CHINACULTURE.COM LTD v. LAM TING BALL, PAUL AND OTHERS

HCA 2902/2017

[2022] HKCFI 1114

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2902 OF 2017

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J U D G M E N T

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Introduction

1.  The 4^th Defendant is incorporated in Bermuda and has been listed on the Main Board of the Hong Kong Stock Exchange (“HKEX”) since 1991 (“Company”).  It was established by the well-known local businessman Tsui Tsin Tong (“TT Tsui”). TT Tsui injected into the Company a business that he had acquired in 1985 called China Paint Holdings Ltd.  As its name suggests China Paint Holdings Ltd was a paint manufacturer and until the middle of 2017 the Company’s principal business was paint manufacturing, which accounted for about 80% of its total revenue.  In addition, it invested in property in Hong Kong and the Mainland and was involved in the iron and steel business.  The production of paint was conducted at four locations in the Mainland:

(1)  The Shajing production plant located at Yabian Industrial Zone, Shajing Town in Bao’an District, Shenzhen (“Shajing Land”).

(2)  The Xinfeng production plant located in at Xinfeng County, Shaoguan City in Guangdong.

(3)  The Ezhou production plant located at Ezhou City in Hubei.

(4)  The Xuzhou production plant located at Xuzhou Economic Development Zone in Jiangsu.

2.  On 10 July 2017 the Company spun-off its paint business into a new listed vehicle (“Spin-Off”) CPM Group Limited (“CPM”). This included the transfer of the Shajing Land.  It is the inclusion of the Shajing Land at book value rather than market value in the Spin-Off that has given rise to the present statutory derivative action commenced by the Plaintiff, Chinaculture.Com Limited (“CC”).  CC is a subsidiary of Chuang’s China Investment Ltd, which is also listed on the HKEX, and at the commencement of the trial owned 19.16% of the Company.  It is controlled by Alan Chuang (“Mr Chuang”).

3.  The 1^st to 3^rd Defendants were at the material times executive directors of the Company.  Paul Lam is the Chairman of the Board of the Company (“Mr Lam”).  It was Mr Lam’s Family that established the paint business, which was later acquired by TT Tsui.  Philip Tsui is the son of TT Tsui (“Mr Tsui”). He was at the material times the Executive Deputy Chairman and Managing Director of the Company and the sole shareholder and director of Prime Surplus Ltd (“Prime Surplus”), the largest shareholder of the Company, holding 26.16% of its issued share capital.  Chong Chi Kwan was an executive director and the Company’s Finance Director (“Mr Chong”).  I shall refer to the 1^st to 3^rd Defendants collectively as “the Defendants”.

4.  The Company’s Board also consisted of the following non-executive directors (“NEDS”): Sir David Akers-Jones, who was an independent non-executive director (“INED”) until 19 July 2017 (“Sir David”); Dr Steven Chow, who was an INED from 1 February 2007 until 9 June 2017 (“Dr Chow”); Bernard Ko, who was a NED from 1 February 2007 until 12 April 2016 (“Mr Ko”); and Richard Hung (“Mr Hung”), (with Mr Chuang as his alternate) from 29 June 2002 to 5 June 2013 and again from 4 July 2016 to 5 June 2019.

5.  It is CC’s case that the Board starting in about March 2012 had developed a business plan, which involved moving the Shajing production plant to Xinfeng and this should have made the Shajing Land available for redevelopment.  This is not what happened.  The Shajing production plant continued in operation and the Shajing Land was included in the Spin-Off and the price at which the initial public share offering took place did not reflect the value of the Shajing Land.  The Company held 75% of the issued shares of CPM, but the value of its interest was less than it would have been if either the Shajing Land had been retained or the value of the Shajing Land had been properly reflected in the value of CPM’s shares at their initial public offering.

6.  CC argues case that as a consequence of the aforesaid matters the Defendants were willfully negligent or in default of their duties to the Company or caused the Spin-Off to be implemented for an improper purpose and that as a consequence the Company suffered loss.  In short, and possibly oversimplifying, CC claims that the loss is the difference between (A) the asset value of the Company assessed on the basis that it has a 100% interest in CPM and the Shajing Land is valued at market and (B) the 75% interest in CPM that the Company had after the Spin-Off.

7.  It is not sufficient for CC to demonstrate that the Defendants have been negligent.  The reason for this is that Clause 167(1) of the Company’s bye-laws[1] contain the following indemnity given by the Company in favour of its directors and other officers:

“The Directors, Secretary and other officers and every Auditor of the Company for the time being of the Company and the liquidator or trustees (if any) for the time being acting in relation to any of the affairs of the Company and everyone of them, and everyone of their heirs, executives, and administrators, shall be indemnified and secured harmless out of the assets and profits of the Company from and against all actions, costs, charges, losses, damages and expenses which they or any of them, their or any of their heirs, executives, or administrators, shall or may incur or sustain by or by reason of any act done, concurred in or omitted in or about the execution of their duty, or supposed duty, in their respective offices or trusts; and none of them shall be answerable for the acts, receipts, neglects or defaults of the other or others of them or for joining in any receipts for the sake of conformity, or for any bankers or other persons with whom any monies or effects belonging to the Company shall or may be lodged or deposited for safe custody, or for insufficiency or deficiency of any security upon which any monies of or belonging to the Company shall be placed out on or invested, or for any other loss, misfortune or damage which may happen in the execution of their respective offices or trusts, or in relation thereto; PROVIDED THAT this indemnity should not extend to any matter in respect of any wilful negligence, wilful default, fraud or dishonesty which may attach to any of the said persons.” (emphasis added)

8.  It is not suggested by CC that this bye-law is unenforceable.  CC accepts that in order to succeed it must demonstrate “wilful negligence, wilful default, fraud or dishonesty..”.  CC’s case on liability stands or falls on first, whether or not it can demonstrate that on the balance of probabilities the Defendants were responsible for mistakes and shortcoming in the way the Spin-Off was introduced, which amount to breach of their duties.  Secondly, the mistakes or shortcomings were not simply the consequence of negligence, but were wilful—I address the relevant law in detail in [20]–[23].  It is CC’s case that the mistakes and shortcomings of which it complains are to be explained by the Defendants underlying purpose in promoting and introducing the Spin-Off, namely, to make the Company a less attractive take-over prospect for Mr Chuang.  I explain the reasons why CC says that the Defendants were concerned about the prospect of an attempted takeover by Mr Chuang in [24]–[29].

9.  I shall divide this judgment into the sections listed below.  Sections (D) to (F) are based on documents and consist consequentially of largely uncontroversial descriptions of events, although the reasons for the events, their implications and consequences maybe contested.  It is helpful in my view to explain the case in this way before moving to an analysis of the factual disputes and evidence.

A.     Directors’ Duties

10.  The Company is incorporated in Bermuda and the directors’ duties are a matter of Bermuda Law.  Although the Bermuda statute, which imposes duties on directors is differently worded to our Companies Ordinance, Cap. 622, there is no dispute that the duties are substantively the same in Bermuda and Hong Kong.  Section 97 of the Bermuda Companies Act 1981 imposes the following duty of care on officers (which by virtue of section 2(1) includes directors) of a Bermuda company:

“Interpretation

Section 2(1) In this Act unless the context otherwise requires—

…

‘officer’ in relation to a body corporate, includes director and secretary…”

“Duty of care of officers

Section 97(1) Every officer of a company in exercising his powers and discharging his duties shall—

(a) act honestly and in good faith with a view to the best interests of the company; and

(b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.

(2) Every officer of a company shall comply with this Act, the regulations, and the bye-laws of the company.

…”

11.  In addition CC relies on the directors’ fiduciary and common law duties and those imposed by the Listing Rules.  The duties are pleaded in [16.1]–[16.4] of the Statement of Claim and are admitted in the Defence subject to a minor qualification in respect of [16.3], which concerns the Listing Rules and in particular Rule 3.08.  The Defendants admit that they owe a duty to take reasonable steps to ensure that the Company complies with the Listing Rules.

12.  It does not seem to me that there is any material difference between the parties on the broad scope of the Defendants’ duties.  Directors owe the company of which they are officers fiduciary, statutory and common law duties to act in a company’s best interests and exercise reasonable skill and care.  In Hong Kong the common law and equitable duty of skill and care was replaced, but the substance of the duties not changed, by section 465 of the Companies Ordinance, Cap. 622, which is a distillation of a director’s statutory, common law and equitable duties of skill and care and echoes the language of the Bermuda Companies Act:

“465. Duty to exercise reasonable care, skill and diligence

…

(2) Reasonable care, skill and diligence mean the care, skill and diligence that would be exercised by a reasonably diligent person with—

(a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company; and

(b) the general knowledge, skill and experience that the director has.

…”

13.  What that means in the context of a contemporary listed company varies to some degree from jurisdiction to jurisdiction.  For example, neither Bermuda nor Hong Kong has an equivalent statutory duty to promote the success of a company, to that introduced in England by section 172 of the Companies Act 2006.  It is also needs to be borne in mind that we are concerned with legal duties rather than what might be considered best practice by business management consultants or lecturers and writers on business management.

14.  A number of relevant criteria and principles emerge from cases in various jurisdiction.  It is clear from authorities concerning adequate provision of information to shareholders, who are required to approve a proposed course of action or a transaction, that a director is under a duty to disclose to shareholders matters within their knowledge relevant to the decision.  This does not necessarily require all information as this might, depending on the facts, overwhelm and confuse a shareholder, but it does require sufficient information to allow an informed decision to be made about the subject matter.  In the context of disposal by a listed company of a subsidiary, which required shareholder approval Austin J explains in ENT Pty Ltd v Sunraysia Television Ltd [2] what this means in practice:

“17. The plaintiff places particular reliance on the decision McLelland J in Chequepoint Securities Ltd v Claremont Petroleum NL (1986) 11 ACLR 94. Like the present case, that case involved a meeting of shareholders to approve a sale of assets by their company, though on that occasion the shareholders were also asked to give effect to a reduction of capital, subject to confirmation by the court as required by the law of that time. Unlike the present case, there the application was for an interlocutory injunction, and so the plaintiff had only to establish an arguable case and show that the balance of convenience favoured the making of the order.

18. After finding that the directors of the company had complied with the company’s constitution by giving a notice that disclosed the general nature of the business of the meeting, his Honour turned to consider the fiduciary obligation of the directors, and said (at 96):

‘Where directors take it upon themselves to urge or recommend or advise members to exercise their powers in general meeting in a particular way, they are in general required to make a full and fair disclosure of all matters within their knowledge which would enable the members to make a properly informed judgment on the matters in question’

(citing Bulfin v Bebarfald's and Devereaux Holdings Pty Ltd v Pelsart Resources NL (No 2) (1985) 9 ACLR 956).

19. The obligation to make full and fair disclosure does not oblige the directors to give shareholders every piece of information that might conceivably affect their voting. The adequacy of the information provided in documentation is to be assessed in a practical, realistic way having regard to the complexity of the proposal (Fraser v NRMA Holdings Ltd (1995) 55 FCR 452, at 468). Speaking of the statutory obligation to avoid misleading or deceptive conduct, while relying on cases concerning the directors' duty of disclosure, the Full Federal Court said in Fraser v NRMA Holdings, at 468:

‘The need for an applicant to establish materiality is of particular importance in a case like the present one where the proposal is complex, and involves difficult questions of commercial judgment and matters of degree and conjecture as to the future about which there is room for a range of honestly and reasonably held opinions. If every possible formulation of the commercial objective of the proposal, and arguments for and against every theoretical possibility, were set forth the total package of information to members would be likely to confuse rather than to illuminate the issue for decision, even for people having a familiarity with corporate law and commerce. The need to make full and fair disclosure must be tempered by the need to present a document that is intelligible to reasonable members of the class to whom it is directed and is likely to assist rather than to confuse: Devereaux Holdings Pty Ltd v Pelsart Resources NL (No 2) (1985) 9 ACLR 956 at 959; Re Dorman Long & Co Ltd [1934] 1 Ch 635 at 665-666.’

20. The question is not whether the explanatory documents provided to the shareholders could have been drafted differently, but what effect the documents will have on ‘the ordinary shareholder who scans or reads the document quickly, not as a lawyer, but as an ordinary man or woman in commerce or as an ordinary investor’ (Devereaux Holdings, at 958). If a deficiency is identified, the court considers whether there is any reasonable ground for supposing that the deficiency would cause shareholders to vote, or abstain from voting, under a serious misapprehension of the position (Devereux Holdings at 958-9 per Young J, citing Re Imperial Chemical Industries Ltd [1936] Ch 587 at 618 per Clauson J).

21. The Full Federal Court’s decision in Fraser v NRMA Holdings Ltd is authority for the proposition (stated at 466) that ‘a proper discharge of the duty may require that the directors take reasonable steps to ascertain relevant information for communication to members if that information is not known to the board’. That, in turn, is qualified by the proposition that in considering whether the directors should seek out additional information, it is relevant to take into account the time and cost of acquiring and preparing such information, and the delay involved in doing so (Cleary v Australian Co-operative Foods Ltd (Nos 2 and 3) (1999) 32 ACSR 701, 719). But I do not agree with the suggestion in the defendant’s submissions that the duty to take steps to ascertain additional information is confined to cases where additional information is required to give a proper explanation of a change of circumstances or to ensure that members are not misled by information already provided.

22. The application of the principle by McLelland J in the Chequepoint case is also of assistance in the present case because of the similarity of the facts.  While the directors’ explanatory letter in Chequepoint drew the shareholders’ attention to the benefits they would derive from the transaction, which would permit them to deal with their gold and oil interests separately, McLelland J held that the letter did not deal adequately with the effect of the transaction in financial terms.  He found that the directors had in fact carried out a calculation of the financial effect of the transaction, but no reference was made to this in the material sent to the shareholders.”

15.  CC argues that the same type of duty applies to the provision of information to the Board.  In broad terms this must be correct, although I would expect that a board would require more detailed information as directors should be better placed to assess information about a company’s activities than a shareholder and also to recognise their obligation to do so in order to comply with their duties—a shareholder is free to ignore information provided to him and vote as he or she likes.

16.  Necessarily in order for a board to carry out its function properly it will on occasion need to obtain suitable independent professional advice and assistance.  Failure to obtain advice in circumstances in which a competent director would be expected to do so, or choosing unsuitable advisers, may be negligent and give rise to a breach of the duty of skill and care[3].

B.     Court’s reluctance to interfere with commercial decisions

17.  The court will remedy acts or omissions, which constitute breaches of the duties, which I have discussed in the previous sections.  The court does not, however, interfere with decisions and transactions over which differences have arisen, which are largely matters of commercial judgment.  The reasons are explained by Street CJ in Re Mineral Securities Asia Ltd (in liq)[4]:

“When the court is required to pronounce upon the commercial prudence of a transaction it enters upon a slippery and uncertain field. Apart from the lawyers’ disclaimer of expert qualifications in matters of business prudence, the very process of litigation and the necessary limitations upon the scope of admissible evidence, restrict the available material to far less than is necessary for the making of a commercial decision.”

18.  In Wong Luen Hang v Chan Yuk Lung[5], Chu JA echoes this reasoning:

“26. It is to be recognized that in the performance of their office, directors will from time to time have to make business judgments and business decisions. The court should be slow to interfere with the business judgement and business decisions of directors. As explained in Harlow’s Nominee’s Pty Ltd v Woodside (Lakes Entrance Oil) Co NL (1968) 121 CLR 483, 493,

‘Directors in whom are vested the right and duty of deciding where the company’s interests lie and how they are to be served may be concerned with a wide range of practical considerations, and their judgment if exercised in good faith and not for irrelevant purposes is not open to review in the courts.’”

19.  Of course not every case in which the principal complaint concerns a commercial decision is immune from action.  If a breach of duty has occurred that resulted in a bad commercial decision, which caused loss, the breach of duty will be actionable.  What is material is whether the substance of the complaint is a matter of commercial judgment or genuinely concerns non-compliance with a director’s duties.  A complaint about a commercial judgment cannot circumvent the above principle by being dressed up in the pleadings as a breach of duty.  What is in substance a matter of commercial judgment cannot be successfully attacked by identifying a series of breaches of duty in the process by which it was reached, if the breaches are unlikely to have made any difference to the decision that was eventually made.  In practice the more criticism and evidence focuses on the commercial features of the impugned transaction or corporate affairs, the less likely it is that the court will conclude that it is a genuine complaint of breach of duty as opposed to a disagreement over management decisions.

C.     Wilful default and improper purpose

20.  As I have already explained it is not sufficient for CC to establish breach of duty.  It needs to satisfy me that there was wilful breach of duty.  There is no controversy over what “wilful” means in the present context.  It was explained by Romer J in Re City Equitable Fire Insurance Co Ltd[6] and the explanation approved by the Court of Final Appeal in Bewise Motors Co Ltd v Hoi Kong Container Services Ltd:

“If I may say so with respect, the difficulty is not so much in ascertaining the meaning of the adjective ‘wilful’, as in ascertaining precisely what is the noun to which the adjective is to be applied. An act, or an omission to do an act, is wilful where the person of whom we are speaking knows what he is doing and intends to do what he is doing. But if that act or omission amounts to a breach of his duty, and therefore to negligence, is the person guilty of wilful negligence? In my opinion that question must be answered in the negative unless he knows that he is committing, and intends to commit, a breach of his duty, or is recklessly careless in the sense of not caring whether his act or omission is or is not a breach of duty.”

21.  The Defendants argue that an allegation of wilful misconduct is an allegation of dishonesty.  This is based on a statement of Wilson Chan J in [209] of his judgment in Tao Soh Ngun v HSBC International Trustee Ltd[7].  The authorities discussed in [209]–[212] do not refer to dishonesty and describe the meaning of wilful using the language in which it is explained by Romer J.  It is not clear to me what, if anything, describing wilful as connoting dishonesty was thought by Wilson Chan J to add to the language used in the authorities to which he refers.  It may be that Wilson Chan J considered it relevant because he was concerned with a pleading of wilful misconduct and in [212] he is seeking to draw assistance in determining what needs to be pleaded from the requirements imposed on a party pleading fraud and dishonesty—so the reference to dishonesty was more by way of analogy used to explain why the facts relied on to prove that the act or omission was wilful had to be pleaded with proper particularity.  Be that as it may, it seems to me clear that a plea of wilful misconduct is not the same as a plea of fraud or dishonesty and to the extent that the Defendants intend to suggest by their submission that it is necessary to prove more than reckless indifference to compliance with the relevant duties and obligations I disagree.

22.  It follows, therefore, that CC has not only to establish a breach of duty, but also that either the Defendants intended not to comply with their duties or were reckless as to whether they did or not.  If CC were to establish that the Spin-Off was motivated, as it alleges, by an improper purpose it would almost necessarily follow that there had been a wilful default.  An improper purpose arises when a director exercises his rights and powers for a purpose other than that for which they were conferred.  The paradigm example is using a director’s powers (perhaps by allotting shares) to entrench an existing shareholder’s control of a company[8]. The complaint advanced against, in particular, the 2^nd Defendant Mr Tsui, is a sophisticated variation of that kind of case.  The question is one of fact.  Was Mr Tsui motivated in promoting and introducing the Spin-Off by a desire to reduce the prospect of a takeover attempt by Mr Chuang? Either I am satisfied that CC has demonstrated on the balance of probabilities that from about 2017 onwards the Defendants, or at least one of them, most likely Mr Tsui, was promoting the Spin-Off to thwart a prospective takeover or I am not.  There is no direct evidence that the Defendants were so motivated and CC asks me to draw the inference that they were.  I am mindful of the observations of Ribeiro PJJ in Nina Kung v Wong Din Shin[9] on the need for a disciplined approach to the drawing of inferences, in particular inferences of serious misconduct.

