PASSPORT SPECIAL OPPORTUNITIES MASTER FUND, LP AND ANOTHER v. ESUN HOLDINGS LTD AND OTHERS

HCA 2722/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2722 OF 2008

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J U D G M E NT

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Introduction

1.  On 10 December 2008, eSun Holdings Limited (“eSun”), a company whose shares are listed on the Stock Exchange of Hong Kong (“the Stock Exchange”) entered into a placing agreement (“the Placing Agreement”) with Chung Nam Securities Limited (“Chung Nam”).  Under the Placing Agreement, eSun agreed to issue 120 million new shares in itself to placees to be identified by Chung Nam (“the Placees”), at a price of HK$0.50 per share (the par value of such shares).  In addition, each Placee would receive one non-listed warrant in eSun for every placing share taken up, entitling him to subscribe for one further new share in eSun, also at a price of HK$0.50 per share, at any time from the issue of the warrant until 31 December 2011.  Under the Placing Agreement, completion was to take place on or before 24 December 2008.

2.  The entry into of the Placing Agreement was unanimously resolved upon at a meeting of eSun’s directors held in the afternoon on 10 December 2008.  The minutes of that meeting stated that the proceeds of the placing would be used for the entertainment and media business of the eSun group of companies, and noted that funds previously earmarked for such business had recently been depleted following the acquisition of certain music libraries.

3.  On 17 December 2008, John Woodberry, a representative of the Plaintiffs, Passport Special Opportunities Master Fund, LP and Passport Global Master Fund SPC Limited (to whom I shall refer collectively as “Passport”), met with a number of eSun’s executive directors. Passport was a major shareholder in eSun, holding (as at 17 December 2008) slightly over 28% of eSun’s issued shares.  Passport was unhappy about the Placing Agreement and its terms, and Mr Woodberry urged eSun to revoke it, contending that it was not in eSun’s, or its shareholders’, interests.  eSun declined to do so.

4.  On 19 December 2008, Passport wrote to the Stock Exchange of Hong Kong Limited (“the Stock Exchange”) and the Securities and Futures Commission (“the SFC”), complaining about the proposed placement.  The Stock Exchange and the SFC both indicated that they would look into the matter.

5.  On 22 December 2008, shortly before the original date for completion under the Placing Agreement, Passport commenced HCA 2722 of 2008 against eSun and its four executive directors, Mr Lam Kin Ngok Peter (“Mr Lam”), Ms Leung Churk Yin Jeanny (“Ms Leung”), Mr Cheung Wing Sum Ambrose (“Mr Cheung”) and Mr Low Kit Leong (“Mr Low”), and obtained from Kwan J (as she then was) an ex parte injunction to restrain eSun from proceeding with the placing, alleging that in entering into the Placing Agreement eSun’s directors had acted with an improper purpose.  An application by eSun the following day seeking to discharge the injunction was unsuccessful, and on 24 December 2008, eSun and Chung Nam agreed to extend the long-stop date of the placing agreement to 9 January 2009.

6.  On 2 January 2009, Passport presented a petition (HCMP 6 of 2009) under section 168A of the Companies Ordinance against eSun and the other Defendants to HCA 2722 of 2008, seeking injunctive and declaratory relief to prevent the proposed placement from being completed, and to declare it invalid.

7.  Following the continuation of the injunction by consent at an inter partes hearing before me on 6 January 2009, eSun terminated the Placing Agreement on 9 January 2009, on the basis of “the non-fulfilment of one or more of the conditions in respect of the Placing”.

8.  At the hearing on 6 January 2009, Chung Nam indicated that it wished to be joined to the proceedings as an Intervener, claiming that it would or might suffer loss as a result of the granting of the injunction.  It was subsequently joined as the 1^st Intervener.  At the same hearing, Passport also confirmed that the cross-undertaking in damages which it had given on obtaining the injunction extended not only to eSun, but to any other party affected by it, including Chung Nam.  Subsequently, Passport confirmed that the cross-undertaking extended to the Placees as well, and over the next few weeks, six out of the seven Placees who had agreed to subscribe for eSun shares under the placement were joined as the 2^nd to 7^th Interveners in HCA 2722 of 2008.

9.  As a result of the termination of the Placing Agreement on 9 January 2009, the injunction was no longer necessary and it was discharged by consent when the matter next came before me on 22 January 2009.  It had, however, by this time become clear that the proceedings would have to continue, as Chung Nam and the Placees had indicated that they wished to enforce the cross-undertaking in damages that had been extended to them.  Directions were therefore given for HCA 2722 of 2008 and HCMP 6 of 2009 to be heard together, with the petition in HCMP 6 of 2009 standing as the Statement of Claim in HCA 2722 of 2008.  Directions were also given for the filing of further pleadings to enable the issues to be framed with a view to trying the question of whether or not the injunction had been rightly granted, and to deal with the questions of whether or not the cross-undertaking should be enforced, and if so, in what (if any) amount, in relation to each of Chung Nam and the Placees.  Subsequently, directions were given for the trial of the first of these questions to take place first, since the other questions would only arise if it were held that the injunctions had been wrongly granted in the first place.  This was that trial.

10.  The petition was subsequently amended on a number of occasions.  At the trial, Passport’s case was put on two bases, which I describe below.  Each of the Interveners brought a counterclaim against Passport, seeking to enforce the undertakings in damages which had been extended to them.

Passport’s primary and alternative cases

11.  The primary case was that the directors’ decision to approve the placement was made with the predominant, but improper, purpose of seeking to protect Mr Lam’s controlling interest in eSun by diluting Passport’s shareholding in eSun, because of a perceived danger to such control arising from Passport’s substantial increase in its shareholding in eSun on 5 and 10 December 2008.  For this reason, it was not entered into in what the directors in good faith considered to be the best interests of eSun.  A central element of this part of Passport’s case is its contention that the Placees were not truly independent third parties, but were “friendly hands” in which the eSun shares issued to them would be safely held, from Mr Lam’s point of view.

12.  Passport’s alternative case was that even if, contrary to its primary case, the directors of eSun genuinely believed that it was in eSun’s interests to enter into the placement, in reaching their decision to enter into the placement the directors failed to have regard to certain matters which they should have taken into account, and that their failure to do so rendered their decision one that was made in breach of fiduciary duty and unlawful, with the consequence that it (and, as a result, the placement) was void and of no effect.  Passport says that the directors should have had proper regard to the dilutive effect of the placement on eSun’s shareholders generally (both in terms of their shareholdings, and in terms of their economic interests in eSun), but did not do so.  Passport also alleges that the directors failed to have proper regard to other possible ways of raising funds, such as a rights issue, that could have avoided such dilutive effects.

The factual background

13.  I shall start by setting out briefly the main elements in the factual background to this dispute.  In doing so, I shall set out in somewhat greater detail the events of December 2008, which formed the immediate lead up to these proceedings.

Structure of the Lai Sun group

14.  The company at the centre of these proceedings, eSun, is a company within the Lai Sun group of companies.  At the head of the Lai Sun group is Lai Sun Garment (International) Limited (“Lai Sun Garment”), which is also listed on the Stock Exchange.  Lai Sun Garment was, at the material times, beneficially owned as to 42% by Mr Lam and persons associated with him.  Lai Sun Garment held significant stakes in two other listed companies, namely Lai Sun Development Company Limited (“Lai Sun Development”), in which it held an 11.25% interest, and Lai Fung Holdings Limited (“Lai Fung), in which it held a 40.58% interest.  Lai Sun Development in turn owned 36.08% of eSun.  At the same time, eSun itself owned 36.72% of Lai Sun Development.

15.  Control of Lai Sun Development and eSun was therefore held in part through a cross-holding of shares as between those two companies.  This cross-holding arose in about 2004, as part of an arrangement for the settlement of debts owing to eSun by Furama Hotel Enterprises Limited (an associated company), which had arisen in connection with Lai Sun Development’s acquisition of the latter company in 1997, shortly before the onset of the Asian financial crisis.  Although the creation of the cross-holding may therefore be regarded as a by-product of this financial restructuring, rather than a deliberately constructed arrangement in order to enable a controlling group of shareholders to exercise significant control without the need for a commensurately substantial shareholding, it was recognised by eSun, and by each of the executive directors, that the cross-holding did have this effect.

16.  As a result of the shareholdings described in the previous paragraph, Peter Lam and his associates have a 4.73% attributable interest in Lai Sun Development (representing their 42% interest in Lai Sun Garment’s 11.25% interest in Lai Sun Development), and a 1.70% attributable interest in eSun (representing 4.73% of Lai Sun Development’s 36.08% interest in eSun).  Despite these relatively small attributable equity interests, Peter Lam and his associates had, as was eventually accepted by him in cross-examination, effective control over Lai Sun Development and eSun as a result of the shareholding structure of the various companies.

17.  As at the end of January 2009 (shortly after the events with which we are concerned) Lai Sun Development had gross assets (excluding its interest in eSun) of some HK$8,914.6 million, and eSun had gross assets (excluding its interest in Lai Sun Development) of about HK$3,713.2 million.  The combined gross assets of the two companies were, therefore, in excess of HK$12.5 billion.  These assets were ultimately controlled (through their control of the companies concerned) by Peter Lam and his associates by way of shareholdings that themselves had an attributable combined asset value (excluding the cross-holdings) of HK$285.7 million.  Thus, as a result of this shareholding structure, Peter Lam and his associates were in effective control of assets of just over HK$12.5 billion by virtue of an investment of rather less than one-fortieth of that amount.

18.  The other part of the Lai Sun group of companies consisted of Lai Fung, in which Lai Sun Garment held an interest of just over 40%.  Lai Fung itself had gross assets of HK$12,046.7 million – slightly less than the combined gross assets (excluding cross-holdings) of Lai Sun Development and eSun.  Thus, Lai Sun Development and eSun accounted for just over half of the total assets of the Lai Sun group.

19.  Passport contends that this control was highly valuable, and was not something that Mr Lam would readily countenance giving up.  Mr Sussex S.C., representing eSun and the executive directors, accepted that this was clearly the case, as did Mr Lam under cross-examination.

The business and organisation of eSun

20.  As its name suggests, Lai Sun Garment’s original business was in the textiles and garments industry.  Over the years, the Lai Sun group has also built up a substantial property development business, developing both commercial and residential property in Hong Kong. For its part, eSun had two main areas of operation. By the time the events with which we are concerned took place, by far the more important of these was a project involving the construction and development of a very substantial casino, entertainment and hotel complex in Macau, to be known as Macau Studio City. The Macau Studio City was to have as its underlying theme media and entertainment, and in particular, film and music.  This theme reflected the other main part of eSun’s business, which was connected with various aspects of the media and entertainment fields, including production of feature films, music recordings, and the staging and promotion of live entertainment events such as concerts and other shows.

21.  As at December 2008, eSun’s board of directors consisted of ten individuals – four of whom were executive directors, and three of whom were independent non-executive directors.  The executive directors were (as I have noted) Mr Lam, who was also the Chairman of the board, Ms Leung, whose main role appears to have been on the financial side of matters, although she also had substantial involvement in the media and entertainment side of the business, Mr Cheung (a former solicitor), who dealt mainly with the Macau Studio City project, and Mr Low (a former investment banker), whose responsibilities included the media and entertainment side of the business (although the evidence showed that, in fact, Ms Leung was at least as, if not more, involved in that part of the business).  The non-executive directors were Mr Vincent Lien, Mr Donald Yap (a solicitor) and Mr Carl Tong (an accountant).  eSun’s offices were in what was then known as the AIG Building in Central, which had been developed by Lai Sun Development on the site previously occupied by the Furama Hotel.  The other three directors were Mr Lam Kin Ming and Madam U Po Chu (both members of Mr Lam’s family), and a Mr Andrew Low Chee Keong.

The Macau Studio City project

22.  As I have mentioned, at the material time, the more substantial and important part of eSun’s business concerned the development of the Macau Studio City project.  For present purposes, I do not think that it is necessary to examine the details of the way in which that project was structured and how it evolved in excessive detail.  The key aspects may,  I think, be summarised as follows:-

(1) In October 2001, a Macau company called East Asia Televisao Por Satellite Limitada, which was a sub-subsidiary of eSun, was granted a 25 year lease over a site in Cotai, Macau, by the Macanese Government.  The location of the site was in an area of Macau that was expected to become a new centre of Macau’s gaming and entertainment industry, with high end casinos and hotels to be operated by local and foreign gaming operators.

(2) At the end of 2004, eSun announced that it planned to develop the Macau site into the Macau Studio City casino and resort complex.  The Macau Government’s conditional approval for such plans was obtained in May 2005.  At this stage, the plans called for the construction of a casino, entertainment and hotel complex that would cover a floor area of some 1.5 million square feet.

(3) In April and May 2006, East Asia Satellite Television Limited (“East Asia”), the subsidiary of eSun which was the intermediate holding company of East Asia Televisao Por Satellite Limitada, entered into a joint venture agreement and a side agreement with New Cotai LLC (“New Cotai”), a company with experience in the gaming industry, for the joint development of Macau Studio City.  Under these arrangements, the project would be owned as to 60% by East Asia, and as to 40% by New Cotai.

(4) Subsequently, between January and March 2007, eSun entered into a further joint venture arrangement with CapitaLand Integrated Resorts Pte Limited (“CapitaLand”), a subsidiary of a Singaporean property development company, under which it sold a 33.3% interest in East Asia to CapitaLand.  As a result of this further joint venture, the interests in the Macau Studio City project were held as to 40% by each of eSun and New Cotai, and as to 20% by CapitaLand, with eSun’s and CapitaLand’s interests being held through East Asia.

