgment of Kwan J given on 6 April 2009. The matter before the judge was a petition that had been presented on 11 February 2009 by PCCW Limited

電訊盈科有限公司 (“the Company”). The petition sought sanction of a scheme of arrangement (“the Scheme”) pursuant to section 166 of the Companies Ordinance, Cap. 32 (“the Ordinance”), and confirmation of the reduction of the Company’s share capital involved in the Scheme, pursuant to section 59 of the Ordinance.

2. The Scheme is between the Company and the holders of the Scheme shares, namely all the shares of the Company other than those held by Starvest Limited (“Starvest”) and China Netcom

Corporation (BVI) Limited (“Netcom BVI”) (“the Joint Offerors”) and by shareholders that are termed parties acting in concert with Starvest, namely Pacific Century Regional Developments Limited (“PCRD”) which is Starvest’s parent company, Pacific Century Group Holdings Limited (“PCGH”), Pacific Century Diversified Limited (“PCD”) and Eisner Investments Limited (“Eisner”). These companies are together referred to as “the Excluded Group”. PCD and Eisner are companies wholly owned by the chairman of the Company. Netcom BVI was a wholly owned subsidiary of China Network Communications Group Corporation (“CNC”), due to a merger China United Network Communications Group Company Limited (“Unicom”) replaced it.

3. The stated object of the Scheme is that the Company should be privatised. The mechanism by which that would be achieved is that the Scheme shares would be cancelled and the resulting credit arising would be applied to pay up in full and issue to the Joint Offerors and/or to Unicom the same number of new shares as would be cancelled under the Scheme. The new shares would be issued to Starvest and Netcom BVI (and/or Unicom) in the ratio of 74.27:25.73. The Joint Offerors are to pay the holders of the Scheme shares HK$4.50 in cash for each Scheme share held (“the Cancellation Price”). Sanction of the Scheme was opposed by a number of individual shareholders and by the Securities and Futures Commission (“the SFC”). The judge sanctioned the Scheme. This appeal was brought by the SFC and, at the conclusion of the hearing, the appeal was allowed.

Background

4. It is appropriate to give a brief background of the Company. Before 2000 there were two quite separate companies. In the first place there was Cable & Wireless HKT Limited (formerly “Hong Kong Telecommunications Limited”) (“HKT”). As a result of a scheme of arrangement that company became a wholly owned subsidiary of the second company, Pacific Century CyberWorks Limited (“PCCW”). Prior to that scheme going into effect HKT had been, essentially, Hong Kong’s telephone company. It was regarded as a “solid” utility and had a policy of paying a high proportion of its profits as dividends. However, associated with the abolition of the monopoly of ingoing and outgoing communications from Hong Kong that had been enjoyed by its UK parent company, it can be said that by the year 2000 there was an increasingly competitive market not only globally but, in particular, in Hong Kong. As a result HKT’s operating environment was changing. In 2000, PCCW was a technology-based company of comparatively recent origin. When that scheme was approved in HCMP 2316 of 2000, the judge sounded a note of caution when he said:

“For example, in its letter of advice …. ING Barings has said:

“Minority HKT Shareholders should note that the risk profile of PCCW’s businesses is very different from that of HKT’s businesses and they are advised to refer to the section entitled “Risk profile” of this letter for more details. As explained in such section, the business model of PCCW is unproven and with broadband communications and the Internet sector being relatively new markets, there is considerable uncertainty as to the future prospects of PCCW.” ”

5. There was one shareholder who had objected to that scheme but his objection was overruled. Whilst the pre-scheme price of the HKT shares had been in excess of $20 that soon changed, particularly after what has been termed the “collapse” of the “dot com bubble”. In early 2003 the Company’s shares were consolidated on a 1 for 5 basis. In August 2004 the reduction of capital in the share premium account in the amount of HK$173,464,615,915.00 was approved in HCMP 1699 of 2004. In approving that scheme Kwan J said:

“5. The primary purpose for cancelling the share premium account is to eliminate the accumulated losses of the Company of HK$152,932,345,321.00 as at 30 June 2004 so as to accelerate the time for payment of dividends and to bring its capital account in line with its available assets.”

6. That part of the history has been gleaned from the reported judgments in relation to the previous scheme and the reduction of capital. The Scheme document in the present case shows that by 2006 the net asset value of the Company was approximately 0.06 cents per share. By 2007 that had increased to 0.23 cents and as of 30 June 2008 it had, again, increased to 0.27 cents.

7. In May 2008 the Company commenced a process to reorganise its telecommunications services, media and IT solutions businesses under a holding company, HKT Group Holdings Ltd (“HKTGH”). At the same time it invited proposals from investors for the acquisition of up to 45% equity interest in HKTGH. The Scheme document states that in September 2008 the Company announced that HKT was in the final stage of arranging a $23.8 billion loan as part of the reorganisation and re-leveraging of HKTGH and the HKTGH sale. That was referred to as the HKT Loan Facilities. Although the Company received a number of proposals from bidders, the board is recorded as having unanimously concluded that the proposals were not sufficiently attractive and it approved the discontinuation of the HKTGH sale process. That was announced on 12 October 2008.

8. On 13 October 2008 the closing share price of the Company’s shares was $2.75, which, according to documents filed in this case, was near the historic nine-year low of $2.45. As stated in the Scheme document, the share price had fallen by approximately 42.3% in the month up to 13 October 2008.

9. Immediately thereafter, trading in the Company’s shares was suspended pending announcement of the present Scheme. The effect of the Scheme was that the Scheme shareholders, who represented approximately 52.28% of the issued share capital of PCCW, would be bought out and immediately following the implementation of the Scheme the largest shareholder in the Company would be Starvest Ltd (“Starvest”), which is a wholly owned subsidiary of the then current major shareholder of the Company, namely PCRD. PCRD is a Singaporean company, it was to retain its existing shareholding in the Company because, as already stated, its shares were not, part of the Scheme shares.

10. The Scheme document referred to what was termed a Consortium Agreement between PCRD, Starvest, Netcom BVI and CNC (replaced in the supplemental Scheme by Unicom) which, through its wholly owned subsidiary Netcom BVI, was already the shareholder of approximately 20% of PCCW and immediately following the implementation of the Scheme would be a one third shareholder of PCCW. That agreement provided that those parties would procure that PCCW would, within 20 days after the Scheme becoming effective, declare a special dividend in cash to the post Scheme shareholders of an aggregate amount of between $16,964 million and $17,565 million. It was stated that PCCW expected to have the funds available to pay the dividend from a combination of cash on hand and amounts transferred to it following the drawdown in full by HKT under the HKT Loan Facilities. The Scheme document also indicated that if the Scheme did not become effective then the special dividend proposal would lapse and there was no proposal or intention to declare or pay a special dividend.

11. The Scheme document lists the reasons for the Scheme and the benefits of the proposal for the Scheme shareholders as being:

“The Proposal provides Scheme Shareholders with an opportunity to realise their investment in PCCW for cash during sustained uncertain market conditions, and at a significant premium to the market price prevailing on the Last Trading Date.”

12. Identical wording appeared in the letter from the Independent Financial Adviser, N M Rothschild & Sons (Hong Kong) Ltd (“the IFA”). The Last Trading Date was defined as 13 October 2008. As regards PCRD it was stated:

“Given the relatively low trading liquidity and persistently weak performance of the Shares, PCRD believes that access to the equity capital markets does not provide PCCW with an attractive fund raising avenue, and that the costs and management resources associated with the maintenance of PCCW’s listing status are not warranted.”

13. The matter proceeded and a court meeting was directed in accordance with the usual procedure under section 166 of the Ordinance. In the meantime, however, proxy advisers, whose recommendations are, apparently, frequently followed, particularly by funds, considered the Scheme. They picked up on the statement made by the IFA in its letter:

“In making this recommendation, we note that Independent Shareholders are at liberty to vote according to their personal preference and circumstances and they should consult their own professional advisers for professional advice. Independent Shareholders who are confident of the future prospects of the PCCW Group and/or wish to continue to retain an exposure in the PCCW Group or who are not attracted by the capital value of the Cancellation Price as compared with the historical trading performance or their respective investment costs of the Shares may wish to vote against the resolution in relation to the Proposal.”

14. The proxy advisers made an analysis of the proposal and their, apparently unanimous, advice was that the independent shareholders should not approve the Scheme. When Glass Lewis recommended shareholders to vote against the proposal it said, amongst other things:

“Given that the dividend will include some or all of the Company’s cash on hand, we question whether this cash distribution unfairly benefits the investor group at the expense of the independent shareholders.

Overall, we are not convinced that the financial terms of the proposed transaction are fair for the Company’s independent shareholders....

In our opinion, the board has also failed to provide compelling strategic rationale for the deal from the point of view of the independent shareholders. We do not believe the Company is incapable of continuing as a standalone company. After discontinuing the HKTGH auction process in October 2008, the Company reported that it had a “unique business in Hong Kong” and a “strong cash position”.”

15. The court meeting to approve the Scheme was scheduled to take place on 30 December 2008. Shortly before the meeting the Joint Offerors sent a proposal to the Company that the Cancellation Price be increased from HK$4.20 to HK$4.50 per share. That made it necessary to adjourn the court meeting and the extraordinary general meeting so that the Scheme could be modified. It is fair to say that the course which that meeting took as regards the vote for an adjournment demonstrated that there were a substantial number of independent shareholders who were opposed to the Scheme. Indeed, the initial vote on a show of hands defeated the resolution to adjourn the meeting. It was only after a poll was called that the adjournment resolution was passed. A

supplemental Scheme document was issued to the shareholders on 12 January 2009. The court meeting was rescheduled for 4 February 2009 to commence at 2 pm.

16. Shortly prior to the adjourned meeting there was a report in the press that an anonymous allegation had been received by Mr David Webb, a well-known corporate governance and investment commentator, that Fortis Insurance agents had been given board lots of PCCW shares to induce them to vote in favour of the privatisation plan. Those reports had already been reported to the ICAC and the SFC. The newspaper article continued that the reporter had made preliminary investigations of the PCCW shareholder list and it had, indeed, been found that on a random sample there were a large number of new shareholders whose names corresponded to names of Fortis Insurance agents. The article continued that Fortis Insurance Asia had formerly been known as Pacific Century Insurance and had been a listed company in Hong Kong. In June 2007, the shares of Pacific Century Insurance had been bought by the Fortis Group, which was based in Belgium, from Starvest. The article referred to the fact that Mr Francis Yuen Tin-fan had been the chairman of Pacific Century Insurance and was currently the deputy chairman of Starvest. There was a follow-up article the next day, 1 February 2009, which indicated that the reporter’s attempts to elicit information from two of the agents concerned were met with refusals to divulge anything.

17. The court appointed meeting duly commenced at 2 pm on 4 February 2009. By that stage the Company had already announced that it was making enquiries into the allegations of possible share splitting. At the commencement of the meeting, a request was made to adjourn the meeting. There was an ad hoc resolution to adjourn the court meeting and voting commenced at 2:40 pm. The result of that vote was announced at 4:45 pm. Since those voting against the adjournment had constituted some 73.54%, the meeting then continued. Voting on the resolution to approve the Scheme commenced at 5 pm and the result of the vote was announced at 7:25 pm. The ultimate corrected figure is that 1404 shareholders, either in person or by proxy, voted in favour of the Scheme whereas 859 for shareholders, either in person or by proxy, voted against the Scheme. Approximately 83% of the number of shares held by the Scheme shareholders, present and voting, either in person or by proxy, at the meeting, were voted in favour of the Scheme.

18. This petition was, thereafter, presented on 11 February 2009. When the petition first came on for hearing on 23 February 2009, the SFC applied to intervene. Leave was granted and the SFC was directed to file evidence within 21 days. That was done and the petition came to be heard on 1 April 2009.

19. The judge considered the evidence that had been filed in respect of what had been termed “share splitting” but may, perhaps more appositely, be termed share manipulation. In brief she held that 132 persons in whose names single board lots were acquired through Chung Nam Securities Limited (“Chung Nam”) and 18 persons in whose names single board lots were acquired through Radland International Limited (“Radland”), a related company of Chung Nam, did so as a result of a plan devised by a Eugene Chuang. All the shares had been acquired between 30 December 2008 and 30 January 2009. The judge held that that had been done to boost the head-count in favour of the Scheme so as to “protect” the “investments” by Smart Jump Corporation (“Smart Jump”), and Main Purpose Investments Limited (“Main Purpose”). Smart Jump is an indirect principal subsidiary of Willie International Holdings Limited, a company listed on the Stock Exchange, of which Eugene Chuang’s brother, Henry Chuang, is chairman and a major shareholder. In December 2008, it had acquired 14,037,000 shares in the Company. Main Purpose is a subsidiary of GR Vietnam Holdings Limited, also a company listed on the Stock Exchange, some of whose directors are friends of Eugene Chuang. It is a corporate client of Chung Nam and had acquired 27,300,000 shares in the Company between 5 and 15 December 2008.

20. The judge also held that a plan had been devised by Chu Li Yuet Wah to induce employees of Kingston Securities Limited (“Kingston”) and Golden Resorts Group Limited (“Golden Resorts”), their friends and relatives, and clients of Kingston to purchase one to three board lots of shares and to sign proxy forms in favour of the Scheme.

