GALAXY CHINA OPPORTUNITIES FUND v. TANG JUN AND OTHERS

HCA 1629/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1629 OF 2011

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BETWEEN

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J U D G M E N T

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Introduction

1.  There are three summary judgment summonses before the court.  The plaintiff in each of the three actions is an entity that is part of what is known as the Galaxy Funds. 

2.  Save as to the name of the plaintiff, the number of shares and the consideration involved, the three actions are identical.  For present purposes, it is sufficient to consider HCA 1629/2011 since the issues arising are common to all three actions.

HCA 1629/2011

Background facts

3.  The plaintiff entered into an agreement on 28 October 2010 to purchase 4 million shares (“the Shares”) in a NASDAQ listed company called China Architectural Engineering, Inc (“CAEI”) from First Jet Investments Ltd (“First Jet”), the 5^th defendant, for US $2.2 million.  The share purchase was duly completed.  CAEI changed its name to China CGame Inc (“CCGM”) in March 2011.  CAEI or CCGM (as the case may be) shall hereafter be referred to as “the Company”.

4.  Under clause 4.1(2) of the Agreement, the 1^st to 5^th defendants jointly and severally undertook to procure the delivery to the plaintiff within four months after the completion date, a company guarantee (“the Company Guarantee”) issued by the Company in the form to the complete satisfaction of the plaintiff which entitles the plaintiff to demand that the Company re-purchase such portion of the Shares not yet disposed of during the period of three months after the lock-up period for the Shares under SEC Rule 144 at the re-purchase price of US $0.55.

5.  Pursuant to the Agreement, the plaintiff entered into an option deed with each of 5^th and 6^th defendants. In each case, the plaintiff was granted a put option which, upon exercise during the effective period, required the grantor of the option to acquire such portion of the Shares not yet disposed of (“the Put Option Shares”) from the plaintiff at US $0.55 per share and the grantor was bound to complete the purchase of the Put Option Shares within seven business days after the date of exercise of the Put Option.

6.  Clause 11.1 of the Agreement is an entire agreement clause and clause 11.2 provides that any variation to the Agreement “shall be binding only if recorded in a document signed by all the parties” thereto.

7.  The relief sought in the action is an order for specific performance by the 1^st to 5^th defendants of clause 4.1(2) of the Agreement, damages and interest and as against the 5^th and 6^th defendants, an order for specific performance of clause 1.1 of the option deeds, damages and interest. 

8.  The plaintiff issued a summons on 14 March 2012 seeking summary judgment.

9.  In his written submissions, counsel for the defendants advised the court that no issue is taken in respect of clauses 2 and 3 of the plaintiffs’ summonses and that the 5^th and 6^th defendants no longer dispute their obligations in respect of the Put Option Shares in all 3 actions.  That concession disposed of one of the issues that otherwise would have arisen for determination, namely, the length of the lockup period for the Shares under SEC Rule 144.

10.  Mr Wong who appeared for the plaintiffs sought, and was granted orders in terms of clauses 2 to 5 of the summonses insofar as they relate to the 5^th and 6^th defendants.

The Company Guarantee

11.  It is common ground that no guarantee as set out in clause 4.1(2) of the Agreement has been delivered to the plaintiff.

12.  The only issue left for determination is whether the e-mail correspondence that took place between 27 October 2010 and 24 February 2011 gives rise to triable issues. 

13.  It was submitted that that turns on the question whether the Security Agreement that came to be executed between (1) the plaintiff, (2) First Jet and (3) the Company (being a party to the Security Agreement for limited purposes only) is a fresh agreement completely replacing the obligation under clause 4.1(2) or whether it was nothing more than a variation of that obligation.  Clause 11.2 of the Agreement applies to the latter but not the former.

The e-mail correspondence

14.  On 14 January 2011, the 2^nd defendant first raised the need to get a repurchase guarantee letter prepared by February with Ms Anh Tran, (an attorney at K & L Gates, the US law firm representing the defendants) and Mr Billy Tam of Messrs Ho & Tam, the solicitors then representing the plaintiff.  Messrs Ho & Tam ceased to be the plaintiff’s solicitors as from 15 March 2011.  The 2^nd defendant who was acutely aware of the need to meet the deadline imposed by clause 4.1(2) urged the two recipients of his e-mail to start a dialogue to complete the task.

