CHEN HONGQING v. CHINA SHANSHUI INVESTMENT CO LTD AND OTHERS

HCA 1380/2020

[2021] HKCFI 699

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1380 OF 2020

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J U D G M E N T

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A.   Introduction

1.  The 1^st defendant company (“CSI”) is a Hong Kong company.  It has no ongoing business operations, and is instead a holding company.  The only, or principal, asset held by it is 19.47% of the issued share capital of the listed company China Shanshui Cement Group Ltd (“CSC”).

2.  These proceedings are yet another chapter in the litigation saga spawned by the fight for control of CSC, including through the fight for control of CSI.

3.  The plaintiff (“Chen”) claims to be the beneficial owner of 500,882 shares, namely 50.0882%, of the 1,000,000 issued shares of CSI (each with a par value of HK$0.01).  However, none of those shares are presently registered in Chen’s own name, but are registered in the names of persons who Chen says hold the shares on trust for him.  The trustees are the other defendants to these proceedings, but they have taken no role in them.

4.  On 18 August 2020, I granted an ex parte Order on Chen’s application, restraining CSI from implementing any ordinary resolution (“Resolution”) – that was proposed to be dealt with at an extraordinary general meeting (“EGM”) of its shareholders scheduled for 20 August 2020 – to allot and issue 80,000 shares in CSI to a company, Deyee International Co Ltd (“Deyee”).  On 21 August 2020, I continued the injunction pending the determination of Chen’s continuation summons, and I gave directions for the filing of evidence and the fixing of the substantive argument.

5.  The core evidential material on which the various submissions have been based is to be found in the two affirmations of Chen, and the two affirmations of Hou Jianguo (“Hou”).  Hou is a director of CSI, and the chief accountant and director of Jinan Industrial Development Investment Group Co Ltd (“Jinan Group”), a 3.85% shareholder in CSI.  The second Hou affirmation was provided only the day before the substantive argument, but in the exercise of my discretion I permitted its use at the hearing.

6.  The substantive argument took place on 16 March 2021.  As at the ex parte stage, Chen was represented by Mr Victor Joffe and Mr MC Law.  CSI was represented by Mr John Hui and Mr Lau Ka Kin.

7.  This is my Judgment.

B.   Shape of the Argument

8.  Chen’s submissions, as put forward by Mr Joffe, can be summarised broadly as follows:

(1)  Chen brings the action derivatively, in his capacity as the beneficial owner of 500,882 shares, and so has standing to bring the action.

(2)  The legal principles for the grant of an interlocutory injunction are well established.  Essentially the Court adopts a course that would cause the least irreparable damage to the parties.

(3)  The Board of Directors of CSI (“Board”) exercised the power to put forward the Resolution for an improper purpose, namely to dilute the majority shareholding beneficially owned by Chen.  Therefore, if they were to exercise the power to allot shares pursuant to the Resolution, it would be for the same improper purpose.

(4)  The evidence strongly points to the inference that the proposed allotment cannot be an arm’s length transaction, and suggests that Deyee is not an independent third-party investor.

(5)  Damages would not be an adequate remedy for Chen, as he would lose his ability to procure the passing or blocking of any ordinary resolution, which loss cannot be compensated by a monetary award.

(6)  On the other hand, there is no credible evidence that CSI would suffer any damage from the continuation of the injunction which cannot be compensated by damages.

(7)  The balance of convenience points to preservation of the status quo, as the course likely to cause the least irremediable prejudice to the parties.

9.  CSI’s submissions, as put forward by Mr Hui, can be summarised broadly as follows:

(1)  Because of the effective finality of the injunction sought, Chen faces a higher burden of needing to demonstrate that he will likely succeed at trial on the merits.

(2)  There is no sufficient evidence of any improper purpose on the part of the Board in putting forward the Resolution.  Rather, the purpose is demonstrably appropriate and proper.

(3)  The allegation that Deyee is not an independent third-party and that the proposed allotment cannot be an arm’s length transaction is unsubstantiated.

(4)  The Board had no knowledge of Chen’s alleged majority interest, so it could not have been part of its purpose to defeat or dilute that interest.

(5)  Anyway, the decision as to whether or not to proceed with the proposed allotment rests with the EGM.

(6)  Chen’s allegation of irreparable damage is in any event fraught with serious difficulties.

(7)  Further, any damage suffered by Chen could be quantified in damages.

(8)  The balance of convenience points in favour of refusing the injunction.  If CSI is not allowed to proceed with the allotment, it will lose the chance to obtain crucial financing to alleviate its dire financial situation for good.

10.  There are also some differences between the parties as to the appropriate approach to be taken as a matter of legal principle.

C.   Applicable Principles

C.1    Interlocutory Injunctions

11.  It is well-settled that on an application for an interlocutory injunction the court will consider (1) whether there is a serious issue to be tried, (2) whether damages would be an adequate remedy for the applicant, or whether the respondent would be adequately compensated by an undertaking as to damages for any loss it might sustain, and (3) where the balance of convenience lies.

12.  At the interlocutory stage, the court assesses whether granting or withholding an injunction is more likely to produce a just result in enabling the court to do justice after a full determination of the merits at the trial.  Essentially, the basic principle is that the court should take whichever course seems likely to cause the least irremediable prejudice to one party or the other.

13.  However, where the nature and extent of the interim relief sought is such that the relief would effectively dispose of the claim, the plaintiff will face a higher evidential burden in proving the merits of its case, namely that the plaintiff is at least likely to succeed at trial. Further, if the injunction is likely to cause irremediable prejudice to the defendant, the court may require a high degree of assurance that at the trial it would appear the injunction was rightly granted.

C.2    Locus Standi / Standing

14.  A beneficiary can bring an action in his own name, joining the trustee(s) as the defendant(s).  In such derivative proceedings, the beneficiary stands in place of the trustee(s).

15.  This is a departure from the general situation that companies are entitled and obliged to deal only with those who are registered as having the legal ownership of their shares.  In general, companies are entitled to decline to deal with mere beneficial owners.  But a derivative claim may arise when, for example, it is anticipated that it would be difficult if not impossible to galvanise the trustee into action, particularly if there is an urgency – say, when interim relief is being sought ahead of an EGM: see Eclairs Group Ltd v JKX Oil & Gas plc [2014] Bus LR 835 (CA) at §§33-35; Mutual Life Insurance Company of New York v The Rank Organisation Ltd [1985] BCLC 11 at 13b-e.

16.  In light of part of the argument (see below), it can be noted in passing that in the Eclairs case the relevant beneficial ownership was undisputed, whereas in the Mutual Life case there remained claims to beneficial ownership where title had not yet been fully investigated.

C.3    Improper Purpose

17.  It is established that, in exercising their powers, directors of a company owe fiduciary duties, including the duty not to exercise the powers conferred upon them as directors for any improper purpose.

18.  It is also trite that, whilst directors may take decisions against the wishes of the majority of shareholders, it is unconstitutional for directors to use their fiduciary powers over the shares in the company purely for the purpose of destroying an existing majority, or creating a new majority which did not previously exist: see Howard Smith v Ampol Ltd [1974] AC 821 at 837G.

