CACV 85/2009 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF APPEAL CIVIL APPEAL NO. 85 OF 2009 (ON APPEAL FROM HCMP NO. 2382 OF 2008) _____________________ IN THE MATTER of PCCW LIMITED （電訊盈科有限公司） and IN THE MATTER of the Companies Ordinance, Chapter 32 _____________________ Before: Hon Rogers VP, Lam and Barma JJ in Court Dates of Hearing: 16-18 & 20-22 April 2009 Date of Judgment: 22 April 2009 Date of Handing Down Reasons for Judgment: 11 May 2009 _______________________________ REASONS FOR JUDGMENT _______________________________ Hon Rogers VP: 1. This was an appeal from a judgment of Kwan J given on 6 April 2009. The matter before the judge was a petition that had been presented on 11 February 2009 by PCCW Limited 電訊盈科有限公司 (“the Company”). The petition sought sanction of a scheme of arrangement (“the Scheme”) pursuant to section 166 of the Companies Ordinance, Cap. 32 (“the Ordinance”), and confirmation of the reduction of the Company’s share capital involved in the Scheme, pursuant to section 59 of the Ordinance. 2. The Scheme is between the Company and the holders of the Scheme shares, namely all the shares of the Company other than those held by Starvest Limited (“Starvest”) and China Netcom Corporation (BVI) Limited (“Netcom BVI”) (“the Joint Offerors”) and by shareholders that are termed parties acting in concert with Starvest, namely Pacific Century Regional Developments Limited (“PCRD”) which is Starvest’s parent company, Pacific Century Group Holdings Limited (“PCGH”), Pacific Century Diversified Limited (“PCD”) and Eisner Investments Limited (“Eisner”). These companies are together referred to as “the Excluded Group”. PCD and Eisner are companies wholly owned by the chairman of the Company. Netcom BVI was a wholly owned subsidiary of China Network Communications Group Corporation (“CNC”), due to a merger China United Network Communications Group Company Limited (“Unicom”) replaced it. 3. The stated object of the Scheme is that the Company should be privatised. The mechanism by which that would be achieved is that the Scheme shares would be cancelled and the resulting credit arising would be applied to pay up in full and issue to the Joint Offerors and/or to Unicom the same number of new shares as would be cancelled under the Scheme. The new shares would be issued to Starvest and Netcom BVI (and/or Unicom) in the ratio of 74.27:25.73. The Joint Offerors are to pay the holders of the Scheme shares HK$4.50 in cash for each Scheme share held (“the Cancellation Price”). Sanction of the Scheme was opposed by a number of individual shareholders and by the Securities and Futures Commission (“the SFC”). The judge sanctioned the Scheme. This appeal was brought by the SFC and, at the conclusion of the hearing, the appeal was allowed. Background 4. It is appropriate to give a brief background of the Company. Before 2000 there were two quite separate companies. In the first place there was Cable & Wireless HKT Limited (formerly “Hong Kong Telecommunications Limited”) (“HKT”). As a result of a scheme of arrangement that company became a wholly owned subsidiary of the second company, Pacific Century CyberWorks Limited (“PCCW”). Prior to that scheme going into effect HKT had been, essentially, Hong Kong’s telephone company. It was regarded as a “solid” utility and had a policy of paying a high proportion of its profits as dividends. However, associated with the abolition of the monopoly of ingoing and outgoing communications from Hong Kong that had been enjoyed by its UK parent company, it can be said that by the year 2000 there was an increasingly competitive market not only globally but, in particular, in Hong Kong. As a result HKT’s operating environment was changing. In 2000, PCCW was a technology-based company of comparatively recent origin. When that scheme was approved in HCMP 2316 of 2000, the judge sounded a note of caution when he said: “For example, in its letter of advice …. ING Barings has said: “Minority HKT Shareholders should note that the risk profile of PCCW’s businesses is very different from that of HKT’s businesses and they are advised to refer to the section entitled “Risk profile” of this letter for more details. As explained in such section, the business model of PCCW is unproven and with broadband communications and the Internet sector being relatively new markets, there is considerable uncertainty as to the future prospects of PCCW.” ” 5. There was one shareholder who had objected to that scheme but his objection was overruled. Whilst the pre-scheme price of the HKT shares had been in excess of $20 that soon changed, particularly after what has been termed the “collapse” of the “dot com bubble”. In early 2003 the Company’s shares were consolidated on a 1 for 5 basis. In August 2004 the reduction of capital in the share premium account in the amount of HK$173,464,615,915.00 was approved in HCMP 1699 of 2004. In approving that scheme Kwan J said: “5. The primary purpose for cancelling the share premium account is to eliminate the accumulated losses of the Company of HK$152,932,345,321.00 as at 30 June 2004 so as to accelerate the time for payment of dividends and to bring its capital account in line with its available assets.” 