CHINA SHANSHUI CEMENT GROUP LTD AND OTHERS v. ZHANG CAIKUI AND OTHERS

HCA 2880/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2880 OF 2015

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D E C I S I O N

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Introduction

1.  This is the Plaintiffs’ application for discovery against non-parties, ie the Hong Kong Stock Exchange and the Securities and Futures Commission (“the Regulators”).

2.  The Regulators maintain a neutral position and will abide by any order the court may make.  They have agreed with the plaintiffs in principle as to the scope of documents to be disclosed.  The only matter the court has to decide is the relevance of those documents to this action.

3.  The 1^st and 2^nd Defendants (“the Zhangs”) have not appeared. The summons, affidavits, skeleton submissions, notice of hearing and other relevant documents have been served on them by way of service on Deacons. I am satisfied that there was valid service and I can proceed in the absence of the Zhangs.

4.  The rest of the Defendants take a neutral position and have been excused from attendance.

Legal principles

5.  Section 42 of the High Court Ordinance (“HCO”) and O 24 r 7A(2) of the Rules of the High Court (“RHC”) confer jurisdiction upon the Court to order a non-party to provide disclosure of documents which are relevant to an issue arising out of a claim made within extant proceedings.  The applicant has to meet the following requirements:

(1) the non-party is likely to have the documents in his possession, custody or power (s 42(1) HCO; RHC O 24 r 7A(3)(b));

(2) the documents sought are relevant to an issue arising in or which is likely to arise in the proceedings (s 42(1) HCO; RHC O 24 r 7A(3)(b)); and

(3) the order is necessary either for fairly disposing of the matter or for saving costs (RHC O 24 r 8(2)).

Tullett Prebon (Hong Kong) Ltd v Chan Yeung Fong Nick & ors (unreported, HCA 2197/2009, 9 June 2011), To J (at §§64-76).

6.  The test for relevance is the Peruvian Guano test (eg Tullett Prebon, at §§13, 74 & 76): Hong Kong Civil Procedure 2017, §24/7A/4, a document is relevant if:

“... it is reasonable to suppose, contains information which may – not which must – either directly or indirectly enable the party requiring the affidavit either to advance his own case or to damage the case of his adversary ... if it is a document which may fairly lead him to a train of inquiry, which may have either of these two consequences.”

7.  The test for relevance is slightly relaxed in respect of classes of documents – see Tullett Prebon, at §83:

“In determining relevance of a document in a class of documents, each document must be read in the context as a member of the class of documents and not just in isolation.  A document considered as irrelevant when viewed individually may nevertheless be regarded as relevant if viewed as a member of the class of documents.  So long as each document thus read, individually or as a member of the class, meet the Peruvian Guano test, then it is immaterial that some of the documents in the event do not support the case of the party seeking discovery or adversely affect the case of his opponent.  This is just the “may not must” point stressed by Brett LJ in the Peruvian Guano test.”

Application of the legal principles

8.  This is an application by the Plaintiffs to recover their own documents, principally correspondence sent by the 1^st Plaintiff (“GroupCo”) to the Regulators and their responses. These documents were probably unlawfully removed by, amongst others, the Zhangs and the 3^rd Defendant (“collectively the Original Executive Directors”).  In principle, the Plaintiffs are entitled to these documents. 

9.  There is no dispute as to existence and relevance of the documents sought.  However, the Regulators are bound by the relevant governing legislation to preserve secrecy over documents in their possession and not to permit access to them except in the performance of the Regulators’ statutory functions: section 378(1) of the Securities and Futures Ordinance, Cap 571 (“SFO”). Accordingly, a court order is required before the Regulators can release even the Plaintiffs’ own documents to the Plaintiffs: section 378(2)(e) of the SFO.

10.  The only issue is therefore whether the documents sought are relevant to any matter in issue in the present case.

Relevance

11.  The Plaintiffs claim concern, amongst others, the unlawful conspiracy of the Defendants, allegedly orchestrated by the Zhangs. They also claim that the Zhangs were guilty of unlawful conduct involving breaches of fiduciary duties and the Takeovers Code and the Listing Rules.

12.  The following causes of action are pleaded:

(1) The acts in 2014 of the Original Executive Directors and the 9^th Defendant (“NatBuild”) in wrongfully causing GroupCo to make an allotment to NatBuild of 563,190,040 GroupCo shares at a substantial undervalue (“the 2014 Subscription”).

(2) The acts in late 2014 of the Original Executive Directors in wrongfully causing GroupCo to grant share options to various persons (including the Original Executive Directors and NatBuild) to subscribe for a total of 207.3 million GroupCo shares (“the 2014 Share Options”).

(3) The acts in early 2015 of the Original Executive Directors in causing GroupCo (etc) to adopt a new “change of control” clause in the Group’s loan notes, in an illegitimate attempt to entrench Zhang Junior as the GroupCo Chairman.

