CHINA INVESTMENT FUND CO LTD v. GUANG SHENG INVESTMENT DEVELOPMENT GROUP LTD AND OTHERS

HCA 411/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 411 OF 2016

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D E C I S I O N
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1.  The only controversy this morning concerns the plaintiff’s application (“Summons”) to have the EGM, the subject matter of its injunction application (“Application”), which was adjourned by agreement of the parties[1] to 24 March 2016, further adjourned to a date to be determined by the court hearing the Application.  The Application is scheduled to be heard on 27 May 2016. 

2.  It should be pointed out that when the Application first came before this court on 26 February 2016, the plaintiff sought to have an interim order to adjourn the EGM to a date after the determination of the Application.  The court declined to deal with it because there was an agreement by the defendants who appeared to an adjournment to the 24 March 2016 and there was a possibility that the matter could be dealt with by the court before that day.  There was in fact a hearing date available before the 24 March 2016.  Unfortunately, it could not be taken up because the filing of evidence would not be completed by that date.

3.  The purpose of the Summons is to maintain the status quo pending the determination of the Application.  It is resisted by the defendants on the basis that, with certain modifications of the proposed resolutions to be voted at the EGM and an undertaking by the directors to be appointed (if the resolutions are carried) not to interfere with the works of the Special Investigation Committee, the plaintiff has no viable cause of action to stop the defendants from exercising their voting rights.

4.  Inevitably, this court has to take a view, albeit a preliminary one, on the evidence currently before it in order to determine the Summons.  This is never a satisfactory exercise when the evidence is incomplete, because the plaintiff has yet to file its reply evidence.

5.  It is important to note from the defendants’ evidence that they have disavowed any intention behind their requisition which led to the EGM (“Requisition”) to harm the interest the plaintiff. The reason for the EGM is to change the current management over which they have lost their trust due to its alleged gross negligence in the misappropriation of the plaintiff’s assets which was announced recently (“Misappropriation”).

6.  Given that these matters are to be fully ventilated in May, it is appropriate to keep my comments on the evidence brief.  I find a number of unsatisfactory aspects in the defendants’ case.  They only became shareholders of the plaintiff shortly before the Requisition.  The suggestion that they have lost confidence in the management is lacking in particularity.  Whilst I can understand their disquiet about the Misappropriation, a reasonable shareholder would not simply blame the management without any reason to believe that the Misappropriation is attributable to some act or default on the part of the management.

7.  Further, if the defendants are concerned about the competence of the management, their choice of Mr Man as the sole executive director to replace all the existing executive directors is not consistent with such concern.  Mr Man appears to be ill-qualified for the position and has in fact been disapproved by the Stock Exchange.  The defendants’ change of stance on Mr Man’s appointment only came about after the Stock Exchange has confirmed its disapproval.

8.  The defendants’ choice of Ms Lin to be appointed to the plaintiff’s Board of Directors (“Board”) is also alarming given that she was removed as a director of a subsidiary of the plaintiff for cause, and is the wife of Mr Yao, who is alleged to be the author of the Misappropriation.

9.  In the premises, it appears that the defendants’ action is not consistent with their professed intention.  The defendants’ rights as shareholders of the plaintiff must be respect, but such rights are not free from legal constraints notwithstanding that the threshold which justifies the interference by the court is a high one.

10.  Mr Wong, who appears for the defendants, submitted forcefully that under the modified position adopted by the defendants they will not be controlling the Board even if all their proposed resolutions are carried. However, there will be a radical change to the Board if the resolutions are carried because, inter alia, the number of executive directors will be reduced from 3 to only 1.  I accept the submission of Ms Ip, appearing for the plaintiff, that such a change is likely to disrupt the management of the plaintiff.

11.  I understand that the EGM will be delayed for about 10 days in any case due to the lateness in obtaining information concerning the proposed directors.  I have been informed that if the court declines any further adjournment of the EGM on 27 May 2016, it will take at least 14 days to have it held.  However, no urgency has been demonstrated in respect of the EGM, and it has not been shown that the delay of the EGM for about 2½ months from early April to middle of June 2016 will prejudice the defendants.

12.  It must be remembered that the plaintiff is a public company and the court must be alive to the interest of the investing public.  On the evidence before the court, the plaintiff’s case that the EGM is a concerted effort by Yao and his associates to gain control of, or at least to influence, the management to its detriment cannot be rejected summarily. Self-evidently, it would be very useful to Yao to have someone on the Board who can at least tell him about the actions being planned by the plaintiff in respect of the Misappropriation.

13.  However, I should repeat a concern which was identified by this court when the Application came before it on 26 February 2016.  The defendants collectively hold only about 10% of the plaintiff’s shares.  It is open to the management to try to secure sufficient votes at the EGM to defeat the defendants’ proposed resolutions.  This may be a much simpler and less expensive resolution to these matters.  It is surprising that the management has not, as this court was informed, taken any action in this regard.  On the other hand, I have also been informed that the shares of the plaintiff are widely spread, and the plaintiff is unable to ascertain if the defendants are in control of more shares held in the names of other entities.

14.  Taking all relevant matters into consideration, I believe that the correct decision is to maintain the status quo pending the outcome of the Application.  I therefore grant the interim relief sought, namely, para 1 of the Summons.  I shall hear the parties on costs.

[Submissions on costs of the application]

15.  I agree with Mr Wong that the appropriate costs order is the plaintiff’s costs in the cause.