LEUNG YUET KEUNG v. HARBOUR FRONT LTD

HCA 241/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 241 OF 2016

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D E C I S I O N

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1.  I have before me an application to determine the following four preliminary issues:

(1) Whether the defendant’s offer to sell its shares in Money Facts Limited to the plaintiff at the unit price of HK$104,324.73 by letter dated 9 March 2015 was in breach of and/or triggered the Shoot-out Provisions and/or the Articles of Association of Money Facts Limited (“MF Articles”).

(2) Whether by virtue of the plaintiff’s letters dated 8 & 22 April 2015 the defendant is obliged to purchase the plaintiff’s shares in Money Facts Limited at the unit price of HK$104,324.73 as stipulated in the defendant’s letter dated 9 March 2015 pursuant to paragraph 2 of the Shoot-out Provisions and/or Article 25(b)(ii) of the MF Articles.

(3) Whether the plaintiff’s letter to the defendant dated 22 April 2015 was a notification of the plaintiff’s offer to sell his shares to the defendant at the unit price of HK$104,324.73 pursuant to paragraph 1 of the Shoot-out Provisions and/or Article 25(a) of the MF Articles.

(4) If the answer to (3) is yes, whether or not by virtue of the defendant’s letter dated 27 April 2015, the plaintiff is obliged to purchase the defendant’s shares in Money Facts Limited at the unit price of HK$104,324.73.

2.  The first two issues are raised by the plaintiff and the latter two issues by the defendant. 

3.  The background to this dispute is complex and has developed over a considerable period of time.  It is set out in the judgment of Kwan J (as she then was) in her judgment on 2 February 2004, in HCCW 880/2001 and HCCW 246/2002.  For present purposes, the relevant facts are as follows.

4.  The ultimate beneficial owner of the defendant is Leung Yat Tung (“YT Leung”), and he is the younger brother of the plaintiff.

5.  The plaintiff and the defendant own equally 50% of Money Facts Limited (“Money Facts”) which in turn owns 65.79% of Fonfair Company Limited (“Fonfair”). The defendant also has a direct interest in FonFair of 32.96%.  The remaining 1.25% is owned directly or indirectly by the plaintiff YK Leung and other Leung family members.

6.  Until 1991 Fonfair had been part of the UDL Group.  At the time of UDL’s IPO it was spun off in order that its sole asset, marine lots at Yau Tong, remained in the Leung family’s hands. 

7.  On 5 June 1990, YK Leung and YT Leung entered into a shareholders agreement and established Money Facts to hold shares in FonFair. The shareholders agreement contains provisions which the parties refer to as shoot-out provisions:

“The shares in [Money Facts Limited] shall be nontransferable to any other person without the consent of the other shareholder.

In the event that one of the shareholders in [Money Facts Limited] decides to sell his share, he shall be allowed to do so only after two years has lapsed from the date of this agreement and the following procedure shall be followed:

the intention of the selling shareholder (Seller) to sell shall be notified to the other shareholder (Buyer) together with the price and terms;

the Buyer within 3 months of receiving such notice may elect to:

1. agree to the price and terms offered by the Seller and buy in his own name or through a nominee, the shares from the Seller; or

2. offer his shares to the Seller at the same price and terms, in which event the Seller shall be obliged to buy those shares at that price and terms; or

3. give his consent for the Seller to sell his shares to a third party.”

8.  The MF Articles were subsequently amended and articles 24 and 25 were introduced to reflect the shoot-out provisions.  In February 1998 YT Leung’s 50% interest in Money Facts was transferred to the defendant company of which he remains the ultimate beneficial owner.  YT Leung subsequently became bankrupt.  On 9 March 2015 the defendant at his directions wrote to the plaintiff a letter, which it is not in dispute, was intended to result in the sale of the defendant’s interest in Fonfair and Money Facts.  As the letter is crucial to the determination of the preliminary issues it is necessary to quote the material part in full:

“… As you are the other shareholder of Money Facts and Fonfair both in your own name and as an ultimate shareholder through Money Facts, Harbour Front therefore offers to sell the Shares to you upon the following main terms (such terms are referred to below as ‘Offer’):

