Hong Kong Exchanges and Clearing Limited (HKEx) has noted a number of comments in press reports that suggest there has been some misunderstanding about HKEx's handling of a transaction of Boto International Holdings Limited (the Company). As the case has been concluded, HKEx hopes the following information will clarify its position in relation to the decision of the Stock Exchange of Hong Kong (the Exchange), a wholly - owned subsidiary of HKEx, relating to the transaction.

Background

Various comments in press reports suggested the resolution (see "the revised transaction" below) was passed because the Listing Committee allowed shareholders who were not independent to vote. Some comments also suggested the Exchange allowed too many parties close to management to vote. It was suggested that the following shareholders should not have been allowed to vote on the transaction:-

There was also a press report that said the Listing Committee's ruling that allowed Liliana Tsen and Philip Kao to vote shocked some Listing Committee members because the Exchange usually did not allow any company board member to vote on a deal proposed by the company.

In addition, some market practitioners commented in another newspaper that whether the Company should be treated as a cash company after the Revised Transaction.

The Original Transaction

On 29 March, 2002, the Company entered into agreements to dispose of its entire Christmas festive products and leisure furniture businesses to two wholly-owned subsidiaries of Greenland Investments Holdings Limited (GIHL) (the Original Transaction). GIHL was proposed to be owned as follows: 70 per cent by limited partnerships affiliated with The Carlyle Group, 29 per cent by Sino Pearl Venture Limited, a wholly-owned subsidiary of Happy Nation, a company which is indirectly wholly-owned by HSBC International Trustee Limited (in its capacity as the trustee of Cheerco Trust, a discretionary trust of which Michael Kao and his family members are discretionary objects), and one per cent by Michael Kao.

Given its size, the Original Transaction constituted a major transaction of the Company.

Given the proposed interest of Michael Kao and his family members in GIHL, GIHL would be an associate of Michael Kao and the Original Transaction constituted a connected transaction of the Company.

Under the connected transaction requirements of the Exchange's Listing Rules, the Original Transaction was subject to independent shareholders' approval and any connected person interested in the transaction would be required to abstain from voting under the Listing Rules. The question of who would be required to abstain when the shareholders met to vote on the transaction under the Listing Rules was thoroughly considered by the Exchange. The Exchange decided that, in addition to Michael Kao and his associates (including his family members), certain management shareholders also had a material interest in the Original Transaction and were required to abstain from voting.

However, the Company did not proceed with the Original Transaction.

The Revised Transaction

On 10 July, 2002, the Company entered in new agreements in relation to the disposal of the Company's entire Christmas festive products and leisure furniture businesses to two wholly-owned subsidiaries of GIHL and the subscription of a 25 per cent equity interest in GIHL by a wholly-owned subsidiary of the Company (the Revised Transaction). The limited partnership affiliated with Carlyle was proposed to have the remaining 75 per cent interest in GIHL. The Revised Transaction constituted a major transaction and was subject to shareholders' approval under the Listing Rules.

Michael Kao, Francis Kao, Vivian Kao, Kui Yiu Ngok, Philip Lam, Terry Tse and their respective associates voluntarily abstained from voting.

At the special general meeting held on 19 August 2002, shareholders other than those who abstained from voting approved the Revised Transaction.

Analysis

Voting on the Transaction

The Revised Transaction constituted a major transaction of the Company. Unlike the Original Transaction, the Revised Transaction was not a connected transaction under the Listing Rules.

The Carlyle group is not a connected person of the Company. Under the revised proposal, instead of Michael Kao and his family trust, the Company entered into the subscription agreement with GIHL for the subscription of a 25 per cent equity interest in GIHL. GIHL is not an associate of Kao and is not a connected person of the Company. As a result, the Revised Transaction did not constitute a connected transaction under the Listing Rules.

Under the Listing Rules, a major transaction is subject to shareholders' approval and any shareholder shall abstain from voting if such shareholder has a material interest in the transaction.

Michael Kao and certain management shareholders decided, on a voluntary basis, to abstain from voting in respect of the Revised Transaction following the previous decision of the Exchange regarding the Original Transaction which was a connected transaction.

The comment in a press report suggesting that HKEx usually did not allow any company board member to vote on a deal proposed by the company was incorrect. It would also be wrong to say that HKEx should disallow a person from voting in respect of a major transaction simply because the person is an employee of the Company, or is a nephew of, or has some other relationship with, a director or major shareholder of the Company. It is necessary to consider the circumstances of each specific case to decide whether a person has a material interest in a major transaction and therefore should abstain from voting as required under the Listing Rules.

Based on the circumstances of the case, with Michael Kao and certain management shareholders abstaining from voting, the Exchange did not consider that any other shareholders had a material interest and thus did not require any other shareholders to abstain from voting under the Listing Rules.

Further to the announcement made by the Company on 19 August 2002, the Exchange requested the Company to disclose further information on the voting results on the Revised Transaction in its announcement dated 23 August 2002.

A person should not be deprived of his voting right as a shareholder of a listed issuer. The Exchange is of the view that all shareholders have the same right to vote, except where a shareholder has an interest in the transaction and hence his interest is a different interest from other shareholders; or in certain specified transactions in the Listing Rules that require the controlling shareholders to abstain from voting.

Cash Company

Rule 14.35 of the Listing Rules states that an issuer or group (other than an investment company) whose assets consist wholly or substantially of cash or short-dated securities and which thus ceases to trade will not normally be regarded as suitable for listing. Prior to the completion of the Revised Transaction, the Company was engaged in the Christmas festive products and leisure businesses, and the design and production of three-dimensional computer graphics animation. The Company will continue with its computer graphics animation business and will retain a 25 per cent interest in the Christmas festive products and leisure businesses following the completion of the Revised Transaction. Based on the circumstances of this case, the Exchange does not consider the Company to be unsuitable for listing following the completion of the Revised Transaction under the said Rule 14.35 as the Company will still have operations.