CHAN YUEN TUNG v. KO KIN HANG

HCA 1864/2013

[2018] HKCFI 2081

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 1864 OF 2013

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J U D G M E N T

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Introduction

1.  The plaintiff commenced this action in September 2013 seeking principally the specific performance of a verbal agreement allegedly made in mid- or late-April 2013 (“the alleged Apr 2013 agreement”).

2.  The plaintiff has been a major shareholder of a listed company China Zenith Chemical Group Ltd (“China Zenith”) holding not less than 20% of China Zenith shares.

3.  The defendant has been an investor engaged in investing and/or trading in the stock markets in Hong Kong, the US, Japan and Singapore.  There is evidence suggesting he has quite some experience in stock trading.

4.  Mr Tsang is in effect the person controlling Oxley Investment Co Ltd, which is in the business of stock investment in Hong Kong and elsewhere (respectively “Tsang” and “Oxley”).  For the purpose of this action, because the acts of Oxley were in essence the acts of Tsang, Tsang will be referred to below even though in strict legal terms Tsang acted through Oxley.

Background

5.  Although this has not been so stated expressly, it seems the people connected with China Zenith (for this purpose, this would include the plaintiff) in 2013 were thinking of ways to enable the stock price to properly reflect the value of China Zenith (the last-mentioned phrase is another way of saying the price of China Zenith shares were considered to be undervalued by the stock market).

6.  It was probably for this reason the plaintiff entered into a discussion with the defendant, who the plaintiff was given to understand was a “market maker” (that is, someone who has been known to be able to promote stock prices) (this, however, is not admitted by the defendant).

7.  Irrespective of the real (or precise) reason for doing so, the discussion led to China Zenith entering into two almost identical written agreements with the defendant and Tsang (the agreement with the defendant will be called “the Mar 2013 written agreement” while that with Tsang will be called “Tsang’s agreement” below). It is the plaintiff’s case the defendant (and Tsang) later entered into the alleged Apr 2013 agreement (see para 11 below).

The Mar 2013 written agreement

8.  On 12 March 2013, China Zenith entered into the Mar 2013 written agreement (and Tsang’s agreement).  The following terms are important for present purposes:

(a) China Zenith agreed to issue, and the defendant and Tsang agreed to subscribe, unlisted warrants at $0.002 per share;

(b) the unlisted warrants would confer on the defendant and Tsang a conditional right to subscribe China Zenith shares at $0.19 per share;

(c) the conditions for the subscription right were (1) China Zenith shares should close at $0.30 or above, and (2) the said right was exercisable within 15 months from the issue of the unlisted warrants.

The maximum number of China Zenith shares which could be subscribed was 112 million under the Mar 2013 written agreement (and the same for Tsang’s agreement).

9.  In practical terms, if the China Zenith shares were (and upon their being) fully subscribed by the defendant and Tsang:

(1) China Zenith would obtain capital investment to the sum of $42.56 million;

(2) the defendant and Tsang would each be holding 112 million China Zenith shares worth not less than $0.30 each.

In relation to sub-para (2) above, the monetary gain for defendant and Tsang would each be not less than $12 million (before expenses):

(a) the costs for subscribing each China Zenith share would be $0.192 ($0.002 + 0.19) (total $21.504 million);

(b) the price of each subscribed China Zenith share would be not less than $0.30 (total not less than $33.6 million).

10.  Conceptually, therefore, the rights conferred by the Mar 2013 written agreement and Tsang’s agreement, acquired by each of the defendant and Tsang for $224,000, could bring about a potential gain of about $12 million for each of them within a period of 15 months.

The alleged Apr 2013 agreement

11.  It is the plaintiff’s case he entered into the alleged Apr 2013 agreement with the defendant whereby:

(1) the defendant would deliver the warrant documents to the plaintiff, or someone appointed by the plaintiff, in consideration of (in effect) the repayment of $224,000;

(2) the defendant would not exercise his subscription rights conferred by the Mar 2013 written agreement, nor would he transfer or assign the unlisted warrants.

