HOU HSIAO BING v. REN BAOGEN

HCA 1657/2019

[2024] HKCFI 1820

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1657 OF 2019

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JUDGMENT

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A. Introduction

1.  The Plaintiff (侯曉兵) and his younger brother, Hou Hsiao Wen (侯 小文) (“HHW”), were the directors and shareholders of a Hong Kong listed company, Soluteck Holdings Limited (一創科技集團有限公司) (the “Company”) (stock code: 8111).

2.  The Defendant (任寶根) was a shareholder of the Company.

3.  This case turns on the construction of a simple contract of guarantee between the Plaintiff, HHW, and the Defendant (the “Guarantee”).

4.  On 1 April 2011, the Plaintiff, HHW and the Defendant signed the Guarantee. The material terms of the Guarantee are as follows:

“丙方承諾，如上述公司大量發行股票而引致甲方及乙方所佔上市公司（8111）的百分比權益遭致大幅攤薄而引致經濟損失，丙方會補償有關損失，以下述具體措施：丙方承諾將以每股港幣不低於HK$0.36 收購甲方之1.3億股及乙方之2500萬股，以香港法律為準。甲方、乙方也有權不賣。”

5.  By this action, the Plaintiff seeks to enforce the Guarantee.

B.  The Plaintiff’s Case

6.  The Plaintiff’s case is simple and straightforward. The Plaintiff says that the Guarantee speaks for itself. Under the Guarantee, the Defendant agreed that, in the event the Company issues a substantial number of new shares such that the shareholding of the Plaintiff and HHW in the Company become substantially diluted and result in economic loss to them, the Defendant shall compensate the Plaintiff and HHW by acquiring all their shares in the Company at the price of not less than HK$0.36 per share. As of the date of the Guarantee (1 April 2011), the Plaintiff held a 17.79% stake (131,150,000 shares) in the Company, and was its single largest shareholder.

7.  In consideration for the Defendant entering into the Guarantee:

(1)  The Plaintiff agreed to step down as Chairman of the Board of the Company and support the election of the Defendant’s trusted staff, Madam Wang as the new Chairman of the Board of Directors of the Company; and

(2)  The Plaintiff and HHW agreed not to oppose the resolution in the then coming EGM of the Company to approve the acquisition of the entire issued share capital of China Technology Solar Power Holdings Limited (the “Acquisition”) .

8.  The context and factual matrix leading up to the signing of the Guarantee is as follows:

(1)  Since August 2010, the Company was exploring the possible acquisition of the entire issued share capital of China Technology Solar Power Holdings Limited. On 15 October 2010, the Company through its subsidiary signed an MOU with the vendor for the Acquisition, followed by an SPA entered on 13 December 2010. The Acquisition was conditional upon shareholder approval at an EGM. That was eventually fixed to be held on 31 May 2011.

(2)  Under the Acquisition, the Company would allot a substantial number of shares and convertible bonds (“CB”) to the vendor as part of the payment of the Acquisition price, and the vendor was poised to become the single largest shareholder of the Company and would as a result be able to appoint its representatives to the Board of the Company.

(3)  The Defendant wanted to make sure that the Acquisition proceeded smoothly and asked for support from the Plaintiff and HHW. He met the Plaintiff and HHW in Shanghai on 1 April 2011, and made two requests: (i) the Plaintiff to step down as Chairman of the Board of the Company and let Madam Wang take his place; and (ii) the Plaintiff and HHW not to oppose the Acquisition at the upcoming EGM.

(4)  The Plaintiff and HHW realized that after the successful Acquisition, they would be in the minority camp and without the power of chairmanship, and would not be in a position to prevent the Board from causing new shares to be issued by the Company, or affect the Company’s future share allotment decisions in their capacity as shareholders. This, in turn, may lead to dilution of their shareholding and injure their interest.

(5)  To alleviate their above concerns, and on the Plaintiff’s request (which the Defendant agreed), the parties entered into the Guarantee. Its purpose was to protect and preserve the Plaintiff’s and HHW’s shareholding interest in the Company from the time when the Plaintiff stepped down as its chairman and the Company proceeded with the Acquisition. The protection afforded by the Guarantee was intended to continue for as long as the Plaintiff held shares in the Company.

(6)  Contrary to the Defendant’s case, the Common Intention (as pleaded in §10B of the Re-Amended Defence and Counterclaim) did not exist.

