XCHRX DEG HOLDINGS PTY LTD. v. GOLDEN HARVEST ENTERTAINMENT (HOLDINGS) LTD. and Another

1998, No. A10087

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

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JUDGMENT

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The Proceedings

1. On 20 June 1998, the plaintiff issued a writ of summons against the defendants. In the endorsement of claim, the plaintiff alleges that it is a minority shareholder in the first defendant against which it seeks no relief other than an indemnity in costs. The plaintiff says it seeks relief on behalf of the shareholders of the first defendant in respect of actions and intended actions of the controlling directors of the first defendant, being "shareholders beneficially owned by the second defendant and by friends and associates of the second defendant".

2. The relief sought by the plaintiff is -

a declaration that a decision by the second to tenth defendants "being the directors or the majority of the directors present at a Board Meeting . . . held on 15 June 1998, to entertain an invalidly presented proposal" of which proper notice had not been given to issue and place 37.7 million new shares at 50 cents per share was invalid and void;

a declaration that "the purported decision" of those directors to pass a resolution implementing that proposal was made by the second to tenth defendants "acting in breach of their fiduciary duty to the first defendant" not to raise general working capital but for the improper or primary purpose of -

(i) altering the shareholding in the first defendant;

(ii) "to facilitate the said directors' intended future breach of fiduciary duty selling" to the first defendant assets of another company "to the detriment of all the other existing shareholders or the minority shareholders";

3. The plaintiff also seeks an injunction to prevent the "invalid placement of shares or any action associated therewith". Damages and an indemnity from the first defendant for its "costs incurred in the conduct of this action for an on behalf of the shareholders of the first defendant."

4. On 23 June 1998, the plaintiff obtained ex parte, on short notice to the defendants, an interim interlocutory injunction preventing the implementation of the resolution of the Board.

The Applications

5. I have before me an inter parte summons by the plaintiff seeking to continue the injunction, a summons by the second to tenth defendants seeking to discharge the injunction, and a summons by the first defendant and another by the second to tenth defendants under Order 18, rule 19 seeking an order that the writ and endorsement of claim be struck out. These applications were heard at the same time.

The Resolution

6. The first plank on which the plaintiff's case rests is that the resolution of Board of the first defendant was invalid and void. This was said to be because the proposal was "invalidly presented" in that proper notice of the meeting of the Board was not given and the proposal to consider the resolution was not on the agenda for the meeting.

7. Mr Barlow, rightly in my view, does not now press this point, although he still maintains that the way in which the proposal came to the Board is evidence of the lack of good faith on the part of the second to tenth defendants.

The Plaintiff's Case

8. The basis of the plaintiff's action is derivative; that is, the plaintiff sues on behalf of the first defendant because the first defendant, being under the control of the second to tenth defendants, cannot take such action itself. The essence of a derivative action is that some wrong has been committed against the company. The plaintiff does not maintain any action in its own right.

9. What is the wrong alleged to have been committed against the first defendant in this case? According to Mr Barlow, there is a fraudulent scheme by the second to tenth defendants to vote for the placement of the shares -

(a) "for a collateral purpose viz. so as to alter the make-up of the company's shareholding"; and

(b) "so as to facilitate the dumping of [the second defendant's] film library on the company to the detriment of the minority shareholders when it was clear that such a course of action was contrary to the best interests of the company"

10. Mr Barlow says "the resolution and the course of action contemplated by it are obviously contrary to the best interests of the . . . all the shareholders . . . because -

(a) they are improperly motivated so as to change the shareholding of [the first defendant];

(b) they are improperly motivated so as to facilitate future breaches of fiduciary duties . . . namely [the second defendant's] plan to cause [the first defendant] to buy the film library of [the second defendant's] private group companies . . . at a gross over-value and in circumstances when such purchase is clearly not in the best interest of [the first defendant]; and

(c) they are clearly intended to facilitate the Stock Exchange's clearance of (b) which is a "connected transaction" requiring the approval of a majority of the shareholders at a meeting where [the second defendant] and other connected shareholders cannot vote."

