Television Broadcasts Ltd v. The Takeovers and Mergers and Another

HCAL 250/2017

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTITUTIONAL AND ADMINISTRATIVE LAW LIST NO 250 OF 2017

__________________________

__________________________

__________________________

_________________

J U D G M E N T

_________________

Overview

1.By public announcements made on 24 January and 13 February 2017 (“Announcements”), Television Broadcasts Limited (“TVB”), a company listed on the Main Board of the Stock Exchange of Hong Kong, announced an offer to repurchase up to 120 million of its shares at HK$35.075 per share for a total consideration of up to HK$4,209 million (“Offer”).  120 million shares represented 27.4% of the total issued shares of TVB and HK$35.075 per share represented a premium of 15.6% to the closing price of TBV shares on the last trading day before the second-mentioned announcement.

2.TVB’s largest shareholder[1] and parties regarded as acting in concert with it[2] (“Concert Group”) have an aggregate 29.9% stake in the company.  They intend not to take up the Offer in respect of any of their shares.  If other shareholders tender the maximum number of shares, the Concert Group’s holding may rise to as much as 41.19%.

3.As the Concert Group has 4 representatives sitting on TVB’s board as non-executive directors, the increase in their holding in TVB in consequence of TVB’s buy-back of its own shares would be treated as an acquisition of voting rights for the purposes of the Codes on Takeovers and Mergers and Share Buy-backs (“Codes” collectively and “Takeovers Code” and “Buy-backs Code” respectively) issued by the Securities and Futures Commission (“SFC”).  See Rule 32.1 of the Takeovers Code read together with Note 2 thereto. 

4.And under Rule 26.1 of the Takeovers Code, crossing the holding threshold of 30% would oblige the Concert Group to make a mandatory general offer to all TVB shareholders to buy all their shares on equal terms, unless the Takeovers Executive[3] (“Executive”) should grant a waiver of such obligation commonly known as a “whitewash waiver”.

5.In this connection, the Offer is expressly made conditional upon, inter alia, (1) it being approved by an ordinary resolution by the independent shareholders[4] at an extraordinary general meeting (“EGM”); and (2) a whitewash waiver being granted, and not having been withdrawn, by the Executive.  The former condition, i.e. approval of the Offer by a shareholders’ resolution, is required as a matter of law by s 238(1) of the Companies Ordinance (Cap 622) (“CO”).

6.On 27 January and 15 February 2017, TVB submitted to the Executive respectively an application and a supplemental application for a whitewash waiver on behalf of certain members of the Concert Group.

7.On 16 March 2017, the Executive referred a number of issues arising from TVB’s application for a whitewash waiver for ruling by the Takeovers and Mergers Panel (“Panel”), [5] a committee established by the SFC under s 8(1) of the Securities and Futures Ordinance (Cap 571) with members from the financial and investment community.

8.One of the matters raised for the Panel’s ruling was, if a whitewash waiver should be granted, “whether [the provisions in s 19 of Schedule 1 to the Broadcasting Ordinance (Cap 562) (“BO”)] make any difference in the light of General Principle 1 (“GP1”)” of the Codes.  This question arose as follows.

9.Pursuant to Rule 32.1 of the Takeovers Code, the Executive treats an application for a waiver from the requirement to make a mandatory offer in the case of a share buy-back by general offer or an off-market share buy-back in accordance with Rule 26 as if it were an application for a whitewash waiver in accordance with Note 1 on dispensations from Rule 26. 

10.Note 1 on dispensations from Rule 26 stipulates, inter alia, that the Executive will normally waive the obligation to make a general offer if there is an independent vote (i.e. one by shareholders not involved, or interested, in the transaction) at a shareholders’ meeting.

11.Paragraph 2(e) of the “Whitewash Guidance Note” under Schedule VI to the Codes (which sets out the conditions for the grant of a whitewash waiver) also stipulates that the grant of a whitewash waiver “will be subject to”

“approval of the proposals by an independent vote at a meeting of the holders of any relevant class of securities, whether or not such meeting needs to be convened to approve the issue of the securities in question”.

12.In fact, the Offer is made subject to the passing of an ordinary resolution to approve the whitewash waiver by the independent shareholders of TVB at the EGM. This condition and those for the approval of the Offer by an ordinary resolution of the independent shareholders and the grant and subsistence of the whitewash waiver (paragraph 5 above) are expressly made not waivable so that, if any of them is not satisfied, the Offer will not proceed.

13.However, an issue was raised as to how votes at the EGM should be counted if a whitewash waiver be granted (on the usual condition) and put to the vote.

