TAO SOH NGUN (also known as LO TO LI KWAN or LO TO LEE KWAN) v. HSBC INTERNATIONAL TRUSTEE LTD

HCA 3246/2016 & HCA 355/2018

[2019] HKCFI 1268

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 3246 OF 2016 & 355 OF 2018

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J U D G M E N T

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This Judgment shall be divided into the following Sections:

A.     INTRODUCTION

1.  By these two actions, the plaintiff claims against the defendant as trustee for its having failed to act in accordance with a series of 10 letters (“Letters”) sent by her to the defendant between January 2016 and December 2017.  Whether the Letters are characterised as “instructions” or “requests”, the plaintiff says that the defendant was obliged to comply with them, alternatively that the defendant could not properly but comply with them in the circumstances, even if it was not strictly obliged to do so.  The plaintiff therefore seeks, inter alia,orders compelling the defendant to comply with the Letters, alternatively damages for its having failed to do so, as well as the removal of the defendant as trustee.

2.  It appears to be common ground that the Lo Family Trust (“Trust”) is a discretionary trust conferring upon the defendant as trustee wide powers, all of which (as is clear on the face of the Trust Deed) are matters for the exercise of the trustee’s discretion.  It also appears to be common ground that in considering the exercise of, and in exercising, any of its discretionary powers the trustee has an enforceable duty, amongst others, to act impartially as between the beneficiaries and to treat each and all of them fairly and even-handedly.  The main class of beneficiaries (or more accurately discretionary objects of the defendant’s powers) under the Trust both at the time of its original formation and immediately before the first of the plaintiff’s relevant Letters were the plaintiff and all her 9 children (“Children”),[1]their respective spouses and their lineal descendants.  By the time of the Letters, there were four generations of beneficiaries alive, numbering in the order of 90 individuals. 

3.  The basis on which the plaintiff contends that the defendant had to comply, alternatively ought to have complied, with her Letters is put in a variety of ways in the pleadings and the plaintiff’s written opening.  For the purpose of this introduction it appears to have 4 main alternative elements: –

(1)     a contention that the defendant was obliged to comply with the plaintiff’s instructions by reason of a “common understanding” to that effect which was formed between the plaintiff and the late Mr Lo Ying Shek (“Mr Lo”) on the one hand and the Original Trustee on the other, to which understanding the defendant became a party when it became trustee of the Trust in 1999; or

(2)     a contention that the “common understanding” and/or a “legitimate expectation” created by the way in which the Trust was administered means that overriding, alternatively some especially heavy, weight should be accorded by the trustee to the plaintiff’s instructions, such that in responding to the plaintiff’s Letters the defendant should have considered all other considerations overborne – including it seems the duty to treat all beneficiaries impartially and fairly;

(3)     a contention that in refusing to act upon the plaintiff’s Letters, the defendant was in a position of conflict and deliberately favoured the interests of one beneficiary, KS, over those of the others;

(4)     a contention introduced at trial by amendment to the statement of claim[2]that in refusing to act upon the plaintiff’s Letters, the defendant acted in breach of duty arising from the alleged premium attaching to the block of controlling shareholding in Great Eagle Holdings Limited (“GE”) held by the Trust, and the importance of maintaining the controlling shareholding. 

4.  The plaintiff relies upon a survey of transactions entered into from the inception of the Trust until November 2015, in order to attempt to evidence the alleged common understanding and to establish the legitimate expectation upon which the plaintiff relies.

5.  The plaintiff’s case therefore contains a conventional challenge to a trustee’s exercise of its discretion, to which the defendant says that well-established principles apply, with the addition of three particular features, namely (i) a case that the defendant did not have any or any real discretion at all to exercise when responding to the plaintiff’s Letters, which for reasons to be explained involves an implicit attack on the integrity of the defendant and those involved in the establishment of the Trust; (ii) a case involving an explicit attack on the integrity of the defendant for a deliberate breach of duty in favouring KS; and (iii) a separate breach of duty in not appreciating and acting upon the control premium value allegedly contained in the Trust’s GE shareholding.  Those three features are relied on, the defendant says, because the plaintiff cannot succeed (and recognises she cannot succeed) if the court were simply asked to review the trustee’s decisions as an exercise of its discretion.

6.  The defendant says that the plaintiff’s case on each of them is fundamentally misplaced: –

(1)     The proposition that the defendant was obliged to, or could not but comply with the plaintiff’s requests, is unsustainable as a matter of law, and the necessary common understanding or legitimate expectation cannot in any case be established on the facts.

(2)     The allegation that the defendant favoured KS is completely unfounded.

(3)     The plaintiff is entirely unable to show that the Trust in fact had a “controlling” shareholding in GE, the Trust’s shareholding in GE had a “premium value”, or KS’s stake in GE posed a threat to the Trust’s controlling shareholding and its premium value.

7.  When set against and in the correct background and context, the defendant says it has found itself in the middle of a bitter rift between the Lo family which exploded at the beginning of 2016 and has continued ever since, and in which the administration of the Trust has very regrettably become enmeshed.

8.  The plaintiff’s Letters have been issued as a result of and as her response – it may well be at times a despairing response – to the arguments between her children.  In general terms, what they tried to require the defendant to do were not, or were not obviously impartial as between the beneficiaries; and/or involved matters which the defendant considered it could not or should not appropriately do as trustee.  The defendant’s attempts to put forward solutions consistent with what it perceived to be its obligations owed to all beneficiaries have not so far been successful; but instead it has found itself subject to a well-publicised attack with a view to trying to compel it to do, or to punish it for not doing, that it was not prepared to do in the exercise of its discretion.

9.  The relevant context and background as submitted by the defendant is as follows. 

B.     BACKGROUND

10.  The Trust was established in 1984 as an entirely conventional discretionary trust for well-recognised purposes, principally long term succession planning by providing for the wealth settled into the trust to be passed to the next and succeeding generations free from estate duty.  The Trust thus has a wide class of beneficiaries and confers on its trustee the widest powers of appointment and application of capital and income, together with wide powers of investment and management.  The trustee is expressly entitled to exercise those powers in such manner as it in its “absolute and uncontrolled discretion” thinks fit.  From the outset the classes of beneficiaries included Mr Lo and the plaintiff, and all their issue and any spouses of their issue born within 80 years of the establishment of the trust. “Issue” was specially defined and meant all lineal descendants including adopted children.  At the time the Trust was set up Mr Lo was in his 70s and the Children were all mature adults.  In the intervening 35 years the beneficiaries have grown in number, and now include great-grandchildren of Mr Lo and the plaintiff.  So it seems to be common ground that the defendant as discretionary trustee has a duty to be impartial and act fairly and even-handedly among all those beneficiaries.

11.  In establishing the Trust Mr Lo turned for advice to Peter Edwards at Johnson Stokes & Masters (“JSM”).  At the time JSM and Mr Edwards were amongst the foremost practitioners in the field and the trust companies in the HSBC group regularly dealt with them in acting as trustee for very wealthy clients of JSM seeking to set up discretionary settlements for succession planning, estate duty saving and other purposes.  Even by that time HSBC trustees had an established reputation and experience of acting as a professional trustee going back approximately 40 years.

12.  In order for the Trust to be effective in avoiding estate duty, it was of course fundamental that ownership and control of the settled assets, which would otherwise be subject to such duty on death, be given up by the person introducing the assets into the trust.  That is of course what a discretionary settlement does and why it was routinely used as a mechanism for succession planning free of estate duty: ownership and control of the assets passes to the trustee(s) who has (or have) an unfettered discretion within the terms of the trust as to how they are to be applied.  The trustee owes duties in the exercise of those discretionary powers not to the settlor (former owners of the assets) but to the beneficiaries under the trust deed. 

13.  It need hardly be said that such ceding of ownership and control of what may be very valuable assets to a trust company as discretionary trustee was and is a highly sensitive issue for many would-be settlors.  We do not have the full exchanges or advice passing between Mr Lo and JSM in this case, but it is possible to see well-recognised and entirely conventional methods being adopted to allow Mr Lo and the plaintiff to influence the administration of the Trust and the trustee’s actions without falling foul of the requirement that they should not have control – thereby serving no doubt to mitigate any anxiety which might have existed about the trustee’s dealing with the assets introduced into the trust. 

14.  Foremost amongst these methods is of course a letter of wishes.  These are unilateral documents created by the settlor(s), which are usually professionally drafted.  They express the wishes of the settlor without imposing any obligation on the trustee to follow them; and they usually say so in terms (as the letters do in this case).  Settlors are of course also free to (and frequently do) express less formally as the occasion arises what it is that they want the trustee to do in relation to particular matters which arise from time to time in the life of the trust.  The trust having been set up, these wishes, in however peremptory terms they may be expressed, are not and cannot be binding.  However, by these more or less formal communications, settlors are able to provide both long-term and short-term guidance to the trustee, which the trustee needs to take into account and which the trustee is entitled to follow if it is in accordance with the trustee’s duties.  Very often – sometimes always – the trustee will do so. Accordingly, these means, coupled with a trustee’s duty to apprise himself of relevant matters and a professional trustee’s general practice of consulting before taking decisions, enable a settlor to have – and they frequently do have – a continuing practical involvement in the administration of the trust and its assets without prejudicing the purpose for which the trust was established or the trustee’s independent discretionary control.

15.  From the inception of the Trust in 1984 until the events in 2016, 3 formal letters of wishes were produced for or by Mr Lo and the plaintiff as de facto settlors.  Each of them stated clearly that the requests made were “without imposing any binding trust or obligation upon [the trustee]”.  The defendant (and the Original Trustee) did in practice act in accordance with wishes of Mr Lo in relation to acts of investment and administration of the Trust between 1984 and his death, as they were perfectly entitled to do. 

16.  The defendant submits that an examination of the transactions relied upon by the plaintiff will show nothing which supports the alleged common understanding or any legitimate expectation, but is entirely consistent with this being a discretionary trust operated and administered in the way described above and nothing more.

17.  By 2016 all beneficiaries had been aware of the letter of wishes dated 15 October 1988 (“1988 Letter”) for some years, and it had been the basis upon which the Trust had been administered for the past 28 years.  Some beneficiaries may perhaps have been disappointed by the size of the share of the trust assets which the 1988 Letter putatively gave them, but distributions had been made to the Children according to their shares set out in that letter and it had been applied as recently as November 2015, in making very substantial distributions to beneficiaries, apparently without significant controversy. 

18.  Accordingly, rather than the defendant’s response to the plaintiff’s 10 Letters being a departure from the way the defendant had conducted itself over the preceding years, as the plaintiff claims, the Letters from the plaintiff involved an unexplained, unheralded and uncharacteristic departure from the settled approach which had been adopted for some 3 decades.  Thus on 4 January 2016, the defendant received, out of the blue and through a firm of solicitors with whom the defendant had no prior contact, a letter issued by the plaintiff who was 96 years old at the time (“Jan 2016 Letter”).  The letter expressed wishes which superseded and changed those expressed in the 1988 Letter and appeared out of character for the plaintiff.  This was not an ordinary or routine communication.  The letter did not obviously ask the defendant to take any immediate action other than adopting it as the basis upon which the Trust was to be administered thenceforth.  The only sense in which the defendant failed to comply with it was that it did not immediately adopt it, but sought to engage with the plaintiff and the Children in order to better to understand the reasons for the letter and what was intended by it.  The defendant could not reasonably have been expected to do otherwise.

19.  In the first instance the defendant attempted to set up a meeting with the plaintiff to discuss the matter with her.  In the meantime, the defendant received views from some of the Children expressing concern that the effect of the Jan 2016 Letter was not understood by and did not reflect the wishes of the plaintiff.  The defendant decided to undertake a broader consultation by writing to the plaintiff and all the Children to invite them to a family meeting.  Over the following weeks and months, it became increasingly apparent that there were fundamental divisions between the Children and that for whatever reason the plaintiff had to some extent taken sides.  By February 2016, 3 children, KS, Archie and Vincent appear already to have instructed Herbert Smith Freehills (“HSF”) and in early March began corresponding through them.  HSF on more than one occasion politely but firmly reminded the defendant of its undoubted obligations to be impartial and treat all beneficiaries fairly.

20.  The defendant’s attempts to consult and its decision to instruct solicitors to advise and help it in an increasingly charged process, was met with varying degrees of resistance or non-co-operation from certain of the Children, as well as a degree of non-cooperation from the plaintiff herself.  It gradually became clear to the defendant that it was faced with rival suggestions that the plaintiff was being influenced at various times by one group of children over another, and that the sometimes contradictory wishes being expressed by the plaintiff might perhaps be part of rival approaches being pursued by one group or the other.  It was and is not for the defendant as trustee to take a stance on those disputes, but the defendant had to be aware and be sensitive to those rival contentions and to tread extremely cautiously and delicately when considering and responding to the various requests and communications which it received following the Jan 2016 Letter. 

21.  On 24 February 2016 – whilst the defendant was still in the process of arranging a meeting with the plaintiff – it received another letter from the plaintiff through a new law firm, purporting to revoke the Jan 2016 Letter and requesting the defendant to distribute the entire trust fund, then worth approximately HK$6 billion, to herself or such entity as she may direct (“Feb 2016 Letter”).  The letter again came out of the blue and was accompanied by no explanation other than a complaint expressed in somewhat hostile terms that the defendant had not complied with the Jan 2016 Letter.  In fact, the plaintiff, as her first witness statement accepts, had already asked the defendant not to implement the Jan 2016 Letter.  The Feb 2016 Letter therefore only served to increase the difficulties and uncertainties, and the defendant pursued its efforts to reach out to the plaintiff and the Children to set up meetings with them to discuss the latest events.

22.  When the defendant was still communicating with the beneficiaries (and was yet to meet face to face with the plaintiff), it received a third letter from the plaintiff on 11 April 2016 (“Apr 2016 Letter”).  It again was unheralded.  This requested the defendant to use the available trust funds to purchase 200,000 shares in GE per day, apparently indefinitely.  The reason for and purpose of the letter was not at all clear. The defendant had for some years had an approach of not acquiring fresh shares in GE (save for rights or scrip issues) and had never been asked by any beneficiary to do so.  Indeed, as the plaintiff and the beneficiaries were aware the defendant had long been concerned at the risk posed by the Trust’s concentrated holding in GE shares: as at 30 April 2016, the Trust held some 223 million GE shares which represented approximately 86.89% of the then aggregate value of the Trust.  Shortly after the receipt of the letter the defendant had a phone conversation with the plaintiff where the plaintiff did not appear to recall her request and asked the defendant to put the request on hold.

23.  The defendant, through very senior representatives, finally met with the plaintiff on 12 May 2016 in the presence of her lawyers (another new firm of solicitors).  During the meeting, the plaintiff produced a letter (“May 2016 Letter”) and reiterated her request for the defendant to distribute the entire trust fund to her.  The defendant remained of the view that it could not properly and should not distribute the entire trust fund to the plaintiff, a single elderly beneficiary, effectively thereby putting an end to the Trust and leaving all other beneficiaries with nothing.  The defendant decided to continue the process of beneficiary engagement for the purpose of exploring and developing potential solutions to the obvious family discord and problems that have arisen in the administration of the Trust. 

24.  By around July 2016, the defendant had upon consultation with the beneficiaries and advice from Clifford Chance formed the view that it could not continue to administer the Trust in accordance with its existing terms, and that some form of restructuring along the lines of creating separate funds for each branch within the Lo family was a possible way forward. On 29 July 2016, the defendant wrote to the plaintiff and Children with two alternative proposals for the restructuring of the Trust, upon which it then endeavoured to consult.

25. In the course of the defendant’s efforts to consult with the beneficiaries on the restructuring proposals, it received another letter from the plaintiff on 21 September 2016, requesting the defendant to remove KS and Archie as “Eligible Beneficiaries” and to include them within the “Excluded Class” of the Trust, and reiterating the plaintiff’s request for the distribution of the entire trust fund to her (“Sep 2016 Letter”).  The reason for the request seems to be because KS and Archie had refused to support her request or instruction to the defendant that it pay the entire trust fund to her.  The defendant having considered the circumstances did not give effect to such requests.

26.  On 7 December 2016, the defendant presented at a family meeting (which the plaintiff did not attend personally) a refined restructuring proposal formulated in light of and after considering the views collected in the course of the previous months.  In order to focus the minds of the plaintiff and the Children and to make progress towards a solution of the problems at hand, the defendant requested them to indicate within a specified time whether they agreed in principle to the proposed restructuring of the Trust into 9 separate trusts.  The defendant explained that if there was no agreement on the matter, it would have to make an application to the court for directions either for the approval of its proposal with or without modifications or for directions as to what else should happen.  On such an application the court would of course consider the matter by reference to the views and competing interests of all the relevant parties (who would be entitled to be represented and heard and to oppose any proposal or put forward their own), including beneficiaries who were not party to the disputes between the Children.

27.  Very shortly thereafter on 9 December 2016, HCA 3246/2016 was commenced against the defendant (without further notice or letter before claim).  Its effect, whatever its intention, was to put a stop to the consultation process regarding the restructuring of the Trust, and any directions application to the court since the plaintiff claims that the defendant is obliged to comply with whatever instruction she gives it.  That claim therefore needs to be resolved before any consultation or directions application can meaningfully proceed. 

