PENG HUI ZHOU v. HONG KONG TACHIBANA ELECTRONICS CO LTD AND OTHERS

HCMP 1080/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1080 OF 2008

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BETWEEN

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J U D G M E N T

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Introduction

1.  This was the trial of a petition presented by Mr Peng Hui Zhou (“Mr Peng”) on 6 June 2008, pursuant to section 168A of the Companies Ordinanace (Cap. 32), in respect of Hong Kong Tachibana Electronics Co., Ltd (“the Company”).  Mr Peng seeks an order that his shares in the Company be purchased by the 2^nd and 3^rd Respondents, Mr Koji Matsumoto and Mr Kenji Hasuo (“Mr Hasuo”), who are the other shareholders in the Company.

2.  As at the date of the petition, the Company’s authorised and issued capital was 100,000,000 Japanese Yen (“JPY”), divided into 2 million shares of JPY 50 each.  Mr Peng and Mr Hasuo each held 960 shares, while Mr Koji Matsumoto held the remaining 1,998,080 shares.  Until a few months before the presentation of the petition, the number of issued shares had been much smaller, with only 4,160 shares having been issued – 960 to each of Mr Peng and Mr Hasuo, and 2,240 to Mr Koji Matsumoto.  In seeking to be bought out, Mr Peng asks for his shareholding to be valued on the basis of the relative shareholdings at this earlier stage, ignoring the issue to Mr Koji Matsumoto of 1,995,840 shares at par on or shortly after 19 February 2008 (this being one of the aspects of the unfairly prejudicial conduct relied upon by Mr Peng in support of his petition).

Background

3.  The background to these proceedings can be briefly stated.  The Company is related to a Japanese company called Tachibana Electric Co. Ltd (“Japan Tachibana”).  The nature of the relationship is as follows.  Japan Tachibana is (and has been for many years) engaged in the manufacture and sale of electrical and electronics parts and products for use in various electrical appliances.  Japan Tachibana is run by members of the Nishino and Matsumoto families.  The two families are in fact related – it seems that the reason for the difference in family names stems from the fact that some of the family members were adopted, and took on the surname of their adoptive family.  At present, the chairman of Japan Tachibana is Mr Mutsuo Matsumoto.  Mr Koji Matsumoto is his son.  Prior to Mr Mutsuo Matsumoto becoming chairman of Japan Tachibana, the chairman of that company was Mr Shiro Nishino (who, although having the family name Nishino, was the brother of Mr Mutsuo Matsumoto).

4.  From at least some time in the 1990s, Japan Tachibana sourced its products in China, more particularly in Guangzhou. Towards the late 1990s or early 2000s, Japan Tachibana decided to set up its own manufacturing facilities in southern China.  To do so, it caused Guangzhou Tachibana Electronics Co., Ltd (“Guangzhou Tachibana”) to be incorporated in China as a wholly foreign owned enterprise.  The Company was incorporated in Hong Kong principally to hold the shares of Guangzhou Tachibana, and it was until 18 November 2005 the sole shareholder in Guangzhou Tachibana (thereafter, 1% of the shares in Guangzhou Tachibana were transferred to one of the Company’s major customers).

5.  At its incorporation on 4 July 2001, the subscribing shareholders of the Company were Mr Toshiro Nishino and Mr Toshiyuki Nishino, who were respectively the son and grandson of Japan Tachibana’s former chairman, Mr Shiro Nishino.  Not long after its incorporation, the Company’s authorised and issued share capital stood at JPY 160,000, divided into 3,200 shares of JPY 50 each.  Of these, 2,240 shares were held by Mr Koji Matsumoto (to whom Mr Toshiro Nishino had transferred his shareholding), while 960 were held by Mr Toshiyuki Nishino.  Mr Koji Matsumoto and Mr Toshiyuki Nishino were also the only directors of the Company at this stage.

6.  It was common ground that in the late 1990s, Japan Tachibana’s business with its suppliers in Guangzhou was largely conducted by Mr Mutsuo Matsumoto and Mr Koji Matsumoto, and to a lesser extent by Mr Toshiyuki Nishino, although it was the two latter persons who spent most time in China.  It was also common ground that at about that time, the two Mr Matsumotos became acquainted with Mr Peng.  Mr Peng was then working for one of Japan Tachibana’s main suppliers in Guangzhou, a company called Kyokuto Sakata Electronics Company Ltd.  Mr Peng had studied Japanese as part of his university education, and had become fluent in the language.  It is not surprising that the Matsumotos, who did not speak any Chinese, found it helpful to deal with him.

7.  Mr Peng says that when Japan Tachibana decided to set up its own manufacturing plant in Guangzhou, Mr Mutsuo Matsumoto approached him to ask him to join the new company being set up in China.  He says that following negotiations, he agreed to leave Kyokuto Sakata, and take up employment with Guangzhou Tachibana.  Mr Koji Matsumoto challenged this version of events, suggesting that he and his father had in fact intended to employ someone else (a Mr Zhan, who had been introduced to them by Mr Peng), but that they eventually agreed to employ Mr Peng (who had approached them for the position) when it became apparent that Mr Zhan would not be able to take up full time employment with them.  At the end of the day, I do not think a great deal turns on this particular point.