“187. In HKSAR v Lee Ming Tee & Securities and Futures Commission (2003) 6 HKCFAR 336, Sir Anthony Mason NPJ acknowledged the need for such a disciplined approach to the drawing of inferences and in particular for inferences of fraud or serious misconduct to be drawn only where such inferences are compelling. Dealing with an allegation that senior SFC officers had deliberately and improperly terminated an investigation in order to avoid compromising the standing of the subject of the investigation who was acting as an expert witness in a criminal trial in which the SFC was interested, his Lordship stated:

‘… that conclusion was not to be reached by conjecture nor, as the respondent submitted, on a mere balance of probabilities. It was to be plainly established as a matter of inference from proved facts’. (at §72)

Reflecting the Re H & Others (Minors) (Sexual Abuse: Standard of Proof) [1996] AC 563 principle he added:

‘In the particular circumstances, it was for the respondent to establish as a compelling inference that very senior officers of the SFC had deliberately and improperly terminated the investigation into Meocre Li’s conduct for the ulterior purpose alleged, sufficient to overcome the inherent improbability that they would have done so.’ (Ibid.)

It will be convenient to refer to the principle adopted in these cases as ‘the HKSAR v Lee Ming Tee & Securities and Futures Commission principle’.”

23.  An allegation of wilful misconduct by a director of a power for an improper purpose is a serious one.  As these passages make clear the necessary inference can only be drawn from proven facts, which make the inference compelling.  It is not sufficient to identify a series of wrongs and mistakes committed over time and invite the court to conclude that by virtue of their number it is probable that something more than negligence or indifference was their cause.  This is to invite speculation and conjecture. It is necessary for the court to find facts, which assessed in context are indicative, in the present case, of the Defendants’ attitude and motives.  Context includes how a person or a company normally conducts its affairs.  If it is normally casual and unsophisticated, it is difficult to infer anything about the motives for dealing with a particular transaction in a casual and unsophisticated manner.  Similarly, if the facts can credibly be explained as mistakes or errors of judgment an inference of, in the present case, conscious non-compliance by the Directors with their duties, or recklessness indifference to doing so, cannot properly be made.

D.     The early history of the Company and the reason why CC believes Mr Tsui was concerned to make takeover of the Company less attractive

24.  Mr Tsui says in his witness statement that prior to his Father’s death in 2010, he understood that Mr Chuang had suggested to his Father that the Shajing Land should be redeveloped.  Tsui Senior disagreed believing, says Mr Tsui, that the paint business was the core of the Company’s activities and was a stable, defensive business.  Although, Mr Tsui does not expressly state this in his witness statement it is implicit that that his Father saw the production facility on the Shajing Land as a key component of the paint business.

25.  It is CC’s case that following his Father’s death Mr Tsui heard that Mr Chuang intended to take over the Company and he was upset about this.  CC’s case in this regard is based on Mr Tsui’s evidence contained in his witness statement filed on 2 March 2018. The improper purpose claim was not pleaded until December 2018.  Mr Tsui says that he believed that he and Mr Chuang had a different vision for the Company.  He says that at that time the Company was in need of additional capital and the Board agreed to issue new shares to the Chinachem Group in April 2010, which as well as being a well-established business group also offered business opportunities as it is substantially involved in property development.  The placement to Chinachem Group company Diamond Season Ltd was for 314 million shares representing 16.66% of the enlarged share capital. In 2012-13 Diamond Season Ltd sold 221 million of its shares to Prime Surplus.

26.  Both Mr Chuang’s representatives on the Board voted against the proposal.  Mr Tsui says that Mr Chuang was rude and disrespectful to him at that time and from then onwards their relationship soured.

27.  Mr Tsui says that sometime in 2011 he received a telephone call from Mr Ko who asked whether he would be willing to sell the Shajing Land to Chuang’s Group for between RMB20 to 30 million.  Mr Tsui says that he did not personally approve of such a transaction, however out of respect for Mr Chuang, he told Mr Ko to raise it at an upcoming Board meeting for discussion.  Mr Tsui says that he believes Mr Ko detected his lack of enthusiasm for the sale.  As far as he can recall Mr Ko never followed up the matter.

28.  Mr Tsui acknowledges that his relationship with Mr Chuang deteriorated further in 2013 when Mr Hung retired by rotation.  Prime Surplus voted against Mr Hung’s reappointment, which as Mr Chuang was his alternate effectively prevented Mr Chuang personally representing his interest in the Company at the Board if he so wished.  CC says that by this time Mr Tsui had reason to be concerned about Mr Chuang mounting a hostile takeover.  Mr Chuang controlled two listed companies, which gave him the financial capacity to do so and, consistent with him wanting to do so, CC continued to increase its shareholding from 14.88% in 2012 to 19.16% in 2017.

29.  CC says that Mr Tsui would have appreciated that a spin-off of the paint business, which included the Shajing Land would make the Company a less attractive takeover prospect for the following reasons:

(1)  The Shajing Land would no longer be owned by the Company.

(2)  CC would have no representative on CPM’s Board.

(3)  The Company would only indirectly own 75% of the Shajing Land, which would make the Company a less attractive takeover prospect if the purpose was to realise the Shajing Land value.

(4)  The cost of a takeover was increased because the valuation of the Company would include the value of its interest in CPM and would have to take into account the fact that CPM received HK$215 million from the Spin-Off or involve the purchase of the 25% shareholding in CPM allotted to independent shareholders.

E.     The proposed relocation of the Shajing Production Plant

30.  On 29 March 2012, the Company published its 2011 Annual Report.  Page 4 of the Chairman’s (Mr Tsui) Statement explained the following:

“The Group’s first phase of new manufacturing lines through the factory and buildings to be constructed on our existing land located in Xinfeng … is expected to commence its trial production in the second half of 2012. As the factory in Xinfeng will be constructed in different phases, the production facilities in existing factory located in Shajing will be relocated to Xinfeng in different stages according to the time of completion of different phases in coming years.

During the year, the Group incurred capital expenditure of approximately HK$28.40 million for the construction costs in respect of the production plant in Xinfeng.  The Group believes that the new manufacturing lines would enable the Group to enhance its overall production capacity and to effectively control its manufacturing and production costs to cope with the future business expansion of the Group.”

31.  At a board meeting held on 23 August 2012, Mr Tsui updated the Board about the progress of relocation of the Shajing factory to Xinfeng.  He explained that under the Mainland Government’s redevelopment plan for the Shajing area, the Shajing Land had a good redevelopment prospect and would be a very valuable long term asset:

“13. Any Other Business

Mr Philip Tsui updated the board about the progress of relocation of our Shajing factory to Xinfeng. The first phase (about 30%) of the construction of the Xinfeng plant was completed. … The Shajing Factory could therefore be in use for another 3 years up to 2015.  Under the PRC government’s redevelopment plan for the Shajing area, our Shajing factory land had a good redevelopment prospect and would become a very valuable asset in the long term. Relocation of the Shajing factory to Xinfeng should be given high attention.”

32.  At a board meeting held on 7 December 2012, it was recorded that:

“3.5.1 … The first phase of the development of the Xinfeng factory had been completed and was pending for the grant of production licence which was expected to be given after the Chinese New Year.

3.5.2 … Paul Lam opined that China … Because of the PRC government policies, many paint companies had to move their production plants from urban areas to remote areas which would increase their production cost…With the launch of our Shanghai factory (half of the size of the Shenzhen factory) and Xinfeng factory (3 times of the size of the Shenzhen factory), our production and operation capacities could be increased significantly.

3.5.3 … Shenzhen factory had successfully got a renewed of its production safety license for another 3 years and so the production in our Shenzhen factory could be maintained in the years.  The moving into the Xinfeng factory would be implemented by phases.  Management had started talks with the Shenzhen local government officials to explore the possibilities of changing our Shenzhen factory site from industrial use to residential use.”

33.  On 16 July 2013, the Board was informed that the first phase of the Xinfeng factory had been completed and was in trial operation.  On 29 August 2013, the Board was again informed that the Xinfeng factory had commenced trial production.  On 17 December 2013, Mr Lam updated the Board about the latest development of the Xinfeng factory, namely, that it was in the process of applying for the status as a “New and Hi-tech Enterprise” and that once the application was successfully granted, the relocation to the Xinfeng factory would be in full force.  At the Board meeting on 28 August 2014, Mr Lam and Mr Tsui updated the Board informing directors that the construction of the Xinfeng factory was in its second phase.  It was expected that relocation to the Xinfeng factory would be in full force in around five years, depending on the progress made in obtaining the status as a “New and Hi-tech Enterprise” which would enable the factory to obtain a 10% tax deduction.

34.  Later, at the Board meeting held on 26 August 2015, it was reported that the Xinfeng factory had commenced operation in May 2015 employing about 70 production workers and that a certificate of High-Tech Enterprise was issued on 30 November 2016.  On 23 March 2016, another Board meeting was held at which it was reported to the Board that the foundation of the second phase of Xinfeng factory had been completed and the progress of development of the second phase was progressing satisfactorily.  Four months later on 7 July 2016, Mr Hung suggested at the Board meeting held on that day that in view of the increasing property value of the site of the Shajing Factory, the Board should initiate discussions with the relevant government authorities for rezoning the site of the Shajing Factory with a view to commencing the process and lock in the premium resulting from a change of land use.  Sir David concurred with this idea.  Mr Tsui told the Board that a preliminary discussion had already taken place with the relevant government officials about the land use change policy.

35.  At the board meeting on 25 August 2016, Mr Hung inquired if CPM Shenzhen (owner of the Shajing Land) would be the party to apply for rezoning the land of the Shajing Factory for the purpose of locking in the premium for the change of land use and if management would consider transferring the land to another Group company for the purpose of making the application.  Mr Tsui and Mr Chong replied that they would not consider a transfer at that time as it would incur substantial land appreciation tax.

36.  At the Board meeting held on 22 November 2016, Mr Hung observed that the Shajing Land might have huge development potential.  In June 2017 when the Prospectus for the Spin-Off was issued it contained the following statements:

(1)  “The … Xinfeng Production Plant … is designed as our flagship production plant for the production of solvent-based and water-based paint and coating products”: Prospectus page 147.

(2)  “Following completion of the construction, our Xinfeng Production Plant will have an annual production capacity of 11,591 tonnes of solvent based and 20,000 tonnes of water-based paint and coating products”: Prospectus page 148.

(3)  The Directors of CPM confirmed that they plan to establish the Xinfeng Production Plant as the “important production plant for all types of paint and coating products, with focus on the water-based paint and coating products, serving the customers in Southern China”: Prospectus page 149.

(4)  The “Xinfeng Production Plant would be established as (CPM’s) leading production plant for different types of paint and coating products…. Given that our Xinfeng Production Plant is our leading production plant, our Directors consider that having a research and development centre with the Xinfeng Production Plant is necessary”: Prospectus page 178.

(5)  It was mentioned that “the decrease in the utilisation rate in 2015 for the Shajing Production Plant was due to decreased demand for the paint and coating products and the commercial production activities at Xinfeng Production Plant in May 2015.  [The Company] shifted some of the production activities to [its] Xinfeng Production Plant”: Prospectus page 146.

(6)  In the description of the “Use of Net Proceeds from the Global Offering” at page S-12 of the Prospectus, it was stated that HK$78.5m or 46.7% “will be used for the construction of our Xinfeng Production Plant, including the construction of the infrastructure, office buildings, staff accommodation and related electricity and environmental protection facilities and the purchase of the required plant and machinery for the production of water-based paint and coating products; establishing of a paint and coating product research and development centre; and the construction of three dangerous goods warehouse for the solvent-based paint and coating products produced”.

37.  It is CC’s case that it was only after commencement of the present proceedings, that the Defendants asserted, for the first time, in their Defence, that “the idea of moving the facilities to Xinfeng was abandoned due to the poor state of infrastructure in Xinfeng”: Defence [162(1)].  In June 2018, in answer to a request for particulars the Defendants further asserted that the “idea was abandoned before the 1^st spin-off application made in November 2014”. CC say that this is inconsistent with the what the Defendants had told the Board, and the discussions that had taken place at Board meetings, up until the end of the 2016.  It is also inconsistent, says CC, with the representations made in the Spin-Off, which clearly give the impression that Xinfeng was to be the primary production plant.

38.  Mr Chong explains in [81.2] of his witness statement that although the Company had previously contemplated moving the production plant from Shajing to Xinfeng, the Company’s management “subsequently” found out that the Xinfeng County Government was unable to deliver many of the promises it originally gave and that it was difficult (due to the remote location of Xinfeng) to recruit people.  Mr Chong says this in [81.3]:

“81.3 We also took into account the following factors in reaching the conclusion that the Paint Business should retain the Shajing land and the production plant built thereon:-

(1) The production plant at the Shajing Land is the main production plant of the Paint Business, and has the largest designed annual production capacity (among the four production plants operated by the Paint Business).

(2) The production plant at the Shajing Land has various certifications and accredited laboratory facilities (which are not present for the Xinfeng factory) which are important to the product development of the Paint Business.

(3) Furthermore the Xinfeng factory does not have facilities for the production of water-based paints, unlike the production plant at the Shajing Land.”

Mr Chong says that it was concluded (it is not clear who he suggests so concluded) that the paint business should retain the Shajing Land and the production plant built thereon.  Rather unhelpfully Mr Chong does not state when this conclusion was reached or who the “we” he refers to were.

39.  Mr Chong describes in his supplemental witness statement in [22], matters which he suggests had not been expected at the time of the Prospectus and “more importantly” completion of an acquisition of a factory in Zhongshan in the middle of 2018, which led CPM’s management to the view that it would be more commercially viable to build the new water-based paint production facilities at the Zhongshan Factory rather than the Xinfeng Factory.  CC argues that this suggests that by the time of the Prospectus, it remained the intention of the management to relocate the water-based production plant at Shajing to Xinfeng, which is consistent with page 147 of the Prospectus.

40.  CC also suggests that one would have expected that an important issue such as the abandonment of the relocation plan to Xinfeng Factory would have been raised, considered and discussed in Board meetings.  CC says that it is not mentioned or canvassed in any of the minutes of the Board meetings.  When Mr Hung made remarks at a Board meeting on 25 August 2016 concerning rezoning of the Shajing Factory, a need to make a provision for termination payments that would be incurred at the time of the relocation, or that the Shajing Land had huge development potential, it was never suggested by any of the Defendants that the relocation plan had been abandoned.

41.  It is CC’s case that the abandonment of the relocation plan was determined by the Defendants later and the decision was connected with the Spin-Off which I explain in the next section.

F.     The Spin-Off

42.  The idea of a spin-off was first mentioned in a voluntary announcement of the Company published on 3 December 2013.  It was stated that the Board was exploring if it was viable to spin-off part of its business for a separate listing.

43.  At a Board meeting held on 17 December 2013, Mr Ko asked for more details about the spin-off.  Mr Tsui explained that the consideration of a spin-off was at very preliminary stage.  The idea of a spin-off was raised at another Board meeting held on 7 November 2014.  According to [8] of the minutes, Mr Chong reported on the proposed spin-off.  The minutes record it being stated that:

(1)  A new Cayman Island company would be incorporated for the purpose of the listing application on the Main Board and to hold the subsidiaries for the paint business.

(2)  The newco group would focus on the paint business; whereas the remaining group would consist of the other business of the CNT Group such as property investment, trading of iron and steel products.

(3)  Immediately after the proposed spin-off, it was expected that the Company would hold about 75% of the equity interest of the newco as enlarged by the new issue.

(4)  The proposed spin-off would constitute a deemed disposal by the Company and according to the size tests, it would be recognised as a major transaction under Chapter 14 of the Listing Rules.

(5)  The net proceeds were intended to be used for, amongst other things, the construction of the second phase of the Xinfeng factory.

(6)  The funds raised from the new issue would be approximately HK$250 million to HK$350 million.

(7)  Professional parties were or would be appointed (such as Optima Capital Ltd as the financial adviser; BMI Appraisals Ltd as property valuer).

(8)  The completion of the proposed spin-off would be conditional on shareholders’ approval.

44.  On 13 November 2014, Optima on behalf of the Company, submitted an application for the Spin-Off and separate listing of the paint business on the Main Board of the HKEX (“First Application”). By a letter from HKEX to Optima dated 15 June 2015, the HKEX informed Optima that the HKEX rejected the First Application.  This rejection (and the decision to withdraw the request for review) was reported to the Board on 16 July 2015.

45.  On about 7 April 2016, a written resolution was circulated to the Board members asking members to approve the submission by the Company of a new application pursuant to Practice Note 15 to the Listing Rules (“Practice Note 15”) for the Spin-Off and separate listing of the paint business.  The written resolution stated that the proposed Spin Off was conditional upon the approval of the shareholders of the Company.  Practice Note 15 states:

“2. Introduction

This Practice Note is intended to set out the Exchange’s policy with regard to proposals submitted by issuers to effect the separate listing on the Exchange or elsewhere of assets or businesses wholly or partly within their existing groups (‘spin-offs’). This Practice Note sets out the principles which the Exchange applies when considering spin-off applications. Issuers are reminded that they are required to submit their spin-off proposals to the Exchange for its approval.

3. Principles

The principles, which apply equally whether the entity to be spun off is to be listed in Hong Kong or overseas, are as follows:-

(d) Principles applied in the consideration of spin-off applications

In considering an application for listing by way of spin-off, the Listing Committee would apply the following principles:-

(i-iii) ……

(iv)  there should be no adverse impact on the interests of shareholders of the Parent resulting from the spin-off.”

46.  On 8 April 2016, Mr Ko tendered his resignation with effect from 12 April 2016.  An announcement to this effect was made on 12 April 2016.  On 18 April 2016, the Company issued a voluntary announcement that a proposal to spin-off the paint business had been submitted to the HKEX for consideration pursuant to Practice Note 15.  The proposal was submitted by Squire Patton Boggs on behalf of the Company.  Amongst other things, it was stated in the summary of the application that “the Directors submit that the current application for the Spin-off and Listing is distinguished from the Previous Spin-Off Application”; and that “China Everbright Capital Ltd has been appointed as the sole sponsor to the Listing”.  On 13 June 2016, the HKEX issued to the Company a letter indicating that it could proceed with the proposed spin-off.

F(1).  28 June 2016: meeting at Cova

47.  It is common ground between the parties that on about 28 June 2016, Mr Tsui, Mr Chuang, Mr Hung and a common friend, Eddie Lo, had a meeting in Central.  However, the Parties differ as to what was discussed at the meeting.  It is CC’s case that at the meeting it was suggested by Mr Chuang to Mr Tsui that the Shajing Land should be excluded from the Spin-Off and should continue to be owned by the Company.  The new company could enter into a leasing arrangement for the continued use of the Shajing Land.  Mr Tsui disputes this.  He says that excluding the Shajing Land from the Spin-Off was never discussed.  According to Mr Tsui, they only discussed Mr Chuang’s complaint that the CNT Group had purchased a commercial property in Beijing.

