Sections 15 and 86 of the Companies Act (2021 Revision) and Tonly Electronics Holdings Ltd
| Jurisdiction | Cayman Islands |
| Judgment Date | 09 March 2021 |
| Docket Number | CAUSE NO: FSD 294 OF 2020 (NSJ) |
| Court | Grand Court (Cayman Islands) |
CAUSE NO: FSD 294 OF 2020 (NSJ)
IN THE GRAND COURT OF THE CAYMAN ISLANDS
FINANCIAL SERVICES DIVISION
Application to sanction scheme of arrangement with shareholders – constitution of separate classes of shareholders – basis for sanctioning the scheme – basis for confirming the reduction of capital
Jayson Wood of Harney Westwood & Riegels for the Company
This is the hearing of an application by Tonly Electronics Holdings Limited (the Company) for an order pursuant to section 86 of the Companies Act (2021 Revision) (the Act) sanctioning a scheme of arrangement (the Scheme) between the Company and its shareholders (the Scheme Shareholders) and an order confirming a reduction of capital pursuant to sections 15 and 16 of the Act (the Capital Reduction). The application was heard today (2 March, 2021). The Company was represented by Mr Jayson Wood of Harney Westwood & Riegels.
The purpose and intent of the Scheme is to privatise the Company by cancelling and extinguishing all of the shares held by the Scheme Shareholders (the Scheme Shares) on payment of the Scheme Share Consideration by T.C.L. Industries Holdings (H.K.) Limited (the Offeror) so that thereafter the Offeror, a Hong Kong incorporated company which already owns 61.25% of the issued shares in the Company, will own 100% of the Company's shares. The Capital Reduction is a necessary step in the implementation of the Scheme.
The convening hearing was held on 14 January 2021. On 26 January 2021, following the convening hearing and the filing of further written submissions by the Company, the order giving the requisite directions in relation to the Scheme was made (the Convening Order). The Convening Order provided that there would be two classes of Scheme Shareholders. First, those Scheme Shareholders who were acting in concert, or presumed to be acting in concert, with the Offeror (the Concert Parties) and secondly the other Scheme Shareholders (the Disinterested Scheme Shareholders). The Convening Order directed that a meeting of the Disinterested Scheme Shareholders be held to enable them to vote on the Scheme. No other meeting was required. The Offeror's shares were not to be affected by and the Offeror therefore did not need to vote on the Scheme and the Concert Parties had undertaken to be bound by the Scheme.
The Convening Order also gave directions for the despatch of the scheme documentation to and notification of Disinterested Scheme Shareholders and for the holding and conduct of the meeting of Disinterested Scheme Shareholders (the Court Meeting) including voting at the Court Meeting.
The Court Meeting was held on 23 February 2021 at which the Scheme was approved by Disinterested Scheme Shareholders holding 99.99% of the shares voted in person or by proxy. As regards the headcount test calculated in accordance with the Convening Order, seventy-one Disinterested Scheme Shareholders voted for the Scheme and one Disinterested Scheme Shareholder voted against.
An extraordinary general meeting ( EGM) of the Company's shareholders was also held on 23 February 2021 at which a special resolution for the Capital Reduction was approved by shareholders holding 99.99% of the shares voted in person or by proxy. The other resolutions proposed at the EGM, which are ancillary to the Scheme and the Capital Reduction, were similarly passed by approximately the same majority vote.
The Company is an exempted limited company incorporated in the Cayman Islands on 8 February 2013. Its registered office is situated at Maples Corporate Services Limited, PO Box 309, Ugland House, Grand Cayman.
The Company's shares are listed on the Main Board of the Hong Kong Stock Exchange (the SEHK). The Company is principally engaged in the research and development, manufacture, and sale of audio-visual products (excluding TV sets) for third parties' brands on an ODM (original design manufacture) basis. The Company is also involved in software development through its subsidiaries.