14.  On one hand, GP1 embodies the principle: “All shareholders are to be treated even-handedly and all shareholders of the same class are to be treated similarly.”

15.On the other hand, TVB, as a domestic free television programme service licensee under the BO, is subject to the regime of special controls under the BO which includes s 19 of Schedule 1 (“scale-back provision”):

“(1) Subject to subsection (2), notwithstanding anything contained in the articles of association of a licensee or any provision of any law apart from this section, where any question or matter is to be determined by a poll at any general meeting of the licensee, the following shall apply –

…

(b) where the total voting control exercised by unqualified voting controllers would otherwise exceed, in the aggregate, 49% of the total voting control exercised on the poll by both qualified and unqualified voting controllers, the votes cast on the poll by unqualified voting controllers shall, for the purpose of determining the question or matter, be reduced by multiplying those votes by the percentage determined by the formula specified in paragraph (c);

…

(2) Notwithstanding anything contained in the articles of association of the licensee, this section shall not apply –

(a) where the question or matter which is to be determined by a poll at any general meeting of the licensee is the creation of different classes of shares in the licensee; or

(b)    where the share capital of the licensee is for the time being divided into different classes of shares, to the variation, including abrogation, of any special rights attaching to any such classes of shares.”

(emphasis added)

The terms “voting control”, “voting controller”, “qualified voting controller” and “unqualified voting controller” are defined in s 1(1) of Schedule  1. For present purpose, it is sufficient to say that “qualified voting controller” and “qualified voting controller” mean respectively a shareholder who is ordinarily resident in Hong Kong and has been so for 7 years and one who is not ordinarily resident in Hong Kong and has not been so for 7 years.

16.The formula in s 19(1)(c) is a “scaling back” mechanism.  In short, the votes of all non-Hong Kong resident shareholders at any general meeting are capped at 49%.  And if they represent more than 49%, their votes will be scaled back proportionately. In other words, the votes cast by Hong Kong resident shareholders (regardless of the size of their aggregate holdings) will collectively carry 51% weight.

17.TVB’s second largest shareholder, Silchester International Investors LLP (“Silchester”), is a London-based investment fund holding a stake of over 14%.  As a non-resident shareholder, Silchester is an unqualified voting controller so that its votes are, if necessary, subject to the scale-back provision.    

18.Given the special interest of the Concert Group (comprising of qualified voting controllers) in the matter, they have to abstain from voting at the EGM with the result that there would be a higher proportion of votes from unqualified voting controllers.  In view of past voting patterns from 2012 to 2016, the votes to be cast by unqualified voting controllers are expected to exceed 49% of the total votes cast and therefore stand to be scaled back pursuant to the scale-back provision.

19.On 3 March 2017, Silchester through its solicitors wrote to the Executive, contending that the scale-back provision is inconsistent with, and should be overridden by, GP1.  The Executive was urged, should a whitewash waiver be granted, to “require the vote for Code purposes on the Whitewash Waiver to be conducted on the basis of equal voting power” on a poll basis (i.e. one share one vote).

20.Following a hearing attended by representatives of the Executive and TVB on 27 April 2017 (“Hearing”), the Panel,[6] by a ruling given orally at the end of the Hearing and later in writing (in paragraph 35) on 10 May 2017 (“Ruling”), ruled that a whitewash waiver (“Whitewash Waiver”) “should be granted” conditional on:

(1) firstly, that the majority of votes cast (without adjustment under the scale-back provision) at the general meeting of TVB should be in favour of the resolution to approve the Offer (“Majority Vote Condition”); and

(2) secondly, that the question of whether or not there should be a whitewash waiver should not be put to a vote of TVB’s shareholders in general meeting (“No Vote Condition”).

21.The Panel’s thinking as reflected by the Ruling is that the independent shareholders of TVB would not vote on the Whitewash Waiver.[7] They would vote just on whether to approve the Offer.  They would do so once only.  However, their votes on the Offer would be counted twice, once with application of the scale-back provision and once without.  The former count in accordance with the scale-back provision will determine whether TVB’s shareholders sanction the Offer.  And there would be a whitewash waiver only if the latter count without any scaling-back should also yield a majority approving the Offer.

22.On 30 April 2017, TVB asked for the Executive’s consent to lapse the Offer on the basis that the condition for the passing of an ordinary resolution to approve the Whitewash Waiver by the independent shareholders at the EGM would no longer be satisfied because of the No Vote Condition.  The Executive did not agree with this argument and so informed TVB on 15 May 2017.  The Executive, however, indicated that it might revisit the issue if leave for judicial review of the Ruling should be granted.