(7)  There was no common understanding between the Plaintiff, HHW and the Defendant that (i) the Guarantee would only be effectively so long as Madam Wang remained the chairman of the Company, and (ii) any dilution of shares resulting from the Acquisition would be excluded from the scope of the Guarantee on whether the Plaintiff’s shareholding has been substantially diluted.

9.  The Plaintiff and HHW duly performed their promises to the Defendant after signing the Guarantee:

(1)  On 6 April 2011, the Plaintiff resigned as the chairman of the Board and Madam Wang replaced the Plaintiff as the new chairman.

(2)  At the EGM on 31 May 2011, the Plaintiff and HHW did not oppose the resolution to approve, confirm and ratify the SPA for the Acquisition.

10.  Since 1 April 2011, the Company has issued a substantial number of new shares as set out below. As of the date of the Writ (6 September 2019), the Plaintiff’s shareholding in the Company was substantially to 7.15%, and resulted in economic loss to the Plaintiff (see §7 of the Statement of Claim).

Date	Number of New Shares
1 Jun 2011	133,000,000
2 Sep 2011	24,000,000
16 Dec 2011	32,400,000
26 Nov 2013	74,200,000
10 Apr 2014	91,428,571
29 Jan 2015	91,428,571
22 May 2015	108,181,818
1 Feb 2016	108,181,818
22 Mar 2016	30,000,000
4 Jul 2018	10,000,000
17 Aug 2018	286,000,000
5 Dec 2018	31,220,000
4 Jan 2019	78,000,000

11.  Accordingly, the Plaintiff submits that it is entitled to demand the Defendant to acquire all of the Plaintiff’s shares in the Company at the price of HK$0.36 per share pursuant to the Guarantee.

C.  The Defendant’s Case

12.  The Defendant’s factual case is as follows:-

(1)  In order that the Acquisition would proceed without any potential hiccups, pending the completion of the Acquisition, the Defendant proposed Madam Wang (staff/affiliate of the Defendant) to take over as the chairman of the Board in the Plaintiff’s place;

(2)  The arrangement is purely transitional, because once the Acquisition goes through, the vendor would take over control of the Board and its chairmanship (which was as anticipated and in fact what actually happened).

(3)  To assure the Plaintiff and HHW that this transitional arrangement would not be abused, the Defendant agreed to provide the Plaintiff and HHW the Guarantee to afford protection to the Plaintiff and HHW for this transitional period. The Guarantee was drafted by the Plaintiff in the presence of the Defendant, the Plaintiff and HHW only.

13.  The true common intention of the parties was therefore :-

(1)  The Plaintiff and HHW would support Madam Wang taking over the Plaintiff as transitional chairman of the Company, and would support shareholders’ resolutions to approve the Acquisition; and

(2)  In return, the Defendant provided the Plaintiff and HHW the Guarantee to protect the Plaintiff and HHW’s interest from abuse/shenanigans by Madam Wang or the Defendant during this transitional period.

(3)  The Guarantee was a pragmatic solution between the Defendant, the Plaintiff and HHW to ensure that the Acquisition would go ahead without unnecessary hinderance or concerns, while also providing assurance to the Plaintiff and HHW that the Defendant or Madam Wang would behave.

14.  On 6 Apr 2011, Madam Wang was appointed as the Chairman of the Board with the support of the Plaintiff and HHW. The Plaintiff and HHW remained executive directors of the Company.

15.  On 31 May 2011, a shareholders resolution approving the Acquisition was passed with the support of the Plaintiff and HHW.

16.  On 1 June 2011, the completion of the Acquisition took place, and the Completion Allotment of 133,000,000 shares was duly allotted to the vendor.

17.  On 8 June 2011, Madam Wang stepped down as the chairman of the Board, and she was replaced by Mr Chiu Tung Ping, the ultimate beneficial owner of the vendor. Over the ensuing months, the vendor took complete control of the Board by appointing six of its own directors.

18.  On the above factual basis, the Defendant submitted that as the Guarantee is silent on its duration and it could not be that the Guarantee would last indefinitely, thus, on proper construction,

(1)  The Guarantee will be valid and subsisting only up to the end of Madam Wang’s tenure as the chairman of the Board, which ended on 8 June 2011; and

(2)  The allotment of shares connected to the Acquisition were not events contemplated to be trigger(s) of the Guarantee.

19.  On the above analysis, the Plaintiff’s case should be dismissed as during the tenure of Madam Wang’s chairmanship (i.e. between 6 April and 8 June 2011) there was only one single allotment of 133 million shares, which was the Completion Allotment itself.

