GUANG SHENG INVESTMENT DEVELOPMENT GROUP LTD v. CHINA INVESTMENT FUND CO LTD

HCA 1847/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1847 OF 2016

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D E C I S I O N

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Introduction

1. The defendant, China Investment Fund Company Limited (China Investment), is a listed company.  The plaintiff, Guang Sheng Investment Development Group Limited (Guang Sheng), claims to be a shareholder of China Investment but this is in dispute.

2. On 15 July 2016, Guang Sheng sought and obtained an ex parte order against China Investment from Fung J which, amongst other things, appointed a purportedly independent and unrelated third party, Mr Kenneth Yeo, to act as Chairman of China Investment’s Extraordinary General Meeting (the EGM) to be held on 20 July 2016, having been adjourned to that date on 13 July 2016.

Application to discharge the injunction order

3. China Investment applies to discharge the ex parte order on the basis that Guang Sheng did not have locus standi to make the application and further failed to inform the judge at the ex parte application that the court had no authority to appoint a purportedly outside third party to act as the Chairman of the EGM under China Investment’s Memorandum and Articles of Association and at common law. 

4. China Investment also complains that the ex parte application was made in breach of paragraph 13 of the Practice Direction 11.1 which provides that urgent applications in ongoing or anticipated proceedings involving any matter relating to the internal management of companies should, as far as practicable, be made to the Companies Judge.  Whilst it is highly preferable that such applications are made before the Companies Judge, it is subject to his availability and the nature and urgency of the application.

Background to the application

5. China Investment was incorporated under the laws of Cayman Islands on 18 September 2001 and became listed on the Stock Exchange of Hong Kong on 2 January 2002.  It is an investment company which is principally engaged in investing in listed and unlisted securities and is therefore subject to Chapter 21 of the Rules Governing the Listing of Securities on the Stock Exchange, otherwise known as the Listing Rules. 

Alleged misappropriation of RMB 30 million

6. The facts giving rise to the dispute between the parties concern an alleged misappropriation of a bill of exchange with a face value of RMB 30 million belonging to China Investment.  The bill was purchased by a subsidiary of China Investment for about RMB 24 million on 9 October 2015 and had an anticipated value of about RMB 25.5 million at maturity on 9 April 2016.  One of the directors of the company, Mr Yao Yuan, was the person who recommended the investment and acted as an intermediary between the parties to effect the transaction. 

7. China Investment alleged that in late October 2015 it sought to make an early redemption of the bill, and acting on arrangements made by Mr Yao, the company secretary exchanged the original bill with three other bills of exchange, in the same terms except each had a face value of RMB 10 million.  The three replacement bills could not be transacted and two executive directors of the company confronted Mr Yao over the matter who admitted that he had taken the money obtained from the original bill. 

8. By resolution dated 16 December 2015, the board reported the matter to the police and suspended the duties of Mr Yao and two other non-executive directors related to him, namely, Mr Shi Minqiang (husband of the sister of Mr Yao’s wife) and Mr Yao Zhixiang (Mr Yao’s brother), pending investigation of the matter.  A public announcement was made by China Investment and trading of its shares was suspended.  On 21 December 2015, the board further resolved to set up a Special Investigation Committee, made up of independent non-executive directors, to investigate the matter. 

9. There followed correspondence from Mr Yao and the two other suspended directors and two of the independent non-executive directors, namely, Ms Li Jiangtao and Mr Zhang Qi, raising objections as to the validity of the board’s resolutions. 

The requisition

10. On 13 January 2016, Guang Sheng together with Golden Gate Group Limited, Noah Holdings Limited, Jiang Yongjun and Zhu Gang, deposited a requisition with the company for the holding of an EGM to consider a number of ordinary resolutions. 

11. The resolutions sought, amongst other things, (1) to remove all three executive directors; (2) to remove all four non-executive directors; (3) to remove all directors that had been appointed between the date of requisition and the EGM; (4) to appoint Mr Man Kam Tong as executive director; and (5) to appoint Mr Fan Wei Yong, Ms Lin Yan Jenny and Mr Tam Tak Wah as non-executive directors.  These resolutions were later varied.