23.On 26 May 2017, upon TVB’s application on 16 May 2017, the Executive extended the deadline for the publication of the Offer Document to a date 7 days after the court has ruled on the TVB’s intended application for leave for judicial review on the conditions that the application be made on or before 29 May 2017 and that TVB would facilitate a speedy determination of the application.

24.By a notice in Form 86 dated 29 May 2017 (“Form 86”), TVB applies for leave for judicial review of the Ruling, seeking an order of certiorari to bring up and quash the Ruling and a declaration that the scale-back provision in s 19 of Schedule 1 to the BO apply for and to the shareholders’ approval of the Whitewash Waiver.  TVB has made it clear that it is not asking the court to judge whether a whitewash waiver should be granted, which question remains one for the Executive and TVB’s shareholders.  If TVB succeeds in this application for judicial review, the matter of whether a whitewash waiver should be granted will have to be remitted back to the Executive.

25.On 19 June 2017, Mr Justice Au directed a rolled-up hearing of TVB’s application for leave as well as the substantive judicial review.

26.SFC has entered an appearance.  SFC also represents the Panel and the Executive whose attendance has been excused by the court.

27.Before I turn to TVB’s grounds for judicial review of the Ruling, to put the parties’ respective arguments thereon in context, it is necessary to take a more comprehensive look at:

(1) the scheme of ownership and voting controls over non-Hong Kong resident shareholders of domestic free television licensees prescribed by the BO and the policy rationale behind the same;

(2) the relevant provisions of the Codes and their purposes; and

(3) the Panel’s reasons for the Ruling.

The BO

28.I have already set out s 19 of Schedule 1 to the BO in paragraph 15 above.  In addition, my attention has been drawn to the following provisions in the BO affecting a domestic free television licensee:[8]

(1) s 8(4)(a)(i) under which such a licensee must itself be ordinarily resident in Hong Kong;

(2) s 8(4)(a)(iv) under which the majority of its directors and principal officers must each be ordinarily resident in Hong Kong and has been so resident for at least one continuous period of not less than 7 years;[9]

(3) s 8(4)(a)(iii) under which there must be, at every directors’ meeting, a quorum that has a majority of directors who is each ordinarily resident in Hong Kong and has been so resident for at least one continuous period of not less than 7 years; and

(4) s 20 of Schedule 1 which prohibits any unqualified voting controller (i.e. non-Hong Kong resident shareholder) from holding, acquiring or exercising or causing or permitting to be exercised 2-6%, 6-10% or 10%, in the aggregate, of the total voting control of a licensee without the prior written approval of the Communications Authority.  Subsection (2) goes on to provide:

“If an unqualified voting controller holds more than 10% in the aggregate, of the total voting control of a licensee in contravention of subsection (1)(a), notwithstanding anything contained in the articles of association of the licensee or any provision of the laws of Hong Kong apart from this section, he shall not exercise or cause or permit to be exercised, in relation to any question or matter arising at a general meeting of the licensee, voting rights exceeding, in the aggregate, 10% of the total voting control of the licensee.” (emphasis added)

29.It is plain from the restrictions on ownership and voting control prescribed by these provisions of the BO, and the Panel does not dispute, that their purpose is to ensure that decisions of a licensee, whether at board meetings or shareholders’ meetings, are made and approved by a majority of those ordinarily resident in Hong Kong.

30.Although the BO came into operation only on 7 July 2000, similar provisions entrenching control of a domestic television licensee in the hands of Hong Kong resident principal officers, directors and shareholders could be found in the now repealed Television Ordinance.  In particular, s 19 of Schedule 1 to the BO is modelled on s 17D of the earlier Ordinance.

31.This policy is rooted in the belief that “television is a powerful medium which has the potential to influence a large proportion of the population”; that domestic television services should cater for the “local interests and tastes” and that persons who are ordinarily resident in Hong Kong “may be expected to be responsive to and reflect local tastes and culture”.  See Legislative Council Official Report of Proceedings, 17 July 1991, pages 91-92; Provisional Legislative Council Brief (Ref: BCSB(CR)9/11/2(97)), 5 December 1997, Part 7, paragraph 15; and The 1998 Review of Television Policy: A Consultation Paper, 3 September 1998, paragraphs 11.8 and 11.10.[10]

32.That the shareholders of TVB should be aware of the provisions of the BO that apply to TVB, including the scale-back provision, is acknowledged by the Panel in paragraph 30 of the Ruling.

