POON YEE KAN ANDREA ELEANOR v. NEW PARADIGM E-TECHNOLOGY LTD

CACV 325/2004 and CACV 326/2004

(Heard Together)

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 325 OF 2004

(ON APPEAL FROM HCMP 3682 OF 2003)

BETWEEN

CIVIL APPEAL NO. 326 OF 2004

(ON APPEAL FROM HCMP 11 OF 2004)

______________________

J U D G M E N T

______________________

Hon Cheung JA :

The proceedings

1. This is an appeal from the judgment of Reyes J.  The judge was seized with two matters.  The first was an application by Poon Yee Kan Andrea Eleanor (‘ Ms. Poon’) in HCMP 3682/2003 who claimed that New Paradigm e-Technology Ltd (‘New Paradigm’) had granted her an option to acquire shares in New Paradigm.  She sought, among other things, a declaration that she had the right to subscribe and to be allotted 48,174 shares of New Paradigm or 8% of the entire share capital of New Paradigm at par value.  In the other matter (‘HCMP 11/2004’) New Paradigm sought to rectify the register of members of New Paradigm by striking out the name of Ms. Poon as the holder of 48,174 shares of New Paradigm. 

The orders

2. The judge found for Ms. Poon in both matters.  He made a declaration that,

(1) on about 1 November 1999 New Paradigm granted Ms. Poon an option to subscribe for up to 8% of its share capital at par value, during the term of her employment with the company, but before any takeover of New Paradigm, any listing of the company, or any injection of funds into the company by a third party investor; and

(2) before her resignation from New Paradigm on 19 December 2002, Ms. Poon exercised that option by giving notice on 9 May 2002 to subscribe for 48,174 New Paradigm shares.

3. He further ordered that,

(3) New Paradigm was to validate the 14 May 2002 allotment of 48,174 shares to Ms. Poon; and

(4) New Paradigm was to deliver to Ms. Poon a certificate for 48,174 paid up shares of $1.00 par value each.

4. He dismissed New Paradigm’s application for rectification of its register of members. 

The appeal

5. New Paradigm now appeals against the judgment. 

Nature of the proceedings

6. The proceedings before the judge were by way of originating summons.  The parties agreed that the case would be dealt with by affidavit evidence with no cross-examination of the deponents. 

Background

7. In order to understand this case it is necessary to refer to a company called IVRS (International) Ltd (‘IVRS’).  The shareholders of IVRS were as follows :

(1) Mr. Raymond Cheung (‘Mr. Cheung’) holding a 30% legal and beneficial interest.

(2) Mr. Peter Chan  (‘Mr. Chan’) holding a 20% legal and beneficial interests.  

(3) Dr. Kenneth Wong  (‘Dr. Wong’) holding a 20% legal and beneficial interest.

(4) Dr. Wong also held the legal title to a further 30% of IVRS shares on trust for Ms. May Tse.  Ms. May Tse is Mr. Franky Lai’s (‘Mr. Lai’) wife.  She participated in IVRS’ business through her husband.

8.  These shareholders were the founders of IVRS.  Mr. Lai had attended all major meetings of IVRS in his capacity as the representative of his wife, and had taken part in all major decision making process of IVRS until July 2002.

9. The shareholders of IVRS had in mid-1999 discussed plans to expand the business operation of IVRS.  The plan was to incorporate a company namely, New Paradigm, which would serve as an arm of IVRS to further the business operation of IVRS.  IVRS provided information technology solutions to Hong Kong corporations.  The new company was intended to provide internet software solutions to Hong Kong businesses.  New Paradigm was incorporated with a view either to get publicly listed or to attract external funding into New Paradigm from strategic investors. 

10.  In order to attract prominent management people to join as senior executives of New Paradigm Mr. Lai proposed to the shareholders that an option should be made available to the key management staff to acquire up to 8% of New Paradigm’s shares. 

11.  The option scheme (‘the scheme’) was approved by the shareholders at a meeting on 9 October 1999.  The shareholders of IVRS agreed that under the scheme 40% of the issued shares of New Paradigm would eventually be held in equal shares by five senior staff members namely, Mr. Cheung, Mr. Lai and three key management staff at 8% each. 