19.  As was explained in that case, the right to dispose of shares at a given price is essentially an individual right to be exercised on individual decision and on which a majority, in the absence of oppression or similar impropriety, is entitled to prevail.  Directors are of course entitled to offer advice, and (I might emphasise) bound to supply information, relevant to the making of such a decision.  But to use their fiduciary power solely for the purpose of shifting the power to decide to whom and at what price shares are to be sold cannot be related to any purpose for which the power over the share capital was conferred upon them.

20.  In the present circumstances, the burden is on the applicant for injunctive relief to show that the primary or dominant purpose of the Board, in proposing the allotment for the approval of the EGM, was improper.  How to approach that question has been recently summarised by Recorder Manzoni SC in Fountain II Ltd v Ping An Securities Group (Holdings) Ltd [2020] 1 HKLRD 429 at §41.  With references to citations omitted, those principles are:

(1)  It is a well-established principle of company law that the court will generally not second-guess the correctness of bona fide commercial decisions of the board.

(2)  An allegation that a proposed allotment was not bona fide is a very serious one, necessarily impugning the conduct and motives of most of the board.

(3)  Where more than one purpose for the exercise of a power can be identified, a decision can only be set aside where the dominant or primary purpose was improper.

(4)  The applicant’s burden is to be discharged by evidence, not by assertion and speculation.

(5)  The fact that it might be arguable that an inference may be drawn from primary facts does not necessarily dictate that the applicant has established an arguable case (and, a fortiori, is likely to succeed at trial).

21.  At §42, the Recorder also referenced Giant Crystal Ltd v Energy International Investments Holdings Ltd (unreported, HCMP 1903/2015, 31 August 2015) at §52, where Au Yeung J – herself referencing Yuen J in Kwok Shun On v Wong Sai Wing [2001] 3 HKLRD 811 at §73 – stated that once it is shown that a company does need funds, it is a matter for its management and its commercial decision on whether those funds should be raised by way of placement or other methods.  The court should not interfere with bona fide management decisions and substitute its own opinion for that of the management.

22.  These various references emphasise that the focus will almost inevitably be on whether the relevant decision of the board is one made bona fide, or was an abuse of powers.

23.  It should be obvious that where the question is one of abuse of powers, the state of mind of those who acted, and the motive on which they acted, are all-important.  When investigating the question of the directors’ intention, it is necessary to collect from the surrounding circumstances all the materials which genuinely throw light upon that question of the state of mind of the directors, so as to show whether they were honestly acting in discharge of their powers in the interests of the company, or for any other motive.  In considering the relevant materials, the court may have regard not just to documents which have been produced, but also to the absence of documents or a class of documents which might ordinarily have been expected to exist but have not been produced.

24.  Of course, conclusions of improper purpose will rarely be possible on direct factual evidence, but will be reached on the basis of inferences drawn from other facts.  But the approach to drawing inferences must be proper.  In the context of an application for interlocutory injunctive relief, the court must first look at what the direct facts are.  Then the court must determine whether the inferences sought to be drawn are proper inferences which, in the circumstances, should be drawn.  Once that has been done, the court must consider those inferences which it has drawn, and determine whether the applicant has established a good arguable case (or whatever is the appropriate merits threshold to the particular application).

25.  In the assessment process, the court will bear in mind the inherent improbability of allegations of serious misconduct or impropriety, and require commensurately cogent evidence before concluding the allegations are made out.

26.  The starting point will be a consideration of the power whose exercise is in question.  Having ascertained the nature of this power (and the limits within which it may be exercised), it is then necessary for the court to examine the substantial purpose for which it was exercised, and to reach a conclusion whether that purpose was proper or not.

27.  In relation to purely managerial powers, concerned with the planning and conduct of the company’s business, the court will be slow to identify bespoke restrictions, and will afford the greatest respect to the directors’ skill and judgment.  As it has been put, there is no appeal on merits from management decisions to courts of law, and courts do not assume to act as a kind of supervisory board over decisions within the powers of management honestly arrived at.  But where the powers are capable of affecting the company’s constitution at shareholder level, more circumspection is necessary.  For example, even in the Howard Smith case, where it was held that the directors were motivated by their perception that the best interests of the company would be served by an allotment, the power was nonetheless held to be invalidly exercised because it diluted certain shareholders’ holdings and dilution of that kind was an unconstitutional interference with shareholders’ rights outwith the capital-raising purpose for which the power had been conferred.

28.  In the Eclairs case, at §§101-102, it was emphasised that the court needs to look carefully at the purpose for which a fiduciary power is exercised, where its effect may impinge on the constitutional balance of power between groups of shareholders.  When the Eclairs case went to the Supreme Court – [2015] Bus LR 1395 – Lord Sumption emphasised, at §37, the proper purpose rule as being fundamental to the constitutional distinction between the respective domains of the board and the shareholders.  He said the considerations are particularly important when the company is in play between competing groups seeking to control or influence its affairs.  The current case arises in precisely such circumstances.

29.  In Passport Special Opportunities Master Fund LP v eSun Holdings Ltd [2011] 4 HKC 62, at §147, Barma J (as he then was) concluded 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.  At §§148-149, Barma J held that (a) such obligations have been recognised in a number of English authorities, which 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 to act fairly between them, and (b) a clear line of authority 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.

30.  Whilst recognising the point, Mr Hui submitted that the duty to have regard to the interests of shareholders does not extend to a requirement to consult them.  However, I accept Mr Joffe’s submission that Barma J was identifying the broad parameters of the relevant duty, and how the directors must act so as to meet that duty in the particular circumstances of any case will depend upon the particular circumstances of that case.

C.4    Corporate Documentation

31.  In the light of various matters shown up by the evidence in this case, it is appropriate to keep in mind that section 481 of the Companies Ordinance Cap 622 (“Ordinance”) provides that a company must cause to be recorded (a) minutes of all proceedings at meetings of its directors, and (b) all resolutions passed by its directors without a meeting.

32.  Section 481 also requires the company to keep those records for at least 10 years from (a) the date of the meeting, or (b) the date of the passing of the resolution without a meeting.  A contravention of those requirements means that the company, and every responsible person of the company, commits an offence.

C.5    Contents of Notice of General Meeting

33.  Section 576 of the Ordinance relates to the necessary contents of a notice of a general meeting.

34.  The section provides that a company must ensure that a notice of a general meeting of the company (amongst other things) states the general nature of the business to be dealt with at the meeting, and if a resolution is intended to be moved at the meeting (i) includes notice of the resolution, and (ii) includes or is accompanied by a statement containing the information and explanation, if any, that is reasonably necessary to indicate the purpose of the resolution.

35.  This gives statutory force to the point I emphasised earlier, namely that directors, whilst entitled to offer advice, are bound to supply information to decision-makers – here, the shareholders invited to make a decision at the EGM as to a specific proposed resolution – relevant to the making of such a decision.  In that context, I would point out that I do not think the reference to “indicate the purpose of the resolution” is to be read narrowly such as permitting merely, for example, the statement “to raise funds to pay some debts”.  To my mind, indicating the purpose of any resolution would include the proper identification of some detailed purpose, which would in appropriate circumstances also encompass why the particular course proposed is put forward (as opposed to any other courses as might reasonably be in contemplation).