6. That part of the history has been gleaned from the reported judgments in relation to the previous scheme and the reduction of capital. The Scheme document in the present case shows that by 2006 the net asset value of the Company was approximately 0.06 cents per share. By 2007 that had increased to 0.23 cents and as of 30 June 2008 it had, again, increased to 0.27 cents. 7. In May 2008 the Company commenced a process to reorganise its telecommunications services, media and IT solutions businesses under a holding company, HKT Group Holdings Ltd (“HKTGH”). At the same time it invited proposals from investors for the acquisition of up to 45% equity interest in HKTGH. The Scheme document states that in September 2008 the Company announced that HKT was in the final stage of arranging a $23.8 billion loan as part of the reorganisation and re-leveraging of HKTGH and the HKTGH sale. That was referred to as the HKT Loan Facilities. Although the Company received a number of proposals from bidders, the board is recorded as having unanimously concluded that the proposals were not sufficiently attractive and it approved the discontinuation of the HKTGH sale process. That was announced on 12 October 2008. 8. On 13 October 2008 the closing share price of the Company’s shares was $2.75, which, according to documents filed in this case, was near the historic nine-year low of $2.45. As stated in the Scheme document, the share price had fallen by approximately 42.3% in the month up to 13 October 2008. 9. Immediately thereafter, trading in the Company’s shares was suspended pending announcement of the present Scheme. The effect of the Scheme was that the Scheme shareholders, who represented approximately 52.28% of the issued share capital of PCCW, would be bought out and immediately following the implementation of the Scheme the largest shareholder in the Company would be Starvest Ltd (“Starvest”), which is a wholly owned subsidiary of the then current major shareholder of the Company, namely PCRD. PCRD is a Singaporean company, it was to retain its existing shareholding in the Company because, as already stated, its shares were not, part of the Scheme shares. 10. The Scheme document referred to what was termed a Consortium Agreement between PCRD, Starvest, Netcom BVI and CNC (replaced in the supplemental Scheme by Unicom) which, through its wholly owned subsidiary Netcom BVI, was already the shareholder of approximately 20% of PCCW and immediately following the implementation of the Scheme would be a one third shareholder of PCCW. That agreement provided that those parties would procure that PCCW would, within 20 days after the Scheme becoming effective, declare a special dividend in cash to the post Scheme shareholders of an aggregate amount of between $16,964 million and $17,565 million. It was stated that PCCW expected to have the funds available to pay the dividend from a combination of cash on hand and amounts transferred to it following the drawdown in full by HKT under the HKT Loan Facilities. The Scheme document also indicated that if the Scheme did not become effective then the special dividend proposal would lapse and there was no proposal or intention to declare or pay a special dividend. 11. The Scheme document lists the reasons for the Scheme and the benefits of the proposal for the Scheme shareholders as being: “The Proposal provides Scheme Shareholders with an opportunity to realise their investment in PCCW for cash during sustained uncertain market conditions, and at a significant premium to the market price prevailing on the Last Trading Date.” 12. Identical wording appeared in the letter from the Independent Financial Adviser, N M Rothschild & Sons (Hong Kong) Ltd (“the IFA”). The Last Trading Date was defined as 13 October 2008. As regards PCRD it was stated: “Given the relatively low trading liquidity and persistently weak performance of the Shares, PCRD believes that access to the equity capital markets does not provide PCCW with an attractive fund raising avenue, and that the costs and management resources associated with the maintenance of PCCW’s listing status are not warranted.” 13. The matter proceeded and a court meeting was directed in accordance with the usual procedure under section 166 of the Ordinance.