SANJU ENVIRONMENTAL PROTECTION (HONG KONG) LTD v. WANG LISHAN AND OTHERS

HCMP 1612/2021

[2023] HKCFI 531

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1612 OF 2021

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JUDGMENT

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Introduction

1.  By an originating summons dated 19 October 2021 (“the OS”), Sanju Environmental Protection (Hong Kong) Limited (“the Plaintiff”) applies for final injunctions against the 1^st to 5^th Defendants.  The OS is taken out under sections 728 to 730 of the Companies Ordinance (Cap 622) (“CO”), section 21L of the High Court Ordinance (Cap 4), and the inherent jurisdiction of the court.

2.  The Plaintiff, in its capacity as shareholder, seeks to restrain the passing or carrying out of 4 proposed board resolutions (“the Proposed Resolutions”) of Jutal Offshore Oil Services Limited (“the Company”) set out in a notice to convene a board meeting dated 8 October 2021 (“the October Notice”).  The precise terms of the Proposed Resolutions are set out in [12] below.

3.  The Company is listed on the Hong Kong Stock Exchange (Stock Code: 3303), and is an investment holding company.  Together with its subsidiaries, it engages in the manufacturing of oil and gas facilities and processing skid equipment business.  The Company is substantial.  As at the date of application, the Company had a market capitalization of around HK$1.81 billion.

4.  The Plaintiff is a substantial shareholder in the Company, and held 38.34% of the issued voting shares in the Company. It is wholly-owned by Beijing Sanju Environmental Protection & New Materials Co. Ltd., whose shares are listed for trading in the PRC on the Shenzhen Stock Exchange.

5.  As at the date of the OS, the 1^st to 5^th Defendants were each directors of the Company.  The 1^st Defendant, Mr. Wang Lishan, is an Executive Director and the Chairman of the Board of Directors.  He controlled 24.79% of the issued voting shares in the Company through shares held in his name and his corporate vehicle. The 2^nd Defendant, Mr Cao Yunsheng, is an Executive Director and the Chief Executive Officer (“CEO”) of the Company.  The 3^rd Defendant, Liu Yunian, was an Executive Director, while the 4^th and 5^th Defendants (Su Yang and Qi Daqing, respectively) served as Independent Non-Executive Directors (“INEDs”).

6.  The Plaintiff’s case is that the 1^st to 5^th Defendants are in the same “camp”, with the 2^nd to 5^th Defendants being accustomed to act on the 1^st Defendant’s instructions.  The Plaintiff says they have always voted in the same way since April 2020, and have effective control of the Company at the board level given that the Company had 10 directors and the 1^st Defendant, as Chairman, held a casting vote.  This assertion is disputed by each of the 2^nd to 5^th Defendants, who disagree that they are merely “rubber stamps” of the 1^st Defendant.

7.  At the hearing before me, the Plaintiff was represented by Mr William Wong SC leading Mr. Michael Ng. The 1^st to 2^nd Defendants were represented by Mr Kenneth Chan appearing with Mr Fung Pak Kay and Mr Joshua Choy, and the 3^rd to 5^th Defendants were represented by Mr Bruce Lau.

8.  In broad terms, the Plaintiff’s complaint is that the Proposed Resolutions will substantially undermine the Company’s existing corporate governance framework and will confer sweeping powers upon the 1^st and 2^nd Defendants, as the Chairman and CEO of the Company.  It is contended that the proposals are without legitimate justification, without relevant information being provided to the directors for their proper consideration and, overall, not in good faith or in the best interests of the Company.  The Plaintiff submits that the carrying out or passing of the Proposed Resolution will amount to conduct which is in breach of the duties owed by the directors to the Company, and that an injunction under s.729 of the CO should be granted in order to prevent this.

The October Notice and Proposed Resolutions

9.  The October Notice sought to convene a board meeting of the Company to be held on 25 October 2021.  The Plaintiff issued these proceedings and were able to prevent the passing of the 4 proposed resolutions before the board meeting was convened by obtaining interim relief from the court. 

10.  On 19 October 2021, the Plaintiff applied by summons for interim injunctive relief to restrain the Defendants from passing or carrying out the 4 proposed board resolutions pending the final determination of the OS (“the Summons”).

11.  On 21 October 2021, the Defendants gave undertakings in the terms sought in the Summons.  Those undertakings were accepted by the court.  In view of the undertakings in place, the issue is now whether the final injunctive relief sought by the Plaintiffs should be granted.  Since the Proposed Resolutions are at the core of this dispute, it is necessary to set them out in full.

12.  The Proposed Resolutions read as follows:

“考虑到公司目前由CEO 全面负责贵公司日常运营和管理，业务审批流程需要进行简化，以便提高公司运行效率，提议对公司运营审批的相关权限进行如下安排：

l、  固定资产及其他资本开支事项：

年度资本开支预算以内单项金额不超过人民币 2000 万元的资本开支事项及年度预算之外累计金额在人民币 2000 万元以内的资本开支事项，由 CEO 审批；超过上述 CEO 审批权限的，在年度资本开支预算内的事项和在年度资本开支预算外累计金额在相当于人民币 1 亿元以内的资本开支事项，由董事会主席审批；

(English translation:

1. Fixed assets and other capital expenditure matters:

Any individual capital expenditure within the annual budget not exceeding RMB 20 million, and any cumulative capital expenditure outside of the annual budget not exceeding RMB 20 million, shall be approved by the CEO; individual capital expenditure within the annual budget and cumulative capital expenditure outside of the annual budget which exceeds the CEO’s aforesaid authorities, but within RMB 100 million, shall be approved by the Chairman”) (“Proposed Resolution 1”).