HCA 411/2016

12. On 17 February 2016, the company issued a writ of summons in HCA 411/2016 against the requisitionists seeking a declaration that none of the proposed resolutions in the requisition may validly be moved or passed at any general meeting of China Investment on 12 March 2016 or any adjournment thereof.  The company also took out a summons for an interlocutory injunction.  It was China Investment’s case that the defendants were all connected or acquainted in some way to each other and to Mr Yao, and that Mr Man, who was proposed to be the sole executive director to replace the then existing three executive directors, was not eligible to be appointed as an executive director of a Chapter 21 investment company and his appointment would not be approved by the Stock Exchange as required by the Listing Rules.  In fact, Mr Man was not approved by the Stock Exchange to act as an executive director of the company.

13. The application for interlocutory injunction was initially granted by A Chan J on 11 March 2016.  He noted various matters in his decision in relation to the case for the requisitionists, namely, that they only became shareholders of the company shortly before the requisition, that Mr Man appeared to be ill qualified for the position of sole executive director which had been disapproved by the Stock Exchange, and that one of the proposed appointees to the board was Ms Lin, the wife of Mr Yao.  He found that no urgency had been demonstrated for the EGM and no prejudice would be suffered by postponing the EGM.  He decided that the correct decision, taking into account that Guang Sheng was a public company and the court should be alive to the interests of the investing public, was to maintain the status quo pending the outcome of the application and accordingly granted the interim relief sought.  

14. On 3 May 2016, an interim investigation report was issued by the Special Investigation Committee and as a result the company on 17 May 2016 issued an announcement detailing the findings and conclusion of the Committee.  In summary, it was found that 3 RMB 10 million bills had been misappropriated and appeared to be forged.  Mr Yao was identified as a possible culprit and comments were made about his and others being involved in the affairs of the company as a result of this matter. 

15. On 27 May 2016, G Lam J dismissed the application for the injunction order sought principally because there was no good reason to interfere with the voting rights of shareholders and that the courts would be loath to interfere with the internal democratic processes of a company.  As noted by G Lam J at §21, members of a company in exercising their voting rights do not owe any fiduciary obligation to the company and the court would seldom interfere with the way in which resolutions are to be proposed by members or are to be voted upon by them at properly convened general meetings. He noted that there may be an exception in circumstances where a member had complained of unfair prejudice or breach of agreement but no such complaint had been made in the present case.  He found that the claim as stated in the writ was most unusual, as it was for a declaration that certain resolutions, which had been validly proposed by members holding the requisite amount of shares and contained in a requisition validly deposited with the company pursuant to the articles, may not be moved or passed at the EGM on 12 March 2016 or any adjournment thereof. 

13 July EGM

16. Following this decision, the company made all the necessary arrangements to hold the EGM and by announcement on 24 June 2016 fixed the date for the EGM on 13 July 2016.

17. On 13 July 2016 the chairman of the company, Mr Sui Guangyi, chaired the EGM.  As a result of a complaint by a substantial shareholder that his voting instructions had been forged, it was considered that in the best interests of the company that the meeting be adjourned to 20 July 2016 to allow the issue to be resolved and to make sure that every shareholder entitled to vote was able to exercise their voting right as they wished.  On the same day, a public announcement was issued by the company adjourning the EGM from 13 July to 20 July 2016.

The Li missing shares

18. On 13 July 2016 prior to the EGM, the company received an urgent letter from Messrs Stevenson Wong and Co, the solicitors for Mr Li Xiao Hua, who was the beneficial owner of 70 million shares of the company being the equivalent of 6.32% of the company’s total issued share capital.  Stevenson Wong informed the company that, while Mr Li originally instructed his brokers that he authorised Mr Lo Hung to exercise his voting right of his 70 million shares on his behalf at the EGM, it turned out that only 8,000 shares were so authorised and his remaining 69,992,000 shares were the subject of a forged voting instruction.  They requested that the EGM be postponed to a date to allow their client to sort the matter out and provide a proxy that properly represented their client’s vote.

