INTERNATIONAL CAPITAL NETWORK HOLDINGS LTD. v. CAPITAL ACE HOLDINGS LTD. AND ANOTHER

CACV 330/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 330 OF 2002

(ON APPEAL FROM HCA 1842 & 2066 OF 2002)

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D E C I S I O N

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1. This is an urgent application for a stay of the order of Deputy Judge Carlson given on 5 August 2002 pending an appeal from his order, a Notice of Appeal having been filed on 7 August 2002.

2. By that order, the judge discharged an order made ex parte by Deputy Judge Woolley on 30 May 2002. The effect of the discharge of the order is that the Company would be free to allot shares, which would affect the proportion of existing shareholdings.

3. The background to this matter is as follows. The Company is listed on the Growth Enterprise Market of the Hong Kong Stock Exchange, it having been listed in November 2001. As far as the shareholdings are concerned, it would appear that 39.5% of the shares are held by a company by the name of International Capital Network Investor Limited (which I will refer to as "ICNI"); 25% by members of the public; 24.3% by a company by the name of International Technology Capital Limited (which I will call "ITC") which is controlled (on the face of it) by a Miss Cecilia Chu and which, on the face of the proceedings, is not involved in these proceedings; and 11.3% is held accumulatively by Capital Ace Holdings Limited and Wise Express Assets Limited (which I will refer to as the "Requisitionists").

4. Counsel for the Company however says that in effect some 43% of the shares of the Company are now held by one camp which is the rival of ICNI. This is a matter of dispute.

5. As far as the board of directors is concerned, there are now four directors, ICNI having appointed two directors Mr Daniel Hui, who is the chairman and Mr Michael Lui. The other two directors are independent, non-executive directors. However, under Article 125 of the Company's Articles of Association, the chairman has a casting vote if the board is deadlocked. Accordingly, it is possible for the ICNI directors to control the board.

6. The relevant facts commenced in November 2001 when the Company in general meeting passed two resolutions. By the first resolution, the directors were given an absolute discretion to grant options to employees to subscribe for shares under a share option scheme. Under this mandate, a total of up to 10% of the issued share capital can be issued. The Stock Exchange's approval for listing of these shares has been obtained, so that the Board can at any time grant share options to employees (although not to directors) without further scrutiny or advance notice. Such employees may immediately call for shares to be allotted to them, subject of course to the Stock Exchange's power to revoke its approval.

7. By the second resolution, the directors were given a general mandate to allot shares of up to (i) a total of 20% of the issued share capital of the Company and (ii) shares repurchased by the Company. Under this general mandate, however, placements would be subject to the scrutiny of the regulatory authorities, namely the Securities and Future Commission and the Stock Exchange who would be watching out for concert parties, and it seems at least common ground that there would be a 2-week window in any placing arrangements under this general mandate for objections to be made to any particular placements.

8. Although the resolutions were made in November 2001, the Growth Enterprise Market Listing Rules forbade the issue of shares under those resolutions until 30 May 2002. However before that date, the relationship between some of the shareholders, and between some of the shareholders and the Board, had deteriorated. In March 2002, Mr Hui in a letter dated 27 March 2002 wrote to the Securities and Futures Commission for a ruling that he, Mr Lui and Miss Chu were concert parties, so that there would be no restrictions under the Takeover Code on their purchase of further shares. It was also said that the Company "is currently considering the feasibility of granting share options, issue of warrants, placing or repurchasing shares of the Group should its price become weaker." (Miss Chu has, I believe, since disputed the statement that she was a concert party).

9. This led to the Requisitionists being concerned that the ICNI directors might use their powers to issue shares to bolster ICNI's position.

10. On 10 April 2002, the Requisitionists issued a requisition for an extraordinary general meeting of the Company to be convened within 21 days. The EGM was for the purpose of revoking the previous resolutions for the allotment of shares and was also for the appointment of 7 additional directors.

11. On 29 April 2002, the Company gave notice that the EGM would be held on 2 December 2002. A period of 8 months for the convening of an EGM seems on the face of it to be a lengthy period, and although the Board had sought to explain why some time was required before the EGM could be convened, it has to be noted that the chosen date falls on the day after certain share transfer restrictions imposed at the time of listing would be lifted, so that directors would be able to dispose of their own shares should the result of the EGM go against them. The directors have apparently not disputed that consequence.

12. In other words, so the Requisitionists submit, the fixing of the date for the EGM shows that these ICNI appointed directors were prepared to, and did, exercise their fiduciary powers as directors in such a way that they would benefit themselves.

13. Returning to the narrative of events, the Requisitionists tried to convene an EGM for 23 May 2002, but on 15 May 2002 the Company issued HCA 1842/2002 against the Requisitionists. By an order made ex parte by Deputy Judge Poon on that date, the Requisitionists were restrained from convening the EGM on 23 May 2002. Somewhat curiously, the return date of that summons was by consent ordered to be fixed in consultation with counsel's diaries, and apparently the earliest available date is January 2003, which is in any event, after the date fixed for the holding of the EGM.