D.    Factual Background

D.1    Chen’s Claimed Shares

36.  The shares to which Chen claims to be beneficially entitled can be considered in three tranches:

(1)  100,488 shares registered in the name of the 2^nd defendant, Zhang Caikui (“Zhang Sr”);

(2)  372,651 shares held by the 3^rd to 5^th defendant’s “(Former Receivers”); and

(3)  27,743 shares held by the personal representatives (“PRs”) of Zhou Yongkui (“Zhou”).

37.  As to the first tranche, Zhang Sr is and was at all material times the registered holder of 361,096 shares in CSI. In various earlier litigation in Hong Kong (“Trust Actions”), 2,631 employees claimed against Zhang Sr the beneficial interest in and/or ownership of 456,325 shares.  In a judgment [2018] HKCFI 195 dated 31 January 2018, given in the Trust Actions, it was held that Zhang Sr held a number of the shares in CSI registered in his name on trust for employees, including the 456,325 shares claimed by the employees.

38.  Chen meanwhile entered into various sale and purchase agreements (a) with each of 455 contributing employees (who were not parties to the Trust Actions) for the acquisition of their respective beneficial interest in and/or title to 50,022 shares, and (b) with a Li Yanmin for the acquisition of his beneficial interest in and/or title to a further 50,466 shares (which shares were also registered in the name of Zhang Sr).  It is the aggregate of those two parcels which comprise the 100,488 shares.

39.  Chen has obtained judgments in Ruzhou proceedings against the 455 employees, confirming his entitlement to the beneficial interest in the ownership of the 50,022 shares.  Chen also has Li Yanmin’s written declaration, confirming the sale of his 50,466 shares to Chen.

40.  In HCA 500/2019, Chen claimed against Zhang Sr, seeking amongst other things an order that Zhang Sr should transfer to him the 100,488 shares.  On 7 September 2020, DHCJ To entered judgment in favour of Chen.  With the benefit of that judgment, Chen has asked CSI to register the 100,488 shares in his name in the register of members of CSI, and has provided the Instrument of Transfer duly signed by Zhang Sr and a copy of the judgment/order.  So far, CSI has failed or refused to register those shares in Chen’s name.  Chen alleges the reasons put forward by CSI are simply pretexts intended to cause delay.  CSI – though Hou’s 2^nd affirmation – says otherwise, explaining the perceived need to investigate and verify with the employees whether the transfers are apt.

41.  There is, however, no adverse claim from Jinan Group in respect of any of the 100,488 shares.

42.  As to the second tranche, the Former Receivers were appointed on an interim basis in the Trust Actions to hold an aggregate of the 456,325 shares.  Those shares were therefore transferred to them. Although the Former Receivers were subsequently discharged, they remain as holders of 383,803 shares.

43.  Of the 383,803 shares registered in the name of the Former Receivers, Chen says he was at all material times and remains the beneficial owner in respect of 372,651 of them.  This is because he purchased (directly or indirectly) the beneficial interests in the shares from 2,264 of the previously mentioned 2,631 employees between 2015 and 2017.

44.  Chen commenced HCA 2648/2017 (“2648 Action”) against the contributing employees for the transfer of the beneficial interest in the 372,651 shares.  The original leave to serve the writ out of the jurisdiction was later discharged by K Yeung J (see, further, below).  A decision on an application for leave to appeal heard in October 2019 remains pending.  Jinan Group has been added as defendant to the 2648 Action, because it makes an adverse claim to beneficial ownership in 264,664 of the shares.  That adverse claim is based upon a series of judgments (“Jinan Judgments”) obtained by Jinan Group from the Tianqiao Court in Jinan, which confirm the validity and effectiveness of the sale and purchase agreements which Jinan says it entered into with various contributing employees to acquire the aggregate of 264,664 shares at the price of RMB3,413 per share.

45.  Chen’s attempt to intervene in the Tianqiao Court proceedings was dismissed by that court as his evidence was incomplete. But Chen asserts that those proceedings were “fake” when there was no issue between the Jinan Group and the relevant employees.  Chen refers in particular to what he describes as the “most suspicious aspect” being that 1,838 employees and their legal representatives (one sole law firm in Shandong) saw fit to allow the employees to face the Tianqiao proceedings without informing that court that proceedings had already been started by Chen in the Ruzhou Court against those employees in respect of the same shares.

46.  In fact, Chen has also obtained judgments (“Ruzhou Judgments”) in Ruzhou City in the Mainland against each of 2,258 of the employees, confirming his entitlement to beneficial interest in and ownership of 368,168 shares (out of the 372,651 shares the subject of the 2648 Action).  In October 2019, Chen therefore commenced HCA 1699/2019 (“1699 Action”) seeking enforcement and recognition of the Ruzhou Judgments.  The Former Receivers have not put forward any positive defence, leaving it to Chen to prove his case and stating that they will abide by any order the court may make.  However, various employees have been added as defendants, as has Jinan Group (by the recent decision of K Yeung J dated 23 February 2021 – see, further, below).

47.  Nevertheless, it is on the basis of the Ruzhou Judgments that Chen asserts entitlement to the beneficial interest in the 372,651 shares claimed in the 1699 Action.  Again, though Jinan Group has asserted an interest as to 264,664 of the shares, it can be noted that there is no adverse claim in respect of the other 103,471 shares.

48.  As to the third tranche, Chen says he purchased 27,743 shares from Zhao under a sale and purchase agreement dated 29 September 2017.  Zhao passed away in March 2019, and the PRs (his widow and daughter) became entitled to his estate, including the shares.  As the PR’s failed to transfer legal title in the 27,743 shares to Chen, he commenced proceedings against them in the Mainland.  On 6 March 2020, judgment was given in his favour by the Pingdingshan Intermediate People’s Court, holding that Chen was at all material times and remains the beneficial owner of those shares.  Whilst the PRs have lodged an appeal from that judgment, the appeal has not yet been determined.

49.  Chen’s solicitors have written to each of Zhang Sr, the Former Receivers and the PRs, asking them to attend the EGM and to vote against the resolution.  The only response received has been from solicitors for the Former Receivers, who say they will take a neutral stance and will not attend in person or by proxy.

D.2    The EGM Notice

50.  Since 26 May 2020, the Board has consisted of (1) Hou (who is, as already stated, the chief accountant of and director of Jinan Group) (2) Liu Xinhai (the legal representative of Shandong Yuteng Cement Group Co Ltd, controlled by Zhang Sr), and (3) Wang Mingbo, a director and deputy manager of Jinan Group.  The Board therefore has a majority of members appointed by Jinan Group, and the wider picture suggests that Zhang Sr may have effectively agreed to pass over the control of the Board to Jinan Group.

51.  The notice (“Notice”) calling the EGM is dated 31 July 2020.  It was sent to, amongst others, the solicitors for the Former Receivers, who forwarded it to, amongst others, the solicitors for Chen under cover of a letter dated 5 August 2020.  The Notice stated that the EGM would be held at a named hotel in Jinan, at 10am on 20 August 2020, to consider, and if thought fit, to pass two ordinary resolutions (as ordinary matters), the first of which (in translation to English) was:

THAT pursuant to section 141 of the Companies Ordinance (Cap. 622 of the Laws of Hong Kong), the board of directors be authorised to issue 80,000 ordinary shares at the consideration of 1,250 RMB per share to Deyee International Co Ltd (CR no. 2756019)

52.  Attached to the Notice were (1) an Assets Valuation Report of the Company dated 9 June 2020 and (2) an Explanatory Statement on the proposed allotment of 80,000 ordinary shares under the first ordinary resolution.