12.  According to Mr. Lai the option right was to be exercised prior to any corporate takeover of New Paradigm either by way of external funding by strategic investors or by a public listing of New Paradigm shares.  The rationale was that once there be a corporate takeover, new shareholders may not be aware of the arrangement under the scheme.  The prompt exercise of the rights under the option would serve to avoid unnecessary arguments with strategic investors and potential shareholders of New Paradigm. 

13.  On that basis Mr. Lai approached Ms. Poon and Mr. Barry Yen (‘Mr. Yen’) and invited them to join as senior executives of the new company. 

Ms. Poon’s case

14.  Ms. Poon’s case is that in September 1999 she was approached by Mr. Lai who suggested to her that IVRS intended to establish a subsidiary company to further the business operation of IVRS in the internet and computer software business in Hong Kong.  There were also plans to expand the business operations of IVRS in the other parts of the world. 

15.  On 29 October 1999 Ms. Poon was invited by Mr. Lai, acting as the representative of the founders of IVRS, to join New Paradigm as Vice President - Marketing and Process Planning and a director upon its incorporation.  She would, as part of her terms of employment, be entitled to purchase up to 8% of New Paradigm’s total share capital under the scheme already approved by IVRS in or about early October 1999.  She would be entitled to exercise her right under the scheme at any time during the course of her employment with New Paradigm, before any corporate takeover of New Paradigm by third party, listing of the New Paradigm or third party investment in New Paradigm. 

16.  By a letter of employment dated 1 November 1999 signed by Mr. Cheung on behalf of New Paradigm, Ms. Poon was offered a position in New Paradigm from 1 November 1999.

17.  New Paradigm was incorporated on 24 November 1999.  Ms. Poon and Mr. Cheung were the original subscribers to New Paradigm’s shares, each being allotted 5,000 shares of $1.00 each.  The two were appointed directors of New Paradigm on 29 November 1999, at which time Ms. Poon was also appointed as the company secretary. 

18.  On 29 December 1999 New Paradigm’s board of directors (‘the board’) approved the transfer of 1,000 shares by Ms. Poon and 5,000 shares by Mr. Cheung to IVRS. 

19.  On 5 January 2000 New Paradigm’s authorised share capital was increased from $10,000 to $1 million.  A company resolution of the same date authorized the board ‘to allot shares and to make or grant offers, agreements and options which would or may require shares to be allotted after the expiration of this approval’. 

20.  On 6 January 2000 the board allotted 594,000 shares to IVRS thereby increasing IVRS holding in the company to 600,000 shares.

21.  By an e-mail dated 9 May 2002 Ms. Poon wrote to Mr. Lai, Mr. Cheung, Ms. Tse, Dr. Wong and Mr. Chan :­-

‘... I will exercise the option granted to me by the company for up to 8% of the company’s authorised shares of 1,000,000 at par.  The exercise price of the option [is] par, i.e. HK$1.00 per share, and I will exercise the option in respect of 48,174 shares.

Therefore based on the existing paid up capital of HK$604,000, I will inject HK$48,174 into the company to own a total of 52,174 shares of New Paradigm e-Technology Ltd.’

22.  Ms. Poon paid the $48,174 exercise price for the allotment by a cheque dated 10 May 2002 made out to New Paradigm.

23.  On 14 May 2002 Ms. Poon as director in charge of the day-to­-day affairs of New Paradigm caused the company to allot 48,174 shares in her name.  She remains in New Paradigm’s Register of Members as the allottee of shares numbered from 604,001 to 652,174. 

24.  Ms. Poon resigned from New Paradigm’s employment on 19 December 2002.

25.  By a letter dated 3 July 2003 Ms. Poon complained that New Paradigm had failed to issue share certificates to her in respect of her holdings of 4,000 and 48,174 shares.  She then commenced the proceedings.  This was followed by New Paradigm’s cross suit.

