FINEDON INTERNATIONAL LTD. v. PROFIT CHART INDUSTRIES LTD. AND OTHERS

HCMP 6549/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 6549 OF 2001

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DECISION

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1. This is an application by the Plaintiff, the 88% shareholder of Success Plan Ltd ("the Company") for an order that an extraordinary general meeting of the Company be convened and held under s.114B Companies Ordinance for the purpose of considering and, if thought fit, passing one or more of 28 proposed resolutions that have been set out in a schedule to the Originating Summons, with a further direction, amongst others, that 1 member of the Company present in person or by proxy be deemed to form a sufficient quorum at the EGM.

2. The background of the application is complicated but can for present purposes be summarized as follows.

The Company

3. The Company was incorporated in 1991. Its shareholders were the 1st Defendant, which is controlled by Chan Wai Sun ("Chan"), and a company said to be associated with it called Sharp Wealth. (There is also a 0.01% shareholding held by the 2nd Defendant, who is Chan's wife. It would appear that at least for present purposes, the 1st and 2nd Defendants have been regarded as acting together).

4. Chan and Tong, who are both associated with the 1st Defendant, were appointed directors.

Plaintiff's entry into the Company

5. In June 1993, Sharp Wealth withdrew from the Company and the Plaintiff, a wholly-owned subsidiary of China Everbright International Trust and Investment Corporation ("EITIC"), acquired 82% of the shareholding of the Company.

Shareholders' Agreement

6. There was a Shareholders Agreement dated 4 June 1993 which set out in detail the parties' agreement as to the number of directors to be appointed by the respective shareholders. It was agreed in Clause 2.4(C) that

"notwithstanding anything provided in the Articles, the Shareholders agree with each other that unless and until otherwise agreed in writing by all the Shareholders, the Board shall consist of 7 Directors who shall be appointed and removed as provided in this clause 2" (emphasis supplied).

7. Clause 2.4(D) provided that

"so long as [the 1st Defendant] shall continue to hold not less than 18% of the issued share capital in the Company, [the 1st Defendant] shall have the right to appoint and maintain in office 2 Directors to the Board and to remove any Director so appointed and appoint any Director in his place (such appointment and removal to be notified in writing to the Company and to the other Shareholders)" (emphasis supplied).

8. Clause 2.4(E) provided similarly that

"so long as [the Plaintiff] shall continue to hold not less than 82% of the issued share capital in the Company, [the Plaintiff] shall have the right to appoint and maintain in office 5 Directors to the Board and to remove any Director so appointed and appoint any Director in his place ",

with similar provisions for notification to the Company and the other shareholders.

9. Clause 2.4(F) provided that

"within 7 days after receipt of notice pursuant to clause 2.4(D), 2.4(E), the parties shall join in procuring (so far as it lies within their respective powers) that such action is taken as is necessary under the Articles to effect the appointment or removal concerned. Upon any party ceasing to be a shareholder of the Company, the directors nominated or appointed by such party pursuant to clause 2.4(D) and 2.4(E) shall automatically cease to hold office" (emphasis supplied).

10. Clause 2.4(G) further provided that

"the minimum number of directors required to form a quorum for meetings of the Board shall be 3, 1 of whom shall be a Director appointed by [the 1st Defendant] pursuant to clause 2.4(D), 2 of whom shall be Directors appointed by [the Plaintiff] pursuant to clause 2.4(E)".

Silver Challenge's entry into the Company

11. In December 1993, a company called Silver Challenge Finance & Investment Ltd ("SC") acquired shares in the Company, with the result that the proportionate shareholding of the Company was that the Plaintiff held 47%, SC 35%, the 1st Defendant 17.99% and the 2nd Defendant 0.01%.

Supplemental Deed

12. A Supplemental Deed dated 17 December 1993 was signed by the Company and the 4 shareholders, which amended certain provisions of the Shareholders Agreement. The number of directors remained at 7 directors. However, whilst clause 2.4(D) (i.e. the 1st Defendant's right to appoint 2 directors) was not altered, there was an alteration to clause 2.4(E), i.e. the Plaintiff's right to appoint 5 directors.

13. Clause 2.4(E) was amended to the effect that so long as the Plaintiff shall continue to hold not less than 47% of the issued share capital of the Company, it shall have the right to appoint and maintain 3 directors.

14. A new clause 2.4(EE) was inserted to the effect that so long as SC shall continue to hold not less than 35% of the issued share capital of the Company, it shall have the right to appoint and maintain 2 directors.