20.  Further and additionally, the Defendant contends that the Plaintiff has failed to discharge his burden of proof that any of the 13 allotments (connected to the Acquisition or not) had “led to” (引致) “economic loss” (經濟損失) to the Plaintiff.

D.  Existence of the Pleaded Common Intention  

21.  I am of the view that the first issue to be resolved is factually whether the pleaded Common Intention exists or not. On the evidence before this Court, the resolution of this factual issue, in my view, does not depend on the credibility of witnesses. I find the Plaintiff to be a credible witness. He was cross-examined but very firm on the fact that there was no such pleaded Common Intention.

22.  This is actually agreed to by the Defendant himself. The Defendant gave evidence that before the 1 April 2011 meeting, he and the Plaintiff had never discussed or agreed on the pleaded Common Intention. The Defendant also fairly admitted that he never mentioned to the Plaintiff during their meeting on 1 April 2011 his understanding of the pleaded Common Intention.

23.  I do believe that the Defendant did genuinely entertain such a subjective belief. However, there is no evidence to suggest that such subjective belief was shared by the Plaintiff. It is trite that subjective and uncommunicated intentions regarding an agreement cannot be taken into consideration on the construction of a contract. There is simple no common intention between the Plaintiff and the Defendant.

24.  That basically is the end of the Defendant’s factual case.

25.  Secondly, Mr Chang SC for the Plaintiff is correct that the Guarantee made no mention of the pleaded Common Intention. The Defendant is a seasoned businessman and investor. If he considered that the terms as drafted by the Plaintiff did not reflect his understanding or agreement, he could have suggested amendments. It is difficult to fathom why such important qualifications to the Guarantee was not spelt out in the Guarantee itself.

26.  There is also no evidence that at any time after the 1 April 2011 meeting, the Defendant indicated to the Plaintiff his understanding of the terms or qualifications to the Guarantee. Mr Chang SC has a fair point that the pleaded Common Intention did not appear until after the amendments to the Defendant’s defence. If that was the real intention, the Defendant would have pointed that out immediately when the writ was served upon him. The Defendant gave evidence to the effect that he had poor communication with his lawyers. It is perfectly plausible. But what is conspicuously absent is any contemporaneous communication, whether through instant messaging services or emails, between the Plaintiff and the Defendant evidencing the existence of the pleaded Common Intention. There is zero footprint of the same.

27.  I also agree that even if the Defendant’s former legal team had misunderstood his case because of language barrier, when the contents of the original Defence and Counterclaim was explained or read out to the Defendant, he would have immediately noticed the lack of any reference to the subsequently pleaded Common Intention.

28.  Thirdly, I find that the existence of the pleaded Common Intention inherently improbable. The pleaded Common Intention is premised upon the failure of the Acquisition. However, if the Acquisition were to be failed to materialize, the default position would be that no new shares would have been allotted and the status quo would be maintained. It is difficult to understand why the Plaintiff would be concerned about his interest being diluted and prejudiced.

29.  Fourthly, Mr Chang SC also has a valid point that the pleaded Common Intention is premised upon the Defendant’s contention that the Guarantee was somehow intended to guard against the risk of Madam Wang abusing her powers of the chairman of the Company. However, under Articles 7 and 3(i) of Company’s articles of association, the allotment of new shares must be approved by shareholders at a general meeting by ordinary resolution. Madam Wang did not have the power and authority to approve the allotment of new shares as the chairman. I agree that the Plaintiff as the then Chairman of the Company would be aware of the limits of his powers, including the lack of power to decide on his own to allot new shares. In the circumstances, it is inherently improbable that the Plaintiff could have been the one who raised the concern of Madam Wang abusing her chairmanship powers to dilute his shareholding in the Company, when the risk did not exist (at least to the Plaintiff’s understanding).

30.  Fifthly, Mr Wong for the Defendant during cross-examination advanced a case that if other (unknown and unidentified) external shareholders of the Company joined forces with Madam Wang, they might be able procure sufficient votes to approve new allotments of shares at an EGM. It is fair to say that this is not the Defendant’s pleaded case. The Defendant has not led evidence that this possibility was contemplated by the parties at the time of the signing of the Guarantee. Hence, there is little milage the Defendant can make on this basis. I also note that the Plaintiff has confirmed in cross-examination that he did not have such a concern at the time of the signing of the Guarantee.

31.  Sixthly, the Defendant agreed in cross-examination that Madam Wang was known by all parties to be the Defendant’s nominee on the board of the Company and would act on the Defendant’s instructions. In the Defendant’s own words, he “fully trusted” (全面信任) Madam Wang.