Nature of an option 

26.  The nature of an option is described in Halsbury’s Laws of England 4^th ed., Vol. 9(1) para. 640 as follows :

‘ an irrevocable offer and a power of acceptance .... the grantor of the option is under a conditional duty, and the option-holder has a conditional right, of performance of the option offer, that condition being the exercise of the power of acceptance by the option-holder....The exercise of the option may itself be subject to certain conditions precedent, such as time limit, or the occurrence of a certain event, or duration of a major contract of which it forms a part, or a mode in which it may be exercised.’

27.  A contract of option is a unilateral contract in which only one party is bound : Chitty on Contracts, 29^th ed., para. 4–057.  The conditions to be fulfilled ‘must be identified by its description in the unilateral contract’ : United Dominions Trust (Commercial) Ltd v. Eagle Aircraft Services Ltd [1968] 1 WLR 74 at page 84D.  Strict compliance with the conditions is required : United Dominion Trust at page 81 and United Scientific Holdings Ltd v. Burnley Borough Council [1978] A.C. 904 at 929 A–B. 

28.  Where there is no compliance with the conditions stipulated in the option, no binding obligation is created against the promisor.  As observed in United Dominions Trust, ‘It is not for the court to ascribe any different consequences to non-compliance with one part of the description of the event than to any other part if the parties by their contract have not done so’.  In United Scientific Holdings Ltd it was further stated that ‘the law does not purport to bring parties in a relationship of contractual obligations which they themselves have failed to create’. 

Incomplete terms of the scheme

29.  The first attack by Ms. Linda Chan, Counsel for New Paradigm, against the judgment was that there was no agreement between the parties on some of the essential terms of the option, namely, there was no agreement as to the period during which Ms. Poon could exercise the option, and as to the price of the option. 

Evidence

30.  It is clear from the evidence that the shareholders of IVRS who eventually formed New Paradigm had agreed to offer a share option to the new senior employees of New Paradigm.  It is also clear from the evidence that when Mr. Lai approached Ms. Poon to invite her to join the new company she was told about the option that was included as part of her employment package. 

31.  That the shareholders of IVRS had agreed to an option clearly is supported from the minutes of the meeting of IVRS shareholders on 9 October 1999.

32.  At this meeting it was agreed that:­-

(1) 60% of New Paradigm’s issued shares would be held by IVRS;

(2) the remaining 40% of New Paradigm’s issued shares would respectively be held in portions of 8% each by Mr. Cheung, Mr. Lai, Mr. Yen; Ms. Poon and a yet to be recruited senior executive of New Paradigm; and,

(3) the rights and obligations of New Paradigm’s shareholders would be governed by an agreement to be negotiated among the relevant persons.

33.  The meeting was attended by Mr. Cheung, Mr. Lai, Mr. Chan and Dr. Wong.

34.  This is further supported from the minutes of another meeting of IVRS held on 29 October 1999.  As recorded in the minutes ‘RC (i.e. Raymond Cheung) asked about the custodianship of the 8% plus 2% shares for the two key staff in the new company’. 

35.  Ms. Chan relied upon these two minutes to show that the essential terms on the price and the time for the exercise of the option had not been identified. 

36.  At face-value this is a valid point.  Even Mr. Lai himself accepted that although the scheme was approved at the 9 October 1999 meeting, further details would have to be set out at a later stage.  This, however, does not mean that these essential terms had not been agreed upon subsequently, or that Ms. Poon had not been told of these terms. 

37.  The directors of New Paradigm after its incorporation were Mr. Cheung, Mr. Lai and Ms. Poon.  This remained the position until 14 June 2002 when five more new directors were appointed.  Mr. Lai had been described by Mr. Cheung in his correspondence with Ms. Poon as the CEO of New Paradigm.  It is clear from the evidence that after the incorporation of New Paradigm the issue of the option was raised by the parties.  Mr. Yen, the other employee who was offered the same option, had been involved in the discussion with the solicitors of New Paradigm on the terms of the agreement concerning the scheme and the shareholders’ agreement.  Drafts for these two documents were prepared.  It was proposed that the rights under the scheme were to be exercised within 18 months from the date of the incorporation of New Paradigm.  However, in order to take into account contingencies, the draft agreement provided for some flexibility regarding the exercise of the rights under the scheme. 