53.  The Assets Valuation Report is headed ‘Intend Valuation by Board of Director of [CSI] 100% Equity Project’ and is dated 9 June 2020.  In it, the purpose of the valuation is described as to assess the market value of the entire interest of the shareholders of CSI as at 31 May 2020, providing a reference for the Board to take into consideration when the Board formulates the values of the new shares allotted.  The asset value and liabilities as at the base date of valuation were adopted from the audited accounts up to 31 December 2015 and the unaudited accounts up to 31 December 2019.  But there was also a statement that, as no confirmed data has been provided on the valuation base date, suitable review of or adjustment to the relevant liabilities may not have been made.  The conclusion was that the net value of each share is RMB1,191.37.  The following table identified the summary of assets valuation:

Current assets	7,766,779.41
Non-current assets	739,398,655.95
Including: long term equity investment	739,398,655.95
Total assets	747,165,435.36
Current liabilities	354,482,252.32
Non-current liabilities	-
Total liabilities	354,482,252.32
Net assets	392,683,183.04

54.  The Explanatory Statement read as follows:

Ordinary Resolution (1)

1.  CSI has been facing various debt claims as well as litigations, e.g.:

(i)  In HCMP 1958/2017, CSI was ordered to pay ACC’s costs, to be taxed if not agreed;

(ii)  EY Receivers have issued a statutory demand to CSI in respect of its unpaid professional fees in the amount of HK$17,206,421.30.  CSI has successfully applied for an injunction restraining the EY Receivers from filing a winding up petition against CSI in HCMP 634/2019.

2.  The majority of the assets of CSI are non-current assets.  CSI does not have sufficient cash flow to repay the debts owed by it and to deal with the litigations faced by it.  By way of letters dated 2 August 2018, 16 August 2018 and 11 June 2019 respectively, CSI has through its solicitors, Messrs Cheung & Yip, made request to its shareholders for funding.  However, no shareholder was willing to provide funding to CSI.

3.  It came to the knowledge of the board of directors that Deyee International Company Limited is willing to inject RMB100,000,000 into CSI for 80,000 ordinary shares.  The board of directors is of the view that the allotment of shares to Deyee International Company Limited is in the best interest of CSI.

4.  According to the Assets Valuation Report, the total equity of CSI was valued at RMB1,191,369,862.51, so the net asset value per share was approximately RMB1,191.37.  After the allotment of 80,000 shares, the total equity of CSI would increase by RMB100,000,000 to approximately RMB1,291,369,862.51, with a corresponding net asset value per share of approximately HKD1,195.71.

55.  As can be seen, there is no reference in the Explanatory Statement as to the amount of the costs ordered in HCMP 1958/2017, whether taxed or agreed, when due, or even if they had already been settled. Other than the reference to the demand by the EY Receivers, there is no identification of any other debts owed by CSI, or what other litigation is faced.

56.  There is no explanation offered as to how Deyee’s willingness to inject RMB100 million “came to the knowledge of” the Board, or why the allotment of shares at that value to that company was thought to be in the best interest of CSI.  There is no explanation as to why the sum of RMB100 million is the appropriate sum to raise, or why 80,000 is therefore the suitable number of new shares to create and allot.  There is no description of what that sum would be used for (unless it is assumed in the most general terms that it would be used to repay debts and deal with litigation).  There is no reference to any other forms of potentially raising funds, whether on an immediate or ongoing basis, and why such methods were not thought to be in the best interest of the company.

57.  There is no explanation as to who or what is, or is behind, Deyee and why it or they might be thought suitable to be brought in as a new shareholder, or how the Board has satisfied itself that Deyee is good for the money (for example, without borrowing against the shares to be allotted).

58.  On the face of it, it can immediately be noted that the limited information provided in the Explanatory Statement does not seem to meet the requirement to supply such information to the shareholders as is reasonably relevant to making a decision at the EGM as to the specific proposed resolution.  I accept that questions might be raised at an EGM which might elicit further information, and possibly even further documents, but that is not an excuse for failing to provide appropriate explanations and appropriate materials together with the Notice putting forward the specific resolution.

59.  The Notice and attachments also make no mention of Article 49 of CSI’s Articles (see below).  Nor do they give any reason, or any explanation, why the protection potentially afforded to members by that Article might be or should be by-passed by allotting 80,000 ordinary shares to Deyee.

D.3    Article 49

60.  Article 5(a) of CSI’s Memorandum and Articles of Association provides, amongst other things, that the unissued shares in the company shall be at the disposal of the directors who may allot, grant options over, or otherwise deal with or dispose of them to such persons, at such time, for such consideration, and generally upon the terms and conditions as they think proper.

61.  However, Article 49 provides as follows:

The general meeting resolving upon the creation of any new shares may direct that the same or any of them shall be offered in the first instance, and either at par or at a premium or (subject to the provisions of the Ordinance) at a discount, to all the holders for the time being of any class of shares in the capital of the Company in proportion to the number of shares of such class held by them respectively, or make any other provisions as to the issue and allotment of the new shares.

62.  I agree with Mr Joffe that Article 49 exists for the protection of CSI’s members, and it is designed to ensure that, when approving new issues of shares, the starting point is that the proportion of the existing members’ shareholdings will not be affected.

63.  Of course, Mr Hui is also correct in pointing out that Article 49 is an empowering provision, and does not mandate that new shares shall be offered to existing shareholders proportionately to their existing shareholding.  Nevertheless, Article 49 seems to me part of the constitutional framework of the agreement between shareholders relating to their proportions of shareholding, and so the starting point of potential allocation upon the creation of any new shares.

64.  For the avoidance of doubt, I do not think Article 49 creates a wide range of possible resolutions which might be passed at an EGM, unless the relevant notice for that EGM has provided the proper basis for considering any such potential resolution.  Hence, on the facts of this case, where the Notice simply proposed the particular resolution to be considered and approved, I do not think Article 49 permitted the EGM to canvas other potential resolutions which might have otherwise been put forward by reference to Article 49.

D.4    Prior Requests for Shareholder Support

65.  The Explanatory Statement attached to the Notice made reference to previous requests to shareholders for funding in three letters, dated 2 August 2018, 16 August 2018 and 11 June 2019 respectively.

66.  The letter dated 2 August 2018 referred to a number of ongoing legal actions that CSI was then involved in, including: (a) CSI’s claim for equitable damages or restitution in respect of dilutions of its shareholding in CSC; (b) action against CSI in respect of the unfair prejudice issue regarding CSC; and (c) statutory demands and winding up petitions presented by creditors, including the latest by Hogan Lovells seeking to recover outstanding legal fees.  The letter asked for shareholders’ continued support to repay its creditors and at the same time to continue prosecuting/defending the legal actions.  It further stated that if no funding is forthcoming, CSI would have no alternative but to discontinue the legal actions or compromise with the respective parties in order to avoid incurring further legal costs.