The Codes

General

33.Turning then to the Codes, as stated in paragraph 1.2 of the Introduction to the Codes, the primary purpose of the Codes is to afford fair treatment for shareholders affected by takeovers, mergers and share buy-backs.  The Codes seek to achieve fair treatment by requiring equality of treatment of shareholders and provide an orderly framework within which takeovers, mergers and share buy-backs are to be conducted.

34.Paragraph 1.3 of the Introduction makes it clear that the Codes do not have the force of law, but represent a consensus of opinion of those who participate in Hong Kong’s financial markets and the SFC regarding standards of commercial contract and behaviour considered acceptable for takeovers, mergers and share buy-backs.  This consensus of opinion is reflected in rulings made by the Panel when interpreting the Codes given the diverse range of interests represented by the Panel’s members.  Similar standards of commercial conduct and behavior are applied in other leading financial centres.

35.Paragraph 2.1 of the Introduction sets out the way in which the Codes are to be interpreted: firstly with reference to the General Principles which are essentially statements of good standards of conduct, and then to the specific Rules which expand on the General Principles.  Both the General Principles and the Rules are to be interpreted to achieve their underlying purposes. 

36.This paragraph also expressly allows the Executive and the Panel to modify or relax the effect of the language of the General Principles to achieve their underlying purposes.  Likewise, they each has the discretion to modify or relax the application of a Rule if it considers that strict application would in the particular circumstances of the case operate in an unnecessarily restrictive or unduly burdensome or otherwise inappropriate manner.

GP1

37.GP1 has been set out in paragraph 14 above.

38.It is stressed on behalf of the SFC that TVB has only one class of shares, even though there are 2 classes of holders of such shares namely, qualified voting controllers and unqualified voting controllers who are differentiated by the BO based on whether they are ordinarily resident in Hong Kong or not.

Mandatory general offer & whitewash waiver

39.I have already explained in paragraphs 2 to 5 above the circumstances giving rise to TVB’s application for a whitewash waiver on behalf of the Concert Group.

40.Dealing with this in more general terms, the mandatory general offer obligation is triggered once certain ownership thresholds are crossed.[11]  It is imposed to reflect and ensure the fair and equal treatment of shareholders by providing all shareholders with the opportunity to participate in the change of control through selling their shares at the highest price paid by the offeror for acquiring control.  This is articulated in General Principle 2: “If control of a company changes or is acquired or is consolidated, a general offer to all other shareholders is normally required.”

41.It is therefore emphasised on behalf of the SFC that:

(1) A whitewash waiver is a dispensation from one of the most important obligations under the Takeovers Code.

(2) There is no automatic right to a whitewash waiver.  The Executive and the Panel have the discretion not to waive a general offer obligation where the circumstances merit it.

42.TVB does not contend otherwise before the Panel or in the Form 86.  This judicial review application is not concerned with whether or not a whitewash waiver ought to be granted in this case. 

43.TVB’s position, both before the Panel and in this application, has always been that a whitewash waiver should either be granted on the usual condition of approval by an independent vote at a shareholders’ meeting (to which the scale-back provision would apply) or not at all.

44.Where a whitewash wavier is granted, it is unusual for the same to be not put to the vote fro approval by company’s shareholders.  Indeed, it is unprecedented.

The Panel’s reasons for the Ruling

45.Before I set out the Panel’s reasons for the Ruling, I should for the sake of completeness mention that, prior to the Hearing, the Panel sought and obtained advice from Mr John Scott SC on the following 2 questions (which I slightly rephrase for presentation purpose):

(1) Are there any provisions under the BO that prevent or restrict the Panel from stipulating further conditions for granting a whitewash waiver, in addition to that of a resolution of shareholders at a general meeting determined by applying the necessary capping and scaling back to the votes cast by the unqualified voting controllers as required by the scale-back provision?

(2) If not, can those additional conditions include a condition that the majority of all votes cast on the same resolution, without capping or scaling back, must also be in favour of the whitewash waiver pursuant to GP1?