21. As the judge noted in paragraph 110 of the judgment, a total of 175 Kingston clients became shareholders by acquiring between one and three board lots of PCCW shares during the relevant period. Investigations in respect of Kingston and Golden Resorts had been undertaken as a result of information which had been passed by a person who had been referred to as Witness B. Despite the fact that no confirmation could be obtained from those employees of Golden Resorts and Kingston who had been interviewed, the judge came to the conclusion in paragraph 116 of the judgment that 175 shareholders, who had so purchased their shares through Kingston, were the beneficiaries of a “buy-back” offer from Mdm Chu Li Yuet Wah. Amongst other things the judge noted that some of the clients of Kingston who had bought shares had little formal education and little disposable income. There were inconsistencies in the accounts which they had given to the SFC and the shares had been transferred into the various clients names and proxy forms had been given and lodged in respect of their shares.

22. The judge found that a Mr Ma Kam Wah, who was the manager and an account executive at Success Securities Ltd had purchased 15 board lots of PCCW shares on 12 January 2009. In contrast to the 50,000 shares in PCCW which he had purchased on 29 December 2008 which he had not registered in his own name, the 15,000 shares were put into the names of the 14 relatives and acquaintances and his own name. He had then obtained proxy forms because he had wanted the recipients of those shares to vote in favour of the Scheme.

23. By far the largest amount of shares which were the subject of scrutiny in the court below were 500,000 shares purchased by Mr Lam Hau Wah, referred to also by his other name Inneo Lam. Mr Lam is a regional executive director of Fortis Asia. In the first two weeks of January 2009 he had purchased 2.4 million shares in PCCW. On 5 January 2009 he purchased 500,000 shares which were withdrawn in board lots of 1000 shares each. Before that, he had not purchased shares in PCCW for about 10 years. Mr Lam maintained that the 500 board lots were purchased so that they could be distributed amongst the Fortis Insurance agents as a bonus. His secretary, who was also his sister, Lam Hau Yuk, distributed the shares primarily to the 5 team heads and to the agents in Mr Lam’s own team. At the same time as that was done proxy forms were also distributed.

24. There is no dispute that at the second court meeting 494 persons who had received board lots of shares forming part of the 500 board lots purchased by Mr Lam voted in favour of the Scheme by proxy. 335 of those were agents of Fortis Asia, 9 were clerks, receptionists or secretaries, 12 were spouses of agents of Fortis Asia, 37 were friends, relatives or acquaintances and 101 are unidentifiable. At this stage, it may be said that, apart from anything else, it is quite clear that some of those shares were treated in a way which hardly coincided with Mr Lam’s stated intention. Ricky Tse Yiu Hei, who is a regional director under the supervision of one of the five team heads, received 30 board lots. Of those he transferred one board lot into his own name and the remaining 29 board lots were transferred on a “temporary” basis to 29 of his friends and relatives. He was not asked to give the shares to his subordinates. However, he asked the recipients to vote for the privatisation on the basis that he would ask them to give him the money they received, if the Scheme was approved.

25. The judge considered the arguments which had been arrayed both by the SFC and by PCRD and Starvest and declined to infer that Mr Lam had implemented a scheme of splitting up the 500,000 shares to assist in the privatisation of PCCW.

26. It was also argued below that Mr Francis Yuen was involved in the scheme by Mr Lam to manipulate the head-count. The judge declined to infer from a number of coincidences that Mr Yuen had anything to do with, or had any knowledge of, what Mr Lam did. This matter will be dealt with more fully below.

27. Having reached the conclusion that all the persons in whose names the PCCW shares referred to above were shareholders entitled to vote at the Scheme meeting, the judge turned to consider what were said to be 2 related aspects. The first was whether the vote in favour of the Scheme had been achieved by a majority in number of the shareholders voting in favour of the Scheme, as required by section 166 of the Ordinance and the second was whether the device of “share splitting” should require the court to exclude all votes cast as a result of share splitting.

28. Reference was made to the fact that, under the CCASS arrangements in Hong Kong, the vast majority of shareholders by number and value in nearly all publicly listed companies in Hong Kong normally hold their shares through one legal owner, HKSCC Nominees Limited. In the case of PCCW, that applied to 93.7% of the shares of the independent shareholders. Because HKSCC Nominees Limited was the legal owner of the shares when it came to voting, although the shares would be counted by number, it would only count as one member on a head-count test.

29. Apart from the cases of nominees, where the judge held that the interest of the nominee is that of the principal, the judge declined to hold that there was any reason for the court to be concerned when approving the Scheme that there had been any form of what was referred to as share splitting.

This appeal

30. On this appeal the SFC sought orders that the judgment below should be set aside and that the court’s sanction of the Scheme should be refused. Considerable emphasis was placed upon the arguments that the judge had failed to come to the correct conclusions in respect of the 500 single board lots of PCCW shares that had been given to the Fortis Insurance agents or otherwise distributed by Mr Lam Hau Wah. The SFC contended that the judge had been wrong in her approach in relation to share splitting and should have disapproved such activities and should not have sanctioned the scheme as a result.

31. PCRD and Starvest sought to argue, on a respondent’s notice, that even if, contrary to the judge’s findings, it were open to the court to draw inferences in relation to Mr Lam Hau Wah and Mr Francis Yuen, the court should still sanction the Scheme. It was also sought to be argued that the judge had wrongly drawn inferences in relation to Chung Nam, Radland and Kingston.

The sanction required under section 166

32. Schemes of arrangement have to be sanctioned by the court under the provisions of section 166 of the Ordinance. That provides in section 166(1) that where the scheme is between the company and its members or a class of members, the court may direct that there be a meeting of the members, or class of members, as the case may be. Sub-section (2) provides:

“(2) If a majority in number representing three-fourths in value of the ….. members or class of members, as the case may be, present and voting either in person or by proxy at the meeting, agree to any compromise or arrangement, the compromise or arrangement shall, if sanctioned by the court, be binding on all the …. members or class of members, as the case may be, and also on the company ….”

33. There are thus 2 aspects to the section. The first aspect is that there must be a majority of the members who vote in favour either in person or by proxy and those persons must hold three-quarters majority of the shares voted at the meeting. The second aspect is that the court must sanction the Scheme for it to become effective.

34. Buckley on the Companies Acts 14th edtition, puts the matter in this way at page 473:

“Function of the Court In exercising its power of sanction the court will see, first that the provisions of the statute have been complied with, second that the class was fairly represented by those who attended the meeting and that the statutory majority are acting bona fide and are not coercing the minority in order to promote interests adverse to those of the class whom they purport to represent, and thirdly, that the arrangement is such as an intelligent and honest man, a member of the class concerned and acting in respect of his interest, might reasonably approve.”

35. That passage paraphrases part of the judgment of Lindley LJ in re Alabama, New Orleans,

Texas and Pacific Junction Railway Company [1891] 1 Ch 213 see pages 238-9. He used the expression “… a majority having interests of its own clashing with those of the minority whom they seek to coerce.” The other judges agreed with his approach. Bowen LJ said at page 243:

“Now, I have no doubt at all that it would be improper for the Court to allow an arrangement to be forced on any class of creditors, if the arrangement cannot reasonably be supposed by sensible business people to be for the benefit of that class as such, otherwise the sanction of the Court would be a sanction to what would be a scheme of confiscation. The object of this section is not confiscation. It is not that one person should be a victim, and that the rest of the body should feast upon his rights. Its object is to enable compromises to be made which are for the common benefit of the creditors as creditors, or for the common benefit of some class of creditors as such”

36. He went on to say that

“... although on a meeting which is to be held under this section it is perfectly fair for every man to do that which is best for himself, yet the Court, which has to see what is reasonable and just as regards the interests of the whole class, would certainly be very much influenced in its decision, if it turned out that the majority was composed of persons who had not really the interests of that class at stake.”

37. At page 246-7 Fry LJ was of a similar conviction and said that he would not attempt to forecast what circumstances the court may take into consideration in determining whether or not to sanction a scheme. Of course what was said in that case was in relation to creditors, but there is no doubt that the same considerations apply in respect of shareholders.

38. Although many cases have been cited in the course of argument, I consider it unnecessary to cite from them. They reflect the importance of the court first of all seeing that the statutory provisions have been complied with and secondly various aspects that must be considered when the court exercises its discretion to sanction a scheme.

39. There is a passage in the judgment of Brooking J in ANZ Executors and Trustees Ltd. and

another v Humes Ltd and another [1990] V.R.615 at 622 which considered a provision in clause 21(a) of a Trust deed, which had a similar wording as regards voting majorities as section 166(2) of the Ordinance. He said:

“Turning from textual construction to wider considerations, Mr. Myers argued that it would be highly inconvenient if not absurd that small noteholders should, by reason of an additional requirement of a majority in number, prevail over those who held the great bulk of the notes. But I do not find this at all a surprising result. Clause 21 imposes in substance the same requirement as that laid down in relation to the agreement of creditors or members to a scheme of arrangement by s.315 of the Companies (Victoria) Code. Clause 21(a) is a fair and sensible provision which requires regard to be had in determining whether the majority necessary for a special resolution has been obtained, not only to the size of the investment of those who vote for or against, but also to the number of heads to be counted on either side. And so the result is achieved that mere numbers on a count of heads will not carry the day at the expense of amount invested and on the other hand that the weight of invested money may not prevail against the desires of a sizeable number of investors. A balance is struck between the notion that one is simply to count heads and the notion that one is simply to tot up the amounts invested. When the vote is taken, there must be both a preponderance of investors and a preponderance of investment in favour if the resolution is to be carried, a bare preponderance in the case of the former and a three-fourths preponderance in the case of the latter. This is, as I say, a fair and sensible formula, and one well known in company and insolvency law.”

40. Those sentiments were echoed by at least one of the shareholders who appeared in person and addressed the court on this appeal. The provision in section 166(2) requiring a majority in number balances the voting power of large shareholders against the numbers of smaller shareholders. It will be necessary to return to this aspect shortly.

41. Turning to the voting that took place at the second court meeting, it is accepted that all 1404 shareholders who voted in favour of the Scheme and all 859 shareholders who voted against Scheme were all registered shareholders entitled to vote. No matter whether they held their shares as nominees or beneficially, their votes counted for the purposes of determining whether the requisite majority in shareholders and shares has been reached. Hence what might be regarded as the first part of the court’s function in sanctioning the Scheme had been satisfied. That, however, is not the end of the matter as far as this case is concerned.

42. The judge referred at some length, in particular, to the matters relating to the Fortis Insurance agents. Mr Lam Hau Wah had purchased 500 board lots of PCCW shares in the afternoon of Monday 5 January 2009. When interviewed by the SFC, he claimed that he did so in order to give bonuses to Fortis agents who were under him. Although he had not purchased any PCCW shares for 10 years, despite the fact that he appears to have been an active investor on the stock market and he had been with his company since 1994 and until May 2007 that company had been a member of the PCRD Group. He said that he wanted to give a bonus to the agents and the shares were to be distributed through the 5 team heads who were under him. That matter was left to his sister Lam Hau Yuk who worked as his secretary. One of the reasons he gave for giving shares is that it was something that the agents would remember and appreciate. He was paying for this out of the bonus which he received. However, it is also quite clear from his interview with the SFC that he expected those who received the shares to know of the Scheme and the fact that if the Scheme were to go ahead they would receive $4.50 per share, that is $4,500 for each persons board lot. As noted above, when it came to the vote, 494 people who had received shares purchased by Mr Lam voted by proxy in favour of the Scheme.

43. Before even considering Mr Lam’s connections with Mr Francis Yuen, it seems to me that the inescapable conclusion is that Mr Lam bought the shares and distributed them with the intention that the recipients would vote in favour of the Scheme and thus be shareholders in name only for a short period of time. According to the analysis made by the SFC, and the results were not seemingly challenged, there were 335 Fortis agents who were identified as shareholders consequent

upon Lam’s purchase. 9 of the persons who so became shareholders were secretaries, clerks or receptionists in the Fortis organisation, 12 were spouses of agents and 37 friends and acquaintances, including, apparently, a baby-sitter and a tailor. There were 101 such shareholders whose relationship to Fortis or Lam could not be identified. Thus quite apart from the fact that there were approximately 1,000 agents under Mr Lam and his 500 board lots would be insufficient to satisfy all, it is clear that the distribution was not confined to agents. Indeed, when his sister was interviewed by the SFC it was clear that although she was in charge of passing the shareholdings to the agents directly under her brother, she felt it quite in order to pass shares to those who were not agents and, it would seem, had a stronger connection to herself rather than to Fortis. The impression given by the transcript of that interview is that the primary object was to ensure all board lots were distributed singly to different people.

44. Perhaps equally, if not more, remarkable was the fact that considerable effort was made to see that each recipient received proxy forms, that these were completed and all the shares and proxy forms were registered in individual names in time for the second court hearing. That can have been no mean feat of organisation. In order to get the proxy forms, Lam Hau Yuk went from her office in Langham Place, Mongkok to Mr Francis Yuen’s secretary at her office in Citibank Plaza Central. She then distributed, directly or indirectly, the shares together with the proxy forms, received them all back by 19 January and arranged for the registration. The successful operation, all conducted in a very short space of time, ensured that 494 people who had so become shareholders all voted in favour of the Scheme.