38.  For reasons unknown, the shareholders of IVRS did not sign the agreements, but both Mr. Yen and Ms. Poon were orally assured by Mr. Cheung in August 2000 that the option scheme was in place and that there was no reason to worry about it. 

39.  The matter was raised again by the end of 2001 when Mr. Yen and Ms. Poon were told by Mr. Lai that IVRS had commenced negotiations with a strategic investor interested in the operations of New Paradigm.  Mr. Lai told them that their option to acquire shares should be assigned back to IVRS as the majority shareholder.  Mr. Cheung had proposed to Mr. Lai that an offer be made to Ms. Poon and Mr. Yen that each of them would be paid a sum of $1.2 million in consideration of the surrender of their rights under the scheme.  While Mr. Yen eventually accepted the offer, Ms. Poon was not prepared to accept $1.2 million.  She asked for a substantially higher figure, which was not accepted. 

40.  With this background New Paradigm could hardly deny that an option in fact had been offered to Ms. Poon.  It is true that Ms. Poon in her written counter offers made in April 2002 in response to the offer of $1.2 million stated that :

‘The Purchaser has agreed to allow the Seller to purchase up to 8% of the entire share capital in NP including the 4,000 shares in NP already registered in the name of the Seller (the “Right”) and there is no mentioning of the exercise price per share and the exercise period.’  (emphasis added)

However, on 22 April 2002 both Mr. Lai and Dr. Wong had separately confirmed in writing to her as follows :

‘ Referring to your query on the captioned topic, I confirm that per agreement of IVRS’ shareholders at the formation of New Paradigm e-Technology Ltd. (NP), this option granted to you allows you to own up to 8% of the company’s entire share capital at par, i.e. at the price of HK$1.00 per share.’  (emphasis added)

The price clearly had been identified by this confirmation.

41.  It is also true that shortly before Ms. Poon sent the notice of the exercise of the option she also had written to Mr. Cheung about the deadline for the exercise of the option :

‘ Since my last correspondence to you April 26, 2002 regarding an offer from IVRS shareholders to buy my 8% option & 4000 shares in New Paradigm, and an alternative invitation from you to discuss plans to increase my shares in NP up to 8%.  I have not received any response from you since.

It has been brought to my attention only in the last week that I-Group which includes New Paradigm, is in active discussions with a strategic investor (SI) for fund injection, and that this deal at final closing stage, I would appreciate if you can confirm if this is true, and if so what is the actual deadline for me to exercise this option. I would like to re-state that, as per the original agreement between IVRS and myself on this option, I hold the right to make a decision of either exercising my 8% option on par or selling my shares and options prior to the completion of any S & P [Sale & Purchase] agreement with any SI. As IVRS’ current discussions with the SI, which is a piece of information critical to my decision-making, was withheld from me both when IVRS first offered to buy my shares up to 8% on April 25, 2002, my right to exercise my options should not be affected in any way until I am given reasonable time to make my decision.  Otherwise I reserve my right to claim at present or in future for any losses and damage against NP or any or all of the Purchasers or to future shareholders of NP due to capital restructuring or equally investment by any investors into NP.’  (emphasis added)

42.  Ms. Poon explained that her option was to be exercised during her employment and before the events as specified in her case.  As she was not involved with the discussion with the strategic investor who was interested in New Paradigm, she was uncertain as to the details of the negotiation, such as the closing date of the deal.  As such she took the prudent measure by making enquiries with Mr. Cheung so as to ensure that the time for her exercise of the option had not expired.  She expressly denied that she was uncertain when her right could be exercised. 

Response from Mr. Cheung

43.  The response from Mr. Cheung after Ms. Poon had exercised the option is telling.  Instead of immediately responding to her claim that she could validly exercise the option, Mr. Cheung did not respond at all.  He certainly did not say that the price or the period in which the option was to be exercised had not been agreed upon by the parties.  Until that stage he had been corresponding with Ms. Poon by e-mail.  This sudden silence is puzzling, particularly when Ms. Poon continued to be a director of New Paradigm. 