15.  Later the same day, Ms Tran replied to the 2^nd defendant only, removing Mr Tam from her e-mail communication.  She referred to her “prior” discussions with the 2^nd defendant that the Company “could not directly guarantee to repurchase the shares ... because there are related party transaction and accounting issues that prevent such a guarantee”.

16.  Ms Tran proceeded to outline her proposal of providing an “extra layer of protection” from the Company “through a secured interest in the loans” that First Jet made to the Company, a proposal that apparently she had already discussed with the 2^nd defendant.  Her proposal envisaged (i) a short Promissory Note representing the loans from First Jet to the Company and (ii) an agreement providing a security interest in such Promissory Note to the plaintiff, subject to the plaintiff’s rights under the repurchase guarantee issued by First Jet.

17.  On the following day, in an e-mail headed “Repurchase guarantee letter ...”, the 1^st defendant instructed Ms Tran to “prepare a simple re-purchase guarantee” for the plaintiff.

18.  In response, Ms Tran sought confirmation that the instructions were to draft the Promissory Note and Security Agreement which she proceeded to describe as the plaintiff receiving certain rights to require the Company to pay funds up to the amount of the Note to repurchase the shares. Ms Tran opined that the provision of a repurchase guarantee by the Company might contravene SEC rules and regulations.

19.  On 16 February 2011, the 1^st defendant instructed Ms Tran to proceed.  This was followed in subsequent days by several chasers and on 20 February the 1^st defendant requested Ms Tran to “work on this asap and get [Mr Tam’s] acceptance”.

20.  Drafts were sent to the 1^st and 2^nd defendants by Ms Tran on 21 February 2011 with the following comment:

“the obligations of First Jet under the Option Deed Agreements pursuant to which First Jet agreed to repurchase the shares of common stock that First Jet sold to Galaxy Funds is intended to be secured by the loans that First Jet made to CAE. Therefore, attached firstly is a first draft of an Unsecured Promissory Note that is intended to be entered into by First Jet and CAE memorializing the loans. Secondly, attached is a draft of a Security Agreement pursuant to which First Jet grants a secured interest in the Promissory Note to Galaxy Funds such that if First Jet fails to uphold its obligations under the Option Deed Agreement ... then Galaxy Funds may take possession of the Promissory Note and require CAE, under such Note, to pay directly to Galaxy Funds such amount due under the respective Note.”

21.  Upon receiving the “go ahead” on 22 February from the 1^st defendant, on 23 February 2011, Ms Tran emailed the draft documents under the rubric of “FW: Repurchase guarantee letter from CAEI” to Mr Tam for his review, comment and party execution.  She described the drafts as

“for the satisfaction of the CAE guarantee of the repurchase obligations of under the CAE share purchase transaction with Galaxy Funds. As indicated in previous e-mails, SEC rules and regulations do not permit CAE’s direct guarantee of the repurchase obligation of First Jet’s sale of CAE common stock and therefore it is structured in a manner that is described in the e-mail below, with same effect as direct guarantee.

Please confirm if the attached is acceptable to you ...”

22.  The “e-mail below” referred to would appear to be a reference to Ms Tran’s e-mail of 21 February to the 1^st defendant attaching the drafts which came to be forwarded to Mr Tam. 

23.  Mr Tam was “fine” with the draft agreements except for some minor drafting points.  The drafts were revised in the respects requested.  The e-mail correspondence ended with Mr Tam’s e-mail dated 24 February stating that he was “fine with this final draft”.

The Security Agreement

24.  The Security Agreement dated 24 February 2011 was made by and between First Jet as Grantor, the plaintiff as Grantee and, solely with respect to the acknowledgements and covenants set forth in sections 5.4, the Company.  Mr Dawes who appeared for the defendants, drew attention to the recitals to the effect that, pursuant to clause 4.1(2) of the Agreement, First Jet agreed to deliver to the plaintiff additional security further to which the plaintiff could, upon exercise, require the Company to make payment under the terms and conditions of the Put Option and that the purpose of the Security Agreement was to comply with the terms of clause 4.1(2) such that First Jet should grant to the plaintiff a security interest in the Promissory Note pursuant to which the plaintiff, might take possession of the Promissory Note and require immediate payment of the loan amount from the Company to the plaintiff in satisfaction of First Jet’s obligations under the Option Agreement.

