Re Hong Kong Construction (Holdings) Ltd

HCMP 1256/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1256 OF 2006

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Before: Hon Kwan J in Court

Date of Hearing:  24 October 2006

Date of Judgment:  24 October 2006

Date of Handing Down of Reasons for Judgment:  26 October 2006

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REASONS  FOR  JUDGMENT

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1.This is a petition presented by Hong Kong Construction (Holdings) Limited (“the Company”) on 15 September 2006 pursuant to sections 59 and 166 of the Companies Ordinance, Cap. 32.  The object is to seek the sanction of the court to a scheme of arrangement (“the Scheme”) between the Company and all the shareholders and to seek the confirmation of a reduction of its share capital which forms an integral part of the Scheme.  I have sanctioned the Scheme and confirmed the proposed reduction of capital at the hearing and these are the reasons for judgment.

The Company

2.The Company was incorporated on 12 October 1973 under Cap. 32 as a private company limited by shares under its former name, Kumagai Gumi (Hong Kong) Limited.  Its name was changed to its present name on 12 February 1999.

3.The Company and its subsidiaries are principally engaged in construction, property development and property investment in Hong Kong and Mainland China.  It has also recently extended its activities to investments in alternative energy sector and infrastructure.

4.The present authorised share capital of the Company is HK$35,000,000.00 divided into 3,500,000,000 ordinary shares of HK$0.01 each, of which 2,902,689,955 ordinary shares have been issued and are fully paid or credited as fully paid and rank pari passu in all respects with each other, up to the time the petition was presented.  Since then, the board of directors resolved on 15 September 2006 to pay an interim dividend which would be payable in part by issuing bonus shares, and such shares will rank pari passu in all respects with the existing ordinary shares of the Company.  The allotment of these shares will be completed on or about 7 November 2006.

5.Since 29 May 1987, the shares of the Company have been listed on the main board of The Stock Exchange of Hong Kong Limited (“the Stock Exchange”).

6.On 3 June 2004, the Company adopted a new share option scheme (“the Share Option Scheme”).  As at 9 August 2006, there were 38,600,000 options granted and outstanding under the same.  Holders of the options granted under the Share Option Scheme have agreed with the Company that subject to the Scheme becoming effective, they will accept cancellation of their outstanding options.  The new company, HKC (Holdings) Limited (“Newco”), which will replace the Company as the new holding company upon the Scheme becoming effective, proposes to grant to such holders of the option equivalent number of options under the share option scheme to be adopted by Newco.

Objects of the Scheme

7.The primary objects of the Scheme (“the Redomicile Proposal”) are:

(1)     to superimpose Newco, a company incorporated in Bermuda, above the Company such that Newco will become the new holding company of the Company and its subsidiaries; and

(2)     the existing shareholders of the Company will become the shareholders of Newco, whose shares will be listed for trading on the Stock Exchange in place of the shares of the Company.

8.Newco was incorporated in Bermuda on 14 April 2005 as an exempted company with limited liability under the Companies Act 1981 of Bermuda.  It has established a place of business in Hong Kong and has been registered in Hong Kong as an oversea company under Part XI of Cap. 32.

9.Newco was incorporated with an authorised share capital of HK$100,000.00 consisting of 10,000,000 shares of HK$0.01 each (“the Existing Newco Shares”), which have been issued and are not paid and registered in the name of and beneficially owned by the Company.  Upon the Scheme becoming effective, the Existing Newco Shares with the new Newco shares to be issued (“the New Newco Shares”) will be credited as fully paid and transferred to the existing shareholders so they will become the shareholders of Newco.

Reasons for adopting the Scheme

10.The reasons for adopting the Scheme to implement the Redomicile Proposal were set out in the letter from the board of directors and the explanatory statement enclosed in the Scheme documents dated 11 August 2006 served on the shareholders.