32.  Mr Chang SC for the Plaintiff submits that if the Plaintiff and HHW had expressed any concerns regarding Madam Wang abusing her powers, the Defendant could (and would) have simply addressed such concerns by assuring the Plaintiff and HHW that this would not happen. However, the Defendant stated in cross-examination that he never tried to assure the Plaintiff or HHW that they need not worry about Madam Wang abusing her powers and simply proceeded to sign the Guarantee without much further discussion.

33.  I find the Defendant’s oral testimony also largely credible. He might well have entertained certain perception as to the qualifications to the signed Guarantee, but on the evidence before this Court, on balance, for all the reasons stated above, the Defendant fails to discharge the burden of proving the existence of the pleaded Common Intention.

E.  Common Law Rules on Contractual Interpretation    

34.  Mr Wong for the Defendant, in discharge of his duties and doing the best he can, submitted that even if the Defendant fails to prove the pleaded Common Intention, it does not necessarily mean that there is no time limit to the Guarantee. The Court is entitled to take into account all the objective facts and find as a matter of fact that there is indeed a time limit to the obligations under the Guarantee. Mr Chang SC, on the other hand, understandably argues that there is no basis for this Court to rewrite the terms of a contract for the parties. My main difficulty in acceding to Mr Wong’s suggestion is that there is no alternative plea as to what the reasonable time limit should be. Given this Court’s rejection of the Defendant's case on the pleaded Common Intention, it is difficult for this Court to find that nonetheless a reasonable time limit should be the duration of Madam Wang’s chairmanship. In any event, it is unfair to the Plaintiff. Such an alternative case is not pleaded. This Court is flexible with pleading points and if possible, will allow real issues to be ventilated provided no prejudice is caused to any parties to the proceedings. However, the Plaintiff does not come to this Court to address this alternative case at all. There is also no evidence to support such an alternative case.

35.  Secondly, as a matter of law, I do not think it is correct for this Court to rewrite terms of a contract for the parties. The Defendant relies heavily on the case of The Hongkong Polytechnic University v Rehabaid Soceity [2023] HKCA 956 (“PolyU case”) to argue that the court can somehow read words into a contract as part of the construction exercise. However, every case depends on its own specific case.

36.  Mr Chang SC advances the following legal principles:

(1)  The process of construction of a contract is an objective one. The subjective intentions of the parties are to be disregarded: see Daily Farm Co Ltd v Secretary for Justice [2020] HKCFI 306.

(2)  Regarding the extent to which context and surrounding circumstances can bear upon the meaning of the express terms of the contract:

(3)  Whilst the court when construing a contract should have regard to the context and the surrounding circumstances, there are limits as to the extent to which such context and surrounding circumstances can affect the meaning of the express terms of the contract. The plain, ordinary meaning of the words used must be the primary guide to what the parties have meant. The surrounding circumstances and context do not represent a licence to the court to rewrite a contract: see Au Yeung Kwan v Lee Lam [2020] HKCFI 3024 at §§82-84.

(4)  The mere fact that a contractual arrangement, if interpreted according to its natural language, has worked out badly for one of the parties, is not a reason for departing from the natural language: see Eminent Investments (Asia Pacific) Ltd v DIO Corp (2020) 23 HKCFAR 487 at §§44, 45(e).

(5)  None of the principles of construction would justify a construction that purports to re-write the contract by flying in the face of clear words: see Champion Concord Ltd v Lau Koon Foo (No 2) (2011) 4 HKCFAR 837 at §76. It will be contrary to the principles of ordinary contractual interpretation to read into a contract words which are plainly not there: see Manulife Financial Asia Ltd v Kenneth Joseph Rappold[2024] HKCFI 989 at §36(2).

37.  Mr Chang SC submits that the PolyU case is distinguishable. I agree. The issue in the PolyU case was whether the license agreement signed between the plaintiff university and the defendant charitable body was terminable. The Court of Appeal found that, on a proper construction of the licence agreement, it was terminable upon the cessation of cooperation between the parties (§53). To construe the licence as a perpetual would mean that the plaintiff would have to indefinitely subsidise the defendant’s occupation of space without getting any benefit in return, which “makes neither common sense nor commercial sense” (§48-50). If necessary, the Court of Appeal would have implied a term to the same effect (§§60-62).

38.  I agree that the PolyU case does not lay down any general principle that the court can read words into a contract as part of the construction exercise. Rather, it was a case where the court was tasked with ascertaining the common intention of the parties in respect of the duration of the licence, even though the express terms of the licence agreement were silent on this issue (§§38-39). On the facts of that case, the licence agreement was found to terminable, because it would not be “commercially or practically coherent” without a limit on its duration (§§48, 50, 60).