15. Clause 2.4(F) was amended to the effect that it included SC, and Clause 2.4(G) was amended to the effect that of the quorum of 3 directors, there should be 1 each from the Plaintiff, the 1st Defendant and SC.

Appointment of directors by SC and 1 director by Plaintiff

16. It is not disputed that on 1 March 1994, Zhao Zhongyin ("Zhao") and Dong Fen ("Dong"), SC's appointees, were appointed directors of the Company. It is also not disputed that on 11 April 1994, Wu Tie ("Wu"), the Plaintiff's appointee, was appointed a director of the Company.

SC's withdrawal

17. After some further transfers of shares among the shareholders, in September 1997 SC withdrew from the Company. It disposed of its shares to the Plaintiff, with the result that the Plaintiff became shareholder of 88% of the shares of the Company, with the 1st Defendant's shareholding at 11.99% and the 2nd Defendant, 0.01%.

18. There was however no supplemental deed or agreement between the Plaintiff of the one part and the 1st and 2nd Defendants of the other part.

Appointment of director by Plaintiff in 1998 (challenged)

19. On 19 August 1998, there was a purported board meeting of the Company whereby Li Haifeng ("Li") was appointed a director of the Company. Li is the Plaintiff's appointee.

20. However, it is alleged by the 1st and 2nd Defendants (and not disputed by the Plaintiff) that none of the 1st Defendant-appointed directors was present at that board meeting, rendering that meeting inquorate under Clause 2.4(G).

21. Accordingly, the 1st and 2nd Defendants have now challenged Li's position as a director.

Appointments of 2 directors by Plaintiff (not challenged)

22. On 22 December 1998, however, there was another board meeting of the Company, at which the 1st Defendant-appointed directors were present, at which Fang Lei ("Fang") and Zhu Ronghui ("Zhu"), the Plaintiff's appointees, were appointed directors of the Company. It is noted that Li was listed as being present at this board meeting, without any differentiation of his position from that of the directors present. There is no dispute as to Fang and Zhu's appointments.

Appointments of directors by Plaintiff (challenged)

23. On 2 June 2000, there was a purported board meeting of the Company whereby Ma Yanli ("Ma") and Zang Qiutao ("Zang"), the Plaintiff's appointees, were appointed directors, the resignations of 2 directors Wu Yongjia and Liu Jia being tabled at the same time.

24. The only persons present at the meeting were Fang and Li. None of the 1st Defendant - appointed directors was present. Accordingly, the 1st and 2nd Defendants have also challenged these appointments on the basis that the board meeting was inquorate under clause 2.4(G).

Present position as to constitution of board

25. As a result of the above, the constitution of the board of the Company is that:-

(i) 2 directors have been appointed by the 1st Defendant;

(ii) 3 directors (viz. Wu, Fang and Zhu) have been appointed by the Plaintiff without challenge;

(iii) the appointments by the Plaintiff of 3 other persons (viz. Li, Ma and Zang) as directors have been challenged by the 1st and 2nd Defendants by reason of the quorum provision in clause 2.4(G);

(iv) 2 directors had been appointed by SC (viz. Dong and Zhao). Both the Plaintiff and the 1st and 2nd Defendants have appeared (at least at times) to assume that they are still directors, although that view may be questionable because Clause 2.4(F) provides that they would have automatically ceased to hold office upon cesser of SC's shareholding. They have not responded to correspondence and have not attended board meetings in September and October 2001.

26. However, of the 3 directors appointed by the Plaintiff without challenge, Wu (who has been released after a term of imprisonment) has not been traced. That leaves 4 directors, 2 appointed by the Plaintiff and 2 appointed by the 1st Defendant.

Litigation between the parties

27. The parties are in litigation with one another arising from the failure of a project in Qingdao PRC.

28. Apparently, the Company was originally interested in a project in Qingdao by way of a 35% shareholding in a company called Qingdao Success Real Estate Co Ltd ("QS RE").

29. Under the Shareholders Agreement however, it was agreed that the 1st Defendant was exclusively entitled to the profits and solely responsible for liabilities and obligations arising from this project.