F(2).  Board meetings from July 2016 to 25 August 2016

48.  On 4 July 2016, Mr Hung was appointed as a non-executive director of the Company to fill the vacancy on the Board left by Mr Ko’s resignation.  An announcement to that effect was made on the same day.  At a board meeting held on 7 July 2016, Sir David inquired about the progress of the Spin-Off.  Mr Chong reported that a new spin-off proposal had been submitted: [7.1] of the Board minutes.

49.  At a Board meeting held on 25 August 2016, Mr Hung inquired about the progress of the proposed spin-off.  Mr Tsui stated that all the factories in the Mainland would be included in the paint business proposed to be spun off: [13a] of the minutes.  As I have already explained Mr Hung asked if the company owning the Shajing Land, CPM Shenzhen would apply for rezoning of the Shajing Land for the purpose of locking up the premium for the change of land use.  Mr Tsui and Mr Chong replied that as a land transfer would incur substantial land appreciation tax, they were not considering a transfer of the Shajing Land.

F(3).  Circumstances leading to and including the Board meeting held on 22 November 2016 and the announcement on 23 November 2016

50.  On 19 September 2016, CPM was incorporated in the Cayman Islands as a wholly-owned subsidiary of CNT.  The Defendants were appointed as directors of CPM and continued to be so at all material times.

51.  On 18 November 2016, Carol Fok (“Ms Fok”), the Company Secretary of CNT, circulated a draft written resolution for the approval of the application for the Spin-Off, the listing to be submitted by CPM, and the announcement to be issued by the Company.  No supporting documents were attached to the draft or provided to members of the Board for their consideration.  By emails dated 18 November 2016, Mr Hung requested additional information (such as the use of net proceeds from the proposed global offering and the offer statistics) and the draft announcement before signing the written resolution.  Ms Fok chased Mr Hung to sign the draft written resolution for the approval of the proposed spin-off.  By an email dated 21 November 2016 sent at 4.11pm, Mr Hung told Ms Fok that:

(1)  The proposed spin-off was a major restructuring exercise and it was necessary to convene a Board meeting to allow thorough discussion of the transaction.

(2)  No analysis had been provided to members of the Board about the financial position of the Company after the Spin-Off, in particular its cash flow position and projections.

(3)  The Shajing Land might have huge development potential and the directors should be provided with the following information:

   (a)   whether the town planning authority had approved or responded to the request for the change of use of the Shajing Land; and

   (b)   the provision of two valuation reports in relation to the Shajing Land, i.e. one of its current value and another one of its redevelopment potential.

52.  By an email dated 21 November 2016 (sent at 4.17 pm), Ms Fok forwarded to Mr Tsui and Mr Chong the email from Mr Hung.  On the same day (at 6.07 pm), Ms Fok circulated a notice to directors of a meeting of the Board to be held on 22 November 2016 at 4 pm.  The following day Mr Hung sent to Mr Lam and Mr Tsui a letter stating that:

(1)  The executive directors of the Company had not provided to members of the Board the requested information relating to the proposed spin-off.

(2)  He had earlier sent to Ms Fok the email dated 21 November 2016 requesting the provision of financial analysis and information on the redevelopment potential and valuation of the Shajing Land; and yet such information was still not available.

(3)  In the absence of the requested information, it was premature to convene the board meeting on 22 November 2016.

The Defendants chose to proceed with the Board meeting on 22 November 2016 (“22 November 2016 Board Meeting”).

53.  It is CC’s case that at the 22 November 2016 Board Meeting, the Defendants failed, as CC contends they should have, to disclose their personal interests in the Spin-Off as a consequence of their appointments as directors of CPM in accordance with the Company’s Bye-Laws 102 and 103.

54.  CC also complains that the Defendants did not provide to other members of the Board the information Mr Hung had requested; or adequate opportunity to discuss the pros and cons of the Spin-Off or its terms.  In particular:

(1)  Whilst the Defendants had the draft announcement and the draft Prospectus before the 22 November 2016 Board meeting, they only tabled at the meeting the drafts, which ran to more than 500 pages with important financial information still lacking.  Mr Hung was apparently the only non-executive director who asked for and had been provided with a draft before the meeting.

(2)  Other than for the Defendants, the members of the Board had no information about the background of Innovax Capital Ltd (“Innovax”) and the role which Innovax was intended to play in the proposed Spin Off.

55.  At the 22 November 2016 Board meeting Mr Hung requested the Company to provide (a) a valuation report to evaluate the current value of the Shajing Land and (b) another valuation report to assess the redevelopment value of the Shajing Land.  Mr Chong told the meeting that there was no requirement for revaluation of the Shajing Land.  Mr Hung said that he understood that there was no accounting requirement to do so, but for the purpose of considering the Spin-Off, he requested the Company to provide a valuation report to evaluate the current value of the Shajing Land and a valuation report to assess the value of the redevelopment potential of the Shajing Land.  Without such information, Mr Hung said he would not be able to make a decision.  Mr Hung proposed that a proforma net tangible asset statement incorporating the results of the revaluation be presented in the Prospectus so that the offer could be made more attractive to potential investors thus lifting the cap of the offer price for the shares of CPM.  Mr Hung also suggested that the Company should seek a financial advisor’s opinion on the transfer of the Shajing Land from the CPM Group to a company not included in the Spin-Off so it was retained by the Company.  Mr Hung also asked for the cashflow projections of both CPM and the Company subsequent to the proposed Spin-Off.  Mr Tsui and Mr Chong suggested that the Spin-Off would strengthen the cash position of the Company, as CPM would declare a special dividend of HK$250 million payable to the Company.

56.  It is CC’s case that the way in which the Defendants dealt with obtaining Board approval was negligent:

(1)  They failed or refused to instruct a property valuer to obtain a proper valuation of the Shajing Land, in particular, of its redevelopment value.

(2)  No such proforma net tangible asset statement incorporating the results of such a revaluation of the Shajing Land was ever incorporated into the Prospectus, which was eventually published on 19 June 2017.

(3)  At the 22 November 2016 Board meeting, the Defendants informed the Board that the special dividend would be HK$250 million.  However, contrary to such representations, when the Prospectus was published on 19 June 2017, the special dividend payable to the Company was HK$180 million.  According to p. I-76 of the Prospectus, the amount of dividend was the subject of a resolution of CPM dated 7 June 2017.  This significant reduction was effected without any notice to, discussion of or approval by the Board.

F(4).  23 November 2016: submission of listing application

57.  On 23 November 2016, the Company submitted a listing application for the listing of and permission to deal in the CPM Shares.  On the same day, the Board issued an announcement stating, inter alia, that the Spin-Off was proposed to be implemented by way of issuing to investors, new shares in CPM representing not less than 25% of CPM issued shares (“CPM Shares”).  The announcement stated that the final structure of the Spin-Off and the listing were subject to approval of the HKEX and the final decision of the Board.

F(5).  Board meeting on 8 December 2016 and events thereafter

58.  On 8 December 2016, a Board meeting was held.  The minutes record in [8.2] to [8.6]:

“…

8.2 Mr Hung said that …(i)n his opinion, the Company should provide the terms of the Spin-Off (or at least the price range of the Spin-Off) for the Board’s consideration.

8.3 Dr. Steven Chow agreed that the Directors should know the terms, the pros and cons of the Spin-Off. He also recommended that some amendment should be made to the draft minutes of the Board meeting held on 22 November 2016 as the Directors had not read the Prospectus.

…

8.6 Sir David requested the executive Directors to supply the whole Board with the price of the Spin-Off and the value of the properties to be spin-off substantiated by professional valuer.  Mr Tsui replied that the price would be based on expert opinion which would be provided to the Board later.”

59.  It is CC’s case that neither the price of the Spin-Off nor a valuation of the properties to be spun-off was provided to the Board.  A valuation report produced by BMI relied on by the Defendants was a preliminary estimate and did not consider the Shajing Land’s redevelopment values.  It was also not given to the Board.

F(6).  Circumstances leading to the Board meeting on 30 March 2017

60.  On 19 January 2017, the HKEX wrote to Innovax, drawing its attention to the fact that the HKEX had received a letter of complaint dated 18 January 2017.  On 3 March 2017, Gram Capital Ltd (“Gram Capital”) wrote to CPM setting out its terms of appointment by CPM.  Gram Capital was tasked to act “in relation to the HKEX Letter”. The letter stated that the directors of the Company are “solely responsible for their respective management decisions in relation to the Spin-off…”. At [8] of the letter, it was stated that “Gram Capital shall not be required to contact each member of the board of directors of the Company and management of the Company/CNT individually when seeking information, representation and confirmation”.  CC contends that it is clear that Gram Capital was not instructed to advise in connection with the Spin-Off generally.

61.  On 14 March 2017, Innovax wrote back to the HKEX, setting out its reply to the allegations in the complaint letter.  Innovax stated that they concurred with the view of the Directors (of CPM and of the Company) that requiring revaluation would not provide the Company’s shareholders and the investing public with any meaningful insights into the valuation of the Group as a whole.  It is not suggested by the Defendants that Innovax were told by them about the possible value and potential of the Shajing Land.

62.  On 14 March 2017, Gram Capital, wrote to the Company providing its analysis on matters raised in the complaint letter.  CC suggests that it appears from their letter that Gram Capital’s view that absence of a valuation of the Shajing Land did not distort the pricing of the Spin-Off was based on what they were told by the Defendants and also that there is no suggestion that Gram Capital were told anything about the potential value of the Shajing Land.

63.  On about 22 March 2017, BMI provided to the Company three valuation reports of the market value of the Ezhou, Xuzhou and the Shanghai Properties.  At a meeting of the Board held on 30 March 2017, Mr Hung asked if there was any further update with regard to the proposed Spin-Off apart from its pending approval by HKEX. Mr Tsui replied that there was no other update for the Board.  It is CC’s case that the Defendants did not, but should have, provided to the Board the Complaint Letter, Gram Capital’s letter dated 14 March 2017 and the desk-top preliminary estimates of value prepared by BMI.

F(7).  Setting the price range of the Offer Shares

64.  On 1 September 2016, Innovax was appointed by CPM to act as its sponsor of the global offering of the CPM Shares.  CC complains that this was done by the Defendants without the knowledge or approval of the Board.  Details of the Spin-Off were set out in the draft prospectus of CPM, which was posted on the website of the HKEX on 24 May 2017.  On about 31 May 2017, Innovax issued to the Company a letter dated 31 May 2017 setting out the proposed price range of the shares of CPM (“Offer Shares”) to be offered for listing. Innovax stated, that they were of the view that the market capitalisation of CPM was HK$950 million to HK$1,050 million.  This corresponded to a proposed price range of HK$0.95 to HK$1.05 per share on a post-money basis and assuming an issued share capital of 1,000,000,000 shares.  CC says this letter was not, but should have been, put before the Board.

65.  On about 1 June 2017, Sinolink Securities (HK) Co Ltd (“Sinolink”) (being one of the joint global coordinators, bookrunners and lead managers of the Listing) issued to CPM a letter dated 1 June 2017.  It advised CPM that the fair value of CPM pre-money was within the range of HK$791 million to HK$916 million.  This corresponds to a proposed price range of HK$1.05 to HK$1.22 per share.  The letter was also not disclosed to the Board members other than the Defendants.

66.  The Defendants determined that the offer price for the Spin-Off would be not less than HK$0.80 and not more than HK$0.86 per share.  The Board was not consulted about the offer price.

F(8).  Board meeting held on 1 June 2017

67.  On 1 June 2017, a meeting of the Board (“1 June 2017 Board Meeting”) was held.  CC complains that the Defendants did not put before the Board for discussion, the letters from Innovax or Sinolink, or the draft Prospectus.  Other documents relating to the Spin-Off such as the underwriting agreement and the swap agreement, were only provided to the Board members at the 1 June 2017 Board Meeting.

68.  There is a dispute between the parties concerning the accuracy of [5] of the minutes of the 1 June 2017 Board Meeting which records that it was decided by a majority of the directors that no adjournment was required to allow members to consider the terms of the Spin-Off.  It is CC’s case that the minutes do not accurately record what actually happened at the 1 June 2017 Board Meeting.  CC says that the question of whether the 1 June 2017 Board Meeting should be adjourned was not put to a vote and that Mr Lam (as Chairman) simply decided not to adjourn the 1 June 2017 Board Meeting and no reasons were given. This is reflected in an email sent by Dr Steven Chow dated 13 June 2017 to Board members.  Dr Chow had resigned on 9 June 2017.

69.  On 1 June 2017, the Company issued an announcement (“1 June 2017 Announcement”) stating that:

(1)  16 June 2017 would be the record date for the determination of the entitlement of qualifying shareholders of the Company to participate in the subscription of the CPM Shares on a preferential basis (“CNT Preferential Offer”), and that substantial shareholders would be excluded from participating in the CNT Preferential Offer;

(2)  the Spin-Off and the Listing were subject to the final decision of the Board; and the shareholders and investors should be aware that the Company could not confirm that the Spin-Off and Listing would take place or when it would take place.

70.  In a written resolution dated 7 April 2016, the Board’s resolution to proceed with the Spin-Off was expressly stated to be subject to the shareholders’ approval.  However, the 1 June 2017 Announcement did not state that the Spin-Off was subject to shareholders’ approval.

71.  On 12 June 2017 (after the issue of complaint letters by CC to the Company, the HKEX and the SFC on 9 June 2017), the Board issued a further announcement stating:

(1)  Following clarification from the HKEX on the meaning of the public float of CPM after the proposed listing, the Board wished to announce that the “CNT Non-Qualifying Shareholders” referred to in the 1 June 2017 Announcement would not include substantial shareholders of the Company; and that “substantial shareholders of the Company, so long as they are not CNT Non-Qualifying Shareholders (that is whose address(es) as shown in the register of members of the Company is/are in any of the Excluded Territories; or who is/are otherwise known by the Company to be resident in any of the Excluded Territories on the CNT Preferential Offer Record Date; or who is/are directors of CPM and/or their respective close associates), may participate in the CNT Preferential Offer when it is made by CPM”.

(2)  The Spin-Off was subject to, amongst other things, the approval of the HKSE and the final decision of the board of CPM.

72.  CC complains that this failed to inform shareholders, as it says it should, that the Spin-Off was still subject to Board’s approval and shareholder approval.

F(9).  Publication of the Prospectus and the 19 June 2017 Announcement

73.  On 19 June 2017, CPM issued the final prospectus (“Prospectus”), for the Spin-Off.  According to the anticipated timetable in the Prospectus, dealing in the shares of CPM was expected to commerce on 30 June 2017.  Also on 19 June 2017, the Defendants caused the Company to issue an announcement (“19 June 2017 Announcement”) for the purpose of setting out further information on the Spin-Off from the perspective of the Company and the implications of the Spin-Off for the Company under the Listing Rules.  In the 19 June 2017 Announcement, it was stated that:

(1)  If the Global Offering was completed, the total number of CPM Shares to be offered under the Global Offering would be 250,000,000 CPM Shares (assuming that an Overallotment Option was not exercised), representing 25.0% of the number of the CPM Shares in issue immediately following completion of the Global Offering and the Capitalisation Issue, and 287,500,000 CPM Shares (assuming that an Overallotment Option were to be exercised in full), representing 27.7% of the number of the CPM Shares in issue immediately following completion of the Global Offering and the Capitalisation Issue.

(2)  The Offer Price was expected to be not less than HK$0.80 and not more than HK$0.86 per share.

(3)  the Spin-Off and the Listing would benefit the Remaining Group of the Company as a whole, with a special dividend of HK$180 million to be received from the CPM Group.

74.  It is CC’s case that the Defendants were in wilful default of their directors’ duties in that:

(1)  The special dividend of HK$180 million was never considered, discussed or approved by the Board and was inconsistent with the representations by Mr Lam and Mr Tsui at the 22 November 2016 Board Meeting that the special dividend to be distributed would be HK$250 million ([3.9] of the Minutes).  The discrepancy was never explained to the Board and its confirmation that it was acceptable was never sought.

(2)  The Offer price range of HK$0.80 to HK$0.86 was not discussed or approved by the Board.

75.  In mid-July, Sir David tendered his resignation as an INED of the Company.

F(10).  Issue of the Petition

76.  On 22 June 2017, CC issued a petition (HCMP 1454/2017), with Prime Surplus and the Company as the 1^st Respondent and the 2^nd Respondent respectively, pursuant to section 724 of the Companies Ordinance (Cap. 622) (“Petition”) on the basis that the Spin-Off was being procured and implemented by the Board in a manner unfairly prejudicial to the shareholders of the Company, and seeking orders from the Court to ensure, amongst other things, that the Spin-Off would not proceed until (i) proper valuations were conducted in respect of the assets proposed to be spun-off to CPM; and (ii) shareholders’ approval was obtained in respect of the Spin-Off in general meeting.  On 22 June 2017, the Company issue an announcement notifying the public of the issuance of the Petition.  On 27 June 2017, Mr Tsui on behalf of the Company, wrote to the Listing Department of the HKEX to address the allegations in the Petition.  The letter stated that the intention to move production to Xinfeng recorded in the Annual Report 2011 was a long-term plan following full commercial operation of the Xinfeng Production Plant.  Although the letter stated that its contents had not been reviewed by Mr Hung, there is, says CC, no evidence that the letter was approved by other non-executive members of the Board.

77.  On 30 June 2017, the Company (at the Defendants’ direction) issued an announcement (i) notifying the public that CPM had issued a Supplemental Prospectus on 30 June 2017 (“CPM Supplemental Prospectus”); (ii) providing further information about the Petition, including the relief sought by CC; and (iii) stating that the Executive Directors (the Defendants) were of view that the allegations in the Petition were “unfounded” and that the Company had a strong defence and “should be able to defeat the claims from the Plaintiff”.

78.  In the CPM Supplemental Prospectus, CPM (1) provided information about the Petition and the relief sought by CC; (2) set out a revised timetable for the Spin-Off; and (3) purported to state the views of the directors of CPM (which included the Defendants) as regards the Petition as follows:

“Our Directors consider that the Petition constitutes material new information to investors’ decision on their informed assessment of our Company in deciding whether to apply (or maintain an application) for our Offer Shares. It is nevertheless the current intention of our Directors and the Joint Global Coordinators to complete the Listing and the Global Offering. Our Directors have been advised by Counsel (Mr. Laurence Li, Barrister-at-law, Hong Kong) that:

(1) The Petition is unsubstantiated and unmeritorious both as a matter of fact and as a matter of law, i.e. the Plaintiff is unable to demonstrate any unfair prejudice;

(2) The Petition should not affect our Company as we are not a party to the Petition. No allegation is advanced against our Company and there is no legal basis for any request to add our Company as one of the respondents to the Petition;

(3) The court would unlikely grant any relief to the Plaintiff, in particular any relief which would affect the Spin-Off and Listing; and

(4) It is improbable that the court would entertain any request of the Plaintiff to unwind or reverse the Spin-Off or Listing.

The Counsel has reached the above views following the review of the current position of law and more importantly, our Company is not one of the respondents to the Petition.”

79.  On 7 July 2017, without, says CC, any prior discussion or approval by the Board, the Defendants procured the Company to issue an announcement that the final offer price of the CPM Shares would be HK$0.86 per share.