28.  The plaintiff continued after the commencement of the action to send further letters of requests, along similar lines (but not identical) to those already issued.[3] The defendant declined to give effect to them.  The plaintiff commenced a second action (HCA 355/2018) to make claims in respect of those further letters of requests, and the two actions were ordered to be tried together.  In the meantime, Lu in his capacity as beneficiary commenced another action against the defendant and other beneficiaries, (including the other two Joint Appointors and Guardians), raising similar but not entirely the same complaints as the present actions.

29.  The high emotions which lie behind the positions adopted by the plaintiff and some of the Children give a perception and proceed on the basis that there are in effect two opposing camps in this dispute.  The plaintiff appears now to side with one group of her children, against another group in the rift which has developed amongst them.  Anyone who does not agree with or accede to her demands appears to be treated by her and the children aligned with her as a member and supporter of the opposing group of children. The defendant therefore finds itself branded as being in the “camp” of KS, Archie and Vincent.  The defendant submits that this is as unfortunate as it is incorrect.  The defendant in these proceedings obviously is seeking to defend itself against the allegations now made against it, but beyond that the defendant says it has been and is studious in avoiding taking sides.  The defendant submits that it has simply been attempting to fulfil its duties to those to whom they are owed – that is the beneficiaries of the Trust as a whole – in increasingly fraught and difficult circumstances. 

30.  The court notes in that connection that a considerable amount of the evidence in this trial involves detailed matters relating to the dynamics and disputes occurring within the family since around early 2016.  Consideration of this evidence is regrettably inevitable.  But the court does not have to make findings about the rights or wrongs of any family member in that dispute. Instead, it serves as essential background within which the crucial events in these proceedings have to be viewed.  The evidence also serves to assist the court in determining whether the defendant, having found itself caught in the middle of serious conflict between the beneficiaries, was merely trying its best to seek a solution and was distinctly not seeking to favour any particular beneficiary.

C.     CORE ISSUES AT TRIAL

31.  Over the course of the trial, a large number of matters have been ventilated during the course of the evidence.  Concentrating however on the essentials of the case, I agree with the defendant that one can identify the following 6 core issues which, on the latest incarnation of the pleadings, the court is called upon to decide: –

(1)     Whether there existed any common understanding (“the Alleged Common Understanding”) between the plaintiff and her late husband (Mr Lo) on the one hand, and the defendant on the other hand, that the defendant would administer the Trust in accordance with the plaintiff’s written requests/instructions.

(2)     Whether because of the representations by the defendant and the manner in which the Trust was administered gave rise to a legitimate expectation on the part of the plaintiff that the defendant would administer the Trust in accordance with her requests/instructions.

(3)     Whether:

(a)     it was and is obvious (as the plaintiff’s leading counsel, Mr Yu, put it in opening) that the Trust’s block of GE shares enjoyed a control premium value;

(b)     if (but only if) so, whether it was and is also obvious that KS’s stake in GE threatened that control and value; and

(c)     the defendant knew, or was grossly negligent in not appreciating and acting upon, both (a) and (b) above.

(4)     Whether there is otherwise any basis for interfering with the defendant’s decisions not to purchase further GE shares in response to the plaintiff’s requests on the grounds that: (a) the defendant’s concern about the concentration of the Trust’s investments in GE shares was not genuine or was misplaced; and/or (b) the decision not to buy failed to give effect to or to take into account what the plaintiff says is the purpose of the Trust, ie to preserve the “controlling shareholding” of GE within the Trust.

(5)     Whether in acting as trustee of the Trust, the defendant was in a position of a real and sensible conflict, or real and sensible possibility of conflict, by reason of its also being at all material times a trustee of the KSL Trust.

(6)     Whether in the steps which it has taken in the administration of the trust since January 2016 the defendant was doing the bidding of KS (see the plaintiff’s Written Opening paragraph 220) or otherwise deliberately acted with an improper purpose of favouring KS’s interests.

32.  On any view, before the plaintiff can succeed at all she has to achieve a positive answer to at least one of the 6 questions posed in paragraph 31 above.  The defendant submits that the court can and should confidently answer “no” to each of those questions since the plaintiff’s case on each of them is unsustainable both on the facts and the law.  In particular:

(1)     The existence of the Alleged Common Understanding is inherently very improbable.  The plaintiff (contrary to her witness statement) cannot in truth give any evidence of its existence and there is no basis for it to be inferred.  There is no contemporaneous documentary or oral evidence to support it; and no subsequent evidence which suggests it.  The evidence which is available is positively inconsistent with it.

(2)     There is no room as a matter of law in a trust context for one person’s expectation (legitimate or otherwise) to control a discretion conferred on a trustee under the trust instrument.  But in any event there is no factual basis at all for the alleged expectation to have arisen, still less for it to be a legitimate one in the necessary sense.

(3)     The plaintiff has failed to establish that the Trust’s block of GE shares enjoyed a control premium value or that KS’s stake in GE threatened that alleged control and value.  Both sets of alleged facts were and are very far from obvious.  That being so, the plaintiff cannot establish that the defendant was grossly negligent.  The plaintiff also failed to establish that the defendant actually knew those alleged facts.  Indeed, it is clear on the evidence that the defendant did not and does not believe that the Trust’s shares enjoyed any control or control premium or that KS’s stake in GE was a threat.

(4)     There is no basis for the court to interfere with the decisions made by the defendant not to purchase further GE shares in response to the plaintiff’s requests.  Those decisions were ones which the defendant was perfectly entitled to take – indeed the defendant says it was right to take – in the exercise of its discretion; and it is not for the court to substitute its own view or judgment for that of the defendant.  It is beyond serious argument that the defendant had been concerned for some time and continued to be concerned about the concentration of the Trust’s investments in GE; and more than one beneficiary had expressed the view either that no more GE shares should be bought or expressed differing views as to whether the Trust should retain the GE shares held within it in the long-term.  The defendant was perfectly entitled to take the view – and it is plain this was its genuine view – that no further shares should be bought.  The plaintiff misuses the concept of the “purpose” of the Trust in order to try to create a factor which she says should have governed or influenced the defendant’s decision.  It is plain however that there was no relevant “purpose” of the sort for which the plaintiff contends.

(5)     No real sensible conflict (or possibility of conflict) has been identified by the plaintiff.  Indeed, what the conflict was alleged to be was never clearly put to any of the defendant’s witnesses.

(6)     The steps taken by the defendant in the administration of the Trust since January 2016, including its decisions not to accede to such requests as the plaintiff made, were steps which the defendant was fully entitled to take and constituted its genuine, and carefully-considered responses, to a delicate, difficult and increasingly contentious situation.  There is no evidence to suggest and no basis for inferring that what the defendant did was done at KS’s bidding nor that the defendant was actuated by an improper purpose of favouring KS. 

33.  Answering “no” to each of those core issues is sufficient to dispose of this case.

34.  I accept that in reaching a decision in these proceedings, this court must bear in mind what is actually the plaintiff’s pleaded case.  It is imperative to focus on the pleadings, which set the permissible boundaries of the issues to be decided by this court.

D.     ALLEGED COMMON UNDERSTANDING

D1.    General Remarks

35.  Before delving into the substance of the defendant’s response to the plaintiff’s claim regarding the Alleged Common Understanding, it is to be remembered that the plaintiff may be advancing her claim in two different ways. 

36.  The plaintiff’s pleadings suggest that part of her claim in relation to the Alleged Common Understanding is based on an agreement reached between the Original Trustee and the de facto settlors (ie Mr Lo and the plaintiff) at the time of the establishment of the Trust which had the effect of preserving control over the trust assets in the settlors and of obliging the Original Trustee to administer the Trust in accordance with the instructions of Mr Lo and the plaintiff (or the survivor of them).

(1)     The plaintiff alleges that the Alleged Common Understanding arose as a result of representations made by JSM to Mr Lo and the plaintiff prior to the establishment of the Trust and the plaintiff asks the court to infer that the Original Trustee was at all material times fully aware of the understanding and agreed to abide by it in the administration of the Trust.

(2)     The plaintiff claims that upon the defendant replacing the Original Trustee as trustee of the Trust, the Alleged Common Understanding became an understanding that the defendant would administer the Trust in accordance with the written wishes, requests, and instructions of Mr Lo and the plaintiff (or the survivor of them).  And the plaintiff asks the court to infer that the Alleged Common Understanding was communicated to the defendant, and the defendant agreed to abide by it.  Thus, it is alleged that such agreement then became binding on the defendant after the change of trusteeship, such that the defendant had no choice but to comply with the plaintiff’s requests and the plaintiff is now seeking to enforce such agreement in view of the defendant’s refusal to comply with her Letters. 

(3)     Hence, the Alleged Common Understanding as pleaded in the statement of claim is expressly said to be that the defendant would act “in accordance”with the plaintiff’s instructions.

37. The second way in which the plaintiff appears to be advancing her claim is that the Alleged Common Understanding meant that the defendant should consider the plaintiff’s requests as a “material or primary consideration”.  In other words, this part of the case appears to be that the Alleged Common Understanding meant that some overriding or especially heavy weight had to be accorded to the plaintiff’s requests/instructions when the defendant was deciding what to do.

38.  When the plaintiff opened her case orally, it seemed for a period that the plaintiff might not be seeking to rely upon the Alleged Common Understanding as binding the defendant to do what the plaintiff said, and was concentrating instead upon the second way of putting her case.  Thus the plaintiff’s oral opening submissions contained the suggestion that the plaintiff did not put her case “on the basis that [the Trust] is a sham… nor… that [the defendant doesn’t] have a discretion… Because [the plaintiff’s] case is simply [that] because of the way in which this was set up, and the way in which it has been run, that this becomes a highly material fact which a reasonable trustee must take into account”.

39.  Anyhow, both ways in which the plaintiff appears to put her case are considered below.

40.  In that connection the defendant correctly makes 3 main points.

41.  First, whichever way the plaintiff puts her case, she has to establish the Alleged Common Understanding which she alleges as a matter of fact. 

42.  Second, even if she could establish the necessary facts, the suggestion that the understanding in truth obliged the defendant to do the plaintiff’s bidding, involves the proposition that the Trust Deed does not mean what it says in purporting to transfer the trust assets to the defendant to administer in its absolute and unfettered discretion in accordance with the terms of the Trust Deed.  If such an agreement had existed as a matter of fact, it is inescapable that the Trust would be a sham.  See, for example, Thomas & Hudson, The Law of Trusts, 2^nd ed, §2.31 and Snook v London and West Riding Investments Ltd [1967] 2 QB 786, 802C-802F, explaining that a declaration of trust is ineffective as a sham if the parties to the declaration did not intend to establish a trust in accordance with its stated terms.  But given the plaintiff’s express disavowal of any suggestion that the Trust is a sham (paragraph 38 above), that alone is sufficient for the court to dismiss the plaintiff’s claim as put on the basis that, contrary to the Trust Deed, the defendant was obliged to comply with whatever the plaintiff asked or told it to do.

43.  Third, the contention that the Alleged Common Understanding meant that some overriding or especially heavy weight had to be accorded to the plaintiff’s requests/instructions is also legally unsustainable.  It involves (or appears to involve) a combination of: –

(1)     an impermissible and legally ineffective agreement purporting to govern or affect the exercise by the defendant of the discretion conferred on it by the Trust Deed; and

(2)     an impermissible attempt to rely on parol evidence and/or subsequent conduct to modify or interpret the terms of the Trust Deed providing that the defendant can exercise the powers in such manner as it in its “absolute and uncontrolled discretion” thinks fit.

It is convenient to deal with these legal points before turning to a detailed consideration of the facts.

D2.    The Plaintiff’s Case Legally Unsound

D2a.  Parol evidence and subsequent conduct

44.  I agree with the defendant’s submission that the plaintiff’s case on the Alleged Common Understanding is an impermissible attempt to contradict the express terms of the Trust Deed by parol evidence and subsequent conduct.  The parol evidence rule applies to the interpretation of trust deeds.  Extrinsic circumstances are not admissible to add to, contradict, vary, or alter the express terms of a trust deed, see Lewin on Trusts, 19^th ed, §§6-004-6-006: –

“6-004. Lifetime settlements are no different from other documents in that the subjective intentions of their authors are irrelevant. What counts is the objective meaning that the words of the document convey to the court when considered as a whole in the light of the surrounding circumstances. Save in the exceptional case of latent ambiguities, the admissible circumstances do not include the subjective intention of the settlor…

6-005 …The traditional formulation of the parol evidence rule is that no evidence of extrinsic circumstances is admissible to add to, contradict, vary or alter the terms of a deed or other written instrument. This is to be understood, however, not as excluding parol evidence of the surrounding circumstances to explain the objective meaning of a settlement or evidence to show what the words mean, but forbidding evidence called to show that the subjective intention of the settlor was different from what the settlement itself expresses. If the settlement does not express the true intention of the settlor, it may be possible to alter it in rectification proceedings, but that is rectification, not construction.

6-006.  Although the rule is called the parol evidence rule, it does not exclude oral evidence only, but all extrinsic evidence.  For instance, drafts of a deed cannot be referred to in order to interpret it, nor can preliminary negotiations, nor can the written opinions of counsel who drafted a settlement be looked at to ascertain the subjective intention of the settlor.  An unambiguous declaration of trust will not be altered even by a recital of the intention of the settlor, let alone by any extrinsic expressions of intent on the settlor’s part.”

(emphasis added)

45.  In the recent Privy Council case of Gany Holdings (PTC) SA v Khan (2018) 21 ITELR 310, Lord Briggs stated at §17: –

“It is convenient to begin with a re-statement of the basic principles by which equity…provides for identification of beneficial interests arising from a gratuitous transfer of property. First, if either the transferor or the transferee makes a written (or oral) declaration as to those beneficial interests, or they do so together in an agreed form, that will generally be decisive, regardless of the subjective intentions of either of them: see for example Whitlock v Moree [2017] UKPC 44. Secondly, and in default of any such declaration, the court looks for evidence from which a common intention as to beneficial ownership may be inferred. This may include evidence of statements made by either party before, at the time of or even after the relevant transfer, the parties’ conduct, and the factual context in which the transfer takes place.” (emphasis added)

46.  I agree that although Lord Briggs was speaking specifically about the identification of beneficial interests, his remarks are applicable more generally to the process by which the court determines the mutual intention between the settlor and the trustee.  The point is that, if there is a declaration between the settlor and the trustee (for example, as contained in a trust deed), that will generally be “decisive, regardless of the subjective intentions of either of them”.  Only in the absence of such a declaration would it be permissible to look at evidence of statements made by either party before, at the time of, or after the creation of the trust.

47.  In the above passage, Lord Briggs referred to the Privy Council decision in Whitlock v Moree [2018] 3 LRC 250 (in which he also delivered the opinion of the Board).  At §23 of Whitlock, Lord Briggs set out similar principles:

“… where the relevant property is transferred to the legal holders by a written instrument, a statement as to the beneficial ownership of the property in that instrument is usually conclusive: see Vandervell v Inland Revenue Commission [1967] 2 AC 291, at 312 per Lord Upjohn. The same passage makes clear that any question whether the instrument does address beneficial ownership, and any issue as to what that beneficial ownership is, falls to be decided as a matter of construction of the instrument, which is an objective process, in which evidence as to the subjective intention of the maker of the instrument is inadmissible.”

As can be seen, Lord Briggs went so far as to say that the subjective intention of the parties is “inadmissible”.

48.  Thus, it is clear from the authorities that, in the instant case: (i) the Trust Deed is conclusive as to the relationship between Mr Lo and the plaintiff (as de facto settlors) and the defendant; and (ii) the plaintiff’s or Mr Lo’s subjective intention (eg as to the purpose of the Trust, or as to the beneficial interests held by the Trust) is completely irrelevant.

49.  As for evidence of the subsequent conduct of the parties (ie anything which the parties said or did after the making of a settlement), that is also inadmissible to assist in the construction of the settlement.  Otherwise one might have the result that a settlement meant one thing the day it was executed, but by reason of subsequent events meant something different later.  See: Lewin, supra, §6-017; James Miller v Whitworth Street Estates [1970] AC 583, 603D-E (Lord Reid), 606E (Lord Hodson), 611D (Viscount Dilhorne), 614H-615A (Lord Wilberforce); and Schuler v Wickman Machine Tool Sales Ltd [1974] AC 235, 261A-262B (Lord Wilberforce).

50.  It is conspicuous that as a matter of law neither Mr Lo nor the plaintiff were actually the settlor of the Trust, and deliberately so.  The plaintiff’s case seems to be seeking to rely upon (1) expressions of intentions; (2) communications or negotiations between the parties prior to the execution of the Trust Deed; and/or (3) the parties’ subsequent conduct, in order so as to contradict, modify, or supplement the express terms of the Trust Deed to which they were not even parties.  This is wholly impermissible.

D2b.  The Trust Deed and the plaintiff’s acceptance of the Trust as a valid trust

51.  As mentioned in paragraph 38 above, the plaintiff’s opening submissions made it clear that she is not alleging that the Trust as declared by the Trust Deed was a sham.  To the contrary she is positively relying on the validity of the Trust as the basis for asserting that the defendant as discretionary trustee was subject to and had acted in breach of various duties in exercising its discretionary powers.  Once the plaintiff accepts that the Trust is a valid discretionary trust, I agree the plaintiff cannot rely on the Alleged Common Understanding either to bind the defendant or somehow to alter the defendant’s duties in exercising its discretion from those owed as a matter of law by discretionary trustees.