46.By his Opinon and Advice dated 25 April 2017 (a copy of which was provided to TVB before the Hearing), while observing that the scale-back provision clearly has priority over GP1 (paragraph 17) and that it would be contrary to the scale-back provision if “apart from the majority of qualifying votes required by [the scale-back provision], the whitewash waiver would only be granted if, on a separate resolution, the majority of votes cast on such a resolution (irrespective of whether or not they were qualifying votes) were in favour” (paragraph 20(ii)), Mr Scott SC advised the Panel:

(1) in paragraph 21(iv):

“If, however, the whitewash waiver was not put to the shareholders of [TVB] for approval by way of a separate shareholders vote / resolution and the shareholders were instead only asked to vote on one resolution, namely the [Offer], then provided the [scale-back provision] was satisfied, I do not believe there could be any reasonable objection to the Panel, in considering the application for a whitewash waiver, attaching a condition that it would only grant a whitewash waiver if, in passing the [Offer] resolution, a majority of the independent shares voted approved that resolution, irrespective of whether or not they were qualifying shareholders under the BO.”

(2) in paragraph 21(vii):

“If the Panel is satisfied that there exists exceptional circumstances justifying the denial to shareholders of a vote on the whitewash waiver, but instead vesting the decision as to the grant of a whitewash waiver solely in the hands of the Panel (conditional upon the majority of independent shares voted being in favour of the [Offer]), I believe such a decision (whilst it might still be challenged by an application for Judicial Review) can be justified as not constituting any breach of the overriding requirements of [the scale-back provision].”

47.At the Hearing, Mr Scott SC further explained:

“… What we are discussing now is a situation where the shareholders would be consulted and asked to vote only on the buy-back.

The use of the analysis of the votes on that resolution to determine whether or not the Panel will grant its whitewash waiver by looking at the composition of the votes does not, …, amount to the Panel trying to find out what the shareholders are thinking. That isn't the correct approach. The Panel, in that situation, would be deciding whether, in its discretion, it is deciding to grant the whitewash waiver, having regard to the level of support of the buy-back resolution.

And in that situation, I think it is important to bear in mind the limits of [the scale-back provision], and it is confined to the situation where any question or matter is to be determined by a poll at a general meeting.

The question of a whitewash waiver on this scenario is not to be determined by a poll at any general meeting of the licensee. It is instead a decision vested only in the Panel”.

48.It is clear from the Panel’s reasoning at paragraphs 20-36 of the Ruling that it accepted Mr Scott SC’s advice.  As summarised by Mr Benjamin Yu SC and Mr Jonathan Chang, counsel for the SFC, in paragraph 34 of their Skeleton Argument, the Panel came to the conclusion that a whitewash waiver should be granted subject to the Majority Vote Condition and No Vote Condition through the following reasoning:

(1) The Codes should be interpreted and applied so that TVB is treated, so far as possible, “like any other company” (paragraph 24).

(2) The Codes exist, at their core, to require that when a person acquires or consolidates control of a company, then a general offer must be made to all shareholders, regardless of their residency (paragraph 26).

(3) It is only under stringent conditions that such an obligation can be waived, because it results in a person obtaining or consolidating control without making a general offer (paragraph 27).

(4) Accordingly, the Codes include provisions to ensure that independent shareholders have an adequate opportunity to consent or object to the acquisition of control without the making of a general offer.  This does not necessarily involve a shareholder vote in a general meeting[12] (paragraph 28).

(5) A whitewash waiver is not a right or a “privilege”.  Shareholders of a company in a general meeting cannot order the Executive or the Panel to do anything.  Rather, the Executive or the Panel, in its discretion, may grant a waiver on such terms and conditions as it thinks fit to achieve the underlying purposes of the Codes (paragraph 29).

(6) Whilst TVB is subject to the BO including the scale-back provision, neither the Executive nor the Panel is under any duty to submit a whitewash waiver to a vote at a general meeting if it would be inappropriate to do so or would not achieve the underlying purposes of the Codes (paragraph 30).

(7) The provisions of the BO, with potentially highly disproportionate voting weights based on residency and turn-out of voters, are fundamentally at odds with the requirements of the Codes, particularly the requirement of GP1 that all shareholders of the same class are to be treated similarly.  Accordingly, a waiver cannot be granted on the normal condition under paragraph 2(e) of Schedule VI to the Codes (namely approval by an independent vote with the adjustment by operation of the scale-back provision at a meeting of shareholders of TVB) (paragraph 31).

(8) The Panel was fully aware that regardless of the Codes, it is a statutory requirement (under s 238(1) of the CO) that the Offer itself must be approved by an ordinary resolution of shareholders in general meeting, the voting on which must be subject to the scale-back provisions (paragraph 34).

(9) The Panel thus decided that in addition to the approval of the Offer by an ordinary resolution of TVB shareholders in a general meeting (to which the scale-back provision would apply), the grant of the Whitewash Waiver is conditional upon the Majority Vote Condition (paragraph 35.1) and the No Vote Condition (paragraph 35.2).