39.  However, on the facts of the present case, the Guarantee is perfectly workable without any time limit. As a matter of law, an option agreement may be open-ended and be of indefinite duration: Sainsbury’s Supermarkets Ltd v Olympia Homes Ltd [2006] 1 P&CR 17 at §56.

40.  Where an option agreement is drawn in wide terms without any time limit, a shorter period will not be imposed or implied, for to do so would be to rewrite the parties’ bargain: Barnsley’s Land Options (7^th Ed.) at §2-148; Habermann v Koehler (1996) 73 P&CR 515 (CA) at 518-519;Chantry Estates (South East) Ltd v Anderson [2008] EWHC 2457 (Ch) at §§19-24 (upheld on appeal [2010] EWCA Civ 316).

41.  Similarly, convertible bonds can also to be structured in such a way that there is no time limit in relation to the exercise of the conversion right. On the facts of the present case, it might be unfair to the Defendant, but it is not commercially unworkable or commercially or practically incoherent not to have a time limit. There is nothing inherently objectionable about the Defendant’s contractual obligations under the Guarantee.

42.  Finally, I should mention that Mr Wong, for the Defendant, very fairly, does not take the point that the Guarantee is not supported by any consideration. Although it is the Plaintiff’s evidence that he also would like to see the Acquisition gone through successfully and it was in the best interest of the Company and its shareholders that the Acquisition be approved by its shareholders, it does not necessarily and logically follow that the Plaintiff and HHW’s support for the Acquisition could not be a valid consideration. It is the Defendant's case that he did not want any hiccups in relation to the Acquisition. As such, the support of the Plaintiff was crucial.

F.  Causation and Economic Loss

43.  To enforce the Guarantee, the burden rests with the Plaintiff to satisfy two conditions: (i) his shareholding had been substantially diluted due to the Company’s allotment of new shares (“…上述公司大量發行股票而引致甲方及乙方所佔上市公司(8111)的百分比權益遭致大幅攤薄…”) and (ii) such substantial dilution caused economic loss to him (“…引致經濟損失…”).

44.  First, Mr Wong for the Defendant made a very fair point that there is no plea as to the causation on economic loss. The Plaintiff’s entire pleaded case with respect to the triggering of purchasing obligation under the Guarantee is set out in the following two paragraphs:-

“7. Since 1 April 2011 i.e. the date of the Guarantee, the Company had issued substantial number of new shares as set out in the Schedule hereto… As of the date of the Writ, the total number of issued shares of the Company is 1,835,232,850, and the Plaintiff’s shareholding in the Company was substantially dilute to about 7.15%.

8. For the above reasons, the Defendant is obliged to acquire all of the Plaintiff’s shares in the Company (namely, 131,140,000 shares) at a price of HK$0.36 per share pursuant to the Guarantee.”

45.  It is fair to say that the Plaintiff’s pleaded case is that upon proof of substantial dilution, by reference to shareholding percentage, the Defendant’s obligation under the Guarantee is triggered. The Statement of Claim makes no reference to any need to show that the allotments have caused economic loss.

46.  However, in his Reply, the Plaintiff justifies its position in the Statement of Claim by restating that there must necessarily be a causal link, §6(3):-

“Any economic loss… suffered by the Plaintiff and HHW must be causally linked to the substantial dilution of their shareholding in the Company by its issue of substantial number of new shares.” (emphasis added)

47.  Mr Wong for the Defendant submits that other than this statement, the Plaintiff has not pleaded how the allotments have caused any economic loss, or indeed what type of economic loss has been suffered. The entirely of the Plaintiff’s pleaded case rests on the drop in shareholding percentage as pleaded at §7 of the Statement of Claim.

48.  The Plaintiff’s straightforward case on causation, relying solely on drop in shareholding percentage alone, is once again restated in the Plaintiff’s Opening at §34(1) to (3). It was not until the Plaintiff’s oral Opening, that for the first time, the Plaintiff explains that his case on causation rests on a reference to market capitalisation. The Plaintiff’s witness evidence also did not deal with the proof of economic loss or the proof of causation. There is only one reference in HHW’s first witness statement that the Plaintiff’s shareholding in the Company has gone from 17.79% in 1 April 2011 to 7.15% at the time of the Writ.

