Listed Companies in HK: Abusing Basic Numeracy in the “Headcount Test”

In the Cayman Islands, a scheme of arrangement must be approved by a dual majority of those present and voting: a simple majority by number and a 75% majority by value. The intention is to strike a balance between the views of those with the greatest economic interest while preventing smaller investors’ interests from being disregarded.

The “headcount test” refers to the simple majority test.  We first consider how the Cayman Islands courts have addressed the difficulty in accounting for the interests of those with the underlying beneficial interest in listed shares. Second, we consider how the headcount test for listed companies is abused by “share-splitting” and a proposal for reform.

Where a company is listed on a stock exchange, the traded “shares” are generally scripless. A custodian (In Hong Kong, we call the “custodian” the “nominee” – which role is served by HKSCC Nominees Limited, a wholly-owned subsidiary of Hong Kong Securities Clearing Company Limited) holds all the shares and is entered on the register of members as the legal owner of the listed shares. Shareholders have only a beneficial interest.

When it comes to the headcount test, the orthodox view is that only those recorded on the register of members are entitled to vote (one can look through the register for the 75% by value test). That is the position in England (Re Equitable Life Assurance Society [2002] EWHC 140) and Hong Kong (Re PCCW Limited [2009] HKCA 178). The effect is that the headcount test is ineffective as it fails to account for the interests of underlying shareholders of listed shares.

By contrast, in the Cayman Islands the Court may direct at the hearing to convene scheme meetings that a custodian cast separate votes in respect of each of its clients (Re Little Sheep Group Limited 2012 (1) CILR 34; Re Limited 2012 (1) CLR 272). This is a more commercial approach, but is not without its shortcomings. It does not purport to count each beneficial owner as it only looks behind a single layer of ownership. The “shareholder” from the stock exchange’s viewpoint might itself be a custodian. It might make members’ schemes more unpredictable. It is out of step with other jurisdictions, a problem in a world where concurrent, interrelated offshore and onshore schemes are increasingly COMMON. Nevertheless, it involves no major practical difficulties and is more apt to protect the interests of shareholders than relying strictly on the register of members.

Share splitting refers to intentionally dividing shareholdings into a larger number of smaller holdings in order to boost influence over the headcount test. This may be done with a view to ensuring the scheme passes or fails the headcount test, or in an effort to hold the company to ransom.

Votes cast as a result of share splitting can be rejected by the scheme meeting Chair. At meetings convened by the Court, the object of the meeting is to promote the interests of the class and members must cast their vote for that purpose (Re Dee Valley Group plc [2017] EWHC 184). This is an ineffective means of counteracting vote splitting. The Court in Dee Valley acknowledged that members can have regard to matters other than their financial interests, and that looking into the minds of members will be fraught with difficulty. It will only be in extreme cases that votes will be shown to have been cast for an improper purpose.

Where the headcount vote passes but was tainted by share splitting, the Court may refuse to sanction the scheme in the exercise of its discretion (Re PCCW Limited [2009] HKCA 178).  This obstacle will be easier to clear than proving an improper purpose, but only assists where the headcount test was passed. Where the headcount test was not passed, the court does not have jurisdiction to approve the scheme.

Following Re PCCW Limited, the headcount test was abolished for most members’ schemes in Hong Kong. The headcount test is completely abolished by the new Companies Ordinance, effective 3 March 2014. The position now is that the scheme must be approved by a majority of 75% by value and must not be opposed by more than 10% by value of “independent” shareholders. Please note that these are the combined requirements as a result of both the Companies Ordinance AND the Takeovers Code.

This development in Hong Kong has been highly effective. It eliminates the risk of share splitting altogether. It also overcomes the difficulty in counting members for the headcount test outlined in Part 1 of this series. It recognises the principle of “one share one vote” but retains a minority safeguard. It would be a welcome development in the Cayman Islands, and uniformity is an important goal where one is increasingly seeing concurrent, interrelated offshore and onshore schemes.


Managing Partner, Harneys’ Asia
Leading offshore litigator, senior tactician and thought leader

Ian specialises in restructuring, insolvency, shareholders’ disputes and contentious trusts and has extensive experience in cross-border and conflict of laws dilemmas. He has been involved in every major recent restructuring involving offshore entities in the region and some of Asia’s highest value contentious estate litigation.
Ian is consistently recognized as a leading lawyer in Chambers, Legal 500, Who’s Who Legal and Global Restructuring Review. He was also selected to appear in Citywealth’s Top 100 trust litigators in 2020 and has featured in ALB’s Offshore Client Choice List for the last five years.