67.  The letter dated 16 August 2018 referred to the previous letter, and that to date no response had been received from the shareholders.  It emphasised the need for support for CSI to repay its creditors and at the same time to continue prosecuting/defending the legal actions.  It also repeated the statement that without the support to provide funding, CSI would have no alternative but to discontinue the legal actions or compromise with the respective parties in order to avoid incurring further legal costs.  This letter added the statement that the lack of funding might result in judgment being entered against CSI and/or CSI being likely to be forced to realise its assets to satisfy outstanding amounts.  Specific reference was made to: (a) the winding up petition issued by Hogan Lovells; (b) the request by Ernst & Young (“EY”) for settlement of outstanding invoices for services rendered; and (c) HCA 1816/2018, being a claim commenced by Sincere Trading Ltd (“Sincere”) and Prime King International Ltd (“Prime King”) against CSI for outstanding loan repayments.

68.  The 11 June 2019 letter referred to the previous two letters and the fact that CSI was indebted and involved in numerous ongoing legal actions, requiring shareholders’ continued support to repay its creditors and at the same time continue prosecuting/defending/settling those legal actions.  Again, it was stated that if CSI was unable to repay the debts and/or defend itself as a result of a lack of funding, judgment may be entered against CSI and/or CSI is likely to be forced to realise its assets to satisfy outstanding amounts and/or be wound up.  Hence, CSI enquired if any shareholder is “willing to provide funding/loan” to CSI.  Specific reference was made to: (a) the winding up petition by Hogan Lovells; (b) a statutory demand from EY presented on 12 April 2019, and the subsequent injunction application taken up by CSI to restrain EY from presenting a winding up petition based on that demand (HCMP 64/2019); (c) the action by Sincere and Prime King for unpaid loans; (d) a claim by Hwa Guo Wai Godwin for director’s remuneration in the sum of HK$900,000; (e) an unfair prejudice petition against CSI regarding CSC; and (f) legal costs of the various legal actions.

69.  I agree with Mr Joffe that the first two letters (to my mind, essentially dealing with one request in August 2018, albeit repeated in the two letters) identified the likely consequences of any failure in the provision of funding to be either (a) necessary cessation or compromise of existing proceedings, and/or (b) the raising of funds by realising some of CSI’s assets.  Therefore, a reader of the letters might reasonably have assumed that either (a) another reader had offered some funding in response to the request, and/or (b) some or part of the problems had been resolved by cessation or compromise of existing proceedings, and/or (c) funds had been raised by realising some of CSI’s assets.  As to the third letter, though it would have dispelled the previous assumption, the reader might also reasonably have reached similar assumptions that perhaps on this occasion someone provided funding or CSI realised some of its assets, or that litigation had been compromised.

70.  As it happens, that was factually correct, at least to the extent that the Hogan Lovell’s claim was settled, and apparently paid, in August 2019.  As to the demand by EY, the third letter identified that an injunction application had been made to prevent presentation of a winding up petition, and what actually happened was that there was a consent summons on EY’s undertaking that it would not issue any such application without giving prior (seven days’) notice.  I can return later to what happened as regards the claim from Sincere and Prime King, and the other claims/actions.

71.  Of course, it is chronologically obvious that there then followed a gap of almost 14 months after the third letter until the Notice was sent out on 31 July 2020.  In that gap, there is no evidence of any other communication from the Board to shareholders seeking, or even about, funding.  Further, by 31 July 2020, the Board had been fairly recently reconstituted as previously described.

D.5    Prior Court Decisions

72.  As I have previously pointed out, the current proceedings are but one chapter in the litigation saga surrounding the fight for control of CSC.  There are a number of previous chapters which have given rise to court decisions, some elements of which (and some judicial statements/findings within which) might be of relevance for present purposes. During his submissions, Mr Hui laid emphasis on some of them, which can be considered broadly chronologically.

73.  In his decision [2018] HKCFI 1042 dated 7 May 2018 in HCA 1282/2017 and the 2648 Action (together), G Lam J referred to a previous decision [2018] HKCFI 194, where he had expressed serious concerns that vital information had been withheld from the court and that a misleading picture had been presented to the court in previous applications.  In the context of Chen’s first attempt to rely on his alleged interest in shares held by employees, G Lam J also referred to the evidence including banking documents showing that a significant proportion of the price paid to the employees came from Tianrui (another competitor for control), and not from Chen.  At §17, G Lam J stated that Chen had not addressed any of these concerns, but had simply parroted that the money had been paid by him and he was independent from Tianrui, whereas Chen “cannot expect this court to suspend its critical faculty and simply to believe anything that has been penned for him to sign”.

74.  In his Reasons for Decision [2018] HKCFI 1169 dated 31 May 2018, G Lam J dealt with the circumstances in which Chen claimed to enforce a share pledge by arbitration.  At §13, he referred to being satisfied that there had been a misleading case presented to the original judge as well as material changes in circumstances, justifying the immediate discharge of receivers.  He then, at §§14-16, described Chen’s initial case based on a secured loan, which later changed to confirmation that Chen had already paid 70% and had obtained beneficial interest in the shares.  G Lam J described part of Chen’s evidence as “disingenuous”, and went on at §§19-22 to disagree with the suggestion on behalf of Chen that the substance of his case had not changed.  Rather, G Lam J thought the differences were drastic and were substantively material in at least two respects.  The second point referred specifically to whether Chen was a front-man for Tianrui, bringing into sharp focus whether or not the whole transaction was an attempt by Tianrui to circumvent any obligation to make a mandatory general offer under the Takeover Code.

75.  In his Decision [2019] HKCFI 2121 dated 30 August 2019 given in the 2648 Action, K Yeung J usefully set out some relevant procedural history at §§7-19.  Having identified, at §20, Chen’s case as presented in the ex parte application for service out, K Yeung J contrasted that with various other steps taken and, at §42, the contrary stance taken and submissions made by the employees.  K Yeung J dealt with whether Chen had shown a good arguable case starting at §75.  He reviewed, at §§85-89, the various cases run by Chen in different proceedings and, at §§90-97, gave consideration to the evidence.  He rejected, at §§105-107, the attempt by Chen to blame his former legal team for the inconsistent cases which he had run, describing some of Chen’s evidence as “clearly misleading”.  At §110, he concluded that Chen had failed to establish a good arguable case on his claim (being the claim to beneficial ownership of the roughly 38% held by the Former Receivers – the second tranche above).

76.  In another Decision [2019] HKCFI 2122 also dated 30 August 2019, at §20, K Yeung J went on to hold that Chen’s case was so contradictory that there was not even a serious issue to be tried.  The criticism of Chen’s evidence might be described as trenchant.  (It is Mr Hui’s submission that, faced with the judicial finding that Chen’s claim in the 2648 Action cannot even satisfy the serious issue to be tried test, Chen is now nevertheless using the same factual basis to assert entitlement to the shares in this application.)

