BRAVE VENTURE LTD v. XINHUA NEWS MEDIA HOLDINGS LTD AND OTHERS

HCMP 1901/2017

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1901 OF 2017

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REASONS FOR DECISION

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1.  On 7 September 2017, the Plaintiff issued its Originating Summons (“OS”) in this action, seeking mandatory and prohibitive injunction orders against the 1^st Defendant (“Company”), a listed company incorporated in the Cayman Islands, and the 2^nd to 10^th Defendants who are directors of the Company, with regard to the annual general meeting of the Company which is scheduled to be held on 29 September 2017. The Plaintiff’s application is made under ss 728-730 of the Companies Ordinance (“Ordinance”), whereby the Court has power to order a party to act or refrain from acting, in the event of (inter alia) a breach of the articles of a company.

2.  By summons issued on the same day (“Summons”), the Plaintiff seeks the orders to be made in the interim of the hearing of the OS. At the hearing of the Summons on 12 September 2017, the 1^st, 5^th, 8^th to 10^th Defendants were present in Court, the Company being represented by Counsel. Leading Counsel for the Company informed the Court that as they were only served with the papers for the hearing on Friday, 8 September 2017, they regarded the hearing as an ex parte hearing, although submissions were made on behalf of the Company.

3.  After hearing the Plaintiff and the Company, I granted orders in terms of paras 1 (1) and (2) of the Summons, whereby the Defendants were ordered to:

(1) forthwith take all necessary steps to enable and facilitate the election of Mr Chow Lap King Brian, Mr Ong Chor Wei, Dr Wong Lee Ping, Mr Chau Shing Yim David and Mr Cheung Ting Kin (“Proposed Directors”) to be considered at the Annual General Meeting of the 1^st Defendant scheduled to take place on 29 September 2017 (“AGM”); and

(2) forthwith (and in any event no later than 5 pm on 14 September 2017) issue all necessary announcements, notices and/or circulars as required under the Listing Rules in relation to the election of the Proposed Directors at the AGM.

4.  The following are the reasons for my decision.

5.  The relevant provisions of the Ordinance are as follows:

“728. Application of section 729

(1) Section 729 applies if, in relation to a company-

(a) A person has engaged, is engaging, is proposing to engage in conduct that constituted, constitutes or would constitute-

(i) a contravention of this Ordinance;

(ii) a default relating to a contravention of this Ordinance; or

(iii) a breach specified in subsection (4); or

(b) a person has refused or failed, is refusing or failing, or is proposing to refuse or fail, to do an act or thing that the person is required by this Ordinance to do.

… …

(4) The breach specified for the purpose of subsection (1)(a)(iii) … … is-

(a) a breach of the person’s fiduciary duties owed to the company in any capacity other than as a director of the company;

(b) a breach of the person’s fiduciary or other duties as a director of the company owed to the company;

(c) a breach of the company’s articles.

729. Court may order remedies

(1) The court may, on application by a member … … of the company whose interests have been, are or would be affected by the conduct or by the refusal or failure, do any or all of the following –

(a) grant an injunction, on the terms that the Court thinks fit-

(i) in the case of section 728(1)(a) … …, restraining the person from engaging in the conduct of requiring the person to do any act or thing; or

(ii) in the case of section 728(1)(b) … …, requiring the person to do any act or thing;

… …

(3) The Court may grant an injunction under subsection (1)(a)(i) … … restraining a person from engaging in conduct-

(a) whether or not it appears to the Court that the person intends to engage again, or to continue to engage, in the conduct;

(b) whether or not the person has previously engaged in the conduct; and

(c) whether or not there is an imminent danger of substantial damage to any other person if the person engages in the conduct.

