[Federal Register Volume 60, Number 162 (Tuesday, August 22, 1995)]
[Notices]
[Pages 43631-43634]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-20773]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 21282; 812-9572; International
Series Release No. 839]
CITIC Pacific Limited; Notice of Application
August 15, 1995.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of Application for Exemption under the Investment
Company Act of 1940 (the ``Act'').
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APPLICANT: CITIC Pacific Limited.
[[Page 43632]]
RELEVANT ACT SECTION: Order requested under section 3(b)(2) of the Act.
SUMMARY OF APPLICATION: Applicant seeks an order declaring that it is
engaged primarily in a business other than that of investing,
reinvesting, owning, holding, or trading in securities.
FILING DATES: The application was filed on April 14, 1995, and amended
on July 31, 1995.
HEARING OR NOTIFICATION OF HEARING: An order granting the application
will be issued unless the SEC orders a hearing. Interested persons may
request a hearing by writing to the SEC's Secretary and serving
applicant with a copy of the request, personally or by mail. Hearing
requests should be received by the SEC by 5:30 p.m. on September 11,
1995, and should be accompanied by proof of service on applicant, in
the form of an affidavit or, for lawyers, a certificate of service.
Hearing requests should state the nature of the writer's interest, the
reason for the request, and the issues contested. Persons who wish to
be notified of a hearing may request such notification by writing to
the SEC's Secretary.
ADDRESSES: Secretary, SEC, 450 Fifth Street, NW., Washington, DC 20549.
Applicant, Level 35, Two Pacific Place, 88 Queensway, Hong Kong.
FOR FURTHER INFORMATION CONTACT:
Mary Kay Frech, Senior Attorney, at (202) 942-0579, or C. David
Messman, Branch Chief, at (202) 942-0564 (Division of Investment
Management, Office of Investment Company Regulation).
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained for a fee from
the SEC's Public Reference Branch.
Applicant's Representations
1. Applicant is incorporated in Hong Kong and its shares are listed
on the Hong Kong Stock Exchange. As of December 31, 1994, applicant had
market capitalization of approximately US$4.8 billion, making it the
fourteenth largest company listed on the Hong Kong Stock Exchange.
2. Applicant's largest shareholder is China International Trust &
Investment Corporation Hong Kong (Holdings) Limited (``CITIC HK''),
which indirectly owns approximately 43% of applicant's shares. CITIC HK
is wholly-owned by China International Trust & Investment Corporation
(``CITIC''), a state-owned enterprise in the People's Republic of China
(``PRC''), which is one of the primary investment vehicles of the PRC
government. CITIC is a ministry-level organization under the direct
oversight of the State Council of the PRC.
3. Applicant came into its current configuration in March, 1990
when CITIC HK bought 49% of applicant's (then named Tyfull Company
Limited) shares. In August 1991, Tyfull Company Limited changed its
name to CITIC Pacific Limited. CITIC HK plays an influential role in
the management and policies of applicant through a management contract
and a number of common directors and senior officers.
4. Applicant's long-term objective is to develop as a large
diversified business with an emphasis on trade and infrastructure
projects similar to the traditional diversified companies based in Hong
Kong known as ``hongs.'' Applicant's principal operations are in Hong
Kong, Macau, and Mainland China. Applicant is treated as a foreign
entity for purposes of most Chinese regulatory schemes and is subject
to restrictions on foreign investment and private ownership in certain
sectors.
5. Applicant's consolidated total assets increased from HK$1,525
million as of December 31, 1990 to HK$34,240 million as of December 31,
1994 (on the basis of audited accounts).\1\ Applicant's growth has
occurred primarily through the acquisition of new businesses financed
in large part by the issuance of new shares. Applicant has been
actively involved in the business affairs of its affiliated companies
and has made significant contributions to these companies at both an
operational and strategic level.
\1\ As of the date of the application, there were approximately
HK$7.73 to each US$1.
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6. Applicant conducts its diversified business operations either
directly or through wholly-owned or majority-owned subsidiaries.