52.  It is trite that there can be no fetter on the discretionary powers of fiduciaries.  As explained in Lewin, supra, §29-227: –

“When the power is fiduciary, the donee must exercise his judgment according to the circumstances as they exist at the time: he cannot anticipate the arrival of the proper time by affecting to release it or not to exercise it or by pledging himself beforehand as to the mode in which the power shall be exercised in the future. Any form of undertaking as to the way in which the power will be exercised in future is ineffective. … The principle is not confined to trustees and the donee of any fiduciary power is similarly unable to bind himself as to its future exercise, as by covenanting to exercise a testamentary power in a particular way. If consideration is given to the donor for the undertaking there would be a fraud on the power but even in the absence of consideration the fetter is unlawful.” (emphasis added)

See also Thomas & Hudson, supra,§§11.39-11.42. 

53.  Any attempt to impose an unauthorised fetter on a discretionary power is totally ineffective.  The consequence is that an undertaking to exercise the power in a particular way cannot be enforced, either by injunction or by an award of damages.  See: Thacker v Key (1869) LR 8 Eq 408, at 411-415; Palmer v Locke (1880) 15 Ch D 294, at 300-301; In re Bradshaw [1902] 1 Ch 436, at 447-449.

54.  In view of the above, once the plaintiff recognises that the Trust is a valid discretionary trust, there can be no fetter on the powers conferred on the defendant by the Trust Deed, and I agree that presents an insuperable obstacle to the attempt to elevate the Alleged Common Understanding into any legally binding obligation upon the defendant.

D3.    The Plaintiff’s Case Factually Unsound

55.  In any event, I agree with the defendant’s submission that the plaintiff’s case regarding the Alleged Common Understanding is unsound as a matter of fact.  It is expressly contradicted by or unsupported by the documentary evidence and witness testimony, and is inherently highly improbable.

56.  It must be remembered that the plaintiff has alleged in her pleadings that: –

(1)     the Alleged Common Understanding arose as a result of representations made by JSM to Mr Lo and the plaintiff prior to the establishment of the Trust;

(2)     the Original Trustee was at all material times fully aware of the Alleged Common Understanding and agreed to abide by it in the administration of the Trust; and

(3)     when the defendant replaced the Original Trustee as trustee of the Trust, the Alleged Common Understanding was communicated to the defendant, and the defendant agreed to abide by it.

57.  The plaintiff has to prove each and every element above, ie the creation of the Alleged Common Understanding by way of representations by JSM to Mr Lo and the plaintiff; the Original Trustee’s knowledge and agreement to abide by the Alleged Common Understanding; and the defendant’s knowledge and agreement of the same.  For reasons explained below, I agree the plaintiff is wholly unable to prove such alleged facts.

D3a.  No contemporaneous documents to support the Alleged Common Understanding

58.  The first point is that the plaintiff has been completely unable to adduce any contemporaneous document (ie from 1983-1984, when the Alleged Common Understanding allegedly arose) which records the Alleged Common Understanding. 

59.  There is a glaring absence of, for example, any correspondence between JSM and Mr Lo; any private note of Mr Lo/the plaintiff; or any internal memorandum of JSM in which the Alleged Common Understanding was recorded. 

60.  The plaintiff is unable to adduce any such document even though she has retrieved all her files from JSM.

D3b.  Alleged Common Understanding contradicted by trust documents

61.  Worse for the plaintiff’s case, the Alleged Common Understanding is positively contradicted by various trust documents, as well as the plaintiff’s own averments regarding the purpose of the Trust.

62.  First, there are the terms of the Trust Deed, which confer on the trustee of the Trust the widest powers of appointment, applications, investment, and management which the trustee is expressly entitled to exercise in its “absolute and uncontrolled discretion”: Clause 19(a) of the Trust Deed.  This is wholly inconsistent with the Alleged Common Understanding which supposedly requires the trustee to administer the Trust in accordance with the instructions and requests of Mr Lo and the plaintiff.

63.  Second, the terms of the 3 letters of wishes issued in connection with the Trust from 1984 to 1988 are also inconsistent with the Alleged Common Understanding.  These letters of wishes all expressly stated that they were not binding and imposed no obligation on the trustee of the Trust:

(1)     The initial letter dated 14 April 1984 signed by Ms Christine So of JSM (who was the settlor of the Trust), stated: “I wish to request you, therefore, but without imposing any binding trust or obligation upon you, to exercise your discretion as trustees in the following manner…”.

(2)     The subsequent letter dated 18 July 1984 signed by Mr Lo again stated: “I wish to request you, therefore, but without imposing any binding trust or obligation upon you, to exercise your discretion as trustees in the following manner…”.

(3)     The letter of wishes dated 15 October 1988 signed by Mr Lo and the plaintiff similarly stated: “We wish to request you, but without imposing any binding trust or obligation upon you to exercise your discretion (in addition to all previous instructions given) in the following manner…”.

64.  The fact that these letters of wishes were expressed to be non-binding is wholly consistent with the well-established general principle that letters of wishes do not impose any legal obligation.  See: Lewin, supra, §29-166; Re Esteem Settlement [2003] JLR 188, §§215-217; Re A and B Trusts [2012] JRC 169A, §4;Hui Chi Ming v Koon Wing Yee [2010] 4 HKC 86, §§56-57 (Fok J, as he then was).

65.  Third, the Alleged Common Understanding is also inconsistent with the plaintiff’s own assertion that the purpose of establishing the Trust was to avoid estate duty, since the Alleged Common Understanding would have caused the trust property to remain comprised in the estates of Mr Lo and the plaintiff for the purposes of that tax (see Section D3c below).

66.  Fourth, amongst the scanty records of JSM regarding the establishment of the Trust which have been produced before this court, there is a note of meeting recording discussions with Mr Peter Edwards of JSM on 24 October 1983.  The discussions refer to the setting up of a unit trust structure in connection with the discretionary trust to be established to provide Mr Lo with “effective control” during his lifetime. 

67.  The plaintiff seeks to rely on this document to suggest that the reference to “effective control” supports the Alleged Common Understanding.  However, I agree with the defendant’s submission that this is misconceived.  The document reveals quite the opposite.  The discussion recognises the nature and effect of a discretionary trust by suggesting a unit trust structure as a possible mechanism for giving Mr Lo some degree of control over the management of the assets to be injected into the Trust.  Such discussion would not have been necessary if there was indeed a common understanding that the trustee would administer the Trust in accordance with Mr Lo’s instructions and thereby provide him with effective control over the trust assets.  Therefore, I agree the contents of this note of meeting in fact contradict the Alleged Common Understanding.  It recognises that the Trust, in itself, does not give control to Mr Lo.

D3c.  Alleged Common Understanding inherently improbable

68.  The plaintiff’s case on the inferred formation of the Alleged Common Understanding is also entirely contrary to inherent probabilities.

69.  The plaintiff’s case on the Alleged Common Understanding is that Mr Lo, the plaintiff and the Original Trustee intended and agreed that Mr Lo and the plaintiff would retain “effective control” over their assets during their lifetimes, and the Original Trustee would administer the Trust in accordance with the wishes, requests, and instructions of Mr Lo and the plaintiff.

70.  Under the estate duty regime prescribed by the Estate Duty Ordinance, Cap 111 (“EDO”) prevailing at the time of the establishment of the Trust in 1984, estate duty was payable on:

(1)     “property of which the deceased was at the time of his death competent to dispose”: EDO, section 6(1)(a); and

(2)     “property passing under any past or future settlement made by the deceased by deed or any other instrument not taking effect as a will, whereby an interest in such property or the proceeds of sale thereof, for life or any other period determinable by reference to death is reserved, either expressly or by implication, to the settlor, or whereby the settlor may have reserved to himself the right by the exercise of any power to restore to himself, or to reclaim the absolute interest in such property or the proceeds of sale thereof”: EDO, section 6(1)(e).

71.  If the Alleged Common Understanding had existed as a matter of fact, Mr Lo and the plaintiff would be regarded as “competent to dispose” of the settled property within the meaning of section 6(1)(a) of the EDO, as well as having “reserved an interest” in such property within the meaning of section 6(1)(e) of the EDO.  See Willougby & Halkyard, Encyclopaedia of Hong Kong Taxation, vol 2 (Estate Duty): –

“Where a settlor establishes a discretionary trust and executes a letter of wishes which reserves to the settlor power to direct the trustees to distribute property to himself, it seems likely that the settlor remains competent to dispose of the settled property.” (I [355-400])

“Where the letter of wishes gives the settlor power to direct the trustee to distribute cash or other assets to the settlor or other beneficiary, this will probably make the settlor competent to dispose of the settled property.” (II [375])

“If a person is the settlor or the notional settlor and can, through control of the trustee, cause trust assets to be distributed to him or to be applied for his benefit, he would have retained an interest within the terms of section 6(1)(e). There might also be liability on the basis that the settlor was competent to dispose of the trust assets under section 6(1)(a).” (II [454.2])

72.  Therefore, if the parties having the Alleged Common Understanding went on to execute the Trust Deed (prepared by JSM) which excluded any reference to Mr Lo and the plaintiff’s effective control over the assets and purported to create a full discretionary trust, such transaction and its associated documentation would have been brought into existence in order to mislead the Inland Revenue Department for the purpose of evading estate duty.  (It is not rendered any less serious an allegation by reason of the fact that estate duty was in the result abolished a few months before Mr Lo died.)

73.  The notion that the plaintiff’s case on the Alleged Common Understanding effectively suggests that the parties were involved in a fraudulent tax evasion scheme was touched upon in Chow J’s decision dated 12 January 2018 regarding further and better particulars, where he observed that in respect of the plaintiff’s case on the Alleged Common Understanding, “the question may legitimately be asked whether the true arrangement of the relevant parties involved a conspiracy to defraud the Estate Duty Commissioner.  It is plainly not possible for this issue to be resolved in the present application.  I shall leave it to the trial judge to consider whether the issue of the legality of the arrangement, as well as its implication, ought to be investigated at the trial.” (§34). 

74.  As submitted by the defendant, the plaintiff’s case effectively involves JSM, Mr Lo, the plaintiff, the Original Trustee, and the defendant being implicated in a scheme to defraud the Inland Revenue Department.  That is wholly improbable in view of the standing and reputation of JSM, the Original Trustee, and the defendant as professional solicitors and trustee companies respectively. 

75.  It is a serious allegation of wrongdoing, which this court should be very cautious before accepting.  Where such serious allegations of wrongdoing are advanced, it is trite that: –

(1)     Although the civil standard of proof still applies, “such standard is to be applied flexibly, factoring in the inherently greater improbability of serious misconduct as compared with lesser forms of misconduct, and therefore requiring the person bearing the burden of proving the allegation to prove it with evidence of a commensurate cogency”: see Nina Kung v Wong Din Shin (2005) 8 HKCFAR 387, §182 (Ribeiro PJ).  See also: Solicitor (24/07) v Law Society of Hong Kong (2008) 11 HKCFAR 117, §§72-75 (Bokhary PJ). 

(2)     If the court is invited to reach a conclusion of wrongdoing as an inference to be drawn on the basis of circumstantial evidence (which is the case here, since there is no direct evidence of the Alleged Common Understanding being agreed by the Original Trustee/the defendant):

(a)     “any such inference must be properly grounded in the primary facts found.  The court guards against indulging in conjecture under the guise of drawing an inference where the primary evidence does not logically and reasonably justify the particular inference in question”: see Nina Kung, supra,§185. 

(b)     Inference of fraud or serious misconduct are to be drawn only where they are compelling, that is, sufficient to overcome the inherent improbability that such conduct had occurred.  The conclusion has to be “plainly established as a matter of inference from proved facts”: see Nina Kung, supra,§§186-187.

D3d.  Alleged Common Understanding unsupported by witness testimony

76.  The existence of the Alleged Common Understanding is also unsupported by the witness testimony, as has become increasingly clear during the course of this trial. 

The plaintiff’s evidence

77.  The plaintiff’s evidence is crucial to her case regarding the Alleged Common Understanding as she claims that it was an understanding reached between the Original Trustee and Mr Lo and herself as de facto settlors of the Trust at the inception of the Trust.  However, the plaintiff’s evidence on the subject is highly unsatisfactory and does not support (and in certain respects directly contradicts) her case.  The following significant points emerged from the plaintiff’s evidence on this subject.

78.  First, it is clear from the plaintiff’s evidence that she had left all matters regarding the Trust to Mr Lo.  Her lack of involvement and understanding in respect of the Trust seriously undermines the veracity of her purported evidence as to the existence of the Alleged Common Understanding.

79.  Although the plaintiff’s witness statement sought to portray her as someone with whom Mr Lo had co-founded GE and discussed everything, including business decisions, it became clear from the plaintiff’s oral evidence that she in fact had minimal participation in business matters.  The plaintiff and Mr Lo were a very traditional Chinese couple in the sense that there was a clear division of roles as between them: Mr Lo dealt with business matters, and the plaintiff was a traditional wife who took care of the family and the Children.

80.  In the plaintiff’s own words during cross-examination, she explained “I looked after the whole family and I looked after all children.  [Mr Lo] just concentrated on the business.”  When asked whether she had, as a matter of interest, followed the share price of GE just to get an impression of how the business was doing, she firmly replied “I did not like to do that.  … Because I was too busy in taking care of the family. I totally relied on [Mr Lo], and I trusted him.  He could do whatever he prefers to do.”

81.  The plaintiff also consistently gave evidence in the witness box to the effect that she completely trusted Mr Lo and left it to him to deal with matters concerning the business and the Trust.  She had little or no understanding of the substance of the documents she was asked by Mr Lo to sign. 

82.  The plaintiff also accepted that she had no involvement in the affairs of the Trust before Mr Lo passed away in 2006:

“Q. So you can’t remember an occasion when you got involved with the trust before he passed away? Is that right?

A. Involved in what?

Q. In the trust.

A.     In what? […]

[Q.] Any involvement of any description was the question that I was trying to ask. […]

A. No. Nothing in particular happened.

[Q.] So you can’t remember any discussions with JSM, for example?

A. No. Nothing in this kind happened after he passed away.

Q. Before he passed away?

A. Before he passed away, if anything happened, he will deal with it by himself.

Q. And you don’t remember any discussions with the trustee that you had before he passed away?

A. No. No discussion.”[4]

83.  The plaintiff’s evidence of her lack of involvement in the affairs of the Trust is consistent with the defendant’s understanding; and also with the evidence of other witnesses (such as KS, Archie, and Vincent).

84.  In fact, the plaintiff did not appear to have knowledge even of basic matters regarding the circumstances surrounding the establishment of the Trust and the administration of the Trust over the years. For example: –

(1)     She had no idea that initially two separate trusts were set up in the names of herself and Mr Lo respectively (before such trusts were merged to become the Trust).  She insisted that there had only been one trust (ie The Trust) all along.  Even when prompted with the documents she signed for the purpose of setting up the trust in her own name, she was unable to recall and maintained that she had no idea of the matter.

(2)     She had no idea that she (and Mr Lo) were removed as Appointers and Guardians of the Trust since August 1998 (with Nina, KS, and Lu being appointed in their place).  She steadfastly insisted that she had never heard of it – not even in the course of these legal proceedings, despite the fact that the plaintiff’s Witness Statement §14 expressly refers to the replacement of her and Mr Lo by Nina, KS and Lu as Appointers and Guardians.

(3)     The plaintiff was so confused by the “news” of her removal as Appointer and Guardian that she repeatedly asked the defendant’s counsel if she could ask Lu to answer on her behalf the questions posed to her in cross-examination.  See for example: –

“Can you ask the question to my son, Lu, concerning the appointor? I have not heard it before.”[5]

“I have not heard about it [i.e. The fact that the plaintiff was removed as Appointer and Guardian in 1998]. Maybe you can ask Lu to come to answer you. …”[6]

(4)     The plaintiff also had no idea that she was removed as a beneficiary of the Trust in 1998 (until she was reinstated in 2009), and insisted that “[n]o one told [her]”, “it did not happen” and that she only heard about that for the first time from the defendant’s counsel during cross-examination – despite the fact that the plaintiff’s Witness Statement §14 expressly referred to such event.

(5)     The plaintiff clearly has no proper understanding of the concept of a discretionary trust.  Her perception of the nature and effect of the setting up of the Trust is encapsulated in this exchange during her cross-examination:

“Q. Let’s start with the core bundle, page 1. This is the first page of the trust deed for your husband’s trust which became the Lo Family Trust. Do you remember ever seeing this document?

A. No impression.

Q. Do you remember your husband ever discussing the terms of this document with you?

A. No.

Q. Who did you think was entitled to benefit under this trust?

A. No. (In English) Only me.

Q. Do you understand what a trust is?

A. Concerning a trust, it is safer to put it in.

Q. Safer in what sense?

A. Ie in respect of the family and the assets.

Q. So do you think it is like putting it into a safety deposit box? Is that what you mean by “safer”?

A. That is the way.

Q. It is like putting money in the bank, is that how you perceive it?

A. Approximately just like putting money into HSBC, because it is world famous, and it is reliable to put it in.”[7]

85.  Second, the plaintiffon her own case is unable to give direct evidence as to the contemporaneous communications with JSM and the Original Trustee whereby the Alleged Common Understanding was allegedly reached.  See the plaintiff’s Witness Statement §8, which states that: –

“When the Trust was established, it was principally [Mr Lo] who contacted JSM to determine the terms and other relevant arrangements with regards to the Trust. As I had complete trust in my late husband, I let him handle the establishment of the Trust. [Mr Lo] told me in various occasions that JSM had explained clearly to him that the Trust was set up solely for the purpose of making arrangements for the estate duty matters and would not have any effect on our controlling interests in the properties in our lifetime. According to [Mr Lo], he had a common understanding with the Original Trustee that the Original Trustee would only handle assets we placed with the Trust in adherence to [Mr Lo’s] and my wishes and instructions.”