Witnesses’ credibility and findings of fact   

12.  Because there is no written document which recorded, or which can evidence, the existence (or non-existence) of the alleged Apr 2013 agreement, a proper resolution of what in essence is a factual dispute would require an assessment of the witnesses’ testimony given during the trial.

13.  The approach adopted by the courts for assessing credibility has been set out in some of my earlier decisions.  See, for example, the decisions in Chiu Chi Tong v Lau Chong Sai & Another, HCA 765/2002 (para 28); Yu Ming Investment Ltd v Peng Ru Chuan, Richard, HCA 814/2002 (para 13); 林傳龍對謝巧玩, HCA 1443/2011 (19 December 2014) (para 15) and Star Glory Investment Ltd v Kai Tuo (HK) Technology Co Ltd and Others, HCA 3523/2002 (13 August 2005) (para 12).  See also what appears to be a similar approach in Esquire (Electronics) Ltd v Hong Kong and Shanghai Banking Corporation Ltd & Another [2007] 3 HKLRD 439, para 135.  The above will be adopted in this action.

14.  I have also borne in mind the approach disapproved by the decision in The Popi M [1985] 1 WLR 948 (see also Ide v ATB Sales Ltd [2008] EWCA Civ 424 (28 April 2008), para 1 to 6; Datec Electronic Holdings Ltd and Others v UPS Ltd [2007] 1 WLR 1325, para 46 to 50).  The impermissible approach was described in the ATB Sales judgment as follows:

“ … a trial judge was not compelled to choose between two theories, where the evidence was unsatisfactory ... it was not possible to proceed on the basis of eliminating the impossible and deciding that the remaining explanation, however improbable, must be the cause ... the concept of proof on a balance of probabilities had to be applied with common sense ... ” (para 3 thereof).

15.  The following witnesses testified at trial:

(a) the plaintiff;

(b) the defendant;

(c) Tsang.

16.  For the reasons given below (and leaving aside the obvious reason of the lack of documents supportive of the alleged Apr 2013 agreement), I disbelieve (and therefore reject) the plaintiff’s testimony and accept the testimony of the defence witnesses as credible and reliable (in particular, as regards the dispute relating to the alleged Apr 2013 agreement).

17.  As has been summarized in para 8 to 10 above, the Mar 2013 written agreement and Tsang’s agreement must have been quite an attractive investment opportunity for the defendant and Tsang (the defendant testified to the effect it was a reasonably attractive deal; Tsang agreed to the suggestion (put during cross-examination) that it was an attractive deal; judging from the way in which the plaintiff cross-examined the defence witnesses, he does not dispute that it was an attractive deal).

18.  The main reason put forth by the plaintiff to explain why the defendant (and Tsang) would agree to the alleged Apr 2013 agreement is that the price movements of the China Zenith up to mid- or late-Apr 2013 were so unsatisfactory to make them sufficiently disappointed (or pessimistic) to in effect “abandon” the Mar 2013 written agreement (and Tsang’s agreement).

19.  According to the plaintiff, there were several announcements published by China Zenith which were so favourable as should make the China Zenith share price soar noticeable (they were put to the defence witnesses during cross-examination):

(1) dated 12 March 2013 (China Zenith entered into the Mar 2013 written agreement and Tsang’s agreement);

(2) dated 11 April 2013 (China Zenith entered into a framework joint venture agreement to develop a coal mine project (or projects));

(3) dated 18 April 2013 (China Zenith granted 3-year share options in effect to its top management personnel).

(collectively “the Apr 2013 announcements”)

20.  Before considering each of the Apr 2013 announcements (see para 22 to 31 below), I pause to note a change of the plaintiff’s case regarding when the meeting which supposedly led to the alleged Apr 2013 agreement was held:

(a) the statement of claim dated 10 January 2014 stated that it was in late-April 2013 (para 6 thereof);

(b) the plaintiff’s witness statement dated 7 April 2016 stated that it was in late-April 2013 (para 11 thereof);

(c) the plaintiff’s supplemental witness statement dated 27 February 2017 was rather ambiguous as to whether it was mid- or late-April 2013 (para 11 and 14 thereof), but was still inclined towards the meeting having been held at the end of April (para 14 thereof stated that, by the time of the meeting, the plaintiff was aware of the closing price of China Zenith shares up to 30 April 2013).

