Re China National Aviation Co Ltd

HCMP 2290/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2290 OF 2006

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Before: Hon Kwan J in Court

Date of Hearing: 23 January 2007

Date of Judgment: 23 January 2007

Date of Reasons for Judgment: 25 January 2007

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REASONS  FOR  JUDGMENT

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1.This petition was presented by China National Aviation Company Limited (“the Company”) for sanction of a scheme of arrangement between the Company and its minority shareholders under section 166 of the Companies Ordinance, Cap. 32 and for confirmation of a reduction of its share capital under section 58. The Company is owned as to 68.4% by Air China Limited (“Air China”). Both the Company and Air China are listed companies.

2.Shortly after its incorporation, the Company commenced and has since continued to carry on business. Its principal activity is to act as an investment holding company and the principal activities of its subsidiaries mainly comprise air catering services, airport handling services, logistics services in Hong Kong and airlines operation business.

3.The present authorised capital of the Company is $400,000,000 divided into 4,000,000,000 ordinary shares of $0.10 each, of which 3,312,680,000 ordinary shares have been issued and are fully paid. Further, there are 104,378,000 outstanding options granted to four officers of the Company on 29 May 2002 entitling the grantees to subscribe for the ordinary shares of the Company on or before 25 October 2009 at an exercise price of $1.14 per share.

4.A reconstruction of the capital of the Company is proposed under the scheme, by which the Company will become a private company within the group of companies whose parent is Air China. Briefly, the scheme involves:

(1)     the reduction of the authorised and issued share capital of the Company by cancelling and extinguishing all of the ordinary shares of $0.10 each in issue other than those registered in the name of Air China;

(2)     the restoration of the authorised and issued capital of the Company to its former amount of $400,000,000 by the creation of such number of new ordinary shares of $0.10 each as is equal to the number of the ordinary shares so cancelled;

(3)     the allotment and issue by the Company of the new ordinary shares so created, credited as fully paid, to Air China or as Air China may direct; and

(4)     in consideration of the cancellation and extinguishment of the ordinary shares mentioned in (1) above, Air China shall pay to the registered holders of such shares HK$2.80 in respect of every ordinary share so held by them.

5.An order was made on 14 November 2006 for a meeting to be convened for the minority shareholders to consider and, if thought fit, approving the scheme. The court meeting was duly convened on 15 December 2006 and the resolution was approved by an overwhelming majority of the shareholders present and voting. 1,048,052,000 shares are subject to the scheme, as confirmed in the affirmation filed by the Company the day before the hearing of the petition. Of the votes cast representing 765,748,128 shares, 763,506,128 shares (99.71% in value and 99.01% in number) voted in favour of the scheme.

6.An aggregate of 18,000 ordinary shares beneficially owned by Merrill Lynch, Pierce, Fenner & Smith Incorporated and Merrill Lynch International were neither represented nor voted at the court meeting, in accordance with The Code on Takeovers and Mergers issued by the Securities and Futures Commission and their undertakings given to the Company under the scheme, notwithstanding that the scheme applies to such shares.

7.Each of Air China, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Merrill Lynch International and the four grantees of the options under the share option scheme have given an undertaking to the court to be bound by and to execute all documents and do all such things as may be necessary for the purpose of giving effect to the scheme.

8.There is provision in the articles of association for the reduction of the share capital by special resolution in any manner prescribed by law.

9.At an extraordinary general meeting of the Company held on 15 December 2006 immediately after the court meeting, a special resolution was passed to approve the scheme and for the purpose of giving effect to the scheme,

(1)     the authorised and issued capital of the Company is to be reduced by cancelling and extinguishing the scheme shares;

(2)     subject to and forthwith upon such reduction of capital taking effect, the authorised capital is to be increased to its former amount by the creation of such number of new ordinary shares of $0.10 each in the capital of the Company as is equal to the number of the scheme shares cancelled; and

(3)     the Company shall apply the credit arising in its books of account as a result of such reduction of capital in paying up in full at par the new ordinary shares of $0.10 each in the capital of the Company to be created as aforesaid, which new shares shall be allotted and issued, credited as fully paid, to Air China or such party as Air China may direct.