86. In other words, the plaintiff did not have any direct discussion with JSM or the Original Trustee in relation to the setting up of the Trust, and bases her entire case on the Alleged Common Understanding on what Mr Lo allegedly told her after handling the setting up of the Trust on his own.

87.  This was further confirmed in her evidence during cross-examination:

“Q. But you have told us that you had no discussion with the trustee at all at the time.

A. The trustee? Are you talking about the trust?

Q. Yes. And so are you, in that sentence.

A. At that time or in that year I did not contact them.

Q. So you have no direct knowledge of any agreement with HSBC?

A. I did not talk to them face to face. After my husband handles the matter, he told me.

Q. Now, you told us earlier today and yesterday that you had no discussions with your husband about the trust.

A. Are you talking me? Myself?

Q. Yes.

A. Talking with my husband?

Q. About the trust.

A. He told me that it had been handled properly. Then I said “okay”.

Q. So you are saying that he told you that it had been handled properly, and you said “okay”?

A. Right.”[8]

88.  Since the plaintiff did not call any witness from JSM (which was noted by this court during opening submissions), and Mr Lo is no longer alive, this means that the plaintiff did not adduce any direct evidence as to the alleged “representations” made by JSM which constituted the Alleged Common Understanding.

89.  Third, the plaintiff cannot even give any satisfactory evidence as to her purported discussions with Mr Lo regarding the Alleged Common Understanding.  During cross-examination, the plaintiff was asked whether she remembered “any discussion with [Mr Lo] relating to JSM”, she replied “No, I don’t remember.”[9]

90.  In the exchange quoted in paragraph 87 above, the plaintiff alleged that Mr Lo had told her after the establishment of the Trust that “it had been handled properly”.  But if that was all Mr Lo had told the plaintiff, it plainly provides no basis whatsoever for the plaintiff to assert that an agreement was reached with the Original Trustee that it would act in accordance with Mr Lo and the plaintiff’s wishes (ie the Alleged Common Understanding). 

91.  The defendant’s counsel sought to probe the matter further and pressed the plaintiff for details as to what she knew about the alleged agreement, and when and how she was allegedly informed of such agreement.  The plaintiff simply maintained that such an agreement existed but was wholly unable to provide any details of the circumstances in which it was allegedly reached or when she was allegedly informed of it by Mr Lo. 

92.  In fact, in the course of such questioning the plaintiff became deliberately unhelpful and refused to provide any meaningful answer regarding her purported knowledge of the Alleged Common Understanding.  See for example the following: –

“Q. And how do you know he [ie Mr Lo] spoke to HSBC about it?

A. You put it in such a complicated manner. This of course happened, because such a huge sum of money and huge amounts of assets entered the trust. How come it would not be explained clearly?”[10]

“Q.     What I am interested in, Madam Lo, is what evidence you can give of discussions between your husband and HSBC.  What you are giving me is argument rather than facts.  Would you give me the facts, please, as you remember them? […]

A. (In English) You don’t talk to trouble, no?

A. What I’m telling you is the true fact. I won’t give you even a single lie, and in fact I am 100 years old. I don’t talk to you since you are too trouble.”[11]

“A. Because I dislike him putting so many questions to him [sic].”[12]

“A. I refuse to answer those questions which are too complicated.”[13]

93.  Eventually, the plaintiff’s evidence as to the actual content of her purported discussion with Mr Lo regarding the setting up of the Trust was encapsulated in the following exchange:

“Q. You had no discussions with HSBC about this, did you?

A. As I said, my husband decided everything, and after he handled the matters, he came back and told me that everything went into the trust in order to avoid the estate duty.

Q. And is that your only recollection of any relevant discussion that you had with your husband, what you have just said?

A.     Yes.  It had been said already, but you repeated the question. […]

Q. So let me put it to you again, Madam Lo. In your witness statement you are talking about a period when the trust was set up in 1984, in this paragraph [P Supp WS §26]. Do you understand?

A. Understand.

Q. And at that time you had no discussions with HSBC, did you? “Yes” or “no”?

A. You mean I myself?

Q. I mean you yourself.

A. No, I did not. My husband was responsible for all the discussions.

Q. And you had no discussions with JSM, did you?

A. No. My husband also handled everything.

Q. And your only recollection of any discussions which you had with your husband was what you told us a few minutes ago, that he came back after setting up the trust and said it had been done to save estate duty?

A. Yes.”[14]

94.  I agree that plainly, none of the above supports the existence of the Alleged Common Understanding.

95.  Fourth, the plaintiff’s oral evidence in fact positively contradicts her pleaded case as to her purported reliance on the Alleged Common Understanding in agreeing to inject her assets into the Trust.

96.  In the plaintiff’s Witness Statement §§9 and 11, she alleges that she and Mr Lo placed their assets into the Trust on the basis of the Alleged Common Understanding, and that “[she] would absolutely not have placed all [her] Great Eagle shares with the Trust if there had not been such an understanding.”  In court, however, the plaintiff gave contradictory evidence during her re-examination:

“Mr Yu: Right. Madam Lo, prior to the establishment of the trust, of course you also owned Great Eagle shares. That’s not in dispute, Madam Lo, we can show you the records.

A. Yes.

Q. And you told us you trusted your husband, and you told us that you knew that Great Eagle shares had been put into the trust, right?

A. Yes.

Q. And at that time were you prepared to have your Great Eagle shares injected into the trust?

A. It was also handled by my husband.

Q. Yes. I’m talking about your wish, your intention at the time.

A. Everything was handled by my husband.

Q. And you were happy for that to be the case?

A. Right.

Q. So if he were to put all your Great Eagle shares into the trust, you were quite happy to do that?

A. I will listen to him everything.

Q. Now would you have been prepared to listen to him and be prepared to inject every – your Great Eagle shares into the trust if there had been no consensus?

A. Not listening to which one?

Q. Your husband. If there had been no consensus.

A. Then I will still trust him.”[15]

(emphasis added)

97.  Fifth,the plaintiffseeks to rely on representations allegedly made by Paulina Lau (“Paulina”) that: (i) the plaintiff’s requests and instructions concerning the administration of the Trust and the trust fund would be followed by the defendant; and (ii) the plaintiff may remove the defendant as trustee of the Trust at any time if she was not satisfied with its performance.  However, the plaintiff’s evidence on such alleged representations was wholly unreliable.

98.  The plaintiff’s Witness Statement §16 alleges in this regard: –

“Ms Lau also expressed to me several times that I hold a unique position in the Trust and that the Defendant would surely act in adherence to my wishes and instructions. Almost every time when I met with Ms Lau, she would make it clear to me that I could remove the Defendant anytime if I had any dissatisfaction.”

99.  However, I agree the plaintiff’s purported recollection of the alleged representations by Paulina is incredible when viewed in light of her evidence in cross-examination, which shows that she has no recollection of most of her meetings or conversations with the defendant’s representatives – including momentous meetings at which very significant matters concerning the administration of the Trust were discussed, as well as some relatively recent meetings and conversations which took place since the events of early 2016.  For example, the plaintiff had no recollection of:

(1)     the meeting on 28 April 2004, regarding discussions over the distribution of shares in GE;

(2)     the meeting on 24 October 2006, between the defendant and the Lo Family after Mr Lo’s funeral;

(3)     the meeting on 1 March 2013, where the defendant and the Lo Family discussed the question of retaining the Trust’s GE shareholding;

(4)     the meeting on 27 November 2015, regarding discussions over a proposed distribution of cash from the Trust;

(5)     the telephone conversations with Paulina on 7 January 2016and 21 January 2016 in connection with the Jan 2016 Letter;

(6)     the telephone conversation with Paulina on 12 April 2016 regarding the Apr 2016 Letter.  (The plaintiff during cross-examination initially said she remembered the conversation, but shortly thereafter she changed tune and said alternately that she did not remember the conversation, or did not in fact have such conversation with Paulina.  She was unable to recall the conversation even after its recording was played to her in court.)

100.  Further, the plaintiff was unable to provide any plausible explanation as to the context in which Paulina allegedly made those representations.  The plaintiff was asked during cross-examination for particulars of the meetings at which Paulina allegedly made representations to her that if the plaintiff was unhappy she could remove the defendant as trustee:

“[Q.] Can you remember precisely any meeting when Paulina Lau said that to you?

A. She would meet me once every one month or so, but I did not go to other places to meet her.

Q. So you had regular meetings with Paulina Lau. And how often do you remember her saying this to you?

A. (In English) Every time.

Q. Every single meeting?

A. After finishing the lunch and before she left she said so.

Q. And how did the issue arise, Madam Lo? It is not something that you say out of the blue to somebody after lunch is it?

… [Interpreter seeks clarification of question.]…

[Q.] How did the issue arise of your being able to remove the trustee if you were unhappy?

A. At that time, I treated her lunch in Yat Tung Heen.

Q. What did you say to her such that she replied, “You can always remove the trustee if you are unhappy”?

A. No, nothing in particular was said. Nothing. If it was smooth, nothing was said. She came to have lunch with me. That’s it.

Q. So she just volunteered this remark out of the blue; is that what we should understand?

A. Right.”[16]

101.  It is inherently improbable that Paulina would have volunteered the alleged remarks out of the blue as the plaintiff alleges. The plaintiff’s evidence on this aspect of her case, which is devoid of detail in every respect apart from the specific representations allegedly made by Paulina to her, is wholly unsatisfactory and is accordingly not accepted, particularly in view of Paulina’s clear and firm denials:

(1)     Paulina testified that she had on many occasions clearly explained to the plaintiff and the other beneficiaries that the Trust was discretionary in nature, under which there was a system for the Appointors and Guardians – not the plaintiff – to fire the defendant as trustee if they were dissatisfied with the defendant.

(2)     Paulina also specifically denied that she had ever told the plaintiff that the plaintiff personally could fire the defendant as trustee.  In fact, Paulina recalled that the plaintiff even asked Paulina why it was not the plaintiff herself who could fire the trustee.

102.  Further, insofar as the plaintiff seeks to rely on certain statements made by Paulina to the plaintiff during a telephone conversation on 7 January 2016, Paulina explained clearly that when Paulina stated “It’s always you who make the decision as long as you are still living” during the conversation, Paulina was actually referring to the fact that under the 1988 Letter, it was the plaintiff who could express her wishes or make her requests to the defendant.

103.  In sum, I agree with the defendant’s submission that the plaintiff’s evidence on the Alleged Common Understanding is highly problematic and fundamentally unreliable.  She is wholly unable to give any useful evidence as to the contemporaneous communications with the Original Trustee which allegedly gave rise to the alleged understanding.  Her evidence on her alleged discussions with Mr Lo, as well as the alleged representations by Paulina, are also entirely unsatisfactory. 

104.  It may be that the plaintiff genuinely – but misguidedly – believes that she is entitled to give instructions to the defendant regarding the administration of the Trust as the Alleged Common Understanding suggests.  During her evidence, she repeatedly asserted that “the money belongs to me, it should be distributed all to me” and “I just wanted to have my money back.  Because it is my money.”[17] She likens the setting up of the Trust with putting assets into a safety deposit box and claims to be the only one entitled to benefit under the Trust.  Her understanding of the nature of the Trust is fundamentally misguided; and this is possibly the reason why she believes in her mind, genuinely but misguidedly, that she is entitled to issue instructions to the defendant and expects the defendant to comply with such instructions.

YS’s evidence

105.  YS’s evidence was of little assistance on whether the Alleged Common Understanding existed.  He accepted that: (i) he had no involvement in the setting up of the Trust in 1984; (ii) he was not aware of any discussions between Mr Lo and JSM in 1984; and (iii) from 1984 to 1989, he had no discussions with Mr Lo/the plaintiff about the Trust (because he had little contact with his family during that period).

107.  YS brushed aside the numerous legal documents which contradicted the Alleged Common Understanding, dismissing those terms as mere technicalities.  For instance: –

(1)     When the defendant’s counsel pointed out the meeting note for the meeting dated 23 January 2009, where Linda Iu of JSM and Paulina explained to the plaintiff and some of the beneficiaries (including YS) that the defendant had “discretionary powers”, YS’s response was to dismiss it as mere “legal jargon”. 

(2)     When the defendant’s counsel referred to a deed of release dated 27 February 2009, which YS himself had signed, and which acknowledged that“The Trustee has exercised its discretionary powers…” and that the defendant had “sole, absolute and uncontrolled discretionary powers”, YS again dismissed it as mere “legal form”, “just legal jargon”, and “a formality”.

108.  I agree with the defendant’s submission that YS’s attitude reflected that of the plaintiff: a stubbornly held belief that the defendant was obliged to follow the plaintiff’s instructions – which belief doggedly ignored the actual terms of the legal documentation. 

Lu’s evidence

109.  Lu’s evidence also did not help the plaintiff’s case as to the existence of the Alleged Common Understanding. 

110.  First, Lu claimed that he discussed with Mr Lo and the plaintiff in 1983-1984 (ie before the Trust was created) about the Alleged Common Understanding.  Lu said that Mr Lo was concerned about retaining control, and therefore asked Lu to write to JSM “asking how the control could be assured”.  JSM then wrote back, saying that the “system incorporating appointors, guardians, will be the answer.”[18]

111.  But I agree this evidence actually undermines the plaintiff’s case on the Alleged Common Understanding.  On Lu’s own evidence, Mr Lo’s concerns about retaining control were (as expressly explained by JSM to Lu) to be catered for by the Appointor and Guardian mechanism – ie by the terms of the Trust Deed itself, and not by some unwritten ‘understanding’ outside the Trust Deed.

112.  Second,as Lu explained in cross-examination, his idea of the Alleged Common Understanding was that the defendant would “follow” or “adhere to” whatever requests were made by the plaintiff and Mr Lo.[19]

113.  However, this was different from: (i) the concept which was stated in another part of Lu’s evidence, which was that the plaintiff’s and Mr Lo’s views would be accorded “the most serious consideration and respect”[20]; and (ii) the plaintiff’s case on the Alleged Common Understanding as explained by her counsel during the oral opening submissions (see §38 above).

114.  Plainly, there is significant confusion within the plaintiff’s side about the precise content of the Alleged Common Understanding.  This highlights the dubiousness of the plaintiff’s claim that the Alleged Common Understanding existed between JSM and Mr Lo; and then was communicated by JSM to the Original Trustee.  It is incredible that such a slippery concept could have been agreed between JSM (a highly reputable firm of solicitors) and Mr Lo; and then communicated by JSM to the Original Trustee (a long-established and respectable trustee company), without being set out in writing anywhere. 

115.  Third, Lu professed to “firmly believe” that if the defendant did not follow his parents’ requests, his parents would have considered to “unwind the Trust or would have stopped injecting further assets into the Trust.”  However, during cross-examination, he admitted that this belief was not based on any actual discussion between him and his parents – ie he merely assumed that this was the case. 

116.  Fourth, Lu’s claim about the Alleged Common Understanding is further contradicted by various correspondence in which he has been involved over the years in his capacity as an Appointor and Guardian.

117.  In a letter dated 27 September 2006 signed by Lu, KS and Nina to the defendant, it was stated at §3: –

“Without imposing any binding trust or obligation upon you, we would be grateful if you could consider exercising your discretionary power as trustee of the Trust to procure the shareholders’ approval for the aforesaid proposal to execute the written resolutions of all the shareholders of SSHL in the form attached and other necessary documents in this connection” (emphasis added).

118.  Similarly, in a letter dated 15 November 2006, signed by Lu, KS and Nina to the defendant, which stated at §3: –

“Without imposing any binding trust or obligation upon you, we should be grateful if you could [consider] exercising your discretionary power as trustee of the Trust to demand SSBL to make a full repayment of the debts in the total sum of HKD182,019,306.12, and waive all interests payable on the debts if such repayment is made within one month from the date of demand” (emphasis added).

119.  If Lu’s claim about the Alleged Common Understanding were true, it is inconceivable that he would have signed such letters in the above terms, without raising any complaint, objection, or queries to the defendant. 

120.  Later, in September 2015, there was a discussion in September 2015 between the defendant and the Appointors and Guardians (i.e. Lu, KS, and Nina) about the possibility of granting an “open waiver” for the defendant’s exercise of investment powers (such that the defendant would no longer be required to wait for 30 days before it made an investment decision): –

(1)     On 16 September 2015 (10:25am) Paulina sent an email to Lu, KS, and Nina asking them to confirm their agreement for Powermax Agents Limited (“Powermax”) to acquire 200,000 shares per day in Tracker Fund at market price for an amount not exceeding HK$5 million, with total holding in Tracker Fund not exceeding HK$50 million.

(2)     At 11:12am on 16 September 2015, Lu replied that he agreed to the acquisition of Tracker Fund shares, but that in the future, he hoped such arrangement would not be reached on such an urgent basis.  He also asked “is such kind of instructions between appointors and trustee considered to be along the proper channel regarding such kind of authorization? Are appointors authorized to give such instructions or approvals?”.

(3)     On 17 September 2015 at 11:03am Lu sent a follow-up email to Paulina, noting “I’m still puzzled about what authority we actually have.  If the appointors don’t have such authority, then in future you shouldn’t waste time seeking for our approval.  It will be your duty and responsibility to make decisions regarding all trust’s matters”(emphasis added).