80.  At 6pm on Sunday 9 July 2017, the Company held a Board meeting at which were tabled announcements which had already been published by the Company including the following:

(1)  12 June 2017: Proposed Spin-Off and Listing of CPM on the HKEX—Clarification Announcement on “CNT Non- Qualifying Shareholders”.

(2)  16 June 2017: Proposed Spin-Off and Listing of CPM on the Main Board of the HKEX—Post Hearing Information Pack and Basis of the CNT qualifying Shareholders Preferential Entitlement published on 16 June 2017.

(3)  19 June 2017: Proposed Spin-Off and Listing of CPM on the HKEX—Disclosable Transaction.

(4)  22 June 2017: Inside Information Announcement—Legal Proceedings dated 22 June 2017.

(5)  25 June 2017: Latest Development on the Proposed Spin-Off and Listing of CPM on the HKEX.

(6)  29 June 2017: Latest Development on the Proposed Spin-Off and Listing of CPM on the HKEX.

(7)  30 June 2017: Latest Development on the Proposed Spin- Off and Listing of CPM on the HKEX.

(8)  7 July 2017: Proposed Spin-Off and Listing of CPM on the HKEX.

81.  It is CC’s case that the publication of these announcements without NED and INED approval, or at least consultation, demonstrates that the Defendants treated the NEDs and INEDs as rubber stamps for what the Defendants saw as a fait accompli.

G.     Alleged Breaches of Directors’ Duties on the part of the Defendants

82.  In its Opening Submissions CC summarises the breaches of directors’ duties that it alleges the Defendants have committed.

(1)  Failure to provide to the Board (other than themselves) material information for the Board to consider / discuss / approve the Spin-Off, including (1) the price of the Spin-Off, and (2) the valuation of the Shajing Land (including both the market value and the redevelopment value of the Shajing Land) supported by expert opinions.

(2)  Failure to give proper instructions to a competent property valuer and to appraise it of all relevant facts and information to properly advise CNT on the redevelopment value and/or potential of the Shajing Land.

(3)  Failure to instruct a financial advisor to advise on the structure to be adopted for the Spin-Off; and/or to consider alternative structures for the Spin-Off.

(4)  Failure to provide to the Board any or any sufficient time for the approval of any decisions relating to the Spin-Off so that the Board made no informed decision for the Spin-Off.

(5)  Procuring the issue and publication of important documents and announcements (including the Prospectus) without providing their drafts for the Board’s consideration, discussion and/or approval, including the range of the offer price of the CPM shares.

(6)  Fixing the Offer Price of HK$0.86 per share without seeking the approval of the Board; and providing no explanation to the Board for adopting the offer price of HK$0.86 per share, which was lower than the offer price as advised by the sponsors and bookrunners of the Global Offering of the CPM Shares.

(7)  Representing to the Board that a special interim dividend of HK$250 million would be made to CNT; when in fact the said special interim dividend distributed to CNT as published in the Prospectus was only HK$180 million.

(8)  Exercise of the powers to procure and / or approve the Spin-Off for the Improper Purposes.

(9)  Procuring the Spin-Off without obtaining the approval of the shareholders of CNT.

(10)  That the alleged abandonment of the plan to relocate productions from Shajing to Xinfeng is a false case.

G(1). The Defendants’ allegation that the redevelopment of the Shajing Land was unrealistic

83.  As I have explained it is CC’s case that the Defendants failed to give proper instructions to a competent valuer and to appraise it of all the relevant facts and information necessary to properly advise the Company on the value, including redevelopment value and potential of the Shajing Land.  The Defendants say that by the time of the Spin-Off it had become clear that this was unrealistic.  In summary CC disputes this on the following grounds:

(1)  From the contemporaneous documents (including the 2011 Annual Report and the various board minutes), it is clear that the Board had assumed that the Shajing Land had redevelopment potential and this never changed.

(2)  The suggestion that redevelopment and rezoning of the Shajing Land was unrealistic was never discussed or tabled for discussion in any of the Board meetings despite Mr Hung on a number of occasions stating the Shajing Land might have huge development potential.

(3)  The allegation that redevelopment or rezoning of the Shajing Land was unrealistic was only raised for the very first time in the Defence.

(4)  The Defendants’ reliance on the provision in the 13^th Five Year Plan that change of land use is subject to “strict control” does not lead to the conclusion that change of land use is “unrealistic”.  This is a non sequitur.  The purpose of the 13^th Five Year Plan was to carry out the urban renewal works in Shenzhen systematically, to accelerate the development and utilization of land, to promote transformation and upgrade of industries, to enhance the comprehensive function of the city, to promote integrated development of Shenzhen and to achieve stable growth in terms of the City’s economy and social quality and a sustainable and comprehensive development.  The fact that the plan mentioned that “industrial to commercial conversion” and “industrial to residential conversion” was to be strictly controlled does not, mean that it would not be allowed.

G(2). The Defendants’ failure to seek obtain valuation reports

84.  The Defendants argue that they had obtained a desktop valuation from BMI.  There was no need for a physical inspection.  They rely upon reports dated: 24 January 2014, 11 January 2016 and 7 December 2016.  CC argues that the first two reports were only prepared for the purpose of considering the mortgage value of the buildings on the Shajing Land and they were expressly stated to be valid for one year only.  The 7 December 2016 report was produced pursuant to an instruction to prepare the valuation “on a desk-top basis” and as a preliminary estimate.  None of them considered the redevelopment value of the Shajing Land.

85.  Given the significance of the amount involved, CC says that responsible directors would have given instructions to valuers to prepare a full report.  CC also question the Defendants bona fides, suggesting that if they had genuinely thought that the 7 December 2016 report was adequate they would have provided it to other Board members.  It is implicit in this argument that the BMI report was a smokescreen.

G(3). Failure to consult the Board on the Offer Price of HK$0.86 per share

86.  It is CC’s case that in failing to obtain Board approval for the Offer Price the Defendants breached their duties as directors. CC says that the Defendants reliance on the advice of Innovax and Sinolink does not address the point.  This was a matter of sufficient significance that Board approval was required.  If the Defendants had dealt with the matter properly they would have convened a Board meeting and provided to members in advance the advice in order that a meaningful discussion could take place leading to a resolution approving the offer price.

H.     CC’s complaints about the way in which the Spin-Off was formulated and introduced

H(1). The early confusion about the precise nature of CC’s claim

87.  The writ was issued on 15 December 2017. The Statement of Claim was served in December 2017.  The Statement of Claim was amended on four occasions; the third of which was very substantial: Amendment (red) February 2018; Re-Amendment (green) June 2018;    Re-Re-Amendment (purple) December 2018 and finally Re-Re-Re-Amendment (yellow) July 2020.  For ease of reference I shall refer to the final version as the Statement of Claim unless the context otherwise requires.  The improper purpose claim was only introduced in [30.8]–[30.11] of the Re-Re-Amendments.

88.  I heard all the interlocutory applications in the Action.  In a short decision dated 11 April 2018 I refer in [2] to confusion, which in the early stages of the proceedings (at that time the Statement of Claim was in its amended form) seemed to exist between the Parties about the precise nature of CC’s complaint and what loss it was being alleged had been caused by virtue of the Spin-Off including the Shajing Land.  I say this:

“2. The need for the amendments and the dispute over whether they should be allowed and the paragraphs the Plaintiff objects to struck out arise, it seems to me, from a failure on the Defendants’ part to understand the part of the Plaintiff’s case to which they relate, namely, whether or not the IPO of 24% of the shares of the subsidiary of the 4^th Defendant operating a paint business involved a substantial undervaluation of the business because of the way in which land it owns was taken into account in arriving at the price at which shares were offered. This is pleaded in some detail in [44] to [52] and [55] of the Amended Statement of Claim. Part of the confusion which seems to have arisen in my view is due to the rather cursory pleading of a defence in [15] of the Defence, which suggests the Defendants had not fully thought through the case which they faced. This is illustrated by a previous attempt to amend, which was withdrawn, which erroneously assumed that a principal feature of the complaint was that the land was not properly valued in the financial statements. The Defendants now wish to amend by adding particulars as to how the Defendants went about the valuation of the offer shares.”

89.  The relevant parts of [15] of the Defence before amendment read as follows:

(1)  The allegation that there had been no proper valuation of the business and assets to be spun-off is misconceived.

(2)  Under the Spin-Off, the paint business is to be transferred to newco, then a wholly-owned subsidiary of the Company.  The transfer was, therefore, a mere accounting exercise which has no effect on the value of the Company.

(3)  The pricing of the Offer Shares was, determined by reference to willing buyers and the investing public (including the price-earnings multiples of comparable companies), and intrinsically reflects the value of the spun-off assets, including the production plants and the intellectual property rights.

(4)  After the Listing (in which 25% of newco’s shares would be offered to public investors), the value of the paint business would be assessed by the market as manifested in newco’s share price.

(5)  There is simply no issue of undervalue.

(6)  In any event, since the Group does not have any plan to dispose of its material properties and assets in the newco Group, a re-valuation would be unnecessary under proper accounting treatment.

90.  My recollection of the early case management hearings is that there was a genuine failure by the Defendants to understand the nature of the financial complaint and CC’s counsel had difficulty explaining it.  The Defendants’ legal team seemed to think that the central complaint was that as the Shajing Land was not valued at market value in the Company’s balance sheet (as it was used for production and was not an investment property) this negatively distorted the IPO offer price, because it was based on a P/E ratio, which did not take into account the market value of the Company’s assets.  The confusion may have been exacerbated by the fact that at that time an improper purpose claim had not been pleaded and the focus appeared to be on the structure of the IPO and the suggestion that the structure caused loss to the Company.  The gravamen of CC’s complaint seemed to be that the Defendants were recklessly careless of their duties to an extent which engaged the proviso to Bye-Law 167.

I.     The Improper Purpose claim

91.  The gravamen of CC’s case in [5] of its written Closing Submissions was that the Defendants were guilty of wilful negligence and wilful default.  However, towards the end of the written Closing Submissions in [126] it is submitted that “Taking into account all the circumstances in this case, D1 -D3 caused CNT to proceed with the Spin-Off for Improper Purposes: SOC §30.8 to 30.11.”  In his final address Mr Yu summarised CC’s case as follows: “My learned friend looks at it that the question in this trial is whether Shajing should or should not be retained in the Remaining Group, and we say that is actually a disguise of the true question, which is whether the 1st, 2nd and 3rd defendants had failed in their duty to ensure that when CNT was disposing of its assets, it gets fair value for the same and whether that failure was deliberate or motivated by improper purpose.  My Lord, surely it cannot be right that, once the board had agreed in principle to a spin-off, the directors ceased to owe any duty to the shareholders to ensure that the spin-off is properly done.  My learned friend’s main defence is that this is a business judgment, and we say that that clearly cannot be an answer.  My Lord, business judgment can be an answer when the board is in full possession of facts and then make a commercial judgment as to what to do, what not to do. But you cannot describe something as a business judgment where the directors assume, in finding out what is the true value of what they are disposing. …So what the plaintiff complains about in this case is not a commercial judgement but egregious negligence and wilful default in not bothering even to find out the value of an important piece of asset before disposing of it.”[10]  Mr Yu identifies what he says are the three legal questions that arise in this case: “One, was the way in which the 1^st to the 3^rd Defendants - was the way in which they acted - in breach of their duties to the company?  The second question: if so, was the breach of duty deliberate or wilful? And thirdly, why did the 1^st to 3^rd Defendants act in the way they did? Was it sheer incompetence or was there improper motive?”[11].  If the answer to the second question is in the affirmative it follows that CC has proved its case. The third question becomes academic.  What is not entirely clear from CC’s closing submissions is the emphasis of its case.  Is it CC’s primary case that the Defendants didn’t comply properly with their duties, and they did not do so because of indifference and incompetence or possibly an improper purpose, but it is not necessary to explore in any detail their motives because their reckless indifference to conducting the Spin-Off competently is so clear?  Or is the primary case improper purpose and reckless indifference to compliance with their duties a secondary case advanced if the court is not satisfied that improper purpose has been established?  This is not an academic point.  As I have explained there is no direct evidence of improper purpose.  I am asked to infer it.  This is a more complicated task in my view than assessing whether it has been demonstrated that the Defendants’ conduct of the Spin-Off was so inadequate that it can properly be concluded that, to quote from Romer J, the Defendants have not only breached their duties, but have been “... recklessly careless in the sense of not caring whether his act or omission is or is not a breach of duty.”[12]

92.  Mr Yu argued that four matters tend to suggest that the Defendants’ negligence was prompted by an improper purpose.  The first, concerned Mr Tsui’s attitude to the paint business.  He was asked in cross-examination if he always preferred the paint business and that he wanted to keep the Shajing Land for the paint business.  Mr Tsui said no.  If the Shajing Land had a high potential value it would be in the interests of the Company to dispose of it.  Mr Yu argued that this indicated that Mr Tsui’s position was not that he was wedded to the paint business and would keep the Shajing Land for that reason regardless of price, which might be misguided and negligent, but suggested that this was the reason for keeping the Shajing Land not some other ulterior purpose.  However, having acknowledged that he was alive to the possibility that if the Shajing Land was very valuable it would be in the interests of the Company to realise that value, Mr Tsui’s conduct had to be judged by reference to that understanding not his possible commercial gaucheness or a sentimental attachment to the paint business.

93.  The second matter was what Mr Yu suggested was Mr Tsui’s willingness to jeopardise his own financial interests by transferring the Shajing Land to CPM for less than full value.  However, this assumes that Mr Tsui thought that that was what he was doing.  If that was not what he assumed the point falls away.

94.  Thirdly, it is difficult to explain what Mr Yu suggested was the Defendants’ failure to more actively involve the Board in the details and progress of the Spin-Off other than by the Defendants having a reason not to do so.  This point assumes that the Defendants’ conduct was for them, unusual and not simply the result of indifferent corporate governance and unsophisticated management.

95.  The last of the four matters is the consistency in approach of the Defendants.  There does not appear to be any difference of opinion or approach between them, which is consistent with them sharing a common agenda.  This does, however, assume that it would be normal for them to operate differently rather than as a unit with, for example, Mr Tsui having general ideas, which were refined and actioned by Mr Chong and Mr Lam.

96.  I asked Mr Yu during his address the following question as it was unclear to me how I was to understand the way in which CC put its case regards improper purpose: “At the moment, I’m not entirely clear about how you put your case in regard to this issue.  We know that spinning the paint business off had been considered before the occasion on which it finally came to be spun off.  So far as the petitioner’s case is concerned, are you saying that the motivation behind having a spin-off, 2016 time, may have been genuine or largely genuine, but during the deliberations about how to go about it, it occurred to Mr Tsui that it would have the advantage, potentially, of getting rid of an issue that may have been concerning him, namely your client’s desire to try to exploit the Shajing land for property development purposes.  Or are you saying that the whole plan for a spin-off, a second go at it, was driven by a desire to put the Shajing land some distance from the petitioner’s influence, or are you not quite sure; all we can say is, or all you will be inviting me to conclude, is that clearly Mr Tsui and Mr Chong have made up a story, so far as the subjects you have been dealing with most recently are concerned, and precisely what their motives were we don’t know because we don’t have any direct evidence of this, although it may well have been tied to a desire to place the land one removed from the company in which your clients own shares.  But it doesn’t really matter because precisely whatever the motivation may have been, the way they went about going about the spin-off necessarily must have involved some kind of disregard for compliance with their duties in the way you complain about breach of duties, and that’s sufficient for your purposes, if I’m with you, because, one, you get the breach of duty and, two, you get the wilful disregard; or something else I haven’t thought of.  MR YU: No, my Lord, that’s in a sense quite a correct description of how we put our case.  It’s this.  Of course we don’t put our case as high as saying that when he conceived of the spin-off, this was for the purpose of trying to get the Shajing land away from the claws of Mr Chuang, if I can put it that way.”[13]  Having heard Mr Jat in closing in a further exchange with Mr Yu on Day 17 he said this: “ …. That’s the slightly extra step that your Lordship is asked to take on improper purpose. …. COURT: Why does it make a difference -- of course, precisely where I reach will affect this -- but if I were to conclude, one, there’s breach of duty, presumably a series of breaches of duty, that I conclude that they are wilful, and I may hypothesise that given the fact that I have concluded that there appears to have been a developing pattern of indifference to doing things properly, there may well have been a motive for doing things in the way that they were done.  I don’t have to go the next step, do I, and then explore what that motive was?....MR YU: My Lord, I can see that on the facts of this case, probably in terms of strict legal concept, your Lordship probably says it doesn’t, because it affects nothing in terms of liability; it affects nothing in terms of quantum.  It’s just that the plaintiffs raise it, your Lordship has the evidence, your Lordship can come to a conclusion.  Of course, if your Lordship feels, ‘I shouldn't come to a conclusion’, it’s entirely within your prerogative, but the evidence is there.”[14]

97.  In my view, in practice the improper purpose claim adds nothing to the complaint of wilful misconduct and neglect in the present case.  The improper purpose claim invites me to explore the motivation behind the way in which the Defendants dealt with the Spin-Off.  I think this is unnecessary.  Having considered all the evidence in detail I do not think that the factual findings that I make, which I explain later would, in any event, allow me to find improper purpose.  As will become apparent I consider that there are perfectly plausible explanations for the way in which the Defendants dealt with the transaction other than the alleged improper purpose.

J.     The Issues

98.  I need to determine the following issues in CC’s favour in order for it to obtain judgment.  First, that the Defendants’ management of the Spin-Off involved breaches of duty.  CC has identified a number of matters, which it contends give rise to breaches of duty, or evidence them or the reasons for them.

(1)  The alleged “false case”, namely, the decision not, as originally planned, to relocate production from Shajing to Xifeng.

(2)  Failure to obtain proper valuations of the Shajing Land.

(3)  Failure to provide proper valuations to the Board.

(4)  Inadequate advice on the structure of the Spin-Off (advisors).

(5)  Board not asked to approve the IPO share price.

(6)  Cova Meeting.

(7)  Failure to obtain shareholder approval.

(8)  Reduction in the cash dividend.

(9)  Failure to call witnesses concerning the decisions not to relocate to Xinfeng and discussions with the Shenzhen authorities about redeveloping the Shajing Land.

99.  For any of these matters to be material they have in my view to be relevant to both the way in which the Shajing Land was dealt with and the second issue, namely, whether the breaches resulted in the Spin-Off being structured in a way, which caused loss to the Company.  It is not sufficient for CC to establish that the Defendants were incompetent if the outcome would probably have been the same if they had been competent.

100.  Thirdly, that the breaches of duty were either committed consciously or as a consequence of a reckless indifference to complying with their duties properly.  This is not proved by the number of breaches alone.  It has to be demonstrated that that the Defendants’ failures to do various things properly weighed against the background facts justify the inference that either they consciously did things improperly or inadequately or were recklessly indifferent to how they should have been done.  Fourthly, if I find the first three issues in CC’s favour that the breaches of duty caused quantifiable loss.  Fifthly, what the loss was.

K.     Evidence

101.  I heard evidence from three factual witnesses for CC: Mr Hung, Dr Steven Chow and Ann Li Mee Sum, who is a director of CC.  I heard evidence from three factual witnesses for the Defendants: Mr Tsui, Mr Chong, Wu Kiu Sing (Brian Wu), executive director of Sinolink.

102.  In addition experts were called by both parties to give evidence on:

(1)  Corporate finance: Christopher Howe of Anglo-Chinese Corporate Finance Limited for CC and Philippe Espinasse of P&C Ventures Limited for the Defendants.