25.  Pausing there, it is to be noted that insofar as the recitals purported to recite the terms of clause 4.1(2) of the Agreement, they did not reflect those provisions accurately.  In any event, the provision of “additional” security must mean something in addition to what was contractually required and would not bear the meaning of dispensing with the original obligations. 

26.  In pertinent part, the Security Agreement provides:

“Section 1.1 Grant of Security Interest

(a) As collateral security for all the Obligations (as defined in Section 1.2 hereof), Grantor hereby pledges and assigns to the Grantee, and grants to Grantee for its benefit a continuing security interest in and to the Company Note (the ‘Pledged Property’).

(b) ...

Section 1.2 Security for Obligations

The security interest created hereby in the Pledged Property constitutes continuing collateral security for all of the obligations that may arise under the terms and conditions of the Purchase and Option Agreements, whether now existing or hereinafter incurred (collectively, the ‘obligations’), the due performance and observance by the Grantor of all of its other obligations from time to time existing in respect of the Purchase and Option Agreements.”

27.  The Security Agreement was expressed to be and created collateral security for obligations from time to time existing under the Purchase and Option Agreements.  No other purpose or objective was expressed.  Its legal effect was to give the grantee, ie the plaintiff, collateral security for all obligations existing under the Agreement and the option deeds.

Is there a bona fide defence?

28.  The short point that arises is whether the defendants have shown that there are triable issues. 

29.  Mr Dawes submitted that the correspondence supports the argument that the plaintiff, acting through Mr Tam “agreed to enter into a fresh agreement providing that instead of procuring the Company to provide the Company Guarantee, [the plaintiff] was to be provided with additional security” by way of the Promissory Note and the Security Agreement. Mr Dawes stressed that Mr Tam acting on the plaintiff’s behalf, (i) agreed to depart from clause 4.1(2) of the Agreement; (ii) commented on and revised the drafts; (iii) indicated without qualification that they were acceptable.

30.  There are 3 affirmations from the defendants’ solicitor, Mr Ko Shiu Pong, Rodney, in support of their opposition to summary judgment.  In his main affirmation (at § 10), Mr Ko asserted and maintained that the Company Guarantee had in fact been delivered to the plaintiff pursuant to the Agreement.  At § 19, he exhibited a copy of the Company Guarantee which, as he remarked, was named as Security Agreement. 

31.  Despite inelegant and/or inaccurate phraseology, the tenor of Mr Ko’s affirmation is that the draft submitted to the plaintiff’s solicitors for comment was the Company Guarantee and was meant to discharge the Company’s obligation under clause 4.1(2), and that after several rounds of amendments, the 1^st and 2^nd defendants, through Ms Tran, sent the “final version of the Company Guarantee with signature of CAEI” to Mr Tam.  That is reinforced by the e-mail correspondence.

32.  Read in isolation, the Security Agreement appeared to give the plaintiff collateral security additional to what the plaintiff was entitled under clause 4.1(2).  Indeed, in the earlier e-mail correspondence, there is a reference to an “extra layer of protection from CAE through a secured interest in the loans that First Jet made to CAE”.  If that was the effect, it would not avail the defendants who remain in breach of the principal obligations under clause 4.1(2) as the Company Guarantee has not been provided.

33.  If, however, the Security Agreement and Promissory Note are read with the e-mail correspondence as a whole, objectively viewed, it is certainly arguable that they were proffered to the plaintiff (through his solicitors) as a substitute for, and in lieu of, the Company Guarantee, in satisfaction of the original obligations under clause 4.1(2).  It is equally arguable that Mr Tam, acting on the plaintiff’s behalf, accepted that offer.  Nevertheless, since the legal effect of such an agreement is to cause a variation or modification of the original obligations, that, necessarily, would trigger clause 11.2.  I do not consider that clause 11.2 could be side-stepped in the manner submitted by Mr Dawes.  

34.  In the result, I do not consider that the defendants have raised any triable issues.  It follows that the plaintiff is entitled to summary judgment on its summons.

Orders

35.  I will make an order in terms of paragraphs 1 to 4 (inclusive) of the summonses dated 14 March 2012 and issued in each of HCA 1629, 1630 and 1631 of 2011. There is also to be an order nisi of costs in favour of the plaintiff, such costs to be taxed if not agreed.