19. Mr Li’s shares had been deposited and held in the CCASS Clearing System operated by HKSCC Nominees Limited as nominees for investors through their respective brokers.  Under this system, if investors wish to exercise their voting rights for their respective shares, they are obliged to give authorisation to their broker to instruct HKSCC Nominees Limited to allow them to vote in accordance with their instructions, and also to compile a consolidated list and provide it to the company shortly before the EGM is convened, informing the company that it has been authorised by the individual investors through their brokers to vote according to the instructions as given by them.

20. However, according to the CCASS Proxy Consolidated List dated 12 July 2016 compiled by HKSCC Nominees Limited which was sent to the company shortly before the EGM, Mr Lo Hung only had authority to vote for 8,000 shares and not the 70 million shares as instructed by Mr Li.  Stevenson Wong submitted a letter of complaint dated 15 July 2016 to the Securities and Futures Commission about the matter.  It is stated that the broker had received an email which contained voting instructions purportedly from their client.  An attempt was made by the broker to contact the client for confirmation but it was unsuccessful.  Later a written instruction was received on 11 July 2016 and before the broker contacted their client, he was approached by Mr Yao who informed him that their client would instruct Mr Lo to be his proxy and exercise the voting rights in respect of 8000 shares and that the remaining shares should be dealt with in accordance with the email instruction.

The present proceedings

21. On 14 July 2016, Guang Sheng issued a writ of summons against China Investment “for breaches and anticipatory breaches of its Memorandum and/or Articles of Association, statutes, regulations and/or rules in relation to the proceedings and/or conduct of the defendant at the material times before and/or of its extraordinary general meetings held on 13 July 2016 and claims for injunction, damages, interests, costs and other relief.”

22. Guang Sheng also made an ex parte application for an interlocutory injunction order in the terms granted by Fung J on 15 July 2016.  It was complained that the EGM on 13 July 2016 was wrongfully adjourned and that the EGM had been the subject of a series of improper adjournments. 

23. The basis of Guang Sheng’s application was that China Investment had no realistic chance of success in refuting the breaches of articles it had committed at the adjourned EGM and thus had no realistic chance of establishing that there was no risk whatsoever of any breach of article at the further adjourned EGM on 20 July 2016.  It was accepted on behalf of Guang Sheng that the injunction sought would have the effect of finally disposing of the present action and thus it should generally only be granted if the court is satisfied that the other party has no realistic chance of success, although it was stressed that the court’s aim is nonetheless to adopt the course which carries the lowest risk of causing injustice.  See Speedy Brilliant Investment Ltd v China Health Group Limited & Anor, HCCW 816/2016, 2 June 2016, unreported, at §13.

24. There are two points to be made about this submission.  First, it is apparent from my examination of the materials that the matter of Mr Li’s missing shares was not properly explained or addressed to Fung J and this resulted in him not having the benefit of full and frank disclosure.  Secondly, the allegation of relentless attempts to stop the replacement resolutions from being voted on is in my view an extreme and unsubstantiated allegation.  There clearly was an issue on its face in relation to a voting irregularity and the adjournment of one week to address it was not inappropriate or prejudicial in the circumstances.  I also note that the contents of the affirmation of Mr Fan Weiyong filed in support of the ex parte application mainly dealt with incidents concerning conflicts or altercations between the parties involved in this dispute and therefore did not address adequately the key issues in relation to Guang Sheng’s application for injunctive relief. 

Submissions

25. Mr William Wong, SC with Mr Jonathan Chan, for China Investment, submits that the ex parte order should be discharged because it is highly unusual both in its terms and in seeking to appoint a person from outside the company to chair the general meeting. 

Lack of locus standi

26. In support of his submissions, Mr Wong argues that Guang Sheng did not have locus standi to commence this action or to make application for the injunctive relief that has now been granted; that China Investment has a high chance of success in defending Guang Sheng’s claim; that Guang Sheng did not present all the material facts to the Court when seeking and obtaining the injunction; and the orders sought by Guang Sheng were unnecessary.