(4)     At 11:37am on the same day Paulina replied to Lu, explaining that with respect to investment matters, “Trustee got the investment powers but subject to 30 days’ prior notice to Appointors & Guardians… With the waiver from Appointors & Guardians, the Trustee can act immediately.”

(5)     At 5:39pm, Paulina sent a further email to Lu (copied to Nina and KS) to explain the role of the Appointors’ waiver.  She explained that “time is of the essence” for investment, and therefore one alternative was for the Appointors to give the defendant an “open waiver” in respect of the defendant’s investment powers, such that the defendant did not have to serve 30 days’ prior notice for investment matters.  This way, “The Trustee can exercise its discretion in investment.”

(6)     In the end, Nina emailed Paulina to decline providing an open waiver.  Paulina then informed Nina’s decision to KS and Lu, noting that as a result, the defendant would have to continue to ask the Appointors and Guardians for waiver of 30 days’ notice. 

121.  I agree the above exchange clearly shows that both the defendant and the Appointors and Guardians (including Lu, who raised no objection or subsequent query on the topic) understood and acknowledged the defendant’s absolute discretionary powers in investment decisions concerning the Trust.

122.  When cross-examined about the above correspondence, Lu simply brushed aside such words as mere legal jargon:

“they always say, whatever we write to them, it is not binding on you, no obligation to follow our wishes, blah, blah, blah…”[21]

“First of all, the appointors, 30 days, blah, blah, blah, those are nonsense, it is irrelevant.”[22]

“But of course right up front they have to say, "Nothing is binding, there is no obligation for the trustee to follow the wishes of the Lo family". That's fine. We have seen that phrase all along all our lives. It is invisible to us.”[23]

123.  Thus, in a similar way to YS (§§107-108 above), Lu brushed aside any document which contradicted the Alleged Common Understanding (in favour of clinging on to his preconceived notion of the defendant’s function).  This was evident throughout his cross-examination.  Another example was when the defendant’s counsel asked Lu about a letter signed by the plaintiff and addressed to the defendant dated 27 November 2015 which stated that: “Without imposing any legally binding trusts or obligations upon you, I should be grateful if you in your capacity as trustee of the trust to consider exercising your discretionary power to…”, Lu dismissed that statement as “just a rhetoric”.[24]

124.  Another relevant chain of correspondence took place shortly thereafter between September and October 2015:

(1)     Paulina proposed, for the purpose of currency diversification, to convert certain proceeds of CNY certificates of deposits into HKD and sought the Appointors and Guardians’ waiver of notice the period. 

(2)     KS agreed to provide a waiver, but Nina did not.

(3)     Therefore, at 12:03pm on 18 September 2015, Paulina informed Lu, KS, and Nina that the defendant would have to wait for 30 days in order to convert the CNY to HKD, noting that by that time, the exchange rate might have changed.

(4)     On 2 October 2015 (10:50am) Paulina further emailed Nina, KS and Lu and forwarded a commentary on the performance of CNY from an investment counsellor of HSBC Private Bank who was advising on Powermax’s investment.  Paulina repeated that the defendant would like to diversify the currency risk and convert part of the CNY proceeds into HKD.  Significantly, Paulina explained that even if the joint waiver was not provided by the Appointors, the defendant would still proceed with the currency conversion on 19 October 2015 (ie 30 days after the defendant made the decision on 18 September 2015).

(5)     In these circumstances, at 12:59pm on the same day, Nina emailed the defendant, KS, and Lu, stating that although she still maintained her view in favour of retaining CNY:

“I regret that my view is not shared by the other two appointors and the Trustee. The Trustee has already made the decision to convert CNY to HKD (or USD) on 18 September 2015 and I cannot singly avert this decision. In such circumstance the conversion of CNY96,244,493.53 will be made by the Trustee anyways whether on 9^th Oct (if I give my waiver) or on 19^th Oct (if I do not give my waiver), I will then reluctantly give my waiver to the 30 days’ notice as requested by the Trustee on the subject matter.” (emphasis added)

(6)     On 7 October 2015, Paulina emailed Nina, KS, and Lu and informed them that the defendant had completed the currency conversion from CNY into HKD the previous day.

125.  Throughout this exchange, Lu did not raise any objection or query as to the way the defendant exercised its discretion to convert the currency in the Trust Fund, or its power to do so without the Appointors’ waivers.  Nor did Lu object or reply to Nina’s email where she stated her understanding that the defendant had already made a decision to convert the currency regardless of her consent.  If the Alleged Common Understanding existed as Lu now claims, it is inconceivable that Lu would have remained silent without raising any objection.

Anna Poon’s evidence

126.  Anna Poon (“Anna”) was involved in the management of the Trust since its inception in 1984, even though she was very junior in the early days and was then assisting the late Ms Anna Yan who was the trust officer in charge of managing the Trust at the time. In around late 1989 to early 1990, Anna became the trust officer in charge of the Trust.  In May 1993, Ms Michelle Cheng replaced Anna as trust officer of the Trust, but Anna continued to supervise the administration of the Trust until around October 2000.

127.  Anna gave clear evidence that she had not, prior to these legal proceedings, heard of the Alleged Common Understanding, and disagreed that the defendant had been administering the Trust in accordance with such Alleged Common Understanding.

128.  During Anna’s cross-examination, she was firm and clear that she never considered the defendant to have been acting on Mr Lo’s instructions in administering the Trust.  She maintained that in respect of each transaction, the defendant had to consider how to act, and when she was involved in the process, she had great respect for Mr Lo’s views because he was running GE’s business successfully at the time, and Anna believed in his judgment and that he would be looking after himself and his family in proposing any matter regarding the administration of the Trust.

129.  Anna also firmly rejected the proposition that she did not truly act as a discretionary trustee given the absence of enquiries on her part as to the circumstances of the beneficiaries.  Her explanation, which I accept is entirely credible, is that she believed that if the beneficiaries needed assistance from the Trust, they would have approached the defendant, either through Mr Lo (who was the head of the family at the time when Anna was involved in the administration of the Trust) or the plaintiff or directly.  Since that had not happened during her time, she did not consider that she had to make general enquiries as to the circumstances of the beneficiaries.

Paulina Lau’s evidence

130.  Paulina first became involved with the administration of the Trust in around December 2002, and was the relationship manager of the Trust from around December 2005 to 2017.  Paulina gave clear evidence that in her almost 15 years of involvement with the Trust, she had never heard of the Alleged Common Understanding as between Mr Lo and the plaintiff (on the one hand) and the defendant (on the other) that Mr Lo and the plaintiff would effectively control the Trust.

131.  In support of her understanding that the Alleged Common Understanding did not exist, Paulina gave evidence that over the past years, when she explained to the plaintiff (including occasions when the plaintiff was accompanied by her lawyer) and other beneficiaries the discretionary nature of the Trust and the non-legally binding nature of the 1988 Letter, no one had ever raised any objections or challenged the defendant’s description of the Trust or the defendant’s discretionary powers, for example, at the defendant’s meetings with the Lo Family on 23 January 2009, 1 March 2013, and 27 November 2015.  Paulina specifically remembered that during the 23 January 2009 meeting, in response to YS’s query of whether the defendant would accede to the plaintiff’s latest wishes, she replied that “the trustee would give due consideration to Madam Lo’s wishes and other factors before it exercised its discretionary powers”,and this explanation was confirmed by Linda Iu of JSM.

132.  Paulina also expressly denied the allegation that the defendant did not take decisions itself but simply followed what it was told to do by Mr Lo when he was alive, and after he died, by the plaintiff.  She clearly testified that the defendant had reached its decisions in respect of the Trust based on its own knowledge and judgment, and in certain cases with reference to the advice of suitably qualified experts and professionals.

133.  The plaintiff seeks to rely on a telephone conversation between Paulina and Archie on 7 January 2016 to support the existence of the Alleged Common Understanding.  However, I agree with the defendant’s submission that this was unfounded: –

(1)     First, the plaintiff relies on counter 245 at page 31 of the telephone transcript, where Paulina stated “Well, when your Mother is here, then it has always been said that she decides”.  However, as Paulina explained at trial, this was referring to the plaintiff’s ability to express her wishes or make recommendations under the 1988 Letter.

(2)     Second, the plaintiff purports to rely on counters 262 and 263 at page 32 of the telephone transcript, where Paulina agreed with Archie’s statement that “Okay, I understand.  That is, originally, it’s Mother who is in control.  Right now, this has changed.  It’s basically that, beneficiary in control.”Once again, this has to be read in the context of the entire conversation and on both parties’ clear understanding that the Trust is a discretionary trust. 

(a)     As Paulina explained, Archie was expressing in general laymen terms that under the 1988 Letter, it was the plaintiff who had the “say”.

(b)     This is corroborated by Archie’s evidence in cross-examination, where he stated in no uncertain terms that it is the defendant as the discretionary trustee with complete and unfettered discretion, who could make the final decision in respect of the Trust, and that the plaintiff could express her wishes to the defendant during her lifetime.

Brent York’s evidence

134.  Consistent with Paulina’s and Anna’s evidence: –

(1)     Brent York (“Brent”) was firm in articulating his view that the Trust was a full discretionary trust.

(2)     He also clearly stated that he had never heard of the Alleged Common Understanding at any time before the plaintiff’s commencement of HCA 3246/2016 (which was contrary to the notion of a discretionary trust).

KS’s evidence

135.  KS’s evidence was that: –

(1)     The Alleged Common Understanding is inconsistent with his recollection and experience of how the Trust has been operated over the past decade (including his experience as one of the Appointors and Guardians).

(2)     He has always understood the Trust to be a proper discretionary trust governed by the Trust Deed.

(3)     He recalled the defendant saying on numerous occasions that final authority rests with the defendant.

(4)     He also recalled the plaintiff mentioning many times that Paulina had told her that the defendant had the final say on the administration and management of the Trust. 

Archie’s and Vincent’s evidence

136.  Similarly, Archie and Vincent gave evidence that neither of them has ever heard of the Alleged Common Understanding from the plaintiff or their other siblings over the years, even on the occasions that the plaintiff has spoken to them about the Trust.

137.  In Archie’s oral evidence, he also confirmed his understanding throughout the years that the defendant has complete and unfettered discretion in the administration of the Trust, and it is the defendant who could make the final decision in respect of the Trust.  Archie further confirmed the exchange between him and Paulina during the meeting on 24 October 2006, where he raised a hypothetical question of whether the defendant would agree to do something if it was what all the beneficiaries had agreed to.  Paulina answered that it would depend “case by case”, which was accepted by Archie.

138.  In Vincent’s cross-examination, he also gave evidence that even if all his siblings requested the defendant to accede to the plaintiff’s wishes, it would be the defendant as trustee who decides for itself, and he did not think that the defendant would simply follow their instruction.  Vincent repeated that regarding whether the defendant should acquire more GE shares, “I think the trustee will have to take its own view as to what they should be doing”.[25]

D3e.  Purported reliance on subsequent conduct

139.  Next, the plaintiff tries to rely on various historical transactions where the Original Trustee and the defendant supposedly complied with requests made by Mr Lo and/or the plaintiff.  In referring to such historical transactions the plaintiff is not suggesting that the defendant had acted in breach of trust in conducting such transactions; instead, the plaintiff’s allegation is that such matters support the existence of the Alleged Common Understanding.

Legal principles

140.  As submitted by the defendant, the plaintiff’s attempted reliance on such historical transactions has to be viewed in light of the following legal principles:

(1)     A trustee must apply his mind to the exercise of any power or discretion.  It is a ground for impugning the exercise of a fiduciary power if the trustees never actually applied their minds at all to the exercise of the discretion entrusted to them: Thomas & Hudson, The Law of Trusts, 2^nd ed, §§11.31-11.33; Turner v Turner [1984] Ch 100, at 109F-110C, 111C (Mervyn Davies J). 

(2)     A related duty is that a trustee must not act as a mere cipher under the dictation or instruction of another; to do so is a breach of trust.  That is because the discretion conferred on a trustee is of a personal nature, and any exercise of the power must be a personal and conscious act of the trustee himself: Thomas & Hudson, supra, §§11.34-11.38; Inland Revenue Commissioners v Schroder [1983] STC 480, 505b (Vinelott J); Pitt v Holt [2013] 2 AC 108, §§66-67 (Lord Walker). 

(3)     However, a trustee can properly exercise his powers in order to give effect to the wishes of an object (or of the settlor), provided the trustee himself has considered the matter and himself takes the final decision.  Similarly, there is no reason why a trustee should not follow the instructions given to him, even if they lead to a course of action which he would not otherwise have adopted, provided he does not simply obey such instructions blindly.  See: Thomas & Hudson, supra, §11.37; Lewin, supra, §29-163; Kain v Hutton [2007] NZCA 199, §272 (Glazebrook J); Kan Lai Kwan v Poon Lok To Otto (2014) 17 HKCFAR 414, §33 (Ribeiro PJ).

(4)     It follows that a trustee’s repeated compliance with a settlor’s wishes is not indicative of an abdication of duty; it is equally consistent with a properly-administered trust where the trustees have in good faith considered each request of the settlor, concluded that it is reasonable, and concluded that it is proper to accede to such requests in the interests of one or more of the beneficiaries of the trust. In fact, in private family trusts, it is common and unsurprising that requests by settlors would almost always be complied with by the trustees.  See: Kan Lai Kwan v Poon Lok To Otto, supra, §35, where Ribeiro PJ referred with approval to the following observations of the Jersey Royal Court in Re Esteem Settlement [2003] JLR 188, §§165-167: –

“165. … In our judgment there is nothing untoward in beneficiaries making requests of a trustee as to the investment of the trust fund, the acquisition of properties for them to live in or for the refurbishment of properties in which they already live. In our judgment many decisions of this nature are likely to arise because of a request by a beneficiary rather than because of an independent originating action on the part of a trustee. The approach that a trustee should adopt to a request will depend upon the nature of the request, the interests of other beneficiaries and all the surrounding circumstances. Certainly, if he is to be exercising his fiduciary powers in good faith, the trustee must be willing to reject a request if he thinks that this is the right course. But when a trustee concludes that the request is reasonable having regard to all the circumstances of the case and is in the interests of the beneficiary concerned, he should certainly not refuse the request simply in order to assert or prove his independence. His duty remains at all times to act in good faith in the interests of his beneficiaries, not to act against those interests for improper reasons.

166. In our judgment, where the requests made of trustees are reasonable in the context of all the circumstances, it would be the exception rather than the rule for trustees to refuse such requests. Indeed, as Mr Journeaux accepted, one would expect to find that in the majority of trusts, there had not been a refusal by the trustees of a request by a settlor. This would no doubt be because, in the majority of cases, a settlor would be acting reasonably in the interests of himself and his family. This would particularly be so where there was a small close-knit family and where the settlor could be expected to be fully aware of what was in the interests of his family. Indeed, in almost all discretionary trusts, the settlor provides a letter of wishes which expresses informally his desires in relation to the administration of the settlement. Furthermore he may change his wishes from time to time. In our judgment it is perfectly clear that trustees are entitled… to take account of such wishes as the settlor may from time to time express provided, of course, that the trustees are not in any way bound by them. The trustees must reach their own independent conclusion having taken account of such wishes.

167. On numerous occasions during the course of the hearing, Mr Journeaux was driven to repeat that Abacus had not rejected any request of Sheikh Fahad. A lack of any refusal may of course be indicative of the fact that trustees have abdicated their fiduciary duties and are simply following the wishes of the settlor without further consideration. But, as mentioned above, a lack of any refusal may be equally consistent with a properly-administered trust where the trustees have in good faith considered each request of the settlor, concluded that it is reasonable and concluded that it is proper to accede to such requests in the interests of one or more of the beneficiaries of the trust. But one does not start, as at times seems to have been the plaintiffs’ case, with an attitude that it is very surprising and worthy of criticism that the trustee acceded to all Sheikh Fahad’s requests. On the contrary… trustees exist for the benefit of beneficiaries and it is in our judgment very common that trustees will have perfectly properly acceded to all the requests of a settlor without in any way abdicating their fiduciary duties and responsibilities. …” (emphasis added)

Historical transactions relied on by the plaintiff

141.  Even if evidence of the historical transactions (which constitute conduct subsequent to the establishment of the Trust) is admissible (which is not accepted, see Section D2a above), they simply do not support the plaintiff’s claim.  To the contrary, there is substantial material in the circumstances in which such transactions were undertaken which is inconsistent with the Alleged Common Understanding.  Further, I agree that the defendant’s witnesses in these proceedings have also given consistent and credible evidence to explain how the transactions do not support the existence of the Alleged Common Understanding.

142.  As pointed out by the defendant, the following matters in particular should be highlighted.

143.  First, the historical transactions include instances where the Original Trustee / the defendant had positively asserted its role as discretionary trustee. 

144.  For example, evidence was adduced at trial that there was an incident where Mr Lo, on 18 February 1986, purported to sell 2,064,000 ordinary shares in GE belonging to the Trust for the purpose of swapping them into preferred ordinary shares in GE without first seeking the Original Trustee’s consent.  On 19 February 1986, Mr T K Kan of GE called Ms Anna Yan of the Original Trustee to inform her of the matter.  Mr Kan explained that “it was difficult for Mr Lo to comprehend that he should relinquish control [over the trust assets] since, to him, he still liked to think that they were his own assets”.  Ms Yan replied that whilst she appreciated how Mr Lo felt, but “as Trustees, [the Original Trustee was] accountable to all the eligible beneficiaries named in the [Trust] Deed.” 

