TALAL EL MAKDESSI v. TEAM Y&R HOLDINGS HONG KONG LTED

CACV 199/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 199 OF 2012

(ON APPEAL FROM HCMP NO. 1054 OF 2011)

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REASONS FOR JUDGMENT

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Hon Cheung JA :

1.  This is the defendant’s appeal against the judgment of Barma J (as he then was) in which he ordered the defendant to provide nine categories of accounting and other records of the defendant to the plaintiff (‘Makdessi’) for his inspection pursuant to section 152FA of the Companies Ordinance (Cap 32). Makdessi is a 20% shareholder in the defendant. This Court ordered the appeal and the execution of Barma J’s judgment be stayed pending the determination by the Supreme Court of the United Kingdom of a parallel proceeding between the parties.

Background

2.  The background of the case is succinctly summarised by the Judge which I will respectfully adopt :

‘ 2. Mr El Makdessi was one of the founders of a number of businesses involved in advertising and marketing in the Middle East.  By a sale and purchase agreement dated 28 February 2008 (“the SPA”), he and the other founder of those businesses, a Mr Joseph Ghossoub (“Mr Ghossoub”), agreed to sell a majority stake in the businesses to the WPP Group, a well known international name in the advertising and marketing industry.  Team Y&R was incorporated in Hong Kong in November 2007 to serve as a vehicle for the transfer of part of Mr El Makdessi’s and Mr Ghossoub’s interests in those businesses to WPP and to form part of the corporate structure following a restructuring of those businesses.

3. In summary, the terms of the sale under the SPA (so far as relevant for present purposes) were as follows:-

(1) WPP Group would acquire a 60% interest in the businesses, which were to be held through Team Y&R.  WPP Group therefore acquired 60% of the shares in Team Y&R, which it held through Cavendish Square Holdings B V (“Cavendish”) as to 47.4% and Young & Rubicam International Group B V (“Young & Rubicam International”) as to 12.6%.  Mr El Makdessi and Mr Ghossoub each retained a 20% interest in the businesses, by each obtaining a 20% shareholding in Team Y&R.

(2) The consideration for the 60% interest in the businesses to be acquired by WPP Group was to be paid in four stages.  Each of Mr El Makdessi and Mr Ghossoub was to receive:-

(a)  An initial payment (called the Completion Payment) of US$34 million on completion of the SPA;

(b)  A further payment (called the Second Payment) of US$31.5 million to be paid into an escrow account on completion of the SPA (the SPA contained terms for the operation of the escrow account and the release of funds in it to Mr El Makdessi and Mr Ghossoub).

(c)  A third payment (called the Interim Payment), to be paid on its due date, which was to be calculated by a formula based on Team Y&R’s OPAT – this being its audited consolidated operating profit calculated in accordance with international financial reporting standards.  The formula was:-

(8 x Average 2007-2009 OPAT x 47.4%) – US$63 million

(d)  A fourth, and final, payment (called the Final Payment), to be paid on its due date, which was also to be calculated by reference to Team Y&R’s OPAT.  The formula for the Final Payment was:-

(M x Average 2007-2011 OPAT x 47.4%) – (US$63 million + the amount of the Interim Payment).

(3) Clause 15 of the SPA gave Mr El Makdessi a put option (“the Put Option”) to sell all or part of his 20% shareholding in Team Y&R to Cavendish.  The Put Option had to be exercised in the first three months of any calendar year and, if exercised, would entitle Mr El Makdessi to payment of an amount calculated by reference to Team Y&R’s average OPAT over a four year period – from the financial year prior to the exercise of the Put Option to the financial year two years after its exercise.  Thus, if the Put Option were exercised between, say, January and March 2011, the amount would be calculated by reference to Team Y&R’s average OPAT from 2010 to 2013.

(4) Mr El Makdessi was to be a director of Team Y&R, and was under certain obligations regarding non-competition with the businesses transferred to be held under the Team Y&R group structure.

(5) In the event that Mr El Makdessi was in breach of his obligations under the SPA, he would not be entitled to the Interim and Final Payments, and he would be required to sell his shareholdings in Team Y&R to Cavendish at a price known as the Defaulting Shareholder Option Price, which was based on the net asset value of Team Y&R.  If such a situation were to arise, it would follow that Mr El Makdessi would not be entitled to exercise the Put Option.

4. Following completion of the SPA, Mr El Makdessi was paid the Completion Payment.  The Second Payment was also paid into the escrow account, and has to a large extent been released to Mr El Makdessi, although an amount of US$4 million has not yet been paid to him.

5.   Mr El Makdessi also became a director (and non-executive Chairman) of Team Y&R.  However, it appears that his role in these positions was short-lived.  According to Mr El Makdessi, at the first board meeting of Team Y&R in April 2009, he was pressured to resign.  This led to his resignation as non-executive Chairman in July 2009, after which he says he was no longer involved in the management or affairs of Team Y&R, although he was not formally removed as a director until April 2011.  Cavendish and Team Y&R, however, say that Mr El Makdessi has been in serious breach of his non-competition obligations (a contention which Mr El Makdessi denies).