1.	Consideration:	HK$825,000,000
2.	Payment terms:	10% payable upon acceptance of the offer and the balance of 90% payable upon completion
3.	Completion date:	30 days from the date of acceptance of the offer
4.	Stamp duty:	To be borne by you as purchaser
5.	Special terms:
	5.1	Pending full payment by Harbour Front to the Trustee under the terms of the Settlement Agreement, as security to ensure payment to the Trustee, all payments made shall be held by Harbour Front’s solicitors as stakeholder who shall apply the same towards any payments for which Harbour Front is liable to pay the Trustee, pending full payment of which, no amounts shall be released to Harbour Front
	5.2	As the terms of the Settlement Agreement are clear, and you have been in management control of both Fonfair and Money Facts since March 2001, and have the clearest picture of the financial position and standing of these companies, then the sale and purchase of the Shares shall not be conditional upon the carrying out of any due diligence by you, as this would be unnecessary.
As the Offer is for the sale of all the Shares to you as a single block, and the Shares comprise both shares in Fonfair and shares in Money Facts, for the avoidance of doubt, we clarify that the Offer does not constitute an offer made pursuant to the Articles of Association of Money Facts and so the 1990 Shareholders Agreement does not apply to the Offer.”

9.  The plaintiff replied on 8 April 2015:

“Notwithstanding the qualification that ‘the Offer does not constitute an offer made pursuant to the Articles of Association of Money Facts and so the 1990 Shareholders Agreement does not apply to the Offer’, it is clear that the offer together with your ‘advertisement in the Hong Kong Economic Times published on 24 March 2015 inviting expression of interest from parties interested in acquiring the shares’ has brought about a situation whereby the following part of the 1990 Shareholders Agreement is triggered into operation.

Specifically, it is provided in the 1990 Shareholders Agreement that:

‘In the event that one of the shareholders in [Money Facts] decides to sell his share, he shall be allowed to do so only after two years has lapsed from the day of [the shareholders agreement] and the following procedure shall be followed:

the intention of the selling shareholder (Seller) to sell shall be notified to the other shareholder (Buyer) together with the price and terms;

the Buyer within 3 months of receiving such notice may elect to:

1. agree to the price and terms offered by the Seller and buy in his own name or through a nominee, the shares from the Seller;

2. offer his shares to the Seller at the same price and terms, in which event the Seller shall be obliged to buy those shares at that price and terms; or

3. give his consent for the Seller to sell his shares to a third party.’

(underlining added)

As it is, notwithstanding your assertion that the offer by way of your letter dated 9 March 2015, it is amply clear that you as a shareholder and party to the 1990 Shareholders Agreement has decided to sell your shares and accordingly be bound to do all as prescribed above and ‘do such and further things as may be necessary to implement and carry out the intent of this Agreement’ as the 1990 Shareholders Agreement so provides.

Whilst noting for the record your breach of the terms of the 1990 Shareholders Agreement by your letter dated 9 March 2015 and your advertisement on 24 March 2015 and reserving my right to further recourse, I shall look to you for strict compliance of the 1990 Shareholders Agreement and take your offer of 9 March 2015 as an offer in fulfillment of the first step of the three step process and will let you have my decision as to how I may elect in due course.”

The plaintiff wrote a further letter on the 22 April 2015:

“Specifically, as said, looking to you for strict compliance of the 1990 Shareholders Agreement I shall take your offer of 9 March 2015 as an offer in fulfillment of the first step of the three step process pursuant to the Articles of Association of Money Facts in response to which, I have decided to and do hereby offer to sell to you the 3,950 shares I hold in Money Facts at HK$104,324.73 per share, being the average price per share of your offer, for a total consideration of HK$412,082,701.06 on the same terms as those you had offered me by way of your letter dated 9 March 2015.

I shall look to have your confirmation of acceptance of my offer within 14 days.  In the event that I do not receive the said confirmation within the said time, I shall take it as your rejection of my offer in further breach of the 1990 Shareholders Agreement.”

10.  The plaintiff says the letter of 9 March 2015 was a notification of an intention to sell to which the shoot-out provisions applied, and that he was entitled to reject the defendant’s offer to sell its shares in Money Facts at a price calculable in accordance with the letter of 9 March 2015, and instead require the defendant to buy his shares at that price which is what he did.  Conversely the defendant says that the 9 March 2015 letter was not such an offer.