21.  By the time of trial, however, the plaintiff seemed to have decided that the said meeting was more likely to have been held in mid-April 2013 (plaintiff’s opening, para 4 (p 5)).  As will become apparent (in para 31 to 32 below), this appears to reflect a “tailoring” of this part of the plaintiff’s case to support his case summarized in para 18 above.

22.  The plaintiff pointed out during cross-examination that, despite the (supposedly) favourable Apr 2013 announcements, the China Zenith shares traded within a relatively narrow price range instead.  However, the defendant disagreed that the said announcements were necessarily favourable to China Zenith shares.  Tsang testified in effect that he was unsure if the Apr 2013 announcements were noticed by the stock market (noting that the China Zenith share price did not change much); he also refrained from saying whether they were viewed favourably by the stock market, preferring to limit to his own view (to the effect that the announcement dated 18 April 2013 might reflect the top management’s confidence in China Zenith).

23.  The announcement dated 12 March 2013 (concerning the Mar 2013 written agreement and Tsang’s agreement) (para 19(1) above) stated (among other things) that China Zenith had agreed to issue a total of 224 million shares to the defendant and Tsang (which would be about (but less than) 10% of the then existing shares).  The said announcement also stated (under “Reasons for the Issue of Warrants and Use of Proceeds”):

“… the issue of Warrants would be a good opportunity to raise further capital … The net proceeds from the Warrant Subscriptions are approximately ($448,000) … will be applied as the general working capital of the Group. Any additional proceeds … upon the exercise of the subscription rights … up to a maximum amount of approximately HK$42.56 million will be applied as the general working capital of the Group.” (emphasis supplied)

24.  The purpose for raising the capital, stated in the said announcement (quoted above), can be understood to mean that the China Zenith Group was in need of “general working capital”. A business operation which is running short of general working capital is usually not viewed with favour by anyone conversant with commerce.  This, one cannot properly conclude this announcement was necessarily positive news without considering the other aspects of China Zenith’s operation.

25.  In addition, the Mar 2013 written agreement (and Tsang’s agreement) might ultimately result in about 224 million new China Zenith shares being issued.  This would have the effect of “diluting” the existing shareholdings (in other words, reducing the worth of each share’s net asset value).

26.  The announcement dated 11 April 2013 (concerning the contemplated coal mine project (or projects)) (para 19(2) above) was stated to be a framework agreement only.  It also mentioned that a formal joint venture agreement was expected to be signed later.  What must have been equally important to any seasoned investor is what it has not mentioned:

(1) whether the coal mine operation was expected to be profitable (and if so, details of the expected profit);

(2) (as has been pointed out by Tsang) coal has not been the favoured source of energy in more recent times.  Such being the background, it is hard to understand why China Zenith has not given any reason for concluding that such a project (or projects) would be a good business opportunity.

With the matters set out in sub-para (1) and (2) above in mind, one can understand why the defence witnesses have disagreed, or not agreed fully, with the plaintiff’s suggestion that this announcement was necessarily positive news for China Zenith.  At most, this announcement may prompt the stock market to begin to investigate into the business prospect of China Zenith.

27.  Finally, as regards the announcement dated 18 April 2013 (concerning the grant of share options) (para 19(3) above), Tsang qualified his agreement that this was positive news by pointing out that the grant of share options to top management personnel was common among listed companies. 

28.  I also note that the exercise price of the share options was stated to be $0.204 per share.  On 18 April 2013, the closing price of China Zenith shares was $0.203.  Thus, on that day, the share options were exercisable at a premium of about $0.001 per share (or a premium of 0.5%).

29.  Similar to para 25 above, the share options, if exercised ultimately, would also result in a “dilution” of China Zenith’s existing shareholdings.

30.  Finally, the closing prices of China Zenith shares in the several trading days following were:

(a) $0.206 (19 April 2013);

(b) $0.203 (22 April 2013);

(c) $0.206 (23 April 2013);

(d) $0.206(24 April 2013);

(e) $0.208 (25 April 2013);

(f) $0.217 (26 April 2013);

(g) $0.22 (29 April 2013);

(h) $0.216 (30 April 2013).

