CHEUNG KWAN v. XU SHENGHENG AND OTHERS

HCMP 1196/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1196 OF 2012

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REASONS FOR JUDGMENT

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1.  This was the respondents’ application to strike out the petition presented by the petitioner under section 168A of the Companies Ordinance (“the Ordinance”). At the conclusion of the hearing, the petition was struck out and the petitioner ordered to pay indemnity costs to the respondents. My reasons appear below.

2.  The petition was presented on 13 June 2012.  The first to third respondents are shareholders and some of the current directors of China Ground Source Energy Ltd (“the company”).  The company was joined as a nominal party.

3.  Unusually for a section 168A petition, the company is not a private company: rather, it is a public company whose shares are listed on the Growth Enterprise Market (“GEM”) of the Stock Exchange of Hong Kong and have been so listed since December 2001.

The application

4.  The respondents’ application is made on the ground that the petitioner lacks locus standi, and, in the alternative, that paragraphs 3 to 43 of the petition are immaterial, irrelevant and scandalous and the petition is an abuse of process.

Locus standi

5.  It is trite law that only a “member” of the company (within the definition of that term in section 28 of the Ordinance) may present a petition under section 168A.  In other words, only a person whose name “is entered on [the] register of members” of the company on the date the petition is presented would have the requisite standing to present such a petition.  See Yan Kwok Kin Julian v Yan Kwok Gay & Others [1997] 3 HKC 237, 241F-H.

6.  It is not disputed that the petitioner was not a member of the company when the petition was presented. That created a seemingly insuperable hurdle for the petitioner to overcome.

7.  Her counsel Mr B.K. Ho did not make any oral submissions on that issue.  He relied on his written submissions.  Mr Ho was unable to cite any authority in support his assertion that section 28 of the Ordinance does not apply to publicly listed companies and only applies to private companies.  The section itself does not differentiate between publicly listed and private companies and there is nothing in the definition of “company” in section 2 that would support such a reading.

8.  Mr Ho also suggested that in considering section 28, a court “may be inclined to take a more flexible approach” by recognising the beneficial owner of the listed shares registered in the names of nominees (such as securities firms) as a member of the company.  But that suggestion has no foundation in law and is unsupported by authority.  It must be rejected.

9.  In short, the petitioner could offer no answer to the respondents’ striking out application based on the petitioner’s lack of locus standi.  For that reason alone the petition must go.

10.  Having reached that conclusion, it is not strictly necessary to address the alternative ground advanced by Mr Mak (who appeared for the respondents).  But in deference to his able submissions, I will deal with the more salient points below.

Abuse of process

11.  The petition is not an easy document to read or, indeed, follow.  Essentially, it listed, in chronological fashion, matters about which the petitioner wished to complain, irrespective of whether those matters concerned the corporate affairs of the company or whether they were matters upon which the petitioner’s claim of unfair prejudice was based.

(A)  “Background information”

12.  In outline, paragraphs 3 to 43 of the petition are replete with allegations against the first to third respondents and others who are not parties to the petition.  They concern (i) alleged loans made between the petitioner and a non-party in 2006 and 2007; (ii) alleged private transactions between the petitioner and the first respondent (including a share sale agreement, pledge of the company’s shares by the first respondent to the petitioner, alleged wrongful transfers of the pledged shares, a transfer agreement and alleged breaches of those transactions/agreements by the first respondent); (iii) alleged commissions of $20 million paid by the first petitioner to the second respondent and two non-parties on the company entering into an Acquisition Agreement with the first respondent’s nominee to acquire the first respondent’s business, the consideration therefore being $704 million comprising cash, shares to be allotted and share options; (iv) private transactions between the petitioner and the second respondent (alleged wrongdoing on the part of the second respondent); and (v) allegations relating to the petitioner’s appointment, service and removal of the petitioner as a director of the company and of some of its subsidiaries.

13.  The allegations made in categories (i) to (iv) above are said to provide “background information”.  But it is difficult to appreciate why allegations of serious personal misconduct and wrongdoing should form part of the petition since it has not even been suggested that those alleged matters/events were affairs of the company.

14.  Mr Mak submitted that acts of a director in his personal capacity not constituting conduct in the course of or an act or omission in the course of conduct of the company’s affairs are irrelevant and have nothing to do with section 168A, citing Re a company (No 001761 of 1986) [1987] BCLC 141, 148a-c.  In that case, in respect of a hypothetical theft by a director of the contents of a safe kept on company premises by using a key he possessed as director, Harman J observed that:

“What there would not be was conduct of the company’s business in a manner unfair to anybody. The right remedy for that would not be a petition under [the English equivalent of section 168A] but an action to recover money, Mareva injunctions to freeze assets and a prosecution and, one hopes, a term in jail for the director. But there is nothing to do with [the English equivalent of section 168A].”

15.  Clearly, the matters referred to in categories (i) to (iv) above have no place in the petition and fall to be struck out.  It should be mentioned in passing that the allegations concerning the $20 million commission forms the basis of a counterclaim by the petitioner who is the defendant in HCA 291 of 2009 and will be decided in that action.

16.  At the hearing, Mr Ho stated that petitioner’s real complaint is under category (v) which concerns about the treatment she received as director of some of the company’s subsidiaries after she raised complaints of serious irregularities: she was barred from entering the offices of the subsidiaries in Beijing and from the company’s office in Hong Kong and deprived of her fees as director.  Those complaints are fleshed out in the petitioner’s affidavits.