11.  Determination of the preliminary issues does not turn on the interpretation of any contentious provisions in the shareholders agreement or the MF Articles.  It turns exclusively on the interpretation of the letters on 9 March 2015 and 22 April 2015. 

12.  Although I am not here concerned with a dispute about the construction of the terms of an agreement, it is helpful to preface my analysis of the contentious correspondence with the consideration of what was said by Lord Hoffmann in the one authority which both counsel put before me, Jumbo King Ltd v Faithful Properties Ltd & Others (1999) 2 HKCFAR 279, in relation to the construction of a deed of mutual covenant that which in my view apply generally to the construction of a document which it is suggested has a legal effect:

“… The construction of a document is not a game with words. It is an attempt to discover what a reasonable person would have understood the parties to mean. And this involves having regard, not merely to the individual words they have used, but to the agreement as a whole, the factual and legal background against which it was concluded and the practical objects which it was intended to achieve. Quite often this exercise will lead to the conclusion that although there is no reasonable doubt about what the parties meant, they have not expressed themselves very well. Their language may sometimes be careless and they may have said things which, if taken literally, mean something different from what they obviously intended. In ordinary life people often express themselves infelicitously without leaving any doubt about what they meant. Of course in serious utterances such as legal documents, in which people may be supposed to have chosen their words with care, one does not readily accept that they have used the wrong words. If the ordinary meaning of the words makes sense in relation to the rest of the document and the factual background, then the court will give effect to that language, even though the consequences may appear hard for one side or the other.”

13.  The letter of 9 March 2015 makes it clear in the introductory paragraphs that the defendant wished to realise the value of its shares in Money Facts and Fonfair in order that YT Leung could finance the settlement he had reached with the Official Receiver who was his trustee in bankruptcy.  It was known to YK Leung that the defendant had no assets other than his shares in Money Facts and clearly the defendant was not in a position to buy YK Leung’s shares.  This would explain why on page 2 of the letter it says:

“As the Offer is for the sale of all the Shares to you as a single block, and the Shares comprise both shares in Fonfair and shares in Money Facts, for the avoidance of doubt, we clarify that the Offer does not constitute an offer made pursuant to the Articles of Association of Money Facts and so the 1990 Shareholders Agreement does not apply to the Offer”

14.  Although it would have been sensible for the letter, which appears to have been drafted by the defendant’s solicitors, to have been framed as a general enquiry which would not have been capable of being construed as an offer which engaged the shoot-out provisions,  it seems to me that a reasonable person reading it familiar, as YK Leung was, with the background against which it was written, would have understood it as clearly being intended to initiate a sale of the shares by means other than the shoot-out provisions.  If the plaintiff was not prepared to agree to this he could simply reject the proposal leaving the defendant to decide whether to make an offer to sell at a price the plaintiff might find more attractive.

15.  The plaintiff’s case seems to be premised on the assumption that if within the letter one can find a section which read in isolation is capable of constituting an offer in accordance with the shoot-out provisions, that is sufficient to engage the shoot-out provisions and entitle the recipient to reject the offer and require his shares to be bought, even if he knows that (1) this is not what was intended and (2) it is not possible because the other shareholder does not have the means to do so.  In my view this is wrong, and I will determine the 1^st preliminary issue in the negative.

16.  The 2^nd preliminary issue only arises for decision if I decide, as I have, the 1^st issue in the negative.  However it seems to me that the assumption implicit in it, namely that if the offer of 9 March did not trigger the shoot-out provisions the plaintiff’s letters of the 8 April and 22 April did, is as artificial as the argument advanced by the plaintiff in relation to the 1^st issue.  The letters of 8 April and 22 April were written on the assumption that they were replying to an offer made in accordance with the shoot-out provisions.  I cannot see how they can fairly be construed, as Mr Fung argues, as a fresh offer pursuant to the shoot-out provisions in the event that the plaintiff’s interpretation of the 9 March letter turned out to be wrong.  I, therefore, decide the 2^nd preliminary issue also in the negative.

17.  It follows that the 3^rd and 4^th preliminary issues should also be determined in the negative. 

18.  As neither party has been successful I will make a cost order nisi that there be no order as to costs.