NEW SPARKLE ROLL INTERNATIONAL GROUP LTD AND ANOTHER v. SZE CHING LAU AND ANOTHER

HCA 123/2024

[2024] HKCFI 419

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 123 OF 2024

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D E C I S I O N

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The parties

1.  The 1^st plaintiff (“Company”) is a company incorporated in Bermuda with its shares (“970 Shares”) listed on the Hong Kong Stock Exchange, under the stock code 970, since 1997.

2.  As at 9 November 2023[1], the Company has issued 383,772,090[2] shares, 246,885,903 (about 64.33%) shares of which are held by public investors. The Company’s total shares in issue increased to 390,722,090 shares on 12 December 2023 due to option holders exercising their options previously granted under share option schemes in 2012 and 2022.

3.  The 2^nd plaintiff is a shareholder of the Company, holding 173,500 (about 0.044%) shares at all material times.

4.  The 1^st defendant (“Mr Sze”) is also a shareholder of the Company. As at 9 November 2023, Mr Sze and parties acting in concert with him (including his son, Mr Sze Ka Ho (“SKH”)) hold altogether 104,690,187 (about 27.28%) shares in the Company. Following the abovementioned increase in the Company’s issued share capital in December 2023, the 970 Shares held by Mr Sze and the parties acting in concert with him represents 26.79% of 970 Shares in issue.

5.  The 2^nd defendant (“Shenwan Hongyuan”) is licensed under the Securities and Futures Ordinance (Cap 571) (“SFO”) to carry out various regulated activities[3] It is Mr Sze’s financial advisor regarding the Share Offer, which was expressly made by Shenwan Hongyuan on Mr Sze’s behalf.

Rivalry over control of the Company

6.  Prior to the making and announcement of the Share Offer, Mr Sze and parties acting in concert with him had made unsuccessful attempts to gain control of the Company.

The Share Offer

7.  On 28 September 2023, Mr Sze notified the Company of his intention to make voluntary conditional cash offers concerning the 970 Shares and the outstanding convertible bonds and share options of the Company.

8.  Shenwan Hongyuan, acting on behalf of Mr Sze, made public announcement of such offers (“Announcement”) on 5 October 2023.

9.  We are concerned only with the offer relating to the 970 Shares (“Share Offer”), by which Mr Sze offers to acquire all the 970 Shares not already owned by him and parties acting in concert with him at HK$0.9 per share (“Offer Price”).

10.  I pause to observe from the trading records produced by the plaintiffs that, save for the period when the 970 Shares were suspended fron trading from 8 to 18 January 2024, the 970 Shares have never been traded at below HK$1 since the date of the Announcement. On 2 January 2024, the price of 970 Shares peaked at HK$1.95 per share.

11.  Indeed, the Company’s independent financial advisor had previously expressed the opinion that the fair unit price of the 970 Shares, based on the Company’s net asset value in its most recent financial reports, should be above HK$5.

12.  The Share Offer is subject to the satisfaction, or waiver by Mr Sze (where applicable), of a number of conditions on or before the “Closing Date”. The Closing Date was initially 22 December 2023. It is, after 2 extensions, currently set to be 8 February 2024. The Share Offer will lapse at 7 pm on 8 February 2024 if it has not by then become, or been declared unconditional, as to acceptances.

13.  The condition material to the present issue is the “valid acceptances of the Share Offer being received would result in [Mr Sze and parties acting in concert with him] holding more than 50% of the voting rights in the Company as at the Closing Date]” (“Threshold Holding Condition”). This condition cannot be waived.

14.  Rule 15.3 of the Codes on Takeovers and Mergers and Share Buy-backs (“Takeovers Code”) requires Mr Sze to publish an announcement when the Share Offer becomes unconditional as to acceptances and the Share Offer becomes unconditional in all respects.

Level of acceptance of the Share Offer since the Announcement

15.  14 acceptances of the Share Offer were received by 22 December 2023 (i.e. the initial Closing Date) by Tricor Investor Services Limited (“Tricor”), the receiving agent under the Share Offer. The shareholding affected was 12.06%, giving Mr Sze and parties acting in concert with him 38.86% of the voting rights in the Company in the event of the Share Offer turning unconditional.

16.  By 12 January 2024 (i.e. the 1^st extended Closing Date), the number of acceptances of the Share Offer increased to 19, affecting 15.81% of the 970 Shares and giving Mr Sze and the parties acting in concert with him a 42.61% shareholding in the Company should the Share Offer become unconditional.