TVB’s grounds for judicial review

49.TVB advances the following 6 grounds for judicial review of the Ruling:

(1) Ground 1 - The Ruling was ultra vires in that the Panel does not have jurisdiction or power to disregard or direct others to disregard provisions of the BO;

(2) Ground 2 - The Panel erred in law in misconstruing the true meaning and effect of the scale-back provision;

(3) Ground 3 - The Ruling was made for an improper purpose and was an abuse of the Panel’s power in that the Panel is attempting to circumvent the scale-back provision;

(4) Ground 4 - The Panel misconstrued GP1, and thus erred in law, took into account an irrelevant consideration, and failed to take into account a relevant consideration;

(5) Ground 5 - The Ruling ignored the requirement in Schedule VI of the Codes that a whitewash waiver should be subject to approval by shareholders.  The Panel thus erred in law, took into account an irrelevant consideration, failed to take into account a relevant consideration, acted unreasonably, and did so for an improper purpose; and

(6) Ground 6 - The Ruling went beyond the factual limits of the case; the Panel failing to recognise that the Offer by its terms is and must be conditional upon any whitewash waiver (if granted) being put to a vote by shareholders of TVB.  The Panel thus erred in law, took into account an irrelevant consideration, failed to take into account a relevant consideration, acted unreasonably, and did so for an improper purpose.

Grounds 1, 2 & 3

50.The first 3 grounds can be considered together. 

Legal principles

51.A person exercising public authority has a duty to promote and must not act to undermine the public policies behind his authority: Padfield v Minister of Agriculture, Fisheries, and Food [1968] AC 997 at 1030B-D per Lord Reid; Backhouse v Lambeth London Borough Council, The Times, 14 October 1972; and R v Home Secretary, Ex p Fire Brigades Union [1995] 2 AC 513 at 552B-E and 554F-H per Lord Browne-Wilkinson.  The principle applies equally to any decision maker who acts to frustrate the policy of a statute even if not a statute from which he derives his power: R (OneSearch Direct Holdings Ltd) v City of York Council[2010] PTSR 1481 at [24] per Hickinbottom J; and Spectrum Resources v Minister of Conservation[1989] 3 NZLR 351 at 372(4)-(19).  As Mr Gerard McCoy SC and Mr Laurence Li for TVB put it, a decision-maker shall not exercise his power to circumvent any law or to thwart the objectives of any law.

TVB’s case

52.It is TVB’s case that the Ruling is an attempt to circumvent the scale-back provision, which defines the different voting rights of shareholders (albeit holding the same class of shares) of a domestic free television licensee.  By the Ruling, the Panel imposes its views on shareholder equality which is in conflict with the scale-back provision giving primacy to the Hong Kong resident shareholders of a domestic free television licensee.  In doing so, the Panel acted ultra vires and for an improper purpose.  It has also made an error of law in missing the true effect of the statutory regime under the BO.

SFC’s case

53.In opposition, it is contended on behalf of the SFC that:

(1) The BO does not provide for the grant of a whitewash waiver.  Whether to grant a whitewash waiver (and if so, on what conditions) is not a matter governed by the BO or the provisions in the BO relied on by TVB.  Nor is there any requirement in the BO or other legislation for a whitewash waiver to be put to a vote at a shareholders’ general meeting. Rather, the grant of a whitewash waiver subject to shareholders’ approval in general meeting is prescribed by the Takeovers Codes.

(2) Whether a whitewash waiver should be granted (and if so, on what conditions) is not a matter for decision by TVB, whether at board level or at shareholder level. The power to make that decision is not vested in the shareholders of TVB.  It is a matter within the province of the Panel.  The Panel derives its powers not from the BO but under the Codes under which it is given the powers to modify or relax the application of a Rule if it considers appropriate.

(3) The scale-back provision applies only “where any question or matter is to be determined by a poll at any general meeting of the licensee”.  It does not apply when the Panel merely decides as a condition for the grant of the Whitewash Waiver that it should accord with the wishes of all of TVB’s shareholders (regardless of residency) on the Whitewash Waiver without requiring the matter to be put to a vote at a general meeting, in much the same way in which shareholders’ approval is ascertained in the context of partial offers. The recount of the votes on the Offer without applying the scale-back provision is simply a way of ascertaining shareholders’ wishes without a shareholders’ meeting.  In other words, the Majority Vote Condition does not require any corporate act on TVB’s part that triggers the scale-back provision.

Discussion

54.The starting point is, I believe, the supremacy of the scale-back provision, if engaged.  The scale-back provision operates notwithstanding “anything contained in the articles of association of a licensee or any provision of any law”.