730. Provisions supplementary to section 729

(1) The Court may grant an interim injunction ... … on the terms and conditions that it thinks fit pending the determination of an application under section 729(1) … …

(2) The Court may discharge or vary an injunction granted under subsection (1) or section 729(1) … …”

6.  The Plaintiff holds approximately 11.97% of the total issued share capital of the Company. Its current application to the Court is premised on the Defendants’ acting in breach of the provisions of Article 116 of the Articles of Association of the Company (“Article 116”).  This provides:

“No person other than a Director retiring at the meeting shall, unless recommended by the Board for election, be eligible for election to the office of Director at any general meeting unless a notice in writing of the intention to propose such person for election as a Director, signed by a member (other than the person to be proposed for election as a Director) duly qualified to attend and vote at the meeting for which such notice is given, and a notice in writing signed by such person of his willingness to be elected shall have been lodged at the principal place of business of the Company. The minimum length of the period during which such notices are given shall be at least seven (7) days and the period of lodgment of such notices shall commence no earlier than the day after the despatch of the notice of general meeting appointed for such election and end no later than seven (7) days prior to the date of such general meeting.”

7.  The Defendants’ opposition to the Plaintiff’s application under  the Ordinance is that such application is misconceived, that no breach of the Articles of the Company has been established, and that there is no basis upon which the Court can grant any injunctive relief as the Plaintiff seeks.

8.  The chronology of events is that on 26 July 2017, the Company published a notice and a circular of the AGM (“AGM Notice”) to be held on 29 September 2017. Amongst the resolutions proposed at the AGM are the grant of mandates to the Board to repurchase shares and to issue new shares in the Company, and for the election of retiring directors.

9.  On 25 August 2017, the Plaintiff served on the Company 5 notices (“Nomination Notices”) of its intention to nominate the Proposed Directors for election as directors of the Company at the AGM, pursuant to Article 116. The Nomination Notices contained information on the Proposed Directors, and their signed notices of willingness to act as directors of the Company. In the Nomination Notices, the Plaintiff requested the Defendants to make the necessary arrangements by 1 September 2017 to enable the election of the Proposed Directors to be considered at the AGM, including the issue of the relevant announcements, notices and circulars as required by the Listing Rules.

10.  Rule 13.70 of the Listing Rules requires the Company to publish an announcement, or to issue a supplementary circular upon receipt of a notice from a shareholder to propose a person for election as a director at the general meeting, where such notice is received by the issuer after publication of the notice of meeting. Rule 13.70 further requires the Company to include particulars of the proposed directors in the announcement or supplementary circular.

11.  On 30 August 2017, the Company notified the Plaintiff to provide a certificate of incumbency of the Plaintiff and the relevant directors’ resolution of the Plaintiff, approving the issue of the Nomination Notices.

12.  In response, the Plaintiff provided to the Company on 1 September 2017 a certified true copy of its directors’ resolutions, and further informed the Company that although the Company had no ground to seek the certificate of incumbency, the Plaintiff would nevertheless arrange for the said certificate to be provided as soon as possible. Such certificate was in fact supplied to the Company later, on the same day. The Plaintiff reiterated its request for the necessary announcement, notices and circulars for the election of the Proposed Directors to be published.

13.  By its letter dated 1 September 2017 (“1/9 Letter”), the Company informed the Plaintiff that it was prepared to propose the election and appointment of the Proposed Directors “at a shareholders’ general meeting of the Company” for consideration and approval. The Plaintiff highlighted that this was not acknowledgment that the election would be put forward for consideration at the AGM.  At the same time, the Company requested the Plaintiff to provide information and documents to the Company, “to ensure that the relevant announcements, notices and circulars would contain sufficient particulars and information for the consideration by the shareholders of the Company, and that such particulars and information are accurate and complete and not misleading”. The information and documents sought in the 1/9 Letter (for ease of reference referred to hereinafter as “Particulars”) are:

(1) more detailed information on the experience of each of the Proposed Directors, pursuant to Rule 13.51 (2) (c) of the Listing Rules, particularly their working experience;

(2) documentary evidence supporting the experience, directorships in public companies, other major appointments and professional qualifications of each of the Proposed Directors;

(3) a statement by each of the Proposed Directors explaining how he proposes and how he will be able to devote sufficient time to the Company’s affairs and to discharge his duties as a non-executive director or independent non-executive director of the Company expected of him under the Listing Rules, particularly Mr Ong Chor Wei and Mr Chau Shing Yim David; and

(4) in respect of Mr Cheung Ting Kin, supporting documents showing that Brilliance Media & Communication Co Ltd was dissolved by way of the registration, that it was solvent at the time of dissolution and there was no wrongful act on the part of Mr Cheung.