145.  So whilst Mr Lo was subjectively having difficulty accepting the reality of having relinquished control over the trust assets, the Original Trustee clearly regarded itself as a discretionary trustee having control and responsibility over the assets and owing duties to all beneficiaries of the Trust.  I agree that this is plainly inconsistent with the Alleged Common Understanding.

146.  Eventually, the Original Trustee agreed to authorise Mr Lo to act as its agent to carry out the share swap.  Anna was asked about this incident during her cross-examination.  She explained that she was not involved in the communications with Mr T K Kan or the Original Trustee’s decision in question, but her understanding is that the Original Trustee agreed to authorise Mr Lo to act as its agent in dealing with GE shares because Mr Lo was at the helm of the company at the time and was the best person to monitor the price of the shares.  She considered this to be an example where the Original Trustee, having been made aware of Mr Lo’s wishes regarding the trading of GE shares, reminded Mr Lo of the Original Trustee’s duty as discretionary trustee to have regard to the interests of all beneficiaries and then negotiated with Mr Lo to arrive at a consensus and at the same time fulfil the Original Trustee’s fiduciary duty.

147.  Another example: in relation to the October 2008 distributions, the plaintiff had proposed to waive interest for the excess distribution; however, after considering the matter, the defendant “had decided to still charge cost of fund for the excess distribution in order to be fair to all beneficiaries” (see meeting note dated 23 January 2009).  In other words, the defendant made its own decision, which was contrary to what had been suggested by the plaintiff. 

148.  Second, the transactions also include communications which indicate that the Original Trustee / the defendant appreciated that it had a discretion in exercising its powers, and was prepared to exercise such power based on its own view.  A number of examples have been given during the trial. 

149.  In March 1990, the Original Trustee had to elect between cash or scrip dividends in respect of the GE shares held by the Trust. It expressly asked Mr Lo for his “recommendation” in the following terms:

“We shall be most grateful if you will let us have your recommendation as to how we should receive the dividend. If we do not hear from you on or before 29 March 1990, we shall notify the Bank nominees to receive the dividend in cash for the above account.” (emphasis added)

150.  Also in March 1990, the Original Trustee had to vote in respect of certain proposed resolutions to establish GE as the new holding company of the group pursuant to a scheme of arrangement.  The Original Trustee wrote to Mr Lo to indicate that it would vote in favour of the resolutions unless it received any contrary view from Mr Lo.

151.  For GE’s 1996 AGM, the Original Trustee wrote to Mr Lo to indicate that it would vote in favour of the proposed resolutions unless it received any contrary view from Mr Lo.

152.  Third,the transactions also include requests made by Mr Lo and/or the plaintiff in expressly precatory terms to the Original Trustee, which contradict the Alleged Common Understanding.  See for example: –

(1)     letter from Mr Lo and the plaintiff to the Original Trustee dated 26 September 1995, stating: “Without imposing any legally binding trust or obligation upon you, we would be grateful if you could consider exercising your investment power as trustee of the Trust to subscribe for 10,534 shares in… Graswood… at US$1.00 per share and advance a sum of HK$113,263,674.80 to Graswood by way of interest free loan” (emphasis added);

(2)     letter from Mr Lo and the plaintiff to the Original Trustee dated 15 September 1999, stating: “Without imposing any binding trust or obligation upon you, we should be grateful if you in your capacity as trustee of the Trust, would consider exercising your powers as follows: (1) to waive the debt in the sum of HK$113,263,674.80 owing from Graswood to you as trustee of the Trust… (2) to transfer by way of asset contribution the 10,534 shares in Graswood being all the shares owned by the Trust in that Company to SSHC as trustee of the Unit Trust” (emphasis added);

(3)     letter from Mr Lo and the plaintiff to the Original Trustee dated 5 November 1997, stating: “Without imposing any binding trust or obligation upon you, we should be grateful if you in your capacity as trustee of the Trust, would consider exercising your power under Clause 9(i) of the deed… to acquire 7,484,940 shares in [GE] through your nominee at HK$13.00 per share for the Trust” (emphasis added). 

153.  Fourth, regarding transactions where the Original Trustee or the defendant made a decision which was in line with Mr Lo’s request, the evidence of the defendant’s witnesses as to why such a course of action was accepted credibly supports the defendant’s case that the Original Trustee or the defendant itself was not simply acting on Mr Lo’s instructions, but had reached their own decision to take those steps.

154.  A prime example of this concerns the series of transactions involving the Original Trustee’s application of dividends received from the GE shares held by the Trust as interest-free loans to Shui Sing Holding Corporation (“SSHC”) as trustee of the Shui Sing Unit Trust (“SSUT”). The plaintiff relies heavily on such transactions to suggest that the Alleged Common Understanding exists.

155.  However, as explained by Anna in her testimony, the Original Trustee was not simply acting upon the instructions of Mr Lo in relation to the treatment of the dividends.  Anna said that she knew that Mr Lo was behind the SSUT, and she considered the granting of the interest-free loans to be appropriate because she understood that Mr Lo was managing the investment of the funds provided to SSUT, and on that basis she did not feel that it was necessary for her to consider other alternatives for utilising the dividends.  See, for example, her explanation that:

“… because Mr Lo is running the unit trust, the trust deed of unit trust, that do the investment, so my consideration is because Mr Lo is there, that’s why I invested – I put the money into the company. And actually the interest-free loan is only a mechanic, in order to get Mr Lo helping the trustee to invest in the market, there needs to be some way to put the money into the unit trust, so the interest-free loan is the mechanic to put it into the [unit trust]”).[26]

She did not think there was any problem in the trustee continuously acceding to the requests for the dividends to be applied as interest-free loans to SSUT over the years because:

“as long as the late Mr Lo [was] running it [i.e. SSUT], we were comfortable. Because he is a businessman, he has run the company. So – and I think he would look after the interests of all his family”.[27]

156.  Anna also disagreed that the documentation in connection with the treatment of the dividends, such as the trustee’s memoranda of determination, were mere “formalities”.  She emphasised that there was an initial decision that Mr Lo was the appropriate person to invest the dividends received, and as long as Mr Lo continued in that role, the trustee was comfortable to continue to apply the dividends as interest-free loans to SSUT to enable Mr Lo to look after that money. 

157.  Insofar as the plaintiff argues that the treatment of the dividends shows that the defendant was not exercising any discretion in the matter because the Trust and the SSUT had different beneficiaries, and the trustee ought to have but failed to consider such matter in deciding whether to apply the dividends it received from GE shares as interest-free loans to SSUT – Anna frankly accepted that she did not remember who the beneficiaries of the SSUT were and did not try to find out.  She also fairly accepted that if she had known that some of the Children were not beneficiaries of SSUT, she would probably have wanted to make enquiries as to why such Children were not included, and to consider the reasons given.  However, she remained firm that she was not merely acting on instructions and had dealt with the dividends in the way she did because she considered that Mr Lo was the appropriate person to look after the money.

158.  In this connection, it must be borne in mind that the plaintiff makes no allegation that the Original Trustee was negligent or in breach of duty in its administration of the Trust.  What the plaintiff is asking is for the court to infer from the aforesaid transactions that the Original Trustee was blindly following Mr Lo’s instructions pursuant to the Alleged Common Understanding.  Even if there were certain questions which Anna could in retrospect have asked in connection with her work back in the 1980s and 1990s, I agree her clear and credible explanations as to how she had considered and saw fit to accede to the transactions are amply sufficient to refute the plaintiff’s allegation that the Original Trustee was not exercising any discretion but was merely taking instructions from Mr Lo.

159.  It is also notable that on each occasion when the Original Trustee received dividends from the GE shares held by the Trust, it had on its own initiative placed the funds on call deposit pending its consultation of the wishes of Mr Lo and the plaintiff as to the use of the funds.

160.  Fifth, regarding some of the historical transactions, for example the distributions in 2008, 2009 and 2015, the plaintiff points to the fact that the defendant had sought to obtain a letter of request from the plaintiff before proceeding to act accordingly.  However, I agree this provides little evidence of the Alleged Common Understanding.  As explained by Brent, it is standard practice for the defendant, whenever it intends to make a distribution out of a discretionary trust, to request the settlors or beneficiaries to make written requests for the distribution.  The purpose is to avoid any allegation that the defendant was unilaterally making payments from the trust for unclear purposes.

161.  That practice makes perfect sense generally, but especially in the context of the present Trust.  The beneficiaries of the Trust include members of the Lo Family which are extensive and belong to different branches of the family.  Further, as can be seen from the correspondence and meeting notes over the years, it was common for the beneficiaries to hold (and robustly express) different views on myriad issues.  In all circumstances of the family dynamics, there were good practical reasons for the defendant (even though it had absolute discretion to make decisions) to ask for such letters of wishes, in order to reduce the risk of later disputes about whether the decisions were in the best interests of the beneficiaries or accorded with their preferences. 

162.  In light of the above, the defendant’s requests for letter of wishes over the years are entirely neutral.  It does not demonstrate that the defendant saw itself as bound to follow whatever wishes were expressed by the plaintiff. 

Trustee documents relied on by the plaintiff

163.  The plaintiff also relies on the following documents in support of the Alleged Common Understanding, but that is likewise unsound.

164.  First,the plaintiffrelies on a document entitled “Summary of Trust”, which form part of the case opening documents of the Trust and contains a line stating “Investment Responsibilities: to act on instructions of the principal”:

(1)     When asked about this document in cross-examination, Anna was firm that despite the use of the word “instructions” in the document, she did not understand the role of the Original Trustee/the defendant as trustee of the Trust to be one where the Original Trustee/the defendant simply followed the settlor’s instructions.  She explained that the Summary of Trust was “only part of the opening documents [of the Trust]”, and she “was trained to look at the [trust] deed first before [she] look[s] at the summary”: Anna XXn, Day 13 (14 June 2018), pp.46 (line 18) to 51 (line 14).

(2)     Anna also explained that she thought that the word “instructions” used in the Summary of Trust was “extracted from the letter of wishes prepared by JSM”, and she understood that regardless of the use of the word “instructions”, she still considered that the Original Trustee had to act as a discretionary trustee.  In her words, “whether it is an instruction, or a recommendation, or to express his wishes, we do it the same way.  We just go through the process as a discretionary trust.  There is no difference.  Whether it is a letter of instruction, it is a letter of wishes, or it is a letter of advice, or recommendation, we still go through the same thinking process as a discretionary trustee.  I mean the word “instruction” doesn’t really mean to us that much compared with “recommendation”, “advice”, or “wishes”.”

(3)     Further, there are also other statements in the Summary of Trust which contradict the Alleged Common Understanding, including, “Class of Trust: Discretionary Settlement”; “Purpose: To hold assets for eligible beneficiaries”; and “Other Responsibilities: Normal Trustee Responsibilities”.

165.  Second,the plaintiffrelies on a “Private Trust Review Checklist” dated 1 August 1995, which contains in its first page, against the question “10. Is a special fee due for onerous duties/requests”, a handwritten annotation “X: JSM passive account hold only shares in Great Eagle”.  Again, when asked about this document in cross-examination, Anna was firm that she did not understand it to mean that all decisions concerning the Trust were to be made by the settlor instead of the trustee.  She thought that the statement simply reflected the fact that at that time the Trust did not have much activity except holding shares in GE. 

166.  Third,the plaintiffrelies on a document entitled “Quarterly Progress Report Proforma for the 4^th Quarter 1989”, which contains a statement, under the heading “Investment Performance”, “The Trust holds private company shares and Great Eagle shares.  These should be held for good as instructed by client.”

(1)     Anna firmly disagreed that this suggests that the Original Trustee was simply acting on the instruction of Mr Lo without exercising its own discretion.

(2)     Anna subsequently explained that Mr Lo’s view as to the retention of the Trust’s GE shares was accepted by the trustee because “… the late Mr Lo who actually running the company, and he was the founder of the company.  I think his input to the trustee should be serious[ly] take[n] into consideration.  I think that is the – my thinking process at that time.  So I take into his advice or instruction, whatever, that we feel it is good to keep the shares.  Maybe – Mr Lo will see the prospect of the company, and all that, yeah.”[28]

(3)     Anna emphasised that she disagreed that she was simply going along with whatever Mr Lo said, but she accepted his views on the basis that he was the founder of GE and was “running it so successfully” at the time and that she trusted his judgment and believed that “he should be looking after… himself and the rest of the beneficiaries”.[29]

167.  Fourth,the plaintiffalso seeks to rely on the use of the terms “client” or “principal” by the defendant’s officers to refer to Mr Lo and/or the plaintiff, to suggest that it indicates that the defendant regarded itself as bound to take instructions from Mr Lo and/or the plaintiff.  I agree with the defendant that this is contrived and misconceived: –

(1)     As Anna explained during cross-examination, she used the terms “client” or “principal” to refer to Mr Lo and the plaintiff because they were the asset contributors of the Trust.  She stressed that that was just “a term to address them”, and rather than considering herself bound to take instructions from Mr Lo and the plaintiff, it only meant that if they came to her with requests, she could consider the requests.

(2)     The same applies to the use of the words “instruct” or “instructions”.  Anna explained that during the 1980’s, not much attention was paid to the use of such terminology in the daily administration of trusts:

“So – and then in those days when client use “instruct”, it doesn’t mean that really an instruction, but we just – that is the early stage that people don’t pay much attention.  But I think at that time we simply just don’t take it really thinking that it is an instruction, just it is not – that’s what I explained.

So when you talk about instruction, they – we – like the summary of trust, it is like that we take from the letter of wishes, and that, in those days, that sort of words is not so much – so – we do not see that at that time we don’t see that sort of implication so seriously about the impact on the estate duty planning.  So we just let it carry on using the word “instruction”.  But from the trustee perspective, we still treat it as a discretionary trust, consider whatever instruction, or advice, or view, that given to the trustee.  …”[30]

168.  There are also other records of the defendant which clearly contradict the Alleged Common Understanding.  For example: –

(1)     In the defendant’s “Trustee Risk Indicator Checklists” dated between November 2006 and November 2008, “No”was recorded in response to the question: “Did the Trustee slavishly follow the Settlor’s request (and/or Settlor’s representative)?”.  Paulina confirmed that these answers were true, and whenever this statement appeared in the documents, it was true to the best of her information and belief.

(2)     The Alleged Common Understanding is also contradicted by the circumstances surrounding the preparation and the terms of the Trustee Memorandum dated 31 March 2003, which Paulina testified was executed pursuant to the suggestion of Linda Iu of JSM and Regina Ng (legal counsel of GE) to set out the terms of the 1988 Letter.  The Trustee Memorandum came about because of the Securities and Futures Ordinance, which was to come into force on 1 April 2003, extending disclosure requirements to a “founder” of a discretionary trust, which was defined as someone “whose consent is required as a condition (whether having legal effect or not) to exercise by any trustee of his discretion in connection with the trust property, or in accordance with whose wishes (whether having legal effect or not) any trustee is accustomed, or would be expected, to act”.  The defendant, in consultation with JSM, prepared the Trustee Memorandum to confirm the terms of the 1988 Letter which was stated in the memorandum to be “[s]ubject always to and without in any way fettering the discretionary powers of [the defendant”.  Neither Mr Lo nor the plaintiff was disclosed as “founders” of the Trust.  If JSM had indeed been privy to the Alleged Common Understanding as the plaintiff alleges, it would have been inconceivable for them to have approved the draft Trustee Memorandum in such terms and circumstances.

D3f.   Purported reliance on level of fees

169.  In her statement of claim, the plaintiff pleads that the Original Trustee and the defendant were paid a fixed annual fee for their services “which was relatively insubstantial compared with the value of the Trust Fund”.  The insinuation in such pleading is that relatively modest fees of the Original Trustee and the defendant support the existence of the Alleged Common Understanding, whereby the Original Trustee and the defendant merely had to comply with the instructions of Mr Lo and/or the plaintiff, rather than to administer the Trust in their own discretion. 

170.  However, I agree with the defendant that this is misconceived.  It is clear from the evidence that the relatively insubstantial fees charged by the Original Trustee and the defendant resulted from the historical fixing of the fee at a low level for commercial reasons since the establishment of the Trust, and despite repeated efforts by the Original Trustee and the defendant to increase the fees to be charged, such requests were met with resistance by the Lo Family and the parties have only been able to agree on modest increments in the fees.  This is why the fees charged for the administration of the Trust remains disproportionate to the value of the Trust Fund.  In short, the level of fees is plainly not corroborative of the existence of the Alleged Common Understanding.

171.  The evidence was as follows:

(1)     Initially, the Original Trustee charged Mr Lo HK$10,000 for the set-up of the Trust and HK$15,000 for the annual fee.  Such fees were negotiated by JSM on behalf of the settlors with the Original Trustee.  As stated in the letter from the Original Trustee to JSM dated 18 May 1984, such fees were “a very substantial concessionary fee”.

(2)     In agreeing to such fees, the Original Trustee had taken into account its relationship with JSM and the Lo Family, and potential business opportunities for the HSBC Group.  As the Lo Family was a prominent and high net worth family in Hong Kong, the Original Trustee considered it important to establish and maintain a good relationship with the Lo Family.  It was common for the Original Trustee to charge clients, who were prominent and high net worth families, referred by JSM a very substantial concessionary fee on account of the Original Trustee’s relationship with JSM, the Original Trustee's relationship with those clients and potential business opportunities with those clients for the HSBC Group.