49.  Further, no documentary evidence has been provided by the Plaintiff for the purpose of proving causation. In fact, the daily share price of the Company was disclosed by the Defendant. The Plaintiff has never made any reference to the daily share price in any of its evidence either.

50.  Mr Wong for the Defendant submits that the Plaintiff made no attempts to adduce any factual or expert evidence to explain any of the data now before the Court. The critical flaw in the Plaintiff’s pleaded approach to the issue of causation is that it assumes that allotments do not bring economic value to the company.

51.  Mr Wong accurately points out to the Court that the shares of the Company is highly illiquid and volatile. A small amount of capital can bring the share price up and down dramatically within the mere span of hours or days, a rather typical “penny-stock”.

(1)  In the few months after the Completion Allotment on 1 June 2011, share price (and market capitalization) had in fact increased between June to August 2011. Similar patterns of share price (and market capitalization) increase can also be seen in the weeks or months after some allotments: e.g. the allotments on 26 November 2013 (remained higher all the way until 2017), 29 January 2015 (remained higher all the way until 2017), 22 March 2016 (remained higher all the way until 2017);

(2)  In other cases, the share prices (and market capitalization) have remained stable in the weeks or months after: e.g. 10 April 2014, 22 May 2015, 1 February 2016, 4 July 2018, 17 August 2018 (initial drop in the subsequent month and remained higher for the months thereafter);

(3)  There are also instances where the share prices (and market capitalization) in fact dropped in the weeks or months after: e.g. 2 September 2011, 16 December 2011, 5 December 2018 and 4 January 2019.

52.  I agree that it is not entirely helpful to simply point to the fact that over the course of 2011 to 2019 the share price (and market capitalization) of the Company has experienced a downward trend. It must be correct that the longer the time horizon, the more causative factors would be in play to affect the share price. The correlation between issuance of new shares and economic loss can hardly be proved by simply looking at the market capitalization.

53.  That was my main concern as well and I indicated so to Mr Chang SC at the beginning of the trial. It may not be possible to just look at the Plaintiff’s share of the total market capitalization without analysing the net asset value (“NAV”) position of the Company. It might well be that the allotments did bring in substantial assets to the Company but the same are currently underpriced by the market. With the consent of the parties, the audited financial statements of the Company covering the relevant financial years are now produced to the Court. Hence, the Court has a better understanding of the financial position of the Company.

54.  Mr Wong for the Plaintiff also submits that by looking at the NAV figures themselves it would not be possible to draw a logical and consistent indication as to the correlation, let alone causation, with allotments:-

(1)  NAV of the Company has in fact increased dramatically from 2011 (HK$98.5 million) or about HK$0.134/share (737,192,072 total shares) to 2016 (HK$404.6 million) or about HK$0.283/share (1,430,012,850 total shares); during this period 9 of the 13 allotments (a total of 692,820,778 shares out of the grand total of 1,098,040,778 shares) in the Statement of Claim Schedule had taken place;

(2)  NAV experienced a dramatic drop to HK$64.5 million in 2017 [or about HK$0.045/share (1,430,012,850 total shares); however, during this period there was no allotment as per the Statement of Claim Schedule;

(3)  Comparing the assets figures between 2016 and 2017, the most significant drops came under “Goodwill” (from HK$311.6 million in 2016 to HK$45.5 million in 2017 – a drop of more than HK$266 million) and “Accounts and bills receivable” (from HK$229.3m in 2016 to HK$80 million in 2017 – a drop of almost HK$150 million); just how these 2 drops were correlated to any allotments simply cannot be worked out.

55.  However, I am of the view that one has to approach the issue of causation with a dosage of commonsense. The inescapable fact is that the substantial increase in shares of the Company did not bring in an equivalent economic value to the Company. As such the Plaintiff’s economic interest in the Company has been reduced. A simple way to look at this issue is but for the dilution of shareholdings by way of the issuance of new shares, the Plaintiff would still be holding 17.79% of the total shareholding of the Company but now he only holds 7.15%. If the 7.15% shareholding is worth much more than or equivalent to 17.79% as at 1 April 2011, then the Plaintiff cannot complain. But it is not.

56.  The question is no matter one looks at the market capitalization or the assets value of the Company, the Plaintiff’s economic interest in the Company has reduced. The Plaintiff also cannot complain if he is still holding 17.79% but the price per share and the NAV per share have dropped.

57.  Mr Wong for the Defendant is certainly right that in the capital market, there is a basket of factors which might well have affected the value of the Plaintiff’s economic interest. However, the key question to ask is whether a substantial increase in new shares is a factor which contributed to such reduction. On balance and on the facts of the present case, I am of the view that the answer is in the affirmative.