(5) By May 2007, the Macau company had entered into credit commitment agreements for the funding of the intended development with Deutsche Bank and Morgan Stanley.  However, a few months later, in September 2007, Morgan Stanley withdrew as a lead arranger for the financing of the Macau Studio City project.

(6) Also in September 2007, the Macau company received an indicative offer from the Macanese Government under which the floor area of Macau Studio City would be increased to 6 million square feet.  This would involve a substantial increase to the land premium that would be payable to the Macanese Government, but the precise amount of the increase was not known at that stage.

(7) In November 2007, eSun entered into a Memorandum of Understanding (“the MOU”) with New Cotai to further regulate their relationship in respect of the Macau Studio City project.  Among other things, the MOU required (subject to certain conditions being met) each of the parties to it to contribute to an additional capital commitment of US$300 million towards the project, which it was envisaged would be required in order to secure financing from banks on a commercial basis.

(8) However, during the course of 2008, disputes developed between eSun and New Cotai, making it difficult for them to move forward with the Macau Studio City project.  It became apparent from the evidence given at the trial that the problems between them were serious, and were proving very difficult to resolve.  A number of high level meetings were held in various places in the middle of 2008, none of which resulted in any progress.  Ultimately, the result was that in October 2008, New Cotai terminated the MOU (as it was entitled to, in the circumstances as they had by then developed).  Although it was at one stage suggested that this meant that the Macau Studio City project was no longer viable, at the trial it was accepted by Passport that the termination of the MOU did not mean that the joint venture was necessarily at an end.

(9) Despite the difficulties that eSun and New Cotai were by then experiencing in connection with their joint venture, when the Macau Government issued a revised indicative offer for a modification to the land grant in respect of the Cotai land in late September 2008, it was accepted by eSun.  Such acceptance was communicated to the Macau Government with the agreement of New Cotai, notwithstanding that New Cotai would shortly thereafter terminate the MOU.

Passport’s initial  investment in eSun

23.  The two Passport entities which are the Plaintiffs/Petitioners are United States based investment funds, or “hedge funds”, operated by Mr John Burbank, an experienced investor.  Passport’s interest in eSun appears to have been triggered by the announcement by eSun of its entry into the MOU with New Cotai in early November 2007, and the increase in the size of the Macau Studio City project.  Passport appears to have taken the view that the Macau Studio City project could, if successful, result in eSun increasing significantly in value, and in November 2007, Passport began to acquire shares in eSun on the market.  The employee within Passport who had identified eSun as an attractive investment, and who had responsibility for monitoring its investment in eSun was Mr Woodberry.  Internal memoranda of Passport in the earlier stages of the investment in eSun indicate that Passport viewed eSun as a potentially very profitable investment, and anticipated that its share price could rise to more than three times the price initially paid by Passport.

The eSun rights issue in May 2008

24.  A few months after Passport’s initial acquisition of shares in eSun, in March 2008, eSun announced a proposed rights issue, pursuant to which shareholders would be offered the opportunity to subscribe for new shares at a subscription price of HK$2.50 per share.  The rights issue was to raise a total of just over HK$1 billion, the bulk of which was intended to be used towards funding the Macau Studio City project, it being anticipated that eSun would have to contribute towards the increased land premium that would be charged by the Macau Government for the increase in gross floor area of the project, and towards the additional capital contributions then envisaged under the MOU.  The rights issue was arranged by Chung Nam, which underwrote it.  Chung Nam in turn secured the participation of eight companies to act as sub-underwriters, each of whom took up a portion of the underwriting liability in respect of the rights issue.

25.  The rights issue was not fully subscribed – some 73.43% of the available rights were taken up by the shareholders entitled to them (Passport was one of the shareholders taking up its full entitlement), leaving some 26.57% of the rights shares unsubscribed for.  As a result, Chung Nam, as underwriter, was required to take up the unsubscribed for rights shares.  In the event, the unsubscribed rights shares were taken up by the sub-underwriters, each of whom was said to be a long standing institutional client of Chung Nam.  The sub-underwriters were, respectively, companies called Winning Horsee Limited, Great Panorama International Limited, Main Purpose Investments Limited, Skytop Technology Limited, Dollar Group Limited, Pearl Decade Limited, Sino Wealth Limited and Best Casting Limited.

26.  When eSun announced the results of the rights issue, it stated that apart from some HK$77 million, which would be used for general working capital purposes, the rest of the net proceeds of the rights issue (some HK$934 million) would be used for the purposes of the Macau Studio City project.  The announcement also stated that the board of eSun considered that with the funds raised by the rights issue, it was envisaged that eSun would have sufficient funds to meet its requirements over the next 12 months.

eSun’s acquisition of the Capital Artists library

27.  On 29 May 2008, there was a meeting of the Executive Committee of the eSun Board (consisting of the four executive directors), at which the possible acquisition of Capital Artists Limited (“Capital Artists”), which was the owner of a substantial music library, was discussed, resulting in a decision to make a bid for that company.  There was a further discussion of this proposed transaction in full board meetings of eSun held on 4 July 2008 and 12 September 2008.  At the last-mentioned of these meetings, it was resolved to proceed with the proposed acquisition.  This decision was implemented when eSun entered into an agreement to acquire the entire share capital of Capital Artists on 23 September 2008.

Fall in price of eSun shares

28.  During the course of 2008, the share price of eSun declined.  Although this was perhaps to a large extent a result of the global financial crisis which deepened dramatically in the course of the year, and particularly in the last quarter or so, the drop in eSun’s share price can only be described as very substantial.  Having stood at just under HK$5.00 at the start of the year, the price of eSun shares declined steadily until, by mid-May 2008, it was only slightly above the rights issue offer price of HK$2.50.  Shortly after the rights issue closed, the price of eSun’s shares continued to move downwards, to just over HK$2.00 by the end of May.  The downward trend continued unabated, and by the end of October 2008 the share price had fallen to around HK$0.24, before making a slight recovery to around HK$0.30 odd at the beginning of December.

29.  At these levels, the price of eSun’s shares stood at a very significant discount to its net asset value.  On the basis of eSun’s consolidated balance sheet as at 30 June 2008, its net asset value per share was in the region of HK$4.535 per share, of which HK$1.35 was attributable to cash or cash equivalents.

Acquisition by Passport of additional eSun shares

30.  At the beginning of December 2008, Passport held about 11.96% of eSun’s issued shares, and was the second largest single shareholder in eSun after Lai Sun Development’s 36.08% shareholding.  At this stage, there were two other substantial shareholders in eSun, both of which were US based investment funds.  These were TCS Capital Management LLC (“TCS”), which held 8.65% of eSun’s issued shares, and Och-Ziff Capital Management Group LLC (“Och-Ziff”), with a shareholding of 6.8%.

31.  On 5 December 2008, Passport acquired the whole of TCS’ shareholding in eSun, taking its stake in eSun to 20.61%.  Thereafter, on 10 December 2008, Passport acquired Och-Ziff’s shareholding in eSun, increasing its stake to 27.41%.  According to Mr Low, Mr Woodberry informed him of Passport’s interest in acquiring the Och-Ziff stake in a telephone conversation between them on 9 December 2008 (which was the evening of 8 December 2008 in the United States, where Mr Woodberry was at the time).  Mr Woodberry denied this, and said that he had mentioned only the purchase by Passport of the TCS stake, which had already taken place.  Both Mr Woodberry and Mr Low agreed, however, that Mr Woodberry did float with Mr Low the possibility of Passport obtaining a seat on the eSun board, as it was (whether as a result of the acquisition of the TCS stake, or of both that stake and the Och-Ziff shareholding) by some margin the second largest single shareholder in eSun.  Both also agreed that this suggestion was put in a friendly, or non-threatening way, which was in line with the way in which Passport had hitherto dealt with eSun.

32.  It appears from internal Passport e-mails which were disclosed in these proceedings that the thinking behind these purchases was that they would lower the average cost per share of Passport’s shareholding in eSun, and might put Passport in a position to obtain a seat on the eSun board.  Having initially invested in eSun at a very much higher price, in the hope that this would prove to be a bargain should the Macau Studio City project come to fruition, and having further taken up its share of the eSun rights issue in May 2008 with the same hope in mind, Passport had come to the realisation that there were serious problems in eSun’s relationship with its joint venture partner, New Cotai, and was no longer optimistic of a successful development of the Macau Studio City project.  However, given eSun’s very substantial holdings of cash and its ownership of some 35 acres of the Cotai strip, and having regard to the value of eSun’s cash holdings in the extremely severe global economic crisis that had unfolded in the last quarter of 2008, Mr Woodberry felt that the opportunity to acquire additional eSun shares at a low price was worthwhile, particularly if eSun could eventually be persuaded that the Macau Studio City project could not succeed, and that it should make a substantial cash distribution to its shareholders instead.  It would not seem, however, that Passport’s thinking was known to eSun’s directors at this time.

33.  Passport was not, however, the only party in the market for the TCS and Och-Ziff stakes in eSun.  Chung Nam, which had underwritten eSun’s earlier rights issue, and whose clients had incurred substantial losses from their sub-underwriting of the eSun rights issue, had also made approaches to each of TCS and Och-Ziff indicating interest in acquiring their respective stakes in eSun.  In late November and early December 2008, there was an exchange of e-mails between Chung Nam and TCS in which Chung Nam made what it described as a “firm bid” for the TCS block at a price of HK$0.28 per share on 2 December 2008.  This offer proved to be unsuccessful, as TCS decided shortly afterwards to sell its shareholding in eSun to Passport at HK$0.32 per share.  Having failed to acquire this block of shares, Chung Nam later approached Och-Ziff indicating that it was interested in acquiring Och-Ziff’s shareholding in eSun at a price of about HK$0.33 per share.  This too came to nothing, as Och-Ziff decided to sell its stake in eSun to Passport as well, at a price of HK$0.32 per share.  I shall return, later in this judgment, to the communications between the various entities involved in the attempts to purchase these two blocks of eSun shares.

34.  Each of these purchases by Passport resulted in the turnover of eSun shares traded on the Stock Exchange increasing significantly, to a level many times that of recent weeks, triggering enquiries by the Stock Exchange of eSun as to whether its management was aware of any reason for the sudden increase in activity in the trading of eSun shares. These enquiries were made of eSun’s corporate secretarial department, which sent e-mails to all of eSun’s directors to ascertain whether any of them were aware of the reasons for this.  On each occasion, each of the directors indicated that they were unaware of any reason for the increased level of trading in eSun’s shares.  On the first occasion, the e-mail sent by eSun’s company secretary did not give details of the volume of trading in eSun’s shares resulting from the acquisition by Passport of the TCS shareholding. However, this sort of information was provided in the e-mail sent out on the second occasion, on the morning of 10 December 2008, in relation to the volume of trading generated by the transfer of the Och-Ziff stake from Och-Ziff to Passport.

35.  In addition, within the next two days after concluding each of these transactions, Passport filed disclosure of interests notices pursuant to the Securities and Futures Ordinance, recording its acquisitions of the two blocks of eSun shares, and faxed to eSun copies of Substantial Shareholder Notices recording the same information.  However, the evidence (which was not seriously disputed) was to the effect that the information in these notices did not reach the eSun directors until 15 and 16 December 2008 in respect of the Och-Ziff and TCS transactions respectively.

Mr Chuang’s approaches to Mr Lam

36.  According to Mr Chuang, disappointed at his failure to secure the TCS block of eSun shares, he called Mr Lam on 5 December 2008, and asked whether eSun might be willing to issue new shares to him and his clients at about the then market price, telling Mr Lam that his clients who had sub-underwritten the rights issue in May that year had suffered substantial losses as a result of the slump in eSun’s share price since then.  It seems that this conversation was a brief one, with Mr Lam rebuffing the approach.  Mr Lam said in his evidence that he was in fact out of Hong Kong that day, and so did not discuss the matter at any great length with Mr Chuang, particularly as it was not possible for eSun to issue shares at the then market price, which was below the shares’ par value of HK$0.50 per share.

37.  Mr Chuang says that he again approached Mr Lam a little before 10:30 am on 10 December 2008, on realising (having noticed from his Bloomberg terminal that a substantial block of eSun shares, which could only have been the Och-Ziff block, had changed hands) that Chung Nam had failed to acquire the Och-Ziff block.  He says that this time, he proposed the issue of new shares by eSun at par value, but on terms that each new share issued would be accompanied by a warrant to subscribe for a further share, also at par value, which Chung Nam would place with its clients, a mechanism that was clearly designed to bridge the gap between the subscription price of HK$0.50 per share, and the then market value of the shares.  On this occasion, Mr Lam was more receptive, and it appears to have been agreed between them (in principle, at least) that such a placing would be further pursued.

The eSun board meeting of 10 December 2008 and the entry into of the Placing Agreement

38.  Thereafter, Mr Lam appears to have informed a number of eSun’s senior executives, including Mr Cheung and Ms Leung, of the proposed placement, and to have asked that the necessary steps be put in train to enable this to be dealt with.  I was told that thereafter, such senior executives had a meeting with Messrs Richards Butler, eSun’s solicitors who handled its corporate finance matters, to brief them on the proposal, and to instruct them to start preparing the documentation for it.

