Introduction

With the economic downturn brought about by, for one, the COVID-19 pandemic, there has been an increasing number of listed issuers having their shares suspended from trading by the Hong Kong Stock Exchange (“HKEX”) for failing to maintain sufficient levels of business operations and assets as required for its continued listing pursuant to the Main Board Listing Rule 13.24 (“Main Rule 13.24”) or the equivalent of the Growth Enterprise Market (“GEM”) Listing Rule 17.26 (“GEM Rule 17.26”).

Recently, in China Trends Holdings Limited v The Stock Exchange of Hong Kong Limited [2021] HKCA 980, the issuer was one of those companies but ultimately opted to resort to the judicial review route by seeking to challenge the decision reached by HKEX. As demonstrated in this case, Hong Kong Courts remain slow to interfere with the decisions of HKEX and clarifications have been made by the Court of Appeal (“CA”) regarding the Court’s correct approach when facing GEM Rule 17.26.

The listed issuer

China Trends Holdings Limited (“China Trends”) was a company listed on the GEM Board of HKEX since 31 July 2002. In 2009, it disposed of its original business in sales of mobile phones appliances and related application solution, hence, its principal businesses remained with (1) trading in electronic technology and related products; and (2) provision of digital solutions, media and e-commerce platforms. As with most other listed issuers which attracted HKEX’s attention, China Trends’ financial performance had been far from satisfactory, in particular, its share price was trading at HK$0.01 since mid-September 2018.

That attracted the Listing Division of HKEX (the “Listing Division”) to issue a letter to China Trends, triggering HKEX’s concern on China Trends’ compliance with GEM Rule 17.26, hence kick-starting the investigation and consequently the series of decisions made by the Listing Division, GEM Listing Committee and the GEM Listing (Review) Committee (the “Review Committee”). In short, all of them had reached and upheld the decision that GEM Rule 17.26 had not been complied with and trading of shares ought to be suspended (the “Review Decision”)[1].

China Trends then applied to the Hong Kong Courts for judicial review against the Review Decision. The application for judicial review was first dismissed by the Court of First Instance (“CFI”). On appeal (the “Appeal”), China Trends challenged the Review Decision on the primary grounds of irrationality and Wednesbury unreasonableness[2].

It should be highlighted that in this case, GEM Rule 17.26 was the main listing rule involved. GEM Rule 17.26 was amended in October 2019 and the amended version reads as follows:

“An issuer shall carry out, directly or indirectly, a business with a sufficient level of operations and assets of sufficient value to support its operations to warrant the continued listing of the issuer’s securities.”

GEM Rule 17.26 entails two requirements that a listed issuer should be able to meet:

1.        It has a viable and sustainable business; or

2.        It has sufficient assets that enable it to have a viable and sustainable business.

As the relevant law in this respect is rather straight-forward, the focus of this Appeal was not the reading of GEM Rule 17.26, but rather on the conclusion of the Review Committee that China Trends failed to demonstrate that its business was viable and sustainable to warrant the continued listing of its shares.

The law

GEM Rule 17.26

So, what does “viability” and “sustainability” mean? It appears that the CA did not come up with a definite answer. The CA emphasized that the application of GEM Rule 17.26 is a qualitative assessment rather than a quantitative one. In conducting this qualitative exercise, the specific facts and circumstances of that issuer has be taken into account holistically and not simply by way of a “counting exercise” under which the levels of assets and revenue of the issuer are measured against a quantitative or comparative benchmark. There is simply no universal benchmark applicable to all companies to be set.

Having regard to the great deal of flexibility in the application of GEM Rule 17.26, the CA made a special remark that:

“The assessment of whether the obligation under of [Main Rule 13.24] has been satisfied is primarily a matter for the relevant committees of [HKEX], which comprise experienced professionals in various aspects relevant to the operations of [HKEX]. This approach is in line with the general principle that the court should accord a wide margin of discretion to the decision of a professional body where the decision in question is based on an exercise of professional judgment and expertise, and should not interfere in such decision save in a compelling case.”

“Proximity to insolvency” requirement?

