“One share per person to save ATV”

On 11 February 2015, the management of Asia Television Limited (“ATV”) announced during a press conference the initiation of “one share per person to save ATV”, appealing to the  supporters ATV for acquisition of a total of 10.75% of its shareholdings, which is destined to be disposed of so as to rescue the company from its imminent financial crisis.  The funds received will be used to pay off the outstanding wages and licence fees.

It was proposed that each supporter take up one share for the consideration of HK$10,000, which amount, it was reckoned should be affordable to many of the ATV supporters.  It is not clear on what basis the proposed consideration of HK$10,000 was worked out.  According to the records from the Companies Registry, ATV has issued altogether 1,316,000,000 shares.  10.75% of it is equivalent to about 141,470,000 shares.  Based on the proposed consideration of HK$10,000 per share, the total consideration will be around HK$1,414 billion!  In contrast, the market value of the entire TVB is merely HK$21.5 billion.

Whilst the management of ATV is attempting every possible way to salvage the television station with over half a century’s history in Hong Kong, the proposed scheme will encounter formidable legal hurdles and does not seem to be practical. Those who propose the scheme, despite all the good intentions, should be aware of the potential criminal liability in respect of the unauthorised collective investment scheme (the “CIS”) regulated under the Securities and Futures Ordinance (the “SFO”).

What is CIS?

Pursuant to Schedule 1 of the SFO, a CIS has four relevant elements as set out below:

1.        it must involve an arrangement in respect of property;

2.        the participants do not have day-to-day control over the management of the property;

3.        the property is managed as a whole by or on behalf of the person operating the arrangement and/or the contributions of the participants and the profits or income from which payments are made to them are pooled; and

4.        the purpose of the arrangement is for the participants to participate in or receive profits, income or other returns from the acquisition or management of the property.

“Arrangement” amounting to a CIS has a wide meaning, which could be an arrangement without any formality and communications may amount to arrangements even if they are not legally binding.^[1]

Moreover, a CIS may cover any property. Whilst “property” is defined under section 1 of schedule 1 of the SFO to include money, goods, choses in action and land, whether in Hong Kong or elsewhere, such definition of “property” is by no means exhaustive and shares in a private company such as ATV will almost certainly amount to a “property” within the meaning of a CIS arrangement.

Now that the management of ATV has made a verbal invitation to the public for investment by way of “one share per person” in ATV, it may arguably amount to an informal arrangement in respect of the shares in ATV. Further, the potential shareholders are likely to be merely holding such shares for entitlement to dividends (if any) without getting involved in the management of ATV. It appears that ATV’s call for “one share per person” may fall within the definition of CIS and therefore be subject to the regulation under the SFO.

How is CIS regulated under the SFO?

Under section 103 of the SFO, it is an offence, inter alia, to issue an invitation which is or contains an invitation to the public to acquire, or offer to acquire, an interest in or participate in a CIS, unless the issue is authorised by the SFC under section 105(1) of the SFC or the exemptions apply.

It is the SFC’s policy that a CIS should be authorised by the SFC before the same is marketed to the public. Hence, authorisation of the CIS itself should first be obtained under section 104 of the SFO before authorisation to issue advertisement, invitations or document of CIS pursuant to section 105(1) is applied for. The purpose of these provisions is to enable the members of the investing public to make a properly and accurately informed decision to invest in a CIS.

Without taking positive steps pursuant to section 104 and section 105 of the SFO, the management of ATV should watch out for the potential criminal liability arising under section 103(4) of the SFO^[2].

The incident of The Apex Horizon

A well-known example of unauthorised CIS leading to intervention by the SFC is the sale of hotel room units by Pearl Wisdom Limited, a wholly-owned subsidiary of Cheung Kong (Holdings) Limited (together with all parties involved, the “Cheung Kong Parties”). In 2013, Pearl Wisdom Limited offered the sale of hotel room units of The Apex Horizon in Kwai Chung to the public and a total of 360 hotel room units were individually sold.

The SFC investigated and subsequently formed the view that such offer of sale of hotel rooms constituted an offer to acquire an interest in or to participate in a CIS under the SFO.

Eventually, although the Cheung Kong Parties do not agree with the SFC’s view, they entered into an agreement with the SFC to unwind the sale of the hotel rooms. This avoids the SFC invoking section 213 of the SFO to seek court orders unwinding the sale.

SFC’s power to seek court order

Under section 213 of the SFO, for contravention of provisions under the SFO, the SFC may apply to the Court of First Instance for, inter alia, an order restraining or prohibiting the occurrence or continued occurrence of the relevant contravention or an order declaring a contract relating to an interest in any CIS to be void or voidable.

Hence, even if the supporters of ATV take compassion on the television station, answer to the ATV’s invitation and in fact acquire its shares, SFC may apply to court to declare such acquisition void should the SFC consider that such invitation amount to a CIS under the SFO.

Conclusion

Whilst unit trusts and mutual funds are the most common type of CIS, CIS is not exhaustively defined in the SFO. Its application is subject to the interpretation by the SFC on a case by case basis. More importantly, its scope can be enlarged from time pursuant to section 393 of the SFO, which provides the flexibility to address the changing market conditions.