39.  At 12:30 pm on 10 December 2008, trading in eSun’s shares was suspended at eSun’s request.  The announcement of the suspension advised that the suspension was “pending the release of an announcement of the Company relating to a placing of new shares in the Company”.

40.  Shortly after 3:00 p.m., eSun’s company secretary sent an e-mail to its directors convening a board meeting to be held at 3:30 pm for the purpose of considering whether or not eSun should enter into the placement.  At about 3:20 pm, a further e-mail was sent to the directors attaching a document which summarised the terms of the placing, and its effects on the shareholdings in eSun.  The document showed that if the placement went through, Lai Sun Development’s share of the enlarged share capital would drop from 36.08% to 32.89%, and that if all the warrants were exercised, such share would drop further to 30.23%.  Reference was also made to the position in relation to shares held by three directors of eSun (which accounted for less than 1% of its issued shares).  The document did not, however, differentiate between Passport and the other public shareholders in eSun, treating them as a single group of shareholdings.

41.  The board meeting was attended by seven of eSun’s ten directors.  The minutes show that Ms Leung and Mr Low were present at the meeting, while Mr Lam, Mr Cheung, Mr Carl Tong, Mr Donald Yap and Mr Andrew Low attended by telephone.  Mr Vincent Lien, Mr Lam Kin Ming and Madam U Po Chu did not attend.  According to the minutes, Ms Leung was elected to chair the meeting.  She mentioned the enquiry by the Stock Exchange as to the substantial increase in the volume of eSun shares traded that morning, and went on to say that as eSun had been approached by a broker in relation to a possible placing of shares, trading in the shares had been suspended at eSun’s request.  Reference was made to the schedule to which I have referred in the preceding paragraph, and the principal terms of the placement – that it involved the placing of 120 million new shares in eSun, each with attached warrants to subscribe for an additional share (i.e. 120 million further shares) on or before 31 December 2011 at a subscription price of HK$0.50 per share, and an exercise price of HK$0.50 per warrant.

42.  Ms Leung went on to say that the placing would initially raise HK$60 million in new funds, and that the shares would be placed to independent third parties.  She said that the proceeds would be used for the entertainment and media business of the eSun group, and for general working capital, noting that the bulk of the funds raised through the rights issue a few months earlier were earmarked for the Macau Studio City project, and that funds previously earmarked for the media and entertainment business had been depleted following the recent acquisition of music libraries, in particular the acquisition of the Capital Artists library (which had taken place in about late August/September 2008).

43.  Ms Leung indicated that eSun’s share capital would be increased by about 8.8% as a result of the placing of 120 million new shares.  Following a discussion, details of which are not recorded in the minutes, the placing was approved.

44.  Thereafter, eSun entered into the Placing Agreement with Chung Nam after the close of trading on 10 December 2008.  It appears to be common ground that the Placing Agreement was in largely standard terms.  Completion under the placing agreement was to take place on 24 December 2008, subject to the fulfilment of various conditions precedent, the most important of which, for the purposes of these proceedings, was the granting of approval by the Stock Exchange for the listing of the shares to be issued under the placing agreement, and pursuant to the warrants.

45.  The following day, 11 December 2008, eSun made two announcements through the Stock Exchange.  The first stated that it had entered into the Placing Agreement.  This announcement stated that the placees would be independent third parties, and were expected to be six institutional or professional investors.  It also set out the principal terms of the placement, stated that the funds raised would be used to finance the media and entertainment business of the eSun group, provided a table setting out the impact of the placement and warrants (if exercised) on eSun’s capital structure and shareholdings (in the same terms as the schedule provided to the directors prior to the board meeting), and mentioned the previous rights issue, stating that the funds then raised had not yet been utilised.  The second announcement, made jointly with Lai Sun Development, set out the financial impact of the placement on the two companies.  The placing would, as was noted in the schedule placed before the directors and in the first announcement, result in the dilution of Lai Sun’s shareholding in eSun.  As the placing price was less than eSun’s net asset value per share prior to the placement, the effect of the placement would be that the net asset value per share of the enlarged share capital after the placement would be less than the net asset value per share prior to the placement.  For Lai Sun Development, the effect was that it would have to recognise a loss of about HK$173 million as a result of the reduction of the value of its interest in eSun, based on the reduced value of eSun’s net assets attributable to it.  Further, because of the cross-holding between eSun and Lai Sun Development to which I have referred earlier, the loss to Lai Sun Development would carry through to eSun, which would in turn have to recognise a loss of some HK$65 million as a result of the reduction in the value of its 36.72% stake in Lai Sun Development.

Passport’s reactions to the Placing Agreement

46.  When Passport became aware of the suspension of trading in eSun shares on 10 December 2008, and of the impending placement, Mr Woodberry tried unsuccessfully to contact Mr Low to find out what was happening.  When Passport learnt, from the announcements of the following day, of the terms of the placement, Mr Woodberry was extremely concerned, as the placement, if completed, would result in a dilution of Passport’s shareholding and a consequent reduction in the amount of any dividend that might eventually be received by it if eSun could be persuaded to give up on the Macau Studio City project and distribute a substantial portion of its surplus assets to its shareholders.  He therefore continued to try to make contact with Mr Low. Eventually, Mr Woodberry travelled to Hong Kong to meet with eSun’s management – this meeting took place on 17 December 2008.  Although Mr Woodberry tried to remain calm and reasonably friendly in his attitude, when it became apparent that eSun would not reconsider the placing, he became more aggressive, and threatened eSun’s management with serious consequences should they persist with the placement.

47.  On 19 December 2008, Passport’s solicitors wrote to the Stock Exchange and Securities and Futures Commission complaining about the placement.  They said that Passport considered the placement to be for improper purposes, not in the best interests of the company, and entered into in breach of eSun’s directors fiduciary duties.  They questioned the need for the placing to have been entered into so quickly, when eSun still had all of the over HK$1 billion raised by the rights issue in May 2008 available and the placing would raise a relatively small amount but would result in the dilution of existing shareholders’ interests by about 16%, and would also incur the cost of having to recognise an accounting loss of about HK$65 million.  The letter went on to question the independence of the placees and to call for eSun to be required to fully investigate the matter, disclose the identity of the placees and their beneficial owners, and confirm that each place was indeed independent of Passport.

48.  Thereafter, these proceedings were commenced with the making of the ex parte application for injunctive relief before Kwan J.

Passport’s primary case

49.  Passport’s primary case is that the placement was entered into for an improper purpose, namely to protect or enhance Mr Lam’s control over eSun, as described in paragraph 11 above, rather than genuinely for the purposes, and in the interests, of eSun itself.  As Mr Bleach S.C., appearing for Passport, accepted, the burden of proving that in resolving to enter into the Placing Agreement, eSun’s board (or at least a majority of them) were actuated not by the true commercial interests of eSun, but by the improper purpose alleged, rests on Passport.  Given that the inquiry is into the state of mind of the eSun directors, it is not surprising that there is no direct evidence to this effect.  On the contrary, each of the four executive directors (all of whom gave evidence at the trial), denied that they had it in mind to protect Mr Lam’s position as the controlling shareholder of eSun through his and his family’s interests in Lai Sun Development.  Passport, however, asks the court to infer that eSun’s directors were indeed motivated to make their decision by the alleged improper purpose, and does so on the basis that the facts and circumstances surrounding the placement were, in Passport’s submission, such as to point overwhelmingly to that inference being the appropriate one to draw.

50.  As I have also noted, a key element of Passport’s argument is the proposition that the placees were not, in fact, independent .  However, this too is a matter as to which (again, perhaps not surprisingly) there is little direct evidence. Mr Bleach says, however, that this, too, is something which should be inferred – the inference being made on the basis of evidence as to the relationship between the placees and Mr Chuang, and Mr Chuang and Mr Lam, and from the circumstances surrounding the placing of the placement shares to the placees.

51.  Establishing that the placees were not truly independent (despite that being provided for by the Placing Agreement, and having been asserted in the public announcements made by eSun concerning the placement) is of considerable importance to Passport’s case.  The alteration to eSun’s capital that would have been effected by the issue of the placement shares, and the shares deriving from the associated warrants (if they were eventually exercised) was such that if the placees were independent of Mr Lam, and could not be relied upon by him to act in accordance with his interests so as to assist him to maintain control of eSun, the new shares created by the placement and warrant would weaken Mr Lam’s control over eSun, as they would represent a significant increase in the shares outside his control, which might be available to an investor who wished to mount a bid to take over control of eSun.

The law on improper purposes

52.  So far as the law is concerned, the applicable principles are well-established, and can be taken largely from two decisions: Harlowe’s Nominees Pty Ltd v Woodside (Lakes Entrance) Oil Co. N.L. (1968) 121 C.L.R. 483, a decision of the High Court of Australia, and Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821, a decision of the Privy Council.

53.  In Harlowe’s Nominees, a case in which an existing shareholder of a company alleged that its directors had allotted and issued shares to a new investor not for the purpose of raising capital which was needed by the company, but for the purpose of preventing the plaintiff shareholder from acquiring control and to protect their own position as directors, it was stated (at pages 492-493 of the judgment):-

“At the threshold of the argument for Harlowe on the appeal was a submission of law which was put in the form of a corollary upon the undoubted general proposition that a power vested in directors to issue new shares is a fiduciary power which the directors are not entitled to exercise otherwise than bona fide for the benefit of the company as a whole. The suggested corollary is that an exercise of the power cannot be maintained as having been bona fide in the interests of the company unless the company had at the time of the exercise an immediate need of the capital to be paid up on the new shares. In many a case this may be true as a proposition of fact; but in our opinion it is not true as a general proposition of law. To lay down narrow lines within which the concept of a company’s interests must necessarily fall would be a serious mistake. … The principle is that although primarily the power is given to enable capital to be raised when required for the purposes of the company, there may be occasions when the directors may fairly and properly issue shares for other reasons, so long as those reasons relate to a purpose of benefiting the company as a whole, as distinguished from a purpose, for example, of maintaining control of the company in the hands of the directors themselves or their friends. An inquiry as to whether additional capital was presently required is often most relevant to the ultimate question upon which the validity or invalidity of the issue depends; but that ultimate question must always be whether in truth the issue was made honestly in the interests of the company. … Directors in whom are vested the right and the duty of deciding where the company’s interests lie and how they are to be served may be concerned with a wide range of practical considerations, and their judgment, if exercised in good faith and not for irrelevant purposes, is not open to review in the courts. Thus in the present case it is not a matter for judicial concern, if it be the fact, that the allotment to Burmah would frustrate the ambitions of someone who was buying up shares as opportunity offered with a view to obtaining increased influence in the control of the company, or even that the directors realised that the allotment would have that result and found it agreeable to their personal wishes... . But if, in making the allotment, the directors had an actual purpose of thereby creating an advantage for themselves otherwise than as members of the general body of shareholders, as for instance by buttressing their directorships against an apprehended attack from such as Harlowe, the allotment would plainly be voidable as an abuse of the fiduciary power, unless Burmah had no notice of the facts.”

54.  To similar effect is the speech of Lord Wilberforce delivering the opinion of the Privy Council in Howard Smith v Ampol.  That was a case in which the background was a takeover struggle in which both Howard Smith and Ampol sought to obtain control of a company called R.W. Miller (Holdings) Ltd.  Each had tabled a bid to buy out the entirety of the issued share capital of Millers, with Howard Smith’s bid being the higher, and being favoured by Millers’ management.  Ampol, together with another company, Bulkships Ltd., held 55% of the existing share capital.  They made it clear that they would not sell their shares to Howard Smith if it should make a general offer.  The directors then allotted new shares to Howard Smith, thereby diluting Ampol and Bulkships’ joint holding to some 36.6% of Millers’ enlarged share capital.  Ampol challenged the allotment, claiming that it had been made for an improper purpose.  The trial judge found that although Millers was in need of funds, it had previously raised required funds by way of loan capital, and that while the directors were not motivated by a desire to retain their positions (and thus were not acting in their own selfish interests), they had made the allotment with the primary purpose of reducing Ampol and Bulkships’ proportionate shareholding in Millers, so that Howard Smith’s takeover bid could succeed.  He held that this was an improper purpose for which to exercise the fiduciary power to issue shares.  Upholding that decision, Lord Wilberforce said this (p.832B-G of the judgment):-

“… It is important to appreciate that the case put forward by the majority directors was … that their primary purpose was to raise necessary capital. …”

“… Their Lordships accept that such a matter as the raising of finance is one of management, within the responsibility of the directors: they accept that it would be wrong for the court to substitute its opinion for that of the management, or indeed to question the correctness of the management’s decision, on such a question, if bona fide arrived at. There is no appeal on merits from management decisions to courts of law: nor will courts of law assume to act as a kind of supervisory board over decisions within the powers of management honestly arrived at.”

“But accepting all of this, when a dispute arises whether directors of a company made a particular decision for one purpose or another, or whether, there being more than one purpose, one or another purpose was the substantial or primary purpose, the court, in their Lordships’ opinion, is entitled to look at the situation objectively in order to estimate how critical or pressing, or substantial or, per contra, insubstantial an alleged requirement may have been. If it finds that a particular requirement, though real, was not urgent, or critical, at the relevant time, it may have reason to doubt, or discount, the assertions of individuals that they acted solely in order to deal with it, particularly when the action they took was unusual or even extreme.”

