Sanyuan Group Ltd ("Sanyuan") which was a listed company on the Hong Kong Stock Exchange ("HKSE") and together with its subsidiaries (the "Group") were previously engaged in transportation, property investment and pharmaceutical/health care businesses.

The transportation business of the Group was discontinued in 2002 and the Group's property investment properties were sold between 2001 and 2003 to repay bank borrowings. Since 2004, the Group has been primarily engaged in biotechnology through its subsidiary, GenePro Medical Biotechnology Ltd ("GenePro"). In 2005, the Group entered into a joint venture with Jin Shun Branch Company ("Jin Shun") to engage in trading of pharmaceutical products.

Sanyuan had been suspended from trading on the HKSE since May 2004. The HKSE informed Sanyuan that trading in its shares would not be allowed to resume unless Sanyuan complies with Rule 13.24 of the Listing Rules. Rule 13.24 provides that "an issuer shall carry out, directly or indirectly, a sufficient level of operations or have tangible assets of sufficient value and/or intangible assets for which a sufficient potential value can be demonstrated to the HKSE to warrant the continued listing of the issuer's securities."

In order to forestall de-listing, Sanyuan presented a resumption proposal (the 'Proposal") to the HKSE in late 2005. The Listing Committee of the HKSE ("LC") decided that the Proposal did not satisfy the requirements of Rule 13.24. Its decision was upheld by the Listing Review Committee ("LRC") and the Listing Appeals Committee ("LAC"). Sanyuan applied to the Court of First Instance for judicial review of the LAC's decision.


The LC refused to re-list Sanyuan in December 2005 on the following reasons. Sanyuan's Proposal essentially comprised of the continuation of the business operation of GenePro, the commencement of business operation of the joint venture company and a proposed rights issue to raise HK$15 million.

The LC decided that the GenePro business was still at a preliminary stage and would not be considered a sustainable business for the purpose of Rule 13.24 due to its low level of operation and operating loss. The joint venture company had only commenced operation in November 2005 and was run by Jin Shun's previous management. Sanyuan had used the track record of Jin Shun as an indication of how the joint venture company would perform in the future. The LC was of the view that Jin Shun's track record might not be indicative of the joint venture company's scale of operations and there was no confirmed order or sufficient track record to support the sustainability of the business run by the joint venture company.

The LRC and LAC were also not satisfied that Sanyuan had complied with Rule 13.24 of the Listing Rules and upheld the decision of LC.

Court's Decision

At the judicial review, the Court held that it should be extremely slow to substitute its views for those of the experienced members of the relevant committees. If the Court is to overturn the decision of any particular committee, it must be evident to the Court that such committee failed to comply with some legal norm or came to a decision which is wholly unreasonable. The Court cannot review the substantive merits of an administrative decision by a committee. It must confine itself to examining the legality of the decision or of the process by which the decision was reached.

The relevant Listing committees were subject to an overriding need for fairness and transparency in the application of Rule 13.24. The Court decided that the LC, LRC and LAC simply rejected Sanyuan's financial figures as "insufficient" without any attempt to articulate any objective reference by which their conclusions were reached. An applicant must at least be entitled to know what standard of operation or what sort of asset base he is expected to have in order to qualify for re-listing. If his resumption proposal is rejected, an applicant cannot simply be told that his turnover, profit or assets are considered insufficient. That is tantamount to giving no reasons. The applicant should be informed in what sense his financial numbers have been deemed to be insufficient and is entitled to know what level of operation or asset base he has fallen below.

Accordingly, Sanyuan was entitled to have the LAC's decision quashed for procedural unfairness and inadequacy of reasons and the Court remitted the matter to the LAC for reconsideration in accordance with the law.

The Court further held that a tribunal dwells on an irrelevant matter at some length during a hearing does not mean that the tribunal's eventual decision is automatically invalid, particularly where the matter plays little or no part in the tribunal's substantive reasoning and eventual determination. It would be wrong in such situation to say that the final decision was irregular on the ground of irrelevant consideration.


According to the decision of this case, the fact that the HKSE is a self-regulating body and the HKSE's committees are made up of experts in the market cannot overcome the need for transparency and fairness in its application of the Listing Rules. The HKSE should identify objective standards and give reasons for its decisions.

Experienced lawyers in our Corporate Finance and Securities Department regularly advise listed companies on regulatory compliance, capital and private fund raising and transactional matters.  If you have any question on the above eNews or any part of the Listing Rules, please do not hesitate to contact us.

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