Hong Kong Court Approves PCCW Going Private Scheme Despite SFC Concerns over Share Splitting

A Hong Kong court approved the takeover and privatization of a major telecommunications company despite serious allegations of impropriety by the Securities and Futures Commission involving share splitting and the coercion of minority shareholders. Justice Kwan concluded that the statutory majority who voted for the scheme were acting bona fide and were not coercing the minority in order to promote interests adverse to those of the class whom they represented. (In re PCCW Limited, Court of First Instance, Hong Kong Special Administrative Region, April 6, 2009).

The privatization proposal was to provide shareholders an opportunity to realize their investment in the company for cash during sustained poor market conditions. The independent financial adviser was of the view that the cancellation price offered a reasonable premium and that the terms of the proposal were fair and reasonable to the shareholders. On the advice of the independent financial adviser, noted the court, an independent board committee recommended that shareholders vote in favor of the scheme.

In the court’s view, the fact that a large majority in value of the shareholders approved the scheme was a major factor in considering whether an intelligent and honest person might reasonably approve. The function of the court is not to decide how it would have voted on the scheme, but to consider whether an intelligent and honest member of the class could reasonably approve it.

The Court of Appeal stayed the decision and granted the Securities and Futures Commission leave to appeal the order of the Court of First Instance approving PCCW’s scheme of arrangement to privatize the company. On appeal, the SFC will seek clarifications in relation to the splitting of shares. The Commission is concerned that important points of law regarding the splitting of shares, which are of significant public concern, have not been fully clarified. the SFC’s Chief Executive Officer, Martin Wheatley, said that these are important points of principle for the Hong Kong market and the protection of minority shareholders.

Share splitting 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. At common law, a shareholder is entitled to transfer some of his or her shares to nominees to increase voting power at a meeting, noted the court, and there is no legal provision or regulatory rule in Hong Kong prohibiting share splitting for that purpose.

In addition, the court found no discernible public policy in Hong Kong regarding share splitting in the context of a scheme for privatization of a company. Further, no mention of any abuse in the practice of share splitting was made in the Takeovers Code, which represents a consensus of opinion of those who participate in Hong Kong’s financial markets, and of the SFC, regarding standards of commercial conduct and behavior considered acceptable for takeovers, mergers and share repurchases. If Hong Kong is to introduce a policy on share splitting, reasoned the court, there should be a publicly available statement by the regulatory authority, after proper and informed consultation

It would be unfair and wrong for the SFC to ask the court to lay down, for the first time, a policy on what should or should not be followed with regard to share splitting in a scheme, and to apply the policy to the scheme on a retrospective basis. This would only lead to chaos, said the court. Thus, the court rejected the idea of excluding all votes in favor of the scheme as a result of share splitting.