11.The Company has been engaging in the construction business in Hong Kong for over 30 years and has been granted “C” licences for public construction works in Hong Kong.  Over the past 18 years since the listing of its shares on the Stock Exchange, the Company has been perceived as a construction company.  Following the completion of the corporate restructuring exercise in April 2004, the board of directors believe it in the interests of the Company to review and expand its revenue stream as and when appropriate to reduce the reliance on the volatile property markets in Hong Kong and Mainland China and to secure a stable revenue environment for the Company’s investors.

12.Under the existing corporate structure, the two distinct businesses of the group (construction business and the other businesses such as investment in property, alternative energy sectors and infrastructure) are embedded under one entity.  Due to the strong public perception that the Company is a construction company, the board of directors believe it is important to introduce a new and clear image to the public that the group is expanding with diversified businesses, by introducing Newco as the new ultimate holding company of the group.

13.A further reason is to protect the businesses of the group from any future claims against the Company in relation to the construction business.  The construction business is susceptible to claims by the nature of the business and the implementation of the Redomicile Proposal would enable the group to better protect its businesses from future claims in relation to construction works.  Upon the implementation of the Scheme, the Company will become a wholly owned subsidiary of Newco and a distinct business of the group engaging principally in the construction business, while the other assets or businesses will be acquired by or injected into other wholly owned subsidiaries of Newco.  So claims and litigation against the Company arising from construction works would not affect the status of the other businesses.

14.A third reason is to facilitate the future expansion of the group with a positive market perception and improved creditability, with a new and clear public and international image of Newco upon the implementation of the Scheme.

Principal features of the Scheme

15.The Scheme involves the following principal steps:

(1)     the Company’s authorised and issued share capital will be reduced by cancelling and extinguishing the 2,902,689,955 ordinary shares of the Company already issued, and such new shares to be issued, as a result of the aforesaid resolution to pay interim dividends in part by way of bonus shares, prior to the effective date of the Scheme (called collectively “Scheme Shares”);

(2)     subject to and forthwith upon such reduction of capital taking effect, the authorised share capital of the Company shall be increased to its former amount by the creation of such number of new shares as is equal to the number of Scheme Shares cancelled;

(3)     the Company shall apply the credit arising in its books of account as a result of such capital reduction in paying up in full at par such number of new shares being equal to the number of Scheme Shares cancelled, which shall be allotted and issued, credited as fully paid, to Newco; and

(4)     in consideration of the cancellation and extinguishment of their Scheme Shares, the holders of the Scheme Shares (whose names appear in the register of members of the Company at the record time) shall receive the Existing Newco Shares and New Newco Shares, both credited as fully paid, on the basis of one Newco share for every one Scheme Share cancelled as aforesaid.

16.The implementation of the Redomicile Proposal will not alter the business and the net assets and liabilities or the financial position of the group, other than the payment of professional costs and expenses relating thereto, estimated to be approximately HK$7 million.

17.Immediately after the implementation of the Redomicile Proposal, Newco will act as the holding company of the group which will continue to carry on the present business activities.  Ownership, voting control and management of the group will remain as at present and the interests of the Company in its subsidiaries will remain unaffected.

The court meeting and the extraordinary general meeting

18.By an order made on 18 July 2006, it was ordered that the Company should convene a meeting of the holders of the Scheme Shares for the purpose of considering, and if thought fit approving, with or without modification, the Scheme.  Directions regarding the service of notice of the court meeting and the Scheme documents, and the advertisement of the court meeting have been complied with.

19.At the court meeting held on 13 September 2006, the Scheme was approved without modification by the holders of the Scheme Shares.  25 votes representing over 99% in value of the shareholders present and voting in person or by proxy approved and voted for the Scheme.  Only one vote representing 0.0118% in value voted against the Scheme.

20.At an extraordinary general meeting of the Company held immediately after the court meeting, a special resolution was duly passed that conditional upon the Listing Committee of the Stock Exchange approving the listing of and granting permission to deal in the Newco shares, the Scheme is approved and for the purpose of giving effect to it, on the effective date of the Scheme, the steps described earlier for the reduction of capital will be implemented and the Share Option Scheme will be terminated.  There is provision in the articles of association to reduce the share capital by special resolution.

