DEACON TE-KEN CHIU v. RONALD LI-KAI CHU AND OTHERS

BETWEEN

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JUDGMENT

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Kempster, JA:

1. This is an appeal from a judgment of Nazareth J given on 29 January 1991 whereby he refused a motion to dismiss or strike out a petition as disclosing no reasonable cause of action or constituting an abuse of the process.

2. The petition in question is that of Deacon Te-ken Chiu ("the petitioner") and was filed on 12 April 1990. As against Ronald Li-kai Chu, Pang Big-fei and Tang Fook-tai ("the respondents") he invokes section 168A of the Companies Ordinance (Cap 32), more restricted in its terms than s. 459(1) of the English Companies Act 1985, and, "with a view to bringing to an end the matters complained of", seeks an order directing them, or Ronald Chu alone, to buy his shares in Fan Ling Theatre Ltd ("the company") at a fair price to be assessed on the basis of the shareholdings of the parties prior to 10 March 1989. Alternatively he seeks an order that the three respondents, or Ronald Chu alone, should sell their, or his, shares in the company to him at a fair price to be assessed on the same basis but allowing credit for capital contributions made to the company since 10 March 1989. It is to be observed that pursuant to article 32(iii) and (v) of the company's articles of association the petitioner could instead have given the company a "transfer notice" in respect of his shares specifying the sum he fixed as the fair value and submitting himself to the certificate of the company's auditor for the time being as to such value in the event of "the purchasing member" disputing his figure. However, the petitioner was entitled to take the view that the auditor might apply a discount by reason of what had become his minority shareholding and, presuming the conditions of s. 168A satisfied, to seek relief from the court. Re Abbey Leisure Ltd [1990] BCC 60.

3. Since the formation of the company on 6 January 1959, when the relationship between the petitioner and Ronald Chu was that of quasi partners with equal shareholdings, a cinema has been built and a related business carried on. On 10 March 1989 the capital was increased from $1 million to $2 million. Although named in the articles of association as one of "the first directors of the company" and elected chairman of the board in the earlier years the petitioner has never personally attended a director's nor, possibly, a general meeting. As a result, no sanction of the board having been given and no alternate director having been approved as required by article 76 he may well, on or about 23 January 1990, have ceased to be a director pursuant to article 73 (e). For that matter the petitioner, and the respondents as well, might be thought to have ceased to be directors on the expiry of two years from the date of their respective appointments pursuant to articles 69 and 78. On the other hand it may be that all were or are to be regarded as directors de facto or may rely upon the terms of article 79 whereby re-election is deemed to have occurred.

4. These consideracions bring me to one of the matters relied upon as constituting "unfairly prejudicial conduct" namely the exclusion, after notice of objection, of the petitioner's representatives from board meetings held on 21 July and 4 and 12 December 1989 respectively. As paragraph 39 of the petition rightly states this behaviour was "entirely contrary to the company's previous practice of accepting Madam Leung and Mr. Tam as alternative directors for the purposes of board meetings." No objection was made to the attendance of these persons or one of them at board meetings held on 20 December 1988 and 15 February 1989. While I cannot think that strict compliance with the articles of association of a company would normally entitle a member to complain, in the instant case, where no reason for the change of attitude is given and the relations between the parties were so poor, the allegation cannot be regarded as insignificant or incapable of supporting the petitioner's claim for relief; particularly as the ostensible minutes of meetings of the company and of the board prior to 1982 appear to reflect matters agreed by exchange of letters or by telephone. There is no substance in the submission, founded on article 84, that the petitioner was entitled to appoint representatives to attend board meetings as proxies rather than as alternates and that their exclusion was therefore unlawful. If by "proxy" were to be understood the representative or representatives of an absent director entitled to vote on resolutions by reason of article 87 the detailed provisions of article 76 would be otiose.

5. The other matter relied upon by the petitioner is, to quote paragraph 35 of the petition, that

Naturally he was concerned at the effect on the balance of shareholdings and of voting rights as between Ronald Chu and himself and can reasonably argue that his legitimate expectations were frustrated.

