Re Alibabacom

• Jurisdiction: Cayman Islands
• Judge: (Cresswell, J.)
• Judgment Date: 01 May 2012
• Court: Grand Court (Cayman Islands)
• Date: 01 May 2012

Grand Court, Financial Services Division

(Cresswell, J.)

IN THE MATTER OF ALIBABA.COM LIMITED

J. Wood and Ms. J. Collett for the company;

C.D. McKie for the offeror.

Cases cited:

(1) British Aviation Ins. Co. Ltd., Re, [2006] 1 BCLC 665; [2006] BCC 14; [2010] Lloyd”s Rep. I.R. 254; [2005] All E.R. (D.) 290 (Jul); [2005] EWHC 1621 (Ch), referred to.

(2) Dorman Long, In re, [1934] Ch. 635; [1933] All E.R. Rep. 460, considered.

(3) Equitable Life Assur. Soc., Re, [2002] 2 BCLC 510; [2002] BCC 319; [2002] All E.R. (D.) 109; [2002] EWHC 140 (Ch), considered.

(4) Euro Bank Corp., In re, 2003 CILR 205, considered.

(5) Little Sheep Group Ltd., In re, 2012 (1) CILR 34, followed.

(6) NFU Dev. Trust Ltd., In re, [1972] 1 W.L.R. 1548; [1973] 1 All E.R. 135, referred to.

(7) PCCW Ltd., Re, [2009] 3 HKC 292, considered.

(8) UDL Argos Engr. & Heavy Indus. Co. Ltd. v. Li Oi Lin(2001), 4 H.K.C.F.A.R. 358; [2002] 1 HKC 172; [2001] HKCU 1184; [2001] HKCFA 19, referred to.

Legislation construed:

Grand Court Rules 1995 (Revised), O.102, r.20(6): The relevant terms of this paragraph are set out at para. 64.

Companies Law (2011 Revision), s.86(1): The relevant terms of this sub-section are set out at para. 16.

s.86(2): ‘If a majority in number representing seventy-five per cent in value of the creditors or class of creditors, or members or class of members, as the case may be, present and voting either in person or by proxy at the meeting, agree to any compromise or arrangement, the compromise or arrangement shall, if sanctioned by the Court, be binding on all the creditors or the class of creditors, or on the members or class of members, as the case may be, and also on the

company or, where a company is in the course of being wound up, on the liquidator and contributories of the company.’

Practice Direction cited:

Practice Direction No. 2/2010, Schemes of Arrangement and Compromise Under Section 86 of the Companies Law.

Companies-arrangements and reconstructions-confirmation by court-in counting majority in number of members for purposes of Companies Law (2011 Revision), s.86(2), court may direct that custodian, clearing house or nominee of clearing house cast votes in accordance with clients” instructions and specify number on whose instructions votes cast-practical approach and consistent with Practice Direction No. 2/2010-compliance ensures court has all material information to determine whether to sanction scheme

Courts-Grand Court-precedent-Grand Court not to depart from previous Grand Court authority unless plainly wrong

The petitioner company sought an order under s.86 of the Companies Law (2011 Revision), sanctioning a proposed scheme of arrangement between itself and its members.

The company was an exempted limited company incorporated in the Cayman Islands and listed on the Hong Kong Stock Exchange as carrying on business as an investment holding company. The majority shareholder, Alibaba Group Holding Ltd., held approximately 51.2% of the company”s issued shares and was the scheme offeror. HKSCC Nominees Ltd. (‘HKSCC’) held approximately 27.92% of the company”s shares as common nominee for securities held in Hong Kong”s Central Clearing and Settlement System (‘CCASS’) depository.

The scheme”s objective was to privatize the company so that it would become wholly owned by the offeror, Alibaba Group Treasury Ltd. (‘Alibaba Treasury’) and Direct Solutions Management Ltd. (‘Direct Solutions’), following which the company would apply to the Hong Kong Stock Exchange for the withdrawal of the listing of its shares. The scheme was to be implemented as follows: (i) the scheme shares, i.e. shares which were not registered in the respective names of the offeror, Alibaba Treasury and Direct Solutions, would be cancelled; (ii) the company would then immediately increase its share capital to its former amount by the issue of the same number of new shares to the offeror as the number of the company”s shares cancelled and extinguished; (iii) the company would apply the credit arising in its books of account as a result of the share capital reduction to pay up in full, at par, the newly-issued shares to the

offeror; and (iv) the offeror would pay or cause to be paid to each scheme shareholder the cancellation price for each scheme share held.