8.  In the result, Mr Peng was employed by Guangzhou Tachibana in January 2002 as a vice general manager, with duties which included overseeing the acquisition of its premises and factory, oversight of the sales division of Guangzhou Tachibana, sourcing of raw materials, handling the processing of customs documentation, and dealing with production and human resources.  There was a dispute as to whether or not his duties included responsibility for sales, to which I shall return later.  Mr Peng was also appointed a director of Guangzhou Tachibana.  Mr Peng says that his salary upon appointment was some RMB 12,000, plus a further allowance of JPY 50,000, then equivalent to about RMB 3,000.

9.  Mr Koji Matsumoto accepted that Mr Peng was involved in the setting up of Guangzhou Tachibana, both in relation to its incorporation, and in relation to its acquiring and fitting out factory premises in Guangzhou.  Although Mr Koji Matsumoto sought to play down the contribution of Mr Peng, I would accept Mr Peng’s evidence that he was in fact quite closely involved with these matters, and did a substantial amount of work in relation to them.

10.  In the financial year ending on 31 December 2002, the Company recorded a modest profit of JPY 1,095,797 on turnover of JPY 375,833,851.  In the following financial year, the Company recorded increased profit of JPY 43,204,505 on turnover of JPY 867,389,321, with net assets of JPY 44,484,698.

11.  On 26 February 2004 the authorised and issued share capital of the Company was increased from JPY 160,000 to JPY 208,000, by the creation and issue of a further 960 shares of JPY 50 each.  These new shares were issued to Mr Peng, who paid JPY 48,000 for them and was appointed as a director of the Company at the same time.  The reason for the issue of shares to Mr Peng lies at the heart of these proceedings.

12.  Mr Peng says that by around the end of 2002, he was approached by Mr Mutsuo Matsumoto and later also by Mr Koji Matsumoto, who told him that they were concerned that the Company and Guangzhou Tachibana were not operating profitably, and that they were anxious to generate sales to customers other than Japan Tachibana, sales to whom did not give rise to substantial profits, as the margins on such sales were low.  He says that they asked him to take on the additional responsibility of dealing with actual sales, by trying to locate and cultivate additional (and more profitable) customers for the products manufactured by Guangzhou Tachibana.  Mr Peng says that he was promised an interest in the business, through the provision to him of a shareholding in the Company, and his appointment as a director of the Company.  The allotment of shares to him in February 2004 was, said Mr Peng, the fulfilment of that promise.  According to Mr Peng, he was told that he would benefit from the hoped for increased profitability of the business through the distribution of dividends by the Company.  However, Mr Peng accepted in cross-examination that he could be dismissed as an employee of Guangzhou Tachibana and removed as a director of the Company for cause.

13.  On the other hand, Mr Koji Matsumoto denies that any such offer had been made, or that such an agreement was reached.  He says that Mr Peng was made a shareholder and director of the Company simply as a form of recognition of his status as a valued employee of Guangzhou Tachibana (it not being possible for Mr Peng to be provided with a shareholding in Guangzhou Tachibana as that company was set up as a wholly foreign owned enterprise, and Mr Peng was a national of the PRC).  Mr Koji Matsumoto says that the award of shares to valued employees is part of Japanese business culture, and does not carry with it any real intention of granting significant ownership rights in respect of the business.  While the employee would be entitled to dividends on his shareholding if dividends were declared, this might or might not happen. In the event that the employee subsequently left his employment, he would be expected to return the shares, receiving back what he had paid for them.  In his closing submission, Mr Yuen S.C. appearing for the 2^nd and 3^rd Respondents likened such an award of shares to the award of a medal for good performance, marking out the employee in the eyes of his peers as someone who had been specially recognised by his employer.

14.  Thereafter, Mr Toshiyuko Nishino, who, according to Mr Koji Matsumoto, had returned to Japan in about April 2003, and some time thereafter was reassigned to a different role within the business, resigned as a director, being replaced by Mr Hasuo, who also acquired Mr Toshiyuko Nishino’s shareholding of 960 shares in the Company at a cost of JPY 50 per share.  Mr Hasuo does not appear to have been stationed in China.  Instead, he would make periodic visits to Guangzhou, approximately once a month, during which he said that he would inspect the accounts of Guangzhou Tachibana, and discuss its business with Mr Koji Matsumoto.

15.  In the financial year ending on 31 December 2004, the Company’s profit had increased further, to JPY 142,233,907 on turnover of JPY 1,201,885,335, and in the following year, there was a further increase in profit to JPY 206,997,837 on turnover of JPY 1,487,181,070.  By this point, the Company’s net assets had reached JPY 393,764,442.

16.  According to Mr Peng, after the Chinese New Year in 2006, in about March he approached Mr Koji Matsumoto and requested that a dividend should be declared, having regard to the Company’s profitability and level of retained profit.  Mr Peng says that this request was ignored.