44.  In terms of written objection from New Paradigm, this only came on 5 August 2002 when Mr. Andrew Lau (‘Mr. Lau’) then IVRS’ chief financial officer and since 12 July 2002 a director of New Paradigm, wrote to Ms. Poon.  In his e-mail Mr. Lau firstly stated that there was no written agreement for the granting of share options.  Then he said that assuming a verbal confirmation on the percentage of the share option to be granted to Ms. Poon existed, the price and the exercise period still had not been discussed.  He further stated the share option was not approved in shareholders’ meeting nor in directors’ meeting. 

45.  In my view this response came very much as an afterthought.  Mr. Cheung himself accepted that he did not raise any objections immediately.  He stated that since the allotment would have to be approved by the board, it would be proper for the issue to be discussed at the meeting of the board to be convened by New Paradigm for such purpose.  One may ask what was there to stop Mr. Cheung from convening a board meeting himself for the purpose of rejecting Ms. Poon’s claim to the shares?  In my view there is ample evidence to support the finding of the judge that an option indeed had been granted to Ms. Poonfor the price and period as claimed by her. 

Who granted the option?

46.  Ms. Chan argued that if there was an agreement for the granting of the option then such was made between Ms. Poon and the shareholders of IVRS.  As was rightly pointed out by the judge Ms. Poon was approached by the shareholders of IVRS on behalf of New Paradigm, which then was yet to be formed.  Ultimately Ms. Poon was to serve New Paradigm.  Hence it could not be the shareholders of IVRS who had offered the option to Ms. Poon.

Ratification

47.  As New Paradigm was only incorporated after the option was granted, an issue concerning pre-incorporation contracts arises.  The principle is clearly stated in Gore-Browne on Companies, 45^th ed., para 8[9] as follows :

‘ Where incorporation of the company has not been effected the contract may be expressed to be made between the vendor and the company, the draft being initialed for the purpose of identification, or it may be made between the vendor and a trustee for the intended company and dated and executed.  But in either case the company is not bound by the contract until it has entered into a direct agreement, after incorporation, to become so, since a company cannot ratify a contract made before it came into existence, nor can the unincorporated company be the ‘undisclosed principal’ on whose behalf the contract was concluded; a fresh contract or novation of the existing contract is essential.’

Section 32A of the Companies Ordinance

48.  Legislation has intervened regarding pre-incorporation contracts, and this is to be found in Section 32A of the Companies Ordinance, Cap. 32 which provides that :

‘(1) Where a contract purports to have been made in the name or on behalf of a company at a time when the company has not been incorporated 

(a) subject to subsection (2) and any express agreement to the contrary, the contract shall have effect as a contract entered into by the person purporting to act for the company or as agent for it, and he shall be personally liable on and entitled to enforce the contract accordingly;

(b) the company may, after incorporation, ratify the contract to the same extent as if it had already been incorporated at that time and as if the contract had been entered into on its behalf by an agent acting without its authority.

(2) Where a contract is ratified by virtue of this section, the person who purported to act for or on behalf of the company in making the contact shall not thereafter be under any greater liability than he would have been if he had entered into the contract on behalf of the company as an agent acting without its authority and after its incorporation.’  (emphasis added)

New Paradigmratified the scheme

49.  The scheme clearly was entered into by the shareholders of IVRS on behalf of New Paradigm, which at that time was not in existence.  Furthermore, the evidence clearly pointed to ratification of this scheme by New Paradigm after the incorporation.  A ratification may either be express or implied.  As pointed out by the authors of Bowstead and Reynolds on Agency 17^th ed., para 2–073 :

‘Rule (3). Implied ratification. Express ratification will however be comparatively rare, and a ratification will more often be implied from words or conduct.  Such words or conduct must be unequivocal: they must not be such that they could be accounted for by other interpretations, e.g. that the principal is simply resuming possession of his own property. 

Estoppel. Ratification merges almost imperceptibly into estoppel.  When the silence or inactivity is known to and relied on by the third party, an estoppel may in appropriate cases arise against the principal, who may be estopped from saying that he has not ratified.  Para 2–075.

A number of cases go further and indicate that a ratification by the shareholders may be implied if they can be regarded as having acquiesced in such an act with knowledge of the circumstances, even in the absence of a formal meeting.  Para 2–078.’