Applicant, through wholly-owned subsidiaries, owns 100% of the shares
of Dah Chong Hong, one of the largest Hong Kong based traders and
distributors. Dah Chong Hong has substantial operations in Hong Kong
and Mainland China and business in Japan, Canada, and Singapore. Dah
Chong Hong's business includes distribution and servicing of vehicles,
and import and distribution of numerous items, including a wide range
of foods, building materials, electric appliances, and audio-visual
equipment. Applicant nominates the board of directors of Dah Chong Hong
and is actively involved in all major decisions regarding its business.
7. Applicant owns majority interests in Jiangsu Ligang Electric
Power (Jiangsu Province) and Zhengzhou Xinli Electric Power (Henan
Province). Each of these entities is a Chinese joint venture company
established to construct and operate a power station. The partners in
these projects are Chinese government-owned entities. Under the
relevant joint venture agreements, applicant has primary responsibility
for the design and construction of these power stations, and for their
operation and maintenance as well as financing. In addition, applicant
recently has acquired a 50% interest in a power plant project in Kai
Feng, Henan Province, China.
8. Applicant has a 55% controlling interest in four large
manufacturing operations in Mainland China that focus generally upon
items related to infrastructure development, including steel, telephone
wires and cables, stainless steel pipe, and small and medium range
motors.
9. Applicant has 50% interests in two major real estate development
projects in Hong Kong. Applicant acts as co-developer and plays an
active role in these projects, which include shopping and office space,
and residential, hotel, and school facilities.
10. Applicant has majority interests in several tunnel development
projects and completed tunnel and bridge operating companies. Applicant
controls a 50% interest in Western Harbour Tunnel Company Limited
(``WHTCL''), the leader of the consortium that will build the Western
Harbour Crossing in Hong Kong. An executive director of applicant
currently serves as chairman of the board of WHTCL and two other
officers of applicant also serve on the board. Applicant also owns a
50% interest in Shanghai CITIC Tunnel Development Co. Ltd., a joint
venture with Shanghai Huangpu River Tunnel Construction Co. Applicant
provides advanced management skills to this project, and is an active
participant in all stages of the project, including design and
planning, construction, operation and maintenance.
11. In addition, applicant, through a wholly-owned subsidiary, is a
45% joint venture participant in Shanghai Huang Pu River Tunnel and
Bridges Development Company Ltd. (``Huang Pu Tunnel & Bridges''), which
was granted a 20-year franchise commencing January 1, 1995, for the
operation, management, and maintenance of a tunnel and two bridges in
Shanghai, China. The other 55% interest in the joint venture company is
owned by two PRC companies connected to the Shanghai government.
Applicant has contractual rights to participate in control of the joint
venture and appoints three of the seven members of the board of
directors. These directors actively are engaged in
[[Page 43633]]
the management and development of Huang Pu Tunnel & Bridges.
12. Applicant also holds a number of its businesses in the form of
strategic alliances through shareholdings in companies in which
applicant holds less than 50% of the equity share capital, many of
which are controlled companies within the meaning of section 2(a)(9) of
the Act. Applicant is the largest single shareholder of Dragonair, a
major regional airline that serves 14 cities in Mainland China and 6
other cities in Asia from its base in Hong Kong. Applicant, directly
and indirectly, owns 46.2% of Dragonair's voting securities and has an
economic interest in an additional 3.75%, for a total economic interest
of 49.95% Applicant has a controlling influence over the company's
management through its control of five of eleven seats on the board of
directors of Dragonair, and has played a key role in negotiating and
obtaining new routes in Mainland China for Dragonair. Dragonair's
operations are subject to air transport service agreements between the
United Kingdom and other countries that effectively prohibit any non-
British company from owning and controlling a 50% or greater interest
in an airline company in Hong Kong. This restriction is expected to
change once Hong Kong reverts to Chinese sovereignty in 1997.
Applicant's Legal Analysis
1. Applicant would like to offer its securities (or depository
receipts representing securities) in the United States, in private
placements, offerings to qualified institutional buyers, or possibly a
public offering. Applicant seeks an order to clarify that it will not
be subject to regulation as an investment company in the United States.