17.  As at the close of trading on 23 January 2024 (which is the 2^nd extended Closing Date), the total number of acceptances has risen to 26 representing 78,396,280 (20.1%) 970 Shares. Should the Share Offer become unconditional, these 26 acceptances would, taking into account their existing shareholdings, give Mr Sze and parties acting in concert with him an aggregate of 183,086,467 970 Shares, representing 46.86% of the total issued share capital of the Company.

18.  There has not been any further acceptance of the Share Offer after 23 January 2024.

The plaintiffs’ complaint

19.  The plaintiffs do not (and cannot) object to the Share Offer.

20.  Their complaint is that Mr Sze had, through his intermediaries, secretly approached shareholders of the 970 Shares and secured from them acceptances of the Share Offer but with “under the table” considerations in different forms but well over and above the Offer Price.

21.  The Share Offer, if allowed to proceed to completion in these circumstances, would create a false appearance of active sales of the 970 Shares, and therefore suppress the price of 970 Shares, at the artificially low price of HK$0.9 or thereabout.

22.  It is the plaintiffs’ case that such conduct by Mr Sze and the parties acting in concert with him in disregard of, and departure from, the the terms of the Share Offer constitutes breaches of the Codes on Takeovers and Mergers and Share Buy-backs (“Takeovers Code”), the Stamp Duty Ordinance (Cap 117) (“SDO”) and the Securities and Futures Ordinance (Cap 571) (“SFO”), not to mention a conspiracy to defraud the Company’s shareholders and public investors.

23.  These are serious allegations. In support, the plaintiffs have produced 2 affirmations made by Mr Chen Tze Suen (“Mr Chen”), 2 affirmations by Mr Zheng Hao Jiang (“Mr Zheng”), the Company’s chairman, chief executive officer and executive director.

24.  According to Mr Chen:

(1)  He handled and managed the financial affairs for a Mr Thomas Shie (“Mr Shie”) from about 2017 to about 2022. Mr Sze and Mr Shie are business partners engaging in share speculation activities.

(2)  A Mr Wang Bang Yi (“Mr Wang”) is also a business partner of Mr Sze. Since about the beginning of 2023, Mr Wang has contacted Mr Chen on behalf of Mr Sze regarding disputes with other financial institutions.

(3)  To facilitate the completion of the Share Offer, Mr Sze, Mr Shie and SKH, using nominee accounts, had already acquired a large number of 970 Shares at prices higher than the Offer Price before making the Share Offer.

(4)  SKH was indebted to a company called FingerTango Inc (stock code 6860) (“FingerTango”), which has commenced legal proceeding against, inter alios, SKH and others.

(5)  FingerTango holds about 6 million 970 Shares.

(6)  In December 2023 and January 2024, Mr Shie actively procured Mr Chen to reach out to FingerTango to see if they would be willing to sell them the Company's shares at a premium over the Offer Price, which was to be applied to the repayment of the loan due from SKH to FingerTango.

(7)  To motivate Mr Chen, Mr Shie offered to pay Mr Chen a reward of HK$0.05 per share if he was able to close the deal.

(8)  On 12 January 2024, Mr Shie requested Mr Chen to talk to FingerTango to see if they would be willing to accept the Share Offer and be paid HK$30 million on top of the Offer Price.

(9)  Mr Sze, Mr Shie and Mr Wang all reached out to Mr Chen multiple times by telephone later on the same day in a somewhat frantic manner.

25.  In further support, Mr Zheng has deposed that:

(1)  The Company has received a complaint by letter, which is produced, alleging that there had been at least 14 trading activities which appeared to aim at driving down the prices of the 970 Shares so to facilitate certain parties to acquire the Company’s shares below its otherwise true market value.[4]

(2)  In early 3 January 2024, a long-time acquaintance and shareholder of the Company, Mr Zhang Ji (張悸) (“Mr Zhang”), informed Mr Zheng that someone was actively acquiring 970 Shares and he had been approached by an intermediary who, on behalf of his principal, wanted to persuade him to sell his 9 million 970 Shares. To “sweeten” the deal, they offered to purchase all of Mr Zhang’s 970 Shares at HK$3 per share if he were agreeable to accepting the Share Offer (i.e. at the Offer Price) but on the understanding that he would also receive the price difference (i.e. HK$2.1 per share) off-market.

26.  The preceding 2 paragraphs contain just brief summaries of the respective evidence of Mr Chen and Mr Zheng. Their affirmations are much more detailed with particulars of the persons involved and the dates and times of the occurrences being deposed to and supported by telephone call records and a number of screenshots of WhatsApp and WeChat messages from Mr Shie and Mr Wang to Mr Chen and WeChat messages between Mr Zhang and Mr Zheng which appear to be consistent with the matters being spoken of by Mr Chen and Mr Zheng.