77.  In his Decision [2019] HKCFI 2720 dated 31 October 2019 in the 1699 Action, K Yeung J expressed the provisional view that the stance taken by Chen was “extraordinary, verging on being an abuse”. Amongst other things, K Yeung J was affronted by the fact that the Ruzhou Judgments had mainly been available to Chen by December 2018, but throughout and until shortly before the Decision, Chen maintained that Hong Kong was clearly and distinctly the appropriate forum for the trial, and that the legal proceedings instituted in the Mainland were defensive measures only, but that having lost the jurisdictional challenge (whilst nevertheless appealing from it) he was taking “a different turn”.

78.  In his recent Decision [2021] HKCFI 440 dated 23 February 2021 in the 1699 Action, K Yeung J permitted the joinder of Jinan Group to that action.  In doing so, he rejected, at §33, Chen’s then Counsel’s characterisation of the 1699 Action as simply an enforcement action on the Ruzhou Judgments, as what Chen ultimately seeks is to get hold of the subject shares.

79.  I note that, in a supplemental skeleton argument fled for the ex parte application, Mr Joffe sought to defuse or dilute some of the judicial criticism of Chen, and I have borne that in mind.

D.6    Sincere and Prime King

80.  On 28 September 2016, Harris J heard an application to strike out the petition to wind up CSI issued on 22 December 2015 by Sincere and Prime King.  Harris J recorded in his judgment of the same date that CSI argued that the advances were not repayable, because they were intended to be injections of capital into CSI, which was to finance the retirement of various loans that it had taken out with banks to finance its subscription in the shares of CSC at the time it was listed, and that the loan agreements that record the advances claimed by Sincere and Prime King were shams.

81.  Harris J struck out the petition as he was satisfied that CSI (and the opposing contributors) had demonstrated a bona fide defence on substantial grounds.

82.  In CSI’s audited financial statements for the year ended 31 December 2014, Harris J’s decision striking out the petition was referenced in Note (3).  It was stated that CSI had reassessed the substance of the four advances and concluded that the advances were of capital in nature, as the settlement is neither planned nor likely to occur in the foreseeable future.  The advances were reclassified to being non-current liabilities.

83.  In CSI’s audited financial statements for the year ended 31 December 2015, Note (13) noted that included within ‘amounts due to related parties’ were the advances from Sincere and Prime King.  Those amounts were described as non-interest-bearing, unsecured and settlement of which are neither planned nor likely to occur in the foreseeable future.

84.  Therefore, it has been CSI’s consistent stance that the advances from Sincere and Prime King were not genuine borrowings, but merely advances of capital nature, the settlement or repayment of which was not anticipated as likely to occur in the foreseeable future.  Though no audited accounts for 2016 and 2017 have been disclosed, there are some unaudited accounting documents for the periods.  But no evidence has been produced by CSI as to why the previous position as to those advances might have changed (though the unaudited 2019 figures which were used as part of the asset valuation attached to the Notice appear to have included the advances as part of ‘other accounts receivable’ within current liabilities).

85.  In passing, it can be pointed out that the unaudited accounts of CSI for the year ended 31 December 2019 show current assets of about RMB7.8 million, as against current liabilities of about RMB354.5 million, leaving net current liabilities of about RMB350 million.  Of course, the accounts also show that CSI held long-term equity investments of about RMB739.4 million, so that it had net assets of around RMB392.7 million.

86.  There is no evidence that the 2018 action commenced by Sincere and Prime King has made any great progress toward any resolution.

D.7    Deyee

87.  Deyee is a company incorporated in Hong Kong on 18 October 2018.  The annual return for Deyee dated 18 October 2019 shows it has an issued share capital of US$50,000, with its sole shareholder being a company incorporated in the British Virgin Islands, called Deyi Investment Ltd (about which nothing is known).  It has two named directors, Wang Haicheng and Jiang Guantao (who are shown as having their ‘residential address’ in the same building in Shandong).

88.  In his evidence, Hou asserts that Deyee is an independent third-party unrelated to CSC or CSI, with which it is dealing at arm’s length.  Hou says that Jinan Group has neither interest in, nor control over Deyee.

89.  Hou also says that although Deyee has been established for a short period of time, it has sufficient funds and has said that it can have RMB100 million ready shortly to subscribe for CSI’s additional shares.  But, because of confidentiality, Deyee has only agreed for the Board to disclose limited financial information over Deyee’s business and operations.  Hou says that Deyee and its related companies carry on the business of import and export of hardware products and equipment, and it has developed rapidly since its establishment.  In 2019, it achieved an operating income of RMB280 million and profit of RMB14.45 million.  Deyee and its related companies are said to be cash-rich and looking for investment opportunities.

90.  No other information about Deyee, its “related companies”, its financial position or its directors and shareholders has been made available.  No documents have been provided.

E.    Locus

91.  On the areas of dispute, it is convenient first to deal with the question whether Chen has the appropriate standing to be able to bring these proceedings, and to seek the interim injunction relief.

92.  I am satisfied that he has.  First, it is not realistic to think that any of Zhang Sr, the Former Receivers or the PRs will take any action in relation to the EGM.  Secondly, there is a significant proportion of the shares to which Chen lays a claim to beneficial ownership, where there is no adverse claim (at least by Jinan Group).  Even ignoring the third tranche, the relevant number of shares appears to be 100,488 and 103,471 (together 203,959, namely over 20% of the CAS shares).

93.  In the circumstances, it does not seem to me that I need to resolve the dispute on Chen’s allegations that CSI’s failure or refusal to register the transfer of 100,488 shares from Zhang Sr to Chen was a deliberate delaying tactic.  But I see some force in Chen’s point that since the transfer of those shares was made to him pursuant to a court judgment, there is no reason for CSI not to give effect to it, and it is beyond CSI’s remit to investigate third-party claims to its shares.

F.    Applicable Merits Threshold

94.  Mr Hui submits that the higher merits threshold is engaged in relation to the current application.  This is, he says, because if the injunction is granted the proposed allotment would be effectively ‘killed’.  The dispute in the present case cannot be resolved quickly, without a full-blown trial.  Indeed, there are disputes between Chen, the employees and the Jinan Group as to title/ownership of the disputed CSI shares.  Therefore, resolution of these matters is likely a few years away. But, in the meantime the proposed allotment to Deyee is most likely to fall through.  In effect, Mr Hui says, if the injunction is granted, there is no point for CSI to continue to contest the action at trial, as the action would have been effectively finally disposed of by the grant of the injunction.

95.  Mr Joffe submits that analysis is in error.  First, the injunction sought does not seek to prevent the vote itself, but rather to prevent the implementation of the one specific resolution put forward for consideration, if passed (but no other resolution as might be passed).  Further, he says that it is only necessary to restrain the proposed allotment pending determination of the action, and there is little evidence to suggest that the proposed allotment could not be postponed.  Indeed, it was postponed already (as Hou has revealed that the EGM was postponed), and there is no actual evidence from Deyee that it would not wait.  This ties in to a point to which it may be necessary to return below, but Mr Joffe asks rhetorically why Deyee would not be prepared to wait to take up shares which are clearly in significant demand from elsewhere, if it has been prepared to wait for the last eight months or so.

96.  I am of the view that the higher threshold is not engaged in the particular circumstances of this case.  Nevertheless, when looking at the key complaint that the directors have acted for improper purposes, I will consider whether Chen has shown merely a serious issue to be tried or something better than that on the higher merits threshold test.