2、  业务合同审批：

相当于人民币5 亿元以内的经营合同及其预算，由 CEO 审批；超过以上限额的经营合同签订事项以及涉及到垫支1 亿元以上经营合同，再由董事会主席最终批准；

(English Translation:

2. Approval of business contracts: Business contracts and its budget of a value not exceeding RMB 500 million shall be approved by the CEO; business contracts exceeding the aforesaid limits and any business contracts involving advances of more than RMB 100 million shall be finally approved by the Chairman”) (“Proposed Resolution 2”).

3、  人事方面：

总裁助理及以下级别人员的任命及薪酬待遇等相关事项由 CEO 审批；但管理层年度奖励方案须报董事会主席审批；

(English Translation:

3. Personnel aspect: The appointment and remuneration of staff with the rank of President’s assistant or below shall be approved by the CEO; however, the management’s annual reward plan must be submitted to the Chairman for approval”) (“Proposed Resolution 3”).

4、  其他方面：

为了公司融资、业务合同等业务需要而进行的包括对外开出保函、对外发出担保信、下属公司间的相互担保、公司资产的抵押、质押及对集团内公司的担保等事项，金额在相当于人民币 5000 万元以内的，由 CEO 审批，超过此限额的，由董事会主席审批。”

(English Translation:

4.  Other aspects: The grant of external deeds of guarantees, the issuance of external guarantee letters, mutual guarantees between subsidiaries, mortgages, pledges of company assets, and guarantees for companies within the group, etc. for business needs such as company financing, business contracts, etc. shall be approved by the CEO if the amount does not exceed RMB 50 million; and if it exceeds this limit, it shall be approved by the Chairman”) (“Proposed Resolution 4”).

The Relevant Factual Background

13.  Having set out the Proposed Resolutions, to provide proper context, it is necessary to set out some of the relevant background leading up to the October Notice.

14.  This is not the first time that the Defendants have been sued in connection with proposed resolutions with respect to the Company.  In fact, this is the third set of legal proceedings in which the Plaintiff has sought injunctive relief against the Defendants with respect to board resolutions. The previous two were in HCMP 570/2021 and HCMP 823/2021, and the Plaintiff successfully obtained injunctive relief in both actions.

15.  On 27 May 2021, Linda Chan J granted an injunction against the Defendants in HCMP 570/2021: see Sanju Environmental Protection (Hong Kong) Ltd v Wang Lishan [2021] HKCFI 1503. At §§8-23, the learned Judge helpfully recorded the factual background leading up to her decision, which I gratefully adopt.

16.  In short, the Judge held that the Defendants acted in breach of their duties to act in good faith and with reasonable care and skill in deciding to vote for a resolution at a meeting to be held on 27 April 2021.  This was in relation to a proposed allotment and issuance of 164,401,638 new ordinary shares in the Company to Mr Zhang Jinbing, and an injunction was granted by the court.  There was no justification for the proposed issuance of new shares at a discount to a single investor, and the Defendants had failed to demonstrate that there was a genuine need to raise funds by way of the subscription (§42). Although the Judge declined to grant an injunction with respect to another resolution with respect to an investment of RMB 220 million in a pier project, the court concluded that the Defendants had acted in breach of duty by failing to provide relevant information pertaining to that resolution by 26 April 2021 (§38).

17.  Unlike in the present proceedings, all 5 Defendants were represented by the same legal team, and the Plaintiff’s case that they were all in the same camp and had majority control over the board does not appear to have been disputed: §12.

18.  After the decision was handed down, the 1^st Defendant circulated a notice to convene a board meeting 4 days later.  This was to “discuss” the grant of a total of 100 million share options to 29 selected staff on the purported basis of stabilizing staff morale.  A further notice was issued since the resolution was only to “discuss” (and not approve) the grant of the share options, and a board meeting was eventually convened on 10 June 2021.  At that meeting, the Defendants voted in favour of the share options resolution.

19.  This led to the Plaintiff commencing HCMP 823/2021 on 10 June 2021.  The Plaintiff obtained an ex parte injunction to restrain the Defendants from carrying out the purported grant of share options.  The effect of the grant was to dilute the Plaintiff’s shareholding in advance of the 2021 AGM to be convened later that month, and to circumvent the injunction the Plaintiff obtained in HCMP 570/2021 with respect to the issuance of new ordinary shares.  On 18 June 2021, the injunction was continued by Linda Chan J until the 2021 AGM.

20.  Viewed against this background, it is clear that the Defendants have repeatedly engaged in conduct in breach of their duties as directors, especially in relation to the issuance of new shares or share options.  This conduct has led to time and costs being incurred, and also valuable judicial resources being spent, and were clearly related to an attempt to jockey for control and voting influence in advance of the 2021 AGM.  Although I am conscious that the subject-matter of this application is different, I am mindful that there are previous unchallenged findings of breach of director’s duties against the Defendants.

The 2021 AGM and Subsequent Events

21.  The 2021 AGM was eventually convened on 28 June 2021.  In the event, the 1^st to 3^rd Defendants were re-elected as executive directors, although there were 45.4% of the votes cast against their re-election.  After the 2021 AGM, the 2^nd Defendant was appointed as the CEO of the Company at a board meeting convened on 9 July 2021.  There was also a board meeting convened for 18 August 2021 where (among other things) Mr Tam Kin Yip was appointed as an INED.

22.  On 23 September 2021, the 1^st Defendant called Mr Wang Ningshen and asked him to resign from either of his positions as Executive Director or President.