45. Far from having the shares transferred to CCASS, which might be regarded as conventional, they were all registered in individual names. When that fact is combined with knowledge that, after registration, the share certificates were not given to the individual shareholders but were retained by Ms Lam on the basis that if the privatisation proceeds, the transferees will receive the Cancellation Price by cheque and if it fails then the transferees may ask her for certificates and sell the shares or ask her to sell the shares for them, the matter becomes even more remarkable.

46. Mr Yu SC, in arguing the matter for PCRD, said that no inference should be drawn as regards Mr Lam that his intention was that the recipients of his beneficence should vote for the Scheme, because that had not been put to him. That complaint does not seem to be well grounded at all. In the first place, it was made more than abundantly clear, at the beginning of the interview, that Mr Lam was being investigated in respect of offences, particularly under section 300 of the Securities and Futures Ordinance Cap. 571. In the second place it is clear from his answers that although he denied it was his intention to influence the head-count, he knew full well that the recipients of the shares that he had purchased and arranged to be distributed would almost certainly vote in favour of the Scheme given the opportunity.

47. Mr Lam was clearly not prepared to admit that he had taken steps to insure the recipients of the board lots of shares would vote in favour of the Scheme. He said, without it being suggested to him, that he knew it would be “sensitive” if he did so and it would create a lot of trouble if there were a “high-profile investigation”. Then a little later in the interview there was the following exchange:

“ 695. C: Er, I will definitely hope the -- the result will be all pass(ed).

696. A: Huh. Well, if they voted altogether, well, then, the chance would be higher?

697. C: Er, well, i--i--if, (I) mean, theoretically, er, I, I, might -- I really would think so, however, I know there’s something that I can’t do.

698. B: What is thing that (you) can’t do?

699. C: (I) mean, if, for instance, I ask those persons to vote, I know I can’t do (it). [B : Mm.] That means I can’t, er, tell some people to go together to vote “yes”, that means, something that would affect the result.

700. A: However, what about indirectly telling them to do (it)?

701 C: (I) can’t even it’s indirectly, for sure.”

(A was the interviewer and C was Mr Lam)

48. It appears to me that for the purposes of the present appeal, but perhaps not in relation to other matters, it is not necessary to come to a concluded view as to what role, if any, was played by Mr Francis Yuen.

49. Mr Yuen is the deputy chairman of PCRD. Although PCRD was a Joint Offeror, it is quite clear that it is the major partner and stands to gain the overall control of PCCW should the Scheme be sanctioned. Mr Yuen’s involvement in the Scheme appears to have been right from its inception. As already noted the HKTGH proposal was abandoned on 12 October. From what he said in his interview with the SFC, Mr Yuen’s major role after March 2008 had been in relation to securing CNC’s consent to the sale of 45% of HKT, i.e. apparently HKTGH sale process. The sale process was apparently left to PCCW and Mr Yuen said that he had no day to day responsibilities at PCRD and from about September his life was “quite leisurely …. essentially playing golf.” The Last Trading Date of the PCCW shares was 13 October and thereafter the shares were suspended. In his interview with the SFC Mr Yuen described how he had been at a pilates class until 11 am on the day the shares were suspended and had been sent a number of messages to call back the chairman. He carried on:

“So then I was informed that the share price was suspended, and he’s considering a - to privatise the company. So then I become, you know, in a more involved again, to help him to formalise, you know, like the price, okay, and also the local media type of advice. So essentially those are sort of the two roles that I played in the privatisation, advising the chairman on the offer price, and sort of like the local media reaction to the proposal.”

50. Mr Yuen had known Mr Lam for a long time dating back to the time when he had been Chairman and later Executive Chairman of the immediate parent company of Fortis, which had then been named Pacific Century Limited. From May 2007 to March 2008 Mr Yuen had remained a senior adviser to Fortis NV, which had acquired Fortis Insurance. There were clearly contacts between Mr Yuen and Mr Lam in late 2008. Mr Yuen is adamant that those contacts were primarily because he was making enquiries about the Fortis business. He was making those enquiries because people outside the Fortis organisation were interested to see whether there would be any future in a possible management buyout of Fortis Insurance. There were however, a remarkable series of coincidences.

51. As already noted, the first court meeting was adjourned on 30 December 2008. The meeting concluded at approximately 12:45 pm. Again, as already noted, that meeting had to be adjourned because it was thought that the independent shareholders would vote the Scheme down on a straight majority of those voting in person or by proxy. Using the current terms, the Scheme would pass the 75% vote in respect of the shares but fail on the head-count. The Cancellation Price had had to be raised. That was not only a matter upon which Mr Yuen had previously advised but, on his own

account, was one of the few things he did at PCRD after September 2008. At 3:45 pm Mr Yuen called Mr Lam. In their interviews with the SFC neither Mr Yuen nor Mr Lam were forthcoming about that telephone conversation. There were, of course, press articles which appeared after the adjourned meeting.

52. On Monday 5 January, after the New Year holiday, Mr Yuen called Mr Lam three times in less than an hour on his mobile phone and either spoke, or attempted to speak, to him. Mr Lam returned the call before lunch. It was that afternoon that Mr Lam gave the order to purchase the 500 board lots of PCCW shares. Mr Lam merely said, in his interview, that he had decided to buy the shares that morning. That same day Mr Yuen called Mr Lam on his mobile phone again at about 6 pm.

53. There then followed other telephone calls in the intervening time up until the end of the month. Although the judge observed that, during that time, Lam Hau Yuk, who was Mr Lam’s younger sister and secretary, obtained 500 to 600 proxy forms from Francis Yuen’s secretary, Lesley Wai, and the judge commented on the fact that Ms Wai had gone on leave on 18 February and had not returned to Hong Kong even by the date of the hearing below, the judge did not comment on the coincidence that Ms Lam should chose to go over from Langham Place to Citibank Plaza to pick up the proxy forms from none other than Mr Yuen’s secretary. One might have expected that, if proxy forms were to be collected, they would be collected from the share registrars, Computershare Hong Kong Investor Services Limited, whose address is given in the Scheme document as the place where the proxy forms must be lodged. Or one might have expected that the forms would be obtained from PCCW itself. The fact that the forms were obtained from the secretary of the deputy chairman of the company instigating the privatisation, who was the person who had advised on the Cancellation Price right at the beginning, only to have to change that price because it had proved to be manifestly too low, can only raise suspicion of complicity.

54. The other remarkable point about this event, in particular, is that if their statements and those for whom they work are to be believed, Mr Yuen’s secretary and Mr Lam’s also, appear to have been remarkably uncommunicative with their bosses. Mr Yuen said that he did not know that Ms Wai had provided any proxy forms.

55. The next remarkable event took place on Saturday 31 January. That day the article appeared in the Ming Pao newspaper referring to the fact that Fortis agents were being allocated shares on the basis that they should vote in favour of the Scheme. As noted above, the article disclosed that the information had been passed to the SFC and the ICAC. The article then went on to name Mr Yuen and to refer to his position in PCRD and to his former position in the insurance company. Mr Yuen called Mr Lam on his mobile phone at about 9:15 pm that night. When Mr Lam was interviewed on 11 February, he indicated that the conversation had been about golf. He did not say that Mr Yuen had asked anything about the newspaper article or what was said in it.

56. When Mr Yuen was interviewed on 2 March, in his solicitor’s office, he was a little more forthcoming. When asked about 31 January he said that he came back from the Mainland and had read the article in the newspaper. It would appear that he had messages from colleagues who told him that the PCCW PR line was that the Company was looking into it. He also spoke at some length a friend who used to work for him and Pacific Century Insurance in the PR field. Because of what was said in the article, Mr Yuen said that his position was “sensitive and embarrassing”. Apart from speaking to one member of the press, who Mr Yuen knew, he also spoke to Mr Lam. Mr Yuen said that there were two purposes for that telephone conversation the first was to arrange a game of golf, which apparently he could not do, and the second was to find out what he could. The way Mr Yuen put it in the interview was:

“Then I say, “How about I get, say, the Fortis people to deny it?”, because obviously they – people are talking about them. So it’s a process of finding out what’s going on. So then after that conversation then I picked up the call to call Inneo (Mr Lam), because I know he’s based in Langham Place, and the newspapers’ allegation is on that. So it’s both, say, you know, like using the excuse as – you know, Chinese new year to call him, and say “Well, the newspaper seems to be quite noisy about the Fortis agents in this thing”. So he just said, well, he’s not aware of any improper activities. And that’s about what he said on the subject, and I can’t place too much on that, so I just take it so there’s no sort of improper activity in their part on that. And, you know, as far as I can recollect that is about it with the conversation. Actually, I would like to say, find out a little bit more about what happened, so at the end of it I also suggested, you know, could we have a golf game somewhere so that we can know a bit more about it. But he just can’t – can’t make it. So I say, “Can we have a golf game say like tomorrow, so that” – not saying that I try to find out more, but I try to, say, maybe find out a bit more. But he couldn’t make it.”

Later in the interview he added:

“Well, I essentially would like him to-you know, if he knows anything, you know, either tell me or come out to deny, or things like that.

Q. Did he?

A. Well, he denied, saying there’s no sort of improper activities.

Q. Were you assured by that? You asked no more questions?

A. I asked no more questions, yeah. Yeah.”

57. It strains the imagination too much to accept that someone, in respect of whom it was undoubtedly being implied in the press that there was involvement in underhand, if not illegal, conduct that had been reported to the ICAC as well as the SFC, should leave the conversation in the way he said he did. If he had telephoned Mr Lam 9:15 on a Saturday night in order to find out what was happening amongst the Fortis agents, he would not have been satisfied with a statement that there were “no sort of improper activities”, whatever he understood that to mean. He would, at the very least, have asked Mr Lam to find out what he could and ring him back possibly on the Monday.

58. For this reason alone I find it impossible to say that Mr Yuen’s statement in paragraph 18 of his second affirmation has the ring of truth. He said:

“I…..had no knowledge of Lam’s acts until I read the 2nd Affidavit of Mark Steward.”

Mark Steward’s second affidavit was sworn and filed on 17 March.

59. The final matter on this aspect is that within an hour before the second court meeting on 4 February, Mr Yuen sent Mr Lam 2 SMS messages, or at least it was one message sent twice. Mr Yuen did not refer to these when he was asked in his interview about contacts with Mr Lam and he did not refer to it in his second affirmation. It was only in his third affirmation filed on 30 March, that Mr Yuen said that it had been an enquiry about the timing of the lunch meeting that Mr Yuen had had with Mr Lam and another officer of Fortis when he was trying to find out about Fortis’ business in connection with the possible management buyout.

60. In my view the multiple series of coincidences both of timing and the collection of proxy forms are such that it casts a shadow of doubt over whether and to what extent Mr Yuen had influenced or was involved with Mr Lam’s activities in distributing the board lots of PCCW shares. As already indicated, I consider it impossible to accept at face value that Mr Yuen was as ignorant as he claims of Mr Lam’s activities until he read Mr Steward’s second affidavit. I am fully aware that none of those interviewed by the SFC have revealed anything that would implicate Mr Yuen and have not given a statement that Mr Lam asked them or required them to vote in favour of the Scheme. It is, however, a fact that, by giving away the 500 board lots on the basis that they would be registered in personal names as opposed to being put into CCASS, and ensuring that the board lots were duly registered in time for the second court meeting in those individual names and that the proxy forms were duly completed and filed, Mr Lam was fully aware that the persons who received those shares and became shareholders would almost certainly vote in favour of the Scheme. He must be taken to have known that would happen. As in other aspects, it can only be taken that a man intends the likely consequence of his actions. His answers in the interview to the SFC show that he was fully aware of the impropriety of manipulating the vote. Because he gave the shares away and even paid the costs of the transfer, he was in effect buying the votes. If his intention was that all the shares should go only to Fortis agents, the manner of the hurried distribution clearly would have frustrated any such intention.

61. On the respondent’s notice, Mr Yu SC argued that in the first place the share transfers and related activities that had been found by the judge to have taken place involving Chung Nam, Kingston, Success and Radland had no connection whatsoever with the respondents and, therefore, should be disregarded as being irrelevant.

62. In my view, as will be elaborated below, for the same reason as in the case of the board lots purchased by Mr Lam, if the court cannot be satisfied that the vote cast was a true reflection of the votes of parties who would be entitled to vote at the meeting and that there had been no manipulation of the outcome of the vote to produce a distorted result, it matters not whether the vote manipulation was carried out at the instigation or connivance of the respondents.

63. It was also argued that the judge had reached the incorrect conclusion in paragraph 109 of the judgment when she held that there were sufficiently cogent reasons to infer that the 132 and 18 persons in whose names the single board lots were acquired through Chung Nam and Radland did so as a result of a plan devised by Eugene Chuang and that that had been done to boost the head-count in favour of the Scheme so as to protect the investments by Smart Jump and Main Purpose.

64. In my view none of the points raised in the Schedule to the respondent’s notice displace the conclusion which the judge reached. In particular, the fact that Mr Chuang might be in the habit of keeping $500,000 in cash in his safe really does not affect the issue. The other points would appear to be arguments in relation to the matters taken into account by the judge and that they, too, are not arguments which carry weight.

