CHINACULTURE.COM LTD v. LAM TING BALL AND OTHERS

HCA 2902/2017

[2018] HKCFI 742

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2902 OF 2017

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D E C I S I O N

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1.  The trial of this Action is to commence on 4 June 2018 with 15 days reserved. I have two applications before me. A summons dated 14 March 2018 for leave to amend the Defence and a summons dated 5 March 2018 to strike out paragraphs of the Defendant’s witness statements, which primarily address the issues raised by the proposed contentious amendments to [15] of the Defence. The amendment of [39] is not contested.

2.  The need for the amendments and the dispute over whether they should be allowed and the paragraphs the Plaintiff objects to struck out arise, it seems to me, from a failure on the Defendants’ part to understand the part of the Plaintiff’s case to which they relate, namely, whether or not the IPO of 24% of the shares of the subsidiary of the 4^th Defendant operating a paint business involved a substantial undervaluation of the business because of the way in which land it owns was taken into account in arriving at the price at which shares were offered.  This is pleaded in some detail in [44] to [52] and [55] of the Amended Statement of Claim.  Part of the confusion which seems to have arisen in my view is due to the rather cursory pleading of a defence in [15] of the Defence, which suggests the Defendants had not fully thought through the case which they faced.  This is illustrated by a previous attempt to amend, which was withdrawn, which erroneously assumed that a principal feature of the complaint was that the land was not properly valued in the financial statements.  The Defendants now wish to amend by adding particulars as to how the Defendants went about the valuation of the offer shares. 

3.  The Plaintiff objects to the proposed amendment because it is concerned that it raises matters on which the Plaintiff will require expert evidence and that given the limited time before trial it may not be possible to deal satisfactorily with the matters raised by the amendments and maintain the trial dates.  Although I have sympathy for the Plaintiff’s concern, my bigger concern is that the issues between the parties are clearly identified and understood and that the required evidence is adduced.

4.  The Plaintiff seeks to strike out the witness statements of Graham Lam and Wu Kiu Sing and [33]–[34], [36]–[53], [63], [66]–[69], [73], [76], [85]–[86] and [88]–[89] of Chong Chi Kwan’s witness statement.

5.  Graham Lam is the Managing Director of Gram Capital Ltd and his witness statement does no more than exhibit Gram Capital’s report dated 14 March 2017 containing its response to a letter from The Stock Exchange of Hong Kong Ltd prompted by complaints made by the Plaintiff similar to the ones advanced in these proceedings.  Wu Kiu Sing, who is a director of Sinolink Securities (Hong Kong) Company Ltd, exhibits a letter dated 1 June 2017 from Sinolink to the 4^th Defendant dealing with its estimate of a fair market value of the company to be listed for the purposes of the IPO.

6.  Mr Chong describes in the relevant paragraphs of his witness statement how the offer price came to be determined, although he also expresses his own views and understandings on various related matters during this narrative. 

7.  Mr Jat SC confirmed before me that none of the evidence proposed to be adduced through these witnesses is intended to be opinion evidence.  They are intended to record the decision making process during the period leading up to the IPO and, in the case of Mr Chong, his thinking and assumptions at the time.

8.  Paragraphs 15(2) and (3) of the Defence plead that:

“Under the Spin-Off, the Paint Business is to be transferred to Newco, then a wholly-owned subsidiary of the Company. The transfer was therefore a mere accounting exercise which has no effect on the value of the Company.”

“The pricing of the offer shares, determined by reference to willing buyers and the investment public (including the price-earnings multiples of comparable companies), intrinsically reflects the value of the spun-off assets, including the production plants and the intellectual property rights.”

9.  In my view, although this response to the complaint of an undervaluation is pleaded in general terms, it raises the matters which the evidence I have referred to above addresses.  The amendments proposed to be made to [15] flesh out the averment in sub-para (3) and describe the advice the Board received and, which it appears largely determined the offer price.  It is hardly a surprise that the Board took advice from investment bankers on an appropriate offer price and that the Board was largely guided by what it was told.  Excluding evidence about this would leave the court with an incomplete picture of what took place.  What seems to have happened is that neither party has properly understood the other sides’s case and that the sooner it is clear from the pleadings what each party contend and evidence is prepared to address the arguments and counter-arguments the better.  If, as may be the case, the real issues are (a) whether the method of pricing the shares was wrong and resulted in an underpricing and (b) the Board was negligent in not recognising this; the sooner this becomes clear and relevant evidence adduced the better.

10.  I will, therefore, allow the amendments and dismiss the summons to strike out the contentious evidence.  The costs of and occasioned by the amendments be to the Plaintiff in any event.  So far as the costs of the two summonses are concerned I will make an order nisi that the costs of both be in the cause with a certificate for two counsel.  I consider that this is an appropriate order given that the applications have been contentious because in my view of a degree of confusion to which both parties have to some degree contributed.

11.  If further directions are required for the conduct of the Action or the current directions require amendment the parties should approach my Clerk to fix an early case management conference.