23.  As mentioned above, the October Notice was circulated on 8 October 2021 to convene a board meeting for 25 October 2021.  The first item of the October Notice was to remove Mr Wang Ningshen as President and to appoint the CEO as President. Mr Wang was eventually removed as President on 25 October 2021.

24.  The Proposed Resolutions were the second item mentioned.  The October Notice states that the purpose of the 4 proposed resolutions was to simplify the “business approval mechanism” and increase the Company’s efficiency, and to facilitate the 2^nd Defendant as CEO to take “comprehensive responsibility” for the daily operations and management of the Company.  However, one of the Plaintiff’s complaints is that there was no prior notice or justification provided in advance of the October Notice.  There was no discussion known to the Plaintiff regarding the Proposed Resolutions before the October Notice was received.

25.  On 15 October 2021, Mr Gao Zhiqiang, an Executive Director, expressed his opposition against the resolutions, and stated his view that they were not in the best interest of the company as it would allow the 1^st and 2^nd Defendants to make all major business and financial decisions without notifying other directors or senior management of the Company. He asked for legitimate justifications for these resolutions failing which legal action would be taken.

26.  On 17 October 2021, the Plaintiff informed the Defendants that the proposed resolutions would substantially undermine the existing corporate governance structure and that insufficient information had been provided to properly consider the resolutions.  These proceedings were then commenced on 19 October 2021, and undertakings were given on 21 October 2021.

The Existing Corporate Governance Framework

27.  In order to understand the changes contemplated under the Proposed Resolutions, it is necessary to examine the Company’s existing corporate governance framework prior to the October Notice.  Pursuant to a board resolution dated 10 April 2020, the following matters required approval by the board as a whole:

(1)  main contracts exceeding the amount of RMB 1.5 billion.

(2)  all guarantees and securities granted to entities outside of the Company’s group.

(3)  the appointment and remuneration of positions with the rank of Vice-President or above.

(4)  any use of capital outside of the Company’s ordinary operation.

28.  The approvals by the Chairman, the President, the Vice President (Finance), and at least 3 other senior management staff were required for (i) any contract payment by the Company to entities outside the Group exceeding RMB 1 million; and (ii) daily reimbursement or borrowing by the Company exceeding RMB 300,000.

29.  Regarding the Company’s subsidiaries, any expenditures on purchases, subcontracting, transportation, and labour services exceeding RMB 10 million required the approvals of the Chairman, the President, the Vice President (Finance), and least 3 other senior management staff of the Group.

30.  Accordingly, from the above, it can be seen that the Company did have an existing corporate governance framework which set in place different levels of approval required for different types of business transactions and operations.  Some of these needed the approval of the board as a whole, while others did not, but still required the approval of a number of senior individuals within the Company.  This framework was part of the Company’s internal control system and meant that the use of its assets and capital would be subject to approval and scrutiny.

The Effect of the Proposed Resolutions

31.  The stated purpose of the Proposed Resolutions in the October Resolutions was to simplify the business approval mechanism, to increase the Company’s operational efficiency, in light of the fact that the CEO was to be “comprehensively responsible” for the daily operation and management of the Company.

32.  The proper interpretation of the Proposed Resolutions is disputed, and there has been evidence filed to explain what was actually meant to be covered by the Proposed Resolutions.  However, the question of interpretation is not a subjective exercise.  It must be approached objectively having regard to the language used in the resolutions, the relevant context, and how they would have been reasonably understood by a reasonable recipient of the notice.  One of the features of this case is that there is no contemporaneous material to explain the justifications for the proposals contained in the Proposed Resolutions, or their intended effect or scope.  This is so despite a request for legitimate justifications to be provided on 15 October 2021.

33.  As will be seen below, the Proposed Resolutions vested substantial powers of approval concentrated in the CEO and the Chairman, and did not mention anything about the existing internal controls or corporate governance framework or how the Proposed Resolutions would co-exist with that framework.

34.  Proposed Resolution 1 deals with items of individual and cumulative capital expenditure, and provides for a RMB 20 million and RMB 100 million limit to the approval of authority of the CEO and Chairman respectively.  These limits apply to individual items of capital expenditure within budget and for cumulative capital expenditure which is outside budget.

35.  Under Proposed Resolution 2, business contracts of a value not exceeding RMB 500 million shall be approved by the CEO.  Moreover, a business contract which exceeds RMB 500 million, or involves advances of more than RMB 100 million, shall be finally approved by the Chairman.  There is no limit stated as to value of the business contracts which can be “finally approved” by the Chairman.  Proposed Resolution 2 is silent as to how its terms are to be reconciled with the existing corporate governance framework, which provided that a business contract with a value in excess of RMB 1.5 billion requires the approval of the board of directors.

36.  In my view, there is an obvious conflict with the existing framework because on a plain and ordinary reading of Proposed Resolution 2, there is no limit on the value of business contracts the Chairman can approve, and hence the Chairman can approve a business contract of a value exceeding RMB 1.5 billion.  Thus, under the broad terms contemplated in Proposed Resolution 2, the CEO and Chairman together would be able to approve any business contract of any value.  Needless to say, given the potential value of the business contracts at stake, this is an extremely wide and sweeping power.

37.  The effect of Proposed Resolution 3 is that the appointment and remuneration of staff at the rank of President’s assistant or below shall be approved by the CEO, and the Chairman must approve the management’s annual reward plan.

38.  Under Proposed Resolution 4, the CEO has the power to approve of various forms of guarantees (including external guarantees), and the pledging of Company assets if the amount does not exceed RMB 50 million, and if it exceeds this limit, it shall be approved by the Chairman.  In my view, there is a conflict between this and the existing corporate governance framework which provides that all external guarantees and securities must be approved by the board as a whole.