55.  However, while accepting that the raising of capital was a matter of management within the proper sphere of the directors, Lord Wilberforce concluded that on the findings made at trial, the primary purpose of diluting Ampol and Bulkships’ combined proportionate holding so as to destroy their majority or create a new majority was something which was not constitutionally within the powers of the directors to do, even though they did it honestly and without motives of self-interest.

56.  It is also pertinent to note that Lord Wilberforce also made the following further point (at p.838E-F of the judgment):-

“It was an issue at the trial whether, assuming that the issue to Howard Smith was an improper act on the part of the Millers’ directors, Howard Smith had notice of this impropriety. Street J. held that they had such notice, mainly, but not exclusively, because of the terms of their own letter of July 6, 1972, addressed to Millers. Their Lordships need do no more than express their complete concurrence on this point.”

57.  The question that I have to consider therefore is: what was the purpose, or primary purpose, for which the directors of eSun acted in deciding to enter into the Placing Agreement with Chung Nam?  In deciding this question, it is the directors’ subjective intentions and perceptions that are determinative.  That said, however, as appears from Howard Smith v Ampol, objective considerations of matters such as the company’s true financial position, the reality of its need for funds, and the effects of the allotment of new shares upon the shareholders (both in financial terms and in terms of their voting power), are matters that, while not of themselves determinative, are relevant in that they may be taken into account when assessing the credibility of the directors’ evidence as to their professed purposes.  The more extreme the steps taken by the directors, the less ready might the court be to accept the explanations that they put forward.

The approach to the drawing of inferences

58.  As I have observed, on the subjective question of what purpose was in the directors’ minds, and what motivated them to resolve to enter into the Placing Agreement, there is little direct evidence apart from that given by the executive directors at trial, and Mr Bleach’s case is based on inferences which he says should be drawn from the surrounding circumstances at the time the directors made their decision on the afternoon of 10 December 2008.  Mr Sussex accepted that it was open to the court to infer, in a proper case, that the directors had acted for an improper purpose, and to do so on the basis of the surrounding circumstances.  He warned, however, against being too ready to draw such an inference, submitting that this should only be done if the inference was one which was compelling, relying on the following observations of Sir Anthony Mason NPJ in HKSAR v Lee Ming Tee & Securities and Futures Commission (2003) 6 HKCFAR 336 (at paragraph 72 of the judgment):-

“72. … that conclusion was not to be reached by conjecture nor, as the respondent submitted, on a mere balance of probabilities. It was to be plainly established as a matter of inference from proved facts. … In the particular circumstances, it was for the respondent to establish as a compelling inference that very senior officers of the SFC had deliberately and improperly terminated the investigation into Meocre Li’s conduct for the ulterior purpose alleged, sufficient to overcome the inherent improbability that they would have done so. …”

59.  Two years later, the Court of Final Appeal returned to the question of drawing inferences in Nina Kung v Wang Din Shin (2005) 8 HKCFAR 387.  In that case, Ribeiro PJ had this to say (at paragraphs 185 to 187 of the judgment):-

“185. … Where, as in the present case, the court is invited to reach a conclusion of forgery as an inference to be drawn on the basis of circumstantial evidence, any such inference must be properly grounded in the primary facts found. The court guards against indulging in conjecture under the guise of drawing an inference where the primary evidence does not logically and reasonably justify the particular inference in question. …

“186. … It is not permissible merely to choose what may be considered to be the more likely of two guesses if neither is properly justified by the primary facts found. …

“187.  In HKSAR v Lee Ming Tee & Securities and Futures Commision (2003) 6 HKCFAR 336, Sir Anthony Mason NPJ acknowledged the need for such a disciplined approach to the drawing of inferences and in particular for inferences of fraud or serious misconduct to be drawn only where such inferences are compelling …”

60.  Although Sir Anthony Mason NPJ did say, in HKSAR v Lee Ming Tee, that inferences of serious misconduct should not be drawn on a mere balance of probabilities, I do not think that he had it in mind that a different standard of proof from the ordinary civil standard of balance of probabilities should be adopted in civil cases, such as this, where the court was being urged to draw such an inference.  It is clear that the decision as to whether or not the directors acted with an predominant improper purpose in mind is one that is to be reached on a balance of probabilities (see the extract cited from Harlowe’s Nominees v Woodside, above).  However, in coming to this decision, the court will bear in mind the inherent improbability of allegations of serious misconduct or impropriety (which the allegations in this case are – see e.g. per Rich J in Mills v Mills (1938) 60 CLR 150 at 169-170, where he described allegations that shares had been issued for an improper purpose as being “the equivalent of fraud or bad faith”), and will require commensurately cogent evidence (whether direct or circumstantial) before concluding that the allegations are made out, even on a balance of probabilities (Re H (Minors) (Sexual Abuse: Standard of Proof) [1996] AC 563).  This was accepted by Mr Bleach.

61.  It is also relevant to bear in mind that the board of eSun was composed of a number of individuals.  For present purposes, however, it will suffice if a majority of the directors voting in favour of entering into the Placing Agreement were led to do so in furtherance of an improper purpose.

The evidence

62.  Bearing these principles in mind, I turn to consider the evidence in relation to Passport’s first case.  At the trial, Mr Woodberry gave evidence for Passport, while each of eSun’s four executive directors, Mr Lam, Ms Leung, Mr Cheung and Mr Low gave evidence for eSun.  Mr Chuang gave evidence for Chung Nam, and each of the 2^nd to 7^th Interveners gave evidence on their own behalves.  Each of them had made various affirmations and witness statements prior to the trial, and gave oral evidence at the hearing.

63.  As will appear from what I say below, there were some aspects of the evidence of Mr Lam, Ms Leung and Ms Cheung which I found unsatisfactory.  Of the Interveners, I have to say that I found Mr Chung Yuk Lun, the 6^th Intervener to be a somewhat unsatisfactory witness, in particular in respect of his evident reluctance to answer a number of reasonably straightforward questions.  That said, however, for the reasons which I shall explain, this has not affected the ultimate conclusions which I have reached on the key question of the purpose that lay behind the eSun directors’ decision to resolve to enter into the Placing Agreement.

Why Passport say that the alleged improper purpose should have been inferred

64.  Passport’s case on the relevant surrounding circumstances, from which an  improper purpose on the part of eSun’s directors is to be inferred, may be summarised as follows:-

(1)    The nature of Lai Sun Development’s (and hence Mr Lam’s) control of eSun being, as a result of the cross-holding which existed as between Lai Sun Development and eSun, one in which Mr Lam and his associates were able, by virtue of a relatively small investment of less than HK$300 million, able to control assets held by the two companies which were worth over HK$12 billion, was such that it was of immense value, and was not something that Mr Lam would lightly countenance giving up, or being deprived of.

(2)     In the light of that control, the acquisition by Passport of the two substantial blocks of eSun shares from TCS and Och-Ziff on 5 and 10 December 2008 respectively (such acquisition being something which Passport contends was known to at least the eSun executive directors at or prior to the time of the board meeting on 10 December 2008) was something which would have been perceived by the eSun directors as a sudden and rapid build up of Passport’s (or some other investor’s) stake in eSun, which might threaten Mr Lam’s control over eSun.

(3)     The effect of the placement, in terms of the shareholdings in eSun was such as to dilute the existing shareholders’ interests in the company to a significant degree, but retaining a shareholding of just over 30% (if all the warrants were eventually exercised) in the hands of Lai Sun Development, which would therefore retain effective control of the company.  In such a situation, with Passport holding just under 25% of eSun’s issued shares after the placement, the shareholdings of the placees would be decisive in any takeover battle that might ensue.  Passport suggests that this in itself makes it highly probable that the placees were persons allied with Mr Lam, since the consequence if this were not so would be that Mr Lam’s control would be placed under threat.  If, however, (as Passport suggests) the placees were persons who would deal with their shares in a manner favourable to Mr Lam’s interests, in terms of assisting him to retain control of eSun, this would further cement Mr Lam’s position of control.

(4)     The financial consequences of the placement for eSun, could properly be described as unusual or even extreme, in that it would result in eSun raising some HK$58 million in cash from the placement, while at the same time suffering a loss of about HK$65 million as a result of the diminution of the value of its holding in Lai Sun (by virtue of the fact that Lai Sun Development’s interest in eSun would diminish in value by some HK$173 million as a result of the placement, and the carried through effect to eSun’s own balance sheet as the result of its shareholding in Lai Sun Development).  Thus, while the placement would raise some HK$58 million in cash, it would result in a net loss overall of some HK$7 million for eSun.

(5)     The apparent failure of the board to have regard to a number of relevant considerations, such as the actual funding requirements of eSun’s media and entertainment division, eSun’s present financial resources (which were considerable) and what would be available absent the placement, whether it was still necessary to earmark funds that had previously been earmarked for the Macau Studio City project, whether the funds to be raised by the placement had some correlation to eSun’s funding needs, the impact on the media and entertainment division of declining the funds offered for the placement, and the adverse financial effects for eSun (and hence its existing shareholders) of the placement.

(6)     The unsatisfactory nature of the directors’ evidence as to eSun’s funding needs, in particular those of the media and entertainment division.

(7)     The speed with which the board meeting was convened and held, and the paucity of information placed before the board at the meeting.

(8)     The fact that Mr Chuang should just happen to call Mr Lam immediately after the sale of each of the TCS and Och-Ziff blocks of shares in eSun, and the manner in which Chung Nam identified and approached the placees.

(9)     A consideration of eSun’s actual funding needs, in the light of its available funds, and the previous public statements that had been made by its board about the adequacy of its available working capital on a number of occasions in the months prior to the placement.

(10)   The relationship between Mr Chuang and the placees, which is said to show that the placees would be likely to act in accordance with Mr Chuang’s wishes, and the relationship between Mr Chuang and Mr Lam, which is said to give strong support to the view that Mr Chuang could be relied upon to act in Mr Lam’s interests when necessary.

65.  Mr Bleach submits that in the light of these factors, the overwhelming probability is that the directors did, despite their protestations to the contrary, decide to enter into the placing agreement not for any proper purpose of eSun, but for the principal and improper purpose of buttressing Mr Lam’s control over the company, and to prevent what was perceived by them as an effort by Passport to build up its stake in eSun as a prelude to a takeover bid from resulting in a successful attempt to wrest control of the company from Mr Lam and his associates.  Accordingly, he submits, the court should not shrink from inferring this.

The answers of the Defendants and the Interveners

66.  Mr Sussex, however, together with Mr Sarony S.C. and Mr Bell for Chung Nam and the 2^nd to 7^th Interveners respectively, say that Passport falls far short of meeting the burden that rests on it in order to prove the case it advances.  They point to the following factors, which they say negatives the inference that Passport requires the court to draw in order to succeed:-

(1)     Even accepting, as they did, that the control which Mr Lam was able to exercise in relation to eSun was a matter of very considerable value, it was not appropriate to draw the inference contended for, since none of the directors (apart from Mr Low) were aware that Passport was buying into eSun in a big way.  Thus, being unaware of any threat to Mr Lam’s control, the directors would not have been motivated to act in order to entrench it.

(2)     Further, Passport was not in fact interested in making a takeover bid, and had always portrayed itself to the eSun board as being friendly to eSun’s existing management, and anxious to be supportive of such management and be a good long term shareholder in eSun.  The directors, it is said, were unaware that Passport’s attitude to eSun had recently changed and had diverged from that of eSun’s management, in that rather than hoping for the ultimate success of the Macau Studio City project, Passport was now hoping for the failure of that project and the eventual distribution of eSun’s cash reserves to its shareholders.  In these circumstances, there was again no reason for Mr Lam or the other directors to regard Passport as a threat to Mr Lam’s control of eSun.

(3)     More fundamentally, there was no evidence of any connection between the placees on the one hand, and eSun and Mr Lam on the other, such that they would be prepared to subordinate their interests to those of Mr Lam.

(4)     Likewise, there was no evidence that Mr Chuang was so connected to Mr Lam as to be likely to support Mr Lam in maintaining his control of eSun, at the expense of himself and his clients.

(5)     On the contrary, the evidence of each of the 2^nd to 7^th Interveners was that they had entered into the placement purely with a view to making a profit for themselves, in the anticipation that eSun’s share price would rise to a level at which they could sell their placement shares at a profit.  Further, the evidence of Mr Chuang was to similar effect, in that he had made it clear that Chung Nam had in mind to offer the shares to its clients who had sub-underwritten the earlier eSun rights issue and had suffered realised or unrealised losses as a result, so that they would have an opportunity to ameliorate such losses when eSun’s share price recovered.

(6)     Mr Sussex also contended that the directors’ evidence that there was a real and genuine funding need for eSun’s media and entertainment division, which was intended to be addressed by the placement, should be accepted, notwithstanding that it was not suggested that the need was one which could be described as pressing, urgent or critical – rather, it would enable the media and entertainment division to have more scope for embarking on projects that it wished to take up, as it would be less constrained from doing so having limited funds at its disposal.  He suggested that the way in which the funding need arose (as a result of the depletion of available funds due to the unplanned for acquisition of the Capital Artists music library) was typical of the way in which the business of the media and entertainment division was conducted – in an opportunistic and ad hoc way, taking advantage of such opportunities as presented themselves from time to time, and it was in the same opportunistic spirit that the board decided to take advantage of the offer by Chung Nam to procure placees to subscribe for new shares in eSun at a substantial premium to the price on which its shares were trading on the Stock Exchange, at a time when the credit and fund raising environment was exceptionally challenging, given that Hong Kong, like the rest of the world, was in the throes of the worst financial crisis in living memory.