17.  On 12 July 2006, it was unanimously resolved by the Company’s directors and shareholdings at board and general meetings held on that date, and attended by Mr Koji Matsumoto, Mr Hasuo and Mr Peng, that the Company’s authorised share capital should be increased from JPY 208,000 to JPY 100,000,000, by the creation of a further 1,995,840 shares of JPY 50 each.

18.  The Company’s performance continued to improve during 2006, and in that year, it recorded a profit of JPY 264,530,718 on turnover of JPY 1,893,831,112.  By the end of 2006, the Company’s net assets had increased to JPY 658,295,160.

19.  On 17 January 2007, the board of Guangzhou Tachibana resolved to remove Mr Peng as a director and to terminate his employment as vice general manager of Guangzhou Tachibana on the grounds of alleged misconduct.  Such misconduct was said to consist of two main matters. The first was the manner in which Mr Peng had allegedly mismanaged the affairs of Guangzhou Tachibana, which Mr Koji Matsumoto said had led to numerous complaints from other employees, and a general lowering of morale of such other employees.  The second was the alleged misappropriation of a sum of RMB 110,000 by Mr Peng from Guangzhou Tachibana in order to acquire a life insurance policy in respect of himself.  Mr Peng left the offices of Guangzhou Tachibana almost immediately.  Subsequently, he successfully brought proceedings against Guangzhou Tachibana in the Chinese courts, claiming compensation for unfair dismissal, succeeding both at first instance and on appeal (although the amount of compensation awarded was reduced on appeal).

20.  Thereafter, on 22 November 2007, Mr Peng was removed as a director of the Company at an EGM of the Company held on that date.  Further, at another EGM of the Company held on 19 February 2008, it was resolved that the remaining 1,995,840 shares in the Company (which had been created in July 2006) should be issued to Mr Koji Matsumoto at a price of JPY 50 per share (i.e. at par value), ostensibly to raise capital to fund the construction of additional factory premises for Guangzhou Tachibana.  Mr Peng did not participate in either of these EGMs, and says that he was not given proper notice of them.

21.  Additionally, in early 2008, the solicitors acting for Mr Peng wrote to the Company to request the declaration of a dividend.  The Company’s response, through its solicitors, was to the effect that it was not proposed to declare any dividend as the Company needed to retain its funds for anticipated future expansion of its production facilities.

Mr Peng’s complaints and the Respondents’ response

22.  Thereafter, on 6 June 2008, the petition was presented.  In it, Mr Peng complained that the affairs of the Company had been conducted in a manner that was unfairly prejudicial to his interests in three principal respects, having regard to the agreement which had been made in relation to the issue of shares to him in February 2004, and in the light of the relationship between the parties.  These were:-

(1) The refusal to declare any dividends, notwithstanding Mr Peng’s requests;

(2) The exclusion of Mr Peng from the management of the Company and Guangzhou Tachibana in 2007 and thereafter as a result of his dismissal from his employment with Guangzhou Tachibana and his removal as a director of the two companies; and

(3) The dilution of his shareholding in the Company by reason of the allotment of shares at a nominal price to Mr Koji Matsumoto in February 2008.

23.  Resisting the petition, it was contended for Mr Koji Matsumoto and Mr Hasuo that:-

(1) There was no relationship of trust and confidence between the shareholders that could result in any of the matters complained of being regarded as unfairly prejudicial to Mr Peng;

(2) There was no such agreement as alleged by Mr Peng relating to the issue of shares to him, as to the declaration of dividends, or as to his continued involvement in the affairs of the Company so as to render any of the matters complained of unfairly prejudicial to him; and

(3) In any event, the specific complaints were unfounded and had no merit.

The issues

24.  In my view, the principal issues that arise for determination are:-

(1) Whether there was some relationship of trust and confidence between the shareholders;

(2) Whether Mr Peng’s shares were allotted to him on the basis of the agreement alleged by him, or whether they were allotted to him for the reasons stated by Mr Koji Matsumoto;

(3) Whether there had been a refusal to declare dividends, and if so, whether such refusal constituted unfairly prejudicial conduct;

(4) Whether the dismissal of Mr Peng from his employment, and his subsequent removal as a director of Guangzhou Tachibana and the Company, constituted unfairly prejudicial conduct;

(5) Whether the dilution of Mr Peng’s shareholding in the Company as the result of the issue of shares to Mr Koji Matsumoto constituted unfairly prejudicial conduct; and

(6) Whether any, and if so what, relief should be granted on the petition.

25.  Within each of these broad issues, there were of course a number of more detailed matters that required consideration.  I shall deal with these to the extent necessary when considering the position in relation to each of the broad issues.