I quote from Mr Barlow's written skeleton before me.

The Plaintiff's Evidence

11. In an affirmation made for the purposes of the ex parte application, Mr Peter Foo, a director of the plaintiff, says that the second defendant (Mr Chow) controls about 49.83% of the shares in the first defendant, a public company. The plaintiff holds about 16.99% of the shares. The second defendant controls a group of private companies that manufactures and produces films which are distributed and exhibited by the first defendant.

12. Mr Foo says that, in March 1998, he had a meeting with the fourth and ninth defendants (Mr Tam and Mr Phoon). They told him that the private companies had financial difficulties. They asked him if there was any way that the plaintiff's group could help by purchasing the film library of the private companies. They said that if the plaintiff's group did help, it could have control of the first defendant and the Mr Chow could then play golf. Mr Foo told them that he did not think the library was worth the outstanding bank debt of AUD$30-40 million owed by the private companies, and he considered it to be "of dubious commercial value". Mr Foo says he thought this because the second defendant had been trying unsuccessfully to sell the library for the last 12 months.

13. About 15 April 1998, Mr Phoon telephoned him to tell him that he was working on a proposal that would affect the first defendant and the private companies. Mr Phoon said he would reveal the details later.

14. A board meeting of the first defendant was arranged for 12 June 1998, but this was rescheduled to 15 June 1998 at Mr Foo's request.

15. On 12 June 1998, Mr Graham Burke, another director of the plaintiff, told him of a "3 Part Deal" proposed by Mr Chow and Mr Phoon. Mr Foo thought this deal was improper and told Mr Burke this. This deal, as conveyed to Mr Foo, was -

(a) to place shares of the first defendant with Mr Robert Kuok, Mr Li Ka Shing and Mr Rupert Murdoch;

(b) that the first defendant purchase the library; and

(c) that the businesses of the first defendant and the private companies be stripped down.

16. On 12 June 1998, Mr Foo met Mr Phoon and Mr Tam. He told them that, bearing in mind his fiduciary duties, he could not accept the placement and the proposed purchase which he considered to be only in the interests of Mr Chow and not the first defendant. Mr Phoon said that the placement and purchase "were now not connected and that they were now separate issues". This, says Mr Foo, was in direct contrast to what Mr Phoon had told Mr Burke on 12 June. Mr Foo does not make it clear whether the word "now" was used by Mr Phoon, or that this statement is Mr Foo's interpretation of what Mr Phoon was saying.

17. During 13 and 14 June 1998, Mr Foo proposed to Mr Phoon alternatives to the "3 Part Deal".

18. At the board meeting on 15 June 1998, Mr Foo says he was handed a resolution regarding the placement. He was not told beforehand that this would be proposed. During an adjournment of the meeting, Mr Foo discussed the placement with the sixth defendant (Mr Alan Chow), the eighth defendant (Mr Chu), Mr Phoon, Mr Michael Kwee and another independent director. Mr Kwee is the representative on the Board of Prudential Asset Management Ltd.(Prudential) which holds a substantial minority shareholding in the first defendant. Mr Kwee asked if the Board would agree to him and Mr Foo having the right of veto over the purchase of the library if we agreed to the placement. The others did not agree, Mr Phoon saying that only the placement was under consideration and this was a separate issue to the purchase of the library. Mr Foo said that he considered the passing of the placement resolution to be improper. He was told that this would be put to the vote anyway. Mr Foo then left the meeting in protest.

19. On the same day, he wrote to Mr Chow. In this letter, he said ". . . I find it illegal that CK Phoon can contemplate on one hand to do a share issue and then propose as part of a three part plan in the same breath the purchase of the cancerous private library by the public group."