(2)  Business valuation: Edwina Tam of Deloitte for CC; Kenneth Yeo Boon An of BDO for the Defendants.

(3)  Property valuation: CK Lau for CC; Gary Man for the Defendants. 

103.  I had directed that expert evidence on corporate finance could be filed in order to explain the technical aspects of the process of an IPO if either party thought that it was necessary in order for the court to understand and determine the issues.  I dealt with this in my decisions dated 24 July 2020 and 4 September 2020.  By the time the matter came on for trial and I had read the evidence it seemed to me fairly clear that although informative, the evidence of Mr Howe and Mr Espinasse (both are highly experienced and were impressive witnesses) and, in particular the areas of disagreement between them, were not of any real significance given the nature of the issue I had to decide, namely, whether or not there had been wilful default.  Their evidence provides background and context when assessing whether or not the Company obtained suitably comprehensive advice and, if I conclude that it failed to do so, it is likely to have made any difference to how the Spin-Off was structured and how the Shajing Land was dealt with.  Other than for a few matters to which I refer later I do not think that anything turns on their evidence and there is no need to explain it in any detail.

K(1).  Mr Hung

104.  I will deal with the factual evidence first.  Mr Hung is an executive director and vice-chairman of CC.  CC did not file a witness statement from Mr Hung.  Instead it filed a document entitled “Plaintiff’s Statement of the nature of evidence intended to be adduced from Hung Ting Ho Richard provided under Order 38 rule 2A(5)”.  For some unexplained reason Mr Hung’s position was that he was not prepared to give a witness statement, had separate legal representation and adopted the position that he required his evidence-in-chief to be adduced orally.  Following me making it clear that I found this attitude unsatisfactory he agreed to adopt the statement as his evidence in chief.  Whether his initial position reflected a concern that, because Mr Hung had been a director of the Company he had to be seen to be independent of CC (however, artificial that might be) or the consequence of some arcane tactical thinking, it was not helpful.  As I explain in [114] the witness who gave, what might be characterised as CC’s official evidence had no involvement in the matter at all.  Mr Chuang himself did not give evidence and explain his concerns.

105.  It is not in dispute that Mr Hung had on a number of occasions explained that he thought that the Shajing Land had valuable development potential, asked for valuations to be obtained and that the Board was not provided with advice from independent advisers of its development potential or valuations of what it might be worth if it did have development potential.  What is important is the reasons why the Defendants did not do the things that Mr Hung proposed.  So far as the detail of Mr Hung’s evidence is concerned it became apparent during his cross-examination that in respect of some of the issues it was less controversial than might have been anticipated.

106.  So far as the IPO offer price was concerned Mr Hung accepted that he did not query why 90 cents was the figure included in the details of the Spin-Off given to the Board for the meeting on 1 June 2017, although this was lower than the estimated figure of 95 cents to 105 cents mentioned at the 22 November 2016 Board Meeting.  Mr Hung accepted that although it was correct that the Board was not asked to approve the IPO price of 86 cents per share the Defendants were not hiding the fact that the price would be lower than the estimate tabled on 22 November 2016.  Mr Hung also accepted that there was no requirement that the Defendants come back to the Company’s Board for approval of the offer price and that although aware from the prospectus that the offer price was anticipated to be between 80 and 86 cents he did not go back to the Board and query the price.  Mr Hung accepted this characterisation by Mr Jat in cross-examination of the way the Board deliberations progressed and concluded[15]:

“Q. I’m not suggesting otherwise. I’m just saying those points were raised, it was debated, sometimes heatedly; that’s correct?

A. Yes.

Q. And at the end, when matters were put to the vote, the majority of the board resolved in the way as we have seen recorded in the minutes; correct?

A.     That’s correct.”

107.  Mr Hung explained that he was concerned that proper regard was given to the Shajing Land’s value.  In cross-examination he said[16]:

“A. there was one time when I was saying you just -- the company can’t -- the executive board can’t take the approval of the previous board for approving the spin-off as a mandate, without dispose -- proceed with the spin-off, which amounts to a disposal of the CPM shares with its underlying asset value, without regard to the price that we got, the consideration we got for the underlying asset value. That’s why I always raised that we should have a valuation report, two valuation reports. We’ve got to tell the other board of directors that the assets have huge development potential.

…

“Q. No. So, in your mind at the time when you were looking at these figures, what was your understanding in terms of whether the directors -- the executive directors would come back to the board with the advice and the price? What was your understanding?

A. Our understanding, if they come back with a revaluation figure, the price should be substantially higher, because what they are now saying is they are going one tranche along the price-earnings ratio, P/E ratio, without regard to the underlying asset value.

And, as I mentioned in the past, even if the land is included in CPM, as a director, we should have a revaluation figure and put it as a proforma net tangible asset statement, to show to the potential investors this company has this value, asset value.

So some investors may just buy this based on the P/E, but some may want some insurance, what if the operation flops in future.  So that’s my thinking, my belief.”

108.  My understanding of Mr Hung’s evidence was that there were two reasons why he thought that valuations should be obtained for the Shajing Land and that the valuations took into account its possible redevelopment potential.  The first was that without this information it was difficult for the Board to assess at what price it would be prudent for the Board to dispose of the paint business by a spin-off.  The second was that even if the share price was calculated by reference to a P/E ratio, which did not reflect the market value of the new company’s assets the information might still give comfort to potential shareholders as they would see that in addition to the paint business’ income stream it had valuable property assets and this would make it a more attractive investment.

109.  In relation to complaints about insufficient time being given to Board members to read documents he accepted this characterisation of what had transpired[17]:

“A. That was the fact.

Q. Thank you. Yesterday, you used the word ‘bulldozing through’ the spin-off. I just want to make sure that I understand what you are talking about. You are not saying that the executives were bulldozing though the transaction, the spin-off itself. You were saying that insufficient time was given for you to digest the details that were proposed for the purpose of implementing the spin-off.

A.  Yes.”

K(2).  Dr Chow

110.  CC subpoenaed Dr Steven Chow.  However, CC had filed a document similar to the one filed in respect of Mr Hung setting out the nature of the evidence that it was envisaged would be adduced from Dr Chow, who worked at the time he gave evidence at LGT Bank.  The document was prepared without consultation with him and he did not adopt it as his evidence although I understood from his answers to questions from Mr Yu in chief that other than for section D it was largely accurate.  Dr Chow knew TT Tsui and joined the Board of the Company at his suggestion in February 2007 as an INED and remained a director until 9 June 2017.  Dr Chow gave evidence on the Board’s involvement in the Spin-Off between November 2016 (in particular the Board meeting on 22 November 2016) and his resignation seven months later.  Dr Chow resigned because he wished to retire from his various public appointments.  It was unrelated to any controversy in the Company over the Shajing Land.

111.  In answer to questions from Mr Yu, Dr Chow said that he was aware of the long term plans to relocate production from Shajing to Xinfeng and he was not aware of hearing about any difficulties in doing so.  In cross-examination he explained that he was not very concerned about the Shajing Land’s redevelopment potential because it was used for the Company’s day-to-day manufacturing operation.  He was more concerned about the P/E ratio that would be used to determine the IPO offer price.

112.  Dr Chow explained that the directors had been on the Board of the Company for considerable periods and the executive directors (the Defendants) he thought ran the Company competently.  Dr Chow’s evidence is most relevant and helpful in describing his attitude, and his impression of the attitude of other directors, to the Spin-Off and its components, which are the subject of CC’s complaints such as the price and the valuation of the Shajing Land.  In relation to the 22 November 2016 Board Meeting I understood it to be his evidence that his principle concern was not the price.It was Dr Chow’s evidence that only Mr Hung was concerned to adjourn the 1 June 2017 Board Meeting.

113.  Dr Chow’s evidence on matters of detail was understandably hazy on occasions given the fact that he had left the Board three years before giving evidence.  However, in my view his evidence is important and instructive in relation to a number of the central complaints.  He was not concerned about the fact that the Shajing Land was to be part of the assets spun-off as it was used for production.  He explained that as a banker the Shajing Land being included in the Spin-Off was consistent with his expectations.  It was clear that he supported the Spin-Off and was not concerned about the precise share price.  As I have mentioned he was mainly interested in the P/E ratio.  Although Dr Chow would have liked to have been given documents such as the prospectus for the IPO earlier in order to have had the opportunity to read them more thoroughly before Board meetings, generally he thought that Board meetings were conducted properly and in an adequate manner.  Neither Mr Hung nor Dr Chow were asked about the managerial practices of the Defendants and the Board’s approach to corporate governance generally.  There is no evidence about what, if any, policies, protocols, codes of conduct or practices the Company had dealing with internal management matters and corporate governance.  All I have is evidence from Dr Chow, who is an experienced banker, that he considered that Board meetings were generally conducted in a satisfactory manner.

K(3).  Ms Li

114.  Ms Li Mee Sum, Ann is a director of CC.  She became a director on 14 February 2000 and is responsible for overseeing CC’s investments.  Except in relation to CC’s complaints to the HKEX and the Company and the Chuang’s Shajing document I referred to earlier, her evidence was based on reading the disclosed and publicly available documents and what Mr Chuang told her about the meeting at Cova.  It was her evidence that CC’s nominee director (Mr Ko was expressly mentioned by her) did not tell her what had transpired at Board meetings.  This is consistent with Mr Hung’s answers in cross-examination and re-examination to questions about whether he reported back to Mr Chuang about what had been discussed at Board meetings. He said he did not, because that the deliberations at Board meetings were confidential.

115.  Ms Li’s evidence is consequently only relevant in understanding CC’s reasons for dissatisfaction for the way the Spin-Off was structured.  Ms Li gave the following evidence in this regard[18]:

“COURT:	Sorry, let me see if I’m following this correctly.
	One can distinguish between, on the one hand, a present desire to see if you can change the zoning of the Shajing land with a view to, as soon as you have achieved that, immediately developing it as a residential development and presumably sell it. That’s one way one can be thinking about the Shajing land and its use.
	The other is to say, ‘We don’t have an immediate -- we don’t have a present plan, but we think it is commercially prudent to retain ownership within CNT with a view to having the option in the future to try and rezone it, and then, if we are successful, do something more profitable with it’, and you are saying that your thinking at the relevant time, 2017/2016, was the second, not the former.
A.	Not the first. We are fully aware that Shajing still needs to be the production plant.
MR JAT:	Yes.
A.	I mean the prospectus says so clearly that they need the funds, to raise the funds for building a water-based production facilities, and we know that it takes a few years, perhaps. After you build the facilities, you have to test run, and then relocation is not like moving house, we were fully aware of that. What we are saying is just retain your ownership. We are not talking about asking you to relocate now and redevelop it now.
Q.	That is from Chuang’s perspective a better use of this piece of land; right?
A.	Exactly, from the CNT shareholders’ point of view.
Q.	From CNT shareholders’ point of view, from CNT shareholders’ commercial angle, it’s going to be more profitable?
A.	No, not commercial angle; shareholders’ interest angle.
Q.	Shareholders’ interest -- as the shareholder of CNT, you are interested in the dividends to be distributed?
A.	Not true. I mean shareholders of CNT doesn’t just interested in dividends to be distributed. They have dividends 1 cent a year.
Q.	Yes.
A.	I mean, are you telling me that the whole company worth for the shareholders is only 1 cent per year? It’s not true.
Q.	That’s one of the benefits. The other benefit is of course as a substantial shareholder, you could have influence or eventually even control of the group?
A.	I think the point I would like to make, and actually I really don’t want to argue, I hope I didn’t have to argue with you, I just want to make one point clear, is that what we are looking at, the spin-off, is as we said in the witness statement, the idea of a spin-off, we didn’t object, but the way that it is spin-off, and it is not to the benefit of the Remaining Group, that we are objecting, because we don’t see any prospect for the Remaining Group. We don’t have the cash generating from the paint business before the spin-off. We don’t have the business prospect, other than what was left behind, the Sai Kung and then Au Tau, and then taking away Shajing which has development potential in the future.
COURT:	Can I ask you this, because it might possibly shorten things a little bit. You said that you -- and I use the term ‘you’ to describe you personally and the shareholder.
A.	Okay.
COURT:	You didn’t object to the spin-off. I assume you didn’t particularly mind that the company hadn’t got a valuation of the land. Your point was the land clearly had potential and simply should have been retained?
A.	Yes.
COURT:	If they had retained it, you were happy; you didn’t require them to go and get a valuation, they just had to make that decision?
A.	Yes, that is what I want to say.  Yes.”

116.  It, in my view, is fairly clear from the minutes of 22 November 2016 Board Meeting that Mr Hung had at that meeting raised the issue of the Spin-Off including the Shajing Land and the Company running the risk of depriving itself of what might be the Shajing Land’s significant redevelopment value.  Paragraph 3.4 of the minutes records Mr Hung making this point:  “Mr Hung raised concerns about the proposed spin-off of the land and building of Shajing production plant (the “Property”)together with the production operation to the CPM Group.”  In paragraph 3.7 Mr Tsui is recorded as addressing this point: “Mr. Tsui Ho Chuen, Philip (‘Mr. Tsui’) explained that the CPM Group would continue the Paint Business.  Right now, the Property was for the paint production in Shajing, our main production plant producing the Group’s paint products.  That was why the Property must be retained by the CPM Group.  We were more concerned about the earning capacity of the Group.  If the Listing could be materialized, the Company’s shareholders would continue, to be benefited from the revenue and profits of PM which would continue to be a 75% owned subsidiary of the Company.”

117.  As Mr Jat put to Ms Li this was not how CC had framed its case in the various iterations of its Petition (HCMP 1454/2017) and this Action.  It is, however, consistent with the evidence of Mr Hung that at the Cova meeting Mr Chuang had tried to persuade Mr Tsui to exclude the Shajing Land from the Spin-Off.  However, Mr Hung in his evidence talked in term that suggested that unlike Ms Li he was thinking of the Shajing Land being redeveloped in the near term rather than retained, because of its long term prospects.  He says this, for example, “Well, as I said, this Shajing land is very valuable land.  That was public knowledge.  Anyway, because the market in Shajing, in the Shenzhen area, the property prices have been increasing and there has been more and more residential buildings being built around the Shajing factory, and obviously it’s logical to develop this piece of land into a residential area.  So that was what Mr Alan Chuang wanted; correct?  Yes”[19].  Mr Hung accepted in cross-examination that it was made clear at the Board meetings, for example 15 August 2016, that the Spin-Off would include the Shajing Land.  He also accepted that at that meeting neither he, nor any other director, queried the proposal on the grounds that they expected production to be moved from Shajing to Xinfeng.

118.  Given Ms Li’s evidence it seems to me clear that CC’s principle concern and the one that led to the commencement of the Petition and this Action was that the Shajing Land was included in the Spin-Off, which is pleaded in [64] to [74] of the Statement of Claim; not the increasing number of individual complaints that have emerged as the Statement of Claim has undergone considerable amendment and, which have been advanced by CC’s legal team at trial.  It would appear from Ms Li’s evidence that CC did not know at the time it issued the Action about the details of the way the Board progressed the Spin-Off and what, for example, advice the Board had from corporate finance advisers or property consultants.  As I have explained the principle complaint advanced in Petition and the Statement of Claim was a lack of the proper valuation of the assets spun-off.  Paragraph 46 of the Statement of Claim (which was one of the original paragraphs) pleads: “Even if (which is not admitted) no single property interest forming part of the Company’s non-property activities had carried more than 15% of the Group’s total assets as of 31 December 2016, it does not accord with commercial/business common sense and was not in the interests of the Company or its shareholders to state the Company’s properties at net book value or otherwise adopt clearly outdated values in the context of the Spin-Off, the result of which would be that the disposal of the CPM Shares by the Company was at serious risk of being substantially undervalued.  This is particularly so given that the Paint Business was and had been an important and substantial business segment of the Company’s business”.  The only other original complaints were first, that the Defendants had put themselves in a position of conflict by being appointed directors of CPM.  Secondly, that as a consequence of not obtaining “proper” (by which I assume is meant at market) valuations of the assets including the Shajing Land, the Defendants avoided the need for shareholder approval of the Spin-Off because the threshold stipulated in [3(e)] of Practice Note 15 and Rule 14.07 was not met but, in any event, the appropriate course would have been to put the Spin-Off before shareholders for consideration given the transaction’s commercial significance.

119.  In its yellow form the complaint was not obtaining shareholder approval despite the Board resolution of 7 April 2016 ([21.1] of the Statement of Claim) and the false case that plans to move production from Shajing to Xinfeng had been abandoned ([30.8] & [30.11(7)]).  As I have already explained in the 4^th round of amendments the improper purpose claim is introduced along with a number of others.

120.  The claim that has been presented at trial does not reflect either CC’s concerns at the time of the Spin-Off and is not readily reconcilable with the evidence of Mr Hung and Dr Chow.  It is clear that neither of them objected to the Spin-Off or the way in which it was dealt with subject to particular and quite precise concerns or objections.  In the case of Mr Hung it was the failure to get valuations of the Shajing Land and in the case of Dr Chow it was receiving documents too close to a number of Board meetings.  Mr Hung did not vote against the Spin-Off.  He abstained. Dr Chow voted in favour and there is nothing in his evidence to suggest that he even with the benefit of hindsight, thinks that this was a mistake or that the Shajing Land should have been subject to comprehensive valuations that had regard to its potential redevelopment value.

121.  This is relevant to the perspective from which the claim should be viewed.  CC’s case at trial is an invitation for the court to conduct an inquiry into the way in which the Spin-Off was conducted and to assess the conduct of the Defendants with the benefit of hindsight and by standards that are more demanding than those that emerge from CC’s own evidence as being generally acceptable to the Company’s Board.  As it is necessary for CC to demonstrate wilful breach of duty and that if the Defendants had conducted the Spin-Off as CC suggested at trial that they should, the outcome would have been different, it is not sufficient for CC to demonstrate that the Defendants have fallen short of best practice with the result that in some instances there may have been breaches of duty.  What is necessary is to show mistakes and inadequacies, which are so serious that they support the inference that the Defendants had a reckless disregard for their duties as directors.  Given CC’s evidence which places great emphasis on the desirability of the Company retaining the Shajing Land, the corporate finance experts’ evidence in this regards is relevant.  In cross-examination Mr Howe gave the following explanation of the prospects of this being practical if the HKEX was to approve the Spin-Off[20]:

“Q.	In short, as you say, every case is different. One case being able to have a lease structure, that is MS Group, does not mean the Stock Exchange will say yes to another case. You would agree with that?
A.	I would, but I would also say this, that the reason why we really looked into this wasn’t to try and advocate for the plaintiff. It was to try and understand, to help the court, what the situation actually is, because there are a very large number of listings and I started off with many of -- in my mind with many of the points you are so ably making, and I merely wanted to test, in drawing up all this information, what the general market practice had actually been.
	One of the reasons for that is my business partner, Stephen Clark, who I have worked with for nearly four years, made the comment to me, and I was worrying about continuing connected transactions for my theory -- he said, ‘Oh, Chris, the market is riddled with them, I’m trying to get rid of them all’, so I looked into it to see how much of it was happening, and hence the extra 21 things, and so forth.
	I’m not in my report trying to say any particular thing, other than this seems to be going on a lot, market-wide, and it does seem to include production facilities and assets which I actually found quite strange, some of which Mr Yu mentioned earlier on.  I didn’t actually know, until I carried out this exercise, that that sort of thing was going on to that degree, but I do know now, and so I’ve written what I’ve written, that this seems to me to support my notion of being able to do from a corporate finance point of view what a sensible corporate financier would try and do with a spin-off like this, which is to leave the component bits where they should be.”

