ALAN JOHN MUIR v. JOHN ROBERT LAMPL AND ANOTHER

HCA 1172/2004
HCA 2666/2004
(Consolidated)

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1172 and 2666 OF 2004

(Consolidated)

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REASONS  FOR  DECISION

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1.  On 26 November 2004, I dismissed the Plaintiff’s application for interlocutory injunction on the ground that there is no serious issue to be tried.  I now give reasons for the decision.

2.  The Plaintiff and the Defendants are shareholders in a private company called Jasman Asia Limited.  The Plaintiff and the 1^st Defendant are directors of the company.  The Plaintiff’s claim was based on Clause 4 of the Shareholders’ Agreement dated 11 March 2003.  The relevant parts of Clause 4 are as follows,

“4.  CONSTITUTION OF THE BOARD OF EACH OF THE COMPANY OF THE GROUP

4.1  Unless otherwise agreed in writing by the Shareholders, the number of directors of the board of the each of the company of the Group (including the Board) at any time shall consist of four (4) Directors of whom one (1) shall be appointed and may be removed at the request of Huge Returns, and three (3) at the request of Lampl and Muir in each case by written notice to the relevant company of the Group.

4.2  The initial directors of each of the company of the Group shall comprise the following persons and shall be regarded as nominated by the Shareholder(s) listed opposite each of the names:

       Name                                      Nominated by

       Julian Peter Walsh                   Lampl and Muir

       Alan John Muir                        Lampl and Muir

       John Robert Lampl                  Lampl and Muir

       Cheung Wang                         Huge Returns

4,3  Any director of the companies of the Group may at any time by notice in writing signed by him and lodged at the registered office of the relevant company of the Group or delivered at a meting of the directors, appoint any person to be his alternate director and the appointing director may in like manner at any time terminate such appointment.  An alternate director may act as alternate to more than one director.  An alternate director shall not be entitled to receive any remuneration from the relevant company but he shall be entitled (subject to his giving to the Company an address within Hong Kong at which notices may be served on him) to receive notices of meetings of the directors and to attend and vote as a director at any such meeting at which the director for whom he is appointed to act as an alternate is not present, and generally at such meeting to exercise all the powers, rights, duties and authorities of the director.  A director who is also an alternate director shall be entitled in addition to his own vote to a separate vote on behalf of the director for whom he is appointed to act as an alternate.  An alternate director shall be entitled to sign a resolution in writing of the directors pursuant to Articles of Association of the relevant company of the Group.  An alternate director shall automatically cease to be an alternate director if the director for whom he is appointed to act as an alternate ceases for any reason to be a director.  Every person acting as an alternate director shall be an officer of the relevant company of the Group, and shall alone be responsible to the relevant company of the Group for his own acts and defaults, and he shall not be deemed to be the agent of or for the director of whom he is appointed to act as an alternate.

4.5  The Shareholders shall be entitled at any time by notice in writing to the relevant company of the Group to require the removal or substitution of any director appointed at the request of such Shareholder(s) and other Shareholders shall agree to use their respective best endeavours to procure the removal or substitution of such director when so requested by any other Shareholder(s).  The Shareholders and the relevant company of the Group shall be indemnified in full by the Shareholder(s) removing a director appointed at the request of such Shareholder(s) against any claim by such director for unfair or wrongful dismissal and/or other compensation arising out of such removal (except for remuneration or disbursements to which the removed director is lawfully entitled or incurred prior to his removal).

4.6  A director shall be entitled to inform the Shareholder(s) nominating him of all matters concerning the Group’s Business, and each Shareholder receiving such information undertakes to keep the information confidential pursuant to Clause 14.”

3.  A notice dated 30 October 2004 called for an Extraordinary General Meeting of the company to be held on 29 November 2004.  The meeting is to considered the following motion,   

“That [the Plaintiff] be removed from the Board of Directors of the Company on the grounds that he has knowingly and intentionally contravened the clear and lawful instructions of the Board and has failed to act in the best interests of the Company.”

4.  The Plaintiff’s case was that the motion, if carried at the meeting, would constitute a breach of the Shareholders’ Agreement, in particular Clause 4.