65. The judge was fully entitled to draw the conclusion which she did in paragraph 116 of the judgment when she said that the 175 shareholders who were clients of Kingston who had been registered in respect of one to three board lots, had become so registered as a result of a plan devised by Mdm Chu Li Yuet Wah on the basis of their shares would be subject to a buy-back offer and that the plan was devised in order to boost the head-count in favour of the Scheme. The fact that some of those persons may have purchased before Mdm Chu does not seem to me to affect the issue and the fact that the only evidence was obtained from an employee who had been dismissed and not from other staff members or clients who had been interviewed, again, is not sufficient to

displace the conclusion to which the judge arrived. As in the case of Chung Nam and Radland I consider that the judge’s conclusions should be upheld.

The need for the court’s sanction

66. As already observed, the court is required to sanction the Scheme and the first part of the scrutiny that function had been satisfied. All those who voted, whether for or against the Scheme, were registered shareholders. Company law takes no notice of any trust or beneficial interest attaching to shares. Hence, as far as the formalities are concerned, there is no question of challenge. Although it can be said that the threshold has been achieved because those who voted in favour of the Scheme were shareholders, the fact remains that there was a clear manipulation of the vote and because of the extent to which that happened the court cannot be sure that the vote was fair. That is relevant on the second aspect of the court’s function.

67. In approaching the second aspect of the court’s function under section 166(2) regard must be had to the policy underlying the provisions of that section. Reference has already been made to that above.

68. In paragraph 139 the judge referred to the fact that approximately 3,256 million shares in the Company were held through CCASS whereas some 217 million shares were held in registered names. One of the aspects highlighted by the facts of this case is that the shares which remain registered in CCASS can be counted, on the basis of proxy votes, as regards the number of shares but cannot be counted on a head-count. In those circumstances, this court simply does not know how the individual shareholders whose shares remain in CCASS would have voted. It was, of course, possible for shareholders to arrange for their shares which were held in CCASS to be transferred into their own names, but it has to be observed that neither the Scheme document nor any of the other material which has been shown to this court has suggested to the shareholders that it might be an appropriate course for them to have their shares registered in their own names.

69. At the end of the passage in which the judge dealt with the head-count the judge considered that, because of the comparatively low proportion of shares which were held by individual shareholders in their own names, the provisions in the Ordinance relating to the head-count seemed to her “to have an element of unreality, not to mention the lack of even-handed treatment and a level playing field.” No doubt it was for that reason that the judge did not consider it part of the function of the court in approving the settlement to have regard to whether or not there had been any kind of manipulation of the vote in order to ensure that the head-count requirement of the majority of the independent shareholders was satisfied.

70. In my view it cannot be said that there is anything inequitable in the court requiring that the majority of shareholders should approve a scheme of arrangement. No doubt the matter will be reviewed when the upcoming new company law legislation is prepared. The difficulties of those whose shares are held within CCASS may also be addressed. But the court cannot disregard the legislation. On the contrary the court must have regard to the policy of the legislation when exercising its discretion whether or not to sanction the Scheme. That policy has a sound foundation. It matters not that the Takeover Rules do not contain a similar provision. The Takeover Rules are there in addition to the statutory requirements. They are not there to mirror them. If the court knows that there has been some form manipulation of the vote and it cannot be satisfied that the result of the vote has not been achieved by manipulation, it is impossible for the court to give its sanction.

71. It was argued that if the court were to embark on a consideration of whether there had been vote manipulation when deciding whether or not to sanction the Scheme, it would be changing the law. Nothing, it seems to me, could be further from the truth. Frankly, the arguments that amounted to little more than that there was nothing wrong with vote manipulation are, on analysis, extraordinary. I do not consider that any right thinking member of society could condone a situation where the law required that a vote should be taken so as to balance the fairness between the holders of shares in different proportions and deliberate steps had been taken to distort that vote; in this case, it may be said, at minimal cost to those responsible. Vote manipulation is nothing less than a form of dishonesty. The court cannot sanction dishonesty. It is also a form of coercion where the wishes of the minority in number of shares are overridden by those who hold the majority of the shares; that is the very thing that Lindley LJ said that the court should see should not be allowed to happen: see in re Alabama at p. 239

72. As an acid test it can be said that both Mr Lam and Mr Yuen knew that manipulation of voting, for example in the case of Mr Lam by giving shares on the basis that a person would vote in particular way, would be wrong. Mr Lam said exactly that in his interview with the SFC. Mr Yuen’s statements in his interview were predicated on that.

73. The judge below considered that objection might only be raised if the shares were held as a nominee for another who directed the voting. That is far too narrow a view. The judge also considered that it would be impossible for the court to decide in each scheme case whether there had been vote manipulation. The difficulties of detection should not deter a court from preventing abuse. It was said that “vote splitting” was a common phenomenon carried out by those who bought shares in companies that were subject to a pending scheme of arrangement. The so-called expert evidence in that regard was simply a bald assertion. The only occurrences referred to were in respect of a scheme that had been voted on after the events of this case and another case that had occurred about 20 years previously in respect of an overseas company where the SFC had also sought to take action in an effort to prevent abuse. In any event, the short answer to that point is that the fact that abuse occurs is not a ground for its sanction.

74. In my view there is no need to have regard to the Australian cases which touch upon this aspect. They seem to me to point clearly in the direction that vote manipulation is something which the court or tribunal concerned must try to prevent.

75. Finally on this aspect, I would mention the practical matter of what would happen if this court were to say that it would condone vote splitting and other forms of vote manipulation by those who wish to achieve a vote in particular way. It would lead, at once, to those involved simply arranging that shares be registered in the names of other people willing to cooperate. To use the vernacular, it would become a free for all; any vote would be meaningless.

Is the Scheme such as the court should approve?

76. Although the conclusion has already been reached that the court should not approve the Scheme because the court cannot be satisfied that vote properly reflected the true votes of the shareholders because of the voting irregularities, it is in my view appropriate to consider whether this Scheme was such as should have been approved, given that there was a substantial body of independent shareholders that were opposed to it.

77. It is true that schemes of arrangement are frequently used in respect of privatisation of companies. Generally speaking the court would not refuse to sanction a scheme because individual shareholders objected on a commercial basis. However, it has to be said that in most cases there is

a clear rationale for the proposal and that the scheme does benefit the shareholders. But, as has been said, the object of the statute is not confiscation. As was said by Street J in re Jax Marine Pty.

and Companies Act 1961 [1967] 1 N.S.W.R. 147 at page 148:

“When the petition, if there be a petition, comes before the Court there is ample room with in the Court’s statutory discretion to decide the petition in accordance with the requirements of justice and equity as those requirements appear to affect the rights of the class and its members …….. The legislative scheme underlying s.181 and the requirements of justice and equity can be given effect by weighing any such special motives or factors when deciding whether, within the statutory discretion, a scheme should be approved and, if so, whether that approval should be conditional or qualified.”

78. The starting point for such consideration must be the reasons for the Scheme. The body of the petition, itself, is silent as to the reasons. In the explanatory statement in the first Scheme document the reasons for and benefits of the proposal for the Scheme shareholders is put as follows:

“The Proposal provides Scheme Shareholders with an opportunity to realise their investment in PCCW for cash during sustained uncertain market conditions, and at a significant premium to the market price prevailing on the Last Trading Date.

The Joint Offerors are committed to the Proposal which, if it becomes effective, offers cash in an uncertain market and provides an opportunity for Scheme Shareholders to redeploy capital invested in PCCW into other investment opportunities that they may consider more attractive in the current market environment.”

79. In other words, what is being said is that it provides a means for those who want to sell their shares, to sell them at slightly over the market price on 13 October 2008. As has been observed, the price on that day was almost at the historic low. The authors of the explanatory statement did not attempt to suggest what the “other investment opportunities” might be and as to why the Company cannot provide a suitable investment opportunity at current depressed levels. It might also be said that it would appear that those statements would seem to be directed to scheme shareholders who were shareholders on the Last Trading Date.

80. What is clear from the figures given in the letter from the IFA is that in the three-year period up until the “The Latest Practical Date”, which was set as 3 December 2008, the highest value for the shares had been $5.75 and the average closing price over the three-year period had been $4.83. In the letter that formed part of the first Scheme document, it was stated:

“The Shares had consistently closed above the Cancellation Price during the period from 14 October, 2005 up to and including 16 September, 2008...”

81. Significantly, the letter also shows that the proposed price was 7.6% lower than the average closing price in the 90-day prior to the Last Trading Date and 9.4% lower than the average closing prices in the 180-day period prior to the Last Trading Date. Those percentages can be compared, very unfavourably, with the percentages for recent privatisations of other telecommunications companies in Hong Kong, which are set out on page 36 of the first Scheme document. Hutchison Global Communications Holdings Ltd was privatised under a scheme and on that occasion the price was 45.3% above the 90-day average and 43.2% in excess of the 180-day average. China Resources Peoples Telephone Company Ltd was the subject of a cash offer, which was 61.2% above the 180-day average and 51.4% above the 90-day average. Sunday Communications Ltd was

the subject of what was termed a very substantial disposal. In that case, the price was 16.3% above the 180-day average and 20.8% above the 90-day average.

82. What is also of note, is that the closing share price on the Last Trading Date, namely 13 October 2008, the last day on which the Company shares were traded before the announcement that there would be an offer, was $2.75 which, as already noted, was near the historic nine-year low of $2.45 and the share price had fallen by approximately 42.3% in the one month up to 13 October 2008.

83. The IFA discounted the comparable transactions analysis on the basis that it was a general indication of pricing benchmark. It sought to rely somewhat heavily on the EV/EBITDA multiple. EV stands for the enterprise value. That is defined as the equity value plus net debt and minority interests less interests in joint ventures. The EBITDA represents the earnings before interest income, finance costs, income taxes, depreciation property, plant and equipment, and amortisation of land lease premium and intangible assets, gain/loss on disposal of property and other costs. The EBITDA is commonly used in the telecommunications industry worldwide as an indicator of operating performance, leverage and liquidity. As stated in a footnote to the letter from the IFA it is not a measure of operating performance in accordance with the Hong Kong Financial Reporting Standards and should not be considered as representing net cash flow from operating activities.

84. The next argument put forward as justification for the cancellation price was based upon on the attempted sale of HKTGH. That is a Cayman Islands company, indirectly wholly owned by PCCW. As previously observed the Company invited proposals from investors for the acquisition of up to 45% of the equity interest in HKTGH. That process came to a halt on 12 October 2008 when the Company announced that it was discontinuing that process. As was set out in Glass Lewis’s analysis, formal proposals had been received from several bidders but the board had decided to discontinue the auction process on the grounds that such proposals were not “sufficiently attractive”.

85. The proxy advisers pointed out that the valuation of the Company based upon that exercise was seemingly flawed. In the first place, the Company had not been satisfied with any of the proposals that had been put forward. In the second place, the sale process only related to 45% of HKTGH. What was on offer to outside investors, therefore, was not a company as a going concern, nor was it a majority share in such a company, nor was it the assets of such a company. All that was on offer was simply a sale of shares that would give a minority interest in a company that would be run by other people. It was, therefore, not accurate to refer to it as a sale of parts. The IFA also tried to justify the price on the basis of the price of the Company’s shares on the market.

86. The IFA referred to the proposed special dividend that would be paid to the post Scheme shareholders. The statement that it was a financing structure common for privatisation transactions was no doubt true. What, perhaps, could have been said was that such an arrangement was often used in cases where the bidder on the privatisation was bringing some profit to the existing shareholders by unlocking value by realisation of undervalued assets.

87. The IFA stated in their letter that they considered that the terms of the proposal were fair and reasonable as far as the Independent Shareholders were concerned and they advised the Independent Board Committee to recommend it. Nevertheless, perhaps, most noteworthy is the guarded recommendation given by the IFA at the conclusion of its letter quoted in paragraph 13 above.

88. The proxy advisers gave what, at best, might be said to have been a grudging approval of the increased offer and at worst advised against it. For example ISS Governance Services in their proxy alert dated 16 January 2009:

“Whilst we would not contend that this is an attractive offer when viewed in the context of historical trading ranges (although we reiterate our caveat that historical trading ranges are for context and illustration only, and the current economic environment would arguably make it challenging for the company to achieve historical highs), this offer does perhaps represent an attractive exit opportunity of the shareholders.”

89. Importantly it is difficult to see any reason for change from the conclusion the original Glass Lewis report other than that because the Cancellation Price had increased they considered that the independent shareholders would not obtain a better offer from the Joint Offerors. The concerns expressed in the first report do not appear to have been assuaged. Morgan Stanley issued a report on the Company with a price target of $5.30. The best that Deutsche Bank could say was that $4.50 provided an exit opportunity for investors to release capital for alternative investments. Bloomberg.com in an announcement on 19 February 2009 stated that BOC International (Holdings) Ltd had said that the latest bid was still too low. It quoted the analyst as saying:

“ “I still don’t think HK$4.50 is a good enough offer,” said Ng, who has an “outperform” rating on PCCW. “An offer closer to HK$5 would be fairer.” ”

90. In my view, quite apart from the voting irregularities, there are grave difficulties in the way of the court approving this scheme. In August 2000, the Company took over HKT. HKT had been one of the foremost utility companies in Hong Kong. As such, it had clearly had an usual position, since it had been an investment for the cautious investor over the long term. As many of the independent shareholders argued before this court, and as their evidence showed, they had invested their savings in what, at the time, would reasonably have been considered to have been a prudent investment and had remained shareholders after it had been taken over by PCCW. They had done so in the confident expectation that they would remain shareholders and that their investment would be important to them in an environment where they would not have the pension and other benefits that are available in other countries.

