Monday, May 11, 2009

Hong Kong Appeals Court Issues Landmark Ruling Disapproving Going Private Scheme in Light of SFC Concerns

A three-judge Hong Kong appeals court has ruled that a scheme to take over and privatize a major telecommunications company involved a manipulation of the shareholder vote and the coercion of minority shareholders. The court said that the share splitting used in the scheme was a dishonest form of vote manipulation that frustrated the legislative intent of the Companies Ordinance. Because of the extensive manipulation of the shareholder vote, the court could not be sure that the vote properly reflected the true votes of the shareholders. (In re PCCW Limited, Court of Appeal of the High Court, Hong Kong Special Administrative Region)

The ruling was a significant victory for the Securities and Futures Commission, which had pointed out serious allegations of impropriety. SFC Chief Executive Officer Martin Wheatley said that the landmark ruling clarifies that share splitting in this context is a form of vote manipulation and the results of shareholder meetings achieved by manipulative devices may be struck down by the court. He said the decision also makes clear that the purpose of the legislation must not be abused by manipulative means and that the legitimate interests of shareholders must not be overridden by disreputable practices.

The SFC presented evidence to the court questioning the way in which the scheme of arrangement meeting achieved the required majority of shareholders voting in favor of the privatization scheme. The SFC argued, and the appeals court agreed, that the evidence suggested the number of those who voted in favor was influenced significantly by the splitting of larger parcels of shares into single board lots which were then distributed to persons who became registered shareholders with the attached votes cast in favor of the scheme.

Share splitting generally involves one or more members transferring small parcels of shares to a large number of other persons who are willing to attend the meeting and vote in accordance with the wishes of the transferor.