21.The allotment of new shares mentioned earlier would only represent 4.57% of the Company’s issued share capital as enlarged.  The new shares would only be allotted to the existing shareholders and not any third parties, and the allotment is made on a pro rata basis in proportion to the shareholders’ respective shareholdings, except where any shareholder elects to receive cash instead of scrip for their dividends.  Thus, the allotment of new shares would not affect the overwhelming consensus of the shareholders for the approval of the Scheme.

The reduction of capital

22.As mentioned earlier, the reduction of share capital is an integral part of the Scheme.  The reason for the proposed reduction is to give effect to the Scheme.

23.The implementation of the proposed capital reduction will not prejudice the interest of creditors of the Company, since the issued and paid-up share capital will be maintained at the same level as it has been immediately before the proposed reduction takes effect.  It does not involve either the diminution of any liability in respect of unpaid share capital or the payment to any shareholder of any paid-up share capital.

24.At the hearing of the summons for directions on 26 September 2006, an order was made that the settlement of a list of creditors of the Company be dispensed with.  Directions for the advertisement giving notice of the presentation of the petition have been complied with.

25.The Company has not received any objection to the proposed reduction of capital.

Sanction of the Scheme

26.For the court to exercise its discretion to sanction the Scheme, it must be satisfied that all the statutory requirements for the sanction of a scheme of arrangement have been complied with.  I have considered the following matters:

(1)     There is only one class of shareholders in this instance, so no issue arises as to the correct composition of the class or classes of members.

(2)     The court meeting was duly convened in accordance with the directions given on 18 July 2006.

(3)     The shareholders have been given a sufficient explanation of the Scheme and its effects in the Scheme documents dated 11 August 2006 to enable them to make a reasonable judgment how to vote at the court meeting.

(4)     As mentioned earlier, over 99% in value of the shareholders present and voting in person or by proxy voted in favour of the Scheme.  This is more than the majority required by statute, which is a simple majority in number representing three-quarters in value of those present and voting in person or by proxy at the meeting.

27.As all the above requirements have been complied with, the exercise of discretion can be considered.  I would be concerned to see whether the Scheme is such that an intelligent and honest person, as a member of the class concerned and acting in respect of his interest, may reasonably approve.  An overwhelming majority of shareholders voted in favour of the Scheme.  They have acted bona fide.  The court would be slow to differ from the conclusion of the majority in these circumstances.  It would be appropriate to exercise my discretion to sanction the Scheme.

Confirmation of reduction of capital

28.The shareholders are treated equitably in the proposed reduction, as they would maintain the same level of shareholding in Newco.  They have been given an adequate explanation for the reduction in the Scheme documents circulated to them.  It does not appear that creditors’ interests would be prejudiced, as the credit arising from the reduction is to be applied to pay up such new shares to be issued by the Company in such number equal to the cancelled Scheme Shares and hence the issued and paid-up share capital of the Company would be maintained at the same level after the reduction.  Lastly, the reduction is for a discernible purpose, as it is an integral part of the Scheme.

29.Having considered the above matters, I am satisfied it would be appropriate to confirm the proposed reduction of capital.

30.As the exact number of shares of the Company forming the Scheme Shares cannot be precisely ascertained at the hearing of the petition but only after the allotment of the new shares on 7 November 2006, the precise figures that have to be set out in the minute to be registered under section 61 cannot be worked out.  To resolve this, the Company by its leading counsel has offered undertakings to notify the court by filing an affidavit of the exact number of ordinary shares of the Company constituting Scheme Shares as defined in the Scheme within 3 days after the complete implementation of the interim scrip dividend scheme and to file such minute within 3 days thereafter with the relevant information inserted for the further approval of the court.

31.I have accepted the undertakings and made an order in terms of the draft submitted by counsel.  So the order and the minute thereof will not be produced to the Registrar of Companies for registration, until the court has approved the finalised minute after the exact number of ordinary shares of the Company as constituting Scheme Shares has been ascertained and the court notified accordingly pursuant to the undertakings.

Mr Chua Guan Hock, SC and Mr Anson MK Wong, instructed by Messrs Iu, Lai & Li, for the Petitioner