5.  Although the application was taken out by way of an ex parte summons dated 23 November 2004, it was actually proceeded with by way of inter parte application.  Both sides filed evidence and I heard respective submissions from Leading Counsel acting for the parties.  The injunctive relief sought is as follows,

“1.     the Defendants, whether by themselves and/or by their agents, servants or otherwise however be restrained, up to and including the adjourned hearing of this summons or until further order of the Court, from voting in favour of the following resolution at the extraordinary general meeting of Jasman Asia Limited scheduled for 29 November 2004 or other resolution to the effect of removing or procuring or effecting the removal of the Plaintiff from the board of Jasman Asia Limited:-

“THAT Mr Alan Muir be removed from the Board of Directors of Jasman Asia Limited on the grounds that he has knowingly and intentionally contravened the clear and lawful instructions of the Board and has failed to act in the best interests of the Company” ”

6.  The matter came before me as one of the Summons Day application.  Due to the fact that I have another Summons Day application to be dealt with, time was somewhat limited.  In the light of that, with the agreement of the parties, I decided to hear submissions on the question of triable issue first.  Having done so, I came to a clear conclusion that there is no triable issue in the case and there is no need to hear submissions on balance of convenience.

7.  The first issue is whether on proper construction, Clause 4 gives the Plaintiff any immunity from being removed as a director of the company.  I shall call this the construction issue.  The second issue is if the clause has such effect, whether it could be relied upon as between the Plaintiff and the Defendants to circumvent Section 157B of the Companies Ordinance Cap. 32 which provides,

“(1) A company may by ordinary resolution remove a director before the expiration of his period of office, notwithstanding anything in its memorandum or articles or in any agreement between it and him …”

I shall call this the public policy issue.

8.  On the construction issue, Mr Smith SC failed to persuade me that Clause 4 had the effect of prohibiting the other shareholders from voting in favour of a motion to remove the Plaintiff as a director.  As I see it, the combined effect of Clauses 4.1, 4.2 and 4.5 only gives the Plaintiff a contractual right vis-à-vis the other shareholders to have a representative in the board.  Clause 4.5 gives the Plaintiff a right to replace his nominee if he for one reason or another he wants to do so.  That provides one of the means by which such nominee could be removed from the board.  But it does not follow that this is the only means.  The clause is simply silent as to whether the other shareholders could exercise their statutory right under Section 157B to remove a director.  The whole scheme is to ensure that the Plaintiff could have his representative in the board and so long as the other shareholders are prepared to accede to the Plaintiff’s bona fide nomination, there is no breach of the clause even though a previous nominee had been properly removed by the other shareholders under Section 157B.

9.  The reason why I qualify the nomination to a bona fide one is that Mr Smith was constrained to accept that there had to be a limit to the right of a shareholder in having his representative sitting in the board.  If the representative acted contrary to the interest of the company and committed serious breach of his fiduciary duties towards the company, Mr Smith agreed that Clause 4 could not be relied upon to prevent his removal.  Mr Smith submitted that if a shareholder insisted on the retention of such a director in the board, he would in effect be repudiating the Shareholders’ Agreement and acting in breach of an implied term circumscribing the right of nomination.

10.  Section 157B is an important provision governing the power structure of a limited company.  Even assuming that the shareholders are free to enter into agreement to abrogate that statutory right (an issue I will address below), it would require very clear and unambiguous wordings to arrive at that result.  In my view, Clause 4 does not expressly provide for such abrogation nor does it necessarily carry such implication.

11.  The Plaintiff’s claim therefore fails to get off the ground on proper construction of Clause 4.

12.  I now turn to the public policy issue.  This would be relevant only if Clause 4 could somehow be construed as giving rise to an entrenched right on the part of the Plaintiff to remain as a director.  A number of authorities were cited by counsel on this point, Mr Smith relied on Russell v Northern Bank [1992] 1 WLR 588; Bushell v Faith  [1969] 2 Ch 438 and [1970] AC 1099; Harman v BML Group  [1994] 2 BCLC 674 and Mr Whitehead SC, appearing for the Defendants, cited Re Greater Beijing Region Expressways Ltd [1999] 3 HKC 818 and [1999] 4 HKC 807.

13.  Mr Whitehead submitted that insofar as Clause 4 gave rise to a prohibition against the removal of the Plaintiff as a director, that constituted a fetter upon the statutory power conferred upon the company under Section 157B.  It would be against public policy to enforce such an agreement even as between the shareholders. 

14.  On the other hand, Mr Smith contended that there is a distinction between enforceability of such an agreement vis-à-vis the company and enforceability vis-à-vis the shareholders.  His point was that the cases cited by him showed that insofar as one confined oneself to the latter, there was no public policy against remedies being granted to restrain a shareholder from acting in derogation of a shareholder’s entrenched directorship safeguarded under a shareholders’ agreement.