(See also a similar period being mentioned at para 14, plaintiff’s supplemental witness statement)

When the average closing share price is compared to a similar earlier period (for example, the average closing share price of the 8 trading days before (and up to) the 12 March 2013 announcement (para 19(1) above)), there was a price appreciation of about 11% (in about 1-½ months).  It has to be noted that neither the defendant nor Tsang has expressly mentioned the above share price movements in their testimony.  But the real significance of the said average price gain is whether it tends to support the plaintiff’s case that, by mid- or late-April 2013, the defendant (and Tsang) became sufficiently pessimistic in the China Zenith shares (para 18 above).

31.  Accordingly, while there may be a proper basis for suggesting that the announcement dated 18 April 2013 (and the subsequent share price movement up to late-April 2013) was positive news for China Zenith, this also creates a difficulty for this part of the plaintiff’s case: there does not appear to be any valid basis for saying (by the end of April 2013) the share price movement following this announcement would promote pessimism (or dissatisfaction) on the part of the defendant or Tsang (such as would make them “abandon” the Mar 2013 written agreement and Tsang’s agreement (instead of “wait and see” (after all, the Mar 2013 written agreement has given the defendant a 15-month period to decide on this)).

32.  The change in the plaintiff’s case regarding the date of the meeting leading to the alleged April 2013 agreement (para 20 and 21 above) may have something to do with para 31 above.

33.  To summarize, irrespective of whether the meeting (which the plaintiff asserts led to the alleged Apr 2013 agreement) was held in mid- or late-April 2013, the plaintiff’s case would face difficulties because:

(1) if the said meeting was held in mid-Apr 2013, neither the announcement dated 12 March 2013 nor that dated 11 April 2013 was sufficiently favourable as would likely provoke a noticeable share price rally (the discussion set out in para 22 to 26 is repeated);

(2) if the said meeting was held in late-April 2013, the discussion in para 27 to 31 above is repeated.

34.  In view of the matters above, I do not accept that there is proper evidence that the defendant or Tsang became sufficiently pessimistic about their investment by way of the Mar 2013 written agreement (and Tsang’s similar agreement) to enter into the alleged Apr 2013 agreement.  The plaintiff’s testimony to such effect is rejected.

35.  The above should be sufficient for the purpose of making findings of fact in this action.  There are, however, two unpleaded matters which the plaintiff has raised by way of cross-examination.  I shall therefore deal with them as well for completeness.

36.  First, the plaintiff suggested that:

(a) there was some kind of understanding between the top management of China Zenith and the defendant (or even a condition for entering into the Mar 2013 written agreement and Tsang’s agreement) in that the defendant was to provide his “expertise” to help China Zenith “reflect the true value of its shares” (the plaintiff also suggested that this was why the Mar 2013 written agreement and Tsang’s agreement were favourable to the defendant and Tsang);

(b) the defendant subsequently considered that the top management of China Zenith did not cooperate with him in this regard.

37.  These have not been pleaded.  There does not appear to be proper evidential basis to support them (save perhaps hints about them in the plaintiff’s testimony). They have been denied by the defendant and Tsang.  The precise methodology for “reflecting the true value” of China Zenith shares remains unspecific (or unknown).

38.  The plaintiff clarified during closing submissions he does not contend the “understanding” between China Zenith and the defendant (para 36(a) above) was intended to be legally binding.  In addition to this ambiguity, there is possibly another problem concerning this “understanding”: if in fact the real intention for the Mar 2013 written agreement were for the defendant to help China Zenith “enhance” its share price (para 5 and 36 above), that underlying purpose would appear to be share price-sensitive information which might need to be disclosed in the 12 March 2013 announcement (the failure to do so might have been an impropriety).

39.  Secondly, according to parts of the plaintiff’s testimony:

(1) Tsang’s rights conferred by Tsang’s agreement were transferred to a Mr Lo (who the plaintiff described to be his good friend) (“Lo”).  Lo paid Tsang $224,000 for the transfer;

(2) $224,000 was paid for by Lo himself (and no one else).  That sum was a small sum for Lo and Lo did so to “do the plaintiff a favour”;

(3) it was the understanding between Lo and the plaintiff that Lo would not exercise the rights he acquired from Tsang.