122.  Mr Espinasse was asked about this subject by Mr Yu[21]:

“Q.	… Mr Howe tells me that provided you can make commercial sense, that your business proposition can make commercial sense, and in this case the business proposition would make commercial sense because you are spinning off a paint business and you are retaining the ownership of land in a company, the Remaining Group, which actually has a land investment business; right? So this is the first point. It makes commercial sense.
	Two is that the lease structure also must make financial sense for both parties. And thirdly that it must be approved by the shareholders of CNT.
	If a good commercial case could be made out to say, ‘Look, this is what we are doing, because for these commercial reasons we have a reasonable arm’s length lease structure, and although the normal time limit is three years, of course on a case-by-case basis it could be extended if necessary’, that Mr Howe is confident that the Stock Exchange would be persuaded that this would be an acceptable structure.
	Now, on that, what’s your view?
A.	First of all, you never know until the Stock Exchange tells you. Second, we are talking about a property which accounts, from memory, for 58 per cent of the production of the company. It’s a staggeringly large amount. I think it would be highly unlikely that the Stock Exchange could be persuaded to grant a waiver in such circumstances.
	I think, in addition, there was no pre-existing lease arrangement. You would have to effectively say, ‘It was owned before but we are changing it for the purpose of the IPO to make it a lease.’ That again, in my opinion, would make it very unlikely for the Stock Exchange to grant a waiver, in these circumstances.
	On top of that, you are suggesting that it would be longer than three years or significantly longer than three years.
Q.	Only if necessary.
A.	which I think, again, would make it very unlikely that the Stock Exchange would grant a waiver, in such circumstances.
	So I think we are really talking about something which would be really, really small in the realm of probabilities for this to be able to go ahead.
Q.	Okay. I think you and Mr Howe disagree on this point?
A.	We do.”

I would note that Mr Yu’s suggestion in Closing that Mr Howe was confident that the HKEX would be persuaded that this was an acceptable structure was overstating Mr Howe’s evidence.  Be that as it may it seems to me that including the land on which the paint production took place in the Spin-Off was unconventional, that the prospects of getting the HKEX to accept a lease back arrangement was uncertain.  It is quite possible that if the Defendants had approached a corporate finance adviser of the experience of Mr Howe or Mr Espinasse they may well have been advised that a lease back arrangement would be complicated and, quite possibly unsuccessful.  In those circumstances they could properly have decided to include the Shajing Land in the Spin-Off.  The Defendants’ failure to explore the possibility of a leaseback of the Shajing Land seems to me to provide little support for an inference of reckless disregard for their duties as directors.  That leaves the assorted other complaints advanced by CC in the final iteration of the Statement of Claim.  I concede that I find it difficult not to read CC’s written closing submissions without thinking that its approach is to throw as much mud as possible hoping that enough sticks to tempt the court into making findings of fact from which adverse inferences can be drawn, and distracting the court from the broader commercial context in which the Spin-Off was developed and CC’s own evidence, which at trial in my view was largely unhelpful to its case.  I now turn to consider the Defendants’ own evidence.

123.  There is no dispute about the genesis and purpose of what became the Spin-Off and CC’s complaint is not that paint business was spun-off.  The principal complaint, as Ms Li explained, is that the Shajing Land was included in the Spin-Off.  There is a subsidiary complaint that in any event it would have been sensible to have the Shajing Land revalued at what CC assumes would have been an attractive valuation included in the prospectus as it would have made the Spin-Off more appealing to potential investors.  I will focus on these principal matters rather than what I see as peripheral matters.  For example, it seems to me that nothing turns on the fact that the Defendants were also directors of CPM whether the complaint is viewed in isolation or cumulatively with the other complaints.  Even if the Defendants failing to declare that they would be the executive directors of CPM was a breach of duty it does not seem to me that in the context of the Spin-Off it can sensibly be characterised as demonstrating a reckless disregard by the Defendants for their duties.  It was probably fairly obvious to the Company’s Board and I note that Mr Hung did not give evidence that this information came as a surprise to him.

K(4).  Mr Chong

124.  Mr Chong produced the most comprehensive witness statement explaining the background and commercial rationale for the Spin-Off.  Mr Chong is a certified public accountant and has been the finance director of the Company since 2008. In my view he gave intelligent and coherent evidence, although as he gave evidence in English on occasions he had difficulty understanding Mr Yu’s questions.  He explained that he was the director primarily responsible for dealing with technical aspects of the Spin-Off; consulting with professionals and the sponsor and similar work.  In the case of important decisions he would consult Mr Tsui who he regarded as his boss.

125.  Mr Chong was cross-examined extensively on the Defendants’ case that a decision had been made to abandon moving production from Shajing to Xinfeng.  Mr Chong explained that this took place in November 2014 when the PN15 was submitted for the first IPO and that the decision was made as a result of information passed to senior management by site staff.  He could not recall any relevant written reports or a specific meeting at which a decision to abandon the planned relocation was made.  His evidence was that the decision emerged from a gradual process of feedback about the difficulties of operating in Xinfeng including difficulty in recruiting labour and transportation issues.  Mr Chong described the culmination of this process as follows during his cross-examination[22]:

“A.	The final decision for -- to make this -- the final decision to discuss this one is, as I said, from time to time, found this happened, and in the last round, when I -- we are going to submit the PN15, so we discuss with Philip Tsui that we are going to include all the assets in this scheme, and both Philip Tsui and me understood that all these factories, especially the Shenzhen factory, is essential for our production, and it is a core production plant which contributes more than 50 per cent of the actual production volume of our paint group.
	So, when we decided to go ahead this scheme, we understand each other that both Shajing factory and Xinfeng factory will be run parallelly. It is our understanding from time to time to build up.
	So that actually I am hard to say that is there actually a formal meeting to say this one? Not this one, but it’s a gradual process.  I can describe in this way.”

126.  Mr Chong accepted that the minutes of the Board meeting on 7 December 2012 clearly recorded a plan to relocate production to Xinfeng and that the Shajing Land had good redevelopment prospects.  Mr Chong accepted that the Board minutes record a continuing intention to relocate to Xinfeng until 28 August 2014, although it was his evidence that by this time the executive directors were aware of problems at Xinfeng and thinking in terms of the relocation being at least delayed, but the Board had not been told.  Mr Yu asked the obvious question: why not?  The answer to the question emerges from the following cross-examination, which as it is important the relevant parts I quote in full[23]:

“Q.	The board. And so when did the board make that decision to abandon complete relocation? When?
A.	November 2014, when we proposed the whole scheme to the board to explain that we will include all the factory in the scheme. At that moment, we understand that all the assets would be included.
Q.	Well, the fact that all the assets would be included does not mean that you have abandoned the relocation.
	Does it mean that?
A.	It must be -- the relocation must be abandoned, otherwise how can you include all the assets, all the factories, and the PPE -- property, plant and equipment -- in the financial statement? So that if we are going to vacant the Shajing factory in future, we will classify into investment property instead of PPE.
Q.	But the investment property, if the spin-off includes the Shajing property, the Shajing property would become part of CPM and the investment property will be CPM’s investment property; right? So why is that inconsistent –
A.	I beg your pardon, first. I beg your pardon, first.
Q.	What do you want to say?
A.	I still not clear of what sentence you said.
Q.	I’m just asking you why is the fact that the Shajing property is included in a spin-off would mean necessarily that the company would abandon complete relocation?
A.	Because China Paint factory -- Shenzhen factory is the most important production plant to the group, so that when we formulate the whole -- during the restructuring time we formulate the whole scheme, we put this major production plant into the scheme.
Q.	Well, you say -- that is what you now say. Was that the thinking at the time?
A.	Yes.
Q.	Was that your thinking at that time?
A.	At what time?
Q.	Say in August 2014.
A.	Yes.
Q.	So you don’t have to tell the board; the board would just know by virtue of the fact that the Shajing property is part of the assets in the spin-off? Is that what you are saying?
A.	The time -- this was the issue of the timing.
Q.	I don’t quite follow your observation about ‘the issue was the timing’. The question had nothing to do with timing. The question is the concept that you are postulating, that by including the Shajing property into the spin-off assets, that necessarily signifies the abandonment of the complete relocation plan. That’s what you are saying; right?
A.	Yes.
……..
Q.	Why does that necessarily mean that the company would abandon the complete relocation plan?
A.	We understand, when you propose the scheme and include all the factories, and in such scheme we understand that we have – we have sufficient information to the board to understand that all the factories will be used and kept in the paint business for the future production plant --
Q.	I have already asked you the question twice. I am not going to repeat my question. I will just make submissions later on.
MR JAT:	Sorry, my Lord. This is one of my learned friend’s criticisms of me. I think the witness was still trying to say something when my learned friend made that comment. Perhaps my learned friend will allow Mr Chong to complete what he had to say.
COURT:	Did you have anything further you wanted to say, Mr Chong?
A.	Because when propose such scheme, we formulate the structure and tell them how the structure is, so that I trust that it is very clear to the board that we will keep those assets in the -- for the spin-off.  I am not -- (Chinese spoken).”

127.  The thrust of Mr Yu’s cross-examination, and his submission made in closing, was that this does not explain why the Defendants explicitly told the Board that the agreed plan to relocate had been abandoned.  He submitted that Mr Chong’s evidence that this was self-evident from the structure of the Spin-Off is unconvincing. I disagree.  The focus in November 2014 was the structure of the Spin-Off.  If relocation of production to Xinfeng was to go ahead with the result that Shajing became available for redevelopment it would not make sense to include the Shajing Land in the Spin-Off; alternatively it would be sensible for the Spin-Off to be delayed until relocation had been completed.  I understood Mr Chong, who as I have mentioned had some difficulty on occasions dealing with questions because he used English, to be making this point.  It seems to me that assessed in a fast moving commercial context it is credible explanation.  I also note that there is no suggestion that other directors were confused about what was intended.  There is nothing in the minutes recording puzzlement or misunderstanding about where the Company found itself in terms of its original plan to relocate.  Dr Chow was asked by Mr Yu if he had heard about the abandonment of the plan to relocate the Shajing production plant and he said that he had not.  Similarly, he said that he had not heard at Board meetings anything about difficulties at Xinfeng.  As I have already mentioned Dr Chow explained that he was not concerned about the location of the plant and the retention of the Shajing Land, because he regarded the Shajing Land as simply part of the manufacturing operation.  I do not think Dr Chow’s evidence is inconsistent with Mr Chong’s assumption about what the Board would have understood; if anything it is consistent with it as it demonstrates that the focus at the time of the Spin-Off was on what constituted the manufacturing operation rather than what value the Company’s underlying fixed assets might have.  In the context of the Spin-Off problems with Xinfeng and whether or not the relocation was to be abandoned or delayed had little significance.  In terms of understanding the context it also seem to me relevant that there were reasons why the Defendants as executive directors might not be thinking about the feasibility of the relocation when considering the Spin-Off; they would have a different perspective as illustrated by this exchange in cross-examination[24]:

“Q.	But that is different from saying that the directors are aware that the company was not going to do a complete relocation; right?
A.	No.
Q.	‘No’ meaning……?
A.	If you are going to include all the assets as a production plant for the spin-off, how can you relocate it? We can’t.
Q.	Why can't you relocate? It’s just that the relocation is in terms of moving the production facilities from Shajing to Xinfeng. If they are within the same company, why would that be a problem?
A.	Because in set up this scheme, first of all, when you transfer the property from paint group to any other company, there is a substantial LAT, land appreciation tax, up to 60 per cent, you are going to pay it immediately.
	Secondly, if the paint group did not hold this major production plant, it will jeopardise the success of the spin-off, because under the PN15, the spin-off company should work independent on the parent company, and the independency of the operation of the spin-off company is very important.  If in case you no longer to hold this production plant, I believe -- actually, I believe the spin-off scheme would never success.”

128.  Mr Yu suggested to Mr Chong in cross-examination that [7.3] of the minutes of 4 July 2016 Board meeting, which record Mr Hung as proposing that the Company initiate discussions with the relevant Government authorities about rezoning of the Shajing Land, an idea which Sir David is recorded as agreeing with, indicated that Mr Hung was not proceeding on the assumption that the Shajing Land would necessarily be included in the Spin-Off and consequently would not necessarily have assumed that the relocation plan had been abandoned.  Mr Chong in answer said that he thought that Mr Hung was simply promoting his suggestion that redevelopment of the Shajing Land be explored.  I accept that one cannot read into Mr Hung’s question anything material about what he thought about the status of the relocation plan; that is not what Mr Hung was asking about.  Mr Yu also suggested that the final sentence of [7.3], which reads “Mr. Tsui replied that a preliminary discussion had already been made with the relevant government officials about the land use change of policy”, was inconsistent with the assumption that it was understood by this time that relocation had been abandoned.  I disagree. It is clear from the minutes of the Board meetings in July and August that Mr Hung was concerned about the redevelopment potential of the Shajing Land.  I do not think that one can sensibly draw inferences from the exchanges recorded in the minutes about the status of the relocation plan and the veracity of Defendants’ case that it was abandoned.  The purpose of Mr Yu’s cross-examination was to demonstrate that the Defendants’ case in this regard is false and to provide part of the foundation for a submission that if the court so concludes, it would support CC’s case that the inclusion of the Shajing Land in the Spin-Off was to make the Company a less attractive takeover target rather than because transferring all the paint manufacturing operations including the land on which production plant was located was the best structure.  It seems to me that one cannot draw the inference, from the way in which the Spin-Off and the Shajing Land was discussed by the Board in 2016, that the Defendants’ case on the abandonment of the relocation plan was a fabrication. 

129.  The relevant issue is whether or not the Defendants should have proceeded on the basis that the Shajing Land might be very valuable and that it should be valued.  Whether or not the relocation of production to Xinfeng was to be abandoned is a secondary issue.  If the Defendants genuinely took the view that the Shajing Land should form part of the  Spin-Off because it was the site of a significant component of the paint business’ production process it seem to me that precisely what the Defendants’ attitude to relocation was and what they communicated to the Board makes no material difference.  It seems to me that the failure to tell the Board that the plan to relocate had been abandoned was not a breach of duty and even when viewed in context it does not demonstrate indifference by the Defendants to their duties or to have caused or contributed to the inclusion of the Shajing Land in the Spin-Off.  The detailed cross-examination of Mr Chong on the problems that he says had emerged at Xinfeng such as shortage of labour and poor transport make no difference to this conclusion.  Neither does it matter whether his evidence in this regard exaggerated the difficulties.

130.  It was suggested by Mr Yu to Mr Chong that a conflict existed between the interests of the Company and CPM in regard to the Shajing Land because if it was included in the Spin-Off the ability to realise its value would be transferred to CPM.  I do not think that it is helpful or commercially meaningful to think of this as a conflict.  The fact is that the Spin-Off involved the creation of a new listed vehicle of which the Company was the dominant shareholder and able to control the constitution of the new listed vehicle’s board.  As a matter of fact the Company’s ability to control the use of the Shajing Land was restricted, but that does not of itself tell me anything of material probative value.  What is required is to weigh that consideration against the other commercial components of the Spin-Off in order to determine whether the disagreement over the decision to include the Shajing Land should be viewed as a difference of commercial opinion or the consequence of a wilful breach of duty.  The material questions are, therefore, whether the Defendants had inadequate regard to the various relevant considerations in deciding how the Spin-Off should be structured and this was either the result of indifference to their obligations or because they had an ulterior purpose in including the Shajing Land in the Spin-Off?

131.  Mr Yu cross-examined Mr Chong extensively on this subject. Mr Chong’s evidence was that he did not focus on the question of control of the Shajing Land.  He was concerned with the more general question of how the Spin-Off should be structured having regard to various matters, which he thought were relevant as illustrated by the following exchange[25]:

“Q.	So just now I was asking you about the cons, the disadvantages, from CNT’s point of view, and am I to understand that that was not something you remember having ever been discussed?
A.	In respect of the Shajing land, I can say that if we are going to carry out the spin-off proposal, the Shajing land must be retained in the paint group. If we are going to put or leave the Shajing land in CNT’s own portfolio or under the investment property, due to the PN15 requirement, we cannot -- there is a great independence issue, even though we enter the CCT, continuing connected transaction, between the CNT and China Paint Group, because it is overreliance of the land assets on paint group to the Remaining Group.
	So that in case, if we are going to put the asset on the Remaining Group-- let me say ‘the Remaining Group’, rather than paint group, it’s Remaining Group -- then you will prejudice -- jeopardise, sorry, the whole spin-off exercise, so that it is necessary, if you are going to make the spin-off, you must put the asset, the land property, in the spun-off group. It is the first one.
	The second one is the LAT issue. If you are going to put the asset to the Remaining Group, it will instantaneously incur an LAT, land appreciation tax, immediately. And what you call redevelopment is actually a dream, so that we are going to arrange this arrangement, we have to consider that the asset must be put in the paint group, otherwise no spin-off; the spin-off will not success.
	It is what I told Philip Tusi.”

132.  So far as obtaining the valuation of the Shajing Land requested by Sir David was concerned it was his case that he initially overlooked the request and then obtained a desktop valuation from BMI.  It was not tabled at a Board meeting as the valuation was only RMB83 million and, therefore, was immaterial.  He did not refer to it when at the December Board meeting Sir David raised the subject of the valuation again, because he assumes he was not paying attention.  It may be that Mr Chong did not refer to it because he thought it would not satisfy Mr Hung (as Mr Yu suggested to him) and it would just stir up more argument about the redevelopment potential of the Shajing Land, but it does not seem to me that this takes the matter much further.  It is clear in my view that by December 2016 the Defendants were focused on a structure for the Spin-Off, which included the Shajing Land and debating further the redevelopment potential of the Shajing Land probably, viewed from their perspective, served no purpose and consequently they would not have paid much further attention to the matter.  Mr Chong stated this in answer to a question from Mr Yu about why he did not give a copy of the BMI valuation to Mr Hung.  As viewed from Mr Chong’s perspective, the BMI valuation was not high enough to justify further debate about the Shajing Land, I can see no reason not to accept his evidence that he was focused on the decision of the Board to file the application for the listing.  It seems clear to me that the fact that the BMI valuation was not distributed to the Board made no difference to how the matter proceeded. Neither do I think that one can sensibly read anything material into the fact that it was not given to Mr Hung or Sir David.  Particularly outside the precise world of legal practice people overlook things, change their minds and decide not to mention matters that they think are best left alone.  In my view the complaint that the Gram Capital letter was not shown to the Board falls into this type of matter.  As Mr Chong explained he assumed that the complaint to the HKEX that led to Gram Capital being instructed came from Chuangs and Mr Hung was aware of it.  He viewed the complaint as groundless and from his answers in cross-examination viewed it as a vexatious distraction from progressing the Spin-Off.

133.  It was suggested to Mr Chong in cross-examination that the Prospectus was misleading if, as the Defendants contend, the decision has been made to abandon the relocation of production from Shajing to Xinfeng and that this would have misled an investor who read the Prospectus as indicating that in the future the Shajing Land would become available for use other than production. This points seems to me to be artificial.  The Prospectus does not suggest that all production will be moved to Xinfeng.  It says that Xinfeng will become the main production plant.  It implies nothing to which much weight can be attached about the possible future use of the Shajing Land. 