55.The overriding effect of the scale-back provision was recognised by the Panel which expressly acknowledged, in paragraph 34 of the Ruling, that the voting by TVB shareholders on the Offer in compliance with s 238 of the CO must be subject to the scale-back provisions. 

56.Mr Yu SC also accepts that if the Whitewash Wavier be put to a vote by TVB shareholders (as is usually the case), that vote would have to be counted with adjustment in accordance with the scale-back provision and that the Panel imposed the No Vote Condition precisely because of that.

57.Mr Yu SC, however, stresses that the Panel is not obliged by law to put the Whitewash Waiver to TVB’s shareholders for a vote at general meeting.  I am afraid that is beside the point.  The BO is not concerned with what questions or matters are to be put to shareholders of a domestic free television licensee. As submitted by counsel for TVB, “[t]he BO is agnostic as to the source of the requirement for a determination by shareholders, the identity of the person or body requiring it, or the stage at which such is required.”  The scale-back provision applies “where any question or matter is to be determined by a poll at any general meeting of the licensee” (emphasis added).  It does not just apply where the question or matter put to shareholders is required by law to be placed before shareholders.

58.The question to ask is simply whether the Panel did by the Ruling in fact put the Whitewash Waiver to a determination by TVB’s shareholders at the EGM.

59.No doubt the imposition of the No Vote Condition (which in terms forbids a vote on the Whitewash Waiver) was intended to induce a negative answer to this question in favour of the Panel.  And Mr Yu SC does invite me to answer this question in the negative in reliance on the No Vote Condition.

60.With respect, one looks at substance and reality, and not just form.

61.The focus of the Ruling is the Majority Vote Condition which directs a recount of the votes on the Offer without applying the scale-back provision.

62.I have great difficulty with the SFC’s suggestion that the exercise of recounting the votes on the Offer without applying the scale-back provision is simply a way of ascertaining TVB’s shareholders’ wishes on the Whitewash Waiver without a shareholders’ meeting.  Such suggestion might have some validity in the hypothetical situation where a whitewash waiver is sought after the shareholders’ meeting on the buy-back offer[13] and the Executive consults the votes supporting the offer which were cast without the shareholder having in mind a whitewash waiver before deciding whether or not to grant the waiver.

63.Such difficulty is not removed by the SFC’s further point that the Panel did not grant the Whitewash Waiver, but only directed that it should be granted conditional on the Majority Vote Condition and the No Vote Condition.  Once the Panel made the Ruling, the question of whether to grant the Whitewash Waiver reverts back to the Executive who would grant the Whitewash Waiver after the EGM having regard to the level of support for the Offer.  This has provoked an argument between the parties as to whether or not the Whitewash Waiver has been granted. 

64.In my view, it does not matter.  Even if the Panel were technically reserving to the Executive the formal decision of whether to grant the Whitewash Waiver after TVB shareholders have voted on the Offer (as contended by the SFC), the Panel has directed the Executive to exercise its powers to grant the waiver in a particular way.  It cannot be, and it is not, suggested that the Executive, having been so directed by the Panel, could and would exercise its discretion in a manner at variance with the Panel’s direction. 

65.What therefore matters is that the Majority Vote Condition requiring a recount of the votes on the Offer without applying the scale-back provision has been imposed, which raises the issue whether such condition effectively puts the Whitewash Wavier to a determination by a poll at the EGM, thereby triggering the scale-back provision.

66.I do not see how this question can be answered in the negative.  Even though the voting is not on the Whitewash Waiver as such, the votes of TVB shareholders at the EGM will determine the grant or otherwise of the Whitewash Waiver (or, put differently, the outcome of the waiver would depend on the vote).

67.The only point that can be taken on behalf of the EGM is that the vote will not be on the Whitewash Waiver, but on the Offer.

68.The situation must, however, be viewed with regard to reality.  The Panel is setting the conditions for the Whitewash Waiver before the vote and telling TVB shareholders how their votes will be counted and used.  The Ruling is public and has been widely reported in the media.  TVB will also be obliged to explain the Ruling to its shareholders in the Offer Document so that they appreciate the full significance of their votes on the Offer.  So even assuming that, notwithstanding the express conditions of the Offer which require shareholders’ approval of a whitewash waiver and in compliance with the No Vote Condition, the Whitewash Waiver is not put to a vote of TVB’s shareholders at the EGM and the shareholders are asked to vote ostensibly just on the Offer, shareholders voting on the Offer will know that their votes will be recounted as votes on the Whitewash Waiver.  With that knowledge, one would expect them to vote in a way that reflects their views on the Whitewash Waiver.[14]

69.In these circumstances, by requiring a recount of the votes on the Offer for the purpose of granting the Whitewash Waiver, the Panel is in my opinion in substance and in effect directing there to be a vote on the waiver.  The analogy with the approval of partial offers without shareholders’ meetings is therefore inapt.