The Company's shareholder profile is as follows: (a) the Offeror holds 167,452,239 shares representing approximately 61.25% of the Company's issued shares; (b) directors of the Offeror and the spouse of one such director (the Offeror Directors) who hold 1,078,097 shares representing approximately 0.39% of the Company's issued shares; (c) persons involved in the management of the Company (the Management Shareholders) who hold 32,277,094 shares representing approximately 11.80% of the Company's issued shares; (d) BOCI-Prudential Trustee Limited (the Trustee) as the trustee for the administration of the Restricted Share Award Scheme which was adopted by the Company to allow employees to gain a financial stake in the Company, which holds 3,386,385 shares representing approximately 1.24% of the Company's issued shares; (e) Mr Liao Qian, a non-executive director of the Company, who holds 97,746 shares representing approximately 0.04% of the Company's issued shares ( Mr Liao) and (f) the remaining shareholders who hold 69,147,318 shares representing approximately 25.29% of the Company's issued shares and are the Disinterested Scheme Shareholders. Of the total of 273,393,448 issued shares, 148,926,152 shares are held by HKSCC Nominees, representing approximately 54.49% of the Company's issued shares. HKSCC Nominees acts as common nominee for all securities held in Hong Kong's Central Clearing and Settlement System ( CCASS). Some of those shares are held on behalf of the Offeror and the Concert Parties and so could not be voted at the Court Meeting. The vast majority of Disinterested Scheme Shareholders is located in Hong Kong and some others are located in Mainland China.
Under rule 2.10 of the Hong Kong Takeovers Code ( Rule 2.10), only the Disinterested Scheme Shareholders, that is shareholders of the Company other than the Offeror and Concert Parties, are permitted to vote on the Scheme. The Concert Parties (being parties acting in concert with the Offeror according to the definition of “ acting in concert” under the Hong Kong Takeovers Code) are the Offeror Directors, the Management Shareholders, Vast Bright Investment Limited (a company owned by one of the Management Shareholders), Run Fu Holdings Limited (a company in which the Management Shareholders hold an interest); Mr Liao and the Trustee.
The Convening Order made provision for voting by HKSCC Nominees, both with respect to the majority in value and the majority in number (numerosity) requirements in section 86 of the Act. HKSCC was permitted to vote for and/or against the Scheme in accordance with instructions from persons admitted to participate in CCASS (a CCASS Participant) and the number of shares so voted was counted for the purpose of ascertaining whether or not the requirement for approval by seventy-five per cent in value of the Disinterested Scheme Shareholders voting in person or by proxy had been satisfied. For the purpose of ascertaining whether or not the requirement for approval by a majority in number of the Disinterested Scheme Shareholders voting in person or by proxy had been satisfied, HKSCC Nominees was to be treated as a representative of the CCASS Participants from whom it received instructions (and did not have the power to vote on its own absent instructions from CCASS Participants notwithstanding its status as a registered member of the Company) and as a “multi-headed” shareholder such that each of the CCASS Participants from whom voting instructions were received were to be counted as a separate shareholder and the number of such CCASS Participants would determine the number of “heads” attributable to HKSCC Nominees. This approach followed that approved in In re Little Sheep Group Limited [ 2012 (1) CILR 34] and In re Alibaba.com Limited [ 2012 (1) CILR 272] as sanctioned by Practice Direction 2/2010.
The commercial terms of the proposed Scheme are simple. As at the Last Trading Day (29 October 2020), the price of the shares on the SEHK was HK$10.08 per share. During the 180 trading days leading up to the Last Trading Day, the average price of the shares was less than HK$10.08 per share. The payment to Scheme Shareholders proposed by the Offeror is the Scheme Share Consideration of HK$12.00 per share which represents a premium on the current and recent trading price of the Scheme Shares. The independent non-executive directors of the Company, who formed the independent board committee, considered the restructuring to be fair and reasonable and recommended it to Scheme Shareholders. In addition, in a letter to the Disinterested Scheme Shareholders from the independent financial advisor, the independent financial advisor concluded that the Scheme and its associated transactions were fair and reasonable so far as the Disinterested Scheme Shareholders were concerned, and recommended that Disinterested Scheme Shareholders voted in favour of the Scheme.
At the convening hearing the Company initially submitted that the Court should order that the Scheme be treated as a scheme between the Company and all its shareholders (save for the Offeror), that there should be one class of shareholders (namely all shareholders who were parties to the Scheme) but that only a meeting of the Disinterested Scheme Shareholders be convened. The reason for this approach was to ensure that the requirements of Rule 2.10 were clearly satisfied by limiting the meeting to those permitted to vote on the Scheme by that rule. This approach had been followed in other shareholder schemes which needed to comply with Rule 2.10. I indicated at the convening hearing,...
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