20. Mr Graham Burke says that, on 12 June 1998, Mr Chow telephoned him to explain new proposals for the first defendant. Mr Burke says these proposals consisted of three parts. He does not say if that is his description or that of Mr Chow. Mr Chow explained the proposed placement of a little over 6% of the shares with each of Messrs Kuok, Li and Murdoch. He then handed the telephone to Mr Phoon. Mr Phoon explained that the placement would make the first defendant a genuine public company since it would be a positive signal to the public. Mr Phoon then went on to describe the second part of the 3 Part Deal "which he said required the support of the [plaintiff's group] and Prudential . . . in order for the Board to be able to vote this part of the 3 Part Deal through, as Mr Chow was not in a position to vote.". Mr Phoon explained that the second part of the 3 Part Deal was that the business of the private companies would be wound down and that the first defendant "would purchase the film library . . . at a valuation everyone was happy with." Mr Phoon said the value of the library and the trade name was about US$20 million. Mr Phoon said the purchase of the library would be financed "by the rights issue and a share placement". Mr Phoon said Mr Chow could not vote on the purchase so voting support would be required from the plaintiff's group and Prudential. Mr Phoon also explained the third part of the Deal involving reducing the business of the first defendant and the private companies. Mr Burke says that Mr Phoon also spoke about a joint venture with Mr Kuok regarding opening a new film studio. Mr Burke produces a hand-written contemporaneous note of this conversation, which is consistent with what he says. The note does not contain the phrase "3 Part Deal". It does refer to an "extraordinary meeting" and, against the names of the plaintiff's group and Prudential, has written the word "key". The note also reveals that, in relation to the placement, Mr Burke was told that this would be "a signal here to stay".

21. Mr Burke spoke to Mr Foo and then wrote to Mr Phoon. The letter expressed concern about the net asset backing for the shares and "that a transaction as big as buying the library should be rushed to a Board Meeting on Monday without sufficient time to properly understand or review the proposal".

22. Mr Burke wrote again to Mr Chow in a letter dated 16 June. In this letter, Mr Burke spoke of his "shock" of being "told on June 12 of a three part program that would change the face of the company and in our view seriously disadvantage the shareholders. The first part being a proposal to issue 20% of the shares at a low price to a group including one who was also getting the studio opportunity with your private company. The second part was the purchase of your library for US$22 million and the third part the strip down of the company's management structure and businesses. All the more disturbing was that I was asked by CK Phoon despite inappropriate notice to lobby our representative to support this package at the Board Meeting on June 15." Mr Burke then wrote of taking all action open "including opposing the proposed share issue, action against directors and considering preparing a case as an oppressed minority for the wind up of the company."

23. The other evidence from the plaintiff is by Mr John Kirby, who is the chairman of the plaintiff's holding company. He produces a type-written "contemporaneous" note of a telephone conversation with Mr Tam on 16 June 1998. This note speaks of Mr Tam saying that the relationship between the first defendant and the plaintiff's group was "like a marriage and we have informed you all the way along of our intentions and have probably disclosed too much. But the Golden Harvest Group is now in a life or death situation hence the issue of shares." Mr Kirby records his expression of disappointment, but makes no specific mention of the purchase of the library.

24. That is the evidence that was before Mr Recorder Ribeiro SC, the ex parte judge.

Other Undisputed Facts

25. From the evidence adduced by the defendants and the response thereto by the plaintiff, I can find that the following facts are also not disputed by the plaintiff -

1. On 19 November 1997, a general meeting of the first defendant authorised the Board to issue new shares representing up to 20% of the capital.

2. On 15 June 1998, after Mr Foo had left, the Board resolved that the placing was in the best interests of the first defendant and that a working committee was appointed to pursue the matter of acquiring the library and report to the Board on the feasibility of acquiring it.

