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HCMP 2705/2017
[2018] HKCFI 1736
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
MISCELLANEOUS PROCEEDINGS NO 2705 OF 2017
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IN THE MATTER of Enice Holding Company Limited
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and
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IN THE MATTER of the Companies Ordinance (Cap 622)
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Before: Hon Harris J in Court
Date of Hearing: 10 May 2018
Date of Decision: 10 May 2018
Date of Reasons for Decision: 26 July 2018
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R E A S O N S F O R D E C I S I O N
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Introduction
1. This is an application by Enice Holding Company Limited (“Company”) under sections 673 and 674 of the Companies Ordinance, Cap 622 (“Ordinance”) for the sanction of a scheme of arrangement for the privatisation of the Company which, though incorporated in Hong Kong, is listed on the Australian Securities Exchange (“ASX”).
2. While privatisation schemes are commonplace, this scheme contains some novel features because the Company has only one shareholder which holds all the issued shares on trust for the underlying investors.
3. When the Company sought the court’s leave to convene a shareholders’ meeting to consider and vote upon the proposed scheme of arrangement, the Company proceeded on the basis that it would be a conventional privatisation scheme, despite the Company’s unique shareholding structure.
4. The court will not make an order with no substantive effect and accordingly, to sanction a scheme, the court needs to be satisfied that the scheme will be effective in practice.[1] Thus I asked to be addressed on three issues: (a) the court’s scheme jurisdiction in relation to a single‑member company; (b) why the Company needed the scheme as there was only one shareholder; and (c) the practical implications of the scheme.
5. The court then undertook independent research, asked the Company to address a number of consequential issues, and provided guidance to the Company on the structure and feasibility of the scheme. After the Company revised the scheme document in accordance with the court’s guidance, on 26 February 2018 I granted the Company leave to convene a meeting of shareholders to consider the scheme (“Court Meeting”).
6. Before considering the legal issues, I shall first set out the Company’s shareholding structure and the principal features of the scheme.
Company’s Shareholding Structure
7. The Company was incorporated as a private company limited by shares in 2014 and became a public company limited by shares in 2015.
8. By October 2015, the Company had issued 259,300,000 ordinary shares. On 30 October 2015, the Company was listed on ASX.
9. Because the Company is incorporated in Hong Kong, its shares could not be directly traded on Australia’s financial markets using Australia’s electronic clearing and settlement systems. Thus, in order to facilitate electronic trading on ASX, the Company’s shareholding structure had to be altered as follows:
(a) On 26 October 2015, all the Company’s issued shares (ie 259,300,000 shares) were transferred to CHESS Depositary Nominees Pty Ltd (“CHESS”).
(b) Corresponding to the 259,300,000 shares it held, CHESS issued 259,300,000 Chess Depositary Interests (“CDIs”) to the holders of CDIs. CDIs were developed by ASX to facilitate the clearing and settlement of transactions in securities through CHESS where the listed entity is incorporated outside of Australia.
10. The legal effect of these changes to the Company’s shareholding structure is as follows:
(a) CHESS became the only shareholder of the Company.
(b) CHESS holds all the issued shares on trust for the CDI holders, with one CDI unit representing the beneficial ownership of one share.
(c) CDIs (as opposed to the issued shares) will be listed and traded through the ASX trading platform.
(d) The CDI holders’ rights and obligations are governed principally by the ASX Settlement Operating Rules (“ASX Rules”). The key features for present purposes are these:
(i) Although there is no trust deed governing the trustee‑beneficiary relationship between CHESS and the CDI holders, the ASX Rules in effect supply the terms of the trust.
(ii) The CDI holders will enjoy all the economic benefits of the issued shares.
(iii) Although the CDI holders, not being the legal owners, cannot vote at the Company’s general meeting, they can direct CHESS on how to vote.
(iv) Because CDIs are derived from the shares, the CDI holders’ rights vis-à-vis the Company are parasitic on CHESS’ rights as the legal shareholder vis-à-vis the Company.
(v) CDI holders may request CHESS to transfer the shares underlying the CDIs to them in order for them to qualify to attend and vote at general meetings. Article 59A of the Company’s Articles of Association also contains terms to the same effect.