Legal Principles

39.  Relevantly, sections 728 to 729 of the CO provide:

Section 728

(1)  "Section 729 applies if, in relation to a company—

(a)  a person has engaged, is engaging or is proposing to engage in conduct that constituted, constitutes or would constitute—

(i)     a contravention of this Ordinance;

(ii)   a default relating to a contravention of this Ordinance; or

(iii)    a breach specified in subsection (4); or

(b)  a person has refused or failed, is refusing or failing, or is proposing to refuse or fail, to do an act or thing that the person is required by this Ordinance to do.

…

(4)  The breach specified for the purposes of subsection (1)(a)(iii) or (2)(a)(iii) is—

(a)  a breach of the person's fiduciary duties owed to the company in any capacity other than as a director of the company;

(b)  a breach of the person's fiduciary or other duties as a director of the company owed to the company; or

(c)  a breach of the company's articles.

…"

Section 729

(1)  "The Court may, on application by a member or creditor of the company whose interests have been, are or would be affected by the conduct or by the refusal or failure, do any or all of the following—

(a)  grant an injunction, on the terms that the Court thinks fit—

(i)   in the case of section 728(1)(a) or (2), restraining the person from engaging in the conduct or requiring the person to do any act or thing; or

(ii)  in the case of section 728(1)(b) or (3), requiring the person to do any act or thing;

…

(3)  The Court may grant an injunction under subsection (1)(a)(i) or (2)(a)(i) restraining a person from engaging in a conduct –

(a)  whether or not it appears to the Court that the person intends to engage again, or to continue to engage, in the conduct;

(b)  whether or not the person has previously engaged in the conduct; and

(c)  whether or not there is an imminent danger of substantial damage to any other person if the person engages in the conduct.

40.  Under section 729 of the CO, the Court is conferred with a wide jurisdiction to grant a prohibitory or mandatory injunction on an application by a member of creditor of the company in question.  This is not to say that the jurisdiction is not without limits.  The applicant for the injunction must demonstrate that his interests have been, are, or would be affected by the conduct in question.[1]  Moreover, the applicant must also show that the conduct falls within the specified categories under section 728(1)(a), 728(1)(b), 728(2) or 728(3).

41.  The relevant provision for present purposes is section 728(1)(a)(iii).  This applies, in relation to a company, where a person has engaged, is engaging, or is proposing to engage in conduct that would amount to a breach specified in section 728(4).  Such breaches include a situation where conduct on the part of a director would constitute a breach of fiduciary duty owed to the company.  The Court is given power to grant final and interim injunctions to restrain such conduct on the part of the person engaging in such conduct.  Normally, this would be directed at the directors of the company, though the provisions are wide enough to include others.

42.  Section 729(3) makes it clear that the Court may grant an injunction irrespective of whether there is a risk that the conduct sought to be restrained will be continued, or whether there is an imminent danger of substantial damage.  This provision does not say, however, that these considerations are irrelevant.

43.  In many cases, these considerations will be present when the court is dealing with an application for an injunction, and would indeed strengthen the prospects of an injunction being obtained.  However, given the wide variety of conduct which is covered, it is clear to me that the purpose of section 729(3) is to preserve flexibility in the exercise of judicial discretion in granting injunctions.  This is achieved by eliminating any suggestion that the discretion should be restricted by the types of considerations which might be thought to be relevant when the court exercises its equitable jurisdiction to grant an injunction.

44.  The following observations in Kwan, Company Law in Hong Kong – Practice and Procedure 2021 at §8.138 are helpful: -

“The considerations referred to in s.729(3) and 729(4) of the CO which need not bar an injunction are the type of requirements traditionally required for equitable injunctive relief, and it would seem that the effect of s.729(3) and 729(4) of the CO is that the court is to be given the widest possible powers under the statute, devoid of traditional restraints, though the power must be exercised judicially and sensibly” (emphasis added).

45.  In a similar vein, in the context of the comparable legislation in Australia under s.1324 of the Corporations Act 2001, it has been stressed that the court is exercising a statutory jurisdiction, and in doing so, the Court is not confined by the considerations which would be applicable if it was exercising its traditional equity jurisdiction: see Australian Securities and Investments Commission v Mauer-Swisse Securities Ltd (2002) 42 ACSR 605 at [36].  The question for determination is whether the injunction would have some utility or serve some purpose within the contemplation of the statute: [11], [16-19].

46.  Regarding director’s duties, the Plaintiff relies on the fiduciary duty of utmost good faith and to act in the best interests of the company, and not for improper purposes, and the duty to exercise reasonable care, skill and diligence.  These duties have already been set out by Linda Chan J in [2021] HKCFI 1503 at [27], which I gratefully adopt.  The Plaintiff also stresses that directors have an individual and collective duty to exercise independent judgment, and to acquire and maintain sufficient knowledge and understanding of the company’s business and transactions proposed to be entered into by the company: Pacas Worldwide Ltd v China Health Group Ltd (HCA 2961/2015, 18 May 2016) at [25] per Mimmie Chan J.

47.  Moreover, although the delegation of responsibility and functions by directors is permissible, the directors are subject to a residual duty to ensure that there is a system in place for checking upon the performance of the delegated functions: Palmer’s Company Law at [8.2816 & 8.2818].

48.  On the other hand, matters of management are within the responsibility of the directors, and that it would be wrong for the court to substitute its own opinion for that of management or indeed to question the correctness of a management decision where it has been arrived at in good faith.  The court is not a supervisory broad over decisions within the powers of management honestly arrived at: Howard Smith Ltd v Ampol Petroleum Ltd & Others [1974] AC 821, 832; Kwok Shun On v Wong Sai Wing [2001] 3 HKLRD 811 at §73.