27. Mr Wong argues that Guang Sheng does not have locus standi because it is not a registered shareholder.  It is a fundamental principle of company law that the Articles of Association constitute a contract between members and the company and between members themselves.  See Salmon v Quin & Axtens Ltd [1909] 1 Ch 311 at 318. 

28. In Ng Yat Chi v Max Share Ltd and Another [1998] 2 HKC 251, Li CJ (with whom the other judges agreed) stated at 260E that:

“A shareholder must be registered in order to be a member or contributory and to exercise the rights attached to that status under the articles and the Companies Ordinance.”

29. A member is defined under the articles as “a duly registered holder from time to time of the shares in the Register including holders who are jointly so registered.”  As pointed out by Mr Wong, Guang Sheng does not appear on the company’s list of registered shareholders. Accordingly, it had no right to enforce the company’s articles in the present action.  See Eclairs v JKX [2014] 4 All ER 463 at 473 per Briggs LJ; and East Asia Satellite Television (Holdings) Ltd v New Cotai LLC & Ors [2011] 4 HKC 115 at 125, §37, per Tang Ag CJHC.

30. Mr Franki Ho, for Guang Sheng, sought to argue that article 85(2) of the Articles of Association gave Guang Sheng the same rights and powers as a registered shareholder of the company and that this gave it the locus standi to sue the company.  The article in question gives a beneficial owner of shares an entitlement to exercise the same rights and powers as if a registered shareholder in relation to the internal matters of the company.  It does not give, nor can it, a beneficial owner a right to sue that is not otherwise available at law. 

31. I agree with Mr Wong that in the circumstances of the present case, Guang Sheng is not a registered shareholder of the company and does not have locus standi in the present action.  As rightly pointed out by Mr Wong, this was a material fact that was not brought to the attention of Fung J at the ex parte hearing, and as a consequence he proceeded and made the orders as sought on the basis that Guang Sheng had locus standi.  It is to be observed that the status of Guang Sheng not being a registered shareholder had been previously mentioned in the related proceedings of HCA 411/2016. 

Appointment of a chairman

32. Mr Wong points out that article 63 of the Articles of Association provides clear and strict terms as to the appointment of a chairman of a general meeting.  It provides that the chairman of the company shall preside as chairman at every general meeting and if he is unable or unwilling to do so then the directors present are to choose a director to be chairman, and if any of the directors present are unable or unwilling to do so then the members present shall elect one of their number to be chairman. 

33. Mr Wong submits that there is no provision within the Articles of Association for the appointment of an outside person to act as Chairman of a general meeting.  He complains that article 63 was not brought to the attention of Fung J at the ex parte hearing. It seems that was the case.

34. Mr Ho relies on an instance, involving China Health Group Limited, where an independent chairman has been appointed by the court in order to conduct a general meeting.  There is no decision in relation to the appointment and I do not know the basis or the circumstances of the decision.  In any event, what is relevant is the particular Articles of Association of China Investment.  In the present case article 63 is clear in its terms.

Power to adjourn the EGM

35. Fung J’s attention was mainly drawn to articles 62 and 64 concerning the chairman’s power to adjourn a general meeting and it was submitted that the EGM held on 13 July 2016 was improperly adjourned to 20 July 2016.  However, as I have already noted the reason for the adjournment was because of a complaint by a substantial shareholder that his proxy form had been forged by authorising only to vote on 8,000 shares and not the 70 million shares that he held.  As Mr Wong points out, a chairman can adjourn a general meeting where the circumstances warrant it.  See Byng v London Life Association Ltd and Another [1990] Ch 170 at 187G to 188D per Sir Nicholas Browne Wilkinson VC, at 193G to H per Mustill LJ and at 195B to C per Woolf LJ.   

36. I agree with Mr Wong’s submissions that this was a situation where it was appropriate for the chairman to adjourn the EGM.  It is of particular relevance that the adjournment was only for one week in order to allow the shareholder to address the matter.

Assessment of the claim

37. In HCA 411/2016, G Lam J at §19 stated that a case of this type, where an order continuing the interlocutory injunction until trial is likely to be dispositive of the whole action, an applicant should be held to a higher standard so far as its prospects of success are concerned.  He cites in support of this proposition: Cayne v Global Natural Resources Plc [1984] 1 All ER 225, 236b-f; Kwok Shun On v Wong Sai Wing [2001] 3 HKLRD 811 at §43. 