Counsels for China Trends tried to argue that viability and sustainability should be measured with reference to the solvency of the listed issuer, i.e. a listed issuer should only be regarded as not viable and sustainable when it would cease business or where it is in a financially dire position viz insolvent or nearly insolvent or its level of assets was so low that its existing business would no longer be viable.

The CA rejected to read in such “proximity to insolvency” requirement in the application of GEM Rule 17.26. There were two reasons behind:

1.        Earlier listing decisions by relevant committees of HKEX has negated such an approach. According to past practices made by relevant committees of HKEX, solvent issuers could be found in breach of GEM Rule 17.26 or its equivalent;

2.        If such requirement is deployed, it could create absurd results. Insofar as a listed issuer has assets (even if they have not been, and will not be, meaningfully deployed in the course of business), be it a dormant issuer or one with negligible business activity, HKEX would not be entitled to suspend its listing, not to forget these listed issuers might be imposing risks to market speculation and manipulation, insider trading, unnecessary volatility and etc.

The CA upholding the Review Decision

Bearing in mind that the principle that “in the absence of any error of law or failure in taking account of relevant matters or taking irrelevant matters into account, the Court should not intervene with such professional judgments”, it goes with no surprise that the Review Decision was upheld and the Appeal was dismissed. This is primarily because the CA was well aware that the Review Committee had considered at least the following factors in reaching the Review Decision:[3]

1.       The Review Committee had looked into China Trends from two angles:

a.    From the perspective of the scale of operations:

i.     Only its trading business had been generating revenue but recorded net losses or limited profit (excluding non-recurring expenses) over the years. The situation did not appear to be a temporary downturn or decline but a persisting situation. It raised the concern that the trading business and the media business were of no substance at all, not to mention viability and sustainability.

b.    From the perspective of the level of assets:

i.     China Trends’ assets mainly consisted of trade receivables, cash and bank balances. It was doubtful as to whether these assets might be sufficient to support operation and to enable China Trends to carry out businesses with sufficient level of operations to justify the continued listing of its shares.

2.        China Trends’ net losses and negative operating cash flows for several consecutive years from 2012 to 2019;

3.       The Review Committee further noted that companies with three particular characteristics should be treated as extreme cases warranting suspension [4]. The Review Committee had regarded China Trends as fulfilling the first two; whereas for the third characteristics, the findings made by the Review Committee would have suggested that that was also established (even if it was not explicitly said so). When the Review Committee considered China Trends as fitting in the profile of extreme cases, it can hardly be argued that it had made any error in its Review Decision and for the CA to intervene with this assessment as being Wednesbury unreasonable.

4.        After all, China Trends’ arguments (such as that it had conducted its trading business for more than 10 years and the HKEX had not raised any concern, if at all) were acknowledged and considered but rejected by the Review Committee.

As the Review Committee had covered everything it ought to have considered without considering factors it ought not to, there simply leaves no room for CA’s interference.

Conclusion

As similar to other judicial review cases, these cases challenging HKEX’s decision, particularly its decisions to suspend trading of particular issued shares, are always uphill battles. It is always not to lose sight that in the present CA judgment, right at the beginning of its analysis, CA shed light of HKEX’s duty to maintain an “orderly, informed and fair market” and its authority to make relevant rules, particularly for cancellation and withdrawal of the listing or, and the suspension and resumption of dealings in securities.

Against this backdrop, whether the label of “deference” is employed or not, this case clearly demonstrates the Court’s reluctance in intervening with the professional judgment of the market regulators’ in their application of GEM Rule 17.26 (and Main Rule 13.24) and their decisions thereof are hereby confirmed in the absence of compelling factors. This is particularly the case when a decision has gone through the three HKEX committees which all upheld the same decision. Their decisions are somehow immune from attack as the Court is unwilling to interfere given that: (1) GEM Rule 17.26 is a flexible assessment not confined to a single set of premises rigidly confined; (2) the relevant committees of HKEX have considered all relevant facts, materials, circumstances of the listed issuers; (3) there is no clue suggesting the relevant committees have considered factors it ought not to considered; and (4) HKEX’s paramount duty in ensuring a quality market as far as reasonably practicable, one can imagine how hard it is to say any of such bodies has made any errors in any aspects.