49.  Having set out these legal principles, I now turn to consider each of the Proposed Resolutions separately to identify whether there is conduct, or proposed conduct, which would entitle the Court to grant an injunction under s.729.

Proposed Resolution 1

50.  Under Proposed Resolution 1, the Chairman and CEO are not given unlimited powers of approval with respect to capital expenditure.  There is a limit of RMB 20 million with respect to the CEO, and a limit of RMB 100 million for the Chairman.  As can be seen from a comparison table, the Chairman’s previous authority was set at RMB 10 million and RMB 20 million for individual and cumulative items of expenditure respectively.  Thus, there is an increase of the items of capital expenditure which the Chairman can approve up to RMB 100 million, and the CEO could approve up to RMB 20 million.  Board approval would still be required for items in excess of RMB 100 million.  Furthermore, from the evidence, there does appear to be an existing internal control process which governs these items of expenditure, including a procurement management procedure, through which various levels of managerial approval would have to be obtained before an item of capital expenditure is submitted for approval.

51.  I accept that the court should be slow to question an internal management decision of a company (Howard Smith Ltd; Kwok Shun On).  Naturally, it is difficult for the court to question an increase of existing approval limits for capital expenditure without effectively stepping into the board room and substituting its own views for that of management.  It is significant that the Chairman had already previously enjoyed a substantial approval power up to RMB 20 million (which was not called into question), and in my view, it is a matter for the board to decide whether that limit should be increased or not.

52.  There is also the fact Proposed Resolution 1 still contemplates board approval for items of capital expenditure in excess of RMB 100 million.  Accordingly, although the powers of the Chairman would be increased, his approval powers are not unlimited and I am unable to conclude that the maximum limit contemplated by Proposed Resolution 1 is so inflated as render it illusory or artificial.  I am also unable to conclude that the limit is wholly arbitrary as contended by Mr Wong SC in oral submissions.  Any increase in an approval limit will likely involve questions of commercial judgment based on the operational and business needs of the Company.  The merits of the proposed limit, and whether it ought to be scaled down or approved at all, is a matter I believe that should be left for the board to consider and to determine.

53.  While Proposed Resolution 1 does not expressly refer to the existing internal control process, in my view it is clear that Proposed Resolution 1 would not be reasonably construed as meaning that the existing procurement procedure (involving levels of managerial approval) would be replaced wholesale.  I do not think that such a reading would make commercial sense as it would be illogical, especially for a listed company of this size, for an item of substantial capital expenditure to be submitted for approval without prior vetting.

54.  I am conscious that the Plaintiff says that there is insufficient analysis or justification put forward to explain the increase in approval limits.  However, the nature of what is being proposed is important.  What is being considered is not a substantial transaction, allotment of new shares, or important business contract which might merit the provision of relevant information before the meeting takes place for the purpose of meaningful consideration.

55.  While it may be said that it would have more desirable or efficient if further information was circulated to the board to explain the thinking behind the proposal, I do not think that a failure to do would necessarily amount to a breach of director’s duties.  The question of approval limits for capital expenditure, and whether they should be increased, is in my view a matter which the directors would be able to form their own independent opinion on having regard to their own experience within the Company – and if necessary with inquiries being made.  In my mind, the fact that there is still a real financial limit on the approval powers of the Chairman is an important point.

56.  The Plaintiff has also raised the argument of improper purpose, relying on the fact that the Defendants, and in particular, the 1^st Defendant have engaged in a repeated course of conduct involving breach of fiduciary duties.  In addition, it is said that steps have been taken by the 1^st Defendant since the AGM to take steps to further control the Company.  These, however, are general points and do not specifically pertain to Proposed Resolution 1.  Having carefully considered these matters, and the evidence before the court, I am unable to safely reach the inference that Proposed Resolution 1 was tainted by an improper purpose in the abstract, namely, in the absence of an actual set of facts involving an arguably wrongful approval of a specific item of capital expenditure.

57.  For these reasons, I am not satisfied that I should grant an injunction with respect to the passing or carrying out of Proposed Resolution 1.  I should make it clear, that this is not to say, however, that the CEO and Chairman have a completely free hand if Proposed Resolution 1 were to be passed.  Their approval powers would still have to be exercised in good faith and in the best interests of the Company, and not for an improper purpose.  In addition, they would be obliged to acquire sufficient knowledge pertaining to the proposed item of capital expenditure in order to make an informed decision as to whether to grant the approval or not. I do not exclude the possibility of an injunction being be granted in the future where it is shown that the approval involves a breach of duty.

Proposed Resolution 2

58.  Proposed Resolution 2 contemplates, among other things, conferring upon the power of the Chairman to unilaterally approve a business contract which exceeds RMB 500 million in value, or involves advances of more than RMB 100 million, without any limitation.  In other words, on a plain reading of Proposed Resolution 2, board approval would not be required with respect to such contracts and the Chairman would instead be vested with approval power.

59.  In my judgment, this is highly problematic as it would effectively confer upon the Chairman wide and sweeping powers of unilateral approval with no limit with respect to business contracts.  I take the view that this would be contrary to the best interests of the Company, as it would be a fundamental departure from the existing corporate governance framework and it would deprive the board of the collective ability to approve business contracts of a very significant financial value. The Plaintiff points out that a business contract of RMB 500 million would amount to approximately 26.37% of the Company’s net assets as of 30 June 2021. In reaching this conclusion, I have expressly borne in mind that the court should be slow to interfere with internal management decisions. 