(4) The Zhangs’ unlawful amendment of Shandong Cement’s articles of association in late October 2015 in an illegitimate attempt to entrench the Zhangs within Shandong Cement’s board of directors.

(5) The acts of the Defendants in causing the wrongful presentation in November 2015 of an ultra vires winding up petition in the Grand Court of the Cayman Islands to wind up GroupCo and the related application to appoint provisional liquidators over GroupCo (collectively “the Caymans Proceedings”).

(6) The unlawful removal (ie theft) in late November 2015 of the Plaintiffs’ books, records and accounts from GroupCo’s place of business in Hong Kong.

13.  The claim is hotly contested by the Defendants. 

14.  Nine classes of documents are sought.  Classes 1 to 7 are correspondence between GroupCo and certain Directors relating to activities of GroupCo during 2014-2015.  Class 8 concerns complaints made to the Regulators by or against GroupCo and director(s) of GroupCo between 2011 and 2015.  Class 9 is documents relating to publication of GroupCo’s 2015 interim result/profit warning/interim dividend.

15.  The common theme of relevance is that whilst GroupCo was under the control of the Zhangs, the Zhangs were telling the Regulators information upon which they took the pleaded acts.  If established, those acts would tend to show the breach of fiduciary duties or that the Original Executive Directors were acting contrary to the best interests of GroupCo. 

16.  I agree with the analyses of relevance as set out in the skeleton submission of Mr Barlow SC, leading Mr David Chen.

17.  In respect of class 1, after 1 December 2015, the new Board of GroupCo discovered that the Defendants had caused GroupCo to issue notices pursuant to section 329 SFO to various entities seeking information on the beneficial ownership of its issued shares.  Due to the misappropriation of the Plaintiffs’ Records, the new Board is unable to locate any record of such notices or the responses from recipients of such notices from GroupCo’s offices in Hong Kong.

18.  Under section 330 SFO, GroupCo has always been under a duty to notify the SFC of the responses received from the recipients.  Without the notices issued by GroupCo and the responses received from the recipients, it is impossible for GroupCo to discharge that duty.  However, such use of documents sought will be for company management purpose and is not sufficient to support the discovery application.

19.  What is more important is that this Action arose from the December 2015 battle for ownership and control over GroupCo’s issued shares.  The identity of the true owners of GroupCo’s issued shares is plainly relevant to the determination of these proceedings.  For instance, there is an issue between the parties as to whether the 10^th Defendant (“ACC”) was able to control 20.96% of the voting rights in GroupCo (D10 Defence §5.2) or 25.18% by reason of its interest in or control over Yu Yuan Investment Corporation Ltd, which held 4.22% of GroupCo’s issued share capital (D10 Defence §5.2.5).

20.  In respect of class 2, the Plaintiffs’ case is that the 2014 Subscription grossly undervalued GroupCo’s shares and constituted an unlawful attempt by the Zhangs to increase the voting power of NatBuild.  On the other hand, NatBuild pleads that the 2014 Subscription was fairly priced and that it enabled GroupCo to raise substantial working capital.  Class 2 may shed light, amongst others, on the true purpose and timing of the 2014 Subscription, and the application of the subscription proceeds.

21.  In respect of class 3, the Plaintiffs’ case is that the 2014 Share Options were granted in order to unlawfully change the composition of GroupCo’s body of shareholders for the benefit of the Zhangs and NatBuild (ASOC, §23).  The Plaintiffs are being put to strict proof on this matter (eg D3 Defence §20).  Class 3 may shed light, amongst others, on the purpose and timing of the 2014 Share Options.

22.  In respect of class 4, ACC and NatBuild made an announcement on 12 August 2015 concerning the “possible offer for shares in [GroupCo]”.  The Plaintiffs’ pleaded case is that this constituted a conditional voluntary offer which triggered Rule 26.4 of the Takeovers Code (ASOC §27).  Both NatBuild and ACC deny that the announcement concerned or constituted a conditional voluntary offer or that Rule 26.4 was breached (D9 Defence §40; D10 Defence §39).  Class 4 may shed light on whether ACC and NatBuild intended to (or did) make a conditional voluntary offer.

23.  In respect of class 5, the Original Executive Directors procured GroupCo to explore with the Regulators the possibility of making an open offer for the issue and sale of new shares.  ACC admits that GroupCo’s Board explored such a possibility with the Regulators (D10 Defence §41).  Class 5 may reveal (or lead to a train of inquiry in respect of) the Original Executive Directors’ real intention in making the open offer and whether this was another illicit attempt by them to increase ACC and/or NatBuild’s shareholding and control over GroupCo.