(3)     Anna further elaborated in her oral evidence that it was common for the Original Trustee to offer substantially discounted rates to clients referred by JSM.  She explained that “most of the clients referred by JSM we have been charging the fee much less than – based on our standard fee scale… the reason is JSM always refer very big clients to us… probably the senior management thinking that once we have the very big client then we can eventually get more business.  … So their fee is not in line with what we normally charge… because the relationship, because they want to have more business, not only the trust business, more like corporate.”

(4)     Anna accepted that generally speaking, the extent of the responsibilities and workload of the trustee would be one of the factors which go to the level of fees charged.  However, in respect of the Trust, whilst she was not personally involved in the setting of the fee at the inception of the Trust, she would think that such factor was not taken into account in the setting of the fee because what was charged was so low – “it is almost like a gift to Mr Lo”.

(5)     It was the intention of the Original Trustee that the fees to be charged were to be regularly evaluated. See, for example, the Trust Epitome, which noted that trustee remuneration would be “from time to time as agreed by the appointors in writing (with right to charge latest scale)”.  This is consistent with what the Original Trustee stated in its letter to JSM dated 18 May 1984, to the effect that no undertaking was given on behalf of any future management or board of directors of the Original Trustee in respect of the substantial concession made in respect of the fees charged for the set up and administration of the Trust.

(6)     Such evaluation indeed took place from time to time.  See for example the letter from the Original Trustee to JSM dated 7 September 1987, the letter from Mr Lo to the Original Trustee dated 13 October 1987 and the letter from the Original Trustee to Mr Lo dated 27 October 1987 (relating to negotiations between Mr Lo and the Original Trustee in respect of fees).  The issue of fees was also often raised in the quarterly progress reports of the Trust, with internal notes reminding the Trust Officers to revise the fees charged should the opportunity arise.  See the quarterly progress reports in 1991 and the private trust review report for the year ended 30 April 1996, which show that fees were being regularly reviewed.

(7)     However, it was difficult for the trustee to achieve substantial increases in the level of fees charge.  As Anna explained, after the initial fee was agreed between Mr Peter Edwards of JSM and the late Mr David Lees of the Original Trustee at a low level, it was difficult for the trustee to ask for an increase.  The low level of fees is regarded as a “historical problem”.  Anna expressed that “we always complain internally those cases referred by JSM with such a low fee, and why we accept – I mean, internally we disagree with that sort of fee scale, in particular we are holding such substantial shares, but this was historical problem.  So it is difficult from 15,000 to charge half a million.  …”[31]

(8)     Paulina and Brent also firmly rejected the suggestion that low levels of fees were paid to the defendant in respect of the Trust because the defendant did not have any genuine discretion to exercise and was simply following whatever instructions given by Mr Lo and the plaintiff.  They explained, consistently with Anna’s evidence, that the large discount in fees was due to historical reasons ie the Trust had been established for many years and had historically been charged on a low basis, the defendant could not increase the fee tremendously in one go, and the defendant could only adjust the fees one step at a time.

D4.    Alleged “legitimate expectation”

172.  Perhaps recognising her difficulties (both factual and legal) in succeeding on the Alleged Common Understanding per se, the plaintiff seeks alternatively to rely on an alleged “legitimate expectation” (a concept which she borrows from public law) which supposedly arose from the Alleged Common Understanding and the subsequent conduct over the years.  The plaintiff’s argument is that she had legitimate expectations that the defendant would seriously consider her requests as a primary consideration in the exercise of its powers, comply with her requests unless there is a “very good reason” not to do so, and to provide full and proper explanation for any refusal to comply; all of which the defendant was obliged to take into account in administering the Trust. 

173.  However, I accept the submission to the contrary by the defendant that there is no foundation for such alleged “legitimate expectation” in the present case.

174.  Authorities referring to the application of the concept of legitimate expectation in the law of trusts are scanty.  It was mentioned in Lewin, supra, §29-170 in the following context: –

“A beneficiary, moreover, has no general right to a hearing from the trustees, not even when the exercise of the power depends on a judgment as to a state of facts. The rules of natural justice do not apply. It seems, however, that there may be occasions when the trustees would be acting unreasonably if they failed to give a beneficiary an opportunity to persuade them against a particular course. In that limited sense the concept of legitimate expectation, well known in public law, may have some part to play in the law of trusts. So the sudden discontinuance of a modest income payment to an elderly and impoverished beneficiary which had previously been made over a long period is liable to be challenged as unreasonable…”

175.  The above statement that legitimate expectation might have a role to play in trust law is derived solely from the case Scott v National Trust for Places of Historic Interest or Natural Beauty [1998] 2 All ER 705 (cited in a footnote to the above passage).  In that case, Robert Walker J (as he then was) held that trustees were not under any general duty to give a hearing to beneficiaries before making any decision, but he went on to observe at p 718f-g: –

“Nevertheless, if (for instance) trustees … have for the last ten years paid £1,000 per quarter to an elderly, impoverished beneficiary of the trust it seems at least arguable that no reasonable body of trustees would discontinue the payment, without any warning, and without giving the beneficiary the opportunity of trying to persuade the trustees to continue the payment, at least temporarily. The beneficiary has no legal or equitable right to continued payment, but he or she has an expectation. So I am inclined to think that legitimate expectation may have some part to play in trust law as well as in judicial review cases…”

176.  The passage in Lewin and Scott v National Trust was unsuccessfully relied on by beneficiaries in Re The Y Trust [2011] JLR 464 who attempted to argue that the doctrine of legitimate expectation had a part to play in trusts law.  The Jersey Royal Court stated at §63 of its judgment that:

“[t]he Court had to remind itself of its limited role and the legal principles that apply to discretionary trusts. The focus is not upon the expectation of the beneficiary but upon the information available to the person who the settlor has appointed as decision maker. There is no authority for the importation into trust law of a right to be heard or consulted. Such rights would potentially render trusts unworkable.”

177.  Notably, as pointed out by the defendant, the references to legitimate expectation in the above authorities were made specifically in the context of the potential application of rules of natural justice to trusts.  The suggestion is that there may be occasions when trustees would be obliged to give a beneficiary an opportunity to make representations to them before they decide on a particular matter, if the trustees were intending to depart from a previous longstanding course of conduct.  In the present case, the plaintiff is seeking to take the concept one step further – rather than using the principle of legitimate expectation to suggest that she should be accorded some form of procedural fairness prior to the defendant making any decision regarding the exercise of its discretionary powers, the plaintiff seems to be suggesting that she has legitimate expectations that ought to substantively and substantially influence the defendant’s consideration of the exercise of its discretionary powers.  There is no basis for this.

178.  See also the following judicial statements in Pitt v Holt [2011] 3 WLR 19 (CA), [2013] 2 AC 108 (SC), emphasising that analogies with judicial review and public law principles are unhelpful in trust cases:

(1)     Lloyd LJ (at §77 of the Court of Appeal judgment) referred to Chadwick LJ’s judgment in Edge v Pensions Ombudsman [2000] Ch 602 which made reference to the possibility of applying the doctrine of Wednesbury unreasonableness in trusts law.  Lloyd LJ said that Chadwick LJ “did not have to consider how far the analogy with the principles applicable in public law cases could or should be pressed in a pension scheme case.  For my part, I would wish to discourage reference to such public law principles in relation to trust law, since trust law has plenty of satisfactory means of dealing with the issues that arise under trusts, and those issues are inherently different from those arising in public law.”

(2)     Mummery LJ stated (at §235) that “analogies with judicial review in public law are unhelpful and unnecessary [in trust cases].  There is an elementary distinction between, on the one hand, the liability in private law of a fiduciary for breach of duty and, on the other hand, the availability of judicial review for the control of abuses of public power.  There are surface similarities in the language of discretion and in the debates about the limits of discretionary power, but the contexts are so different that it is dangerous to develop the private law of fiduciaries by analogy with public law on curbing abuse of power.  Judicial review in public law is concerned with the lawfulness of decisions and acts of public authorities to ensure that they are acting within the limits of a power usually set by statute.  Breaches of duty in fiduciary law relate to discretionary dispositive powers privately entrusted to a fiduciary who has been selected to exercise the powers for the benefit of members within a designated class.  The discretion of the fiduciary is not controlled by the court, which will not interfere with matters of judgment by the fiduciary.  The only ground on which the court will review the exercise of the discretion is that of a breach of fiduciary duty.  The underlying principles of fiduciary law and private property law are conceptually different from the public interest basis for reviewing the lawfulness of administrative action.”

(3)     Finally, Lord Walker said (at §11 of the Supreme Court’s decision) “There are superficial similarities between what the law requires of trustees in their decision-making and what it requires of decision-makers in the field of public law.  This was noted by the Court of Appeal in its judgment, delivered by Chadwick LJ, in Edge v Pensions Ombudsman [2000] Ch 602, 628-629.  It was also noted by Lord Woolf MR in Equitable Life Assurance Society v Hyman [2002] 1 AC 408, para 20.  The analogy cannot however be pressed too far.  Indeed it was expressly disapproved by the Court of Appeal in these appeals: Lloyd LJ at para 77 and Mummery LJ, at para 235.”

179.  In any event, even assuming (without accepting) that the concept of legitimate expectation can be imported from public law into trust law, it is well-established in public law that a legitimate expectation is only created and given effect if three crucial requirements are fulfilled.  Seethe recent decision in Tung Chun Co Ltd v Town Planning Board [2018] 3 HKLRD 466, at §73, where Chow J summarised those requirements (as enunciated by the Court of Final Appeal in Ng Siu Tung v Director of Immigration (2002) 5 HKCFAR 1 at §§101, 103-104, 112, 360)as follows: –

“There are three well established principles which are relevant to a consideration of the Applicant’s complaints based on legitimate expectation.

First, generally speaking, any representation relied upon to support a legitimate expectation must be ‘clear and unambiguous’.

Second, to qualify as a legitimate expectation, it must be objectively reasonable and legitimate; in particular, ‘an expectation of a benefit which cannot legally be accorded … is not a legitimate expectation’.

Third, a legitimate expectation will not be given effect when doing so means that the decision-maker must act contrary to his legal duties or would have to exercise his statutory discretion in a way which undermines the relevant statutory purpose.”

180.  In the present case, I agree it is plainly impossible for the plaintiff to argue that there had been a “clear and unambiguous” representation (see the first principle above) by the Original Trustee or the defendant to give rise to any legitimate expectation on her part. See: the factual analysis in Section D3 above. 

181.  Further, applying by analogy the principle in public law that an expectation of a benefit which cannot legally be accorded is not a legitimate expectation (see the second principle above), the plaintiff’s alleged expectation that the defendant would comply with her instructions in administering the Trust, or to always give her instructions precedence as the so-called “primary consideration” in the exercise of its discretion over and above the interests of other beneficiaries of the trust, are fundamentally inconsistent with the defendant’s legal powers and duties under the Trust Deed. On that basis, the plaintiff’s alleged expectation simply cannot be “legitimate” and should not be given effect in any event.

D5.    Conclusion regarding the Plaintiff’s case on the Alleged Common Understanding and Legitimate Expectation

182.  For the reasons set out above, I reject the plaintiff’s case based on the Alleged Common Understanding (whether that case is put on the basis that the defendant was obliged to follow the plaintiff’s instructions or alternatively that the defendant had to treat the plaintiff’s requests as a “material or primary consideration”): –

(1)     As a matter of law, the plaintiff’s argument is unsustainable:

(a)     The plaintiff’s case (whichever way it is put) depends on an impermissible attempt to rely on parol evidence and/or subsequent conduct to modify or interpret the terms of the Trust Deed (which is unequivocal in giving the trustee “absolute and uncontrolled discretion”).

(b)     If the plaintiff is arguing that the defendant was obliged to follow the plaintiff’s instructions, then she is necessarily saying that the Trust as declared by the Trust Deed was a sham (because ex hypothesi the Trust Deed did not mean what it says when it gave the trustee absolute and unfettered discretion).  However, the plaintiff made it clear in her opening submissions that she is not alleging that the Trust was a sham. Having thus accepted that the Trust is a valid discretionary trust, it is impossible for the plaintiff to argue that the defendant was obliged to follow her instructions pursuant to the Alleged Common Understanding.

(c)     If the plaintiff is arguing that the defendant had to treat the plaintiff’s requests as a “material or primary consideration”, that is also legally flawed, because it would involve an impermissible and ineffective agreement purporting to govern or affect the exercise by the defendant of the discretion conferred on it by the Trust Deed.

(2)     In any event, I find that there is no factual basis whatsoever for the Alleged Common Understanding: –

(a)     The plaintiff has been unable to adduce any contemporaneous document which records the Alleged Common Understanding. 

(b)     On the contrary, the trust documents which are available (as well as the plaintiff’s own assertions regarding the purpose of the Trust) are positively inconsistent with the Alleged Common Understanding. 

(c)     The existence of the Alleged Common Understanding is inherently very improbable (especially as it would entail JSM, Mr Lo, the plaintiff, the Original Trustee, and the defendant being involved in a fraudulent scheme to defraud the Inland Revenue Department). 

(d)     During the course of the trial, it became obvious that the plaintiff (contrary to her witness statement) could not give any credible evidence about the existence of the Alleged Common Understanding.  The other witnesses’ testimony also did not provide any support for it.

(e)     The plaintiff attempted to rely on various historical transactions (from 1984 to 2015) to support the existence of the Alleged Common Understanding.  This is inadmissible evidence of subsequent conduct.  In any event, on a careful examination, each transaction is: (i) inconsistent with the existence of the Alleged Common Understanding or (ii) entirely neutral. 

(f)     The allegedly low level of fees charged by the Original Trustee/the defendant was readily explicable, and did nothing to prove the existence of the Alleged Common Understanding.

(g)     In light of the above, the plaintiff simply cannot prove as a matter of fact that the Alleged Common Understanding existed (much less that it was known and agreed by the defendant). 

183.  As to the plaintiff’s case on legitimate expectation (which allegedly arose from the Alleged Common Understanding as well as the subsequent conduct over the years): –

(1)     I agree that the concept of legitimate expectation in the sense advocated by the plaintiff has no place in the law of trusts.  It is unhelpful to borrow such concept from public law and judicial review.  In a trust context, there is no room for one person’s expectation (legitimate or otherwise) to restrict a discretion which is expressly conferred on a trustee under the trust instrument.

(2)     In any event, even in public law, a legitimate expectation only arises if there has been a “clear and unambiguous” representation by the public body.  The plaintiff has gone nowhere to establishing such a representation on the part of the defendant (ie that her requests would be treated as a primary consideration and would be complied with unless there is a “very good reason” not to).

(3)     Further, even in public law, an expectation of a benefit which cannot legally be accorded is not a ‘legitimate’ expectation.  The plaintiff’s alleged expectation that the defendant would fetter its own discretion is fundamentally inconsistent with the Trust Deed and therefore could not be legitimate (even if she did have such expectation). 

E.     THE PLAINTIFF’S CHALLENGE TO THE DEFENDANT’S DECISIONS AND ALLEGATIONS OF BREACH OF DUTY

E1.    General Remarks

184.  As summarised by the defendant, the plaintiff’s challenge to the defendant’s decisions in considering the plaintiff’s requests and her allegations of breach of duty is pleaded as follows: –

(1)     The defendant in its capacity as discretionary trustee of the Trust owes duties to the plaintiff in her capacity as an Eligible Beneficiary, including, among others, duties:

(a)     to attend “promptly and fairly” to the plaintiff’s rights and her requests as regards the administration of the Trust;

(b)     to take serious account of the plaintiff’s requests and instructions as the “primary or material consideration” in the exercise of the defendant’s powers and discretions;

(c)     to consider and take serious account of the Alleged Common Understanding in the exercise of the defendant’s powers and discretions;

(d)     to consider and take serious account of the plaintiff’s “legitimate expectations” that the defendant would continue to comply with and follow her requests and instructions “unless there is a very good reason not to do so”, and that the defendant would, if it decides not to follow the plaintiff’s requests and instructions, provide a “full and proper explanation” to the plaintiff as regards the reasons for such decision;

(e)     to comply with and follow the plaintiff’s requests and instructions concerning the administration of the Trust unless there is a very good reason not to do so;

(f)     to provide a full and proper explanation to the plaintiff as regards the reasons for such decision.

(2)     The defendant acted “unreasonably, grossly negligently and in wilful breach or wilful neglect of or in breach of its duties” in that it:

(a)     failed to attend or respond promptly to the requests and instructions in the plaintiff’s Letters;

(b)     failed or refused to properly or seriously consider the requests and instructions in the plaintiff’s Letters;

(c)     failed to take serious account of the requests and instructions in the plaintiff’s Letters as the primary or material consideration in deciding whether to implement the requests in the plaintiff’s Letters;

(d)     failed in considering the requests in the plaintiff’s Letters to take into account relevant considerations, including (i) the purpose of the Trust, (ii) the Alleged Common Understanding and the plaintiff’s legitimate expectations, (iii) the alleged fact that the Trust’s most important asset was the “controlling shareholding” in GE, and (iv) the alleged fact that such “controlling shareholding” was at risk of being jeopardised by the increase in KS’s shareholding in GE;[32]

(e)     in considering the requests in the plaintiff’s Letters, took into account an irrelevant consideration, namely the concentration risk posed by the Trust’s GE shareholding;[33]

(f)     failed or refused to implement the requests and instructions in the plaintiff’s Letters without any good, legitimate or sufficient reasons;

(g)     failed to provide any or any good, legitimate or sufficient reasons for its failure or refusal to implement the requests and instructions in the plaintiff’s Letters;

(h)     failed to act with reasonable care and skill and to act in the best interest of the Trust in failing or refusing to comply with the requests to purchase GE shares in the Apr 2016 Letter, Dec 2016 Letter, July 2017 Letter and Dec 2017 Letter. 