60.  By having such an unlimited power being conferred, the other directors of the Company would be unable to exercise their independent judgment to approve of these transactions, with no effective system to monitor their approval. There would be no requirement even to notify the other directors of a potential approval of a substantial business contract.  I am of the view that the carrying out, or passing, of Proposed Resolution 2, as framed, would amount to a breach of duty.

61.  To meet the obvious concern about having no limits, Mr Kenneth Chan submits that Proposed Resolution 2 must be read in conjunction with the existing governance limit set out in the board resolution dated 10 April 2020.  He relies on the fact that after that resolution was passed board approval was required with respect to business contracts in excess of RMB 1.5 billion.  His argument is that the power of the board in this regard would remain intact even if Proposed Resolution 2 were passed.  It is argued that in fact there is still a limit imposed with respect to the Chairman’s power of approval, and what is actually sought to be achieved is a delineation of the CEO and Chairman’s authority with respect to business contracts under RMB 1.5 billion.

62.  I am unable to accept this argument because it is contrary to the clear terms of Proposed Resolution 2, and if it were passed, it would plainly amount to a reversal of what had been previously resolved on 10 April 2020.  There was no indication in the October Notice or in Proposed Resolution 2 itself about keeping the board’s power of approval intact with respect to contracts in excess of RMB 1.5 billion.  Moreover, under Proposed Resolution 1, there was no mention of a limit to the powers of approval.  If a limit was in fact intended, I am unable to see why this was not clearly spelt out for the directors to consider – especially in light of the recent past history of the Company where injunctions had been granted by the court with respect to problematic board resolutions. On the contrary, the stated purpose in the October Notice was to “simplify” the existing approval mechanism.  This, in view, also points towards a desire to concentrate the power of approval in the hands of the 1^st and 2^nd Defendants, and to bypass board approval.

63.  I take the view that if the drafting of Proposed Resolution 2 did not reflect what was actually intended by the Chairman, the resolution could have been amended to make it clear that the existing power of board approval for business contracts over RMB 1.5 billion was to be retained as provided in the board resolution dated 10 April 2020.  The failure to do so, in my view, is difficult to understand and seriously undermines the credibility of the Defendants’ position.

64.  Having reached this conclusion, I do not find it necessary to express a view on whether it was necessary for “sufficient justification” to be put forward to explain why the change contemplated under Proposed Resolution 2 was needed.

Proposed Resolution 3

65.  The Plaintiff takes issue with the part of this resolution which states that the appointment and remuneration of staff with the rank of President’s assistant or below shall be approved by the CEO.  As stated above, the CEO is the 2^nd Defendant. It was argued for the Plaintiff that the passing of this resolution may undermine the power of the board of directors to supervise remuneration levels.

66.  In fairness, the injunction with respect to this particular resolution was lightly pressed for by Mr Wong SC at the hearing.  In my judgment, this was a realistic stance to take.  Proposed Resolution 3 only relates to the appointment and remuneration of staff below a certain level by the CEO, and there is no evidence to suggest that the CEO would likely act in breach of his duties if he was conferred with such approval powers.  These matters, in my view, are in the nature of internal employment and operational matters where the scope for judicial intervention is limited.  In addition, the CEO would still have to keep the board of directors informed of these matters.  It was not suggested by the Plaintiff that there was any specific ulterior purpose regarding this resolution, and I do not consider that it would be appropriate to grant an injunction at this stage.  I accept that the position may be different if there are future facts which suggests that the CEO has actually abused his power in this regard, but in the absence of such evidence, I decline to grant the injunction with respect to Proposed Resolution 3.

Proposed Resolution 4

67.  The Plaintiff submits that the effect of Proposed Resolution 4 is to remove the requirement of board approval with respect to all external guarantees and securities resolved under the April 2020 Resolution.  This is because Proposed Resolution 4 expressly refers to “the grant of external deeds of guarantees and the issuance of external guarantee letters”.  Moreover, similar to Proposed Resolution 2, the Plaintiff complains that the Chairman would enjoy unlimited powers of approval with respect to external guarantee letters and deeds of guarantees in excess of RMB 50 million.  This would be a unilateral decision, and there would be no need for board approval, contrary to the April 2020 Resolution.

68.  Mr Kenneth Chan submits that Proposed Resolution 4 only concerns (a) the issuance of bank guarantees required for the Company’s financing, business contracts and other operations and (b) the issuance of guarantee letters by the Company required for the Company’s financing, business contracts and other operations, as well as mutual guarantees among subsidiaries, mortgages and pledges of the Company’s assets and guarantees for companies within the Group.

69.  His submission was that it does not involve providing a guarantee in favour of third parties for entitles which the Company is not associated with as a parent company. Moreover, he submits that the intended effect of Proposed Resolution 4 is not to change the requirement that board approval was required with respect to the issuance of “external guarantees” under the April 2020 Resolution.

70.  To recap, Proposed Resolution 4 covers the following:

“Other aspects: The grant of external deeds of guarantees, the issuance of external guarantee letters, mutual guarantees between subsidiaries, mortgages, pledges of company assets, and guarantees for companies within the group, etc. for business needs such as company financing, business contracts, etc.” (emphasis added).

71.  In my view, the scope of the external guarantees and securities covered by Proposed Resolution 4 is unqualified.  It is expressly referring to the grant and issuance of “external deeds of guarantees” and “external guarantee letters”, (外开出保函、对外发出担保信) and it does not contain the qualifications suggested by Mr Kenneth Chan.  On any objective reading, I have no hesitation in rejecting the submission that “external guarantees” were not intended to be covered by Proposed Resolution 4.  This is directly contrary to the actual terms of Proposed Resolution 4, and would in my judgment, amount to a reversal of the required of board approval for the issuance of external guarantees.