G.    Improper Purpose

97.  A question arose during argument as to where the burden lies as regards proof of the existence or absence of an improper purpose.

98.  The question arises because Mr Hui emphasises that Chen’s case, both at the ex parte stage and the inter partes stage, is that the directors of CSI acted with a specific improper purpose, namely with the motive of diluting Chen’s alleged majority beneficial shareholding in CSI.  So, says Mr Hui, if Chen fails to prove (to the relevant standard) that the directors acted with that purpose, Chen would fail to prove the purpose was improper.

99.  On the other hand, Mr Joffe points to the purpose put forward by the directors of CSI.  It is CSI’s case that the purpose of putting forward the proposed allocation of the 80,000 new shares to Deyee was to meet the genuine need for funds.  So, says Mr Joffe, if CSI fails to satisfy the court that that was the purpose, no proper purpose will have been demonstrated, leaving an improper purpose.

100.  I do not think this potential debate warrants lengthy further consideration.  It falls to Chen to demonstrate to the sufficient merits threshold that the Board of CSI acted for an improper purpose.  When considering whether Chen has demonstrated that, it is of course relevant to consider what the Board says was the particular purpose (which it identifies as a proper purpose).  If the evidence demonstrates that particular purpose as being unlikely true, that must be a relevant factor to take into account in considering whether Chen has demonstrated (to the necessary standard) an improper purpose.  No other proper purpose is put forward on behalf of the Board.

101.  I take into account that part of the financial problems facing CSI result from the fact that its only source of income, namely dividends from the CSC shares, have been suspended since 2015.  Further, of the current assets of about RMB7.8 million, the evidence suggests that a relatively small part of that is in readily available cash held in bank account deposits.  I also take account of the fact that some resort has been had to borrowing for relatively small amounts.

102.  Further, I acknowledge that ordinarily the decision as to how to raise funds for a company which requires funds is a management and commercial decision for the Board to make in its commercial judgment.  It can even be said that a decision to allot shares to a third party, which results in dilution of the shareholdings of existing shareholders is an approach which is fair, because it impacts all shareholders.  On the other hand, the particular impact of any particular shareholder may be substantially different.

103.  But, I think Mr Joffe is correct when he submits that it is clear that there is fierce competition for CSI shares.  That seems to me to be the correct starting assumption.  Hence, the practical reality is that if a rights issue had been put forward, the existing members (who are engaged in a fight for influence or control) would have had every incentive to subscribe.  I agree that it defies common sense not to canvass the existing shareholders about the means of raising funds before simply allocating newly created shares to a third party.

104.  An answer for CSI is not to be found in the three letters requesting shareholder support in 2018 and 2019.  As indicated, those letters identified the likely consequences of failure of shareholder support at that time as being (a) the need to compromise or settle or abandon legal claims, and/or (b) the need to raise funds by selling assets.  There was also a significant gap between the letter in early June 2019 and the EGM Notice at the end of July 2020.  There was also the significant change in the Board in that intervening period.

105.  Further, if there were thought to have been some material worsening of the financial position of CSI – in circumstances where the shareholders had been provided with rather limited accounting materials since the audited accounts for the period ended 31 December 2015 – it might have been expected that would have been specifically pointed out to shareholders, and the higher risk of adverse consequences absent shareholder support would have been made clear.  That was not done. That seems to me to answer Mr Hui’s rhetorical question, ‘What is the point of asking again?’. If things had changed, that was a good reason to ask again.  If they were not asked again, perhaps that is because things had not really changed.

106.  I have also already pointed out the lack of material information as might have been found in the Notice of the Explanatory Statement.  There was no mention of the amount of costs said to be owed to ACC, why they were payable, whether they were subject to taxation, and when they might be payable.  Though not clear from the Explanatory Statement, an injunction/undertaking had been obtained relating to the EY demand, and no material identified any change in position since that was obtained on the basis of an affidavit made by Liu Xinhai in April 2019 (when he remains a director).  Nor was there any identification of any change affecting the position of Sincere or Prime King since their petition was struck out in September 2016 (almost 4 years before the Notice) and writ in 2018. No explanation can be seen as to why the particular figure of RMB100 million needed to be raised, at that time or shortly thereafter.  No clear explanation was offered as to how that sum might be deployed.  All this at a time when CSI had in excess of RMB392 million of net assets, the primary asset being a holding of relatively ‘liquid’ listed shares (which might have been sold on the market, or by way of private placement, for example).

107.  As to the raising of funds, I accept the general proposition – for example, as espoused in the Giant Crystal case at §50 – that in real life it can be unrealistic to expect the company to try and seek funding only on the eve of actually needing that funding – it is difficult to apply that proposition to the specific facts of this case, when no justification has been specifically put forward with the benefit of any contemporaneous documentary evidence.

108.  I also accept the force in Mr Joffe’s point that it is unlikely that the Board, the majority of which (perhaps the only active members of which) were appointed by and who are officers/employees of Jinan Group, would not have thought that, of the possible means of raising funds, the one put forward would have the effect of diluting Jinan Group’s shareholding in CSI at a time when they have been fighting for shares. Further, though there is not an issue that the proposed allotment price was an undervalue, there is also force in Mr Joffe’s submission that there appears little commercial sense that in August 2020 Jinan Group would have caused CSI to allot – or permitted its nominated directors to cause CSI to allot – 80,000 new shares to Deyee at a price significantly lower than Jinan Group says it previously paid for shares, and when it was still fighting for shares.

109.  For the avoidance of doubt, Article 49 cannot assist the Board either.  Whilst that Article identifies a relevant power, it does not grant free-wheeling power to the members in general meeting to come up with possible resolutions not previously canvassed in or put forward by appropriate notices in advance of the meeting.

110.  Most telling is the complete absence of any documentary evidence whatsoever as to what the Board did or decided in the period between 25 May 2020 and 31 July 2020 (the date of the Notice).  There is not even a minute of the Board meeting at which it might have been decided to call the EGM, and to identify and approve the recommendations or explanations to be put forward in the Explanatory Statement sent with the Notice (scant information though there was).

111.  There are no materials at all about how the proposed arrangement with Deyee came about, such as who approached whom (and the genesis of the proposed relationship is not even canvassed in Hou’s affirmation evidence).  There is no document identifying the Board’s consideration of Deyee, why it chose Deyee, why it believed Deyee was good for the money, why it priced the shares as it did (except just by reference to the report), or why the proposed allotment to Deyee is thought to be in the best interests of CSI.

112.  The absence of any such documentation cannot be swept aside by Mr Hui’s submission that the document trail may be imperfect, but that is beside the point.  The weakness of that submission is particularly so against the requirements of section 481 of the Ordinance.  Indeed, the complete absence of contemporaneous documentary support points less towards an imperfect documenting of events, and rather more towards the inference that the events simply did not take place.  In other words, the inference is that the Board did not consider other options for raising funds, such as a rights issue.

113.  The various claims made by Hou in his affirmation that other forms of raising funds were considered, but thought inapt, are bare allegations with little or no persuasive force.