2. Under section 3(a)(3), an issuer is an investment company if it
``is engaged or proposes to engage in the business of investing,
reinvesting, owning, holding, or trading in securities, and owns or
proposes to acquire investment securities having a value exceeding 40
per centum of the value of such issuer's total assets (exclusive of
Government securities and cash items) on an unconsolidated basis.''
Section 3(a) defines ``investment securities'' to include all
securities except Government securities, securities issued by
employees' securities companies, and securities issued by majority-
owned subsidiaries of the owner which are not investment companies.
3. Applicant states that it is engaged primarily in the business of
trade and infrastructure development through active participation in
all of its majority-owned subsidiaries and controlled companies and is
not in the business of investing, reinvesting, or trading in
securities. Although applicant owns investment securities within the
meaning of section 3(a)(3) of the Act, and these investment securities
exceed 40 percent of the value of its total assets on an unconsolidated
basis, applicant currently is eligible to rely on rule 3a-1 to exempt
it from the definition of investment company. Applicant is concerned,
however, that a small change in asset values could deprive applicant of
the protection of rule 3a-1.
4. Rule 3a-1 provides a safe harbor for an issuer that derives no
more than 45% of the value of its total assets (excluding government
securities and cash items), and no more than 45% of its net income
after taxes, from securities other than government securities,
securities issued by employees' securities companies, securities issued
by majority-owned subsidiaries of the issuer which are not investment
companies, and securities issued by the companies which are controlled
primarily by such issuer and (a) through which the issuer engages in a
business other than that of investing, reinvesting, owning, holding or
trading in securities, and (b) which are not investment companies. As
of December 31, 1994, approximately 43.77% of applicant's total assets
were composed of interests in non-investment company businesses where
applicant held 25% or less of the business or where applicant held more
than 25% of the business, but another shareholder held a larger control
position (thus putting in question whether applicant has the ``primary
control'' required by rule 3a-1). These assets accounted for
approximately 32.21% of applicant's total investment income (on a
dividend basis) for the four fiscal quarters concluded December 31,
1994.
5. Section 3(b)(1) of the Act provides that notwithstanding section
3(a)(3), any issuer engaged primarily, directly or through a wholly-
owned subsidiary or subsidiaries, in a business or businesses other
than that of investing, reinvesting, owning, holding, or trading in
securities, in not an investment company. Applicant does not fall
within this exception because not of its businesses are conducted, not
directly or through wholly-owned subsidiaries, but through majority-
owned subsidiaries, controlled companies, and other companies.
6. Section 3(b)(2) provides that notwithstanding section 3(a)(3),
the Commission may issue an order declaring an issuer to be primarily
engaged in a business or businesses other than that of investing,
reinvesting, owning, holding, or trading in securities either directly,
through majority-owned subsidiaries, or through controlled companies
conducting similar types of businesses. To clarify its status under the
Act, applicant requests an order exempting it from regulation as an
investment company under section 3(b)(2).
7. In determining whether a company is ``primarily engaged'' in a
non-investment company business under section 3(b)(2), the Commission
considers the following factors: (a) The company's historical
development; (b) its public representations of policy; (c) the activity
of its officers and directors; (d) the nature of its present assets,
and (e) the sources of its present income.\2\
\2\ Tonapah Mining Company of Nevada, 26 S.E.C. 426, 427 (1947).
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8. Applicant states that it was not established, nor has it
developed, as an investment company. At the time of the acquisition of
applicant buy CITIC HK in 1990, applicant was a small company, listed
on the Hong Kong Stock Exchange, having relatively few assets. Since
that time, its has grown to become a diversified company, on the model
of the traditional Chinese ``hongs,'' principally by acquisitions of
business interests from its largest shareholder, CITIC HK. It is now
actively engaged in trade and distribution, consumer credit, aviation,
real estate, telecommunications, tunnels and transportation-related
facilities, power generation, manufacturing, and environmental
projects. Applicant's strategy has been to enter a new line of business
by taking a minority position in a consortium led by an experienced
industry leader, then, once its has gained sufficient expertise, to
assume a controlling or majority position. Applicant asserts than many
of its holdings in China are less than majority-owned because of the
government limitations on ownership by foreign investors. In addition,
the holding structure of applicant's businesses in Hong Kong and Macau
also have been largely shaped by local regulatory and business factors.