14. This led the Requisitionists to fear that in the interim period between 15 May 2002 and December 2002, the directors might use their powers under the mandates to issue shares to parties friendly to the directors, so as to improve their shareholding position.

15. The Requisitionists thereupon asked the directors to undertake not to issue shares during this period, which undertaking was not forthcoming. Accordingly on 30 May 2002 the Requisitionists issued HCA 2066/2002, and Deputy Judge Woolley made an order ex parte on notice that the Company and its directors be restrained from issuing shares without the approval of shareholders in General Meeting.

16. The return date for this application was 2 August 2002 before Deputy Judge Carlson. On 5 August (as I indicated) the Judge discharged Deputy Judge Woolley's order in its entirety and granted a temporary stay of his order until 4 p.m. today.

17. Two days after that, on 7 August 2002, the Requisitionists filed their Notice of Appeal against the Judge's order.

18. There were in effect four issues before the Judge:-

(i) Have the Requisitionists come to Court with clean hands?

(ii) Was there material non-disclosure when the ex parte order was obtained before Deputy Judge Woolley?

(iii) Have the Requisitionists shown a serious question to be tried that the Company through the Board would exercise its power to issue shares purely for the improper purpose of affecting the shareholding balance of power?

(iv) If the answer to question no. (iii) is "yes", then what was the balance of convenience, that is to say:

(a) Can the Requisitionists be compensated by damages if no injunction was granted?

(b) Can the Company be compensated by damages if it is restrained?

(c) Is the party that would have to pay compensation good for the money?

19. The Judge did not consider that the first and second issues were strong enough to enable him to discharge Deputy Judge Woolley's ex parte order. However, he found that there was no serious question to be tried and he found that the balance of convenience was in favour of not granting or continuing the injunction.

20. I have had the benefit of reading the Judge's reasoned Decision of 5 August 2002 which I received yesterday. I have also read the Notice of Appeal which was filed on 7 August 2002.

21. It is clear that the Judge's decision not to grant or continue the injunction was an exercise of his discretion. On appeal, the Court of Appeal would only interfere

˙ if there was a change of circumstances (and none so far has been suggested); or

˙ if the Judge has shown a misunderstanding of law or of the evidence before him ;or

˙ if the Judge had made a wrong inference of the existence or non-existence of facts; or

˙ even if there were no such errors, the Judge's conclusion as a matter of the exercise of discretion had "exceeded the generous ambit within which a reasonable disagreement was possible".

22. At this stage, if it is reasonably clear to me that the appellants have no reasonable prospects of success, i.e. the Court of Appeal would not interfere on appeal, then there would be no ground for me to grant a stay pending appeal.

23. However, if the position is not so clear, then whether I should grant a stay would depend on all the circumstances, in particular the question of prejudice that might be caused to either party should a stay be granted or not granted.

24. Having heard the submissions of both parties, it is not that clear to me at this stage that the appellants have no reasonable prospects of success at all. It is a fact that the Board has chosen to convene the EGM on a date that would suit their personal benefit, a manifestation, so the Requisitionists say, of the ICNI directors being prepared to and in fact suiting their own purposes in priority to convening an EGM where the will of the shareholders in General Meeting would be heard.

25. Further, at a time when rival factions were forming within the Company, the 27 March 2002 letter to the SFC stating that Messrs Hui and Lui regarded themselves as concert parties with Miss Chu so that there would be no restrictions on their further purchase of shares, coupled with the statement that the Company was "currently considering the feasibility of granting share options, and issue of warrants, placing or repurchasing shares of the [Company] should its price become weaker" was evidence on which the Requisitionists could be legitimately concerned that the directors would also deploy that power to enable themselves to remain in control of the Company.

26. As far as the grant of share options to employees is concerned, the regulatory authorities will have no further part to play, unless called upon to revoke the approval previously given. The 10% percentage in total that can be issued to employees in the absolute discretion of the Board is enough to disturb the balance of shareholding power.

27. I cannot therefore say that it is reasonably clear to me that the appellants have no reasonable prospects of success in persuading a Court of Appeal that there was indeed a serious question to be tried. Whether they will ultimately succeed or not is another matter into which I should not and cannot go at this stage.

28. It is also reasonably arguable that the balance of convenience lay in favour of the Requisitionists. Once shares are allotted under the share option scheme, third parties would be affected. More importantly, it is common ground that the Company has no immediate need for additional funding.

29. For the same reasons, in considering whether to grant a stay of the Judge's order, the prejudice issue must be in favour of the Requisitionists.

30. I would therefore grant the stay of Deputy Judge Carlson's order pending appeal, and I would direct that an early date be given for the hearing of the appeal. Whilst I am mindful of the principle of judicial non-interference with corporate management matters, I am also aware that there may arise a situation between now and the hearing of the appeal when the Board may wish to grant share options or to issue shares in respect of a genuine business opportunity. I would therefore give liberty to apply to both parties to come to Court should there be a change in circumstances shown.