50.  IVRS was the majority shareholder of New Paradigm.  It held over 60% of its entire issued shares.  Prior to the incorporation of New Paradigm the shareholders of IVRS had approached Ms. Poon and Mr. Yen inviting them to join the new company.  It was one of the shareholders of IVRS namely, Mr. Cheung, who had signed the employment agreement with Ms. Poon.  Some of these shareholders continued to deal with Ms. Poon and Mr. Yen after the incorporation.  They confirmed the scheme.  In my view the evidence as to ratification is overwhelming. 

Mr. Yen’s option

51.  Further, in my view it is inconceivable that Mr. Yen would be offered the sum of $1.2 million unless there was in existence an option right that had been conferred upon him by the shareholders of IVRS for and on behalf of New Paradigm.  This lent further support to Ms. Poon’s case that in her case a complete agreement had been in existence. 

Originating summons procedure

52.  It must be borne in mind that the parties had chosen to adopt the originating summons proceedings as the basis of their respective claims.  Unlike a writ action, the originating summons proceedings are supported by affidavits and the issues may not be as well defined as in a pleading.  But in any event the evidence before the court indicated that by 1 November 1999 Ms. Poon was told about the terms of the option.

Sections 57B and 57C of Companies Ordinance

53.  In her application Ms. Poon relied on Section 57B of the Companies Ordinance in support of her claim that the directors of New Paradigm had had the authority to allot shares to her.  Alternatively she also relied on Section 57C seeking a validation of shares that may be improperly issued. 

54.  The judge held that it was not necessary for him to determine the dispute over these sections.  He held that there being an enforceable option agreement relating to shares in a private company the court can order specific performance.  He held that it was open to him simply to order New Paradigm to validate the May 2002 allotment insofar as it was defective.  He also held that there was little point in expunging the allotment to Ms. Poon only for the company immediately to validate it. 

55.  In my view the mere fact that Ms. Poon had resorted to ‘self-help’ (a term used by the judge) to allot the shares to herself in the context of this case is not to be regarded as so inequitable as to preclude the remedy of specific performance in her favour; that which is more fundamental is that, as the judge had found, there was a valid option agreement and Ms. Poon indeed had exercised that option by notice.  The orders made by the judge in terms of requiring New Paradigm to validate the allotment, and to deliver a certificate for the shares, are but consequential orders that needed to be made in the light of the declarations he had given.  Likewise I would not express an opinion on the applications of Section 57B and Section 57C because in the circumstances it is not necessary to do so. 

Conclusion

56.  In my view the judge was correct in his decisions.  Accordingly in my judgment these appeals must be dismissed, with costs to Ms. Poon, such costs to be taxed if not agreed.

Hon Yeung JA :

57.  I agree.

Hon Stone J :

58.  I agree with the judgment of Cheung JA, which I have had the advantage of reading in draft.

59.  I would add only that for my part I find it odd that in what seems to me to be potentially so obviously a fact-sensitive dispute that the parties apparently should have agreed to employ the originating summons procedure, and, to boot, to have agreed to dispense with cross-examination of the deponents of the affidavits which were placed before the learned judge below.

60.  Moreover, the consequence of an absence of pleadings allowed Ms Chan, for New Paradigm, the latitude to run arguments which, at bottom, struck me as having more technical than substantive merit – she was, for example, able to make some headway with certain documents which did not in all respects ‘gel’ with the way in which Ms Poon apparently had put her case – although this was against the backdrop of a factual matrix wherein it was tolerably clear that a binding enforceable option had been granted in favour of Ms Poon.

61.  However, given that this was the procedural modus operandi which was adopted by consent, in my view there can be little valid complaint if, as in this case, inferences are drawn on the face of the available evidence which, had the situation been otherwise, may well have been the subject of stringent testing in cross-examination.

62.  As matters presently stand, on the state of the evidence before him the conclusions drawn by the learned judge below are in my judgment correct and are more than capable of withstanding the challenge that now has been launched against them.

63.I too would dismiss these appeals, with costs to the respondent, to be taxed if not agreed.