(7)     So far as eSun’s available funds were concerned, Mr Sussex maintained that the bulk of the funds raised by the rights issue remained ring-fenced for eventual use in the Macau Studio City project, to which eSun reasonably remained fully committed at that point in time.

Control and its value

67.  Dealing first with the value of Mr Lam’s and his associates’ control of eSun through their interests in Lai Sun Development, and the cross-holding between the companies, this is not something that is seriously disputed.  All of the directors recognised (albeit with varying degrees of readiness, Mr Lam in particular being initially somewhat reluctant to agree as to this point) that the cross-holding was something of real and substantial value, not to be easily relinquished.  Notwithstanding that the evidence as to the way in which the cross-holding arose suggests that it was not expressly created for the purpose of buttressing Mr Lam and his associates’ control over eSun, the fact is that once it came into being, the cross-holding did have this effect, and was of particular value for this reason.  I therefore accept that the cross-holding was something which it is likely that Mr Lam would seek to protect against an unwanted predator.

Whether Passport was regarded as a potential predator

68.  But did the directors regard Passport as such a predator?  There are two elements to this question – first, whether the directors were aware of Passport’s rapid build up in its shareholding over the few days up to and including 10 December 2008, and second, whether or not the directors regarded Passport as a threat to their control.

69.  Dealing with the first element, each of the executive directors, apart from Mr Low, said that they were, at the time of the board meeting, not in fact alive to the fact that Passport had built up its shareholding in eSun by a significant extent in the space of just a few days. Although they all eventually accepted that had they thought hard about the matter, and pieced together the information that was available to them, they might have realised that the TCS and Och-Ziff blocks had changed hands, and might further have guessed that they may have been acquired by Passport, they insisted that they did not in fact come to this conclusion, and so did not have it in mind that Passport (or someone else) was acquiring a substantial shareholding in eSun.

70.  The only positive material to suggest that the executive directors knew of the sale of the TCS and Och-Ziff blocks consists of the e-mails sent by the company secretary to all the directors of eSun on the mornings of 5 and 10 December, shortly after receipt of the Stock Exchange enquiries as to the sudden surge in the volume of eSun shares traded on each of those days, and the fact that the Stock Exchange enquiry of 10 December 2008 was recorded as having been mentioned in the minutes of the meeting at which the placement was approved.

71.  Each of the executive directors said that it was not uncommon for eSun to receive enquiries from the Stock Exchange whenever there was an unusually high turnover in shares, or a rapid change in the share price.  They said that they regarded these enquiries as routine in nature, and would simply deal with them by answering the questions posed by the company secretary (usually by saying that they were not aware of any reason for the changes), so as to enable the company secretary to respond appropriately to the Stock Exchange.  They say that they did not, therefore, take particular notice of the enquiries by the company secretary when they were received, and therefore did not focus particularly on the fact that there had been an increase in the trading volume of eSun shares.

72.  Additionally, it may be noted that while the e-mail from the company secretary on the morning of 10 December did mention the level of turnover that had prompted the Stock Exchange enquiry, the e-mail sent on 5 December 2008 did not.  It would therefore not have provided the information necessary for a reader of the e-mail to work out that it was likely that the TCS block had changed hands.

73.  The substantial shareholder notifications lodged by Passport with the company, which did contain all the relevant information, were not brought to the attention of the directors until 15 December 2008 (in the case of the Och-Ziff sale) and 16 December 2008 (in the case of the TCS sale).

74.  In these circumstances, it seems to me that while the executive directors had knowledge of the existence and size of the transfer of shares that had taken place on the morning of 10 December 2008, and could have inferred from this that it was likely that the Och-Ziff block of eSun shares had changed hands, the same was not the case in relation to the transfer a few days earlier on 5 December 2008.  I am therefore disposed to accept their evidence that such enquiries from the Stock Exchange were not uncommon, and that they did not particularly focus on these matters when they received the e-mails from the company secretary, other than to answer the questions posed to them in the usual way, and that they were therefore not aware, or particularly concerned about these matters, and did not in fact draw the inference as to the sale of the Och-Ziff block, or of the TCS block, and were not particularly alarmed by these matters.   In coming to this conclusion, I have taken into account the criticisms that I make later in this judgment of the fact that the decision taken at the board meeting was, in my view, taken in a way that suggests that full consideration was not given to all matters which it would have been relevant for the directors to have taken into account, and also the criticisms that I have made as to the evidence in relation to the claimed funding requirements in respect of the media and entertainment division.  However, as I shall shortly explain, I am also satisfied that the directors’ perception of Passport was not such as would lead them to regard it as a threat.

75.  In the case of Mr Low, his evidence was that he had been told by Mr Woodberry about Passport’s intention to acquire the Och-Ziff block shortly before that happened, in the course of the conversation between them on 9 December 2008 (Hong Kong time). As I have noted, Mr Woodberry denies this, and says that he in fact informed Mr Low about the acquisition of the TCS block, which had already taken place, but not about the planned acquisition of the Och-Ziff shareholding.  Although Mr Low said that he did not recollect having been told about the acquisition by Passport of the TCS block of eSun shares, he accepted that it was possible that this had in fact been related to him.

76.  I am of the view that Mr Woodberry mentioned both transactions in the course of this conversation.  Although it would not have been appropriate for him to have mentioned the intended transaction with Och-Ziff, since this had not yet taken place, and would have been sensitive information, it seems to me that there is no reason for Mr Low to have mentioned this transaction rather than the earlier one if he had not been told of it.  Moreover, Mr Woodberry and Mr Low had known each other for some time, since before Mr Low had joined eSun, and were on friendly terms.  Mr Low was Mr Woodberry’s primary point of contact at eSun, and it is clear from the evidence of both that they had reasonably regular contact in which Passport’s investment in eSun was discussed, and Mr Low would inform Mr Woodberry of developments in relation to eSun.  Given this good relationship, I do not think it particularly surprising that Mr Woodberry would have informed Mr Low in confidence of the acquisition of the TCS block of shares and also of the impending purchase of the Och-Ziff block of shares.

77.  Thus, unlike the other directors, Mr Low did know that Passport had recently acquired a substantial further stake in eSun. However, given that Mr Woodberry also raised, in the course of the same conversation, the possibility that Passport might be given a seat on the board, and that this possibility was raised, as Mr Woodberry put it, in a “respectful” manner, I am satisfied that Mr Low would have regarded the information being provided to him as being provided on a friendly basis, and with a view to Passport strengthening or cementing its relationship with eSun in a constructive way by the possible taking up of a seat on eSun’s board, and would not, therefore, have been alarmed by the fact that Passport was acquiring a significantly larger stake in eSun.  Moreover, it seems to me that if Passport’s intentions towards eSun management were hostile (in the sense that it was seeking to take over control of eSun and oust the existing management, a possibility which was not suggested by Mr Woodberry, either in his evidence, or in any of his internal communications with others within Passport), Mr Woodberry would not have advertised its build up of its holdings in eSun by informing Mr Low of the fact.  This additional consideration provides, I think, further support for the conclusion which I have reached on this point.

78.  Additionally, it seems to me that there was no reason for the other executive directors to have been concerned that Passport might be a potential aggressor.  So far as they were aware, Passport was no more than a hedge fund which had invested in eSun, and had, up to this point, been a supportive investor, as demonstrated by the courtesy visit which Mr Woodberry had paid to Mr Lam in September 2008, and the communications which he had continued to have with Mr Low.  Thus, even if, contrary to my earlier conclusion, the executive directors had been aware of the two large transactions in eSun shares, and had connected them with Passport, this is not, I think, something that would have caused them to be particularly alarmed.

79.  In this context, it is also necessary to deal with a further conversation that Mr Low had with Mr Woodberry, immediately after the meeting between Mr Woodberry and eSun’s management on 17 December 2008.  Mr Woodberry says that after that meeting, which ended on an acrimonious note, Mr Low saw him out of the office, and while doing so, said to him words to the effect that “we were spooked” in a somewhat apologetic tone.  Mr Woodberry suggested in his affirmations and oral evidence that this was a clear indication that eSun’s executive directors were concerned, as at 10 December 2008, about a possible threat to their control of the company under the ownership of Mr Lam and his family and associates.

80.  Mr Low disagreed with this interpretation.  He said that while he may have used words to the effect alleged, he was referring not to the position on 10 December 2008, but to the effect of the meeting which had just concluded, as that was the first time that Mr Woodberry had behaved, vis-à-vis eSun and its management, in an aggressive or hostile manner.

81.  In the light of the previously good relationship between Mr Low and eSun on the one hand, and Mr Woodberry and Mr Passport on the other, and also having regard to the matters just discussed in relation to the telephone conversation between Mr Low and Mr Woodberry on 9 December 2008, I would accept that as at 10 December 2008, eSun’s management was not concerned by Passport’s increase in its shareholding in eSun (of which the other executive directors were not, in my view, particularly conscious), and therefore accept Mr Low’s explanation for what he said on 17 December 2008, rather than Mr Woodberry’s interpretation of it.

82.  Further, although by December 2008, Passport’s objectives in respect of its investment in eSun had altered, and were no longer aligned with the plans of eSun itself, in that Passport had by this time decided that its preferred outcome would be for the Macau Studio City project to be disposed of, or otherwise brought to an end, and the Macau property on which it was to be constructed realised with a view to eSun distributing the bulk of its available assets to its shareholders in the form of a large dividend, this change of heart was not something that was known to eSun’s management.  The only person with whom Mr Woodberry had raised the possibility of such a course of action being taken was Mr Low, in the course of one or more of their conversations.  However, although Mr Woodberry initially suggested that Mr Low had indicated to him that this was a real possibility, he accepted when cross-examined by Mr Sussex that Mr Low had not done more than agree that this might be something that might happen as a last resort, if all else failed.  In these circumstances, I do not think that Mr Low could be expected to have realised, prior to the meeting on 17 December 2008, that Passport’s plans for its investment in eSun had changed so that its objectives were no longer aligned with those of eSun’s management.  Still less is there any reason for the other executive directors of eSun to have known this.  This does not, therefore, affect the conclusions that I have reached in the preceding paragraphs.

The timing and speed of the placing

83.  Turning next to the timing of the placement (the same day as Passport acquired the Och-Ziff block of eSun shares), and the speed with which it was concluded (within the course of the same day), these might be thought to appear somewhat suspicious.

84.  However, so far as the timing of the placement is concerned, as I will explain below, I am satisfied that Mr Chuang had for at least some two weeks prior to 10 December 2008 been actively attempting to acquire a substantial block of eSun shares at a favourable price.  That being so,  as Mr Sarony put it, the approaches by Mr Chuang to Mr Lam, while clearly not coincidental (each having been triggered by Mr Chuang’s realisation that he had been beaten to a particular parcel of eSun shares), are not something that should be regarded as being sinister.

85.  As for the speed with which the placement was concluded, both Mr Clarke and Mr Sabine (giving expert evidence for Passport and eSun respectively) stated that it was common for placements to be concluded relatively quickly, as it was generally desirable to minimise any disruption to trading in the company concerned’s shares.  Thus, this factor too, is not one that provides particularly strong support for Passport’s case.

The 10 December 2008 board meeting

86.  However, when it comes to the proceedings at the board meeting on the afternoon of 10 December, the position is somewhat different.

87.  I do not place much weight on the fact that the table of shareholders that was produced failed to separate out Passport (or Passport, TCS and Och Ziff) and show the effect of the placement on its shareholding separately from that of the general public.  Given my conclusion that the executive directors were not aware that Passport had significantly increased its stake in eSun, there would not seem to be any particular reason to single out Passport for special consideration in the context of this table. Even in relation to the three large stakes held by Passport, TCS and Och-Ziff, there does not seem to me to have been any particular reason to identify them separately.  By contrast, it is understandable that Lai Sun Development’s position should be specifically identified, as it was the controlling shareholder of eSun, and it seems to me reasonable for the board to be informed what impact the proposed placement would have on this.

Failurhe to have regard to economic effects of placement on eSun and its shareolders

88.  However, when it comes to the apparently complete absence of information as to the financial impact of the placement on eSun itself, the position is different.  It is, in my view, a matter for concern that this information was not placed before the board, and that steps were not taken to make it available to the board before it was asked to make a decision on the placement.  While I am prepared to accept, bearing in mind that the eSun shares had been trading on the market at a very depressed level in recent weeks, Ms Leung’s evidence to the effect that the directors were aware that the price at which the placing shares to be issued was at a premium to the market price of the shares, but at a discount to the net asset value of eSun, it does seem to me that it was not sufficient for them to have known this in only general terms.  Given the existence of the cross-holding between eSun and Lai Sun Development, it must have been plain that the loss caused to Lai Sun Development as a result of the dilution of the value of its shareholding in eSun as a result of the issue of shares at below net asset value would feed through to eSun and cause a loss to eSun itself.  While this loss might be described as an “accounting loss” in that it did not involve the outflow of funds, it was nonetheless a real loss as it resulted in the diminution in the value of one of eSun’s major assets (its shareholding in Lai Sun Development). Although it might be thought to be commercially acceptable for eSun to take a paper loss in exchange for fresh cash in the challenging market environment prevailing as at the end of 2008, it seems to me that this was a decision that could only sensibly and properly be taken after information as to the extent of the loss was available.  This conclusion is, I think, reinforced by the fact that eSun and Lai Sun Development felt it necessary to make a public announcement of the incurring of such a loss, and of its likely extent, at the same time as the placing was announced the following day.  That information was, however, not available to the board at the time of the board meeting, and no satisfactory explanation for its absence has been provided.