The legal principles

26.  The parties were in general agreement as to the broad legal principles applicable to Mr Peng’s claim.  Mr Ng, appearing for Mr Peng, accepted that if the acts complained of were in accordance with the provisions of the Company’s articles of association, it would be necessary for Mr Peng to establish “something more”, so as to show that the agreement embodied in the articles did not fully reflect the basis or understandings on which the shareholders associated with each other, in order to make out a case that the conduct was nonetheless unfairly prejudicial to his interests (see e.g. O’Neill v Phillips [1999] 1 WLR 1092 at 1098F-1101G per Lord Hoffman; Re Saul D Harrison & Sons plc [1995] 1 BCLC 14 at 19a-20a per Hoffman LJ).

27.  Mr Yuen, for his part, submitted further that even if there had been some breach of the articles, if the breach were trivial or unimportant, it might not follow that the conduct in question would necessarily be unfairly prejudicial, or so unfairly prejudicial as to call for the granting of any relief.  I do not think that Mr Ng dissented from this proposition, although he disputed any suggestion that any breaches of the articles that might have occurred could be characterised as trivial.

Something more: relationship of trust and confidence or quasi-partnership?

28.  The first issue for consideration is whether there was a relationship of trust and confidence between the shareholders of the Company.  Initially, I had not understood Mr Ng to be submitting that there was any such relationship in the sense in which it has come to be generally understood – i.e. in the sense that the relationship between the parties, although constituted by their membership of the same company, had the qualities of a quasi-partnership, as that term has come to be understood in the context of shareholder disputes.  However, in his closing submissions, it appeared that Mr Ng was in fact suggesting that this was the case.

29.  With respect, I do not think that this case is one that can be described as a quasi-partnership situation.  There was clearly no prior partnership or family style relationship between the Japanese shareholders of the Company and Mr Peng.  On the contrary, until the allotment of shares in the Company to Mr Peng, the relationship between them and him had in substance been one of employer and employee.  Although there might well have been a feeling of mutual respect and trust, this did not, in my view, approach the level of trust and confidence that would be expected in a quasi-partnership situation.  Indeed, Mr Peng’s acceptance, under cross-examination, that he was liable to be dismissed for misconduct, would appear to militate against there having been a relationship of this nature.

30.  I therefore do not think that there was such a relationship of trust and confidence between the parties that, absent an agreement of the nature alleged by Mr Peng, the other shareholders in the Company would have been under any obligation of a quasi-equitable nature that would have inhibited them from acting in accordance with their rights under the articles of association.

Something more: an agreement as alleged by Mr Peng?

31.  That, however, does not conclude this aspect of the matter in favour of the Respondents.  Even absent a relationship of trust and confidence in the sense that I have described, it remains possible for there to be an agreement or understanding beyond that embodied in the articles of association, which can give rise to the “something more” that is required to render conduct that is in accordance with the articles nonetheless unfairly prejudicial and capable of founding a claim for section 168A relief.

32.  In this case, that “something more” can, in my view, lie only in the agreement alleged by Mr Peng, if it is made out.

33.  As it emerged in his evidence during the trial, Mr Peng’s case as to the alleged agreement ran along the following lines:-

(1) He was first approached by Mr Mutsuo Matsumoto at the end of 2002, when Mr Mutsuo Matsumoto spoke to him about the possibility of his becoming a shareholder in the Company, and participating in the Company at the management level. Mr Peng said that he was given to understand that Mr Mutsuo Matsumoto was concerned about the lack of profitability of the Company, and was anxious for Mr Peng to take steps to locate new customers for the Company, who would purchase the goods produced for it by Guangzhou Tachibana at substantially better margins than those available from Japan Tachibana.

(2) According to Mr Peng, his job description and duties at that stage did not include any responsibility for sales, in the sense of seeking to secure new customers for the Company, or for Guangzhou Tachibana.

(3) Mr Peng did not respond to the offer one way or another, but said that he needed time to think it over. Thereafter, in early 2003 and in the course of 2003, both Mr Mutsuo Matsumoto and Mr Koji Matsumoto approached him at various times to repeat the offer. However, in none of these approaches were details of the size of the proposed shareholding to be offered to Mr Peng raised or discussed. Throughout this period, Mr Peng continued to say that he would think about the offer.

(4) During the first half of 2003, Mr Peng introduced Haier (a major manufacturer of electrical appliances on the Mainland) as a potential customer. Haier began placing orders with the Company for goods produced by Guangzhou Tachibana.

(5) Finally, in about the autumn of 2003, Mr Peng agreed to take up shares in the Company. It was agreed that he would remain a vice general manager and director of Guangzhou Tachibana, but would in addition take up 960 shares in the Company, and become one of its directors. According to Mr Peng, there was no discussion between himself and the Matsumotos about the number of shares that he was to acquire, or as to the price at which he was to acquire them. He eventually took the shares up at their par value of JPY 50 per share, paying a total of JPY 48,000 for the 960 shares allotted to him.

(6) He was not actually allotted the shares until February 2004. This was when the Company increased its capital and issued new shares to him. He had not pressed for the shares to be issued, but simply left it to the Matsumotos to decide when this should be done.