70.I agree with counsel for TVB that the Majority Vote Condition in substance and in effect puts the Whitewash Waiver to a determination by TVB’s shareholders albeit not by a vote on the Whitewash Waiver as such (see Form 86 paragraph 55). The scale-back provision is therefore engaged.

71.Compliance with the Majority Vote Condition would, in substance and in effect, call for a vote by the independent shareholders of TVB on the Whitewash Waiver but without applying the scale-back provision.  The dis-application of the scale-back provision is not permissible under the BO.

72.In including the Majority Vote Condition for the grant of the Whitewash Wash, the Panel misconstrued the true meaning and effect of the scale-back provision and disregarded and attempted to circumvent such provision.  The Ruling was ultra vires.

73.TVB has therefore made out Grounds 1, 2 and 3.

74.In light of my conclusion on TVB’s Grounds 1, 2 and 3, it is unnecessary for me to address the other grounds for judicial review.

75.Before I leave this judgment, I should for the sake of completeness state that I have not overlooked Mr Yu SC’s submission that while decisions of the Panel are amenable to judicial review, the courts have long recognised that such decisions should only be interfered with in very limited circumstances.  In support, Mr Yu SC refers to Lord Donaldson MR’s judgments in R v Panel on Take-overs and Mergers, ex p Datafin Ltd [1987] QB 815 at 841D-G and R v Panel on Take-overs and Mergers, ex p Guinness Plc [1990] 1 QB 146 at 159C-G for the following general propositions:

(1) First, the court gives considerable latitude to the Panel on Take-overs and Mergers’ interpretation of the City Codes on Take-overs and Mergers because, as legislator, it can properly alter them at any time and because the rules take the form of principles to be applied in spirit as much as in letter in specific situations.  (Mr Yu SC is fair to point out that unlike the City Codes of Take-overs and Mergers which is promulgated by the Panel on Take-overs and Mergers in the City of London, in Hong Kong, the Codes are issued by the SFC, though in consultation with the Panel.)

(2) Second, even where it is thought appropriate to quash an interpretative decision of the Panel, it might well be more appropriate for the court to declare the true meaning of the rule, leaving it to the Panel to promulgate a new rule accurately expressing its intentions.

(3) Attacks on the Panel’s dispensing powers, the exercise of which is fettered only by the overriding obligation to seek equity between shareholders, would be successful only in wholly exceptional circumstances and, even then, the proper form of relief might well be declaratory rather than substantive.

76.While one may have to look at these principles if it should be necessary to deal with, for example, Ground 4 which on its face goes to the Panel’s interpretation of GP1, insofar as Grounds 1, 2 and 3 are concerned, I note that neither of the cases from which the principles relied upon by Mr Yu SC are derived involved the dimension of operation of a general law which, if triggered, has priority over the Codes.  The crux of the present case is whether the general law (namely, the scale-back provision) is triggered or not.

Disposition

77.I grant TVB leave to apply for judicial review of the Ruling.

78.I further allow TVB’s application for judicial review of the Ruling and make:

(1) an order of certiorari to bring up and quash the Ruling; and

(2) a declaration that the scale-back provision in s 19 of Schedule 1 to the BO apply for and to the shareholders’ approval of the Whitewash Waiver.

The declaration is made on the basis that the Ruling, by the Majority Vote Condition and despite the No Vote Condition, in effect requires TVB’s shareholders’ approval of the Whitewash Waiver but in disregard of the scale-back provision.

79.The question of whether to grant a whitewash waiver to TVB should be remitted back to the Executive.

80.I also make an order nisi that the SFC should pay TVB’s costs of these proceedings, to be taxed on a party and party basis if not agreed, with certificate for two counsel.

81.Last but not least, it remains for me to thank counsel for both parties.  I have been greatly assisted by their able arguments.

Mr Gerard McCoy SC and Mr Laurence Li, instructed by Freshfields Bruckhaus Deringer for the applicant

Mr Benjamin Yu SC and Mr Jonathan Chang, instructed by the Securities and Futures Commission for the 2^nd putative respondent

Attendance of the 1^st putative respondent and the putative interested party excused.