38. I am not satisfied that Guang Sheng has sufficiently good prospects in its action.  The claim as stated in the writ is broad and general and complains of breaches or anticipatory breaches of its Memorandum and Articles of Association and other unspecified provisions in relation to the conduct of China Investment of the EGM held on 13 July 2016. The EGM was adjourned to 20 July 2016 and there is no evidence before me to doubt the allegations of interference of a shareholder’s voting right that warranted the adjournment. 

39. Mr Fan’s evidence as contained in his affirmation is expressed in general and wide terms.  He makes issues of matters that have little, if any, substance to them, such as his being the second largest shareholder of the company and not Mr Li as stated by Mr Luk Hong Man Hammond in his evidence filed on behalf of China Investment.  He seeks to discredit the incident involving Mr Li’s shares by implying that it was fabricated which he suggests is supported by conversations conveyed to him by Mr Yao who spoke to Mr Li concerning an agreement to sell his shares to Mr Sui.  I find no substance in Mr Fan’s assertion.  There is ample documentary and other evidence to support Mr Li’s allegations that his voting instructions were fraudulently interfered with. 

40. The foundation of the cause of action and the basis of the interlocutory injunction was that the EGM on 13 July 2016 was adjourned.  The Li incident fully justified the action taken by the chairman and it was not disclosed to Fung J to the level and degree to which it has been disclosed to me and why on this basis alone I would discharge the injunction.  Far from being conduct that was harsh and oppressive to shareholders at the EGM, the adjournment was a necessary and proportionate response to the Li incident. It is also significant that the company issued a public announcement in relation to what took place at the 13 July EGM. 

41. Mr Fan also complains about the terms of the public announcement and that it imposed harsh requirements on shareholders who were not registered shareholders of the company by requiring them to give updated voting instructions for the adjourned EGM.  As rightly pointed out by Mr Wong, this was misconceived as it is clear that the proxy form and voting instructions given would remain valid at “any adjourned meeting” as well as the adjourned EGM.  The proxy form reads:

“I/We ______... HEREBY APPOINT _____... or failing him, the chairman of the adjourned extraordinary general meeting of the Company… as my/our proxy to act for me/us and to vote for me/us and on my/our behalf at the Adjourned Extraordinary General Meeting (or any adjourned meeting) to be held at Falcon Room, Basement, Gloucester Luk Kwok Hong Kong, 72 Gloucester Road, Wanchai, Hong Kong on Wednesday, 13 July 2016 at 3:00 p.m. or any adjournment thereof for the purpose of considering and, and if thought fit, passing the resolutions as set out in the notice of the Adjourned Extraordinary General Meeting dated 24 June 2016 as indicated below, and, if no such indication is given, as my/our proxy thinks fit.”

The terms of the injunction order

42. In the circumstances of the present case, I am of the view that the terms of the ex parte orders are unnecessary and inappropriate.  I agree with the submissions of Mr Wong and his comments or criticisms of the terms of the injunction order. 

Conclusion

43. For the foregoing reasons, I discharge the ex parte injunction orders and vacate the return date of the summons fixed at 10 am on 22 July 2016. 

44. There were a number of irregularities in the manner in which this application was made to the judge in the ex parte hearing but my principal concerns are the basis on which it was made, namely, the adjournment of one week of the EGM (which was justified given the material indicating serious interference with a shareholders voting rights), and the lack of particularity and inadequate disclosure of significantly relevant matters, namely, the status and locus standi of Guang Sheng; the Li incident; the power of the chairman to adjourn meetings under Article 63 of the Articles of Association and common law; the power or lack thereof to appoint an outside person to chair a general meeting under the Articles of Association; and the terms of the public announcement dated 13 July 2016 in relation to voting instructions and the proxy form. 

45. Accordingly, I order that Guang Sheng pay the costs of China Investment on an indemnity basis with a certificate for two counsel.