14.  By a letter dated 4 September 2017, the Plaintiff’s solicitors asked the Company for an undertaking and confirmation by 6 pm on 4 September 2017, that the Company would forthwith take all necessary steps, including the issue of the relevant announcements etc required under the Listing Rules, for the purpose of enabling the election of the Proposed Directors to be considered at the AGM, and for the date of the issue of such announcements.

15.  On 6 September 2017, the Company issued its letter to the Plaintiff’s solicitors (“6/9 Letter”), stating that the Nomination Notices were invalid, as they do not comply with the requirements of the Company’s “Procedures for shareholders to propose a person for election as a director” (“Procedures”), and do not contain all the relevant information required to be disclosed under Rule 13.51 (2) of the Listing Rules (“Rule 13.51 (2)”). The 6/9 Letter refers to the Nomination Notices as “purported Notices of Nomination”, and repeats several times in the body of the letter that the Notices of Nomination are invalid (for not containing all relevant information of the Proposed Directors as required under Rule 13.51 (2) and pursuant to the Procedures), and that the Company is entitled to disregard the Nomination Notices.

16.  The Procedures relied upon by the Company state:

“1. Article 116 of the Articles of Association of the Company provides that a shareholder may give a notice in writing to propose a person other than a retiring director to be elected as a director of the Company.

2. Such notice together with a notice signed by the proposed person of his willingness to be elected and containing his information as required to be disclosed under Rule 13.51 (2) of the Listing Rules shall be given at least seven (7) days commencing no earlier than the day after the dispatch of the notice of the general meeting appointed for such election and ending no later than seven (7) days prior to the date of such general meeting and sent to the Chairman at the principal place of business in Hong Kong of the Company.” (Emphasis added)

17.  Apart from Rule 13.70 which provides for a listed company to publish an announcement or a supplementary circular upon receipt of a notice from a shareholder to propose a person as a director at the general meeting, the Company has drawn attention to Rule 13.74 of the Listing Rules, which states as follows:

“The issuer shall also disclose the details required under rule 13.51 (2) of any directors proposed to be re-elected or proposed new director in the notice or accompanying circular to its shareholder of the relevant general meeting, if such re-election or appointment is subject to shareholders’ approval at that relevant general meeting (including, but not limited to, an annual general meeting).”

18.  Rule 13.51 of the Listing Rules provides that a listed company must publish an announcement “as soon as practicable” in regard to “any changes in its directorate or supervisory committee”. Rule 13.51 (2) states that “where a new director, supervisor or chief executive is appointed or the resignation, re-designation, retirement or removal of a director, supervisor or chief executive takes effect”, the listed company “must announce the change as soon as practicable” and include the details of any newly appointed or re-designated director, supervisor or chief executive in the announcement. The details set out in Rule 13.51 (2) (a) to (x) (“Details”) include a wide range of matters, from details such as the full name of the director, positions held with the issuer and other members of the issuer’s group, experience including other directorships held in public companies and other major appointments and professional qualifications, to whether the director has been adjudged bankrupt, particulars of any unsatisfied judgments against him, particulars of whether the director has been identified as an insider dealer, etc.

19.  Notwithstanding the breadth of Rule 13.51 (2), the Company only required the Plaintiff to furnish the Particulars by its 1/9 Letter, and the issue raised is whether the Company was justified in insisting upon the Particulars, and in treating the Nomination Notices as invalid by reason of the fact that the Particulars were not furnished by the Plaintiff until 11 September 2017.