40.  Several things are noted:

(a) rather unusually, it was the plaintiff, rather than the top management of China Zenith, which seems to be involved (mostly if not exclusively) in the discussion leading to the alleged Apr 2013 agreement (and the transfer of the rights conferred by Tsang’s agreement);

(b) the reason for the plaintiff to do so appears to be his discovery that the reputation of the defendant and Tsang was such that it would not be advantageous for their names to be connected with China Zenith.  Because the plaintiff’s only connection with China Zenith was his substantial shareholding, it can be inferred the “disadvantage” the plaintiff had in mind was likely to be related to the China Zenith share price;

(c) there is no evidence suggesting that either China Zenith or the plaintiff has thought of seeking other investors to replace the defendant and Tsang to provide “general working capital” to the China Zenith Group.

41.  Taking into account the matters mentioned in para 40 above, it is almost part of the plaintiff’s case that there was no genuine commercial need for the Mar 2013 written agreement and Tsang’s agreement.  But there is no plea that the Mar 2013 written agreement and Tsang’s agreement were a sham; nor indeed has it been suggested that they were a mere façade.

42.  However, because they are not matters pleaded, or matters which the parties have sufficiently investigated into during trial, it is inappropriate for the court to infer too much into this aspect.  Suffice it to say they have been considered when assessing credibility.

43.  By reason of the above, I find as a fact that there was no alleged Apr 2013 agreement.

44.  As regards the defence witnesses:

(1) he is described in the plaintiff’s closing submissions as “clearly evasive, defensive and argumentative”.  It is unlikely for someone of such character to be easily swayed from his original opinion (such as the financial viability of his investment decisions);

(2) despite the plaintiff’s contention to the contrary, there is no immediately known reason for Tsang to perjure to help the defendant advance a false case, having transferred to Lo his rights by Tsang’s agreement.

Tsang testified that he agreed to transfer the rights conferred by Tsang’s agreement to Lo only because of the plaintiff’s threat (which Tsang considered to be a threat to his personal safety).

45.  The plaintiff contends that the letters dated 20 May 2013 from the defendant’s solicitors support the existence of the alleged Apr 2013 agreement.  In this connection, he relies on the part of the letters which read:

“… [the plaintiff has] in or about the first half of April, 2013 repeatedly telephoned and approached [the defendant] with a view to exerting influence and/or force on [the defendant] in his investment in [China Zenith] …”.

I disagree.  First, the letters did not mention any meeting (which allegedly resulted in the alleged Apr 2013 agreement).  Secondly, the statement is too general and imprecise for any inference to be properly drawn from it.

Conclusion

46.  The plaintiff’s claim is dismissed.

Other matters

47.  An order was made on 7 April 2014 in another civil claim concerning the Mar 2013 written agreement (HCA 1331/2013, commenced in July 2013). The plaintiff herein is the claimant therein (together with China Zenith (as the defendant therein)) while the defendant herein is the plaintiff therein. Para 1 of the said order reads:

“[China Zenith] is entitled to withhold the issue and allotment of Shares until the final resolution of [this action] and is obliged to comply with the Judgment of [this action] and the consequential order made by the Judge hearing the same” (emphasis supplied)

48.  Despite the language used in the quoted part of the said order, the parties herein ask me to ignore it (and hence not to make any order in relation thereto) (technically, HCA 1331/2013 is of course not otherwise brought before me at the time of trial).

49.  The parties’ written submissions also mentioned various other points.  These have not been expressly set out or dealt with above.  This is so only because of the need to balance between the length of the judgment and its easier comprehension.  It does not mean those other points are thought to be irrelevant (or have been overlooked).  To avoid doubt, those other points have also been considered.

Costs order

50.  The parties herein agree that the usual rule that costs should follow the event should apply.  There will accordingly be a costs order that the costs of this action (including any reserved costs) be paid by the plaintiff to the defendant to be taxed if not agreed.