30. However, it has been alleged by the 1st Defendant that this agreement in the Shareholders Agreement was subsequently varied by a Chinese Supplemental Agreement dated 15 December 1993 purportedly signed by Wang Yake as representative of the Plaintiff, whereby it was agreed (amongst other things) that the shareholding in QS RE was "included", and that the Plaintiff agreed to repay on behalf of the 1st Defendant a RMB 35m loan made to the Company by Shanghai Huaxia Success Plan Industries Co Ltd ("Shanghai Success Plan"), which is 70% owned by the Company.

31. The authenticity of the alleged Chinese Supplemental Agreement has been denied by the Plaintiff, which has disavowed the alleged agreement. The Company was itself not a party to the alleged Chinese Supplemental Agreement.

HCMP 3653/01

32. In HCMP 3653/01, the 1st Defendant and Sharp Wealth are suing the Plaintiff and the Company in relation to the loan of RMB35m. It is said that the issue is whether the Plaintiff or the 1st Defendant is liable for the loan, and it seems to be accepted that the Company has been made a party only to bind it, no substantive relief having been sought against it.

HCA 3561/01

33. In HCA 3561/01, Shanghai Success Plan is suing the Company for repayment of a loan of RMB 132m. The Company has filed a Defence and has issued a Third Party notice against the 1st Defendant, and the 1st Defendant has in turn, issued Fourth Party proceedings against the Plaintiff.

Alleged potential negligence proceedings

34. Apart from these two proceedings, it has also been alleged by the 1st Defendant that there may be further proceedings arising out of the failure of the Qingdao project. The 1st Defendant alleges that the failure of the project was due to "negligence" on the part of EITIC (the Plaintiff's holding company) or a company within its group, and that consequently, the Company has a claim against EITIC or a company within its group. There are however, as yet no proceedings issued in respect of this alleged "negligence" and little in the way of evidence in the materials before me.

Disputes over constitution of board

35. Be that as it may, the effect of the existing disputes between the parties over the Qingdao project is that since September 2001, there have been disputes as to the proper constitution of the Company's board of directors.

36. This affects the authority of actions undertaken or intended to be undertaken by the board, including instructions given in litigation, whether extant or potential. To date, Woo Kwan Lee & Lo ("WKLL") had been instructed as solicitors for the Company in both proceedings, but the 1st and 2nd Defendants object to their involvement as WKLL are said to be EITIC's legal advisers and would be conflicted out.

37. The Plaintiff's case is that it is entitled to appoint 5 directors, whether by way of reversion to the Shareholders Agreement before SC joined the Company, or by stepping into SC's shoes (SC having had the right to appoint 2 directors). This is disputed by the 1st and 2nd Defendants whose case is that under the Supplemental Deed, the Plaintiff only had the right to appoint 3 directors. They have suggested that the remaining 2 vacancies on the board could be filled by independent directors.

No meetings

38. In an attempt to resolve this dispute, the Plaintiff has sought ratification of the appointments of those directors it had appointed and of their acts, including instructions given to WKLL. The 1st and 2nd Defendants have however refused to meet to resolve this issue, on the basis that the Plaintiff would be likely to use its majority shareholding to pass resolutions favourable to itself.

39. The Plaintiff, using its shareholding, had on 12 October 2001 requisitioned for an EGM to be convened by the board, but the dispute over the constitution of the board meant that no board meeting was held to consider that requisition. The Plaintiff then on 5 November 2001 requisitioned an EGM of the Company to be held on 29 November 2001, but the quorum under the articles required the presence of 2 shareholders. The 1st and 2nd Defendants did not attend the meeting on 29 November 2001, which was rendered inquorate.

40. The Plaintiff accordingly issued the present proceedings in December 2001 for an order that a meeting be held at which the presence of 1 shareholder only would be sufficient, on the basis that it is impracticable to call an EGM otherwise.

The law

41. Section 114B provides:-

"if for any reason it is impracticable to call a meeting of a company in any manner in which meetings of that company may be called, ... the court may, ... on the application of any member of the company who would be entitled to vote at the meeting, order a meeting of the company to be called, held and conducted in such manner as the court thinks fit, and where any such order is made, may give such ancillary or consequential directions as it thinks expedient, including a direction that 1 member of the company present in person or by proxy shall be deemed to constitute a meeting".

42. It is clear that first, it should be shown that it would be impracticable to call a meeting of the Company; secondly, it is a matter of discretion whether the Court would order a meeting.