34.  This version of events was subjected to a sustained attack by Mr Yuen.  He contended that there had been no agreement of the nature alleged by Mr Peng, and that Mr Peng’s account of how the agreement had been reached was a mere fabrication.  Mr Yuen relied on three principal grounds in submitting that there had been no such agreement: first, that the allotment of shares to Mr Peng had made in accordance with Japanese business culture and practice, and not pursuant to an agreement such as that alleged; second, that the story put forward by Mr Peng was inherently incredible; and third, that it was not supported by what actually happened thereafter.

35.  As described by Mr Koji Matsumoto, it is common for Japanese companies to offer a shareholding to valued employees in order to give them a sense of recognition.  While the shares offered would be no different from other shares in the company, and would carry the same rights to dividends if any were to be declared, there is no fixed practice of declaring dividends so as to ensure that there is some return on the shares.  In the case of the Company, he regarded it as being in essence a Japanese company, as it had been set up for the purposes of Japan Tachibana – to hold the shares in Guangzhou Tachibana which had been set up to serve as a production facility for Japan Tachibana.  He said that it was the practice in relation to the Company that shares should be offered at par, and that this had been done on all previous occasions on which shares had been issued, whether to Mr Toshiro Nishino, Mr Toshiyuki Nishino or himself.  When a shareholder ceased to be a shareholder, he would transfer his shares at par (i.e. at the same price which he had paid for them) to his successor – this had happened when he acquired Mr Toshiro Nishino’s shares in the Company, and it also happened subsequently, when Mr Hasuo acquired Mr Toshiyuki Nishino’s shares in the Company.  Mr Koji Matsumoto supported this position by reference to a work on Japanese business culture called “The Japanese Employee”, in which the author expressed the view that what a Japanese employee sought from his employer was not so much remuneration, as a sense of belonging or recognition as part of the “family” or organisation.

36.  Mr Koji Matsumoto explained, in his evidence at trial, that he had had regular conversations with Mr Peng about Japanese business customs, and that the decision to allot shares in the Company to Mr Peng, and to make him a director, was one that was taken by him, without reference to, or negotiation with, Mr Peng.  He said that the offer of shares to Mr Peng was made in accordance with the Japanese custom he had described, and which he had spoken to Mr Peng about on many occasions (he put the number of such occasions at about ten).  He said that this was done with a view to making Mr Peng feel a valued employee, and also for practical reasons, as Mr Toshiyuki Nishino had returned to Japan in about April 2003, leaving himself (Mr. Koji Matsumoto) as the only director of the Company in southern China.  He felt that it would be desirable to have a second director available in the same place.

The alleged agreement: inherent probabilities

37.  I think that the question of whether or not there was an agreement along the lines alleged by Mr Peng can be approached first by considering the inherent probability (or lack of probability) of matters having happened in the way suggested by Mr Peng.  When this is done, it is apparent that the version of events put forward by Mr Peng is one that suffers from serious difficulties.

38.  At a general level, it seems to me that the sequence of events described by Mr Peng is one which is, to say the least, an odd one.  He suggests that despite having been approached with an offer to become a shareholder in the Company, with an expectation of being paid dividends out of future profits, there were no discussions or negotiations as to either the number of shares that he would take up, or as to the price that he would be expected to pay for them.  On the contrary, this was a matter that was simply put forward, without discussion, by the Matsumotos, after he had indicated his acceptance of the suggestion that he should become a shareholder.  This does not strike me as being realistic.  If it were truly the case that Mr Peng were being offered shares that would carry with them the prospect of dividend distributions of potentially significant value, one would expect there to be some discussion or negotiation between him and the Matsumotos as to the level of shareholding that he would take up, and the price for it, before he agreed to take up the shares.  One would not expect to see, as Mr Peng suggests was the case, a situation in which Mr Peng deliberated for months as to whether to take up shares in the Company (not knowing, on his case, how many and at what price), and then to agree to take up shares (still presumably not knowing how many and at what price), and then leave it to the Matsumotos to name the number of shares and price to be paid for them. Similarly, it is odd that, even after the number and price of the shares to be issued to him had become known, that he should have displayed little apparent interest in when he would actually receive them.

39.  I therefore think that Mr Peng’s version of events must be treated with reserve.  However, when one looks more closely at the situation at the time of the alleged offer, and at the actual allotment of shares to him, the difficulties with his case become much greater.

40.  First, Mr Peng’s position was that Mr Mutsuo Matsumoto first approached him at the end of 2002, expressing concern about the performance of the Company.  Mr Peng also said that part of the problem was the very low margins available on sales to Japan Tachibana.

41.  But it is difficult to see why there should have been any such concern.  The Company, and Guangzhou Tachibana, its wholly owned subsidiary, had only recently commenced operations, having been in operation for no more than about one year.  It was to be expected that in the initial stages of operations, there would be significant investment, but not necessarily immediate returns.  It is therefore inherently improbable that Mr Mutsuo Matsumoto (or, for that matter, Mr Koji Matsumoto in the months following) would have been particularly concerned that the Company was not particularly profitable in its first year of operation.

42.  Moreover, by the end of 2003, profitability had improved – the Company’s profits had increased from a little over JPY 1 million, to in excess of JPY 40 million.  Turnover had more than doubled, and profit margins had increased substantially.

