LAM PO CHIU MARK v. ION GLOBAL (BVI) LTD AND OTHERS

CACV 46 /2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 46 OF 2010

(ON APPEAL FROM HCA NO. 4754 OF 2003)

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Hon Rogers VP:

1.  This was an appeal from a judgment of Stone J given on 28 January 2010. The matter before the judge was a claim by the plaintiff against the defendants for the sum of US$741,937 and, in the alternative, damages, for breach of a put option agreement. The plaintiff claimed that the first defendant had failed to honour the put option agreement and that the second and third defendants were responsible for inducing the first defendant to be in breach. The judge had dismissed the plaintiff’s claim.

2.  At the conclusion of the hearing of this appeal, this court allowed the appeal and gave judgment in favour of the plaintiff for the amount claimed and costs in this court and below.

Background

3.  The plaintiff, together with a colleague, a Mr Covey, had founded Chelcon Technology Group Ltd (“the company”).  He had a minority shareholding of 150,001 shares in the company.  The company was subsequently renamed e2e Business Solutions Ltd on 10 April 2000.  The first defendant was originally named The Connection Group (BVI) Limited and its name was changed to that of the first defendant on 3 April 2001.  It was a wholly owned subsidiary of the second defendant.  The judge had little difficulty in finding that the second defendant and its group of companies, which included the first defendant, was controlled by the third defendant.  The judge said that he had no doubt and found that the third defendant remained the de facto controlling mind of the first and second defendants; he quoted what had been said by Deputy High Court Judge Carlson when dealing with an interlocutory application to strike out the statement of claim:

“(the third defendant was the) eminence gris under whose influence the directors and executives of these two companies take their lead in the overall conduct ... of these companies’ affairs.”

4.  It is unnecessary to go into the full history of the matter, it suffices to say that an agreement was reached whereby the first defendant would acquire 55% of the company.  In doing so it would acquire 30,000 of the plaintiff’s shares, thus leaving the plaintiff with a reduced minority shareholding.  The judge found that the plaintiff and his colleague had been assured that there would be a public listing of the company on the NASDAQ, or upon some other internationally recognised exchange, within two years of the takeover and further that the plaintiff and his colleague would be granted put options which would oblige the first defendant to purchase their remaining shares in the company in the event that the envisaged public listing did not go ahead within the two-year period.  The judge specifically accepted the plaintiff’s evidence that he and his colleague had regarded the put options as crucially important because he was concerned that he might have sold the company too cheaply and that the put options would afford the plaintiff and his colleague the possibility of a clean break and enable them to realise the value of their remaining shares if the anticipated public listing did not occur.

5.  The parties thus entered what was called the Stock Purchase and Subscription Agreement (“the agreement”), which, although dated 14 February 2000, was executed on 22 March 2000.  The material parts of that agreement relevant to this appeal were contained in Sections 13 and 14.  Sections 13.01 and 13.02 read as follows:

“ 13.01 Subject to Section 13.02 and Section 14 below, and in consideration of the Sellers entering into this Agreement, the Purchaser hereby grants to each of the Sellers an option which may only be exercisable in accordance with Section 13.02 below (the “Put Option”), to require the Purchaser by notice in writing (the “Put Notice”) to purchase within 60 days of the issuance of the Put Notice the remainder of the outstanding shares in the Company currently held by the Sellers as at the date of the Put Notice (the “Put Option Shares”).

13.02 Subject to the Purchaser’s rights under Section 14, the Put Option may be exercisable by the Sellers with effect from the date falling 2 years from the Closing Date (the “Put Option Vesting Date”) provided that

(a) no public offering of the Company on the Nasdaq National Market or any other internationally recognised stock exchange shall have occurred prior to the Put Option Vesting Date and that

(b) the Warrant Certificate shall have been duly issued by the Company to the Purchaser in accordance with Section 14.04 prior to the Put Option Vesting Date.”

6.  There then followed provisions for the calculation of the price of the put options and it is unnecessary to set them out here.  It suffices to say that the price which would be paid when the put options were executed would be based upon the percentage shareholding which the plaintiff (or his colleague as the case may be) held at the relevant time. Since the closing date of the agreement was 22 March 2000 the Put Option Vesting Date would, therefore, be 22 March 2002, the closing date not being included in the computation of the two- year period.

7.  The provisions as to the warrants were contained in Section 14 of the agreement.  That, in effect, provided that the first defendant as purchaser would gain a benefit in the form of increased capital based on the revenues that would be generated from business referrals for which the first defendant was responsible.  Section 14.01(a) read as follows:

“ 14.01 Issuance of Revenue Warrants

(a) The Purchaser shall receive warrants issued by the Company (“Revenue Warrants”) which shall have an aggregate value equal to US$0.50 for every US$1.00 of revenues (the “Formula”) generated by the Company and recognised in accordance with HKGAAP from Business Referrals (as defined below) during the 24 month period commencing on the Closing Date. Each US$1 of Revenue Warrants shall be equal to US$1 worth of Shares in the Company.”