Impracticability of calling a meeting

43. It is well-established law that the refusal of another shareholder to form a quorum for a meeting is an example of a situation where it would be impracticable to call a meeting of the company (e.g. in re El Sombrero Ltd [1958] 1 Ch 900). A quorum requirement does not confer a veto power on a minority shareholder by his ability to prevent a shareholders' meeting from being held (Re Opera Photographic Ltd [1989] BCLC 763), unless the minority shareholder has a special right attached to his shares rendering his presence at meetings indispensable (eg Harman v BML Group Ltd [1994] 1 WLR 893).

44. In other words, a numerical deadlock of shareholders can be broken by a court-ordered meeting of 1 shareholder, although it would be unlikely for a meeting of 1 shareholder to be ordered to break a shareholding deadlock (eg a 50-50 shareholding in Re Ma On Shan Whitehead Golf Centre Ltd [2001] 4 HKC 582, cf a majority shareholding in Re Opera Photographic Ltd).

45. It is evident in the present case that the 1st and 2nd Defendants have refused to attend the EGM in November 2001 and that it is impracticable for a quorate meeting to be held.

Discretion

46. The question then is whether the Court would exercise its discretion to order a meeting in all the circumstances. The 1st and 2nd Defendants have submitted that the Court should not do so, because at the meeting the Plaintiff would exercise its superior voting powers to oppress the minority, in the form of ratifying the appointments of directors who had been appointed in alleged breach of the Shareholders Agreement and Supplemental Deed (by way of manner of appointment and the number of directors), and the retainer of solicitors who should be conflicted out.

47. The possibility that unfair prejudice might result from a court-ordered meeting is a matter that the Court would take into account, because the Court would not lend its aid to the commission of any acts that would be unfairly prejudicial to any shareholders. That is not to say however that the fact that a petition has been presented would in all circumstances defeat an application for a court-ordered meeting (see eg Re Whitchurch Insurance Consultants Ltd [1993] BCLC 1359).

48. In the present case, if the materials before the Court showed that all the resolutions that the Plaintiff was seeking to pass at the meeting were clearly oppressive, then the Court would not lend its aid to it by ordering a meeting. However, that is not the case here. Under the articles, the Plaintiff has a right to call upon the 1st and 2nd Defendants to pass a resolution to remove the Plaintiff's appointee Wu and to procure the appointment of another person in his place. As noted above, under clause 2.4(F), the parties "shall join in procuring (so far as it lies within their respective powers) that such action is taken as is necessary under the Articles to effect the appointment or removal ...", and it has not been disputed by the 1st and 2nd Defendants that the Plaintiff is entitled to appoint 3 directors.

Meeting ordered

49. Accordingly, I take the view that a meeting should be ordered under s.114B. Once it is accepted that a meeting has to be called, it is for the parties to consider what other matters they wish to put on the agenda.

50. I do not think it would be right for the Court, at an application of a limited nature such as s.114B, to decide on the parties' substantive rights, such as whether on the true construction of the Supplemental Deed, or whether there could be an implied term, that the Plaintiff should have the right to appoint 5 directors after acquiring SC's shares.

51. In my view, that is for the parties to resolve, whether by way of directors resolutions under article 13 or by way of an EGM. It is not for the Court to say how business should be conducted in advance. Should any directors not be acting in the best interests of the Company, they would be personally liable for breach of fiduciary duties. Should any shareholders take any actions that would be oppressive to other shareholders, the prejudiced shareholders would be entitled to present petitions for unfair prejudice or for a just and equitable winding-up of the Company.

52. Since the only issue now before the Court is whether it should order a meeting of the Company to be held to get it out of a "frozen" state, it should confine itself to that consideration. It is neither necessary nor desirable for the Court at this stage to go any further to examine, in advance, the fairness of individual resolutions, as that would in effect pre-empt future considerations of the matters in the preceding paragraph.

Order

53. In the circumstances, I would make an order in terms of paragraph (1) of the Originating Summons, save that the purpose of the meeting would be for considering and if thought fit passing a resolution for the replacement of Wu by a person to be appointed by the Plaintiff, and of paragraphs (2) and (3). I will give liberty to apply to both parties in respect of paragraph (4).

54. As for costs, I note that the Plaintiff has succeeded in getting a meeting ordered, but not for the 28 draft resolutions that it was hoping to get passed. As for the 1st and 2nd Defendants, they had indicated, albeit late and far from clearly, that they did not challenge the Plaintiff's right to appoint 3 directors, and they had not offered a meeting for that limited purpose. In the circumstances, I take the view that the proper costs order nisi would be that both parties should bear their own costs.