The plaintiffs’ case on loss and damage

27.  According to Mr Cheng Kai Sum, an independent consultant specialising in analysing stock market trading behaviours, manipulated sales of 970 Shares through acceptances of the Share Offer at the below market Offer Price would adversely affect the Company in, inter alias, the following manners.

(1)  First, setting the Offer Price at such a low price point would have the negative effect of understating the true value of the Company in the eyes of public investors.

(2)  Second, if the market price of the 970 Shares should remain subdued, it would inhibit the Company’s bargaining power with potential clients thereby making all future fundraising exercises more costly and dilutive to existing shareholders as well.

Ex parte injunction

28.  On 18 January 2024, the plaintiffs applied, on an urgent ex parte basis, to Mr Justice Anthony Chan for, and obtained, an injunction order restraining the defendants (without distinguishing between them) and anyone acting for them in whatever capacity until the conclusion of the hearing of the plaintiffs’ inter partes summons which was to be filed on 19 January 2024 from:

(1)  approaching any persons holding 970 Shares to procure or enter into any arrangement or transaction for the purposes of dealing and/or acquiring their 970 Shares at a price other than the Offer Price HK$.09 per share so long as the Share Offer has not yet lapsed;

(2)  offering to any persons holding 970 Shares any advantage, benefit or consideration of whatever nature other than the Offer Price in return for accepting the Share Offer or entering into any dealing or transaction of whatever nature of any of 970 Shares.

29.  His Lordship, however, made no order to the effect that would stop the defendants from proceeding or continuing to perform any acts to declare the Share Offer unconditional and/or allow the Share Offer to become unconditional and/or in any way to implement or regard the Share Offer as having been successfully completed.

The plaintiffs’ summons dated 19 January 2024

30.  By the summons filed herein on 19 January 2024 (“Summons”), the plaintiffs seek an injunction restraining both defendants from:

(1)  under “paragraph 1”: “proceeding, continuing or taking any steps to carry out or perform any acts so to declare the [Share Offer] for all [970 Shares] unconditional and/or to allow the [Share Offer] to become unconditional and/or in any way to implement or regard the [Share Offer] as having successfully completed without prejudice to the withdrawal rights of the those shareholders who had so far accepted the Share Offer under Rule 17 of the [Takeovers Code] and that [Shenwan Hongyuan] and/or [Tricor] if called upon shall be entitled to release the relevant shares to those shareholders;”

(2)  under “paragraph 2”: “approaching any persons holding … [970 Shares] … so to procure or enter into any arrangement or transaction for the purposes of dealing and/or acquiring their 970 Shares at a price other than [the Offer Price] so long as the Share Offer has not yet lapsed;” and

(3)  under “paragraph 3”: “offering to any persons holding … [970 Shares] … or … any advantage, benefit or any consideration of whatever nature other than the [Offer Price] in return for accepting the Share Offer contained or entering into any dealing or transaction of whatever nature of any of 970 Shares”.

Only Paragraph 1 remains in issue

31.  Mr Sze has since offered undertakings in terms of Paragraph 2 and Paragraph 3 (“Mr Sze’s Undertakings”), without prejudice to his “firm” position that he did “not” carry out the conduct sought to be enjoined under those paragraphs and his right to “substantially” contest the plaintiffs’ case.

32.  In other words, only Paragraph 1 remains in issue.

33.  In this regard, it is contended on behalf of the plaintiffs that (1) Paragraph 1 does not prevent Mr Sze from continuing to implement the Share Offer strictly in accordance with its terms; (2) what this paragraph prohibits Mr Sze from doing is merely declaring that the Share Offer has become unconditional as to acceptances or in all respects; and (3) without such declaration, the Share Offer does not become irrevocable.

34.  I am not so sure. On the material presented to me, there seems to me to be a decent argument, and I proceed on the premise that, the Share Offer becomes unconditional upon the attainment of the Threshold Condition and that the offeror’s declaration merely notifies all relevant parties of the satisfaction of the Threshold Condition and the mechanism for completion.