134.  A rather more forceful point is the absence of documents recording the problems that the Defendants say became apparent at Xinfeng as the plant was developed.  Mr Yu put it to Mr Chong that it having been expressly pleaded that this was false case (which Mr Chong accepted in cross-examination he was aware of) he should have looked for evidence to support the Defendants’ case that the relocation to Xinfeng has been abandoned because of problems that the Defendants say had been encountered.

135.  The minutes of the Board meeting on 28 August 2014 refer to the relocation to Xinfeng “would be in full force in around 5 years…”. However, during his cross-examination on Day 4 Mr Chong said that by 2013 and 2014 the plan to relocate has been abandoned.  Mr Yu suggested to Mr Chong that either this was false or what the Board had been told in August 2014 was misleading.  Mr Chong said that this was to misread the minutes, which were describing the second phase of construction rather than moving production from Shajing to Xinfeng.

136.  Mr Chong was cross-examined on a number of other matters, which it was suggested demonstrate that the Defendants’ case on relocation was fabricated. It was suggested by Mr Yu that the suggestion that transportation was an issue was inconsistent with the Prospectus and also that the need to renew the safety licence for Shajing in 2014 meant it was reckless to abandon the relocation plan, the reasons for which in the first place included concerns about future restrictions on carrying on dangerous production processes in an increasingly developed urban area.  It does not seem to me that these peripheral matters have any material probative value as illustrated by the fact that Mr Chong said that Shajing still has a safety licence.

137.  In short it was Mr Chong’s evidence that it was obvious by the time the PN15 had been submitted to the HKEX that the plan to relocate production from Shajing to Xinfeng has been abandoned because of the structure of the Spin-Off, which clearly involved Shajing being retained as a production plant. Even if it had never been expressly stated, Board members must have appreciated that the original relocation plan had been abandoned.  It seems to me the directors, who bothered to read the Prospectus and think about what the Spin-Off would include must have appreciated that it included the Shajing Land and that production would continue in Shajing.  The directors should have been familiar with the Company’s operations and it seems to me artificial to think that once the proposal had been approved it would not have been apparent that the Spin-Off involved the transfer of the Shajing Land and its continued use for production.  It may be that other directors did not fully appreciate the reason, but it seems to me that this is a peripheral point.

138.  As I have mentioned the more general point about the absence of records dealing with problems at Xinfeng is, at least at first blush, a more troubling point.  However, a feature of this case is that there are very few contemporaneous documents other than Board minutes dealing with the issues that have been raised by CC.  It might be thought that a listed company would have quite extensive internal records of management meetings, emails, reports, budgets and the like recording the Company’s affairs.  However, as I have already noted Dr Chow when asked about corporate governance said that generally he thought it was acceptable.  He made no criticisms at all. Similarly, Mr Hung’s evidence does not deal with the Company’s internal management systems and record keeping.  It seems that the Company did not keep the kind of records that a sophisticated commercial lawyer might expect.  The fact that this is not something that Mr Hung talks about is instructive. Presumably he knew and Mr Ko knew the Company’s management style.  If they knew, for example, that it was punctilious in recording its affairs presumably they would have referred to this and drawn the obvious distinction between the way in which matters were normally dealt with and what would appear to be the paucity of documents concerning the difficulties at Xinfeng.  They do not. This is consistent with it being normal for the Company’s management not recording the problems they were experiencing or producing business plans. They simply got on and did the work that was required of them and the documents that the Company has are those, which are a necessary product of the Company’s business such as purchase orders, invoices, receipts, bank account records, permits, documents required by the HKEX and formal corporate records.  It would appear that the absence of contemporaneous documents produced by management is unremarkable for this Company.  I return to this subject when dealing with Mr Tsui’s evidence.

139.  Mr Chong was cross-examined extensively on his understanding of the land use restrictions in Shajing.  In broad terms it was his evidence that in Shenzhen the change of land use from industrial to commercial or residential was not encouraged; and Mr Chong drew a distinction between the situation in the Mainland and, in particular, Shenzhen and Hong Kong where he understood that changes to residential use were encouraged.  He also said that he understood that the qualification that change of use to residential was strictly controlled indicated that in practice it was difficult to achieve.

140.  Mr Chong had no expertise in property development particularly in Shenzhen.  He was taken through Mr Lau’s evidence to demonstrate CC’s case that a change of use for the Shajing Land to residential, commercial or industrial M10 was possible.  Mr Chong unsurprisingly said he was not aware of the matters to which Mr Lau refers to support his view.  It does not seem to me that much turns on precisely what Mr Chong did or did not know.  His position was clear.  The Defendants proceeded on the basis that the Shajing Land was necessary for production and had to be included in the assets spun-off.  His understanding from what he had been told by colleagues, who had attended a briefing session with the Shenzhen City Shajing Development Office in December 2016, was that an application to rezone the Shajing Land to residential was unlikely to be successful.  Mr Yu took Mr Chong to minutes of the Board meeting on 23 August 2016 at which Mr Tsui is recorded as saying that “Under the PRC government’s redevelopment plan for the Shajing area, our Shajing factory land had a good redevelopment prospect and would become a very valuable asset in the long term.”  Mr Yu asked him what caused him subsequently to assume that this was no longer the case.  Although Mr Chong’s evidence on this question was not very clear, I understood it to be that he proceeded on the basis that what the Company’s Mainland staff were told in the following December was correct.

141.  Mr Chong may have been right or wrong in his assumptions, but so far as CC’s case on liability is concerned what is relevant is whether or not the Defendants breached their duties by not doing more to see whether rezoning was possible and, if it were, whether the breach can properly be characterised as wilful.  If I accept the Defendants’ case, namely, that they proceeded on the assumption that the Shajing Land should be included in the Spin-Off (and it was not a ruse to reduce the prospect of Mr Chuang launching a takeover bid) the issue is whether, given the concerns expressed by Mr Hung and CC via its complaints to the HKEX, the Defendants should have consulted a planning expert and their failure to do so was a breach of duty.  I do not consider that the cross-examination of Mr Chong on what might have been discovered if a planning expert had been instructed of itself helps me to decide either whether his evidence is truthful or, if it is, he was still in breach of duty. 

142.  There was a subsidiary issue as to whether or not shareholder approval for the transaction was necessary, which is dependent on the value to be attributed to the assets.  In my view nothing turns on this as Mr Chong (who it will be recalled is a CPA) took the view that the assumptions made by Ms Edwina Tam in arriving at a value of the business to be spun-off for the purpose of Listing Rule 14.15 was wrong.  I see no reason for thinking that Mr Chong did not genuinely believe that his interpretation is correct and would have done so in 2016 and 2017.  Whether or not he was correct is not, therefore, relevant in my view to an assessment of whether he was in wilful default of his duties in not causing shareholder approval to be sought. 

143.  It is also relevant that at the time of the trial production was still taking place at Shajing and it remains the centre for research and development.  In re-examination Mr Chong explained that the R&D staff were reluctant to move to Xinfeng.  Mr Chong also explained that Mr Hung’s proposal that the Shajing Land should be valued and the valuation included in the IPO Prospectus was not as straightforward as Mr Hung seemed to assume.  He gave this evidence in re-examination[26]:

“Q. ‘	… you can not make an additional valuation surplus attached to the proforma in the prospectus, so that it doesn’t work.’
	Can you explain to us why it doesn’t work?
A.	(Via interpreter) Because the Stock Exchange exercises strict control over what to be put into the proforma net tangible assets. Items usually present there would be net proceeds. Assuming that you go to do a valuation and you put the figure into the proforma net tangible asset, the Stock Exchange will not accept it.
Q.	I see.
A.	(Via interpreter) For the redevelopment value of a property, the Stock Exchange had a detailed appendix to guide you on how to prepare a redevelopment document. You need to have a very detailed and concrete plan in order to put it there. So, when he talks about doing a revaluation on the production plant and put the figure into the proforma net tangible asset, it’s not practical.
Q.	Was that your understanding at the time?
A.	Yes.”

144.  The Defendants were entitled to take a different commercial approach. If they had gone to the Board and said, for example, we do not think it is worth going to the expense of obtaining a detailed planning assessment and revaluation, we believe the Shajing Land needs to be included in the Spin-Off and we propose to proceed on this basis, the evidence does not suggest that the Board would have disagreed.  In my view it is highly probable that the Board would not have required additional reports prepared.  One of the reasons this is my conclusion is the evidence of CC’s own witness Dr Chow.

K(5).  Philip Tsui

145.  Mr Tsui was not a very impressive witness.  My impression was that he was lazy, frankly not especially intelligent and paid little attention to detail as illustrated by his answers to the following questions.  The first part of the evidence quoted below occurred during Mr Tsui’s cross-examination; the second part at the end of his re-examination[27]:

“COURT:	Sorry, Mr Yu -- Mr Tsui, I’ll be corrected if I’m wrong, by Mr Yu or Mr Jat, but I don’t seem to recall seeing, amongst those of the documents in the rather extensive range of files that we have, much in the way of internal memos or reports by the management of CNT concerning in fact anything very much, I don’t think.
MR YU:	Your Lordship is right, yes.
COURT:	Yes. It could have been because they are all in Chinese.
MR YU:	No.
COURT:	No. Why is that? Why, for example, is there no internal memo generated by the senior management of CNT describing the anticipated mechanism for the spin-off? Because I don’t think there is one, is there?
MR YU:	No.
A.	Up to my level, I don’t receive any report, just verbally saying -- because I don’t like the computer, just normally we communicate with our staff usually by phone.
Q.	Yes, but within your organisation -- I’m not just talking about yourself -- I think my Lord’s question is within your organisation, there would have been emails or there would have been memos, there would have been communications in writing within the management; is that right?
A.	I can’t recall it. That’s to my --
COURT:	But you are an executive director of CNT; yes?
A.	Yes.
COURT:	So that is, I take it, your full-time job, as close to a full-time job as you have?
A.	Yes.
COURT:	But you don’t see and you don’t write memos or reports concerning the management affairs of CNT?
A.	Yes, because at that time, when I get the news, there’s nothing surprising, because our focus is to produce paint. Our core business is the paint business.
COURT:	I know, but I’m assuming -- let me just explain to you the way my mind is working, so you understand why I’m asking the questions, and why I might think it’s important.
	I assume the manufacture of paint and coating materials, on the scale that I assume CNT as a group undertakes, is a relatively sophisticated business, and I would have expected there to be some internal documentation, generated by senior or possibly junior members of the management, recording some of the activities that we are investigating during this trial.
	But it would appear that my impression, which is that there aren’t any, is correct.
A.	Up to my level, we don’t receive any report, unless there’s something special.
……….
COURT:	During the course of Mr Yu’s cross-examination, you said on a number of occasions that your staff know that you don’t like computers.
A.	Yes.
COURT:	Well, that’s all very well, but what does that actually mean in terms of the way you work?
A.	Me?
COURT:	Yes.
A.	My communication is mainly through -- over the phone.
COURT:	So you don't send emails very often?
A.	No.
COURT:	Do you prepare conventional hard copy letters or memos to staff?
A.	Not the memos, just some sort of approved -- some sort of expenses, application for approval, mainly for those.
COURT:	Sorry, what you are saying is the documents that come across your desk are mainly for you to approve some expenditure?
A.	Yes, mainly.
COURT:	So you don't receive reports from, for example, the Shajing production facility on its monthly production figures or the level of staff?
A.	No. For me, no.
COURT:	What do you draft?
A.	Sorry?
COURT:	What do you write? What do you draft in your capacity as a director -- did you draft up until 2017 in your capacity as a director of CNT?
A.	Because our manager in China or even in Hong Kong has so many -- has worked in our company for so many years, so I trust him, especially in China, because we -- I don’t often go to China unless there were serious problems.
COURT:	You are not answering my question. What do you draft? Are you saying you don’t basically write anything?
A.	For me?
COURT:	Yes.
A.	No.
COURT:	You’ve told me, or in answer to questions from Mr Yu you refer to delegating tasks, normally to Mr Chong.
A.	For daily operation, yes.
COURT:	When you’ve been asked, as indeed your own counsel did recently, questions about figures, production figures, you couldn’t answer them.
A.	Yes, because I can’t recall the figures, the actual figures. I just got the broad picture.
COURT:	You see, the problem I’m having, Mr Tsui, is working out what you do do.
A.	Just to look the overall of the company and the directions.
COURT:	Well, you are a director of a public company, and you obviously, because you told me this, see yourself as being Mr Chong’s boss.
A.	Mmm.
COURT:	And you are a solicitor, so I assume the concept of duties, both of duties as a director and things like duties to avoid negligence, is something you understand.
A.	Yes.
COURT:	Well, the difficulty I’m having at the moment is reconciling those duties and, for example, you telling me that you don’t communicate with people in a way which leaves a record, because, for example, you don't like computers.
A.	Yes. But the point is --
COURT:	Can you help me understand why I might not conclude that that suggests you simply don’t do your job properly?
A.	The point is if there is a serious problem, then of course, they would have to give me the report.  Otherwise -- everyone in my office knows that I don’t like to see the documents or whatever, so they just let me know and then they will go and resolve it.  If they can’t resolve it, they will let me know and I go down to resolve it.”

146.  It seems to me that Mr Tsui has probably got out of the habit of paying detailed attention to the affairs of the Company and dealing with them in a precise and professional way.  As he accepted during his cross-examination in relation to the December 2016 Board Meeting, he did not bother to read the minutes that were tabled for approval at the next meeting on 30 March 2017. This I find entirely believable.  He obviously didn’t keep his own notes of meetings or anything else.  He relied on the Company’s management and Mr Chong and Mr Lam to run the business.  Part of the problem that he had in answering Mr Yu’s questions in cross-examination, which were thorough and testing, was that Mr Tsui simply was not used to concentrating and having to address matters with the degree of precision that answering Mr Yu’s questions required.  I expect that his recollection of events was generally and genuinely vague because he did not pay detailed attention to the business of the Company.  As a consequence, for example, when dealing with the question of the meeting at Cova at which Mr Hung says the subject of redeveloping the Shajing Land was discussed in some detail and plans produced, it is quite likely that he cannot recall much of what was said because he was not paying attention.  His rather shallow recollection was that he was being harassed and insulted.

147.  That having been said in my view he was honest.  He accepted, for example, that he had believed in 2012 that the Shajing Land had good redevelopment potential and that this understanding, along with the possibility of restrictions being introduced on production of paint because of health and safety issues (which I will deal with in more detail below), were the reasons for the plan to relocate to Xinfeng.  What he was not good at explaining were the changes to the Company’s plans and the reasons for them over the following four or five years.

148.  Mr Tsui was cross-examined extensively on the Defendants’ case that the plan to relocate production to Xinfeng had been abandoned by the time of the Spin-Off.  Mr Yu explored with Mr Tsui the extent to which the original reason for the relocation plan was a concern that production would cease to be possible at Shajing at some time in the future because of restrictions on dangerous manufacturing processes, which might extend to paint production.  Mr Tsui agreed that he understood that this had been part of his Father’s reasoning, but the fact was that the licences had continued to be renewed up until trial and in 2016 and 2017 he had no reason to think that this would not continue to be the case.

149.  It does not follow that because there is a risk that at some point in time in the future it may not be possible to get the necessary licences that management might not decide that the relocation to Xinfeng was not practical and that the then current plan should be abandoned.  The question is whether problems at Xinfeng was a factor in the development of the Defendants thinking in the lead up to the Spin-Off.  It was Mr Tsui’s evidence that there were problems with the development of Xinfeng between 2012 and 2014, but not sufficiently serious that they needed to be raised at Board meetings.  He seemed to see them as day to day management matters.  It was his evidence that by 2014 he expected oil-based production to move, but not all of the production at Shajing to do so and that he understood, for example, references in the minutes of the Board meeting on 28 August 2014 to relocation being in “full force in around five years” to be to those parts of the production that would be moved, which would depend to some extent on the resolutions of the problems that were being encountered at Xinfeng.  His position is summarised in the following exchange[28]:

“A.	Sorry?
Q.	Describe to my Lord the process that led to that decision before the meeting.
A.	Just through the day-to-day -- from time to time discussions.
Q.	Discussions between you and whom?
A.	And Eddie as well.
Q.	Sorry, I didn’t catch your last answer.
COURT REPORTER:	I didn’t catch it either.
COURT:	Can you repeat the answer?
………
Q.	Yes. You were telling my Lord that before this meeting there’s already a decision that you will only do partial relocation; right?
A.	It’s not an actual decision to relocate -- because through the from time to time discussions we realised that there are -- we realised that we will have to keep two factories together, but it is not a firm decision to say -- to abandon the complete relocation.
Q.	When was there a firm decision then?
A.	Upon the submission of IPO, the first IPO.”

150.  In re-examination Mr Tsui explained that the majority of the production on the Shajing Land that continues to this day is water-based and does not require a dangerous goods licence.  The reverse is the case at Xinfeng.

151.  In short his position was that the position crystalised when the structure of the IPO was being finalised as it included transferring to the new listed company the Shajing Land on which production was to continue.  He said that he did not see there being an important difference between complete and partial relocation.  Presumably the difference is mainly relevant to whether or not the Shajing Land was freed up for redevelopment or sale.  All the time it was being used it perhaps did not make very much difference what part of the production process remained at Shajing.  My impression was that Mr Tsui did not have much grasp of the detail of what was going on and as a consequence his answers to Mr Yu’s questions were imprecise and sometimes inconsistent.  I think it reasonable to assume that once the Spin-Off became the focus of attention Mr Tsui would have paid little, if any, attention to matters such as the relocation or alternative uses of the Shajing Land, because his approach to the Company’s affairs was fairly lazy and unsophisticated.  His explanation for the way he responded to questions from Mr Hung at Board meetings about the possible redevelopment of the Shajing Land, which necessarily assumed it was not being used for production, amounted to this: it was known that the prospects of rezoning were remote, the Shajing Land was being used and he did not need to address Mr Hung’s proposals directly.  Although I accept that this was not the correct way to deal with Mr Hung if what Mr Tsui says is correct, it seems to me credible that he simply could not be bothered to argue with Mr Hung.  This question and answer gives a flavour of this attitude[29]:

“Q.	Why didn’t you tell Mr Hung that it is pointless to talk about redevelopment because the Shajing land will have to be kept for the Shajing production plant for the paint business?
A.	Because in my mind, we always focus on the application of the IPO, and in my mind we always thought that the directors had already know the structure of the IPO, including the Shajing plant.”

152.  I note that the minutes of the various Board meetings during this period do not record any of the directors other than Mr Hung, and to a minor extent Sir David, asking how Shajing would be dealt with if all production were to be moved to Xinfeng.  The Board minutes generally record a very shallow level of discussion about the affairs of the Company.  I have no evidence from Mr Hung or Dr Chow, which explains how the NEDs ensured that they were familiar with the affairs of the Company.  It would appear that they were not provided with, for example, quarterly business reports. 