Principal Scheme Features
11. In order to achieve the privatisation goal, the scheme contains the following key steps:
(a) The Company’s issued share capital will be reduced from 259,300,000 to 219,700,000 ordinary shares by cancelling and extinguishing 39,600,000 ordinary shares (“Scheme Shares”) beneficially held by the CDI holders who are not connected with Tech World Limited (“Offeror”).
(b) In consideration of the cancellation and extinguishment of the Scheme Shares, the Offeror will pay CHESS a cancellation price of AUD0.44 for each Scheme Share so cancelled and extinguished. CHESS will hold the cancellation price received from the Offeror on trust for the CDI holders.
(c) Subject to and immediately upon such reduction of capital taking effect, the Company’s share capital will be increased to its former amount by the creation of such number of new shares as is equal to the number of the Scheme Shares cancelled.
(d) The Company will apply the credit arising in its books of account as a result of the capital reduction in paying up the newly created shares, which will be allotted and issued, credited as fully paid, to the Offeror.
(e) On completion of the scheme, the entire issued share capital of the Company will be held by the Offeror and parties associated with it. The Company’s listing on ASX will be withdrawn accordingly.
12. The above steps require two shareholder meetings, namely the Court Meeting and a general meeting of the Company. The general meeting is to approve the reduction of capital.
13. The reasons for the Company’s privatisation proposal are twofold:
(a) From the CDI holders’ perspective, the CDIs are relatively illiquid and the CDI holders can realise their investments quickly under the scheme. The cancellation price of AUD0.23 represented a premium of approximately 91.30% over the CDI closing price as quoted on ASX on the last trading day before the Company’s announcement on 5 October 2017 of the privatisation proposal.
(b) From the Company’s perspective, privatisation will save costs associated with the Company being a listed entity.
Effect of Scheme on CDI Holders
14. I asked to be addressed on the practical implications of the scheme, in particular how the scheme would affect the CDI holders. The position based on the Company’s Australian expert’s evidence is as follows.
15. The scheme is solely between the Company and its shareholders, namely CHESS and any CDI holders who elect to transmute their CDIs into shares in the Company.
16. CDI holders who do not exercise their transmutation right can participate in the scheme by instructing CHESS on how to vote at the Court Meeting and the Company’s general meeting.
17. Regardless of whether the CDI holders give any voting instruction to CHESS, the scheme if sanctioned will affect their rights. For although the CDI holders as such are not party to the scheme, the ASX Rules will operate automatically to reflect the effect of the scheme. In particular, after the scheme becomes effective, pursuant to the ASX Rules:
(a) the CDI holders will no longer have their transmutation rights;
(b) in return, the CDI holders will receive the cancellation price from CHESS.
18. Therefore, in brief, the scheme operates to bind CHESS (as the sole shareholder) and the ASX Rules operate to give reflexive effect to the scheme vis-à-vis the CDI holders such that the scheme in practice becomes binding on the CDI holders.
Outcome of Court Meeting and General Meeting
19. The Court Meeting took place on 11 April 2018 and the scheme was approved by an overwhelming majority. Specifically, 99.82% of the voting rights of the Scheme Shareholders present and voting, in person or by proxy, were cast in favour of the Scheme. Votes cast against the scheme represented 0.18% of the total voting rights attached to all the “disinterested shares” in the Company within the meaning of section 674(3) of the Ordinance.
20. On the same date, the Company held an extraordinary general meeting, at which members resolved the necessary special resolution approving a reduction of capital. That is an integral and necessary component of the scheme as a privatisation requires the cancellation of the Scheme Shares that represent approximately 15.27% of the total issued shares.
21. The balance of the shareholding (approximately 84.73%) is held by the Offeror and parties associated with it. These shares do not form part of the Scheme Shares and consequently were not voted at the Court Meeting.
Jurisdiction—Single-Member Scheme
22. As mentioned above, I asked to be addressed on the court’s scheme jurisdiction in relation to a single-member company. Although Counsel for the Company informed the court that there were precedents of single-shareholder privatisation schemes in other jurisdictions, no reported authorities could be located. The Company’s Australian expert also states in his report that he is not aware of any Australian decision...
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