6.   These allegations would appear to be the reason why the balance of the Second Payment has not been paid to Mr El Makdessi, and nothing has been paid to him in relation to the Interim Payment or the Final Payment.  In 2011, Cavendish and Team Y&R commenced proceedings against Mr El Makdessi in the English High Court, alleging that Mr El Makdessi was in breach of his obligations under the SPA; that he was not, in consequence, entitled to any further payments; and that Cavendish was entitled to acquire his 20% shareholding in Team Y&R at the Defaulting Shareholder Option Price.  These proceedings are being defended by Mr El Makdessi, who has counterclaimed for payment of the balance of the Second Payment, and payment of the Interim and Final Payments as well.  At Mr El Makdessi’s suggestion, the English proceedings have been made the subject of an order for a split trial, with questions of liability to be determined first, and questions of quantum to be stood over until later.  The trial on liability (which will involve a substantial hearing) is presently expected to take place in October or November this year.  It appears that, as a result of the split trial order, discovery in the English proceedings has been similarly split, with discovery and disclosure of documents relating to quantum postponed until after the issue of liability has been determined.’

Purposes of the inspection

3.  Barma J accepted Makdessi’s arguments that the documents sought are for the following purposes :

1) To enable him to work out the amount that he is entitled to receive by way of the Interim and Final Payments;

2) To enable him to work out the amount of the Defaulting Shareholders Option Price (although he denies that he is a Defaulting Shareholder); and

3) To enable him to estimate the amount to which he might be entitled under the Put Option, so as to enable him to consider whether or not he should exercise it.

The documents

4.  The nine categories of documents are :

1) Audited financial statements of Team Y&R and all Group Companies (as defined in the SPA) for the financial years ended 31 December 2007, 2008, 2009 and 2010, and if these were not available, unaudited financial statements.

2) Consolidation and/or combination trial balances for balance sheets and income statements of Team Y&R and each subsidiary in the Group for the same financial years.

3) Supporting schedules to the adjustments made in consolidation workbooks including narrations, amount applicable to each subsidiary and the nature and reason for the adjustments.

4) Board minutes and papers of Team Y&R.

5) Documents recording dividends or returns of capital (including trial balances, ledgers and shareholders’ current accounts) of Team Y&R and other Group Companies for the same financial years.

6) Copies of detailed ledger accounts showing all transactions recorded for shareholders and related parties in the same financial years.

7) Copies of management accounts and reports for the same financial years.

8) Copy of a Group Companies chart showing the relationship between the various subsidiaries of Team Y&R in each of the financial years mentioned above.

9) An executive management report provided in a board meeting held on 20 April 2009.

Subsequent development

5.  Mr Smith S.C. on behalf of the defendant challenges the judgment both on the merits of the decision itself and also by reference to developments that had taken place after the judgment had been given.

6.  This Court is of the view that the subsequent developments have a material bearing on the outcome of the appeal.  As stated earlier in the background of the case, the parties are also engaged in litigation in the English courts in which Makdessi is the defendant and Cavendish and Team Y&R are the claimants.  The claimants contended that Makdessi was in breach of his duty as a director and obligations under the covenants of the SPA.

7.  Makdessi initially denied that he was in breach of his duties towards the company and of the covenants but shortly before the trial before Burton J in the English High Court conceded he was in breach of fiduciary duties.  Consequently he conceded that he was in breach of the covenants subject to his case that the covenants were not enforceable.  The claimants claimed that by virtue of his admission of breaches of fiduciary duty to the company, Makdessi was also in breach of clause 11.2 and sought a declaration that he was a ‘defaulting shareholder’ under the terms of the agreement, and therefore was not entitled to payments of the interim payment or the final payment as a result of clause 5.1 of the agreement, and was obliged within 30 days of the service of notice which had been served on 14 January 2011, to sell to the claimants all his shares in the company at the ‘defaulting shareholder option price’ and they sought specific performance of the latter obligation.

8.  Burton J rejected Makdessi’s argument that clause 11.2 (of which he would otherwise admit breach) was in unreasonable restraint of trade and that clauses 5.1 and/or 5.6 were unenforceable penalty clauses.  The conclusion is that Makdessi is a defaulting shareholder.  This precludes him from exercising the put option and allows the claimants to exercise the call option on his shares.

Impact on the present appeal

9.  Burton J’s decision clearly has a direct bearing on the judgment of Barma J because the basis of Makdessi’s entitlement to inspect documents by reason of the put option can no longer be sustained.  However, Burton J’s decision on the penalty clauses was reversed on appeal (there was no appeal on his decision on clause 11.2) and as Ms Rachel Lam, counsel for Makdessi, rightly pointed out, Makdessi is still entitled to exercise the put option.  However, a further twist of the matter is that the Supreme Court has granted leave to the claimants to appeal against the Court of Appeal decision.

10.  In my view it is unsatisfactory that inspection should be carried out at this stage when the basis of Makdessi’s entitlement to inspection by reason of his right to the put option is now subject to further appeal to the highest court in England.  Makdessi’s right as a shareholder to esinspect documents under section 152FA must be exercised for a proper purpose.  Inevitably this right must be shaped by the final determination of the terms of the SPA.  The better approach is therefore to stay the present appeal until the determination by the Supreme Court.  In respect of the other reasons put forward by Makdessi to seek inspection, his claim on the interim and final payments under the SPA is not related to his right of a shareholder to inspect the company documents.  This is specifically recognized by Barma J when he allowed inspection on the basis that the documents would enable Makdessi to assess the value of his shares in Team Y&R.  Further it appears that this entitlement will also be affected by his status as a defaulting shareholder.  As to the valuation of the defaulting shareholder option price, it is not something so urgent that it cannot be put on hold for a while.  The execution of Barma J’s order is likewise stayed.

11.  As the appeal is stayed, I will refrain from dealing with the merits of the appeal itself.  The two summonses to adduce new evidence are adjourned until the appeal is restored.

Costs

12.  Costs of the appeal are reserved.

Hon Kwan JA :

13.  I agree with the Reasons for Judgment of Cheung JA.

Hon Poon J :

14.  I agree.