58.  Mr Chang SC for the Plaintiff submits that the Plaintiff need not prove that the dilution of his shareholding is the sole or main cause of his economic loss. The causal requirement between dilution and loss is satisfied as long as the allotment of new shares is a cause of P’s economic loss. Further, the causal requirement should be assessed by reference to the cumulative effect of all the allotments, rather than any individual allotment. The phrase “引致經濟損失” is tied to “大幅攤薄”. If the cumulative effect of the allotments was that economic loss had been caused to P, the causal requirement would be satisfied: it matters not that some individual allotments may not have resulted in a loss in isolation. I agree that this is a more sensible understanding of the issue of causation.

59.  Mr Chang SC refers this Court to the following legal principles:-

(1)  To show that an event is “a cause” of an outcome, it is “unnecessary to evaluating competing causes and ascertain which of them is dominant”: Heskell v Continental Express [1950] 1 All ER 1033 at 1047.

(2)  An outcome is often the result of a “combination of causes”. An event may properly be said to be “a cause” of an outcome, “notwithstanding that there may be other causes co-operating to produce it, whether they be antecedent, concurrent or intervening”: Minister of Pensions v Chennell [1947] 1 KB 250 at 254.

60.  It is therefore not necessary for the Plaintiff to prove that the dilution of the Plaintiff’s shareholding in the Company was the sole or only cause of his loss, so long as it was a contributory cause of the diminution in value of his shareholding. The presence of other possible “co-operating” causes (which is not admitted) does not negate the causal link between the dilution and the economic loss suffered by the Plaintiff.

61.  Further, I also agree that the extent of the Plaintiff’s economic loss is irrelevant. The terms “大量” and “大幅” refers only to the scale of the dilution, and not the extent of the Plaintiff’s loss. If the Plaintiff suffered any economic loss due to the dilution of his shareholding, he is entitled to demand the Defendant to purchase all his shares at the agreed price.

62.  The Plaintiff relies on the following material facts:-

(1)  Between 1 April 2011 (i.e. the date of the Guarantee) and 4 January 2019, the Company issued 1,098,040,778 new shares by way of 13 allotment, causing the total number of issued shares to increase by more than two-fold from 737,192,072 to 1,835,232,850: see the Schedule to the Statement of Claim.

(2)  As a result of the Company’s issuance of new shares, the Plaintiff’s shareholding percentage in the Company had been reduced by more than half, dropping from 17.79% to about 7.15%.

(3)  During the same period:

(a)  The NAV of the Company fell from HK$158,347,000 (as at 31 March 2011) to RMB 26,300,000 (as at 31 March 2019);

(b)  The NAV per share fell from HK$0.2148 (as at 31 March 2011) to RMB 0.01433 (as at 31 March 2019); and

(c)  The share price of the Company fell from HK$0.29 per share (as at 1 April 2011) to HK$0.125 per share (as at 4 January 2019).

63.  I am of the view that the dilution of the Plaintiff’s shareholding in the Company was at least a cause of the economic loss suffered by him . First, a share represents a shareholder’s proportional interest in a company. When a company issues new shares, this would dilute the proportion of interest represented by each existing share. Unless such a dilution is matched by a corresponding increase in the value of the company (such that the net impact of the allotment on the value of the share is neutral), a dilution will necessarily have an adverse impact on value of the shares in the company.

64.  In the present case, the public record including the published audited financial statements shows that the large-scale dilution of the Plaintiff’s shareholding was not “counteracted” by any corresponding increase in the value of the Company. In fact, the NAV and the share price of the Company both fell between 2011 and 2019. I agree that the reduction in the Plaintiff’s shareholding percentage contributed to the diminution in the value of his shareholding in the Company. Given the terms of the Guarantee, this Court needs not analyse such allotments’ precise contribution to the diminution in value.

65.  Finally, the fact that the Company’s share price rose after certain allotments shows that those allotments does not contribute to reduction of the Plaintiff’s economic interest in the Company. However, Mr Chang SC is correct that the Plaintiff need not show that he had suffered economic loss in every single instance of allotment. As long as the Plaintiff can show the cumulative effect of the allotments was that an economic loss was caused to him, he is entitled to enforce the Guarantee.

66.  Mr Wong for the Defendant also submits that NAV figures are mere totals and are indiscriminate of the various businesses and assets of the company. However, NAV is a fair proxy in the valuation of a company’s net worth. There is no suggestion that the NAV of the Company increased after every single allotment.