89.  Also on this point, I note that Ms Leung suggested in the course of cross-examination that she had mentioned this matter (although without detailed figures) to Mr Carl Tong, one of the independent non-executive directors and a professional accountant.  This is a piece of evidence which does not appear in any of the affirmations filed by Ms Leung. Nor does it appear in her witness statement prepared for the trial of these proceedings.  In the circumstances, it is not a matter which I accept.  In any event, if Ms Leung had thought the matter sufficiently important to specifically mention to Mr Tong, it is surprising that she did not bring it clearly to the attention of the directors at the board meeting, and no less surprising that she did not take steps to have the necessary information prepared in time for the board meeting, or indicate clearly at the board meeting that it was in the course of preparation.  Had this been done, one would have expected the board to have wanted to be apprised of the information before taking a final decision as to the placement.  There is no evidence to suggest that this was done.

90.  This is, therefore, a point which provides support for the case which Passport puts forward, since the failure to take what would appear to be an important relevant factor into account would cast doubt on the directors’ claim that they had eSun’s interests and purposes firmly in mind.

eSun’s funding needs

91.  So far as eSun’s need for funds is concerned, I am again of the view that, in some respects, the evidence given by some of the executive directors at trial is not wholly satisfactory.

92.  The evidence as to funding needs covered both the requirements of the media and entertainment division and the existence of other available funds within eSun.

93.  Passport suggested that as eSun had raised in excess of HK$1 billion in the rights issue in May 2008, none of which had been spent, eSun did not in fact have any real need for further funds as at December 2008.  In saying this, Passport did not ignore the fact that when embarking upon the rights issue, eSun had made it clear that the bulk of the funds raised were to be earmarked for the Macau Studio City project, but contended that in the light of the difficulties that had beset the relationship between eSun and its joint venture partner, New Cotai, the reality was that the Macau Studio City project, while not terminated, was effectively in a state of suspended animation, and most unlikely to come to fruition, with the result that the funds initially set aside for it should have been regarded as available for eSun’s other businesses.

94.  The evidence as to the position of the Macau Studio City project, which included communications between the eSun/Capitaland side of the joint venture and New Cotai which were only disclosed by eSun with considerable reluctance, make it clear that the relationship was a troubled one, and that there were very significant differences that divided the two sides.  It having become apparent that commercial funding for the project would be dependent on a further injection of capital by the joint venturers, they had entered into the MOU to provide a framework for their cooperation, in particular as to the making of further contributions.  However, over the course of 2008, disputes over the MOU obligations proved difficult to resolve, and despite a number of proposed meetings (most of which either failed to take place or achieved nothing), matters did not make any real progress, leading ultimately to the termination of the MOU by New Cotai in early October 2008. However, this did not mean the end of the Macau Studio City project – rather, it meant that it would become necessary for some other arrangements to be reached between the joint venturers.  The question therefore was whether or not it was thought that such arrangements could or would be made.

95.  Mr Cheung, who had primary responsibility within eSun for the Macau Studio City project, stressed that the project was not one which eSun was prepared to contemplate giving up.  Although he ultimately accepted, as he had to in the face of the documents, that the relationship with New Cotai was seriously strained, he said that he continued to believe that something would be worked out in the end, and that this remained his belief throughout 2008.  He explained that the risk that a continued deadlock and inability to reach a solution might result in the resumption of the land granted by the Macau Government was such an unthinkable prospect that he was sure that, at the end of the day, some accommodation with New Cotai would be reached to enable the project to proceed.  He laid particular emphasis on the fact that while New Cotai did bring the MOU to an end, New Cotai at about the same time agreed to the joint venture accepting the revised indicative offer from the Macau Government to enable the size of the project to be increased to one of some 6 million square feet, nearly double the previously approved size.  He said that he took this as an indication that New Cotai remained committed to the project, and so regarded it as still ongoing, despite the difficult relationship.  He also said that even if there had been difficulties in getting New Cotai to pay its share of the land premium (which would fall to be paid in instalments over a period of some two and a half years from the making of the formal land grant), eSun and Capitaland would have tried to continue the project by making the payments first, and either pursuing New Cotai for its contributions, or (if absolutely necessary) trying to go it alone.

96.  Mr Cheung said that it was not until mid January 2009, when the Macau Government wrote seeking assurances from the joint venture as to the development of the project, and it proved impossible for eSun/Capitaland and New Cotai to agree on a response, that it became apparent that the relationship had irretrievably broken down.  He said, however, that this was not something which had been anticipated in early December 2008.

97.  Although Mr Cheung’s reluctance to make disclosure of the correspondence between the joint venture partners (and the stance taken by him in his evidence opposing an application by Passport for discovery of this documentation) does not do him much credit, I would accept that as at 10 December 2008, it was still his belief, and that of the eSun directors generally, that the Macau Studio City project was still alive, and that it remained appropriate to regard the funds earmarked for that project as still so earmarked.  I am of the view that given the significance of the project to eSun, and the amount of time and money that had already been invested in it, it was not one which eSun would give up on unless there was truly no alternative.  As at December 2008, having regard to the fact that the revised indicative offer had been accepted, with the approval of New Cotai, just two months earlier, and nothing having happened in the interim to change the outlook, it was reasonable for the directors to take this view.  I therefore do not think that the fact that eSun had considerable cash reserves, including the HK$934 million that had been earmarked from the proceeds of the rights issue, can be regarded as a reason to hold that the placement must have been motivated by an improper purpose.

98.  Given that I accept that the Macau Studio Project was still alive as at 10 December 2008, I would also accept the evidence of Mr Cheung that to have used some part of the funds set aside from the rights issue proceeds for a different purpose would have been something that would have caused difficulties for eSun in that it would be likely to be perceived by investors (to whom the change of use would have had to have been disclosed in due course) as signalling that the Macau Studio City project was or might no longer be viable.

99.  So far as the needs of the media and entertainment division were concerned, the picture given by the directors (in particular Ms Leung and Mr Low) in their evidence at trial was that while the media and entertainment division was not in a situation where additional funds were urgently or desperately required, the availability of additional funds would give the division more resources which could be deployed to best advantage as opportunities arose to take on projects or make acquisitions.  All the directors emphasised the fact that the division had, in September 2008, acquired the Capital Artists music library, which had been an unexpected opportunity, and one which had not been planned or budgeted for. That transaction resulted in the expenditure of just under HK$50 million, an amount which the proceeds of the placing would serve to replenish.

100.  The absence of a critical or urgent need for funds is not, in my view, fatal to the directors’ claim to have acted in what they conceived to be the interests of eSun.  Although in Howard Smith v Ampol it was observed that the objective existence of such a need will often be highly relevant to the determination of the question of whether an issue of shares was made genuinely for a proper purpose, it is, I think, relevant to consider that question in the light of the nature of the funding need being suggested by those seeking to defend the decision to make the issue of new shares.  In the Howard Smith case, the case being put forward by the directors was that the issue of shares had been made to address the company’s need for additional funds which they regarded as critical.  Having found that the company’s needs were not as critical or pressing as the directors sought to suggest, the judge in that case rejected these assertions, and concluded that the issue of new shares in that case was motivated primarily by the desire to remove the obstacle posed by the joint shareholding of Ampol and Bulkships to Howard Smith’s bid for control of Millers.  Here, however, the directors did not suggest at trial that there was some pressing need for funds on the part of the media and entertainment division.  The justification that they gave was that an opportunity to obtain additional funds having presented itself, the directors of eSun took the view that it was in the company’s interests to take it up, having regard to the manner in which the media and entertainment business operated, its historical lack of profitability, the fact that it had recently made an unplanned for acquisition,  and the difficulties that it was likely otherwise to have in raising funds commercially should this be attempted.  Of itself, this is not an implausible reason for deciding to enter into the placement that had been proposed.

101.  The minutes of the 10 December 2008 board meeting are consistent with this being the motivation for approving the proposed placement, as they do refer to the bulk of the rights issue proceeds being set aside for the Macau Studio City project, and to the placement providing an opportunity to replenish the funds expended on the acquisition of the Capital Artists library.

102.  That said, however, there are also a number of matters which cast doubt on whether or not this was truly what the directors had in mind when approving the placement.

103.  First, as Passport pointed out, from the time when the rights issue had taken place, through to the approval of the announcement of eSun’s mid-year results in late September 2008, the board had consistently stated that eSun had sufficient working capital to meet its requirements.  This was stated both at the time that the results of the rights issue were announced towards the end of May 2008, and again when eSun’s interim results were announced in September 2008, just when the acquisition of the Capital Artists library had been resolved upon.

104.  Second, the HK$77 million that was available for general working capital as a result of the rights issue had not yet been utilised, and was still retained in cash by eSun.

105.  Third, there was no record, whether at a board meeting or other management or divisional meeting, of any suggestion that the media and entertainment business was in need of any particular funds during the several months between the acquisition of the Capital Artists library and the board meeting on 10 December 2008.

106.  Fourth, and perhaps most significantly, the picture which was presented at trial was in contrast with attempts made by Mr Lam at an early stage of the proceedings to suggest by reference to a cash flow projection produced after the proceedings had commenced that eSun did in fact have significant funding needs, and even more markedly in contrast with evidence in Ms Leung’s witness statement in which she sought to identify eSun’s available resources and the extent of its funding requirement as at 10 December 2008.  These exercises were, in my view, of little value in considering the question of the motivation of the directors in approving the proposed placement, as it was not suggested that any of this material was in fact put before the directors when they were asked to consider the proposed placement.  They represented, I think, no more than ex post facto attempts to establish that there was a need for additional funds on eSun’s part.  But even as such an attempt, it did not serve its purpose particularly well, for the figures put forward suggested that eSun had a funding shortfall of some HK$1.63 billion (including some HK$574 million of entertainment projects which were said to be “in the pipeline” as at 10 December 2008 and a further HK$301 million of entertainment related matters which were identified), against which the funds raised by the placement of some HK$58 million (or HK$116 million if the warrants were in due course exercised) would make no significant inroads, whether into the overall requirement or even the asserted requirement of the media and entertainment division, which on Ms Leung’s figures, totalled some HK$875 million).

107.  Although all of these matters, and in particular the last mentioned, have caused me to question the veracity of the directors statements at trial that the placement was regarded as an opportunity to replenish the funds laid out on the Capital Artists acquisition, I have come to the conclusion that their evidence should nonetheless be accepted, and that the matters stated in Mr Lam and Ms Leung’s affirmation and statement respectively were no more than an (unwise) attempt to bolster their case by trying to demonstrate that the media and entertainment division had a real funding need, prompted perhaps by a realisation that the manner in which the placement proposal had been dealt with at the board meeting (and in particular the lack of information as to the economic consequences of the placement for eSun) might give rise to difficulties.  This is because, as I shall go on now to explain, I am satisfied that Mr Chuang and the placees cannot be regarded as persons who could be expected or relied upon to support Mr Lam if it should become necessary to do so in order to maintain his control over eSun, and I am also satisfied that Mr Lam did not so regard them.

The independence of Chung Nam and the placees

108.  When considering whether or not it should be inferred that the placees would have dealt with the placing shares (and any shares obtained as a result of the exercise of the warrants) in such a way as to support Mr Lam’s control of eSun, it is necessary to bear in mind that Passport does not contend that the individual placees are connected to Mr Lam.  What is suggested is that each of the placees would have dealt with their shares in accordance with the directions or wishes of Mr Chuang, who in turn would have caused the placees to deal with such shares in accordance with the instructions or wishes of Mr  Lam.

The relationship between Mr Chuang and Mr Lam

109.  I shall consider first the relationship between Mr Chuang and Mr Lam.  Mr Bleach submitted that having regard to the facts that Mr Chuang and Mr Lam had known each other for some ten or more years (a matter which both of them accepted), that Mr Chuang regarded Mr Lam as a “good friend” (a relationship about which Mr Lam was rather more circumspect), that according to Mr Chuang, although Chung Nam had only had business dealings with eSun on one occasion prior to the placement (i.e. in connection with the rights issue for which it was the underwriter), he had had too many dealings with Mr Lam to enumerate fully (albeit he said in his oral evidence that these should not be classified as being of a business or commercial nature), and that Mr Chuang clearly felt able to call Mr Lam directly to discuss matters such as the issue of shares to Chung Nam or its clients, the relationship between them should be regarded as undoubtedly a close one, and that there was nothing surprising in the notion that Mr Chuang should wish to help his friend to maintain control of assets of very significant value, which would be at risk if Mr Lam were to lose control of eSun.  In this context, Mr Bleach also pointed out that Mr Chuang accepted when giving evidence that he was aware of the shareholding structure of the Lai Sun group, and suggested that he would therefore have been aware of the implications for Mr Lam of a loss of control of eSun.