15.  Having read the cases, I am of the view that they established the following propositions,

(a)     the law recognizes a distinction between enforceability of agreement vis-à-vis the company and enforceability vis-à-vis the shareholders, see Russell v Northern Bank [1992] 1 WLR 588;

(b)    the court will not enforce against the company an agreement that someone cannot be removed as a director by reason of Section 157B;

(c)     the court will however enforce weighted voting rights conferred on a shareholder even if that weighted voting right could be exercised in a manner which would result in the defeat of a motion to remove a director, see Bushell v Faith  [1970] AC 1099;

(d)    a shareholders’ agreement as to how they shall exercise their voting rights on certain matters could be valid even though it would be unlawful for a company to be bound by such agreement due to provisions in the company legislation, see Russell v Northern Bank [1992] 1 WLR 588 at p. 593B to E;

(e)     a relevant consideration as to the enforceability of an agreement is whether it purports to bind not only those shareholders who are parties to the agreement, but also all those who might become shareholders in the future, see Russell v Northern Bank [1992] 1 WLR 588 at p. 594E to F; Re Greater Beijing Region Expressways Ltd [1999] 3 HKC 818 at p. 824F to H; [1999] 4 HKC at pp. 816I to 817A; 821I to 822B.  If the agreement purports to bind future shareholders, it operates beyond a personal contract between individual shareholders and would be struck down if its tenor were against the policy in the company legislation.                               

16.  On the last proposition, Mr Whitehead relied on Clause 27 of the Shareholders’ Agreement which reads as follows,

“27.  ASSIGNMENT

27.1  This Agreement shall ensure to the benefit of and be binding on each Shareholder and its respective successors and permitted assigns; PROVIDED that none of the Shareholders shall assign or transfer or purport to assign or transfer any of this rights or obligations hereunder without the consent of all the other Shareholders.”

17.  The defendants contended that by reason of this provision, the Shareholders’ Agreement is, to use the words of Cheung J (as he then was) in Re Greater Beijing Region Expressways Ltd, “being elevated to the status of a regulation” of the company and operates beyond the creation of personal obligation between individual shareholders.  It follows that the agreement should be regarded as unenforceable even as between the parties to the present action.

18.  Mr Smith contended that irrespective of the wordings of Clause 27, it could not have any effect vis-à-vis future shareholders as they are not parties to the agreement.

19.  Although the wordings of Clause 27 are different from the relevant clause in the agreement considered in Re Greater Beijing Region Expressways Ltd, it is a distinction without substance.  Unless a potential new shareholder accepts the terms of the Shareholders’ Agreement, the existing shareholders could simply refuse to consent to any transfer of shares.  They could also restrain any purported transfer of share without their consent. Further, the board would probably refuse to register such a transfer.  In the circumstances, it is unimaginable that a new party could become a shareholder without acceding to the terms of the agreement.  It seems to me given the inevitable notice by a new shareholder of the Shareholders’ Agreement before the transfer could be completed by registration, the situation would come within the exceptional cases where a contract could be enforced against third parties discussed in Chitty on Contracts, 29^th Edn Paras. 18-125 to 18-132.

20.  I therefore reject the submission of Mr Smith.  On this ground, the Plaintiff’s claim is also unsustainable.  By reason of the authorities cited in proposition (e) above, I also reject Mr Smith’s submission on severability.

21.  In any event, I do not think the cases go so far as to establish that a shareholders’ agreement prohibiting removal of a director would be upheld as between the shareholders.  Proposition (d) has to be considered by reference to the specific statutory right concerned and by asking in whom the right is vested, see Re Greater Beijing Region Expressways Ltd [1999] 3 HKC 818 at 824D to E.  In the context of a right to present a winding-up petition, Le Pichon J (as she then was) held in Re Greater Beijing Region Expressways Ltd that an agreement not to present winding-up petition would not be upheld as it tantamount to a fetter upon an important right held by a contributory under the company legislation, see the discussion of the submission of counsel at p. 822C to H and the conclusion of Her Ladyship at p. 825I to 826A, in particular the endorsement of what was said in McPherson.  In the Court of Appeal, Rogers JA (as he then was) agreed with Her Ladyship, see [1999] 4 HKC at p. 815F to 817G.

22.  In the context of removal of director and the statutory right under Section 157B, the leading case is Bushell v Faith [1970] AC 1099.  On analysis, the majority in the House of Lords decided the case on a narrow basis.  This can be gathered from the judgment of Lord Upjoin at p. 1109E to G,

“Parliament has never sought to fetter the right of the company to issue a share with such rights or restrictions as it may think fit. There is no fetter which compels the company to make the voting rights or restrictions of general application and it seems to me clear that such rights or restrictions can be attached to special circumstances and to particular types of resolution. This makes no mockery of section 184; all that Parliament was seeking to do thereby was to make an ordinary resolution sufficient to remove a director. Had Parliament desired to go further and enact that every share entitled to vote should have said so in plain terms by making the vote on a poll one vote one share. …”

To the same effect is the judgment of Lord Donovan, see p.1110D to G.

