Introduction

In the recent decision of HKSAR v Cheng Chee-tock Theodore FACC No. 7 of 2014, the Court of Final Appeal (the “Court”) was asked to interpret the provisions of the previous version of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (“Previous Listing Rules”) relating to connected transaction in a criminal appeal.  We will discuss the interpretation approach adopted by the Court.

The Appeal Case

Case History

Cheng Chee-tock (“D1”) was jointly charged with Philip Yu (“D3”) and Kok Teng Nam (“Nam”), who died in May 2008, with one count of conspiracy to defraud the Board of Directors and shareholders of CY Foundation Group Limited (Stock code: 1182) (“CYF”) by concealing an alleged connected transaction (the “Transaction”) and completed the Transaction without complying with the Previous Listing Rules for the period between 2 April 2007 and 28 January 2008 (the “Relevant Period”).  Chong Ching-lai (“D2”) and D3 were separately charged with various counts of money laundering offences, for they dealt with the proceeds of the Transaction.  This article will focus on the conviction of conspiracy to defraud.

D1 and D3 were convicted by the District Court in 2014.  D1 was sentenced to 5 months’ imprisonment and disqualification order was imposed for 3 years.  His appeal against conviction to the Court Appeal was then dismissed.  Yet, the Court unanimously allowed the appeal.

Events Leading to the Conviction

At the Relevant Period, CYF was a company listed on the Hong Kong Stock Exchange and D1 was its Chairman.  D1 was also Chairman, Chief Executive Officer and controlling shareholder (holding some 57.65% of the shares) of Sino Strategic International Limited (“SSI”) an Australian listed company.  China Entertainment Holdings Limited (“CEH”) was a British Virgin Islands company which was a wholly-owned subsidiary of SSI.  Until 29 June 2007, CEH owned 100% of the shares of Sino Joy Holdings Limited (“Sino Joy”), a Hong Kong company, which owned a property on the 17th floor of No 200 Gloucester Road, in Wan Chai (the “Property”).

The chart below is annexed to the judgment of the Court of Final Appeal provided by the prosecution at the trial showing the 4-stage transfers concerning the Transaction:-

• Stage one – period before June 2007:The Property was owned by Sino Joy. Sino Joy was owned by CEH.  CEH was owned by SSI.  D1 was the chairman, CEO and controlling shareholder of SSI.
• Stage two – between 29 June 2007 and 11 September 2007:The Property was still owned by Sino Joy. CEH transferred Sino Joy to Mansion Gains Holdings Ltd. (“Mansion Gains”) at the consideration of HK$46.5 million.  Mansion Gains was owned by Nam.
• Stage three – between 11 September 2007 and 30 November 2007:Nam transferred Mansion Gains to Beauford Ltd. (“Beauford”) which was owned by D2 at the consideration of HK$53.5 million. Hence, Beauford owned Mansion Gains which held Sino Joy which then owned the Property.
• Stage four – from 30 November 2007:CYF set up Highsharp Investments Ltd. (“Highsharp”). D2 transferred Mansion Gains to Highsharp at the same consideration of HK$53.5 million.  Hence, Highsharp owned Mansion Gains which owned Sino Joy which then held the Property.

The Law of Conspiracy to Defraud and the Prosecution’s Case

As set out in the leading authority Mo Yuk Ping v HKSAR [2007] 3 HKLRD 750, conspiracy to defraud was constituted by becoming a party to an agreement with another or others to use dishonest means: (a) with the purpose of causing economic loss to, or putting at risk the economic interests, of another; or (b) with the realization that the use of those means might cause such loss or put such interests at risk.  The prosecution’s case was that:

• D1 and his co-conspirators conspired to effect a connected transaction constituted by CYF’s acquisition of the Property;
• they knew that it was a connected transaction but conspired falsely to represent to CYF that it was not;
• D1 had a beneficial or financial interest in the Property but conspired with his co-conspirators falsely to conceal that fact; and
• by such concealment and false representations, D1 and his co-conspirators induced CYF to complete the acquisition without the necessary company resolutions and without complying with the Previous Listing Rules.