91. There has been no attempt to give an explanation for the almost total loss of value of the Company. That value may have been lost because of the collapse of the dot com euphoria is one thing, but no explanation has been given as to the cause of any loss thereafter. Nor can the fall in the share value over the last 9 years be attributed to the current difficulties in the world’s financial markets.

92. As already indicated the asset value of the company had already been almost extinguished in 2006. Given that background, it is important to see what the rationale for the Scheme is. It has been suggested that the low price of the shares over recent years has hampered the ability of the Company to raise finance. The reason for the low share price could not be attributed to the independent shareholders who have remained shareholders throughout. There is no indication that the Company is in need of raising finance. In so far as intentions as to the future business is referred to in the Scheme document or elsewhere it would seem that the intention is to carry on as before.

93. The Scheme, as revised in the supplemental Scheme document, encompasses what is referred to as the Consortium Agreement which includes the agreement to pay the revised special dividend of not less than HK$18,134 million, increased by a further $600 million if options are exercised. It

was stated that PCCW expects to have funds available to pay the special dividend from a combination of cash on hand and amounts lawfully transferred to PCCW following the drawdown in the full by HKT under the HKT Loan Facilities and repayment in full of the Existing Facilities. That arrangement is more fully explained on page 25 of the supplemental Scheme document. In the period from 28 November 2008 to 2 January 2009 PCCW drew down some $23,800 million under the HKT Loan Facilities and out of that repaid some $16,600 million to the Bayrische Landesbank, i.e. the Exisitng Facilities. That left a total net surplus of some HK$7,200 million which was said to have been drawn down “to effect the transfer of certain businesses and assets between the PCCW Group companies.” It would seem, therefore, that not only is the Cancellation Price, payable by the Joint Offerors, to be fully covered by this special dividend, but the special dividend will leave the Joint Offerors with a further bonus payment of some $2,000 million. It would seem that $7,200 million would have come from borrowings and the rest would come from cash available on the Company.

94. In my view, the independent shareholders who have addressed this court have put their point succinctly. Not only are they being treated inequitably and being bought out when the share price has reached an historical low, but the Joint Offerors would receive a dividend which should be payable to all shareholders. The figures show that almost all those who voted against the Scheme had been long term shareholders, i.e. 829 out of 859 who voted against the Scheme were shareholders prior to the public announcement of the possible privatisation. In contrast those who voted in favour, had, for the most part, only acquired the shares after the first court meeting, i.e. 940 out of 1404, and 1288 out of 1404 had become shareholders after the Scheme was announced.

95. The proxy advisors expressed the view that they did not believe the Company was incapable of continuing as a standalone company. The Scheme document states that it is the intention of the Joint Offerors for the PCCW Group to maintain its existing business upon successful conclusion of the privatisation and that they had no plans to introduce any material changes to the business and/or assets of the PCCW Group its fixed. It went on to say that the Joint Offerors would assess, from time to time, any opportunity that may arise. One such putative opportunity was said to be a possible listing of any of the telecommunications services, media and IT solutions businesses. One can only surmise that it is, thus, not outside the Joint Offerors contemplation that not only is the business is viable but they would also be fully prepared to float it again on the market once the stock markets had recovered.

96. It is in this context that manipulation of the shareholding becomes even more relevant. Quite clearly the shareholders who have acquired their interest in the period after the adjournment of the first court meeting and have voted in favour of the Scheme have acquired their interest in the full knowledge of the likely Cancellation of their shares and the rational conclusion is that they have intended all along to benefit from an immediate capital gain of 30% or more on receipt of the Cancellation Price. Put in another way, it is difficult to see that a person who has acquired an interest in a company in the knowledge that there is a scheme afoot to privatise the Company at a price which is above the depressed current price of the shares is need of an exit strategy. Such a person has not been locked into an investment; he or she has taken a chance on the Scheme, which is in process, going ahead.

97. Having reached the conclusion, in view of the evidence of vote manipulation, that the court could not be satisfied that the vote had been reflective of the proper majority, it would not be right for the court to exercise its discretion on other bases independently of that because the factual basis would not be clear. Nevertheless, on the basis that there is a substantial body of shareholders who have retained their shares from the time they were at a multiple of the current market price, in circumstances where the drop in asset value has not been explained but it has recovered over the

last 3 years, and where those attempting to privatise the Company are in control of the Company and consider it has a viable future, I see that there are strong grounds for refusing to sanction a scheme that would have the effect of forcing those shareholders out of the Company and depriving them of the opportunity to benefit from any potential increase in value and share price. Whether that potential increase would or will happen is, of course, unknown. Still less do I see that it would be right for the court to sanction such a scheme when the Cancellation Price, and more, is to be paid out of an immediate dividend payable only to those who would remain shareholders.

98. Without knowing the factual circumstances that would exist if the factors of vote manipulation had not been present, it is impossible to say whether the court would approve this Scheme. What can be said is that there are grounds for the assertion that the Scheme amounts to little more than a confiscation of the Independent shareholders shares at a depressed price and those are factors which the court could take into consideration.

99. Some of the Independent shareholders who addressed this court raised other matters. Complaints were made about the length of the court meeting and the inability of shareholders to address the meeting. Questions were raised about the valuation property held by PCCW. For the most part it is not possible for this court to deal with those matters, still less, to take those matters into consideration in deciding the outcome of this appeal.

100. As regards the length of the meeting, a distinction must be drawn between the court meeting and the EGM which was held immediately thereafter. The supplemental Scheme document specifies that the reconvened court meeting was to commence at 2 pm and the reconvened EGM was to commence at 2:30 pm or so soon thereafter as the court meeting shall have been concluded. It also states that the announcement of the results of the reconvened court meeting and the reconvened EGM should be no later than 7 pm on Wednesday 4 February 2009. Clearly that timetable was disrupted because of the request for adjournment. That matter was only concluded at 4:45 pm. It is not clear whether discussion as to the Scheme took place whilst the vote count on the adjournment resolution was carried out. Nevertheless, it is clear that the vote counting took a considerable time. In view of the deadline for the announcement of the results of the vote, it would be apparent that the voting had to commence very swiftly. As it was, the announcement of the result of the vote at the court meeting was later than was set out in the timetable. Given the fact that voting commenced at 5 pm in respect of the court meeting, I do not consider that it is possible to raise any complaint on the basis that the meeting was unduly long and shareholders were unable to stay for the vote. Undoubtedly the elderly and the infirm may find it difficult to remain but for voting to commence at 5 pm was clearly reasonable. This court was only concerned with the voting at the court meeting and was not concerned with the voting or other conduct at the EGM which followed.

101. In so far as complaint was made that shareholders had been unable to address the meeting, there were clearly considerable time restraints. It would be impossible for all shareholders to address the meeting and those that were to speak at the meeting would have to be limited as to time. Whilst it is important that in any meeting proper discussion should take place so that views can be ventilated and the attention of those present can be drawn to matters which those speaking may consider have been overlooked, in the present case it is unlikely that any further discussion would have altered the way votes were cast.

102. In respect of the complaints which were made that the Company’s properties had been undervalued, considerable attention was placed on a small number of the properties. Quite apart from the fact that records of transfers of properties close by the properties concerned were only produced in the course of argument and hence it was not possible for any valuer to express

observations as to what were said to be comparable properties, it is clear that the properties listed in appendix II of the Scheme document are for the most part listed as “Properties where no right of alienation exists”. There were only very few properties which were listed as having no restriction upon alienation. Hence although, for the most part, the listed properties may be adjacent or nearby more valuable properties, the realisation of any value from them would be problematic, to say the least.

103. A point was also raised that the accounts appeared to show that costs in relation to the Cyberport development appeared to be borne by the Company whereas the benefit of the project appeared to have been accorded elsewhere in particular to PCRD. Again, because this point seems to have been raised late in the proceedings consideration could not be given to it.

104. For those reasons I considered that the appeal should be allowed.

Hon Lam J:

105. I agree with the judgment of the Vice President. In view of the general importance of the matters canvassed before us, I would add my observations on the following aspects of the case,

(a) The nature of Section 166 proceedings and the burden of proof;

(b) Vote manipulation and the discretion of the court under Section 166;

(c) Privatisation by a scheme under Section 166 as opposed to a general takeover under Section 168.

Nature of Section 166 proceedings

106. Proceedings to seek the court’s sanction for a scheme of arrangement are summary in nature. It has to be made by petition (Order 102 Rule 5(1)(h) Rules of the High Court). Evidence is usually adduced by affidavits or affirmations and there is no discovery. Cross-examination is rare, if not unheard of. The application is usually heard within a tight timeframe to fit the time-table of the scheme mandated by financing conditions and other regulatory regimes.

107. Further and more importantly, as submitted by Mr Poon SC, it is not ordinary adversarial civil litigation. The onus falls squarely upon the petitioner to satisfy the court that the scheme should be approved. On many instances, section 166 applications are disposed of on an ex parte basis. Even so, in the exercise of its Section 166 jurisdiction, the court would have to examine the application and satisfy itself that the scheme is one which, as an intelligent and honest man, a member of the class concerned in acting in respect of his interest might reasonably approve of.

108. I also agree with Mr Poon that the jurisdiction of the court is quasi-inquisitorial. If the court has relevant queries pertinent to the approval of the scheme which the documents and the meetings do not appear to address, the court is entitled to raise the same and in the absence of satisfactory answer from the petitioner it can withhold its sanction. Thus Buckley acknowledged that whilst the court will be slow to differ from the meeting it may do so when some blot is found in the scheme. At footnote 2 of para.425.54 of the current edition of Buckley, it is said that a blot on a scheme means a defect in the scheme which escaped notice and only came to light after the meeting (see

also Re Equitable Life Assurance [2002] 2 BCLC 510 at p.539). The court is not a mere rubber stamp.

109. This must be right since the sanction of the court carries with it an element of compulsory acquisition or modification, having a statutory effect of modifying the rights of the dissentients. As highlighted by Buckley at para.425.53,

“The discretion of the court as to whether or not it should sanction the scheme is important, since once the scheme has been sanctioned it binds all parties, even the dissentients.”

And that is why the court will not simply look at whether a statutory majority has been achieved. Buckley continues at the same paragraph,

“The court will have regard to the amount and quality of information which has been supplied and the conduct of the meeting.”

110. Hence, the following was said in respect of the role of the court in sanctioning a scheme by Jonathan Parker J in Re BTR Ltd [1999] 2 BCLC 675 at p.680 after referring to Buckley,

“It does not, as may have been suggested, involve using a rubber stamp. It involves a consideration of all the relevant circumstances. The court is not obliged to follow the majority decision at the meeting convened under [s.166(1)].”

111. When the case went to the Court of Appeal, Chadwick LJ said to similar effect, [2000] 1 BCLC 740 at p.747,

“The way in which Parliament’s intention is to be given effect … is that 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. That, as it seems to me, is the check or balance which Parliament has envisaged.”

112. Clarke LJ said these in the same case at p.749,

“Minority shareholders are protected in this class of case by the fact that the court has a discretion whether or not to approve the scheme having regard to all the circumstances of the case.”

113. The facts that the SFC intervened in the proceedings and a number of minority shareholders took part in the proceedings to oppose the scheme do not alter the fundamental nature of the proceedings. The petitioner has to satisfy the court the three matters mentioned in Buckley,

(a) compliance with the statute;

(b) the class is fairly represented and the statutory majority are acting bona fide and not coercing the minority in order to promote interests adverse to those of the class; and

(c) the scheme may reasonably be approved by an intelligent and honest man of that class acting in respect of his interest.

114. Bearing in mind that the summary and quasi-inquisitorial nature of the proceedings and the burden rests upon the petitioner, one must not assume the court would take every statement relied upon by the Petitioner (whether in the Petition or in his evidence in support of the Petition) on its face value even though the opposing parties may not be able to prove to the contrary.

115. In so saying, I am not suggesting that the court should be pre-disposed to question statements made under oath by those giving evidence for a petitioner. But if there are matters which cast serious doubt on the extent to which a statutory majority fairly reflect the interest of the class, the court must take this into account in deciding how much weight it can attach to the opinion of this majority.

116. Given the summary nature of the proceedings, it may well be that the court cannot fully resolve some dispute of facts as it would in an ordinary piece of adversarial litigation. However, if the court cannot be satisfied by the Petitioner that the statutory majority is fairly representative of the views of the class, naturally it will be questioning more readily whether the decision of the majority is promoting the interest of the class.

117. In the present case, much has been said by Mr Yu SC as regards the SFC and the opposing shareholders failing to prove the allegations of manipulation of votes to the cogent standard dictated by HKSAR v Lee Ming Tee (2003) 6 HKCFAR 336 and Nina Kung v Wang Din Shin (2005) 8 HKCFAR 387. The argument found favour at the court below. Mr Yu SC also advocated that the court should follow the approach of Lord Templeman in Tay Bok Choon v Tahansan Sdn bhd [1987] BCLC 472 in dealing with conflicts in the affidavit evidence.

118. But one must remember all these cases cited by Mr Yu were cases concerning adversarial proceedings where the court must make a finding of fact in the contest between the parties. They are not cases where the court is exercising a supervisory power conferred by the statute to modify property rights of some dissentients against their wishes in the context of summary proceedings.

