In the matter of PCCW Limited （電訊盈科有限公司）

11 May 2009, Court of Appeal, Hong Kong

Background to the Scheme of Arrangement

The company (0008.HK) was essentially, prior to 200, Hong Kong's telephone company and was regarded as a "solid" utility stock and its shares were trading in access of HK$20. It became a subsidiary of Pacific Century Cyberworks Limited after two schemes of arrangement pursuant to section 166 of the Company Ordinance. In 2003, there was a consolidation of the shares on a 1for 5 basis.

The case before the court was a petition by certain majority shareholders asking the court to sanction the scheme of arrangement the principal object of which was to privatise the company by paying the "independent shareholders" (i.e. general shareholders excluding the majority offering shareholders and their related companies). The privatisation price offered to the independent shareholders was initially HK$4.20, later raised to HK$4.50. Before the shares were suspended from trading, they were trading at HK$2.75, near its historical low of HK$2.45.

Exercise of the Court's Discretion

The issue before the court of appeal was whether it should exercise its discretion to sanction the scheme of arrangement. The circumstances surrounding the scheme of arrangement were relevant in the court's consideration whether to sanction the scheme of arrangement.

When interviewed by the SFC, Mr. Lam Hau Wah (a.k.a. "Inneo Lam", regional executive director of Fortis Insurance) said he purchased the shares (see "Share Splitting" below) to be given to Fortis agents as a bonus and something they "would remember and appreciate". Only 335 of the recipients were Fortis agents and others were spouses, employees, friends or unidentified, which Rogers VP of the court of appeal said "hardly coincided with Mr Lam's stated intention".

The Vice President also set out "a remarkable series of coincidences" in his judgment. It was "no mean feat of organisation" that Lam’s sister and secretary had made sure that all the proxy forms were completed and registered with the shares within two weeks to make sure that the 494 new "shareholders" could vote in time for the scheme.

The proxy forms were collected by Lam's sister from the secretary of a Mr. Francis Yuen, who was the Deputy Chairman of Starvest, one of the joint offerors and the majority shareholder to privatise the company, instead of the share registrars, Computershare Hong Kong Investor Services Limited. The VP said that Yuen's secretary was "remarkably uncommunicative" with her boss as Yuen said that he did not know that his secretary provided any proxy forms.

On 5 January 2009, the day Lam placed the order of the 500,000 shares, Yuen called Lam three times within an hours and then once again at 6pm.

Share Splitting

The first instance judge (Kwan J) and the court of appeal were obviously troubled by the issue of "share splitting" and action of certain individuals to "boost the head-court".

The Hong Kong Securities and Futures Commission (SFC) intervened on 23 February 2009 upon information that Fortis Insurance agents had been given boards lots (each 1,000 shares) to induce them to vote in favour of the scheme of arrangement. According to the evidence presented by the SFC:

• 494 new shareholders were added to the register of the company as a result of 500,000 shares purchased by Lam;
• 339 shareholders were added through a number of securities brokers

The Vice President said

"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."

The other appeal judge, Lam J, agreed

"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 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)."

The court of appeal by a unanimous decision overturned the decision of Kwan J to sanction the scheme of arrangement.

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