3. Prudential supports the placement.

4. Under the Stock Exchange Listing Rules, there are provisions designed to ensure that the acquisition of property such as the film library by a listed company from a connected person as in this case is in the interests of the company. For example, the Rules require that the acquisition be subject to approval of the company in general meeting, without the connected person voting, that there be an independent valuation and that there be an opinion from an independent expert acceptable to the Exchange as to whether the transaction is fair and reasonable.

Totality of Evidence

26. It is upon that evidence, accepting it at its face value, without taking into account any conflicting evidence adduced by the defendants, that I must decide if the plaintiff has overcome the first hurdle.

The First Hurdle

27. That first hurdle, as far as the applications for continuance and discharge are concerned, is whether or not the plaintiff has any real prospect of succeeding in its claim. In American Cyanamid v Ethicon Ltd [1975] AC 396, Lord Diplock said, at 407G, the court must be satisfied only that "there is a serious question to be tried". He enlarged on this at page 408A -

"So unless the material available to the court at the hearing of the interlocutory injunction fails to disclose that the plaintiff has any real prospect of succeeding in his claim for a permanent injunction at the trial, the court should go on to consider whether the balance of convenience lies in favour of granting or refusing the interlocutory relief that is sought"

28. As far as the strike-out applications are concerned, the situation, as I see it, is somewhat different to that usually prevails in this type of application. In Prudential Assurance Co Ltd v Newman Industries Ltd [1982] 1 Ch 204, at 221H, Cumming-Bruce, Templeman and Brightman, LJJ said -

". . . we do not think that the right to bring a derivative action should be decided as a preliminary issue upon the hypothesis that all the allegations in the statement of claim of "fraud" and "control" are facts, as they would be on the trial of a preliminary point of law. In our view, whatever may be the properly defined boundaries of the exception to the rule [in Foss v Harbottle], the plaintiff ought at least to be required before proceeding with his action to establish a prima facie case (i) that the company is entitled to the relief claimed, and (ii) that the action falls within the proper boundaries of the exception to the rule in Foss v Harbottle."

29. This, to my mind, seems right. It is one thing to proceed with an action on the basis of an alleged wrong against oneself, but quite another to sue for an alleged wrong against another and drag that other through the courts. In the latter case, it seems reasonable that the plaintiff should establish a prima facie case before being allowed to proceed.

Analysis of Plaintiff's Case

30. Before proceeding to see whether the plaintiff has overcome this first hurdle, it is necessary to subject the plaintiff's case to further examination to ascertain its precise nature.

31. I have already recited the plaintiff's allegations in the endorsement of claim and Mr Barlow's submission as to these in his written skeleton.

32. The first point to consider is the allegation that the placement was "not to raise general working capital". It is not, of course, necessary that a placement should be only for the purpose of raising capital in order to achieve legitimacy. There may be a number of other proper reasons for the issuance of new shares. In particular, the placement of shares with very successful and internationally known businessmen in order to generate positive signals to the market, as was the purpose of the placement conveyed to Mr Burke, is a perfectly legitimate reason for the placement of new shares.

33. I should say here that there was some complaint by the plaintiff that the shares were being placed at a price less than that reflected by the net asset value of the first defendant. There is nothing in this point. There is no doubt that the price was fixed according to their market value. One could hardly expect the placees to pay more for the shares than their market value.

34. The next allegation is that the resolution to make the placement was for "the improper or primary purpose of . . . altering the shareholding of the first defendant." This, of course, is not a legitimate purpose, but it is not, without more, a complaint open to the plaintiff in a derivative action. There is no wrong done to the first defendant by issuing shares for this purpose without more. The first defendant does not care how its shareholding is held.

35. Mr Barlow recognises this. He says, rightly, that it is the allegation of the combination of this action, with this purpose, with the motivation "to facilitate the said directors' intended future breach of fiduciary duty selling" to the first defendant assets of another company "to the detriment of all the other existing shareholders or the minority shareholders" that constitutes the wrong against the first defendant and provides the foundation for the derivative action. Mr Barlow enlarges on this, as I have said, by arguing that the plan was to that detriment because it was designed "to cause [the first defendant] to buy the film library of [the second defendant's] private group companies . . . at a gross over-value . . . and . . . to facilitate the Stock Exchange's clearance".

