Injunction restraining share offer to take over a publicly-listed company
Introduction
Any person who wishes to acquire a controlling interest in a company listed on the Hong Kong Stock Exchange is expected to comply with the Codes on Takeovers and Mergers and Share Buy-backs (“Takeovers Code”) issued by the Securities and Futures Commission. Under the Takeovers Code, an important general principle is the equal treatment of shareholders of the same class with equal information provided to them.
Failure to comply with the Takeovers Code may lead to drastic consequences in an extreme case. In New Sparkle Roll International Group Ltd v Sze [2024] HKCFI 419, the Defendants were alleged for offering some of the shareholders “under the table” considerations in different forms which were well above the offer price to all the other shareholders, leading to an interlocutory injunction granted by the Court restraining the Defendants from declaring the share offer unconditional and/or in any way implementing the share offer.
The Share Offer
The 1st Plaintiff is a company listed on the Hong Kong Stock Exchange (the “Company”) whereas the 2nd Plaintiff is a 0.044% shareholder in the Company. The 1st Defendant, Mr Sze, is a shareholder of the Company. Mr Sze and parties acting in concert with him held about 27.28% shares in the Company as at 9 November 2023. The 2nd Defendant acted as the financial advisor to Mr Sze for the acquisition.
On 5 October 2023, the Defendants made a public announcement that Mr Sze offered to acquire all the shares of the Company at HK$0.9 per share (“Share Offer”). However, based on the trading records produced by the Company, save for the period of suspension from trading, shares of the Company were never been traded at below HK$1 since the date of the announcement.
One of the conditions to the Share Offer was the “valid acceptances of the Share Offer received would result in [Mr Sze and parties acting in concert with him] holding more than 50% of the voting rights in the Company”. This condition could not be waived.
The closing date was initially set at 22 December 2023. At the time of the injunction order application hearing on 26 January 2024, the closing date had been adjourned to 8 February 2024 after two extensions.
As at 22 December 2023 (i.e. the initial closing date), 14 acceptances of the Share Offer had been received, giving Mr Sze and parties acting in concert 38.86% of the voting rights in the Company in the event of the Share Offer turning unconditional. As at the extended closing date on 23 January 2024, the total number of acceptances had risen to 26, giving Mr Sze and parties acting in concert 46.86% of the voting rights in the Company.
The Plaintiffs’ allegation
The Plaintiffs alleged that Mr Sze had secretly approached some shareholders of the Company and secured from them acceptance of the Share Offer with “under the table” considerations in different forms which were well over and above the offer price of HK$0.9 per share. Consequently, the Share Offer, if allowed to proceed to completion, would create a false appearance of active sales of the Company’s share and supress its price at an artificially low price of HK$0.9 per share.
It was the Plaintiffs’ case that such conduct constituted breaches of the Takeovers Code, the Stamp Duty Ordinance (Cap. 117) and the Securities and Futures Ordinance (Cap. 571), not to mention a conspiracy to defraud the Company’s shareholders and public investors.
To support the above serious allegations, the Plaintiff produced various affirmations by several individuals with particulars of the persons involved, the dates and times of the occurrences being deposed to and supported by a number of screenshots of WhatsApp and WeChat messages.
The injunction sought by the Plaintiff
By the summons filed on 19 January 2024, the Plaintiffs sought an interlocutory injunction restraining both defendants from, among others, proceeding, continuing or taking any steps to carry out or perform any acts so as to declare the Share Offer unconditional and/or to allow the Share Offer to become unconditional and/or in any way to implement or regard the Share Offer as having successfully completed without prejudice to the withdrawal rights of those shareholders who had so far accepted the Share Offer.
Appropriate legal test
In deciding whether an interlocutory injunction shall be granted, the Court is usually asked to decide whether it is just or convenient to grant an interlocutory injunction:
1. whether there is a serious question to be tried;
2. if so, whether, if the plaintiff were to succeed in obtaining a permanent injunction at trial, it could adequately be compensated by an award of damages in respect of any loss which it might suffer by reason of the defendant continuing to act unrestrained pending the trial;
3. if not, whether the defendant would be adequately protected by the plaintiff’s cross-undertaking in damages should it be later found that the plaintiff should not have been granted an interlocutory injunction; and
4. if there is doubt as to the adequacy of the respective remedies of damages, where the balance of convenience lies.
However, this case is one of the special cases where an interlocutory injunction will, or will practically, have the effect of disposing of a substantive claim in the action since the Share Offer would lapse at 7pm on 8 February 2024 while the date of the decision for interlocutory injunction application is on 6 February 2024.
In such a special case, the Court would have more regard to the plaintiff’s prospect of success, being treated as a factor in the consideration of the balance of convenience. The Court mentioned various tests formulated by previous cases in relation to this higher regard to the prospect of success, including whether the defendant has “no real chance of succeeding at the trial”, whether the plaintiff is “at least very likely to succeed at trial”, or whether the plaintiff has shown “an overwhelming balance on the merits” in its favour. Ultimately, the Court’s task is to arrive at a result which would carry the lowest risk of injustice as a result of the grant or refusal of an injunction.
Adopting the various tests set out above, the Court was persuaded on the available evidence that the plaintiffs’ claim had sufficient merits to support granting of an interlocutory injunction for the following reasons:
1. In light of the abovementioned trading records, it defied common sense and was inherently improbable, that a shareholder would prefer selling under the Share Offer at an offer price of HK$0.9 per share to selling in the open market at a higher price.
2. The Plaintiff’s evidence was not controverted by Mr Sze who has chosen not to adduce any evidence at all, not even a bare denial of the allegations. It was not sufficient for counsel to state in submission that his client did not act in the ways alleged.
Adequacy of damages
The Court accepted that damages would/may not be adequate remedy to either the Company or Mr Sze.
The Plaintiffs adduced the evidence of an independent consultant specialising in analysing stock market trading behaviours, manipulated sales of the Company’s shares through acceptances of the Share Offer at the below market offer price would adversely affect the Company in the following manner:
1. Setting the offer price at such a low price point would have the negative effect of understating the true value of the Company in the eyes of public investors.
2. If the market price of the Company’s shares should remain subdued, it would inhibit the Company’s bargaining power with potential clients thereby making all future fundraising exercises more costly and dilutive to existing shareholder as well.
The Court observed that the above loss and damage would be difficult to quantify and, therefore, may/would not be adequately compensated by an award of damages.
Balance of convenience
Bearing in mind that the Court should adopt the course that involves the least injustice, the existence of (unchallenged) evidence on the strength of the Plaintiffs’ case and the complete lack of evidence of a meritorious defence by Mr Sze, the Court held the balance of convenience tilted in favour of the Plaintiffs. Another consideration in the Court’s mind was that allowing Mr Sze to proceed with what appears, on evidence, to be an illegality may not be reversed after completion.
For the reasons stated above, the Court granted the aforementioned interlocutory injunction in terms applied by the Plaintiffs.
Takeaways
In making an offer to acquire a controlling interest, parties are reminded to comply with the Takeovers Code and other applicable laws and regulations. Parties should be cautious against offering any “under the table” considerations to part of the shareholders to secure acceptance from them in relation to the general offer.
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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors. |
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Published by ONC Lawyers © 2024 |