24.  In respect of class 6, the Plaintiffs’ case is that the 3^rd to 8^th Defendants procured GroupCo to commence the Caymans Proceedings in order: (1) to pre-empt the impending GroupCo shareholders’ EGM (when all members of the Board would be removed and replaced); and (2) to enable the joint provisional liquidators to facilitate a scheme of arrangement whereby the Zhangs, ACC and NatBuild would increase their shareholding and control over GroupCo.  The Defendants deny this, claiming that the Caymans Proceedings were commenced bona fide in the best interests of GroupCo in order to resolve an alleged severe debt crisis (D9 Defence §57(2); D10 Defence §55.4).  Class 6 should shed light on the real purpose of the Caymans Proceedings and its relevant timeline.

25.  In respect of class 7, the Plaintiffs’ case is that the 7^th Defendant is NatBuild’s nominee and the 8^th Defendant is ACC’s nominee and they took part in the conspiracy (ASOC §24A-24B).  The 7^th and 8^th Defendants deny these allegations (D7 Defence §31; D8 Defence §10).  Class 7 may shed light on whether the 7^th and 8^th Defendants were in fact nominees.

26.  In respect of class 8, this may substantiate the Plaintiffs’ pleaded case on breaches of fiduciary duties and other misconduct committed by the Defendants.  However, I am of the view that this class is drafted too widely.  The complaints should be limited to those relating to any of the matters set out in classes 1-7.

27.  In respect of class 9, on 28 August 2015 GroupCo issued a public announcement containing its interim results and unaudited consolidated statement of financial position as at 30 June 2015, stating that it had current assets exceeding RMB9.5 billion.  In the Caymans Proceedings, however, Zhang Junior deposed that GroupCo was unable to repay a RMB2 billion loan falling due on 12 November 2015.  Either GroupCo’s unaudited accounts were incorrect, or Zhang Junior’s affirmation was perjurous.  Relevant correspondence would shed light on this matter and hence the misconduct of the Original Executive Directors.

28.  I am satisfied, having considered the evidence and the submission of Mr Barlow SC that all classes of documents sought are relevant to the pleaded issues.

Exercise of discretion

29.  Discovery orders against non-parties are exceptional.  They should not be used to fish for evidence and should not be oppressive.  The court should consider the following matters:

“First, how important is the information to the issues? Second, has the applicant taken appropriate steps to obtain the information within the proceedings before seeking disclosure from the third party? Third, would it be sufficient for the court simply to draw adverse inferences on the basis that the party from whom the information was sought within the proceedings has failed to supply their information? Fourth, what is the nature of the relationship, if any, between the parties to the proceedings and the third party? Fifth, if disclosure is necessary and proportionate wheel [sic] the editing of documents protect private information?” (Tullett Prebon, supra, at §85)

30.  The claim involves allegations of conspiracy.  It is not easy to prove.  In HKSAR v Lai Wai Cheong [1998] 1 HKLRD 665 at 668, Leong J (as he then was) observed that:

“It is not easy to prove a conspiracy offence. Usually, there are only two ways. The first one is for the conspirators to confess to the police and disclose that they have reached an agreement with the other person(s) to carry out an unlawful practice, or for one of the conspirators to give evidence against the other parties to the conspiracy and reveal what agreement has been reached. The second way is to draw an inference from the subsequent acts of the conspirators as to whether they have previously reached an agreement and then carried it out accordingly. The court can objectively analyse and draw the appropriate inference from proven or undisputed facts. If the only reasonable conclusion that can be drawn is that the conspirators must have reached an agreement, or else a series of acts would not have been carried out, then this is sufficient proof.”

31.  In particular, the Zhangs have not acknowledged service of the writ despite various interlocutory applications already taken.  The burden lies on the Plaintiffs to proof the conspiracy strictly and to draw the appropriate inferences from proven or undisputed facts.  The documents sought are important to the pleaded issues.

32.  The Plaintiffs have previously sought disclosure orders from the Defendants. The Zhangs have disclosed nothing.  What D3 disclosed was probably not complete and he will be subject to cross-examination in March 2017.  The Plaintiffs have recovered some documents from the Jinan office.  Again, they were not complete.  

33.  Each class of documents have been carefully drafted. The timeframe for each class of documents is reasonable. It covers a period of about one year from 2014 up to and including 30 November 2015, except for class 8 (which covers 5 years).

34.  There is no suggestion as yet from any party or the Regulators that any disclosure required editing of the documents, but there is no bar in principle for the Regulators to redact parts of documents to avoid breach of their duty of secrecy to third parties.

35.  In the premises, I am satisfied that disclosure is necessary for the fair disposal of the action.  The Plaintiffs should be permitted access to their own documents in preparation of the case.  It will also save costs in getting these documents well before the trial and spare the Plaintiffs’ efforts in trying to recover the documents from other avenues.

36.  I therefore make an order in terms of the re-amended summons in respect of all 9 classes of documents subject to amendment to class 8 (paragraph 26 above), with costs to the Regulators.  Costs of this application shall be reserved as among the parties.

37.  I thank counsel and solicitors for their assistance.