Pearl wins landmark ruling over exchange council veto

Pearl Oriental won a landmark victory against the stock exchange yesterday, with the body's failure to give reasons for blackballing Pearl's securities arm branded unlawful by a judge.

Jubilant chairman Wong Kwan said he would consider re-applying to launch Pearl Securities in light of the ruling, which he hailed as a breakthrough for the financial community.

Pearl Oriental would also consider claiming damages against the exchange for the loss suffered by Pearl Securities, estimated at $10 million.

The exchange said it was disappointed with the decision. Some members expressed disdain for the ruling, saying it could 'open a whole can of worms'.

Pearl Securities launched a legal challenge to the exchange's power of veto after its application was blackballed in May by the ruling Stock Exchange Council. The application had earlier been approved by the exchange's membership committee and the Securities and Futures Commission (SFC).

The only relief sought by Pearl was declaratory, leading Mr Justice Brian Keith to order both parties to agree on the way to go forward in the light of his judgment.

Mr Wong spent the afternoon in meetings with solicitors to discuss the implications of the Court of First Instance ruling and an appropriate declaration.

Pearl was still interested in the securities business and would consider strengthening its investment after the exchange reformed its voting system and rules.

'Of course, if we try again, it must be according to the new rule,' Mr Wong said. 'This is good news - not just for Pearl Securities, but for the entire financial society.' The ruling indicated 'the requirement of a fair, open and transparent environment for the development of the Hong Kong securities business'.

The judge ruled the Stock Exchange Council must inform candidates of why their application has been refused and give the company the chance to address any concerns. Under the present secret-ballot system, there is no right of appeal and the council need give no reasons for rejection.

Pearl Securities' application was refused after it received four black balls - the minimum for rejection - despite receiving 22 votes in favour.

'In my view, where at least four council members are thinking of voting against the admission of a corporate applicant for membership, the company should be informed why those members are minded to take that course,' Mr Justice Keith said.

The members did not have to be identified and the information did not have to be detailed.

'All that is necessary is for the company to be informed of the nature of the members' concerns, and the gist of any information on which those concerns were based,' he said.

'To the extent that the current system for determining applications for corporate membership of the stock exchange does not allow for that, the current system is unlawful and the challenge to it succeeds.' Pearl Securities was awarded costs.

The stock exchange said it was 'naturally disappointed' with the ruling and was 'urgently considering its position', including the possibility of appeal.

It stressed that the operation of a ballot per se was not unlawful.

One council member said he vehemently disagreed with the court's 'silly decision', which would deter members from casting a black ball for fear of repercussions.

'If we have to give a reason, we find someone's integrity is doubtful, then we would have to prove it,' the member said.

'If we're saying it's an untrustworthy person, we'd be open to libel. This has opened a whole can of worms. If I had to give a reason, I'd be reluctant. I might feel open to litigation.' An SFC official said Pearl Securities would be reviewed to see if it still met the commission's financial resources and other requirements if it re-applied for exchange membership.