6. I do not consider it necessary to rehearse the petitioner's response to the offer of new shares made to him by the company on 28 March 1989 as provided by and in conformity with article 10. The provision for payment was authorised neither by the general meeting held on 10 March nor by the board. Nonetheless by his communication dated 1 April the petitioner accepted the offer but failed to furnish a cheque. Time was extended but the petitioner failed to meet the later date. He next accepted liability to pay interest on a delayed payment but the parties never achieved a consensus as to the mechanics. The matter rests with a request from Ronald Chu, dated 1 August 1989, for the petitioner to indicate a suitable date for his attendance at a board meeting in order that the position may be reviewed. Perhaps a more accommodating attitude by the arguably provoked respondents would have resolved this somewhat petty dispute long ago.

7. In relation to the maintenance of the proceedings I accept Mr. Litton's general proposition, advanced on behalf of the respondents, that to continue in the prosecution of a petition in the face of a fair offer constitutes an abuse of the process. Re a Company (No 005685 of 1988) ex p Schwarcz (No 2) [1989] BCLC 427. It falls to apply it to the facts.

8. On 14 May 1990 Ronald Chu's solicitors wrote to those acting for the petitioner: -

The petitioner's solicitors responded on 22 June asserting that the independent valuer should take into account the redevelopment value of the land owned by the company. So the matter stood when the proceedings came on for hearing at the end of November. But before they resumed on 14 December two letters were exchanged. On 1 December the petitioner's solicitors gave their understanding of the agreed basis of valuation: -

The respondents' solicitors replied by letter of 5 December: -

It had not been made clear before the last day of the hearing before us that the respondents' offer is contained in the letters of 14 and 18 May 1990. Those letters do not specify the basis of the proposed valuation which, being "non-spearing", no party would readily be able to challenge.

9. Efforts by this Court to close the gap have been unavailing though it is now common ground that the company should be valued as at the date when the valuation is carried out.

10. Turning to the doubts of Nazareth J as to which of the parties should be buyers and which sellers, a critical part of any offer made to a petitioner by a respondent, I would adopt the words of Hoffman J in Re XYZ Ltd [1986] 2 BCC 99 at p 526: -

The petitioner has, for some years, been cast in the role of seller. Not only does his attendance record at meetings of the company and of the board at least suggest that his personal antipathy to Ronald Chu precludes his personal attendance and participation in the continuing business at Fan ling but on 31 December 1987 in a letter to Ronald Chu, he explained: -

This despite the acknowledged fact that he had been a pioneer in the establishment of cinemas in the New Territories.

11. As Hoffman J said in another case: -

Re a Company (No 006834 of 1988), ex parte Kremer [1989] BCLC 365 at p 367. Further, although he has signed related contracts and cheque, the petitioner does not approve of the twin cinema concept, involving a further increase in capital, which the board resolved to pursue on 29 December 1989 and has expressed a willingness to sell to the respondents or to the general public in letters from his solicitors dated 16 May and 7 and 22 June 1990. The purchase of his shareholding is one of the two alternative forms of relief sought in the petition None of the respondents, being the majority shareholders, have expressed a wish to sell. Pang Big-fei has managed the cinema throughout and relies upon an annual bonus and enhanced director's fees deriving from that business for his livelihood. Mr Litton is therefore right to contend that the evidence demonstrates that it is the petitioner who must leave the company. He is not, in my opinion, right in contending that a fair offer has been made for the petitioner's shares. Nor was the learned judge entitled so to find.

12. What might be regarded as a fair basis for valuation as between parties enjoying a normal commercial relationship is not necessarily so as between parties embittered and suspicious after years of dispute in and out of these courts. To be fair, in the sense that the further pursuit of the petition would be so unreasonable as to warrant the drastic remedy of striking out, an offer in the circumstances outlined must be unambiguous and balanced as between competing interests. Neither before Nazareth J nor before us was such an offer available for the petitioner's acceptance; narrow as the differences between the parties are.