Appropriate test for grant/refusal of interlocutory injunctions sought in this case

35.  On the test for the grant or refusal of an interlocutory injunction, the starting point is Lord Diplock’s speech in American Cyanamid Co v Eithicon Ltd [1975] AC 396 (HL) at 407F-409D which, as explained by the Hong Kong Court of Appeal in Wah Nam Holdings Co Ltd v Excel Noble Development Ltd [2000] 3 HKC 118, per Ribeiro JA (as he then was) at [28]-[32], requires the court to ask the following questions in deciding whether it is just or convenient to grant an interlocutory injunction:

(1)  whether there is a “serious question to be tried” which means that the claim must not be frivolous or vexatious;

(2)  if so, whether, if the plaintiff were to succeed in obtaining a permanent injunction at trial, it could adequately be compensated by an award of damages in respect of any loss which it might suffer by reason of the defendant continuing to act unrestrained pending the trial;

(3)  if not, whether the defendant would be adequately protected by the plaintiff’s cross-undertaking in damages should it be later found that the plaintiff should not have been granted an interlocutory injunction; and

(4)  if there is doubt as to the adequacy of the respective remedies of damages, where the balance of convenience lies.

36.  The principle that when deciding whether to grant or refuse an interlocutory injunction, the court is not concerned with the merits of the plaintiff’s case save to the extent of satisfying itself that it raises a serious question to be tried but should look at the balance of convenience no doubt applies generally in most cases. There are, however, well-established exceptions to the rule.

37.  In this case, given that the Share Offer will lapse at 7 pm on 8 February 2024, which is this Friday, the interlocutory injunction sought under Paragraph 1, if granted, would yield to the Company the remedy it requires before the trial of this action. It matters not that the injunction would technically have effect only until the trial of this action. An order in terms of Paragraph 1 would obviate the need for a trial of these proceedings. Once the Share Offer lapses, there would be no reason for the plaintiff to continue with this action.

38.  The proper approach to be adopted where an interlocutory injunction will, or will practically, have the effect of disposing of a substantive claim in the action has been comprehensively reviewed by Mr Justice Chow in BMC Global Limited v TOR Asia Credit Master Fung LP, HCA 2392/2016, unreported, 14 October 2016. I gratefully adopt his Lordship’s summary and analysis at [35]-[39] which I set out below:

“35. It is well established that where the grant or refusal of an interlocutory injunction would in effect dispose of the action finally the court will have more regard to the plaintiff’s prospect of success, this being treated as a factor in the consideration of the balance of convenience: see Lai Hoi Ping (suing on his own behalf and on behalf of all other members of Hog Kong Taxi Association) v Persons Occupying Portions of Nathan Road near to and between Argyle Street and Dundas Street to Prevent or Obstruct Normal Vehicular Traffic from Passing and Repassing the Occupied Areas, HCMP 2975/2014, at paragraph 10 per Cheung CJHC.

36. Various tests have been formulated by the courts in relation to this higher regard to the prospect of success, for example-

(1) whether the defendant has “no real chance of succeeding at the trial” (Mak Chi-sing v A & A Continental Commodities Ltd [1983] HKLR 430 at 408 per Roberts CJ, recently applied by Harris J in Speedy Brilliant Investments Ltd v China Health Group Limited, HCCW 816/2016, 2 June 2016 at paragraph 13);

(2) whether the plaintiff is “at least likely to succeed at trial” (Sunlink International Holdings Ltd v Wong Shu Wing [2010] 5 HKLRD 653, at paragraph 10 per Harris J);

(3) whether the plaintiff is “at least very likely to succeed at trial” (Fast - Link Express Ltd v Falcon Express Ltd, HCA 2040/2005, 30 December 2005, at paragraph 9 per Deputy High Court Judge Carlson); or

(4) whether the plaintiff has shown “an overwhelming balance on the merits” in its favour (Cayne v Global Natural Resources Plc [1984] 1 All ER 225, at 236f per Kerr LJ).

37. In my view, it is neither possible, nor appropriate, for the court to seek to formulate a precise threshold that the plaintiff must meet before the court may grant an injunction in his favour in circumstances where the grant of an injunction would in effect dispose of the action finally. The following observation by Butler-Sloss LJ in Lansing Linde Ltd v Kerr [1991] 1 WLR 251 at 269D-E (part of which was quoted with approval by Cheung CJHC in Lai Hoi Ping at paragraph 11) is worth reciting:-

“The jurisdiction to grant the relief sought is, however, statutory, section 37 of the Supreme Court Act 1981 providing for the grant of an injunction in all cases in which it appears to the court to be just and convenient to do so. The speech of Lord Diplock in the American Cyanamid case set out guidelines which could not and, as subsequent decisions of the House of Lords and of this court have shown, did not cover every eventuality. The American Cyanamid case was one in which two large companies were battling over pharmaceutical patents. The interlocutory injunction was granted with the knowledge that the case was unlikely to come to trial for two to three years. In N.W.L. Ltd. v. Woods [1979] 1 W.L.R. 1294 Lord Diplock recognised that American Cyanamid was not dealing with a case in which the grant or refusal of an injunction would have the effect of disposing of the action, and such an exceptional case brought into the balance of convenience an important additional element. In Cayne v. Global Natural Resources Plc. [1984] 1 All E.R. 225, where the grant of an interlocutory injunction would have summarily decided the case in favour of the plaintiffs, Eveleigh L.J. said, at p. 232: ‘this case is one that the court has to approach on a broad principle: what can the court do in its best endeavour to avoid injustice?’