43.  More fundamentally, it seems to me that low profit margins at the level of the Company would not have been a source of concern to the Matsumotos.  It was common ground that the Company was incorporated for the principal purpose of holding the shares of Guangzhou Tachibana, which was set up to serve as a source of supply for Japan Tachibana. Any reduction of profit margins at the level of Guangzhou Tachibana or the Company would be to the benefit of Japan Tachibana, as that company would thereby be enabled to make greater profits on its own transactions.  Having regard to the objects for which the Company was established, it does not seem to me that lack of profitability would have been a matter for concern so far as the Matsumotos were concerned.

44.  Second, while Mr Peng laid some stress on the point that the sourcing of sales was not part of his job description, it emerged in the course of cross-examination of Mr Koji Matsumoto that the translation of Mr Peng’s employment contract with Guangzhou Tachibana on which the parties and the court had relied had omitted a clause which appeared to make it clear that Mr Peng’s duties did include responsibilities for sales. Thus, Mr Peng was not, contrary to his case, taking on an additional responsibility which had not previously been part of his job specifications. Although it was unfortunate that this point was not noted by either party earlier, it seems to me that it is nonetheless one which it is open to the Respondents to make.  Mr Ng submitted that this should not be permitted, as Mr Peng had not had the opportunity to deal with it.  However, no application was made for Mr Peng to be recalled to give evidence about this, and it seems to me that it was, in any case, Mr Peng who was asserting that his job description did not include responsibility for sales.  In these circumstances, I tend to think that Mr Peng could, had it been desired on his side to do so, have ensured that his explanation was put before the court.

45.  Third, the number of shares offered, and the price paid for them, would appear to be remarkably favourable to Mr Peng.  Mr Peng was, on his case, offered 960 shares in the Company.  This represented 23% of its expanded share capital.  On any view, this is a very substantial stake in the Company, and it is surprising that such a stake should have been offered, when, if the objective was to encourage Mr Peng to promote sales, it would have been possible to do so by providing him with a commission based incentive.  Further, the amount paid by Mr Peng for this substantial stake was minimal – some JPY 48,000, which represented less than the amount of the additional allowance he was paid every month.  More pertinently, at the time that the shares were acquired, the Company had, according to its audited accounts, net assets of some JPY 44 million odd.  In the result, Mr Peng was being given shares representing net assets of over JPY 10 million for a fraction of that amount.  This, too strikes me as highly improbable.

Alleged agreement: the argument based on Japanese business practice

46.  On the other hand, the case of the Respondents would appear to provide a significantly better explanation for the allotment of shares to Mr Peng.  A unilateral decision on the part of the Matsumotos to make an award of shares to Mr Peng as a form of recognition for his services and his status as a valued employee would explain why there was apparently no negotiation or discussion as to the number of shares to be allotted, or the price at which they would be issued.

47.  Further, the fact that Mr Peng was allotted 960 shares, exactly the same number as had been allotted to Mr Toshiyuki Nishino, suggests that he was being placed in a similar position.  Likewise, the fact that Mr Peng was provided with the shares at the nominal price of JPY 50 per share, when each share was clearly worth much more, is quite consistent with the approach adopted by the Company to the issue of shares generally – the shares previously issued to Mr Toshiyuki Nishino and to Mr Koji Matsumoto were also issued at par, as were the shares later issued to Mr Koji Matsumoto, in the 2006 allotment of which Mr Peng complains.  These facts suggest to me that it was indeed the practice of the Company to issue shares to valued employees at par.  Given that the two Mr Nishinos received back only what they paid for the shares when they divested themselves of them, it seems to me that in making the allotment to Mr Peng, it was much more likely than not the intention or expectation that he, too, would be expected to transfer such shares to a successor on the same basis – i.e. at the price which he had paid for them.

48.  Mr Ng made a number of criticisms of the Respondents’ case as to the Japanese business practice, but for the reasons explained below, I do not regard these as particularly persuasive:-

(1) Mr Ng suggested that it was odd that Mr Koji Matsumoto should have mentioned or discussed this business practice on as many occasions as he suggested. With respect, however, it seems to me that given that Mr Koji Matsumoto and Mr Peng were working in fairly close cooperation, and shared the same office space, it is not particularly surprising that Mr Koji Matsumoto should have discussed this matter from time to time over the period of two years that they had been working together by the end of 2003.

(2) Mr Ng also suggested that it was significant that Mr Peng had requested the payment of dividends on two occasions – in March 2006 and again in January 2008. However, for the reasons explained later in this judgment, I have come to the conclusion that Mr Peng’s assertion that he made a request for dividends to be paid in March 2006 should be rejected. This point does not, therefore, assist him.

(3) Mr Ng also pointed out that when responding to the request for dividends in January 2008, the Respondents’ solicitors made no reference to the shares having been given to Mr Peng on the basis of the Japanese business practice now relied upon. There is some merit in this point. However, I do not think that it is sufficient to overcome the other difficulties with Mr Peng’s case that I have already referred to.

