Hong Kong Exchanges and Clearing Limited (HKEx) has noted a number of comments in press reports and received enquiries from investors regarding the proposed reorganisation of Paul Y-ITC Construction Holdings Limited (the Company) as announced on 8 October 2002. HKEx hopes the following information will clarify the position of the Stock Exchange of Hong Kong Limited (the Exchange), a wholly-owned subsidiary of HKEx, in relation to the said proposed reorganisation.

Background

The Company released an announcement on 8 October 2002 (Announcement) regarding a proposal as to the reduction in its capital reserves which will then be repaid in specie, being in the form of the assets (Scheme Assets); the shareholders of the Company other than ITC Corporation and its associates (Scheme Shareholders) will agree to novate their pro rata entitlements to the capital repayment in specie by directing the Company to allot/ transfer all their shares in the company holding the Scheme Assets to Dr Charles Chan, the ultimate controlling shareholder of the Company, where Dr Charles Chan will pay to each Scheme Shareholder a cash amount equal to HK$ 0.2 (Offer Price) multiplied by the number of shares of the Company held by the Scheme Shareholders.

Dr Charles Chan also grants ITC Corporation a conditional cash option to pay to ITC Corporation the same cash amount as to each Scheme Shareholder in the same manner under the Proposal if ITC Corporation chooses to exercise the cash option instead of holding its interests in the Scheme Assets.

The Offer Price is at a discount of 90.1 per cent of the pro forma net book value of the Scheme Assets as at 31 March 2002, and a premium of about 9.3 per cent to the last traded price of shares of the Company on 26 September 2002 before the publication of the Announcement of HK$0.183 after adjustment on an ex-dividend basis.

For full details of the Proposal, please refer to the Announcement.

Certain comments in press reports and received enquiries from investors have stated that the Proposal by the Company may be unfair to the Company's minority shareholders.

Analysis

The Proposal is a corporate reorganisation and will be implemented by way of a scheme of arrangement under section 99 of the Companies Act 1981 of Bermuda which requires the approval of the Company's shareholders, other than Dr Charles Chan, ITC Corporation and their associates, which must be by a majority in number representing three quarters in value of the Scheme Shareholders attending and voting at a court meeting. It is also noted in the Announcement that another condition of the proposal is the passing of the resolutions necessary to implement the Proposal at a special general meeting of the Company by the Scheme Shareholders. The above conditions are similar to the voting requirements for withdrawal of listing under Rule 6.12 of the Listing Rules, which also apply to privatisation proposals.

The above arrangement will provide an opportunity for the Scheme Shareholders to exercise their rights to vote for or against the Proposal at the court meeting and the special general meeting and is a mechanism to protect the minority shareholders of the Company.

As noted in the Announcement, the Company will issue a circular on the Proposal, which will contain an advice letter from an independent financial adviser to an independent board committee of the Company, comprising Messrs. Vincent T.K. Cheung and Ernest S.K. Kwok, which has been formed to advise the Scheme Shareholders in respect of the Proposal. Scheme Shareholders will have the benefit of the advice from the independent financial adviser and the recommendation from the independent non-executive directors on the terms of the Proposal to arrive at a decision as to how to exercise their voting rights in respect of the Proposal.

Listing Rules Implications

Corporate reorganisations such as that under the Proposal are not governed by the Listing Rules. An issuer's memorandum and articles of association and the company law in the issuer's place of incorporation will govern such corporate reorganisations.

Terms of issuers' transactions, including the offer price, are commercial decisions for their board and shareholders. It should be the directors' obligation and fiduciary duty to ensure transactions undertaken are fair and reasonable, and are in the interest of issuer and its shareholders. The Listing Rules have relevant provisions to ensure shareholders have the opportunity to vote in major decisions of issuers.

In the Consultation Paper on Proposed Amendments to the Listing Rules Relating to Corporate Governance Issues published by the Exchange in January 2002, HKEx proposes to change the Listing Rules relating to withdrawal of listing so that they are consistent with the latest amendments to the Takeover Code, that is, in addition to the approval of at least 75 per cent of votes attaching to the shares held by the independent shareholders casting their votes, the relevant resolution must not be voted against by more than 10 per cent of the votes attaching to all the shares held by independent shareholders. HKEx received favourable market response on this proposal.

HKEx is concerned about the protection of shareholders' interests. It closely monitors developments in the market and reviews the Listing Rules from time to time to maintain an appropriate level of shareholders' protection.

HKEx also notes concerns about the substantial reduction in assets of a listed issuer. It has committed to publish a consultation paper on continuing listing criteria and related issues by the end October 2002. It is the intention that this concern will be considered in this paper and HKEx will invite views from all interested parties on potential solutions.