Applicant states that it maintains long-term, substantial positions in
even its minority-held companies, and has not looked to asset sales as
an important source of revenue.
9. Applicant has never held itself out as an investment company
within the meaning of the Act, and has never been a registered
investment company (or subject to any analogous regulatory scheme in
another jurisdiction). Applicant has consistently held itself out to
its shareholders and the public as a company actively engaged in the
businesses of trade, distribution,
[[Page 43634]]
consumer credit, aviation, telecommunications, power generation,
environment, roads and tunnels, industrial manufacturing, and real
property. In various circulars issued to shareholders, applicant has
stated that it expects growth in earnings from its operating
businesses.
10. Applicant's principal officers and directors are actively
engaged in the management and development of applicant's businesses. In
many of these companies, applicant's officers play a leading role in
management's strategic decision making or in other essential
operational functions, such as identifying expansion opportunities or
leading financing efforts. Applicant's top officers have extensive
backgrounds in banking, shipping, heavy industry, power generation,
property development, law, government, accounting, and finance. None of
applicant's principal officers has experience as an investment manager
or adviser, and none of them holds himself out as an expert in these
areas. No principal officer of applicant devotes any of his time to
investment management, apart from cash management. Applicant estimates
that approximately 80% of management's time is devoted to considering
issues related to operating its various businesses, and the remainder
of management's time is devoted to the pursuit of new business
opportunities, maintaining relations with joint venture and consortium
partners, obtaining financing, and administrative matters.
11. As of December 31, 1994, applicant's majority-owned
subsidiaries \3\ accounted for 44.46% of applicant's assets for the
prior 12 months. As of December 31, 1994, Dragonair, a company
controlled by applicant,\4\ accounted for 6.91% of applicant's assets.
\3\ Section 2(a)(24) of the Act defines a ``majority-owned
subsidiary'' of a person as 11a company 50 per centum or more of the
outstanding voting securities of which are owned by such person, or
by a company which * * * is a majority-owned subsidiary of such
person.''
\4\ ``Control'' is defined in section 2(a)(9) of the Act to mean
``the power to exercise a controlling influence over the management
or polices of a company, unless such power is solely the result of
an official position within such company. Any person who owns
beneficially, either directly or through one or more controlled
companies, more than 25% of the voting securities of a company shall
be presumed to control such company.''
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12. Applicant also presumptively controls companies other than
Dragonair that are involved in the development of core infrastructure.
Applicant asserts that it need not establish that such companies and
Dragonair conduct ``similar types of business'' within the meaning of
section 3(b)(2) in order to obtain exemptive relief, however. Section
3(b)(2) requires similarity of businesses only among those controlled
companies which must be added to arrive at a determination of the
primary business engagement of the controlling company.\5\ In
applicant's case, only Dragonair need be added to applicant's majority-
owned subsidiaries to demonstrate that applicant is primarily engaged
in trade and infrastructure (aviation) businesses through majority-
owned subsidiaries and controlled companies.
\5\ In the Matter of American Manufacturing Company, Inc., 41
S.E.C. 415, 419 (Mar. 11, 1963).
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13. Accordingly, 51.37% of applicant's assets as of December 31,
1994, valued in accordance with section 2(a)(41) of the Act, were
comprised of its majority-owned subsidiaries and Dragonair.
14. Applicant's income derives from dividends paid out of operating
returns from the companies through which it does business. As of
December 31, 1994, 67.80% of applicant's income for the prior twelve
months was produced by its majority-owned subsidiaries and Dragonair.
15. Applicant asserts that its historical development, its public
representations of policy, the activities of its officers and
directors, the nature of its assets, and the nature of its income
demonstrates that applicant is not engaged primarily in the business of
investing in securities. Applicant submits that it is primarily
engaged, through controlled companies and majority-owned subsidiaries,
in trade, distribution, transportation, power, and other infrastructure
industries in the China region.
For the SEC, by the Division of Investment management, under
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-20773 Filed 8-21-95; 8:45 am]
BILLING CODE 8010-01-M