(4) It was also submitted that it was odd that there was no record of the business practice relied upon. With respect, I do not think that this should be regarded as a weakness in the Respondents’ case – if anything, the absence of a record might be regarded as an indication that from the point of view of the Respondents, this was something that need not be spelt out.

(5) Mr Ng contended that had the supposed business practice been the basis on which Mr Peng was awarded shares in the Company, he should not have been asked to subscribe for further shares in February 2008. Again, there is some force in this point. However, I think it must be borne in mind that by this time, Mr Peng had been dismissed, and the relationship between the parties was clearly fractured. Taken in this context, I do not think that the point is of sufficient weight to overcome the difficulties that Mr Peng’s case faces.

(6) Finally, Mr Ng suggested that the business practice relied upon was tantamount to a breach of section 64A of the Ordinance, in that the rights attaching to the shares issued to Mr Peng had been varied without the necessary resolution. I do not think this suggestion is well founded – the rights attaching to his shares were never varied. They remained the same as those attaching to all the other issued shares in the Company. Had dividends been declared, they would have attracted such dividends just as any other issued shares would have – but the fact was that dividends were never declared.

Alleged agreement: inconsistent subsequent behaviour

49.  Mr Yuen also submitted that Mr Peng’s own behaviour after February 2004, up until his dismissal in January 2007, was inconsistent with the existence of the agreement alleged, in that he had not in fact ever asked for the distribution of a dividend during that period.  In making this submission, Mr Yuen invited the court to disbelieve Mr Peng’s evidence as to his having made such a request orally to Mr Koji Matsumoto in March 2006.

50.  As to this, Mr Peng’s case was that (notwithstanding that the Company’s profitability had significantly increased in the financial year ending on 31 December 2004, with profits increasing nearly threefold from some JPY 43 million to JPY 142 million odd), he had made no request for dividends on the basis of those profits (which, on his case, he had contributed to by introducing Haier and another company called Well-tec as significant new customers for the Company).  Rather, he said that the first time that he raised the question of a dividend payment was in March 2006, after the 2005 profit figures (a further increase to some JPY 206 million odd) would have been known (at least on the basis of management accounts).  Mr Peng then said that when he expressed the view that a dividend should be paid on the basis of accumulated profits, Mr Koji Matsumoto said only that not all of the accumulated profits should be distributed.  Mr Peng said that he did not broach the subject again thereafter.  He also said that he felt from that point on that his relationship with Mr Koji Matsumoto had become strained.

51.  Mr Koji Matsumoto denied that there had been any request by Mr Peng in March 2006 for a dividend to be distributed.  Mr Yuen submitted that this evidence should be accepted.  He submitted that if Mr Peng had indeed asked in March 2006 for a dividend to be distributed, it was inexplicable that he should not have followed up on this request, particularly since it was not rejected outright (on Mr Peng’s case) by Mr Koji Matsumoto.  In the circumstances, Mr Yuen suggested that Mr Peng’s version should be rejected.

52.  In my view, Mr Peng’s evidence in relation to this matter, like his evidence as to the alleged agreement to take up shares, is not credible.  Given his own evidence that there had been no refusal on the part of Mr Koji Matsumoto to distribute a dividend, it is (to say the least) surprising that Mr Peng should not have returned to the fray and followed up on his request.  Indeed, the approach taken by Mr Peng is not, to my mind, supportive of his case that there was an agreement that dividends should be paid on the shares allotted to him.  If there had been such an agreement, one would have expected Mr Peng to be keen to ensure that such dividends were paid, by raising the matter when no dividend was declared despite significantly improved financial results in the financial year ending on 31 December 2004, and to have followed up on the matter far more determinedly than he says he did the following year.

Alleged agreement: conclusion

53.  For all of these reasons, therefore, I am of the view that, in relation to the key question of whether or not there was an agreement of the nature alleged by Mr Peng that he should be allotted shares in the Company on which dividends would be distributed to reward him for his efforts to be undertaken in respect of introducing new customers, Mr Peng’s case should be rejected, and the case of the Respondents preferred.  I therefore conclude that Mr Peng was in fact given the shares which he received in February 2004 merely as a symbol of his valued status, without any promise or expectation that dividends would be paid thereon, and on the basis that on leaving his employment with Guangzhou Tachibana, he would transfer such shares as required by Mr Koji Matsumoto (or whoever was then running the business of the Tachibana companies in Guangzhou and Hong Kong) at the same price which he had paid for them.

No unfair prejudice, as no agreement as alleged

54.  In the light of this conclusion, it seems to me that the allegations of unfairly prejudicial conduct are bound to fail, for the following reasons:-

(1) So far as the complaint regarding non-payment of dividends is concerned, having rejected Mr Peng’s claim that it was agreed that dividends should be paid so as to reward him for his efforts in bringing in new customers, there is not, to my mind, anything either unfair or prejudicial to Mr Peng in the failure to declare dividends. Given the absence of any agreement that dividends should be declared, it was a matter for the Company to decide whether or not dividends should be paid, and whatever decision it made would affect all shareholders equally.

