In Re Cosmos Machinery Enterprises Ltd [2021] HKCFI 2088, Mr Justice Harris corrected some privatisation scheme practice and issued the following guidance:
(1) Rule 2.10 of the Code on Takeovers and Mergers (“Rule 2.10”) did not prevent offeror concert parties from voting on privatisation schemes.
(2) As a matter of scheme law, offeror concert parties cannot be prevented from voting on privatisation schemes.
(3) Offeror concert parties’ vote would not be counted for the purposes of determining whether Rule 2.10 has been satisfied.
Background to the guidance
Rule 2.10 provides:
“Except with the consent of the Executive, where any person seeks to use a scheme of arrangement or capital reorganisation to acquire or privatise a company, the scheme or capital reorganisation may only be implemented if, in addition to satisfying any voting requirements imposed by law:
(a) the scheme or the capital reorganisation is approved by at least 75% of the votes attaching to the disinterested shares that are cast either in person or by proxy at a duly convened meeting of the holders of the disinterested shares; and
(b) the number of votes cast against the resolution to approve the scheme or the capital reorganisation at such meeting is not more than 10% of the votes attaching to all disinterested shares.”
Because of Rule 2.10, some quarters mistakenly thought that offeror concert parties could not vote on a privatisation scheme. For example, in Re Dah Chong Hong Holdings Ltd [2020] HKCFI 274; [2020] HKCLC 89 and Re Joyce Boutique Group Ltd [2020] HKCFI 800; [2020] HKCLC 727, the proponents of privatisation schemes excluded offeror concert parties from voting even though they were subject to the schemes.
The correct approach
In Cosmos, the Court held that the previous practice in Dah Chong Hong and Joyce Boutique was incorrect.
The true interpretation of Rule 2.10 is that it does not prohibit offeror concert parties from voting, though their vote could not be counted in determining compliance with Rule 2.10.
As a matter of scheme law, offeror concert parties cannot be excluded from voting if they are parties to the scheme. Incidentally, the Cayman court in Re Tonly Electronics Holdings Limited (Cayman Grand Court, 9 March 2021) also reached the same conclusion.
If offeror concert parties are wrongly excluded from voting, the Court should have no jurisdiction to sanction the scheme because the voting class is improperly constituted.
Look-Chan Ho acted for the Company in this case