72.  Moreover, as highlighted by Mr Wong SC, the differentiation put forward by Mr Chan was only mentioned for the first time in the evidence filed in opposition to this application, and was never mentioned before the October meeting.  In my view, the suggested differentiation and the alleged exclusion of external guarantees from the scope of Proposed Resolution 4 suggested is disingenuous.  The credibility of his position is undermined by the fact that there was never any amendment to Proposed Resolution 4 after this application was issued.  This would have been the sensible thing to do if, as was submitted, this was a case of a misunderstanding as to what was covered by Proposed Resolution 4.

73.  In my judgment, the effect of Proposed Resolution 4, as objectively construed, would effectively confer upon the Chairman with wide and sweeping powers with respect to the grant of external guarantees.  This was a matter which was resolved to be a matter of such importance that it was reserved for the collective approval of the board of directors.  The sudden reversal of this position would amount to a fundamental departure of the existing corporate governance framework, and it would deprive the board of their collective ability to approve the issuance of such external guarantees.  It would, in my view, require cogent and persuasive evidence to be placed before the board to justify such a fundamental change in position.  I do not consider that there is such evidence in this case, and it appears that the true position is that the Chairman wished to unilaterally usurp powers which were previously reserved to the board as a whole.   For these reasons, I do not believe that this would be in the best interests of the Company, and it would deprive the Company of an effective means to monitor and supervise the grant of external guarantees.

Undertakings

74.  Towards the end of the first hearing day, with a view of saving time and costs, I raised with the parties the possibility that the matter could be resolved by the provision of undertakings by the Defendants.  On 13 January 2022, a draft undertaking was sent by solicitors for the 1^st to 2^nd Defendants and an executed undertaking was provided by solicitors for the 3^rd to 5^th Defendants.  A hearing was convened after the undertakings were provided to see whether this could narrow the issues in dispute between the parties.

75.  The draft undertaking for the 1^st to 2^nd Defendants states:

“Each of the 1^st and 2^nd Defendants (whether by himself or with others or through any agent or any of them whether directly or indirectly) undertakes not to pass at any meeting of the board of directors of the Company any one or more of the resolutions as specified in Paragraph 1(a), (b) and (c) of the Originating Summons of these proceedings (or one substantially with the equivalent effect but of different wordings) IF (1) such resolution has the true effect of granting authority or power to the Chairman of the board, the CEO and/or the President to an unlimited monetary quantum with regard to the subject of the resolution AND (2) prior to such resolution the grantee of the authority or power does not already possess authority or power no less than the authority or power to be granted”.

76.  I accept the submission of Mr Wong SC that this undertaking, in draft form, is meaningless and will only rise to further disputes.  An undertaking provided to the court should be clear and unequivocal in its effect since a breach may amount to a contempt of court.  The qualification inserted into the draft undertaking that if the “true effect” of the resolutions were to grant an “unlimited monetary quantum with regard to the subject matter of the resolution” will only lead to disputes regarding the proper interpretation of the resolutions.  I also agree with Mr Wong SC that the second qualification introduced is also confusing and unclear.

77.  The executed undertaking for 3^rd to 5^th Defendants states:

“Each of the 3^rd, 4^th and 5^th Defendants (whether by himself or with others or through any agent or any of them whether directly or indirectly) undertakes not to vote at any meeting of the board of directors of the Company in favour of any one or more of the resolutions as specified in paragraph 1(a), (b) and (c) of the Originating Summons of these proceedings (or resolutions with equivalent effect), if comparing to the Board Resolution of the Company dated 10 April 2020, an additional power, in monetary terms, in relation to the subject matter of the aforementioned paragraph 1(a), (b) or (c), is given without specifying the limit to such power”.

78.  For similar reasons given above, I am unable to accept this undertaking as it is not clear and unequivocal as to what conduct is covered.  I take the view that the qualification inserted will similarly only give rise to disputes regarding the proper interpretation of the resolutions.

79.  At the end of the day, although the provision of these undertakings does not avoid the need to consider whether an injunction should be granted, it does seem clear that there is little dispute between the parties that the Chairman or CEO should not be conferred with unilateral and unlimited powers of approval with respect to capital expenditure of business contracts.

Whether an Injunction Should Be Ordered

80.  The next question to consider is whether I should grant an injunction to restrain the carrying out, or passing, of Proposed Resolutions 2 and 4.  I bear in mind that the court has the “widest possible power” to grant an injunction under s.729 to restrain a proposed breach of director’s duties which is devoid of traditional restraints.  The court may grant an injunction whether or not the traditional considerations in s.729(4) are met, provided that the injunction would have some utility or serve some purpose within the contemplation of the CO.

81.  In my view, having regard to my previous analysis and conclusions in this judgment, there is a compelling case to justify the grant of an injunction with respect to Proposed Resolutions 2 and 4.   In summary:

(1)  If Proposed Resolutions 2 and 4 are passed, this would result in the position that the Chairman would enjoy sweeping powers of approval with respect to business contracts and external guarantees, without the need to notify other directors.  In my judgment, the passing or carrying out of these two resolutions would be in serious breach of director’s duties and there is an important need to restrain such acts.

(2)  Moreover, it would at the very least be difficult and time-consuming to unwind business contracts and external guarantees entered into on the strength of Proposed Resolutions 2 and 4.

(3)  The injunctions sought only restrain the carrying out, or passing, of Proposed Resolutions 2 and 4 as they are framed, but not otherwise.  Any transactions of the Company can still be proposed, discussed and approved in accordance with the existing corporate governance framework.

(4)  The injunctions will not prevent other genuine proposals to improve or alter the existing corporate governance framework, provided that they are proper and legitimate proposals which will not involve a breach of director’s duties.