The question arises in each application for an interlocutory injunction as to the point on a broad spectrum at which the particular circumstances of the case in question may fit in, and what additional factors there may be to place into the balance of convenience.”

38. In other words, the significance of the merits of the plaintiff’s case as a factor in considering the issue of balance of convenience would vary according to the particular context and circumstance of each case. Ultimately, the court’s task is to arrive at a result which would carry the lowest risk of injustice as a result of the grant or refusal of an injunction.

39. In this regard, it does not seem to me to matter that the plaintiff has raised other claims or sought other relief in the writ (as in the present case where the plaintiffs also seek declaratory relief in respect of the 2^nd defendants’ appointment as joint and several receivers and managers as well as their appointment as directors of the 3^rd defendant) so that, strictly speaking, the grant of the interlocutory/interim injunction sought would not dispose of the action finally. In my view, if the interlocutory/interim injunction would have the practical effect of finally disposing of the claim for an injunction, being a substantive claim in the action, the court is entitled to have a higher regard to the merits of the plaintiff’s case so far as relevant to that particular claim.”

39.  This is, therefore, one of the rare cases in which the court is obliged to take a closer look at the merits of the plaintiff’s claim.

40.  Applying the various tests summarised in [36] of the judgment of Chow J (as Chow JA then was) in BMC Global Limited, I am persuaded, on the evidence adduced before me, that the plaintiffs’ claim has sufficient merits to support an order in terms of Paragraph 1 right away.

(1)  In light of the trading records mentioned in [10] above, it defies common sense, and it is inherently improbable, that a shareholder would prefer selling under the Share Offer at the Offer Price to selling in the open market at a price that would most likely be higher than the Offer Price.

(2)  The plaintiffs’ affidavit evidence as summarised in [24]-[26] above is, surprisingly not controverted by Mr Sze who has instead chosen not to adduce any evidence at all. There is not even a bare denial of the matters attributed to him or the basis upon which they are attributed to him. It is not sufficient for counsel to just state in submission that his client did not act in the ways should to be enjoined. On matters as at fact, the court has to act on the evidence actually adduced by the parties.

Adequacy of damages to either side

41.  I am prepared to accept, and proceed on the basis, that damages would/may not be an adequate remedy to either the Company or Mr Sze and the parties acting in concert with him.

42.  Regarding the plaintiffs, I repeat [27] above. It appears to me the loss and damage stated therein would be difficult to quantify and, therefore, may/would not be adequately compensated by an award of damages.

43.  As for Mr Sze, my attention has been drawn to the scenario following the halt of the Share Offer which is that Mr Sze and the parties acting in concert with him would have to wait 12 months before they could make another offer, during which circumstances may change in ways that cannot now be predicted in an informed manner. This is the highest that one can put for Mr Sze.

Balance of convenience

44.  Moving then to the balance of convenience, bearing in mind that the court should adopt the course that involves the least injustice, the existence of (unchallenged) evidence on the strength of the plaintiffs’ case and the complete lack of evidence of a meritorious defence by Mr Sze is, to my mind, the decisive factor that tilts the balance decidedly in favour of the plaintiffs.

45.  Another consideration that weighs heavily on my mind is allowing Mr Sze to proceed with what appears, on evidence, to be an illegality which, if completed, may not be reversed.

No evidence against Shenwan Hongyuan

46.  Mr Ronny Tong SC (leading Miss Sabrina Leung and Mr Mike Yeung) accepts that there is no evidence whatsoever implicating Shenwan Hongyuan in the conduct sought to be enjoined by the Summons.

Orders

47.  For the reasons stated above, in addition to Mr Sze’s Undertaking, I make an order in terms of Paragraph 1 against Mr Sze. I dismiss the Summons as against Shenwan Hongyuan.

48.  I shall hear the parties on costs of both the applications before Anthony Chan J and me. Written submission on costs (accompanied by a statement of costs) shall be exchanged between, and lodged by, the parties within 14 days from today and shall be replied to (if so advised) within 14 days thereafter. There shall be no further submission on costs without leave of the court. The decision on costs (including summary assessment) shall be rendered on paper unless an oral hearing is directed.

49.  The parties shall have liberty to apply.