13. Looking at the evidence objectively and as a whole it appears that the petitioner may be able to demonstrate that, perhaps for reasons of his own making, the affairs of the company have been conducted in a manner prejudicial to his interests and that he was therefore entitled to commence these proceedings with a view to bringing the matters of which he complains to an end. The respondents accept that relations between the petitioner and themselves have irretrievably broken down. That, together with the conclusion as to the so-called offer relied upon by the respondents, suffices, in my opinion, to determine this appeal from a strike-out decision in the petitioner's favour. I would dismiss it accordingly.

Silke, V-P:

14. I am in agreement with the reasoning and conclusions in the judgment just delivered by My Lord, Kempster JA. I, too, would dismiss the appeal.

Barnett, J:

15. I arrive at the same conclusion as My Lord, Kempster JA, but by a slightly different route. As Mr. Fung was at pains to remind us this appeal involves consideration of the exercise of discretion by the judge below. Authority is hardly necessary for the proposition that this court should not interfere with that exercise unless it is shown that the judge made an error of principle. The hearing below and this appeal revolved principally around two issues. First, the nature of the offer made by the three respondents and the petitioner's failure to accept that offer. Second, who should go, that is to say, which party or parties should sell their shares.

16. Dealing with the latter point first in my judgment the material marshalled before the judge and this court leads ineluctably to the conclusion that it is the petitioner who must go. Once it became apparent that the first respondent was trying to take over the running of the company and to take off in a direction of which the petitioner did not approve, and once it became apparent that lawfully or otherwise the first respondent was determined to block the petitioner's representatives from board meetings, I find it difficult to understand why the petitioner did not see fit to attend personally in spite of his allegedly busy scnedule. I observe that the petitioner has in fact never attended a board meeting personally and has indicated once in correspondence, that is to say the letter of 31 December 1987, that he looked to the respondents to conduct the affairs of the company properly.

17. There is no warrant, in my view, for removing the second and third respondents by compelling them to sell their shares. It would be wholly unsatisfactory to saddle them with a majority shareholder who does not approve the direction the company has taken and who at the very least will be an uncomfortable bedfellow. In relation to that direction it is to be noted that the petitioner opposed it as fundamentally unsound, yet signed substantial contracts for equipment.

18. Finally, I note that only the petitioner has ever shown a willingness to dispose of his shares. Nothing in my view could be more plain and obvious than that the petitioner should go. That the judge was not persuaded of this amounted in my view to an error of principle.

19. Turning to the respondents' offer. Like the judge I find it to have been reasonable. It used article 32 of the memorandum and articles of association of the company, that is to say, the contract between the parties as its basis. But it made three important concessions. First, there should be an independent valuer. Second, there should be no discount for the petitioner's minority shareholding. Third, the petitioner's shares or the valuation to be placed on those shares would be on the basis of his 48 per cent holding before the unhappy increase in capital occurred. That offer even now holds good. It provides for a fair value.

20. The petitioner, however, has been concerned as to the basis of valuation because of the development potential of the land. He is anxious that this should be provided for. He is concerned that if the valuation is "non-speaking", he will have, as the authorities show, little chance of challenging that valuation. Various formulae have been suggested to try to overcome this, but no agreement has been reached. Mr. Litton contended that agreement is not necessary. He said that the valuer need only be instructed to find a fair value, leaving it to the valuer's skill and judgment. The parties themselves can make such submissions as they see fit to the valuer. He said that these are matters of mere mechanics.

21. For my part I do not think that the petitioner's objections can so easily be brushed aside. Valuation of a company's shares is a notoriously subjective exercise. Different valuers often arrive at staggeringly different valuations depending upon their basis of valuation, perhaps an earnings basis, perhaps a net assets basis, and the factors which they have taken into account in coming to their conclusions. If there is not to be an agreement as to the basis for valuation and for a detailed "speaking" valuation, in my judgment the petitioner is entitled to the protection of this court. I think it manifest that the petitioner's refusal to accept the respondents' offer was not unreasonable and that the judge was wrong to hold that it was. Otherwise I agree wholly with My Lord. The appeal should be dismissed.