20.  It is not disputed that in seeking the injunctive relief sought, the Plaintiff has the onus of establishing a serious issue to be tried, and where the nature and extent of the interim relief sought is such that the relief will effectively dispose finally of the claim, the Plaintiff has a higher evidential burden in proving the merits of its case, that it is “at least likely to succeed at trial” (Sunlink International Holdings Ltd v Wong Shu Wing [2010] 5 HKLRD 653; Sim Kon Fah v JBPB & Co [2011] 4 HKLRD 45). Where a mandatory injunction is sought, as in this case, the Plaintiff is required to show “a strong prima facie case” and the Court must have “a high degree of assurance” that at trial, it will appear that the injunction was rightly granted (para 29/1/29 HK Civil Procedure 2017).

21.  On behalf of the Company, it was argued that there is no breach of Article 116 as alleged and relied upon by the Plaintiff as the basis of its application. According to the Company, Article 116 does not impose any positive obligations on the Company or its directors. It merely provides for the eligibility requirements of categories of persons for election as a director of the Company at a general meeting, one category being those who have been proposed by way of Nomination Notice served on the Company. Any obligation on the part of the Company to issue announcements or circulars arises under Rule 13.70 of the Listing Rules, and not under the Articles. On the Company’s case, there is no breach by the Company or the Directors of Article 116, and it is not open to the Plaintiff as a shareholder to enforce any provision of the Listing Rules which govern the relationship between the Company and the Stock Exchange. In short, the Company argued that the provisions of ss 728-730 are not triggered in the absence of any contravention of the Ordinance, any breach of fiduciary or other duties owed to the Company, and any breach of the Company’s Articles.

22.  I am satisfied, to the requisite standard required for the grant of a mandatory injunction, that the Plaintiff is likely to succeed at trial in its claim for the injunctive relief sought.

23.  Under Article 116, the Plaintiff as shareholder of the Company has the right to propose a person for election as a director at a general meeting of the Company, by lodging with the Company notice in writing of its intention so to propose, in accordance with the provisions and timeline set out in Article 116. The Plaintiff lodged the Nomination Notices on 25 August 2017, but the Company failed to confirm that it would be issuing the announcement or circular upon receipt of the Plaintiff’s Nomination Notices (as it was required to do under Rule 13.70, and would normally do upon its acceptance of a Nomination Notice served) (“Requisite Announcements”). In the 1/9 Letter, the Company asked for the Particulars to be furnished before it would prepare the Requisite Announcements.  The Defendants claim that they were only acting reasonable and responsibly in so doing.  However, in the 6/9 Letter, the Company claimed that the Nomination Notices were invalid for not including all the relevant information of the Proposed Directors as required under Rule 13.51 (2), and that the Company was entitled to disregard the same.

24.  On the expert evidence on Cayman law applicable to the Company, the Plaintiff has complied with the requirements of Article 116, and the Nomination Notices are valid. According to the Plaintiff’s expert evidence, the Procedures have not been incorporated by reference into the Articles of the Company, have no legal status under Cayman law, and any failure to comply with the Procedures does not invalidate the Nomination Notices. Under Cayman law, the Articles of the Company have primacy and cannot be added to or subtracted from by implication.  According to the Plaintiff’s expert, where a shareholder asserts rights under the Articles of the Company, which is a statutory contract, clear language is required before the Articles can be read to allow the Company to alter the legal effect of the Nomination Notices served under the provisions of Article 116.

25.  At this stage of the proceedings, I accept the evidence of the Plaintiff’s expert. In any event, even if the Procedures had been effectively incorporated to apply to the Nomination Notices served under Article 116, such as to require the information under Rule 13.51 (2) to be contained in the Nomination Notices, sensibly and reasonably read, paragraph 2 of the Procedure and Rule 13.51 (2) do not require the Nomination Notices to set out all the Details set out in Rule 13.51 (2) (a) to (x), but only such Details as may be applicable to the Proposed Directors and their nomination.

