For the first time in Hong Kong, in Re Allied Properties (HK) Ltd [2020] HKCA 973; [2020] 5 HKLRD 766, the Court of Appeal itself sanctioned a privatisation scheme of arrangement, overruling the refusal of the first instance Judge to do so.
The Court of Appeal judgment confirms the following law and practice for privatisation schemes:
(1) The usual headcount test for a scheme of arrangement does not apply to a privatisation scheme in a takeover situation.
(2) The mere fact that part of the scheme consideration is funded by dividends declared by the company is unobjectionable.
(3) The scheme explanatory statement should explain to the scheme shareholders realistic alternatives to the scheme.
The material facts
Allied Properties (HK) Ltd (“Company”) was a Hong Kong-listed company. In April 2020, its majority shareholder (“Offeror”) made a proposal to privatise the Company using a scheme of arrangement, whereby the scheme shareholders’ shares would be cancelled in return for HK$1.92 per share in cash. This amount consisted of HK$0.42 per share from the Offeror and HK$1.50 per share by way of a special dividend declared by the Company.
More than 99% of the scheme shareholders voted for the scheme. However, at first instance, Linda Chan J. refused to sanction the scheme for two reasons. First, she was not satisfied that the scheme shareholders’ meeting satisfied the headcount test. Secondly, she held that the scheme explanatory statement did not adequately explain the scheme alternatives and did not provide adequate value comparisons:
“A relevant comparison of value, in this context, would be a comparison between what the scheme shareholders can expect if they remain as shareholders and what they can expect under the scheme. As to the former, the company should inform the scheme shareholders that if they remain as shareholders, they can expect the company to be able to declare and pay dividend out of its accumulated profits in future unless there are valid reasons not to do so… It is reasonable to expect the directors to act in accordance with their duties and cause the company to declare and pay dividend to the extent that it has sufficient accumulated profits and cash for that purpose…
[G]iven that the Company proposed to use … its accumulated profits … to pay the Special Dividend upon the Scheme becomes [sic] effective, it would be fair and reasonable for the Company to inform the Scheme Shareholders that they can expect the Company to use the same amount to declare and pay a dividend to all the shareholders if the Scheme falls through. This is because the board of directors has already considered the financial position of the Company and decided that it is appropriate to use the Relevant Reserve to pay the Special Dividend. It would be unreasonable, if not perverse, for the board to refuse to use the Relevant Reserve to declare and pay a dividend to all the shareholders if the Scheme is not implemented” ([2020] HKCFI 2624 at [46] and [62]).
The Court of Appeal’s decision
The Court of Appeal reversed Linda Chan J’s decision and exercised its own discretion to sanction the scheme.
The Court of Appeal reasoned as follows:
First, the headcount test is inapplicable to a privatisation scheme in a takeover situation:
“The Scheme involves a “takeover offer” within section 674(5). And where a scheme involves a takeover offer, by virtue of section 674(2) the headcount test in section 674(1)(c)(ii) is replaced by the requirement that the votes cast against the scheme of arrangement do not exceed 10% of the total voting rights attached to all disinterested shares in the company (“the negative 10% test”). In other words, for schemes involving a takeover offer, the dual requirements as stated in section 674(2) consist of a 75% majority in value of the voting rights of the members present and voting … and the negative 10% test. See Re Cheung Kong (Holdings) Ltd [2015] 2 HKLRD 512 at §§37 to 39; Re Enice Holding Co Ltd [2018] 4 HKLRD 736 at §34; Company Registry’s Briefing Notes in January 2013, §§5 to 14” (at [27]).
Secondly, the Court of Appeal noted that the explanatory statement had made it abundantly clear that the alternative to the scheme if voted down would be reversion to the Company’s existing dividend policy and in that scenario no special dividend would be paid. It could not be said that the intention to revert to the existing dividend policy must be unreasonable if the board of directors in the exercise of their commercial judgment considered this to be in the best interests of the Company. Therefore, the learned Judge’s hypothesis on dividend was illegitimate.
Thirdly, the Court of Appeal held that the scheme was such that an intelligent and honest person, a member of the class concerned and acting in respect of his interest, might reasonably approve. The privatisation has the overwhelming support of the scheme shareholders, who were in a position to consider the information provided in the scheme document on the commercial impact of the scheme.
Commentary
This decision is a most welcome appellate confirmation and clarification of the privatisation scheme law and practice.
In addition to the matters mentioned above, the Court of Appeal judgment also contains a number helpful procedural points practitioners should pay attention to.
John Scott SC JP, William Wong SC, and Look-Chan Ho acted for the Company in this case