(5)  I am unable to accept the submission that the grant of the injunction will cause loss to the Company.  I am not satisfied that there is evidence to suggest that the existing corporate governance framework has, as a matter of fact, caused any delay in securing business contracts or the completion of projects by the Company.

(6)  I do not think that the grant of the injunction is likely to cause confusion.  Any suggestion of confusion arising from the phrase “similar effect” can be dealt with by replacing that with “equivalent effect”.  This will avoid disputes over whether a proposed resolution is “similar” or not.

82.  The next question to consider is against whom the injunction should be ordered.

83.  For the 2^nd Defendant, Mr Kenneth Chan submits that he is not simply a “rubber stamp” of the 1^st Defendant.  I do not find it necessary to decide this question because it is clear, in my view, that the 2^nd Defendant would vote in favour of the Proposed Resolutions if they were tabled at a board meeting.  This is particularly in light of the very substantial powers that the 2^nd Defendant, as CEO, would be given under the various resolutions.

84.  For the 3^rd to 5^th Defendants, Mr Bruce Lau submits that there is no sufficient evidence to demonstrate that they are accustomed to act on the instructions of the 1^st Defendant.  He submits that there is no factual basis to conclude that they are merely “rubber stamps” of the 1^st Defendant.  Although they have voted in the same manner as the 1^st Defendant since April 2020, Mr Lau points out that this, in itself, does not show a lack of independence on the part of the 3^rd or 5^th Defendant especially given the limited period of voting record involved.  Additionally, he submits that a consistent voting pattern does not show the reasons why the 3^rd to 5^th Defendant may have voted in favour of a particular resolution.  He also points out that voting in the same way as other directors on the board is not, in itself, conclusive evidence of a lack of independence – for independence does not necessarily entail opposition.

85.  In relation to the 3^rd Defendant, he was in fact a director nominated by the Plaintiff and there is no explanation as to how he became a “rubber stamp” of the 1^st Defendant.  With respect to his previous vote in favour of the granting of share options to staff members, he has explained that in his view this because he wished to “placate” them after certain threats were made against them by senior officials of the Plaintiff company.  In other words, his reasons for this vote had nothing to do with an intention to dilute the shareholding of the Plaintiff.

86.  As regards the 4^th and 5^th Defendants, Mr Bruce Lau highlights their roles as INEDs.  The 4^th Defendant has acted as a INED of the Company since its listing in 2006, and there has never been a complaint that he only voted in accordance with the instructions of the 1^st Defendant.  As for the 5^th Defendant, Mr Bruce Lau highlights his past experience as an INED for a number of listed companies and the fact that his independence has never been called into question.  Apart from explaining his voting decisions, he has also confirmed that not a single director ever communicated with him with respect to the Proposed Resolutions.

87.  The starting point of my evaluation is that an allegation that a director of a listed company lacks independence and is simply a rubber stamp of someone else is serious allegation, and the court will need to carefully examine the evidence to ascertain whether such is an allegation is made out.  At the same time, the court should not be naïve, and it should be ready to draw the appropriate inferences if there is evidence to back them up.

88.  I have carefully considered the voting patterns relied upon by the Plaintiff, and also the points raised by Mr. Bruce Lau on behalf of the 3^rd to 5^th Defendants.  I accept his submission that the evidence is insufficient to draw the conclusion that they are merely rubber stamps of the 1^st Defendant.  I am conscious that the 3^rd to 5^th Defendants were made subject to injunctions granted by the court on the basis that they were in the same “camp” as the 1^st to 2^nd Defendants.  However, I must approach the issue on the basis of the evidence now before the court, and in my judgment, there is insufficient evidence to draw the inference that the 3^rd to 5^th Defendants will do whatever is asked of them by the 1^st Defendant.   In addition, as stressed by Mr. Lau, the available record showing similar voting is with respect to a limited period of time and does not show, without more, a lack of independence.

89.  Moreover, the 4^th to 5^th Defendants have expressed reservations regarding to lack of limits under some of the Proposed Resolutions in evidence.  The Plaintiff contends that this is a belated and self-serving expression of concern, and given their past voting record, it is still likely that they will vote in favour of the Proposed Resolutions as framed.  I am unable to agree with the Plaintiff’s submission in this regard, and I take the view that their concerns expressed in the affirmation evidence cannot be said to be incredible.

90.  For these reasons, on the evidence before the court, I am unable to accept the submission that the 3^rd to 5^th Defendants are accustomed to act on the instructions of the 1^st Defendant.  I accept Mr Bruce Lau’s submission that there is no satisfactory evidential basis to conclude that they will in act in breach of their duties as directors with respect to the Proposed Resolutions.  I decline to grant an injunction against them.

Conclusion

91.  I grant an injunction against the 1^st and 2^nd Defendants with respect to the passing, carrying out or giving effect to Proposed Resolutions 2 and 4.  I make an order in terms of §1(a)-(b) of the OS against the 1^st and 2^nd Defendants, save that the words “similar effect” be replaced with “equivalent effect”.

92.  I dismiss the OS against the 3^rd to 5^th Defendants.

93.  I make a costs order nisi that (i) the Plaintiff is entitled to 75% of its costs of these proceedings against the 1^st and 2^nd Defendants, to be taxed if not agreed, with certificate for two counsel; (ii) the 3^rd to 5^th Defendants are entitled to their costs of these proceedings against the Plaintiff.   To assist the parties, I have adopted the starting point that costs should follow the event, and the reduction in costs payable to the Plaintiff is attributable to the fact that I did not grant an injunction in relation to Proposed Resolutions 1 and 3.