114.  Instead, there is what seems strongly to be an attempted ‘after the event’ rationalisation put forward in Hou’s affirmation. With respect, the affirmation reads like someone has trawled through every possible debt of, or claim as has been made against, CSI over the last several years, in an attempt to conjure up a sufficiently persuasive argument that these matters justified the proposed allocation to Deyee.  Certainly, the evidence and submissions referred to numerous matters which did not even appear in the Explanatory Statement, and some of which appear chronologically irrelevant.

115.  Reliance on the Hogan Lovells claim which had been settled in mid-2019, when the petition was formally withdrawn, lends no support to a claim for funding in mid-2020.  The attempt to rely on that claim notwithstanding is rather telling.  Further, if it was genuinely the Board’s position that, though it thinks it is not liable to EY, still it would be naive to ignore any risk of it being held liable to EY, one would expect to have seen that identified and analysed.  There is no evidence that the Board genuinely considered any risks, probabilities, likelihoods or even possibilities in any particular amount or against any particular chronology.

116.  There is also at least significant doubt that Deyee is a truly independent third party.  The overall circumstances create that doubt, including the questionable commercial incentive for a truly independent third party to acquire only a 7% minority shareholding in CSI (after the increase in capital) when there are substantial potential adverse consequences from the raft of litigation relating to CSC and the various holdings in it, and the fact that CSI’s income stream in the form of CSC dividends had been interrupted since 2015.  But there is also the complete absence of relevant evidence of the proposed dealings with Deyee (see above).  Again, the absence of material is not to be swept aside by the submission that a lack of proper documentation leaves much to be desired.  It is the lack of any real documentation which properly founds the suspicion and the apt drawing of inference, against the other circumstances, that Deyee is not a truly independent third party dealing at arm’s length.  For the avoidance of doubt, it seems to me that there is a difference between the commercial incentive for Chen or Jinan Group to acquire CSI shares, and any commercial incentive for a truly independent third-party now to come into the picture by acquisition of such shares.

117.  I have taken into account the point made on behalf of the Board that it did not even know that Chen claimed to have a majority beneficial ownership interest in CSI, so it could not have intended to defeat that majority interest when putting forward the proposed allocation. However, I think that is somewhat far-fetched against the overall evidence.  It is also clear that at least Jinan Group was aware of Chen’s claims against the Zhang Sr 100,488 shares, and Jinan Group must know that it and Chen are (on Jinan Group’s intervention) adverse parties to the 368,168 shares the subject of the 1699 Action, where Chen says his claim is supported by the Ruzhou Judgements.  I have also taken into account the various judicial comments made about Chen’s claims to beneficial ownership of various tranches of shares, but the very fact that CSI now points to those comments identifies CSI’s prior knowledge of the various claims to ownership being made by Chen.  Even if there are some mathematical ‘wrinkles’, which depending on how they are ironed out may mean that Chen is ultimately held not to be the beneficial owner of as much as 50.088%, for present purposes those wrinkles do not seem to me to be of any great weight.

118.  But, in the meantime, the various judgments obtained by Chen at least demonstrate a strong case for present purposes as to his beneficial entitlement in the shares to which he lays claim.

119.  In conclusion, even applying the higher merits threshold test, I would be satisfied that Chen has demonstrated that the proposed allotment was put forward for an improper purpose.

H.    Damages as an Adequate Remedy

120.  Mr Hui submits that Chen’s case on irreparable harm is premised on the notion that he is the beneficial owner of 50.088% of the issued share capital of CSI, so that if the proposed allotment were passed he would lose the ability to control CSI through the passing of ordinary resolutions.  But, on analysis, Chen has no ability to control CSI at present, either as a matter of fact or in law (and it remains at least doubtful that he would ever become so entitled, where his claim to beneficial ownership is wholly contingent in the face of the various disputes).  Mr Hui also refers to, and I take account of, the fact that Chen has not made relevant disclosure under the SFO (see above).

121.  Mr Hui also submits that in any event loss and damage suffered from a dilution of shareholding is quantifiable by damages, calculated with respect to the share price and percentage diluted.  If Chen is genuinely concerned about the diluting effect of the proposed allotment (allegedly from 50.088% to 46.38%), he would only need to purchase around 3.62% of the shares of CSI in order to retain the potential voting majority.  The cost of those shares can clearly be quantifiable in damages.

122.  I disagree.  It seems to me that loss of the potential majority or control ownership does not simply turn on the price of the percentage difference.  This is particularly the case in circumstances such as the present, where there is significant competition for shares in any event, not just relating to matters of control but matters of influence.  Further, steps may be taken during any interim period which would be extremely difficult to unravel and for which damages might be extremely difficult to quantify or calculate.

123.  On the other hand, if the injunction is continued CSI will not likely suffer any damage that cannot be compensated by financial compensation.  In the absence of any real evidence of a particular or urgent need for any specific amount of funds, reaching a different conclusion seems at least difficult.  Chan has offered the usual cross undertaking as to damages, identifying that the 203,959 shares which are not subject to any dispute would be worth over RMB250 million at the proposed allotment price per share.

I.    Balance of Convenience

124.  I agree that the balance of convenience points in favour of the continuation of the injunction, so as to preserve the status quo.

125.  I do not think it is a point properly in favour of the refusal of the injunction to say that if it turns out that the proposed allotment should be held invalid in the end, the court could set it aside provided that Deyee is not a bona fide purchaser for value without notice.

126.  Nor do I think the possibility that the interim injunction would prevent obtaining financing from Deyee (about which possibility there was really no evidence, even if it is thought that the greater the delay the more likely a proposed deal would collapse) points in favour of refusing the injunction.  Nor does the injunction have the effect of preventing the members from voting in general meeting (though it would have the effect of preventing implementation of the vote, if the proposed resolution is passed).

127.  Overall, in circumstances where there is the underlying fight for control of (or at least influence over) CSI and CSC, and where the financial position and claims do not seem to have been significantly changed for some period of time, it seems to me that preservation of the status quo is appropriate.

128.  To put it another way, I think that the risk of irreparable harm as might be caused by the grant of the injunction (should it turn out that it ought to have been refused) is less than the risk of irreparable harm as might be caused by the refusal of the injunction (should it turn out that it ought to have been granted).

J.    Result

129.  In the circumstances, and in the overall exercise of my discretion, I order the continuation of the interlocutory injunction.  That is the course of action which seems to me to represent the lower risk of injustice.

K.    Costs

130.  I have not yet heard any argument as to costs. Further, how to deal with the costs of an argument relating to an interlocutory injunction are not always entirely straightforward, and may depend very much on the particular circumstances.

131.  In these circumstances, I reserve the question of costs to be dealt with on paper submissions.

132.  As the successful party on the application, Chen will provide his submissions on costs within 14 days.  If Chen seeks any form of summary assessment, he must also provide a Statement of Costs for Summary Assessment within the same period.  Thereafter, CSI must provide its submissions on costs within 14 days, together with any Statement of Objections to any claim for summary assessment.  Chen will then have 7 days for any reply.  The first round of submissions will be limited to 15 pages for each party.  Any reply submissions from Chen will be limited to 5 pages. I will then deal with the question of costs, and if appropriate any summary assessment, on the papers.