The Court’s Decision

The central issue of this Appeal was whether CYF’s acquisition was a connected transaction within the meaning of the Previous Listing Rules.  The Court considered how the connected transaction constituted under the Previous Listing Rules.

Connected Transaction under the Previous Listing Rules

To qualify as a connected transaction, it had to be a transaction between a listed issuer (inclusive of its subsidiary) and a “connected person” (Rule 14A.13(1)(a) of the Previous Listing Rules).  As defined by Rule 14A.11 of the Previous Listing Rules, “connected person” includes:

• A director, chief executive or substantial shareholder (i.e. 10% or more of the voting power) of the listed issuer;
• Any associate of a director, chief executive or substantial shareholder of the listed issuer, including “…any person or entity with whom the connected person has entered, or proposes to enter, into any agreement, arrangement, undertaking, whether formal or informal and whether express or implied, with respect to the transaction which is such that, in the opinion of the Exchange, that person or entity should be considered a connected person”.

However, the prosecution did not rely on the concept of “associates” in this Appeal.  Thus, the Court needed to identify the connected person from whom Highsharp could be said to have acquired the companies holding the Property because there has to be a connected person being the party to the transaction with Highsharp in order to make it a connected transaction.

Interpretation of the Previous Listing Rules

The Court rejected the prosecution’s submission and ruled that the Previous Listing Rules could not be construed so that a connected transaction is constituted by a transaction between a listed issuer and a non-connected person.

The prosecution submitted that it is necessary to apply a purposive approach in interpreting the word “between” under Rule 14A.13(1)(a) of the Previous Listing Rules in order not to defeat the purpose of the Previous Listing Rules.  It was the prosecution’s submission that (1) one of the purposes of the Previous Listing Rules is to avoid connected persons taking advantage of their positions through transactions with the listed issuer at the cost of its minority shareholders; (2) this purpose would be defeated if a connected person, who had a beneficiary or financial interest in an asset of which he wished to take advantage, could avoid the Previous Listing Rules requirements only because his interest was indirect, as a shareholder, and not direct.  Thus, the word “between” in the definition of “connected transaction” should be construed to have an expanded meaning so that even though the transaction identified as the “connected transaction” is actually between SSI (not a connected person) and CYF, it should nevertheless be regarded as a transaction “between” CYF and Cheng (a connected person) because of D1’s alleged beneficial or financial interest in the Property.

The Court took the view that a purposive interpretation did not permit plain words to be ignored or overridden because some purported purpose which was asserted to be desirable would not be achieved if effect is given to those words.  There could be no doubt as to what “between” means in that context: the listed issuer and the connected person must be mutual parties to the transaction.  So, it was wrong to suggest that the Previous Listing Rules’ objectives regarding transactions in which connected persons are indirectly interested would be circumvented unless such a meaning is attributed to the word “between”.  Also, the Previous Listing Rules catered expressly for a wide range of situations where a connected person is indirectly interested in a transaction with a listed issuer.  Therefore, it was wrong to extend the definition of “connected transaction” to embrace a meaning that the words used could not possibly bear.

Implication

While the chapter relating to connected transaction of both the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Main Board Listing Rules”) and the Rules Governing the Listing of Securities on the Growth Enterprise Market of The Stock Exchange of Hong Kong Limited (the “GEM Listing Rules”) have been amended in July 2014, there have been no substantial changes to the definitions of “connected person” and “connected transaction”.  The definition of “connected transaction” of both of the Main Board Listing Rules and the GEM Listing Rules has been slightly amended to “transactions with connected persons”.  Based on the Court’s ruling in this Appeal, it is likely that Hong Kong courts will adopt the same approach if they need to construe the word “with” in order to give an interpretation to the definition of “connected transaction”.

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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.