110.  However, having seen and heard Mr Chuang giving evidence at trial, I am quite satisfied that Mr Chuang’s objective in his business dealings is to make money first for himself, and second for those he regards as his close friends.  While Mr Chuang accepted that the placees would fall into this category, he did not put Mr Lam in the same bracket.  Mr Chuang questioned why he should put himself out, or put himself or his close friends at financial risk for Mr Lam, with whom he may have been friendly, but who had provided him with little in the way of business to date, the only transaction that they had previously been involved in being the rights issue for eSun, which Mr Chuang pointed out generated about two million odd dollars in fees for Chung Nam, but resulted in the sub-underwriters, all of which were companies connected with his close friends, suffering very substantial losses, whether realised or on paper.  Mr Chuang also made it clear that while he regarded Mr Lam as a friend, he regarded him as an equal (saying that he thought that he was at least as wealthy as Mr Lam) and did not see him as someone whom he owed any favours.  As to his ability to call Mr Lam directly, Mr Chuang said that there was nothing unusual in this – so far as he was concerned, he could call up anyone he liked.  I accept Mr Chuang’s evidence in these respects, and am satisfied that while he regarded himself as being on good terms with Mr Lam, he did not feel obligated to do Mr Lam any favours.

111.  Most importantly, however, it seems to me that the evidence of Mr Chuang’s unsuccessful attempts to acquire eSun shares from both TCS and Och-Ziff points strongly supports his evidence to the effect that he had been monitoring eSun’s shares for some time, and had been on the lookout for an opportunity to offer his clients, the sub-underwriters of the rights issue, an opportunity to reduce their losses by picking up significant quantities of eSun shares cheaply.

112.  I have noted that on 2 December 2008, Chung Nam made a firm offer to acquire the TCS shareholding in eSun at HK$0.28 per share.  Although Mr Clarke, Passport’s expert, was inclined to be dismissive of this offer, as being well below the market price, and thus not a serious one, I do not share his scepticism.

113.  It should be noted that the offer of HK$0.28 per share did not come out of the blue.  There had been previous e-mail correspondence between Chung Nam and TCS, in which Chung Nam had expressed interest in acquiring the TCS stake in eSun.  TCS had apparently taken this expression of interest seriously, as it responded with an offer to sell at HK$0.35 per share.  This was slightly above the then market price, and about 10% above the price of HK$0.32 at which TCS eventually sold out to Passport. Chung Nam’s response to this offer was to say that it was too high, and that it might be possible to conclude a deal at around HK$0.30.  It was after this, when no further response had been received from TCS, that Chung Nam made its “firm offer” of HK$0.28 per share (which was about 10% below the price at which the eSun shares were eventually sold).  Viewed in this context, it seems to me that the Chung Nam offer should be regarded as a genuine one, albeit perhaps one which may not have been final.  Had TCS responded positively to the offer, perhaps with a counter offer, I see no reason to think that had it not been for the fact that Passport was by now also interested in acquiring TCS’ shareholding in eSun, negotiations might not have progressed to a conclusion.

114.  It would seem that TCS did not appear to share Mr Clarke’s scepticism about the seriousness of the Chung Nam offer either.  In Mr Woodberry’s report to Mr Burbank of his negotiations with TCS shortly before Passport agreed to buy TCS’ eSun shares at HK$0.32 per share, he indicated that TCS had told him that they would like to sell to Passport, but that they would only give Passport a limited window of three hours in which to decide whether or not to go ahead with the transaction, as they had another buyer available who had made a bid for the shares.  This could only have been a reference to Chung Nam.

115.  Most significantly, the timing of Chung Nam’s enquiries and offer to acquire the TCS block of eSun shares, which began at the end of November 2008, is inconsistent with the any suggestion that Chung Nam and Mr Chuang had Mr Lam’s interests in mind.  There is no evidence to suggest that at this time, Mr Lam or Mr Chuang were or should have been aware of Passport’s interest in acquiring significant quantities of additional eSun shares.  Nor is there any evidence of any communications between Mr Chuang and Mr Lam at this point in time from which it might be inferred that they were acting in combination.

116.  In these circumstances, I do not see any reason to doubt the genuineness of the subsequent offer by Chung Nam to Och-Ziff to acquire its eSun shareholding at about HK$0.33 per share, a price which was in fact higher than that which Och-Ziff accepted from Passport.  Again, had Och-Ziff responded positively to Chung Nam instead, there is no reason to suppose that a sale might not have been concluded between them.

117.  Although Mr Chuang and Chung Nam would not appear to have approached the sub-underwriters prior to having made such enquiries and offers to acquire the TCS and Och-Ziff shareholdings, I do not regard this as a factor which requires a different conclusion to be reached.  It seems to me that Mr Chuang would have been confident that he would be able to persuade his friends to go along with his suggestion, in one way or another.

118.  The fact that it was Mr Chuang who called Mr Lam both on 5 December 2008 and 10 December 2008 (rather than the other way around), on both occasions shortly after a large block of eSun shares had eluded him, also supports the view that it was Mr Chuang who was interested in acquiring shares in eSun at a low price, and not Mr Lam who was looking for a safe place in which to place eSun shares with a view to thwarting what might be a hostile buyer.

119.  Given that I accept that Mr Chuang was seeking to acquire eSun shares with a view to reducing the losses being suffered by his clients, there is no reason to think that his clients would have hesitated to sell out at such time as it suited them to do so, when there was a sufficiently attractive profit to be made.  Nor is there any reason to suppose that Mr Chuang would have sought to dissuade them from doing so.

120.  Thus, this critical part of Passport’s case is not established, and I do not think that it can properly be inferred that Chung Nam and its clients should be regarded as “safe pairs of hands” in which eSun shares would be held against a potential predatory investor, so as to maintain Mr Lam’s control of eSun and the substantial assets of the Lai Sun group.

121.  Nor do I think that the evidence establishes that Mr Lam would have thought that Mr Chuang or his clients represented such a safe repository for eSun shares.  On 5 December 2008, when he first asked Mr Lam about the possibility of acquiring newly issued shares in eSun, Mr Chuang complained about the performance of eSun’s share price, and the losses this had caused to his clients, likening them to being on a “doomed boat” (or perhaps a sinking ship).  Having been told this, there is no reason to think that Mr Lam could have understood anything other than that Mr Chuang’s objective was to try to ameliorate his clients’ losses by picking up additional eSun shares for them cheaply, thus bringing down their average cost of investment in eSun shares (if they had not yet sold the shares acquired when sub-underwriting the rights issue) or offering them an opportunity to recoup some or all of their losses if the eSun share price eventually recovered.  That being so, there would be no reason for him to think that Mr Chuang or his clients would not act to realise any gains that might be made when it suited them to do so, regardless of what might be in Mr Lam’s own best interests.

The relationship between Mr Chuang and the placees

122.  Turning to the relationship between Mr Chuang and the placees, this is a matter that is not of critical relevance in the light of the conclusion which I have reached in relation to the relationship between Mr Chuang and Mr Lam.  However, for the sake of completeness, I shall deal with it briefly, and explain my conclusions in relation to it.

123.  Mr Chuang described each of the placees as his good friends (or good buddies), an assessment in which each of the placees concurred.  Apart from being good friends, there were also clearly an extensive network of business dealings and relationships between them.  These were spelt out in some detail in the evidence of Mr Woodberry and Mr Clark.  They consisted of:-

(1) The relationship between the 2^nd to 7^th Intervener placees and the sub-underwriters:-

(a) The 2^nd Intervener, Mr Howard Wong, was the chairman and executive director of a listed company called GR Vietnam Holdings Limited, and also a director of one of the sub-underwriters, a company called Main Purpose Investment Limited.

(b) The 3^rd Intervener, Mr Benny Kwong, was the chairman and executive director of a listed company called Heritage International Holdings Limited, of which another sub-underwriter, Dollar Group Limited, was a wholly-owned subsidiary.

(c) The 4^th Intervener, Mr Osman bin Kitchell was the chairman, chief executive officer and an executive director of a listed company called Unity Investment Holdings Limited, of which another sub-underwriter, Great Panorama International Limited, was a wholly-owned subsidiary.

(d) The 5^th Intervener, Mr Yeung Ming Kwong was the acting chairman and an executive director of a listed company called Forefront Group Limited.

(e) The 6^th Intervener, Mr Chung Yuk Lun, was chairman and an executive director of a listed company called Radford Capital Investment Limited, of which another sub-underwriter, Winning Horsee Limited, was a wholly-owned subsidiary.

(f) The 7^th Intervener, Mr Henry Chuang Yue Heng (Mr Chuang’s brother) was chairman and an executive director of a listed company called Willie International Holdings Limited, of which Pearl Decade Limited, another of the sub-underwriters, was a wholly-owned subsidiary.

(g) The remaining placee, who did not intervene in these proceedings was a Mr Paul Suen Cho Hung, who was the chairman and executive director of two listed companies known as China Yunnan Tin Minerals Group Company Limited and Poly Development Holdings Limited.

(2) Three other listed companies, Freeman Corporation Limited, Mascotte Holdings Limited and China Sci-Tech Holdings Limited are said to have (or to appear to have) connections with various of the companies mentioned in sub-paragraph (1) above.  The first two of these companies had cross shareholdings with some of such companies at various times.

(3) Freeman, Willie, Radford, Unity, Heritage and Mascotte all had cross-shareholdings in each other as at about November 2008.  Willie and Radford also had shareholdings in Forefront.

(4) Chung Nam was part of a group of companies ultimately controlled by an offshore company called Hennabun Capital Group Limited, of which Mr Chuang says he is the permanent managing director, and of which Mr Chuang appears to be the single largest shareholder (with Heritage, Radford and Unity also holding stakes of between about 0.5% and 3% odd.

(5) Mr Chuang himself had (at various times in 2007 and 2008) shareholdings in Heritage, Mascotte, Radford and Forefront, ranging from just under 2% to just under 5%.

(6) As at late May 2009, Chung Nam, through its broker participant accounts at CCASS (the central clearing system for shares listed on the Stock Exchange) held some 16.39% of the issued shares of GR Vietnam, 32.98% of Poly Development, 39.66% of Heritage, 51.2% of Mascotte, 54.2% of Radford, 57.41% of Willie, 59.05% of Unity, 59.92% of Freeman and 60.32% of Forefront.

(7) Chung Nam has been involved in capital raising exercises (as placing agent for placements of shares and convertible notes, or as underwriter of rights issues) for Heritage, Radford, Unity, Willie, GR Vietnam, Forefront, Yunnan, Freeman, Mascotte and China Sci Tech on between three and six occasions for each company between late 2005 and mid 2008, deriving some 82% of its income from placements and rights issues over that period from these companies.

(8) Chung Nam has its offices on the 26^th floor of the China United Centre, a building located at 28 Marble Road, North Point.  Many of the other companies mentioned above also have offices in the same building, these being Freeman, Forefront, Radford, Winning Horsee, Great Panorama, Unity, Willie, Heritage, Dollar Group and Pearl Decade.

124.  These matters were not disputed as matters of fact by Mr Chuang or the placees.  However, they all said that it did not follow that the placees would act in accordance with Mr Chuang’s wishes.

125.  I have concluded that despite the many connections between the placees, the various companies mentioned above with which they were associated, and Mr Chuang and Chung Nam, it would not be appropriate to infer that the placees were in effect ciphers, who would have done just as Mr Chuang wished, in relation to the eSun shares that were to be the subject matter of the placement.

126.  First, there is no evidence of the placees, or the companies with which they are connected having acted previously in a coordinated manner, let alone in a manner that was both coordinated and associated with Chung Nam or Mr Chuang.

127.  Although Mr Clark asserted this at one stage in his evidence, he eventually accepted that this was not the case.  The example he gave was to suggest that in connection with the rights issue, each of the sub-underwriters was financed by Heritage (part of whose business included moneylending).  But this was not in fact the case.  Apart from funding its own subsidiary (Dollar Group), Heritage financed Unity and one other sub-underwriter.  However, the remaining five sub-underwriters were either financed by their own holding companies, or made their own arrangements for financing.

128.  Further, the sub-underwriters of the placement did not themselves deal with the shares they received in the same way.  One (Best Casting Limited) disposed of part of its shares almost immediately upon receiving them, while others variously disposed of parts of their shareholdings at different times, or continued to hold on to them right up until the time of the placement.

129.  In addition, when approached in relation to the placement, each of the placees indicated that their companies would not take up the shares, as Mr Chuang had originally had in mind.  Although the placees eventually took up the placement for their own accounts, Mr Henry Chuang gave evidence, which was not challenged, that Willie (the company of which he was chairman and an executive director) decided to dispose of its own remaining holding in eSun two days later, on 12 December 2008.  This too, tends to point against the placees being likely to act in a coordinated way, or in accordance with Mr Chuang’s suggestions.

130.  I do not think that any inference of effective control by Mr Chuang over the actions of the placees can properly be drawn from the fact that substantial portions of the issued share capital of the companies of which they were chairmen were lodged in Chung Nam’s participant CCASS account.  It is common for shares to be held in brokers’ participant CCASS accounts on behalf of their clients, particularly where the clients themselves may not have their own CCASS accounts.  In such cases, the shares remain the property of the clients, to be dealt with in accordance with their instructions.  While the broker might have the ability to deal with the shares without reference to the clients if they are pledged by the clients to secure margin facilities and conditions arise in which the broker is entitled to have recourse to the security, this does not equate to the broker being the beneficial owner of the shares, or being free to deal with them as he pleases.

131.  Nor do I think that such an inference should be drawn from the fact that a number (but not all) of the placees were granted temporary advances to cover the outstanding balances on their accounts after those accounts had been debited with the cost of the shares they were to take up under the placement (Mr Howard Wong, the 2^nd Intervener, and Mr Paul Suen, who did not intervene in these proceedings did not require such facilities, having placed Chung Nam in funds for their shares).  Until such time as there was a default in response to a margin call, the shares would (had they been issued) have remained in the ownership of the placees.