The company issued the present summons seeking the leave and directions of the court to call a meeting of the scheme shareholders, other than parties acting in concert with the offeror as defined by the Hong Kong Takeovers Code, to consider and, if thought fit, approve the scheme by special resolution. The summons raised the question of how to determine whether the majority in number, required by s.86(2) of the Companies Law, has been achieved when scheme shares are registered in the name of one or more custodians or clearing houses.

The company submitted, inter alia, that (i) the traditional common law approach to a custodian instructed to vote some of its shares in favour of a scheme and others against, was to treat the custodian for the majority in number test as one vote for the scheme and one vote against; (ii) this approach was consistently applied by the Grand Court until earlier this year when, relying on GCR, O.102, r.20(6)(b)-‘the court may direct that . . . [a] custodian or clearing house shall specify the number of votes cast in favour of the scheme and the number of clients or members on whose instructions they are cast and the number of votes cast against the proposed scheme and the number of clients or members on whose instructions they are cast’-the court held that it was appropriate to count the parties from whom the clearing house received instructions; and (iii) the court should decline to follow this decision: it was unprecedented and contrary to the traditional position, which was not raised or argued by the petitioner”s counsel; it was inconsistent with the plain language of s.86(2) and the well-established principle that ‘member’ in the Companies Law means ‘member of record’ (see the definition in s.38); r.20(6)(b) was discretionary and must therefore have addressed something other than the mandatory headcount test-its true purpose was to assist the court in the exercise of its general discretion whether or not to sanction a scheme by expressly enabling it to require information as to participants” voting instructions; and there was no use drilling down to one level of beneficial ownership beneath the custodian when the ultimate beneficial owners may have existed many levels below that.

The offeror supported the company”s submissions, adding, inter alia, that whilst Practice Direction No. 2/2010, para. 4.4-‘the majority in number will be calculated on the basis of the number of clients or members giving instructions to the custodian or clearing house’-clearly contemplated that participants should be counted for the headcount test, (i) the true construction of r.20(6)(b), that the court required information to be provided, should prevail to the extent that this paragraph purported to provide a different meaning; (ii) a practice direction was of very limited authority, being directions given without argument; and (iii) it was not open to the court by practice direction to alter well-established common law rules as to how votes should be counted at a scheme meeting.

Held, granting the order sought subject to appropriate amendments:

The court would grant leave to call the meeting as proposed, but direct that any custodian, clearing house or nominee of a clearing house could cast votes for and against the scheme in accordance with its clients” instructions and should specify the number of clients on whose instructions they were cast. As a court of co-ordinate jurisdiction, the court would not depart from a previous Grand Court authority unless it was plainly wrong. In the light of the fact that the previous Grand Court authority was consistent with and reflected Practice Direction No. 2/2010, and because the proposed timetable for the scheme required an immediate decision, the court would similarly adopt the practical approach provided by GCR, O.102, r.20(6): compliance with such a direction would enable the court at the hearing of the petition to consider whether a majority of members had been achieved with all the potentially material information before the court (paras. 64–66).

1 CRESSWELL, J.: This is the hearing of a summons issued by Alibaba.com Ltd. (‘the company’), seeking the leave and directions of the court to call a meeting of certain of the shareholders of the company under s.86(1) of the Companies Law (2011 Revision) to consider and, if thought fit, to approve by special resolution a scheme of arrangement (‘the scheme’) between the company and certain of its shareholders (‘the scheme shareholders’). The company is represented by Mr. Jayson Wood. This summons raises, among other matters, the question of how to decide whether the ‘double majority’ mandated by s.86 of the Companies Law has been achieved for the purposes of a scheme of arrangement between a company and its shareholders.

2 The evidential material filed in support of the summons comprise: the first affirmation of Ms. Elsa Wong Lai Kin (‘Ms. Wong’), made on April 16th, 2012; the second affirmation of Ms. Wong made on April 20th, 2012; letters from the Securities and Futures Commission (‘SFC’) and the Hong Kong Stock Exchange, both dated April 20th, 2012; and the affirmation of Ms. Teresa Ko made on April 10th, 2012.

3 The company is an exempted limited company incorporated in the Cayman Islands on September 20th, 2006 and listed on the Main Board of the Stock Exchange of Hong Kong Ltd. The company is an investment holding company and, through its subsidiaries, principally carries on business facilitating activities for suppliers and buyers through online marketplaces. The majority shareholder is Alibaba Group Holding Ltd., which holds...