36. Essentially, the allegation is that the second to tenth defendants were acting in concert in a scheme to sell an asset to the first defendant and make it pay more than the asset is worth. This is a case of an allegation of an attempt to misappropriate the first defendant's property.

37. If there is sufficient evidence of this scheme to overcome the first hurdle, I accept that it properly constitutes a good cause of action by the first defendant against the second to tenth defendants, and, therefore, a sound basis for a derivative action.

38. I am also satisfied, so far as it may be relevant, that this is not a case where the conduct of the directors could be ratified by a general meeting of the shareholders. There may be a uncertain division between those cases where conduct can be ratified and those where it can not, but it must be clear that in a case where, in essence, the directors, who are also the holders of most of the shares, are plotting to misappropriate the company's property, a majority of the shareholders - meaning, in this case, the same people who are doing the plotting - are not permitted to forgive their own wrong. To find otherwise would be offensive to common sense.

39. So, on this analysis, the essential allegation regarding which the plaintiff must show a real prospect of success, or a prima facie case, is that there was a plot by the second to tenth defendants to misappropriate the first defendant's property in the way I have described, and that the resolution to make the placement was a step towards implementing this plot.

Assessment of the Evidence

40. Mr Barlow submits that the evidence in this case is not a matter of inference, but of direct evidence from the mouths of the plotters themselves.

41. If this is so, I have to say that my first thought in examining the evidence to see if there is sufficient direct evidence to establish a real prospect of success, or a prima facie case, is that this plot, if it exists other than in the imagination of the plaintiff, is a very strange one, and one that was sought to be advanced by the plotters in a most naive manner.

42. If I am to take it, as Mr Barlow suggests, that the plot is evidenced directly by what the plotters themselves said, we have the extraordinary scenario of the plotters saying to the plaintiff, if I may phrase it in the common speech - "Look, we have a plan here to rip off the company - and, incidentally, you, Mr Li Ka Shing, Mr Robert Kuok and Mr Rupert Murdoch - in grand style. We place shares with Messrs Li, Kuok and Murdoch, hope that they will vote for the plan and help it through the Stock Exchange. Will you co-operate in helping to sell the library to the company so that your shares, as reflected in the net asset value of the company, will be much reduced?"

43. That scenario is, of course, ludicrous. And it is not what came directly from the mouths of the real defendants. In fact, there is no direct evidence at all of the essential allegation that the placement of shares was to facilitate anything other than the legitimate purpose of joining the names of people important in the market with that of the first defendant. There is, of course, direct evidence of the "3 Part Deal", and, indeed, the second to tenth defendants do not deny that, in fact, four matters were discussed with the plaintiff's representatives -

1. The placement.

2. The library.

3. The "down-sizing".

4. The new studio.

44. But, there is no direct evidence that the second to tenth defendants were seeking the resolution authorising the placement in order to help in purchasing the library at "a gross over-value". The evidence is, in fact, that Mr Phoon told Mr Burke that what was proposed was, according to Mr Burke's note, to "inject library into public co at valuation all happy with". And, of course, there was nothing at all wrong with such a proposal. What Mr Phoon was seeking was the plaintiff's support for this proposal, which was not at all outrageous. It is ridiculous to suggest that Mr Phoon was seeking the plaintiff's support for a proposal to purchase the library at too high a price.