17.  According to the petitioner, she was appointed a director of some of the subsidiaries in April 2008 and participated in their management in June 2008.  On 15 January 2009 she reported irregularities she had discovered to the board of the company and was prevented from entering the company’s office on 21 January 2009.

18.  It is common ground that she was appointed a director of the company in early February 2009, albeit the parties disagreed as to whether this took place on 5 February 2009 or 6 February 2009.  It is also common ground that she was removed as a director by the members voting at an EGM held on 25 March 2009 and her bid to be re-elected as a director failed.

19.  While those matters related to her interests as a director, they did not relate to her interests as a member.  As Ferris J held in Jaber v Science and Information Technology Ltd [1992] BCLC 764 at 782e-f:

“... it is not every interest of a person who happens to be a member of a company, interference with which is capable of being the subject of an application under [the English equivalent of s168A] ... the interests must be those of a member in his capacity as a member, not in some other capacity such as that of director or employee.”

20.  Thus, the matters in category (v) also have no place in a section 168A petition and must be struck out.

(B)  Complaints that concern corporate affairs

21.  There were 3 such complaints (“the corporate complaints”): (i) the 4 into 1 share consolidation in February 2010 (§ 50); (ii) the cash subscription of 373,615,000 shares by the first respondent in January 2011 (§ 47); and (iii) the cash subscription of 850 million shares by China Energy Conservation and Environmental Protection (Hong Kong) Investment Company Ltd (“CECEP”) at a discount in June 2012 (§ 48).

22.  According to Mr Ho’s skeleton submissions (§ 36), those complaints were allegedly included in the petition to show how the petitioner’s shareholding in the company was reduced to below the 10% threshold for requisitioning a meeting of the company.  But he went on to say that the petitioner “does not seek to rely on them as part of her case on unfair prejudice”.  In those circumstances, the rationale for including the corporate complaints in the petition eludes me.

23.  Suffice it to say that, in any event, none of the corporate complaints has any substance.  The respondents have demonstrated that each of those matters was proper, approved by the board and conducted in accordance with the articles of association of the company.  Moreover the petitioner has failed to show that there are special circumstances that might have created any legitimate expectation that there would be no share consolidation and no share subscriptions by the first respondent or outside investors.

24.  Further, there was also evidently no prejudice involved.  The 4 into 1 share consolidation affected all members alike and did not cause any gross reduction in share value. 

25.  As regards dilution, on the evidence, while the petitioner held 9.81% of the issued shares prior to 8 September 2010, after the relevant event on that date, it was reduced to 2.26%.  Then on an unknown date between 8 September 2010 and 27 February 2012, she disposed of all her shares.  Prior to acquiring 125 million shares representing an interest of 6.05% on 27 February 2012, her interest in the company was zero.  According, I am satisfied that the share subscription by the first respondent in January 2011 and by CECEP in April and June 2012 could not have diluted the petitioner’s interest to below 10% because she did not have a 10% interest to be diluted on the relevant dates.

The relief sought

26.  The relief set out in the petition is for an order:

(1)  that the first to third respondents be removed as directors of the company;

(2)  alternatively, an order that the company convene a meeting of members to consider and if thought fit to remove the first to third respondents as directors and to elect replacement directors; and

(3)  such other order as the court thinks fit including an order that the first or second respondents or both of them may be ordered to purchase the 125 million shares held by the petitioner.

27.  The first and second respondents were elected as directors by the members of the company in accordance with its constitution, namely, its articles of association.  There is no room for the superimposition of any equitable rights to management participation by way of legitimate expectation in the case of a publicly listed company since the articles of association are exhaustive of the rights of the parties, at any rate (as in the present case) where it is not suggested that the association was one of ‘partnership’.  See Hong Kong Corporate Law, Vol.3. [7904] and the cases therein cited.  The petitioner has not established special circumstances that could conceivably confer on her any equitable right to have the first and second respondents removed from the board or to require that an EGM be held to consider their removal.

28.  As regards a buyout, it is now said to be ancillary relief.  But in the case of a publicly listed company where shares can be sold on the open market, it is difficult to see how or why a court would grant such relief.

Indemnity costs

29.  In the present case, it is incomprehensible why it was ever thought fit to present a section 168A petition.  The petitioner could not but have known that she had no hope of surmounting the locus hurdle.

30.  Some 80% of the petition was taken up by allegations that are wholly unrelated to the corporate affairs of the company and include allegations made against non-parties.  The allegations made were grave, being unproven accusations of dishonesty, serious wrongdoing and criminal acts.  It was scandalous to make those allegations when they were entirely irrelevant to the section 168A application.

31.  So far as the corporate complaints are concerned, not only have they been shown to be false and of no substance, the petitioner placed no reliance on them as part of her case of unfair prejudice.

32.  Once the “background information” and corporate complaints are stripped out of the petition, there is nothing left.  In those circumstances, it is difficult not to agree with Mr Mak that the petitioner had no genuine grievances and the petition was nothing but a personal vendetta against the individual defendants and the non-parties dragged into the picture.  That was not a proper use of the court process and constituted an abuse in respect of which indemnity costs are appropriate.