8.  Section 14.04 related to the Date of Issue and was as follows:

“ 14.04 Date of Issue. The Revenue Warrants shall be issued in the form of the Warrant Certificate attached as Exhibit C which shall be executed as a deed by the Company and delivered to the Purchaser on the date falling 24 months from the Closing Date (the “Issue Date”) and shall be exercisable for a period of 12 months from the date of their issuance, provided that in the event of any public offering of the Company or an (“Acceleration Event”) occurring before the Issue Date, the Purchaser shall be entitled at its sole discretion to receive Revenue Warrants in accordance with Section 14.01 above, in respect of all revenues of the Company deriving from business referrals (as such term is defined in Section 14.01(b) above) and accrued as at the date on which the Acceleration Event occurred. Any such Revenue Warrants shall be exercisable immediately by the Purchaser at a price to be calculated in accordance with Section 14.03 above.”

9.  The kernel of the judge’s decision is contained in paragraphs 69-71 of his judgment as follows:

“69. However, Section 13.02 provides that the Put Option was exercisable “with effect from the date falling 2 years from the Closing Date ‘the Put Option Vesting Date” – that is, 22 March 2002 – provided that two conditions are satisfied.

70. These conditions are first, that e2e must not have been publicly listed by the Vesting Date – and it is common ground that this condition is satisfied – and second, that the Warrant Certificate “shall have been duly issued by e2e to [the 1st defendant] in accordance with Section 14.04 prior to the Put Option Vesting Date”: see Clause 13.02(b).

71. It is this second precondition which creates the difficulty, because by Clause 14.04 the issuance of the Warrant Certificates “shall be executed as a deed by e2e and delivered to [the 1st defendant] on the date falling 24 months from the Closing Date (the ‘Issue Date’)” – and clearly this cannot be achieved given the coincidence of the date.”

10.  The judge went on to consider the possibility of there being an implied term.  He expressed himself in strong terms that he had sympathy for the plaintiff and would have held that the second and third defendants were responsible for the first defendant’s breach of contract if there had been one.

This Appeal

11.  On this appeal Mr Man, who appeared in this court but not in the court below, took the simple point that the judge had fallen into error when construing the agreement and had failed to give it a proper construction.  In my view, he was clearly right.  On the defendants’ construction the put option could never be exercised.  That clearly cannot have been the intention of the parties.  Despite Mr Lau’s strenuous arguments, it cannot be suggested that the provisions as to the put options were ineffective.  The parties had carefully inserted those provisions into the agreement and had included specific formulas for adjusting the price, which the first defendant purchaser would have to pay under the put options, depending upon the amount of business which it was responsible for the company being able to generate.  The conclusion that the provisions as to put options were ineffective flies in the face of the proper way of construing a document, which Lord Hoffman was at pains to explain in various judgments including, in particular, his speech in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 at pages 912-913.

12.  For my part, I consider that the matter can be put quite succinctly: the contractual document must be read with an understanding of what the parties must have intended.  In this case it is only reasonable to assume that both parties intended that the put option provisions would be effective.  It was not argued that either party intended the provisions would be inoperable. Certainly, Mr Lau, who appeared on behalf of the defendants, did not seek to argue that.

13.  When Sections 13 and 14 of the agreement are considered it will be noted that what is to be taken into account is the extra business which has been generated by reason of the referrals for which the first defendant was responsible in the two-year period commencing on the completion date.  The two-year period was completed at midnight of 21 March 2002.  The company was thereafter required to execute and deliver the relevant warrant certificates.  The provisions of Sections 13 and 14 were designed to ensure that the first defendant obtained the benefit of those certificates which represented the fruits of the business referrals for which it was responsible.  They were to be issued for the benefit of the first defendant.  It was the company’s obligation to issue the certificates and the defendants were fully responsible for seeing that was done.

14.  In argument, Mr Lau even went so far as to suggest that if no warrants were issued then the put options could never be exercised.  That, in my view, must be clearly wrong. The company was obliged to issue the warrant certificates.   The difference in phraseology between Section 14.01(a) and Section 13.01 makes it clear that the put options could not be exercised until such time as the calculation of the first defendant’s entitlement to revenue warrants could be completed.  For the purpose of the calculating the price for the exercise of the put options, it would not matter whether the certificates had actually been issued, the calculation of the entitlement to the warrants was what was important.  That would adjust the price of the put options and could be calculated.

15.  For these reasons I had no hesitation in holding that this appeal should be allowed.

Hon Le Pichon JA:

16.  I agree.

Hon Lam J:

17.  I respectfully agree with the judgment of the Vice-President.  The agreement has to be construed as a whole.  When it is so read, the clear common intention as manifested in the agreement is to confer a put option on the Plaintiff and the purpose of the warrant certificate is to facilitate the calculation of the price.  The construction of Sections 13.02(b) and 14.04 by the Vice-President at paras. 6 and 13 above is wholly consistent with the common intention of the parties and accords with common sense.  There is no need to resort to rectification to achieve such result.  I have no hesitation in preferring that construction to the one put forward by the Defendants which has the effect of frustrating the common intention of the parties.