23.  That rationale cannot be applied here because we are not dealing with a situation where the Plaintiff was given weighted voting rights in respect of a motion to remove him from the board.

24.  Mr Smith also relied on Harman v BML Group  [1994] 2 BCLC 674.  I do not think that case is of any assistance on the question I have to decide.  In that case, there was no question of the removal of a director whose office had been entrenched by terms in the shareholders’ agreement.  As can be seen from the report at p. 678e to f, the proposed resolution at the intended meeting did not seek the removal of Mr Blumenthal from office.  It only sought the removal of two other directors not protected by the shareholders’ agreement.  The issue fell to be decided in that case was whether the court could exercise its power under Section 371 of the Companies Act 1985 in a manner that overrides class rights attached to a class of shares regarding the necessary presence of B shareholder to constitute sufficient quorum for a meeting.  It has nothing to do with Section 157B.  Whilst Mr Smith had taken me to parts of the judgment of Dillon LJ, I do not think there is any specific discussion on the interplay between Section 157B and the validity of shareholders’ agreement prohibiting the removal of a director.    

25.  There is therefore no binding authority on the specific question whether shareholders could lawfully enter into an agreement which prohibits them from voting for the removal of a particular director.  As a matter of principles, I hold that an unqualified agreement not to remove a particular person as a director constitute an unlawful fetter on the statutory power conferred under Section 157B for the following reasons,

(a)     bearing in mind the background leading to the enactment of Section 157B or its equivalent in England (set out in the judgment of Lord Upjoin in Bushell v Faith [1970] AC 1099 and Gower & Davies’ Principles of Modern Company Law, 7^th Edn p. 309-311), it is meant to be a strong provision safeguarding shareholders’ residual indirect control in the management of the company.  It expressly overrides provisions in Articles of Association (which is in a sense a contract between the shareholders) and contracts made by the company.  It provides an important underpinning for the check and balance in the distribution of power between the shareholders and directors;

(b)    whilst I can readily see legitimate justification for giving a shareholder an enforceable right to appoint a representative in the board in a private company, it is questionable whether absolute immunity from removal could ever be justified.  Such immunity would mean that even a majority of shareholders could not remove a director who acted seriously in breach of his duties towards the company.  If such a right is upheld, the only solution when shareholders are faced with such a situation is to petition for winding up.  That seems to be too drastic;

(c)     the running of a company affects not only its shareholders but also creditors of a company. Hence, the management of a company cannot be regarded as a purely private matter between its shareholders.  Unlike a provision for weighted vote (that has to be contained in the articles of association in order to be effective), shareholders agreement is usually a private document not registered at the Companies Registry.  Parties dealing with the company are unlikely to have access to the latter;

(d)    the development of the law since Bushell v Faith in the context of just and equitable winding-up and Section 168A remedies reduce the need to give entrenched protection to minority shareholder regarding his immunity from removal as a director;

(e)     there is a conceptual difference between weighted voting right and an absolute agreement prohibiting the removal of a director.  In the former case, the result would be dictated by the vote cast by the shareholder with weighted votes whereas in the latter, the result is dictated by the terms of the shareholders’ agreement and the conflict with Section 157B is more acute and direct;

(f)     a director holds a fiduciary position.  When a majority of shareholders cease to have confidence and trust in a director and express the corporate wish of having such director removed, an essential foundation for continuing such fiduciary relationship is gone.  To impose such a director on the shareholders artificially is a recipe for future disputes and could not be in the best interest of the company;

(g)     the interest of minority shareholder would be adequately protected by having the right to nominate a person to the board.  It is, in my view, disproportionate to go further to insist on immunity of such nominee from removal.          

26.  I therefore rejected Mr Smith’s submissions on the question of triable issue and dismissed the summons accordingly.

27.  As mentioned in the course of hearing, it appears to me that the proper way the present dispute between the parties should be resolved is a corporate divorce.  Apparently, an offer had been made by the Defendants for buying out the Plaintiff’s shares.  Whether relief by way of a Section 168A petition or just and equitable winding-up could be pursued in the light of that is a matter which may need to be decided in the future.  In any event, for reasons given above, the insistence of the Plaintiff to remain on the board does not strike me as a viable nor the appropriate remedy.