119. I have to highlight the summary nature of Section 166 proceedings as Mr Yu’s submissions seems to have been lost sight of the same. Counsel submitted that certain people were not subpoenaed and some were not even contacted by the SFC in order to have their evidence before the court. Counsel also placed much reliance on the lack of cross-examination of Mr Yuen and Mr Lam (and several other persons involved in the allegations of share manipulation). It is said it would be unfair for the court to draw unfair inference against them without giving these persons a fair opportunity to answer such allegations.

120. In my judgment, though the court will strive to give a person a fair opportunity to answer some allegations advanced against him or her before reaching a conclusion against that person, there are occasions where by the very nature and objective of the proceedings (in which that person is not party) the court will need to proceed with the matter on a view formed on the basis of the available materials before it even if that person has not been given an opportunity to present his case to the court.

121. It does not mean that the court convicts that person of some serious allegations without hearing him. As I have tried to highlight, Section 166 proceedings are not ordinary adversarial proceedings. The court does not in these proceedings make findings against a particular person. Rather, the focus should be whether on the materials presented a petitioner has satisfied the court that the scheme should be sanctioned.

122. If the court is not satisfied that the statutory majority had not come to a decision representative of the class in question, it simply means that the petitioner has failed to discharge his burden with the consequence that the court cannot find it appropriate to approve the scheme. Such a decision on the part of the court cannot be equated with a finding made by the court in a piece of ordinary adversarial civil litigation by a claimant against a particular defendant that such defendant had manipulated the votes.

123. One can only understand the summary way in which Section 166 applications are dealt with by the court when one properly appreciates the nature and objective of Section 166 proceedings. The procedural history in the present case is a good illustration. The Court Meeting that approved the Scheme took place on 4 February 2009. The Petition for sanction was presented on 11 February 2009. The SFC first received information on 15 January 2009 and it commenced its inquiry on 30 January 2009. Investigation was commenced under Section 182 of the Securities and Futures Ordinance on 5 February 2009. Mr Poon SC had referred to the scope of the investigation. The many volumes of transcripts of SFC interviews with witnesses placed before us give some idea to the scale of operation. I have no doubt that the SFC has been working expeditiously and diligently and many officers (and also lawyers) on their team have to work under great pressure and long hours in order to present a case to the court.

124. The SFC applied to intervene in the Section 166 proceedings on 23 February 2009. The court gave a very tight timetable for the filing of evidence in view of the scheme timetable. There was no discovery and the SFC can only present to the court limited information that would assist the court to decide whether the scheme should be approved. This point was canvassed at paragraph 15 of the skeleton submission put by the SFC before the learned judge at the court below. The hearing took place on 1 April 2009 and it lasted two days. The judge delivered her judgment on 6 April 2009.

125. Against the background of this case, bearing in mind the number of potential witnesses and the scale of the investigation, if the court has to make a finding on the factual allegations as regards vote manipulation as in a piece of ordinary adversarial civil litigation it would take years before the trial can take place and such a trial would last for several weeks. That would frustrate the utility of Section 166 proceedings and as explained above, that is not required under Section 166.

126. The court does not have to make positive findings that Francis Yuen, Lam Hau Wah, Eugene Chuang and Chu Li Yuet Wah were lying before it comes to the conclusion that on the materials presented the court cannot be satisfied that the statutory majority voted in favour of the scheme was fairly representative of the class interest. Once the court is not satisfied with the representative nature of the votes, it can accord less weight to the view of such majority. In any event, as mentioned earlier, the court is never bound by the vote of the majority.

127. Thus, the summary procedure is premised on a limited role played by the court in fact findings within the context of Section 166 proceedings. This approach is dictated by the nature of the application. If it were otherwise, in case of serious conflicts in terms of vote manipulation, the court would not be able to resolve the matter other than by way of lengthy trial that cannot be completed before the automatic lapse of the scheme through inevitable delay.

128. Therefore, with the greatest respect, the learned judge fell into error by adopting an approach to fact finding as if one is dealing with ordinary adversarial litigation.

129. Having said so, I respectfully agree with the Vice-President on the proper conclusions to be drawn in respect of votes manipulation in the context of these proceedings.

130. Further, in coming to the above conclusions as regards the proper approach to be adopted by the court in Section 166 proceedings, I have borne in mind certain dicta on the burden fell upon the dissenting shareholder. Mr Yu referred to the judgment of Lord Maugham in Carruth v Imperial

Chemical Industries Ltd [1937] AC 707 at p.769-770 where His Lordship said,

“… the onus is on those who say the scheme, so far as the alteration of rights is concerned, is unfair; … those who contend that the interests of the minority are being unfairly overridden by persons with other and conflicting interest, must prove it.”

131. In Re BTR plc [2000] 1 BCLC 740 at p.748i, Chadwick LJ said,

“It was for an objector, if he asserted that the scheme was commercially unviable, to put forward his own evidence and seek to persuade the judge that a meeting, properly directed, could not sensibly have come to the conclusion which it did. The concept that the judge was obliged to conduct a trial, with cross-examination, on that point, at the hearing to sanction, is misconceived.”

132. But those dicta were directed at the substantive merit or demerit of the scheme instead of the weight to which a court can give the decision of the majority. On the latter topic, which is the pertinent one for present consideration, what Lord Maugham said in Carruth v Imperial Chemical

Industries Ltd at the same page earlier than the part cited by Mr Yu actually accords with my approach.

“… shareholders acting honestly are usually much better judges of what is to their commercial advantage than the Court can be. I do not intend to throw the smallest doubt on this general proposition … but I doubt very much whether it is of great value as a guide when it is proved that the majority of the class have voted or may have voted in the way they did because of their interests as shareholders of another class.”

133. Reference was also made by counsel to a digest of the decision of Lewison J in Re Linton

Park plc [2005] All ED (D) 174. The digest does not give much information regarding the evidence placed before the court in that case. The neutral citation of the case is [2005] EWHC 3545 and I was able to obtain a copy of the full judgment from Westlaw. What happened in that case was that a dissenting shareholder simply wrote a letter to the court asserting the vote count was different from what he himself gathered. Dealing with that objection, the learned judge said,

“If a challenge is to be made to the accuracy of that report it needs cogent evidence to support it. The vague allegations made by letter based on unattributed hearsay are not in my judgment enough.”

134. Another objection raised by that shareholder in a letter to the court was an argument of collateral motive stemming from the special interest of another shareholder. The argument was advanced on the basis of a purported telephone conversation with the manager of that shareholder. This prompted the observation of the learned judge that,

“A serious allegation of collateral motive must in my judgment be backed by proper evidence.”

135. The quality of the evidence before this court is very different and I do not regard what had been said in that case to be inconsistent with what I perceive to be the proper approach set out above.

Vote manipulation and the discretion of the court

136. Vote manipulation can take many forms and share splitting is but one of them. In the context of a meeting held under Section 166 the effect of vote manipulation is a distortion of the fair representation of the will of the majority determined by voting. Section 166 prescribes that there must be majority in value as well as majority in number. These are two distinct requirements. If share splitting is permitted, taking to its logical conclusion, there will not be two requirements: majority in value can always command majority in number. Hence, share splitting undermines the underlying spirit of the dual requirements prescribed by the legislature as pre-condition for scheme approval under Section 166.

137. In the court below, the learned judge took the view that share splitting does not necessarily lead to an outcome that does not fairly represent the interests of the members of the class as a whole (see para.147 of the judgment). She was also concerned about the impracticalities of investigating into suggestion of share splitting in every case.

138. As I see it, these are two separate questions. As far as the impracticalities are concerned, I do not think it should affect how the court should approach the problem as a matter of law. It is up to the SFC to decide what cases they should intervene and when they do how much evidence they would place before the court bearing in mind the proper approach of the court as stated above. Likewise, it is up to a petitioner and a company to decide how much evidence they need to put in by way of response. In each case, the court will have to assess how much weight it can attach to a majority decision in the light of such evidence.

139. Turning to the first question, I agree with the learned judge share splitting may not necessarily lead to an outcome that does not fairly represent the interests of the members of the class as a whole. But share splitting, when it occurs on a material scale, does have the effect of distorting the picture in terms of having a resolution fairly representative of the will of a bona fide majority. Hence, the court must be mindful of that in assessing the weight to be attached to such resolution.

140. It is said that share splitting is not illegal and it is just an exercise by a shareholder of his property right. Counsel for the company and counsel for the petitioner cited Re Stranton Iron &

Steel Co (1873) LR 16 Eq Cas 559, Pender v Lushington (1887) 6 Ch D 70 and North-West

Transportation Co Ltd v Beatty (1887) 12 App Cas 589 for the proposition that share splitting for the purpose of increasing the voting power is unobjectionable.

141. With respect, I do not regard these authorities to be of much relevance in the present context. Those cases were all concerned with the exercise of the voting power in a general meeting of the company. None of them dealt with the exercise of the court’s discretion under Section 166. These cases only show that the vote cast by a shareholder who acquired such status by way of share-splitting was to be counted as a valid vote. There is indeed no quarrel about that. Mr Poon accepted that all the votes cast at the Court meeting should be counted for the purpose of establishing a majority in number for conferring jurisdiction on the court to consider whether the scheme is to be sanctioned.

142. The question is whether the court in the exercise of its discretion should accord less weight to the majority decision when on the evidence it is not satisfied with such decision as being fairly representative of the interest of the class by reason of share splitting (and other forms of votes manipulation). I do not think those authorities addressed this issue.

143. I also do not see much relevance that the shareholder is exercising his property rights. As I put it in the course of argument, a shareholder who cast his vote in a particular manner by reason of an advantage offered to him by someone else can also be said to be exercising his right as shareholder

in casting his vote. Yet it is accepted by counsel that the court should take this into account in the exercise of its discretion under Section 166.

144. The exercise of voting right by a shareholder is not free from restraints. There is a long line of authorities establishing that in a class meeting, a shareholder must exercise his voting power in the interests of the class as a whole and this is a restraint on his freedom to vote, see British America

Nickel Corporation v O’Brien [1927] AC 369 at p.373 and other cases referred to at paras.158 to 159 of the judgment of Kwan J. The learned judge accepted this principle but came to the conclusion that there is insufficient evidence to support a case of collateral interest leading to the disenfranchisement of those the SFC sought to impugn.

145. It appears from the judgment that the learned judge focused on the insufficiency of evidence to establish a case of nominal ownership of the shares, see paras.160 and 165 of the judgment when she held that there was no reason for concluding that the majority was not voting in the interest of the class as a whole. Thus Her Ladyship concluded at para.164 that the majority was voting to ensure that they could realize their investment as shareholders in the Company at a premium by attaining the return of $4.5 a share.

146. This is further reflected at para.178 of the judgment where the learned judge identified the purpose of the scheme as follows,

“The privatization proposal is to provide Scheme shareholders an opportunity to realize their investment in the Company for cash during sustained poor market conditions.”

147. With respect, when the court exercises its discretion by refusing to sanction a scheme that has been approved by the statutory majority, the court is not disenfranchising those shareholders who voted in favour of it. They were not disenfranchised because their votes were counted for the purpose of establishing the statutory threshold. The court is simply carrying out its statutory function at the next stage and as explained above, in any event the court is not obliged to adopt the view of the statutory majority. This is particularly so when the court is not satisfied that the statutory majority was achieved without vote manipulation practices.

148. The underlying objection to share splitting (and other vote manipulation practice) is the frustration of the legislative intent of dual majority requirements in Section 166. There is no need to have any further directives or guidelines, administrative or otherwise, from the SFC to inform the market that share splitting is objectionable. In my view, it is a necessary implication inherent in Section 166. Equally, it is inherent under the statutory requirements of Section 166 that if other forms of vote manipulation were detected, the court cannot accord the same weight to a majority decision as it otherwise would have. There is no need to have criminal or other regulatory sanction in place before the court can pronounce that such manipulation practices are objectionable.

149. Further, transferring shares to nominees with direction to vote in a particular manner is only one of the many forms of vote manipulation. As the facts of the present case illustrate, there can be other forms which does not involve nominee shareholders being created. Such practices are equally objectionable in that they distorted the view of the bona fide majority.

150. In the present context, there is sufficient evidence to cast doubt on the integrity of the 849 votes questioned by the SFC. There were features associated with these votes which distinguish them from the votes of ordinary arbitrageurs. There is also a distinction between legitimate votes lobbying and setting in place an arrangement designed to create more votes to be cast in a pre-determined manner without regard to the substantive merits of the subject in question (pre-

determined even before the relevant shares were acquired). In this connection, I respectfully agree with the judgment of the Vice-President and Barma J. Further, as mentioned above, the ultimate burden is on the Petitioner to satisfy this court that the usual weight can be attached to the majority vote. I am of the view that they have failed to discharge such burden.

151. When the court comes to a conclusion it is possible that a material number of votes were influenced by vote manipulation practices, it cannot accord the majority decision its usual weight. The court would need to examine the scheme with rigour to see whether it can be said to be in the interest of the class as a whole. The focus is not whether the votes should be counted or why did those shareholders cast their votes that way, but whether the scheme should be sanctioned.

152. It may be true that the majority shareholders were voting for the Scheme to get the $4.5 return for his or her share, but that should not be the first concern when the interest of the class as a whole is considered. Before one addresses whether it was a good price to take if one were to realize his or her shareholding at this stage, the shareholder should ask whether this is the right time to realize. In respect of that question, different shareholders may hold different views. However, if the overall picture is distorted by vote manipulation practices, the court cannot take the decision of the majority at its face value.