132.  It was also suggested that the way in which Chung Nam carried out the placement was unusual, in that there was no evidence of sales scripts or other preparation to enable Chung Nam’s account executives to pitch the placement to potential placees, that there was no audio recording of the telephone conversations in which the placements were offered to and accepted by the placees, and because Chung Nam asked for jumbo certificates (a single certificate for the whole of the allocation to each individual placee) rather than multiple certificates in smaller or board lot quantities.

133.  With respect, I am not convinced that any of these points are particularly powerful.  So far as the absence of scripts or sales pitches are concerned, it is clear that Mr Chuang had in mind to offer the shares to his friends, and his evidence (which I accept) was that he spoke to them directly in the first instance, and arranged for the sending out of letters of offer for their signature after they had indicated interest in the placement. Given the good relationship between Mr Chuang and the placees, I do not think that this is implausible.  As for the failure to produce an audio recording of the discussions, I accept Mr Sarony’s submission that given the existence of written confirmations of the written offers sent out by Chung Nam, and the fact that the placement was not a transaction carried out through the Stock Exchange, it was not necessary to have an audio recording in order to comply with paragraph 3.9 of the Code of Conduct governing brokers’ dealings with their clients.  Finally, in relation to the point about jumbo certificates, the evidence was that the same procedure had been followed in relation to the rights issue some months earlier, and there was therefore nothing exceptional about this.  In any event, since the shares would no doubt have been deposited into Chung Nam’s CCASS participant account where they would have been held for the account of the placees, and from which they could have been sold in whatever quantities the placees chose, there would seem to have been little need to insist on being given a large number of smaller or board lot sized certificates.

134.  Chung Nam had carried out a large number of previous placements, both for the companies mentioned above, and for others. There was no evidence before me to suggest that the way in which this proposed placement was to be carried out differed in any significant respect from the others.

135.  Finally, it must be noted that it would have been highly uncommercial for the placees to have foregone the potential profits that they could have earned from the placement shares.

136.  Taking all of these circumstances into account, I do not think that it is established that the placees would have dealt with the shares in accordance with Mr Chuang’s wishes, even if (contrary to my earlier conclusion) Mr Chuang had been sympathetically inclined towards Mr Lam in the event of a struggle for control over eSun.

137.  Even if I am wrong as to the relationship between Mr Chuang and the placees, and the placees should be regarded as effectively puppets of Mr Chuang’s in connection with the placement, having regard to the assessment I have made of Mr Chuang, it seems to me that if it were his own money at stake, Mr Chuang would have been no more (and probably even less) inclined to be supportive of Mr Lam if the opportunity to make a handsome profit presented itself to him.

Conclusions as to Passport’s primary case

138.  To sum up therefore, I have come to the conclusion that having regard especially to the evidence which establishes, in my view, that Mr Chuang was actively seeking to acquire a substantial shareholding in eSun at a point in time before Passport’s interest and acquisitions of the TCS and Och-Ziff blocks and having regard to his having effectively informed Mr Lam that he was seeking to obtain shares in eSun to enable his clients to ameliorate their losses from their investments in eSun, it would not be appropriate to regard Mr Chuang as someone on whom Mr Lam could rely, or thought he could rely, in the event of a struggle for control over eSun.

139.  Although there are other facets of the evidence (in particular the quality of the evidence in relation to the financial needs of eSun, and the lack of consideration of the financial effects of the placement on eSun) that might otherwise have lent support to Passport’s thesis that the placement was motivated primarily by an improper purpose of seeking to protect Mr Lam’s control over eSun, I am of the view that when the evidence is taken as a whole, such an inference is not one which should be drawn on the balance of probabilities, and still less as a compelling inference.

140.  Further, even if I am wrong in thinking that Mr Lam and the other members of the board were not motivated by the alleged improper purpose (perhaps thinking wrongly that Mr Chuang was indeed a “safe pair of hands”), having regard to my findings as to Mr Chuang’s objectives, it does not seem to me that there would be any sufficient basis for concluding that Mr Chuang was, or must have been, aware of the improper purpose alleged. That being the case, it seems to me that while (on this basis) the placement might have been voidable (see Harlowe’s Nominees and Howard Smith v Ampol cited above), it would not have been appropriate to have exercised the court’s discretion to avoid the placement to the detriment of the placees, who were in the position of third party purchasers without notice of the impropriety.

141.  I therefore conclude that the placement should not be declared to have been unlawful on this basis.

Passport’s alternative case

142.  Turning to Passport’s alternative case, this is that even if the directors were not (as I have held) motivated to enter into the placement by an improper purpose, it was nonetheless tainted by their failure to have proper regard to the adverse impact of the placement proposal on eSun’s shareholders, in that there was no proper consideration by the directors of the substantial dilution effects, both in terms of shareholdings in eSun and in terms of the financial impact by reference to the substantial reduction in attributable net asset value per share before and after the placement.  Connected with the latter point is the additional argument that the effect of the placement was actually to reduce the total assets of eSun as a result of the loss that would have to be recognised arising from the cross-holding between eSun and Lai Sun Development (see paragraph 45 above). Further, it was alleged that no regard, or no proper regard was paid to alternative means of raising funds that would not have such an effect, such as a further rights issue.  It was also, I think, suggested that regard should have been, but was not, paid to the position of Passport itself.

143.  It will be apparent from my discussion of the way in which the board meeting went, and the information that was placed before the board for the purposes of that meeting, that I am not satisfied that there was any, or any sufficient material, placed before the board to enable them to make any meaningful assessment of the financial impact of the placement upon eSun or upon its shareholders, in terms of the dilution of the attributable net asset value per share.  On the face of it, no such information was provided to the board – the only material provided in relation to dilution was as to the dilutive effect of the placement on shareholdings in eSun, and not as to the economic effects of the placement, whether on the shareholders, or on eSun itself.  So far as the failure to consider the impact on Passport is concerned, however, I do not regard this as a particular problem, since there was, as I have held, no reason for the directors to have thought that Passport’s position differed materially from that of eSun’s other shareholders.  Nor do I think that the failure to consider alternative means of raising funds was a matter for criticism, given that I accept that the placement was a case of eSun taking advantage of an opportunity that presented itself, rather than actively going out in search of ways to raise funds.  Had there been no offer of the placement, the question of raising funds would not have arisen, and there was no real alternative that could be considered.

144.  However, Mr Sussex submitted that even if I were to come to this conclusion, it did not follow that the right course would be to conclude that there had been any breach of fiduciary duty, or that even if there was, the consequence was that the placement should be set aside.  He submitted that it would not be appropriate to incorporate into the company law context concepts such as a duty on a board of directors to have regard to all relevant factors and exclude from consideration any irrelevant factors when exercising their powers as a board, failing which their decision might be open to challenge.  He also submitted that there was clear authority that the court should not presume to sit as a tribunal to which persons dissatisfied with the decision of a board of directors could appeal (see, e.g. Howard Smith v Ampol itself, and Kwok Shun On v Wong Sai Wing & others [2001] 3 HKLRD 811, at 285J to 826D per Yuen J (as she then was)).

145.  In order to determine this part of Passport’s case, and to decide whether or not it should result in Passport being granted the relief that it seeks, it is necessary to consider the following matters:-

(1) Whether there is a fiduciary obligation on the part of a board of directors, when exercising their power to issue new shares, which it is well established is a fiduciary power, to have regard to the interests of the company’s shareholders;

(2) If so, whether that duty was breached in the present case; and

(3) If so, what are the consequences of such a breach.

146.  As to the first two issues, I propose to deal with them briefly, given the conclusion that I have reached in relation to the last question identified above.

147.  In relation to the first question, although I was initially attracted by Mr Sussex’s submission that it would be inappropriate for a court to interfere with the decision of directors in relation to commercial questions such as whether or not, and how, funds should be raised for the company concerned once it is established that the power was exercised in good faith for proper purposes, and was not tainted by an improper primary motivation, I have come to the conclusion that there is an obligation of a fiduciary nature imposed upon directors, when deciding whether or not, and in what manner, to embark on an issue of new shares, to have regard to the interests of shareholders, and to exercise the power (if it is decided to do so) in a way that is fair as between different groups of shareholders.

148.  These obligations are recognised in a number of English authorities, including e.g., Re BSB Holdings (No. 2) [1996] 1 BCLC 155, in which, in the context of an unfair prejudice petition, the English Court of Appeal concluded that where there are groups of shareholders with differing circumstances and interests, it is necessary for directors to have regard not just to the interests of the company but also to the interests of the different groups of shareholders and act fairly between them.  A similar conclusion was reached by Judge Purle Q.C.in Re Sunrise Radio Limited [2009] EWHC 2893.

149.  Further, as noted by Judge Purle Q.C., there is a clear line of English authority that suggests that when considering whether or not to exercise a fiduciary power, the fiduciary should take into account relevant factors and exclude from consideration irrelevant factors.  See, e.g. Re Hastings Bass [1975] 1 Ch 25 (which was recently considered by the English Court of Appeal in Pitt v Holt [2011] EWCA Civ 197, in which it was held (differing from Re Hastings Bass on this point) that the consequence of a failure to comply with this obligation was that the exercise of the power would be voidable (and not void, as held in Re Hastings Bass).  This principle has been echoed in the company law context on a number of occasions, including Re a Company, ex p Glossop [1988] BCLC 570 and Hunter v Senate Support Services Limited [2005] 1 BCLC 175.

150.  Although Mr Sussex urged that this principle should not be imported into the context of the exercise by directors of their fiduciary powers, I have some difficulty in seeing why the fiduciary powers of directors, although admittedly powers that are exercised in different circumstances from the fiduciary powers of, for example, trustees, should be treated in such a different manner because of this.  While I accept that the court should not set itself up as a tribunal to which disgruntled litigants can appeal against the commercial decisions of the board of directors, I do not think that this excludes the possibility that the court can and should, in an appropriate case, inquire into the manner in which the decision was reached. If it can be established that the decision was reached with no consideration at all for a clearly relevant factor, it is not immediately apparent why it should not be subject to challenge.

151.  As for Mr Sussex’s point that Re Smith & Fawcett Limited [1942] Ch 304, in which Lord Greene MR said that the question as to the limits of the directors exercise of a fiduciary power conferred on them by the articles of association was a matter of construction, and would only be subject to limitations imposed by the articles themselves, or as implied by law, it seems to me that the effect of the cases to which I have referred is to identify an implicit limitation arising by virtue of the law.

152.  I do not think that this involves a contravention of the principle that the court should not substitute its own judgment for the business judgment of the directors.  If it is shown that the directors have taken account of the relevant factors, and have not acted for improper purposes, the weight that they choose to assign to the various factors which they properly take into account is a matter for them, and not something with which the court should concern itself.

153.  Further, I am of the view that the consequences of this approach are not as drastic as might at first appear, provided that it is borne in mind that the consequences of a breach of this obligation are not that the exercise of the power is void, but that it is voidable, as I explain below.

154.  If I am right in this approach, the views that I have expressed in paragraph 143 above mean that the directors in this case fell short of their obligations, and their decision in relation to the placement is susceptible to being challenged.

155.  However, this leads on to the third question – what is the effect of the failure by the directors to comply with their fiduciary obligations in exercising the power to issue shares in eSun with which they were entrusted?  In my view, the consequence is that the placement was voidable, and not void.  That this should be the result accords with the views expressed in Hunter v Senate Support Services Limited and Pitt v Holt.  It also appears to me to be right as a matter of principle. Whereas in many cases, the exercise of fiduciary powers may only involve the interests of those who might be regarded as the objects of those powers (as in the case of beneficiaries under a trust), or the persons affected may be limited (as in Hunter v Senate Support Services, where the persons affected by the forfeiture of the recalcitrant shareholder’s shares were the shareholders of the company), there will be other cases (such as the present) in which the interests of third parties will come into play.  In such cases, the question of whether or not the faulty exercise of the fiduciary power should result in its being set aside altogether will be a matter that falls to be decided by the court in the exercise of its discretion, having regard to general equitable principles.

156.  In the present case, I am of the view that the application of such principles means that the decision of the board on 10 December 2008, and the placing agreement entered into in consequence of it, should not be set aside or avoided.  To do so would be to interfere with the rights of the placees under the placement, when there is no basis for thinking that they were aware of any defect in the processes of the company when it decided to enter into the placement.  As I have explained in the context of Passport’s primary case, I do not consider that Mr Chuang or the placees would have had knowledge of any improper purpose on the part of the board (if, contrary to my conclusion, its members were motivated by such a purpose).  Still less is there any reason to think that Mr Chuang or the placees would have known of the way in which the board meeting proceeded, so as to be aware that the directors had failed to give any real consideration to the economic impact of the placement on Sun’s shareholders.

Disposition and further conduct of the proceedings

157.  That being so, it does not seem to me that the placement should be declared unlawful and set aside on this basis either, and Passport’s claims to relief should accordingly be dismissed.

158.  So far as Chung Nam and the placees counterclaims are concerned, these are founded on the cross-undertaking in damages that was given by Passport in order to maintain the ex parte injunction which it obtained.  However, the question of whether or not the cross-undertaking should be enforced is a matter which is to be dealt with in a separate hearing, and I do not propose to go into the evidence and submissions that were made as to certain aspects of this at present.

159.  After the parties have had the opportunity to consider my judgment, they are requested to restore the matter for a further directions hearing in order to enable appropriate directions to be given for the further conduct of the matter, and for questions of costs to be considered.

160.  It remains for me to thank all counsel for their submissions.