26.  In my judgment, the Nomination Notices contain the necessary information on the names, ages, qualifications and experience of the Proposed Directors, and the relevant directorships they hold, as required under Rule 13.51(2) and as applicable to the Nomination Notices. The information sought in item 1 of the 1/9 Letter was already and adequately contained in the Nomination Notices, and even the further detailed information sought by the Company was supplied by the Plaintiff on 11 September 2017.  Items 2 and 4 listed in the 1/9 Letter are not Details required under Rule 13.51 (2), but constitute supporting evidence, which was in any event provided by the Plaintiff on 11 September 2017. Item 3 listed in the 1/9 Letter is not within the information required under Rule 13.51 (2) at all, but was also furnished by the Plaintiff on 11 September 2017.

27.  There was no cause for the Company and the Defendants to treat the Nomination Notices as invalid, and to be disregarded, as claimed by the Company in the 6/9 Letter. As shareholder, the Plaintiff’s contract with the Company under Article 116 is that it would be entitled and would have the right by notice served in accordance with Article 116 to propose a person for election as a director of the Company, and that the person so nominated by the Plaintiff under Article 116 would be eligible for election to the office of director at the general meeting of the Company. The Plaintiff’s contract with the Company has been breached, when the Company failed or refused to recognize and accept the validity of the Nomination Notices served by the Plaintiff under Article 116, and to give effect to the Plaintiff’s rights as shareholder of the Company.

28.  The basis of the grant of the injunction sought by the Plaintiff is not simply the enforcement of Rule 13.70 of the Listing Rules, as Leading Counsel for the Company submits, but the enforcement of Article 116 and the rights of the Plaintiff as shareholder thereunder. To order the Company to issue the Requisite Announcements is the method of enforcing or the manifection of the Company’s recognition of the Nomination Notices, by carrying out the act in response to the Nomination Notices, and pursuant to the mandatory injunction imposed on the Defendants.

29.  I am satisfied that there is a breach of Article 116 of the Articles of the Company, within the meaning of s 728 (4) of the Ordinance, such that an injunction can be granted under s 729 of the Ordinance.

30.  The Company complained that the application for urgent injunctive relief was unwarranted, and that it was the Plaintiff which had acted unreasonably in refusing to provide the information and documents sought by the Company and in threatening legal proceedings. In my view, the Company had no basis to claim in its 6/9 Letter that the Nomination Notices were invalid and could be disregarded, and in light of the stance taken by the Company in its 6/9 Letter, and the forthcoming AGM, the Plaintiff cannot be said to have acted unreasonably in issuing the OS and the Summons on 7 September 2017. It was only at the commencement of the hearing on 12 September 2017 that the Company through Leading Counsel confirmed that it would be issuing the Requisite Announcements on or before 14 September 2017, but short of offering any undertaking to do so.

31.  I have effectively ruled that the Defendants have no defence to the claims made by the Plaintiff on the basis of the Nomination Notices.  To the extent that I have to consider the balance of convenience, I accept the submissions made on behalf of the Plaintiff, that the Defendants will not suffer any conceivable loss or damage as a result of the grant of the injunctions sought. The Plaintiff will be prejudiced and will not be adequately compensated in damages, if it is not able to nominate the Proposed Directors for election at the AGM, but has to wait for some other general meeting, after directors have been appointed or re-elected at the AGM.

32.  For all the above reasons, I granted the injunctions sought in terms of paragraphs 1(1) and (2) of the Summons. They are in my view adequate to enable and facilitate the election of the Proposed Directors to be put forward at the AGM, for consideration by the shareholders. The prohibitive injunction sought in paragraph 1(3) may be uncertain in terms of enforcement and unnecessarily wide, as it is unclear what steps may constitute “steps to prevent the election … to be considered”, to be regarded as breach of the injunction.

Costs

33.  The orders made at the hearing on 12 September 2017 were on the basis that the Nomination Notices comply with Article 116, and adequately set out the information required to be furnished for the nomination of the Proposed Directors.

34.  The parties agreed at the end of the hearing on 12 September 2017 that the orders made on the Summons have disposed of the OS, and that no further directions are required for the conduct of the proceedings.

35.  Since the Plaintiff has succeeded overall in its application for injunctive relief, the order nisi which I make is that the Defendants are to pay the Plaintiff’s costs of the Summons and of the OS, including the costs of the hearing on 12 September 2017, with certificate for 2 counsel.