10.The proposed reduction 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 capital. The proposed form of reduction of capital under the scheme is not uncommon (Re National Bank Ltd. [1966] 1 WLR 819 at 823C to F; Re Savoy Hotel Ltd. [1981] 1 Ch 351 at 357A to B; Re China Light & Power Co. Ltd. & Anr. [1998] 1 HKLRD 158 at 161D to G).

11.At a hearing of the summons for directions for the reduction of capital on 16 January 2007, an order was made to dispense with the settlement of a list of creditors. I am satisfied that the proposed cancellation of the scheme shares should not adversely affect or prejudice the creditors of the Company. The amount of cancelled paid up capital would remain intact in the Company virtually throughout the whole reduction process so that the same amount may be applied to pay up the new shares to be allotted to Air China or its nominees. Assets of the Company would not be depleted despite the cancellation of all scheme shares.

12.The directions given for advertisement of a notice of the presentation of the petition have been complied with.

13.At the hearing of the petition, I gave leave to amend the definition of “Scheme Share(s)” in the print of the scheme in the composite scheme document by adding the words “other than those registered in the name of Air China”, which were left out due to inadvertence. I am satisfied no prejudice would have been caused to any shareholder or any other party and none would have been misled as a result of the omission, as all the other documents in the composite document – the letter from the independent board committee of the Company, the letter from the independent financial adviser to shareholders, and the explanatory statement did not have this omission and had incorporated the correct definition of “Scheme Share(s)”. Further, the meaning of the scheme shares was made clear in the notice of the court meeting advertised in the newspapers.

14.Each of the statutory provisions for sanction of a scheme of arrangement has been complied with:

(1)     The class of members was properly constituted in the scheme. The Company has only one class of shares. The shares subject to the scheme are all its shares excluding those registered in the name of Air China. The rights attached to all its shares are identical and treatment under the scheme of all holders of scheme shares is identical. The consideration payable to all holders of scheme shares, being $2.80 cash for each scheme share cancelled, is the same for all shareholders.

(2)     As mentioned earlier, the court meeting was duly convened on 15 December 2006.

(3)     The explanatory statement required by section 166A was sent to shareholders pursuant to the order made on 14 November 2006. The shareholders were given a sufficient explanation of the scheme and its effects and sufficient information to enable them to make a reasonable judgment how to vote at the meeting.

(4)     The requisite majority, being a simple majority in number representing three-quarters in value of those present and voting, had voted in favour of the scheme.

15.There are no grounds for thinking that the class of shareholders was not fairly represented at the court meeting or that any of those voting was acting otherwise than in good faith for the benefit of his interest as a member of the class.

16.Having regard to the recommendations to the shareholders by the independent board committee and the independent financial adviser, I am satisfied that the scheme is such that an intelligent and honest man, being a member of the class concerned and acting in respect of his interest, might reasonably approve.

17.The requirements for reduction of capital have all been satisfied. The shareholders are treated equitably in the proposed reduction; the mechanics of the scheme is for all scheme shares to be cancelled and, in exchange, their holders will receive $2.80 cash for each scheme share cancelled. Adequate explanation regarding the cancellation of the scheme shares, which is an integral part of the scheme, has been given in the explanatory statement. As mentioned earlier, I have been satisfied there would be no depletion of the Company’s assets as a result of the proposed reduction and have made an order to dispense with the settlement of a list of creditors. The proposed reduction is to give effect to the scheme and is for a discernible purpose. 

18.I have therefore sanctioned the scheme and confirmed the proposed reduction of capital. An order in terms was made of the draft submitted.

Mr. Winston Poon, SC, instructed by Baker & McKenzie, for the Petitioner