Concealing Secret Agreement To Acquire A Listed Company Was A Defraud

Introduction

Rule 26 is a fundamental provision of the Code on Takeovers and Mergers ("Takeovers Code") to ensure transparency and fairness in corporate control transactions and to protect the interests of minority shareholders. A recent court case involving concealment of a secret agreement to acquire a listed company highlights that regulators do not tolerate person taking advantage of their positions to enrich themselves at the expenses of minority shareholders.

Background

At the material time, Chim Pui-chung ("D1") was the substantial shareholder of Asia Resources Holdings Limited (currently known as Zhong Jia Guo Xin Holdings Company Limited) ("Asia Resources"), being a listed company in Hong Kong, and Ricky Chim ("D2"), son of D1, was the executive director and chairman of Asia Resources. In July 2013, D1 and D2 negotiated with a mainland businessman Ma Zhonghong ("Ma") in private an "acquisition of shell" agreement, under which Ma agreed to pay D1 a sum of approximately HK$210 million to control 70% to 75% of the entire share capital of Asia Resources. The key terms of the secret agreement also included (i) D1 would transfer the majority of his shareholding in Asia Resources to Ma or his nominees; and (ii) D2, in his capacity as director and chairman of Asia Resources, would cause the company to issue new shares and convertible notes to enable Ma and his nominees to acquire the shares.

Takeovers Code implications

Rule 26.1 provides that a mandatory offer must be made if any person or group acting in concert acquires 30% or more of the voting rights in a company. Meanwhile, Rule 26.2 provides that a mandatory offer must be, except with consent, conditional only upon acceptances resulting in the offeror and concert parties holding more than 50% of the voting rights. If the offeror already holds more than 50%, the offer must be unconditional.

In order to execute the above secret agreement, D1 and his associate substantially sold their combined 35% stake in Asia Resources. Concurrently, Ma, through a network of proxies including family members and business associates, purchased not less than 30% of the shares of Asia Resources from open market. One of the effects of this secret agreement was that no single person/entity would reach the 30% threshold on paper that would otherwise trigger a mandatory general offer under the Takeovers Code.

Defrauding

In late July and early August 2013, D2 chaired two board meetings. At the meetings, directors of Asia Resources resolved and approved to proceed with the placing of new shares and the issuance of convertible notes to raise funds of over HK$550 million. D2, who voted on both occasions, declared that he did not have any interest in the capital-raising exercise and he had never disclosed the above agreement to Asia Resources and its board of directors. The placing of new shares was completed in late July 2013. In mid-August and mid-September 2013, Asia Resources published an announcement and a circular in relation to the issuance of convertible notes, respectively. In the announcement and circular, it was stated that no directors and shareholders had a material interest in the issuance of convertible notes, and no shareholders were required to abstain from voting in the general meeting concerned. At the general meeting held in October 2013, D1 voted for the issuance of convertible notes, and the resolution was eventually passed by shareholders.

The prosecution was brought by the Independent Commission Against Corruption following a referral by the Securities and Futures Commission. The pivotal issue in this case was that the D1 and D2 were found to have defrauded the Asia Resources' board of directors and shareholders, and the Listing Division of The Stock Exchange of Hong Kong Limited (the "Stock Exchange") by concealing the secret agreement involving illicit payments of over HK$200 million.

The Court finds that the defendants deliberately structured the acquisition of Asia Resources through multiple nominees to avoid triggering the mandatory 30% disclosure threshold and the subsequent mandatory offer requirement, which resulted in depriving minority shareholders of the opportunity to sell their shares at a premium and undermined regulatory oversight. Given both defendants' extensive experience in listed companies and financial markets, they were fully aware that concealing the true nature of this "acquisition of shells" transaction was improper¹.

While acquiring control of a listed company is not illegal in itself, the deceptive method used in this case specifically concealing the controlling buyer's identity and the purpose of the capital-raising exercise, which prevented the board of Asia Resources from protecting minority interests and obstructed the Stock Exchange's regulatory function. Asia Resources' minority shareholders were ultimately prejudiced as their investment was exploited for the defendants' private gain².

Eventually, the Court found D1 and D2 guilty of conspiracy to defraud. In February 2025, D1 was sentenced to 34 months' imprisonment, and D2 was sentenced to 37 months' imprisonment. Both D1 and D2 were also disqualified from being company directors for three years. In sentencing, the Court reprimanded the defendants for undermining Hong Kong's reputation as a financial centre and making an adverse impact on the monitoring mechanism of the city's financial system. The Court also noted that D1 was the instigator of the scam while D2 had abused his official capacity and the trust placed in him by the board of directors of Asia Resources and the public.

Takeaway

This case serves as a reminder that the mandatory general offer requirement under Rule 26 of the Takeovers Code is a fundamental investor protection. In addition, no person should take advantage of their positions to enrich themselves at the expenses of minority shareholders. This case also underscores the paramount importance of transparency in corporate control transactions.

In case of doubt, the relevant persons should consult professional advisors at the earliest opportunity before embarking on a course of action which might have implications under the Takeovers Code.

Footnotes

1. See Reasons of Verdict of [2024] HKDC 2085, at [206], dated 9 December 2024. https://legalref.judiciary.hk/lrs/common/search/search_result_detail_frame.jsp?DIS=164894&QS=%2B%7C%28DCCC%2C439%2F2022%29&TP=RV

2. ibid, at [320].

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