(2) So far as the complaint of exclusion from management of the affairs of Guangzhou Tachibana and the Company are concerned, having accepted that he was liable to be dismissed, it is difficult to see that Mr Peng has any cause for complaint in relation to his dismissal in the context of these proceedings under section 168A. Even if the dismissal of Mr Peng from his employment with Guangzhou Tachibana was unfair, that would seem to be a matter which calls for redress under the law governing his employment – a matter which has already taken place, as Mr Peng has successfully sued Guangzhou Tachibana for unfair dismissal in the Chinese courts and obtained an award of damages in respect thereof. But having been dismissed by Guangzhou Tachibana, and having left his employment with it, I do not see that there is anything particularly unfair about his subsequent removal as a director of the Company. Indeed, one would expect that as he is no longer involved with the business of the Tachibana companies, he would not be kept on as a director of the Company.

(3) Finally, in relation to the complaint of dilution of his shareholding, it seems to me that even if one were to accept that (contrary to the Respondents’ case) there was no proper justification for the issue of the large number of additional shares to Mr Koji Matsumoto at par, so as to very significantly dilute Mr Peng’s shareholding in the Company, while this might have been unfair, it would not have been prejudicial, in that at the end of the day, Mr Peng would only ever have been entitled to recover for his shares the amount he had paid for them, having regard to the basis on which they were issued to him. That being so, the position remains that as and when he disposes of his shares, he will be no worse off than he would have been had no further shares been issued.

55.  In these circumstances, it seems to me that the petition must fail, and should be dismissed.

Position if the alleged agreement had been established

56.  If however, I am wrong in my conclusion that the Respondents’ case is to be preferred to that of Mr Peng in relation to the basis on which Mr Peng’s shares were issued to him, I think it would follow that Mr Peng would probably have succeed in establishing unfairly prejudicial conduct.  This is for the following brief reasons:-

(1) On Mr Peng’s case, the agreement was not only that he would be issued shares in consideration of his taking on the responsibility for finding new customers for Guangzhou Tachibana’s products, but that he would also be effectively remunerated for this by the declaration of dividends. If, contrary to my view, this were in fact the position, I do not think it would help the Respondents to say (as they do) that while prejudicial, the non-declaration of dividends would not have been unfair since it affected all shareholders equally. Having regard to the terms of the agreement which would have been established (had Mr Peng’s case succeeded), it seems to me that there would have been clear unfairness in the Company and the Respondents reneging on that agreement by failing to declare dividends so as to give to Mr Peng the reward he had bargained for.

(2) Further, having regard to the nature of the agreement, it would seem equally unfair for Mr Peng to find his shareholding diluted as it was, since that would have severely reduced the amount of the dividends to which he was entitled (as they would have had to be spread out over a much larger shareholding, of which his proportionate part had been very much reduced). Given the price at which the new shares were issued (i.e. par, or JPY 50 per share), they were clearly issued well below their true value, which casts considerable doubt on the professed reason for the issue of new shares – namely to raise funds for further expansion of Guangzhou Tachibana’s manufacturing facilities, whether in China or elsewhere in South East Asia. Further, it does seem that previous requirements for funding were met, not from issues of shares, but from borrowings from Japan Tachibana, for whose principal benefit any expansion of production facilities would be – this casts further doubt on the professed reason for the issue of new shares.

57.  On either or both of these grounds, it seems to me that unfairly prejudicial conduct of a nature that would call for relief to be granted would have been made out.  The appropriate relief would, I think, have been to have ordered the Respondents to buy out Mr Peng’s shares. However, the basis on which his shares should have been valued would not necessarily have been a straightforward matter.

58.  So far as the dismissal of Mr Peng from his employment with Guangzhou Tachibana is concerned, given Mr Peng’s acceptance that he was liable to be dismissed as a director and employee of that company, I tend to think that his dismissal, even if it proved to be on improper or unfair grounds (as to which I express no concluded view), would not have been a matter of which complaint could be made in these proceedings, for the reasons explained in paragraph 54(2) above, and also because this was something that related not so much to the affairs of the Company, but to the affairs of Guangzhou Tachibana, and that having (rightly or wrongly) been dismissed from that Company, I do not find it surprising or unfair that he should thereafter have been removed as a director of the Company, and do not think that this would afford him a good foundation for seeking relief.  However, given my view that, had he made out his case in relation to the alleged agreement, Mr Peng would have succeeded on the other two grounds of unfairly prejudicial conduct relied upon, this would not make any difference at the end of the day.

Disposition and costs

59.  For the reasons which I have given, therefore, I conclude that Mr Peng has failed to make out his case of unfairly prejudicial conduct in relation to the affairs of the Company on the part of the Respondents, and accordingly order that the petition should be dismissed.  So far as costs are concerned, I can see no reason why these should not simply follow the event, and I therefore make a costs order nisi that Mr Peng should pay the 2^nd and 3^rd Respondents their costs of these proceedings, such costs to be taxed on the party and party basis if they cannot be agreed.