45. If there is no direct evidence to establish a reasonable prospect of success, or a prima facie case, is there any indirect evidence? There is not. How can it possibly be inferred reasonably that Mr Phoon, identified by the plaintiff as the architect of the plot, who is an experienced investment banker, had the slightest idea, hope or ambition that a plan to misappropriate the money of the first defendant could survive the most cursory of considerations by such people as the plaintiff, Mr Kwee of Prudential and Messrs Li, Kuok and Murdoch, other shareholders and the Stock Exchange, all of whom, or any one of whom, must have detected the plot immediately? The answer to that is that it cannot be so inferred. That means that the evidence, far from supporting the plaintiff's case to any degree, shouts most tellingly against it. The plaintiff has not the slightest chance, on the evidence before me, of establishing that there was any plot to misappropriate the first defendant's money. There is no even a prima facie case that this is the situation. There was a plan, which the Board implemented, to examine the proposal to acquire the library, and, it may be, if the necessary majority of the shareholders are satisfied that the plan is a good one, that the first defendant may acquire the library for a price that "all happy with", but this cannot found any ground for complaint by the first defendant or, therefore, the plaintiff.

46. There is also other evidence that is most compelling against the plaintiff's case; evidence that indicates that the plaintiff's present case of the plot is an afterthought constructed for the purpose of these proceedings. If it had been in the minds of those representing the plaintiff at the relevant time that what the real defendants were thinking of was a plot to misappropriate the first defendant's assets, why did they not say so in contemporaneous correspondence? Of course, they complain about the "3 Part Deal", but nowhere do they say clearly - "This placement is the first step in this plan of yours to rip off the company. That is wrong. You cannot do it." There is nothing technical in what the plaintiff says the real defendants were seeking to do. Any layman would understand it, as the plaintiff's witnesses now say they do. They say now, quite unequivocally, that the real defendants were plotting a dishonest and unlawful act. If they thought that earlier, there is no explanation of why they did not challenge the real defendants with this. In his first affirmation, Mr Foo says the placement "is in fact for the purpose of altering the shareholding of [the first defendant] and/or to enable [the first defendant] to purchase, at an uncommercial value, the film library . . ." That is a plain enough allegation, but, if it were thought to be the case at the time, why was it not made earlier to the real defendants? The answer to that is that the plaintiff, at that time, thought nothing of the kind.

47. Even if it could be said that there is some evidence of a plot by Mr Chow, Mr Phoon and others to "dump" the library on the first defendant at "a gross over-value", the chances of this plot succeeding, in the light of the considerations I have already mentioned, are so minimal as to be non-existent. No independent shareholder in his right mind is going to support a proposal having the inevitable consequence of costing him money. It follows that there is no danger of the first defendant suffering any injury, and no need at all for an injunction.

48. In the result, I find that the plaintiff has not established a prima facie case that the first defendant is entitled to the relief claimed, and, therefore, that the plaintiff is not entitled to proceed with this action. The writ and endorsement of claim are struck out. In my view, the plaintiff has not established any real prospect of succeeding in its claim or raised a serious question to be tried, and, for this reason, a continuation of the injunction cannot be justified.

The Other Issues

49. My finding on the evidence is sufficient to dispose of this matter, but I will express a view on the other issues raised.

Material Non-disclosure

50. If I had found that there was any sufficient evidence of the plot described and any real danger that it might be implemented, I would have found that there was no material non-disclosure as alleged justifying the discharge of the injunction. Or, if there was any non-disclosure, it was innocent and such that it could be forgiven so that the continuation, or a new injunction, was appropriate.

Balance of Convenience

51. On the balance of convenience, if there had been any sufficient evidence of the plot described and any real danger that it might be implemented, I would have found that the balance of convenience dictated that the injunction should remain in place. The disadvantages of attempting to unravel the implementation of the alleged plot far outweigh, in my view, the inconvenience of holding the position until trial.

The Costs

52. I have heard no argument on costs, but I see no obvious reason why costs should not follow the event. I make order nisi that the plaintiff pay the defendants costs of the action and the applications.

This Judgment

53. It seems to me of some importance that this judgment should be available to the Stock Exchange and the market because the plaintiff's proceedings may have had some effect on the first defendant's position. Accordingly, I adjourn these proceedings into open court for the purpose of handing down this judgment.