153. As indicated at para.179 of her judgment, the learned judge attached great weight to the decision of the majority at the Court meeting. In that regard, I am respectfully of the view that she had fallen into error. It therefore behoves this court to exercise the discretion under Section 166 afresh. For the reasons given by the Vice-President, I agree that the court should exercise its discretion by refusing to sanction the scheme in this instance.

Privatisation under Section 166 vis-à-vis Section 168

154. In the course of hearing, I have asked and Mr Todd QC agreed from the point of the view of the dissenting shareholders the effect of the Scheme was having their shares being expropriated. If sanction were granted, their shares were to be compulsorily acquired at the price of $4.5 per share against their wishes. I also raised the question whether the scheme should have been proceeded under Section 168 of the Companies Ordinance. Counsel referred to Re National Bank Ltd [1966] 1 WLR 819, In re Savoy Hotel Ltd [1981] 1 Ch 351 and In the matter of TDG plc [2008] EWHC 2334 (Ch) to show that the offeror can choose to proceed under Section 166 instead of Section 168.

155. In the light of these cases, I am happy to assume that a scheme for the compulsory acquisition of shares can go under the Section 166 route. However, the mechanics and onus of the two routes are different and in my view there is much to be said that the court should adopt the approach of Templeman J in In re Hellenic Trust Ltd [1976] 1 WLR 123 at p.129D,

“But the decision in In re Bugle Press Ltd fortifies me in thinking that where one has what is in effect a [section 168] scheme then, putting it at its lowest, there must be a very high standard of proof on the part of the petitioner to justify obtaining by [section 166] what could not be obtained by [section 168] …”

156. In re Bugle Press Ltd [1961] Ch 270 concerned a scheme under the English equivalent of Section 168. Under that statutory route, an offeror put forward a scheme of acquisition and obtained the acceptance of 90 per cent of shareholders, he could compulsorily acquire the remaining 10 per cent. Instead of the court giving sanction, the section provided for application to be made by the dissenting shareholder seeking an “otherwise order” from the court. In such application, the onus was on the dissenting shareholder to show that the scheme was unfair. The rationale of such an

approach was explained by Maugham J in In re Hoare & Co (1933) 150 LT 374, which basically is that the court would defer to the general wisdom of the shareholders holding 90 per cent.

157. It is pertinent to note how an argument based on that approach was dealt with by the court in In re Bugle Press Ltd [1961] Ch 270. In that case, the 90 per cent shareholders who accepted the offer were actually related to the offeror. Counsel submitted that the scheme was within the language of Section 168 and the onus was on the dissenting shareholder to show unfairness. This is how Lord Evershed MR said in response at p.285,

“If that argument is right, it would enable by a device of this kind the 90 per cent majority of the shareholders always to get rid of a minority shareholder whom they did not happen to like. And that, as matter of principle, would appear to be contrary to a fundamental principle of our law that prima facie, if a man has a legal right which is an absolute right, then he can do with it or not do with it what he will.”

158. After adverting to the special circumstances in that case, the Master of the Rolls held that the onus was reversed once the minority shareholder showed that the 90 per cent shareholders were not independent. At p.287, His Lordship said,

“the section has been used not for the purpose of any scheme or contract properly so called or contemplated by the section but for the quite different purpose of enabling majority shareholders to expropriate or evict the minority; and that, as it seems to me, is something for the purposes of which, prima facie, the court ought not to allow the section to be invoked ---- unless at any rate it were shown that there was some good reason in the interests of the company for so doing …”

159. In other words, in the absence of acceptance by 90 per cent independent shareholders, the policy under Section 168 is that the court will prevent the compulsory acquisition of the dissenting minority by an “otherwise order” unless the company can show a good reason for the expropriation.

160. Para.12.028 of Palmer’s Company Law said the following regarding the interface between the two sections.

“It has been said that approving such a scheme would then require a very high standard of proof. But more recently it has been said that whether a company proceeds by way of a scheme of arrangement or a takeover offer is a matter of choice. The lower threshold being countered by the need for court approval.”

But the question is whether the court should take this into account before giving approval under Section 166. I see no reason why it should not.

161. Given the protection to the minority shareholder under Section 168, I am of the view that a petitioner proceeding under the Section 166 route without obtaining 90 per cent independent acceptance should be subject to the same consideration. He must show a good reason for the acquisition instead of simply relying on the majority approval.

162. For the reasons given by the Vice-President, I do not see any good rationale for the Scheme as far as those shareholders whose shares are to be compulsorily acquired are concerned. Much was said about the offer being a good exit strategy. Based on the materials available, I have difficulty in understanding why a shareholder should regard it as the right time to exit from the company. The offer was made at a time when the market was at its low. Mr Chang SC referred to several passages in the advice from the financial adviser in the Scheme Document. Having read those passages a

number of times, I must say I find the analysis on the future prospects of the company to be inadequate. It is simply too general to be of any meaningful assistance to an independent shareholder to decide whether it would be better for him to stay in the company or to exit. After all, the offerors under the Scheme are the existing major shareholders who have representatives in the management of the company. Apparently they have confidence in the future of the company. And it is not suggested that there would be any fundamental changes in the business operation of the company in the future.

163. At p.62 of the Scheme Document, the following was said about the future,

“It is the intention of both PCRD and CNC for the PCCW Group to maintain its existing business upon the successful privatization of PCCW. … PCRD and CNC have no plan to introduce any material changes to the business and/or assets of the PCCW Group … On the other hand, PCRD and CNC will assess any opportunity that may arise from time to time involving the business and/or assets of the PCCW Group (including a possible listing of any of its telecommunications services, media and IT solution businesses).”

164. Any exit at this stage would mean that the public shareholders would not be able to participate in the benefit to be generated by such opportunities. Though it may be said that such opportunities may or may not be realized, a public shareholder is entitled to know why they are to be squeezed out when there are possible opportunities out there.

165. Of the three matters identified by Buckley, I am not satisfied in two respects regarding this scheme. I am not satisfied that class is fairly represented and acting bona fide in the interest of that class. Further, I am not satisfied that scheme may reasonably be approved by an intelligent and honest man of that class acting bona fide in the interest of the class.

166. For these reasons, and for those given by the Vice-President and Barma J, I am of the view that the learned judge below should not have sanctioned the scheme and the appeal was allowed accordingly.

Hon Barma J:

167. Subject to the views which I express in paragraphs 199 to 202 below, I agree with the judgments of the Vice-President and Lam J. In particular, I agree that this appeal should be allowed on the basis that the court cannot be satisfied that the majority by number of the shareholders of PCCW who voted in favour of the scheme at the adjourned scheme shareholders meeting held on 4 February 2009 fairly represented the class of scheme shareholders as a whole, as a result of the various arrangements made by different persons or groups of persons to increase the number of shareholders voting in favour of the scheme at that meeting.

168. In view of the importance of this appeal, and the interest that it has generated, I propose to briefly state my views as to the approach that the court should take as to the question of whether or not the votes cast at the court meeting are fairly representative of the class concerned, and as to whether or not the court should in this case refuse its sanction for the scheme on the basis of the merits of the scheme itself.

169. The relevant facts as to both of these matters are set out in the judgment of the Vice-President, and I gratefully adopt them.

170. In opposing PCCW’s application for sanction, the SFC put before the court below evidence which suggested that in each of the following cases, registered shareholders voting in favour of the scheme had done so as the result of arrangements made so as to artificially increase the number of shareholders voting in favour of the scheme:-

(1) 494 registered shareholders who had each been given one board lot of 1,000 shares in PCCW out of 500,000 shares in PCCW purchased by Mr Lam Hau Wah, a regional executive director of Fortis Insurance Asia Limited – it was suggested by the SFC that the arrangements in relation to such shareholders were the result of an agreement between Mr Lam and Mr Francis Yuen Tin Fan, the deputy chairman of Starvest;

(2) 132 registered shareholders in whose name single board lots were acquired through Chung Nam Securities Limited;

(3) 18 registered shareholders in whose name single board lots were acquired through Radland International Limited;

(4) 175 registered shareholders, holding between one and three board lots each, who had purchased their shares through Kingston Securities Limited; and

(5) 14 registered shareholders whose shares had been purchased by a Mr Ma Kam Wah, a manager and account executive at Success Securities Limited.

171. In the court below, Kwan J was satisfied by such evidence that, in the case of the shareholders referred to in paragraphs 170(2) to (5) above (totalling 339 registered shareholders voting in favour of the scheme), they had acquired their shareholdings as part of arrangements that had been devised to artificially boost the number of shareholders voting in favour of the scheme. However, in the case of the shareholders referred to in paragraph 170(1) above, after considering the evidence and the submissions put before her, Kwan J declined to find that there had been any arrangement to artificially boost the number of shareholders voting in favour of the scheme, and further declined to find that Mr Yuen had any knowledge of what Mr Lam had done.

172. As the scheme was approved by 1,404 individual shareholders voting in favour of the scheme and 859 voting against it, even if the votes of the shareholders referred to in paragraphs 170(2) to (5) above were discounted or disregarded, there would still have been a majority of individual shareholders voting in favour of the scheme. Accordingly, Kwan J concluded that the scheme should be sanctioned.

173. I agree with the Vice-President, for the reasons that he gives, that Kwan J was justified in coming to the conclusions that she did in relation to the shareholders referred to in paragraphs 170(2) to (5) above. Further, I also agree with him (and respectfully differ from the conclusion of Kwan J) that similar conclusions can and should be reached in relation to the shareholders referred to in paragraph 170(1) above.

174. In my view, where arrangements are made so as to artificially boost the number of shareholders voting in favour of a scheme of arrangement, this is objectionable, and is a matter that, if it comes to the attention of the court considering whether or not to give its sanction to the scheme, can and should be taken into account by the court. Where the result of the arrangements is to create a majority of registered shareholders voting in favour of the scheme, which would not have been obtained but for the arrangements, the court can and should, when considering whether or not to give its sanction to the scheme, disregard the votes of such shareholders.

175. It seems to me that this necessarily follows from the terms of section 166(2) of the Companies Ordinance (Cap. 32). That provision makes it clear that, before it can become binding on the members of the class voting upon it, a scheme of arrangement must receive the support of a majority of the class concerned, and that such majority must be obtained by reference to two distinct measures. First, the scheme must receive support from a majority in number of those present and voting (whether in person or by proxy) at the class meeting. This requires a simple majority in terms of headcount. Second, and additionally, it is also necessary for that simple majority in terms of headcount to amount to a three quarters majority by value of the shareholdings in respect of which votes have been cast. There is therefore superimposed on the simple majority by headcount, a requirement that there also be a three quarters majority by shareholding value.

176. This dual requirement has been in place in respect of schemes of arrangement in the United Kingdom since the Joint Stock Companies Act of 1870, and in Hong Kong since at least the 1911 version of the Companies Ordinance.

177. The requirement of a 75% majority by value is designed to ensure that only proposals that have the support of a substantial majority in value terms of the class in question will become binding on all members of the class. It has the effect that a large number of small shareholders, amounting to a numerical majority in terms of headcount, cannot cause a proposal to become binding on a minority with a substantial shareholding. But the majority by number criterion also serves a purpose, that being to provide a degree of protection for the interests of the smaller shareholders, by ensuring that a proposal which does not enjoy broad based support among shareholders individually cannot be forced through by a small minority of individual shareholders who between them control a large stake in the company. In an extreme case, absent the headcount requirement, a single shareholder holding 75% of the shares in the class voting on the proposal would be in a position to ride roughshod over the objections of all other shareholders in that class.

178. It has been pointed out that, by insisting upon a simple majority in favour in terms of headcount, the legislation has the effect of enabling a numerical majority with a small stake in the company in financial terms, to thwart the desires of a substantial number of class members (falling short of a majority in terms of headcount) with an overwhelming financial interest in the matter (as measured by the size of their shareholding). However, the question of where the balance lies, and where best the line should be drawn is clearly a matter for the legislature to determine. That line having been drawn as it has been in section 166(2) of the Ordinance, it is for the courts to carry out their role having regard to the legislation as it stands.

179. Given the present state of the legislation, embodying as it does a requirement (which is not, in my view, an unreasonable one) that a proposal should enjoy the support of a substantial majority by value and a simple majority by number of class members voting on the proposal, it seems to me that arrangements which have the effect of artificially increasing the number of voters in favour of a resolution are clearly contrary to the objectives embodied in section 166(2) as such arrangements would clearly decrease the protection given by the legislation to what would, in their absence, have been a numerical majority against the proposals.

180. In considering whether or not a particular set of arrangements offends the objectives of section 166(2), so as to require the court to consider whether votes cast in favour of a proposal should be disregarded when the court is determining whether or not to give its sanction to the scheme, I think that the question that has to be answered is whether or not the court is satisfied that those voting in favour of the proposal pursuant to such arrangements did so with the interests of the class in mind. This approach is, I think, supported by the authorities.

181. Thus, in Buckley on the Companies Acts (14th

edition) it is stated at p.473 that, having satisfied itself that the provisions of the statute have been complied with, the court will see that “the class was fairly represented by those who attended the meeting and that the statutory majority are acting bona fide and are not coercing the minority in order to promote interests adverse to those of the class whom they purport to represent”, going on to point out that while the court does not simply rubber-stamp the decision of the meeting, it will be reluctant to differ from it unless “the meeting has not considered the matter with a view to the interests of the class which it is empowered to bind”.