153.  Mr Tsui was also cross-examined in some detail on his knowledge of the property market in Shenzhen.  In particular he was taken to evidence that the market was, unsurprisingly, rising in the mid 2010s.  It seems to me consistent with Mr Tsui’s superficial approach to business that he might know the general trends, indeed it would have been difficult I would have thought for any business person in Hong Kong during the relevant period not to have been aware that Shenzhen’s economy was booming and that it property market was rising, but I accept Mr Tsui’s evidence that he did not pay attention to particular transactions or market data.  The point behind this cross-examination was to build a basis for suggesting to Mr Tsui that if the Defendants had commissioned the kind of property report and valuation that Mr Hung had requested it would have been likely to have told them that the Shajing Land had considerable and valuable development potential.  If Mr Tsui was not aware of this from publicly available information he should have been alerted to it by Baker &McKenzie’s letter of 9 June 2017 sent on behalf of CC to the Company, which suggested that the net value of the Shajing Land was RMB4 billion.  Mr Tsui accepted that this did not cause him to seek out further information about the potential of the Shajing Land or ask BMI Appraisals to estimate the redevelopment value of the Shajing Land.

K(6)   Brian Wu

154.  The Defendants also called Brian Wu of Sinolink, who had advised on the IPO and, in particular, the offer price.  The thrust of the cross-examination of Mr Wu was to demonstrate that the IPO was rushed, which is consistent with the motivation for the Spin-Off being to move the Shajing Land out of the Company rather than because of a genuine belief on the part of the Defendants that it was commercially beneficial to the Company and its shareholders.

155.  In cross-examination of Mr Wu by Mr Law it was suggested that the final share price of HK$0.86 had been arrived at without applying a 20% IPO discount as is the Defendants’ case, which reduced the share price from that, which can be calculated from estimates in Sinolink’s letter of 1 June 2017, which gave an estimate of HK$1.05 to HK$1.22 to HK$0.86. I accept Mr Wu’s evidence that the final share offer price was the result of applying a 20% discount to the initial estimate.  I can see no reason not to accept this explanation that the initial estimate was based on an assessment of comparables, and that for the purposes of promoting a successful IPO it is normal practice, and one adopted in the present case, to fix the final price shortly before bulk printing of the prospectus and that the final price will commonly include a discount to make the IPO more attractive to investors.  I do not think the absence of anything in writing from Sinolink saying this at the time justifies me not accepting Mr Wu’s evidence in cross-examination.

K(7).  Conclusion

156.  I am not satisfied that CC has demonstrated an improper purpose in the sense of a conscious decision to structure the Spin-Off in such a way as to discourage a takeover attempt.  It seems to me that the evidence falls far short of establishing facts, which support such an inference.  CC invites me to make an alternative finding if I am not so satisfied, namely, that there has been wilful default by the Defendants in compliance with their duties.  As I have explained the issue here is not whether the Defendants fell short of best practice or dealt with some aspects of the Spin-Off negligently.  I need to be satisfied that in a number of relevant respects the Defendants breached their duties owed as directors to the Company and also that they were recklessly indifferent to complying with those duties.  This in my view cannot be done by simply listing all the steps that had to be undertaken to deal with the Spin-Off and the requests and suggestions of Mr Hung and determining whether each step was undertaken with the level of skill and care to be expected of an executive director of a Hong Kong listed manufacturing company and also the knowledge, skill and experience of the particular director in question.  Context is important.  It is also important not to lose sight of the fact that I am not undertaking an inquiry into the shortcomings of the Defendants’ management of the affairs of the Company, but an assessment of whether or not their conduct of the Spin-Off was in material respects sufficiently wanting as to constitute breach of duty.

157.  Mr Tsui’s approach to the Spin-Off was casual and lazy.  To that extent he did fail generally to exercise the skill and care required of him as a director.  In the case of Mr Chong it seems to me that the position is more complicated and nuanced.  Was he, for example, in breach of duty in failing to obtain an assessment of the redevelopment potential of the Shajing Land and a valuation of the Shajing Land on the basis that it did have redevelopment potential?  It does not seem to me that this question is to be answered by viewing the question in isolation and on the assumption that the land might have had significant redevelopment potential.  It needs to be considered in context.  The context involves identifying why the question needed considering at all.  If the Company had not been contemplating a Spin-Off of its paint manufacturing business would there have been any reason to do so?  It would appear not to be in dispute that the Shajing Land was properly valued in the audited financial statement.  Although it might be suggested that it was sensible for the Board to have the market value of the Shajing Land estimated from time to time in order to keep abreast of the market value of the Company’s assets it has not been suggested that regardless of the Spin-Off the directors’ duties required an estimate.  I accept that Mr Chong assumed that if the Spin-Off was to go ahead the land on which production took place needed to be included in the business transferred into the new listed company.  Having considered the evidence of Mr Howe and Mr Espinasse this seems to me to be a reasonable view for him to have taken.  This being the case the decision not to obtain a report, which considered the prospect of redevelopment and the value of the Shajing Land becomes less remarkable particularly if one accepts, as I do, that Mr Chong genuinely thought that the prospects of changing the land use were limited anyway.  I accept that Mr Chong and Mr Tsui were focused on the Spin-Off and not especially interested in what they saw as the limited prospect of redevelopment.  Although Mr Hung’s request was reasonable, whether or not it should have been complied with in my view is a matter of commercial judgment and the way in which the Defendants dealt with the revaluation was not in breach of duty.  It seems to me that the same type of analysis applies to the other criticisms that CC has advanced.  I accept that the Defendants’ management of the Spin-Off and reporting to the Board was slipshod and, in particular, that various complaints viewed in isolation, such as obtaining approval to the final share price, fell short of best practice. However, that does not mean that the Defendants breached their duties.

158.  A problem that seems to me to loom large over CC’s case is that it was Ms Li’s evidence that CC did not object to the Spin-Off, just the inclusion of the Shajing Land and its valuation in the balance sheet and that Dr Chow’s evidence suggests that although he was unhappy with the late provision of documents for certain Board meetings he did not object to the Spin-Off including the Shajing Land.  Consequently, subject to what I discuss in the next paragraph, it seems to me that there is no reason to think that if Mr Tsui and Mr Chong had obtained more comprehensive advice, presented it in a more sophisticated way, specifically sought a resolution approving the shareprice of HK$0.86 it would have made any difference to the Board’s decision to approve the Spin-Off.

159.  It seems to me necessary in order for CC to succeed to satisfy me that if the Defendants had sought advice from a competent valuer on the prospects of obtaining consent to a change of use for the Shajing Land and its likely value if such consent was forthcoming, the advice would have supported the view expressed in Baker & McKenzie’s letter of 9 June 2017.  Perhaps the net figure for the valuation would not have been as high as RMB4 billion, but it would have been sufficiently high to cause the Defendants and the Board to rethink the structure of the Spin-Off or the wisdom of spinning-off the paint manufacturing business at all.  The Parties filed expert evidence from two property experts, whose views differ markedly on the prospects of obtaining a change of use.  At this point it will suffice to say that having heard both experts I can see no reason to think that if the Defendants had caused the Company to instruct an expert and that the expert’s instructions were not slanted to encourage a particular view, the report that would have been obtained would necessarily have supported CC’s view.  Although little can be read into the reports of Cushman & Wakefield and BMI Appraisals in this context, the fact that it does not appear to have been suggested that the Shajing Land might have development potential, which is the kind of observation that might have been volunteered if the property valuers had reason to think it might have, is consistent with my view.

L.     Loss

160.  CC has calculated the loss as the difference between the fair market value of the Company’s interest in the paint business immediately prior to the Spin-Off on 9 July 2017 and immediately after the Spin-Off at which point the Company’s interest in CPM was reduced from 100% to 75%.  The loss claimed in its final iteration is set-out in [161] of CC’s closing submissions:

“Adopting the valuation provided by Edwina Tam, the figures are set out in Edwina Tam 2^nd §3.1 (updated).

(1) On the basis of existing zoning of the Shajing Land, the difference of pre and post-spin off values come to the figure of HK$210,891,000.

(2) For redevelopment scenario from M1 to M0, the difference is HK$264,866,000.”

161.  CC obtained a direction for business valuation expert evidence to be adduced in respect of the following issue:

“The fair market value of the Company’s interest in the Paint Business (held through its 100% shareholding in CPM) as at the Pre Spin-Off Date, taking into account the fair market value of CPM’s assets and liabilities using the ‘asset-based approach’ (assuming there were no material changes in the financial position of CPM between 30 June 2017 (as stated in CPM’s Interim Report for the period ended 30 June 2017) and the Pre Spin-Off Date), including the market value of the Subject Properties as per the valuation evidence in paragraph 1 above.”

162.  In [3.1]–[3.3] CC’s expert Edwina Tam of Deloitte Advisory explains her instructions:

“3.1 In accordance with my instruction outlined in section 2a above and the directions made by the Court in the Order, I have relied solely on the asset approach in determining the fair market value of the Paint Business, incorporating the results of a valuation conducted by Jones Lang LaSalle contained in their report dated 8 March 2018 (‘JLL Report’). I have not been instructed to consider any other valuation approaches and/or consider future plans relating to the operation of the Paint Business. I am instructed that Chinaculture does not have the relevant information and documents in relation to the Paint Business in order to consider an alternative approach to valuation.

3.2 The asset approach measures the difference between the value of assets less the value of liabilities of the business.[30] This approach focuses on the fair market value of a company’s total recorded assets less its total recorded liabilities. The asset approach is typically appropriate for investment or real estate holding companies whose value is comprised on a collection of individual assets.

3.3 For a going concern business, an income or a market approach will generally be adopted in assessing the fair market value of a business (which would also reflect the value of any internally generated intangible assets) based on its historical and prospective profitability. With an asset approach, although it may not reflect the value of internally generated intangible assets, it measures the net tangible asset value of the business, which can serve as an important benchmark for investors to assess the ‘floor value’[31] of a business.

For a going-concern business, a rational controlling shareholder would not be willing to accept less than the ‘floor value’, i.e. the net asset value of the business.”

163.  As the Company and CPM are going concerns it would appear that an asset value approach to assessing the impact on the Company’s economic interest in the paint business and the business retained by the Company is not generally the appropriate valuation method as it does not take into account the ability of the Company to generate profit from its tangible and intangible assets. Ms Tam accepted in cross-examination that in assessing the post spin-off value one would normally consider the value of the shares, which constitute the shareholder’s asset.  I note at this juncture that Ms Tam explains in [3.1] of the passage from her 1^st report quoted above that she was instructed to use the asset value method because CC does not have the relevant information and documents in relation to the paint business in order to consider an alternative such as an income or market approach.  I do not have any evidence to demonstrate that this is correct.  As both the Company and CPM are public companies with comprehensive annual reports it is not clear to me why, for example, enterprise value could not be used as would be common when considering valuing a company for takeover purposes.  As a result of CC’s approach what in substance one ends up is with an assessment of loss based on the value that is allocated to the Shajing Land.  The Parties’ respective business valuation experts have used the value produced by the property experts.

164.  For reasons I have explained earlier it seems to me that if the Company had obtained a strongly positive report on the prospects of obtaining a change of use for the Shajing Land from industrial to residential and a valuation that was in the order of the values produced by Mr Lau (in his report RMB674 million based on existing land use rights and zoning and as high as RMB4 billion assuming residential and ancillary retail use) it is unlikely that the Spin-Off would have gone ahead for the following reasons.  First, it is unlikely, and I have found, that it would have been possible to Spin-Off the paint business if the Shajing Land was retained by the Company and let to CPM.  Secondly, it would have made no sense to Spin-Off the paint business including the Shajing Land if it was anticipated that given the Shajing Land’s value it would be redeveloped.  On this basis the question is what loss has been caused to the Company by the Spin-off taking place?  CC’s approach assumes that the loss was being deprived of 25% of the interest in the Shajing Land.  This seems to me wrong or at least overly simplistic.  The loss would be the value of the business of the Company as a going concern prior to the Spin-Off and the value of the business of the Company as a going concern after the Spin-Off.

165.  In [4.3] of her Report Ms Tam reaches this conclusion:

“On the assumption that the only difference in the Paint Business pre and immediately post Spin-Off is the net cash raised from the public offering, the total fair market value of the Paint Business as at the Post Spin-Off Date was approximately HK$1,570.7 million (i.e. the fair market value of HK$1,395.3 million as at the Pre Spin-Off Date, plus HK$175.4 million of cash proceeds from the public offering), of which CNT would retain a 75% stake. As such, the fair market value of CNT’s interest in the Paint Business (held through its 75% shareholding in CPM) as at the Post Spin-Off Date is HK$1,178.0 million, reflecting a HK$217.3 million reduction from the Pre Spin-Off Date value of approximately HK$1,395.3 million.”

This approach gives no credit to the benefits of the Company having a 75% interest in another company listed on the Main Board of the HKEX. It is uncontroversial that benefits attach to a listed company spinning-off a discrete business into another listed vehicle, which it controls.  Ms Tam has only given credit for the additional cash that has been raised.  Clearly there must be other benefits, which should be taken into account.  As Mr Espinasse explains in [93] and [572-6] of his 1^st report:

“93. In my opinion, the benefits of a spin-off cannot entirely be reduced to the valuation achieved by the spun-off company in its IPO and there would have been a number of other important factors taken into consideration for the spin-off IPO of CPM Group. A separate fund-raising platform and financial transparency are also common considerations for spin-off cases and are generally favoured by banks and investors in subsequent debt and equity financing transactions.”

“572. As noted in Section 3 above, the benefits of a spin-off cannot be reduced to the valuation achieved by the spun-off company in its IPO.

573. In my experience, spin-offs are usually undertaken to reposition a distinct business as a standalone entity, with a view to, inter alia:

· releasing the intrinsic value of a company, that is, obtaining a higher valuation from the market for a business, than that achieved by keeping it bundled with a variety of other assets under the umbrella of the listed parent;

· enabling investors to separately appraise the strategy, strengths and opportunities of that business;

· targeting a separate shareholder base for the business, as well as distinct sources of funding (through the debt, equity and, potentially, equity-linked capital markets);

· increasing financial and operational transparency for the business through a separate governance framework; and

· more directly aligning the responsibilities, accountability and rewards of the management of the spun-off company with the business of the company being spun-off.

574. In my opinion, the spin-off IPO of CPM Group was no different. There were a number of reasons for, and clear benefits achieved under the transaction, above and beyond the valuation achieved by the issuer through the IPO.

575. I would also note that, to this day, CNT Group retains a 75% ownership of CPM Group and that CPM Group remains consolidated in the accounts of CNT Group. Accordingly, the interests of both companies necessarily remain aligned.

576. Finally, although this is not something I would personally recommend or support, I note that a substantial value likely can be ascribed to a company simply because of the fact that it has a public listing. In this respect I note a recent judgment in Hong Kong in which the Court found the average shell premium to have a value of HK$350 million.”[32] [33]

In the joint report the experts give an example in [96(b)]:

“Mr. Howe notes that in his opinion, these shell premiums were actually running at HK$650 – HK$750 million at the relevant time for a ‘clean’ listing on the Main Board so a Spin-off was a transaction that should have been considered, in his view but not co-mingling high value or potentially high value property assets (if that is in fact what they were as the Plaintiff asserts) with the paint manufacturing business because the stock market would have given no value or little value to the Property if it was a high value or potentially high value asset as the Plaintiff asserts as explained above in Mr. Howe’s paragraph 60 above.”

166.  The fact that Ms Tam does not include anything other than the cash raised in respect of the value obtained by virtue of a Spin-Off, which CC’s own expert takes the view made commercial sense and has identified one benefit (the shell premium value), which he values at July 2017 at between HK$650-750 million, calls into question the appropriateness of using an asset value approach to quantify loss.  I would note that Mr Howe’s evidence is consistent with my own experience of dealing with schemes of arrangement to restructure the debt of companies listed on the Main Board of the HKEX during the relevant period.  The HKEX has subsequently changed its Rules, which has had an impact (along with the deteriorating economy) on the value of a listing, but this is not relevant.  On 26 July 2019 the SFC published a statement on its approach to backdoor listings and shell activities, which I accept also had a negative impact on the value of a listing.  However, loss is claimed on the basis of the difference between the Company’s interest on the date of the Spin-Off, 17 July 2017, and immediately following the Spin-Off.  The fact that some years later the value attaching to the listing declined is in my view not a reason to ignore what the listing was worth at the time of the Spin-Off.  As I have already noted I am concerned with the loss caused to the Company in July 2017 by the Spin-Off, not simply the difference in value between the amount at which the Shajing Land was carried in the Company’s ultimate subsidiary’s accounts and its market value.

167.  I have quoted [3.3] of Ms Tam’s Report above.  In the final sentence she says this “For a going-concern business, a rational controlling shareholder would not be willing to accept less than the ‘floor value’, i.e. the net asset value of the business.”  With respect to Ms Tam this seems to me to be wrong.  The minimum that a rational controlling shareholder would be willing to accept what would be the equivalent to a distribution as a consequence of the realisation of the assets.  This would most commonly occur by way of dividend or on a solvent liquidation.  This is why in my view Mr Yeo is correct that tax needs to be taken into account[34]; although not for quite the reasons he gives.  I am concerned to assess the loss that has been caused to the Company on the assumption that the Spin-Off should not have included the transfer of ultimate beneficial ownership of the Mainland subsidiary, which owns the Shajing Land to CPM at the value that the land was carried in the subsidiary’s accounts, which did not reflect its market value. If the Shajing Land were to be sold significant tax would obviously have had to be paid in the Mainland by the Mainland subsidiary.  Presumably (although Mr Yeo does not deal with this so I will ignore it) if the resulting profit were to be distributed to the subsidiary’s shareholder there would have been an additional tax on that distribution.  As I am concerned with loss, not just what CPM’s balance sheet would look like if the Shajing Land is included at market value, credit has to be given for that amount.  I would not, however, have made a deduction for the valuation discount suggested by Mr Yeo, which seems to me to be speculative.

168.  Once the premium attaching to the new listing and tax is taken into account even using CC’s expert’s valuation of the Shajing Land no loss is established unless I am satisfied that CC has proved that a change of uses to residential was possible.  For the reasons explained in [170] I am not. Therefore, had I found in CC’s favour on liability I would still have given judgment for the Defendants.

169.  It is not necessary for me to deal with the evidence of the experts on valuation.  However, I have some comments on it.  The experts provided opinions on the market value of the properties in the Mainland, including the Shajing Land, owned by the Company’s subsidiaries on 9 July 2017 and the redevelopment value of the Shajing Land on 9 July 2017.  Mr Lau valued the Shajing Land at RMB674 million and gives it a redevelopment value varying from RMB1,435 million to RMB4,057 million depending on the alternative use to which the land were to be converted. Mr Man valued the Shajing Land at RMB145 million and as he was not satisfied that a change of use could be obtained did not give an alternative redevelopment value. 

170.  Neither Mr Lau nor Mr Man are experts on Mainland planning regulations. They relied very heavily on input from colleagues in the Mainland.  It seems to me that there is considerable uncertainty over what the Shajing Land is worth. In my view the valuations, particularly that of Mr Lau, is no more than an informed guess.  Mr Lau’s valuation has been presented as a sophisticated assessment of rules, practice and comparables leading to a reliable estimate of the Shajing Land value in 2017.  But given the uncertainties in terms of interpretation of rules and the differences between the Shajing Land and the comparables I am not satisfied on the balance of probabilities that CC has demonstrated that the Shajing Land could have been rezoned.

M.     Determination

171.  I dismiss the Action and make a costs order nisi that CC pays the Defendants’ costs with a certificate for two counsel, such costs to be taxed if not agreed.