67.  I should also mention that as a matter of construction, I am of the view that the shares allotted pursuant to the Acquisition should be discounted as it is quite clear that the effect of the Guarantee is forward looking. It is premised upon the fact that the allotments in relation to the Acquisition would proceed and the Plaintiff wanted protection against further dilutions. The Plaintiff was not concerned and there was no reason for him to be concerned about a dilution in his shareholding given that the Acquisition was something that he preferred to take place.

68.  However, Mr Chang SC is correct that even if the dilution of shares as a result of the Acquisition is excluded, the Plaintiff is still home on the basis that the other allotments, cumulatively, did contribute to a loss to his economic interest in the Company.

G.  Amendment of Statement of Claim

69.  As the Defendant takes the point that the Plaintiff has not properly pleaded its case on causation as to his economic loss, at the end of the oral closing submissions, Mr Chang SC for the Plaintiff indicated that an application for amendments to the Statement of Claim would be made. I gave a set of directions in relation to the proposed amendment application. On 3 July 2024, the Plaintiff duly took out a summons to amend his Statement of Claim to reflect the causation points that Mr Chang SC advanced at the closing submissions.

70.  In his submissions, as set out in the letter dated 12 July 2024 issued by Messrs. S.Y.Wong & Co., the Defendant objects to the amendment application on the grounds, first, the proposed amendments “were never pleaded, were not in the Plaintiff’s written opening, and were not referred to in evidence (whether in witness statements or in examination). They should not be allowed to be introduced after closing submissions.” Secondly, “[t]he Defendant also maintains that the use of NAV and market capitalization now, without assistance of any proper analysis and detailed breakdowns, is highly problematic and should not be allowed.”

71.  I am of the view that the Court’s duty is to resolve real issues. It is correct that the Plaintiff did not plead the issue of causation in his Statement of Claim but only in §6(3) of the Re-Amended Reply and Defence to Counterclaim. However, the Plaintiff’s pleaded economic loss due to the dilution of his shareholding in the Company was stated in §8 of the Statement of Claim. The Plaintiff relied on the share price movements to prove his case on causation. I do not see any problem with that. There is no need for witness to speak to price movements which is a matter of public record.

72.  The essential question is whether the Defendant is prejudiced by this late amendment application. It is not the Defendant’s case that he will need to adduce further evidence, factual or expert, to deal with the proposed amendments. Indeed, the Defendant’s case is that even with the proposed amendments, the Plaintiff still cannot discharge his onus to prove the causation issue.

73.  I bear in mind that the NAV and the market capitalization figures pleaded in the new paragraphs 7A and 7B of the draft Amended Statement of Claim are matters of public record. Mr Wong for the Defendant also fairly accepted that the Court can study the publicly available financial statements of the Company in considering the causation issue.

74.  On the facts of the present case, even though the application for amendments was made very late, I am of the view that the issue of causation must be viewed and decided from a commonsense perspective. The Defendant never suggests that this Court will require expert evidence to make a determination on this issue.

75.  Accordingly, I will allow the late application for amendments to the Statement of Claim with costs of and occasioned by the application to be paid by the Plaintiff to the Defendant to be taxed, on party to party basis, if no agreement can be reached by the parties.

H.  Disposition

76.  For all the reasons stated above, I make the following orders:

(1)  An order for specific performance that the Defendant do purchase the Plaintiff’s 131,140,000 shares in the Company at the price of HK0.36 per share pursuant to the Guarantee;

(2)  The Defendant do pay the sum of HK$47,210,400, being the purchase price for the Plaintiff’s 131,140,000 shares in China Technology Solar Power Holdings Limited (the “Shares”) within 28 days herein;

(3)  The Defendant do pay interest on the purchase price payable by the Defendant to the Plaintiff at 4% per annum from 6 September 2019 up to the date of payment within 28 days herein;

(4)  Upon the Defendant paying the Plaintiff the sums in paragraphs (2) and (3) above, the Plaintiff should forthwith execute all necessary documents for the purpose of transferring the Shares to the Defendant;

(5)  Costs of this action be to the Plaintiff (including all reserved costs), to be taxed on a party to party basis if not agree, with a certificate for two counsel.

(6)  Costs of the Summons dated 3 July 2024 are to be paid by the Defendant, to be taxed on a party to party basis if not agree, with a certificate for two counsel.

77.  Finally, it remains for me to thank Mr Chang SC and Mr Kwan for the Plaintiff and Mr Wong and Mr Lam for the Defendant for their helpful assistance.