182. What the court must be satisfied of (and the legal burden of doing so lies, I think, with the promoter of the scheme, for the reasons explained by Lam J) is that those attending and voting at the meeting fairly represented the class, and that the majority (whether by number or value apparently voting in favour of the scheme) were acting bona fide and not promoting interests adverse to those of the class whom they purport to represent.

183. In some cases, it will be clear that the majority was obtained with the votes of shareholders who did not fairly represent the class, and who did not have in their minds the interests of the class concerned when voting in favour of the resolution.

184. One example would, I think, be a case in which it is known that a number of shareholders are mere nominees for another, who are instructed to vote in a particular way by their principal. In such a case, it will not be difficult for the court to come to the view that the votes of the nominees should be disregarded or discounted when considering whether or not the majority achieved at the meeting really represented a majority (in numerical terms) of members of the class. In such a case, however many in number the nominees may be, they, together with their principal, represent the views of only one person in respect of the resolution, and the individual nominees, although voting on the resolution as shareholders, will not have in any real sense considered the interests of a class as a whole in casting their votes. Nor can it be said that they fairly represent the class. To regard the votes of the nominees as counting towards the headcount requirement would, in my view, clearly undermine the purpose that that requirement serves.

185. Similarly, where a shareholder or group of shareholders is induced to vote in favour of a scheme of arrangement by special incentives that are not available to other shareholders in the class, such shareholders do not vote with the interests of the class in mind, but with regard to their own personal interests, so as to obtain a benefit for themselves which is not available to the rest of the class.

186. In every case, however, it seems to me that the central question remains the same: is the court satisfied that the statutory majority was obtained with the votes of shareholders who fairly represented the class, and who voted with its interests in mind? This may not always be an easy question, and the answer will depend very much on the facts of the particular case.

187. Counsel for Starvest and PCRD raised a number of objections to the proposition that arrangements made with a view to increasing the headcount in favour of a proposed scheme of arrangement should lead the court to discount or disregard the additional votes so obtained. I consider these objections below.

188. First, it is said that it is not illegal for an owner of shares in a company to make such arrangements as he sees fit for holding them. Thus, it is open to him to hold his shares through nominees if he chooses to do so. He can divide or subdivide his shareholding into a number of smaller lots, each held in the name of a different registered owner. This, it is said, is one of the

prerogatives that attaches to the property rights that he has over the shares that he owns. The court’s attention was drawn to a number of cases in which it was held that it was in order for an owner of shares so to arrange his shareholding so as to increase the number of votes which he could exercise at a general meeting of shareholders, and it is of course common for a sole controlling shareholder in a company to split his shareholding among a number of nominees, for example where this is necessary to comply with any legal requirements that may exist concerning minimum numbers of shareholders.

189. However, in my view, it is a non sequitur to contend that because it is not illegal or prohibited to arrange one’s shareholding in a company in such a way as to increase the number of individual shareholders it therefore follows that the court cannot and should not have regard to such arrangements when considering, in the context of a scheme of arrangement, whether or not the voting at a class meeting was fairly representative of the class of members concerned.

190. When exercising its statutory function under section 166(2) to consider whether or not a scheme of arrangement ought to be sanctioned, it seems to me that it is important for the court to be satisfied that the members voting at the meeting fairly represented the class of which they were members, and that in casting their votes, they did so in a way that was bona fide in the interests of the class of which they purported to be members. Where a class member is a mere nominee, it does not seem to me that in his capacity as a nominee, he in any real sense represents (fairly or otherwise) the members of the class concerned. Rather, he represents his principal and the interests of his principal. I therefore think that in such a situation, it would be entirely proper for the court, when considering whether or not to give its sanction to a proposed scheme of arrangement, to discount the votes of members of the class who are shown to be nominees for other members of the class, with a view to seeing whether or not there is truly a majority of members of the class favouring the scheme.

191. Another objection that was taken is that this approach does not provide for a level playing field, in the sense that while it would permit (and in my view, require) the court to have regard to vote splitting or share splitting that has the effect of increasing the headcount in favour of the proposal, it does not have the opposite effect – in other words, it does not enable the court to have regard to similar behaviour which has the effect of increasing the headcount in opposition to the proposal. It is said that as a result, because the court does not consider these matters at the first stage, when considering whether or not the statutory majorities have been achieved, the effect of vote or share splitting against a proposal may mean that the statutory majorities are not achieved, so that the court is never in a position to consider whether or not to sanction a proposed scheme, and therefore to look into the actual headcount for or against it.

192. There is some force in the suggestion that the approach I suggest is the correct one has the potential for such an asymmetry. However, it seems to me that this does not demonstrate that this approach is incorrect. Rather, it suggests that there may be a case for refining the legislation so as to enable the court to look into the true headcount position both for and against the proposal in every case where there is reason to believe that the apparent headcount either way is not fairly reflective of the class concerned. Possible models for such legislation may be found in the provisions of the Australian legislation cited in the course of argument before us. Put another way, it does not seem to me that the fact that it may not always be possible to give full effect to the purpose of the dual majority requirement under section 166(2) is a good reason for not doing so when that can be done.

193. It was also suggested that the requirements of section 166(2) had to be considered in the light of the fact that the vast majority of shareholders in publicly listed companies hold their shares

through CCASS, and therefore would not be entitled to vote, as they would not be the registered holders of their shares. The effect of this is that CCASS would vote shares registered in its name in accordance with the instructions (if any) received from its market participants. Such market participants generally seek instructions from the beneficial owners of the shares held through them with CCASS. The result is that CCASS will vote a certain number of the shares registered in its name in favour of the resolution, and a certain number against it, according to such instructions as it may receive. This does not affect the number of shares voted for and against the resolution in value terms. However, in terms of headcount, CCASS will be counted as one vote in favour and one vote against the resolution, thereby cancelling itself out. This, it is said distorts the position in terms of the desires of the beneficial owners of the shares held by it.

194. However, it seems to me that this too, is not an argument in favour of permitting votes cast by persons who do not fairly represent the class whom they purport to represent being given full weight by the court, when the court has good reason to think that this is the position. The same argument holds in relation to any shareholder who chooses to hold his beneficial interests through a nominee company that provides such services to a large number of individual shareholders. Where such a shareholder wishes to have his vote count, both in terms of the shares he holds, and in terms of headcount, he is at liberty to take steps to have the shares registered in his own name. The fact that many such shareholders may choose not to do so (or may not be aware of their ability to do so) does not mean that the court should turn a blind eye to situations in which the voting, in headcount terms, is distorted by the effect of nominee or other arrangements designed to inflate the number of shareholders apparently voting in favour of the proposed scheme of arrangement.

195. In any event, as the Vice-President has pointed out, in the present case, there is no evidence as to what number of beneficial owners of shares held and voted by CCASS favoured the resolution, and what number opposed it, in headcount terms. It is therefore impossible to say what the outcome would have been in terms of the numbers of individual shareholders voting for or against the scheme of arrangement, and in these circumstances, I do not think that there is anything unreasonable in applying the legislation as it stands. If it is thought that the legislation has not kept up with changes in shareholding mechanisms for listed shares, this is a matter that can, and properly should, be addressed by making appropriate amendments to the terms of the legislation.

196. Finally, it was submitted that the evidence did not support the view that PCCW, PCRD and/or Starvest (or persons connected with them) were responsible for the arrangements which were made by the various persons referred to in paragraph 170 above.

197. However, I do not think that this provides a reason for ignoring the problems that existed in relation to the vote in headcount terms. If, as I think was the case, the vote in headcount terms did not fairly reflect the views of the class concerned, I do not see that this should be disregarded by the court simply because the failure to fairly reflect the views of the class concerned was not brought about by the company or the promoters of the scheme. Whatever the cause or reason for the matters which have been discussed, their effect was the same – to render the vote, in numerical terms, an unsafe guide to the views of the class of members voting on the proposal.

198. As I have said, for the reasons explained by the Vice-President, I agree that it is impossible for the court to be satisfied that in any of the cases mentioned in paragraph 170 above, those voting in favour of the scheme as a result of the arrangements mentioned fairly represented the class of members concerned, or cast their votes with the interests of that class in mind. It would therefore be appropriate to consider what the position would have been, had their votes not been cast. Quite clearly, the position would have been that the scheme would have failed to garner the necessary support from a numerical majority of the shareholders present and voting at the class meeting.

199. In these circumstances, the court should be very slow to grant its sanction for a scheme of arrangement in the face of its concerns as to whether or not the majority apparently achieved was truly reflective of the class in question. In the present case, I can see no reason for doing so.

200. So far as the merits of the scheme are concerned, I agree with the Vice-President and Lam J that the scheme was not one which appeared to have any very clear rationale, and cannot be said to be one which was clearly or obviously in the interests of the shareholders whose shares it was proposed to buy out under the privatisation proposals. However, I would hesitate to hold that it would have been appropriate, on those grounds alone, and absent the concerns about whether or not the vote (in headcount terms) truly represented a majority of the class of shareholders in question, to hold that the scheme is one which should not be sanctioned.

201. This is because it seems to me that in most cases, where there is no reason to doubt the representative nature of the class members present and voting at the class meeting, it is the members of the class, and not the court, who are best placed to determine what is in the best commercial interests of the class. While there may be rare cases in which it can readily be said that the scheme propounded is not one which could reasonably be regarded as in the interests of the class concerned, it does not seem to me that this is necessarily such a case, notwithstanding that the terms offered for the privatisation were not, in my view, particularly attractive.

202. This is particularly so having regard to the fact that PCCW shares continued to be traded after the announcement of the scheme, of its revision, right up until the holding of the adjourned court meeting (and indeed, could be traded after the result of the vote was known, right up to the point in time when the scheme became effective). The consequence of this is that shareholders voting at the meeting might take very different views of the commercial merits of the proposition that was put before them. A shareholder who had acquired shares in the company some considerable time earlier, when the share price was much higher than that offered under the scheme, and who felt that the company had prospects going forward that made it more desirable to remain a member of the company, might well think that the scheme was not commercially attractive enough to garner his support. On the other hand, it would be open to other individuals to purchase shares on the open market at less than the buyout price proposed under the scheme, in the hope that the scheme would be approved, so that they would be able to realise their investment in the company for a reasonably attractive short term gain. Shareholders in such a position are, it seems to me, just as much shareholders in the company as those in the former situation, but they could quite rationally and sensibly vote in favour of the scheme.

203. In these circumstances, if (contrary to the views which this court has come to) the court were satisfied that the result of the class meeting was fairly representative of the class, I do not think that the court should substitute its view of the commercial merits of the proposal for that of a truly representative majority of members of the class concerned, simply because, in the view of the court, the scheme was not one which the court considered attractive. Whether or not such flaws or drawbacks as there might be in the scheme were such as to justify its rejection is, in my view, ultimately a matter for the members of the class to determine, save in wholly exceptional cases – which I do not think is the case here.

204. However, given that the majorities apparently obtained at the adjourned court meeting were not, in my view, fairly reflective of a majority of the class as a whole in numerical terms, it is, I think, open to the court to have regard to the fact that there was such substantial opposition to the scheme (especially where, as here, this would have carried the day but for the impugned votes), on grounds which would appear to be far from irrational or unreasonable, and on this basis, to decline

to sanction the scheme. It is therefore my view that it would be right, in the circumstances of this case, to decline such sanction.

(Anthony Rogers) Vice-President

(M H Lam) Judge of the Court of First

Instance

(Aarif Barma) Judge of the Court of First

Instance

Mr Michael Todd QC, Mr John Scott SC, Mr Jonathan Harris SC & Mr William Wong instructed by Messrs Richards Butler for the Applicant/1st Respondent

Mr Winston Poon SC & Mr Godfrey Lam SC instructed by Securities and Futures Commission, the Intervener/Appellant

Mr Denis Chang SC, Mr Benjamin Yu SC, Ms Linda Chan & Mr Laurence Li instructed by Messrs Arculli Fong & Ng for Pacific Century Regional Developments Limited and Starvest Limited, the Interested Parties/2nd & 3rd Respondents

Mr Samuel Chan instructed by Messrs Baker & McKenzie for China Netcom Corporation (BVI) Limited, the Interested Party/4th Respondent

Wong Yuk Kwun, the Interested Party/5th Respondent in person (Present)

Mr Daniel R Fung SC, Mr Hectar Pun & Mr Newman Lam instructed by Messrs JCC Cheung & Co. for Hung Sau Chun, the Interested Party/ 6th Respondent & Wong Tak Lau, the Interested Party (Independent Shareholder)

Wong Lai Chun, the Interested Party/7th Respondent in person (Present)

Mr Lee Wing Kui instructed by Messrs Fan Wong & Tso for Mr Au Ching Chuen (Independent Shareholder)

Submissions received by:

Chan Pang Ching 陳鵬程

Tam Yuk Kuen 譚玉娟

Tang Kwok Chiu 鄧國昭

Leung Kwok Keung 梁國强

Yun Mei Far 甄美花

Chan Po Kam 陳寶琴

Au Yeung Leung Sau Ling 歐陽梁秀玲

Lam Chung Wah 林長華

Yip Mei Wan 葉美雲

Chow Wai Ling 鄒慧玲

Lau Siu Cheung 劉兆祥