185.  The plaintiff’s case in this respect has therefore 4 main aspects:

(1)     First, the plaintiff seeks to rely upon the alleged Common Understanding and/or the plaintiff’s alleged legitimate expectations both as matters which it is said the plaintiff should have taken into account and also as matters which the plaintiff says modify the obligations and duties which the defendant owes by virtue of the Trust Deed when making its decisions.

(2)     Secondly, she relies on the contention that the Trust’s block of GE shares was controlling and that KS’s stake in GE threatened it as matters which, she says (a) should have been taken into account by the defendant and prompted it to buy shares in accordance with her requests and (b) gives rise to a claim for compensation or damages. 

(3)     Thirdly, the plaintiff also relies on an alleged “purpose” of the Trust as a matter which, she says, should have been taken into account by the defendant and prompted it to buy shares in accordance with her requests (and again she says its failure to do so gives rise to a claim for compensation or damages).

(4)     Fourthly, the plaintiff contends that the question of concentration risk was a factor which the defendant should not have taken into account.  She also contends that it was not a genuine part of the defendant’s thinking.

186.  Detailed analysis and findings on the Alleged Common Understanding and legitimate expectations have already been made in Sections D1 to D5 above, but for immediate purposes they appear to be pressed by the plaintiff in aid in order to subject the defendant to various unconventional duties in the exercise of its discretionary powers, for example, a duty to consider and take serious account of the plaintiff’s “legitimate expectations”, a duty to comply with and follow the plaintiff’s requests and instructions concerning the administration of the Trust “unless there is a very good reason not to do so”, and a duty to provide “full and proper explanation” to the plaintiff as regards the reasons for any refusal of the plaintiff’s requests.  However, these attempted modifications to the conventional duties owed by a trustee do not have any proper foundation in law any more than they do in fact.

187.  The questions of control and of KS’s stake in GE threatening the Trust’s shareholding (or its value) are addressed in Section E3c below.

188.  The Trust’s concentrated shareholding in GE is dealt with in Section E4 below.

189.  The alleged purpose of the Trust is dealt with in Section E3b below. 

190.  Before turning to those matters, it should be noted as a preliminary point here that, as the plaintiff’s amended pleadings effectively acknowledge, her claim for breach of duty against the defendant can only succeed if she can show not only that the defendant was in breach of duty, but also that its breach was deliberate (ie “wilful”) or if not positively deliberate then so seriously and obviously wrong that it was “grossly” negligent.  These aspects are dealt with in Section E2 below. It is convenient to turn first to the scope of the duties and obligations which the defendant owed (and did not owe). 

E2.    The Defendant’s Duties in its Discretion: Wilful Default and Gross Negligence

E2a.  Exemption of Liability: Clause 19(b) of the Trust Deed

191.  Except for the requirement under Clause 29 that the trustee shall not exercise certain of its powers except after having given 30 days’ notice to the Appointors and Guardians, its powers are “absolute and uncontrolled”, see Clause 19: –

“(a) Subject to the terms hereof every discretion or power hereby conferred on the Trustees shall be an absolute and uncontrolled discretion or power and no trustee shall be held liable for any loss or damage occurring as a result of his or its concurring or refusing or failing to concur in an exercise of any such discretion or power.

(b) No trustee shall be liable for any breach of trust howsoever occurring except to the extent (if any) that such breach results from his or its own wilful default or wilful neglect.

(c) The Settlor and each Trustee shall be held harmless against any claims losses death duties taxes and impositions arising in connection with the Trust Fund or any part thereof.

(d)    The Trustees shall not be responsible for any loss or damage occasioned to any person by the exercise of any power under this Deed or by law conferred on the Trustees or by any alleged failure to exercise any such power, nor for any liability howsoever incurred in the carrying out of its duties under this Deed…”

192.  The provision in Clause 19(b) of the Trust Deed, which provides that the trustee shall not be liable for “any breach of trust howsoever occurring except to the extent (if any) that such breach results from his or its own wilful default or wilful neglect”, is undoubtedly effective subject only to the provisions of the Trustee Ordinance. Section 41W(4) of the Trustee Ordinance, Cap 29 (introduced in 2013) provides that “[a] term of a trust is invalid to the extent to which it purports to – (a) relieve, release or exonerate a trustee from liability for a breach of trust arising from the trustee’s own fraud, wilful misconduct or gross negligence; or (b) grant the trustee any indemnity against the trust property for the liability”.

193.  Subject to Clause 19(b) and the other provisions of the Trust Deed, the defendant as a donee of discretionary powers is under no obligation to exercise them.  What it is obliged to do is to from time to time form a judgment bona fide as to whether it should exercise the power: Lewin, supra, §29-127.

194.  Trustees must of course act responsibly and in good faith, in the sense that they “must give genuine and responsible consideration to the exercise of their powers”: see Lewin, supra,§29-152.

195.  This duty implies an obligation not to act irresponsibly or capriciously (see further Section G2 below). 

196.  Trustees in considering whether or not and if so how to exercise their discretionary powers are under a general duty to take into account relevant matters and not to take into account irrelevant matters: Lewin, supra, §29-158.  But this is not a test equivalent to a judicial review test in public law.  As explained in Lewin, supra, §29-159: –

“Most decisions, whether taken by trustees or by any other person, could be better informed. To hold the trustees to be in breach of duty for failing to consider every matter which they might sensibly regard as relevant would at best be burdensome on the trustees and, in cost and delay, on the beneficiaries; at worst it would paralyse decision-making. The range of circumstances which require to be taken into account will depend upon the context. … The duty to take relevant matters into consideration is in our view best regarded as an element in the duty to act responsibly, so that the trustees must have a rational basis for a decision but will be in breach of duty only if a given matter is so significant that a failure to take it into account would be irrational.” (emphasis added)

197.  Similar concerns were expressed by Robert Walker J in Scott v National Trust, supra, at 718b-d: –

“In an imperfect world trustees (like other decision-makers) do often make decisions which are based on less than complete information and less than full analysis and discussion, and there is real difficulty in formulating the test for determining when a decision is so flawed as to be invalid. … To impose too stringent a test may impose intolerable burdens on trustees who often undertake heavy responsibilities for no financial reward; it may also lead to damaging uncertainty as to what has and has not been validly decided.”

198.  So a trustee’s duty is not to be interpreted as requiring him to act “reasonably”, and it is well-established that a decision of trustees exercising a discretionary power should not be upset on the ground that they have in the opinion of the court acted “unreasonably”: Lewin, supra, §§29-153 to 29-155.  See also Edge v Pensions Ombudsman, supra,p 536B, where Sir Richard Scott VC (as he then was) held that the Pensions Ombudsman in considering whether trustees of a pension fund had acted in breach of trust was “not entitled to substitute his own opinion for the opinion of the trustees themselves on what was fair or what was a valid reason for the decision”.

199.  Thus, the mere fact that the court would not have acted as the trustees have done is no ground for interference.  For example, in Re Steed’s Will Trusts [1960] Ch 407, the English Court of Appeal refused to interfere, at the instance of a primary beneficiary, with the exercise by trustees of their discretionary powers of sale.  Lord Evershed MR stated in his judgment at pp 417-419:

“… ought the trustees to exercise their discretion as they propose by a sale, or should they rather succumb to the plaintiff’s wishes, she being the person who has such an overwhelmingly preponderant interest in the trust property? … It may well be that other trustees might have been … submissive … but they have not taken that line. The line they have taken has been a deliberate exercise of the discretion and a deliberate discharge of the duty. There is no ground whatever for suggesting that they have done any wrong thing, as that word is ordinarily understood. How then can the Court now be asked to override the discretion which the testator conferred upon them … ”

200.  Thus any failure to take into account a relevant consideration (or to ignore an irrelevant consideration) should only constitute a breach of duty if the consideration in question was sufficiently fundamental or significant so as to deprive the trustee’s decision of any rational basis.

201.  Moreover – and this again may represent a significant difference from the public law sphere – what weight (if any) is to be given to any particular consideration is a matter for the trustee.  He is free to consider but not act or rely upon a matter as well as striking his own balance as to the relative significance to be accorded to matters in his reaching a decision.  In the words of Chadwick LJ in Edge v Pensions Ombudsman [2000] Ch 602, 627D(cited with approval in Pitt v Holt [2011] 3 WLR 19 at §76 (Lloyd LJ)): –

“The essential requirement is that the trustees address themselves to the question …. The weight to be given to one factor as against another is for them.” (emphasis added)

202.  As submitted by the defendant, there is certainly good reason for leaving the weighing of different considerations to the trustees because, as explained by Chadwick LJ further in his judgment, the trustees are the persons entrusted with the relevant powers, the settlor (or person with the power to appoint trustees) has chosen them and not the court to make decisions and “[t]hey are likely to be in a much better position to identify and weigh the relevant factors than the court… can ever hope to be.” (p 630E).

203.  See also Bryson J’s remarks along the same lines in Sayseng v Kellogg Superannuation P/L [2003] NSWSC 945 at §65: –

“Testing the relative weight of observations and conclusions in the body of material before them was something for the directors of the Trustees to consider. Unless some ground or reasoning can be pointed to which puts one conclusion or the other out of consideration in the minds of reasonable people, the decision cannot be set aside …”

E2b.  No duty to give reasons

204.  The plaintiff contends that the defendant was under a duty to provide “full and proper explanation” to the plaintiff as regards the reasons for any refusal by the defendant to comply with the plaintiff’s requests.  I agree with the defendant that this is wholly contrary to the longstanding principle that trustees exercising a discretion are not obliged to disclose their reasons for taking a particular decision: Lewin, supra, §29-234.  In fact, such principle is so entrenched that withholding reasons has been referred to as a “well established entitlement of trustees”: Sieff v Fox [2005] 1 WLR 3811, §37 (Lloyd LJ).

205.  The rationale for the rule that trustees are not obliged to give reasons was explained in Re Londonderry’s Settlement [1965] Ch 918as follows: –

(1)     “… nobody could be called upon to accept a trusteeship involving the exercise of a discretion unless, in the absence of bad faith, he were not liable to have his motives or his reasons called in question either by the beneficiaries or by the court” (p 928G, per Harman LJ);

(2)     “… where trustees are given discretionary trusts which involve a decision upon matters between beneficiaries, viewing the merits and other rights to benefit under such a trust, the trustees are given a confidential role and they cannot properly exercise that confidential role if at any moment there is likely to be an investigation for the purpose of seeing whether they have exercised their discretion in the best possible manner” (emphasis added, pp 935G-936B, per Danckwerts LJ);

(3)     “The settlement gave the absolute discretion to appoint to the trustees and not to the courts.  So long as the trustees exercise this power with the consent of persons called appointors under the settlement and exercise it bona fide with no improper motive, their exercise of the power cannot be challenged in the courts – and their reasons for acting as they did are, accordingly, immaterial.  This is one of the grounds for the rule that trustees are not obliged to disclose to beneficiaries their reasons for exercising a discretionary power.  Another ground for this rule is that it would not be for the good of the beneficiaries as a whole, and yet another that it might make the lives of trustees intolerable should such an obligation rest upon them … Nothing would be more likely to embitter family feelings and the relationship between the trustees and members of the family, were trustees obliged to state their reasons for the exercise of the powers entrusted to them.  It might indeed well be difficult to persuade any persons to act as trustees were a duty to disclose their reasons, with all the embarrassment, arguments and quarrels that might ensue, added to their present not inconsiderable burdens.” (emphasis added, pp 936G-937C, per Salmon LJ).

206.  While trustees are not under any duty to give reasons for their decisions, they may voluntarily give disclosure of their reasons if they think fit.  It must be noted however that if trustees do choose to give reasons, the court has no greater liberty to scrutinise their decision than if they do not.  As explained by Lord Normand in Dundee General Hospitals Board of Management v Walker [1952] 1 All ER 896, 900A: –

“It was said for the appellants that the courts have greater liberty to examine and correct a decision committed by a testator to his trustees, if they choose to give reasons, than if they do not. In my opinion, that is erroneous. The principles on which the courts must proceed are the same whether the reasons for the trustees’ decision are disclosed or not, but, of course, it becomes easier to examine a decision if the reasons for it have been disclosed.”

207.  Further, insofar as it may be suggested that adverse inferences may be drawn from any failure to give reasons by a trustee (see, for example, Scott v National Trust, supra, p 719b, suggesting that if a trustee’s decision is attacked in legal proceedings, he “may be compelled either legally (through discovery or subpoena) or practically (in order to avoid adverse inferences being drawn) to disclose the substance of the reasons for their decision”), I agree with the defendant’s submission that this is wrong, because such reasoning subverts the rule that there is no duty to give reasons.  See Sayseng v Kellogg Superannuation P/L [2003] NSWSC 945, §61, where Bryson J referred to “the well established immunity of trustees from being compelled to give reasons for discretionary decisions”, and emphasised the danger of any suggestion that adverse inferences may be drawn from any failure to give reasons by trustees:

“… If they give reasons the reasons are open to examination, but they may not be compelled to give reasons. To give their exemption from compulsion reality, trustees may not be exposed to adverse inferences and findings based on their not having given reasons at the time of their decisions, or their not having given evidence in litigation so as to explain their reasons; if they were so exposed, they would not in truth have any exemption. In the present case the Trustee did not give reasons, and all that can be known about the reasons are the very slight matters that may be inferred from evidence about the material which was circulated to the directors and from the terms of their resolutions. Their not having gone further in evidence is not a basis for any inference relating to whether they exercised the discretion in good faith, or upon real and genuine consideration, or upon the right question, or for any adverse inference at all. Observations to this effect by the plaintiff’s counsel were not well directed.” (emphasis added)

208.  For the foregoing reasons, it is not uncommon for trustees when considering exercising discretionary powers not to record as a matter of policy their reasons for taking the decision which they take.

E2c.   Meaning of wilful misconduct and gross negligence

Wilful misconduct

209.  Wilful misconduct involves deliberate misconduct where the trustee knew that it was acting in breach of duty or was wholly reckless as to whether or not it was so acting.  An allegation of wilful misconduct involves an allegation of dishonesty.

210.  For example, in Armitage v Nurse [1998] Ch 241, 252D-G, Millett LJ (as he then was) said that the expression “wilful default” in the context of a trustee exclusion clause means “a deliberate breach of trust… [n]othing less than conscious and wilful misconduct is sufficient.  The trustee must be conscious that, in doing the act which is complained of or in omitting to do the act which it is said he ought to have done, he is committing a breach of his duty, or is recklessly careless whether it is a breach of his duty or not” (emphasis added).

211.  See also Barnsley v Noble [2017] Ch 191, where the English Court of Appeal highlighted that “wilful” wrongdoing means:

(1)     conscious and wilful misconduct that is inconsistent with good faith (§36);

(2)     misconduct to which the will is a party, something opposed to accident or negligence; the mis-conduct, not the conduct, must be wilful (§§39, 58);

(3)     there is no difference in the meaning of expressions such as “wilful default”, “wilful misconduct” and “wilful wrongdoing” (§60).

212.  Therefore, I agree that an allegation of wilful default or neglect involves an allegation of dishonesty, and there are strict and important requirements about pleading and particularising dishonesty.  A plaintiff who alleges dishonesty must plead and establish at trial facts, matters and circumstances to show that the defendant was dishonest and not merely negligent.  The court will not infer dishonesty from facts which have not been pleaded, or from facts which have been pleaded but are consistent with honesty, see Three Rivers DC v Bank of England (No 3) [2003] 2 AC 1 at §§184-186 (Lord Millett): –

“[184] It is well established that fraud or dishonesty (and the same must go for the present tort) must be distinctly alleged and as distinctly proved; that it must be sufficiently particularised; and that it is not sufficiently particularised if the facts pleaded are consistent with innocence ... This means that a plaintiff who alleges dishonesty must plead the facts, matters and circumstances relied on to show that the defendant was dishonest and not merely negligent, and that facts, matters and circumstances which are consistent with negligence do not do so.

[185] It is important to appreciate that there are two principles in play. The first is a matter of pleading. The function of pleadings is to give the party opposite sufficient notice of the case which is being made against him. If the pleader means 'dishonestly' or 'fraudulently', it may not be enough to say 'wilfully' or 'recklessly'. Such language is equivocal. A similar requirement applies, in my opinion, in a case like the present, but the requirement is satisfied by the present pleadings. It is perfectly clear that the depositors are alleging an intentional tort.

[186] The second principle, which is quite distinct, is that an allegation of fraud or dishonesty must be sufficiently particularised, and that particulars of facts which are consistent with honesty are not sufficient. This is only partly a matter of pleading. It is also a matter of substance. As I have said, the defendant is entitled to know the case he has to meet. But since dishonesty is usually a matter of inference from primary facts, this involves knowing not only that he is alleged to have acted dishonestly, but also the primary facts which will be relied upon at trial to justify the inference. At trial the court will not normally allow proof of primary facts which have not been pleaded, and will not do so in a case of fraud. It is not open to the court to infer dishonesty from facts which have not been pleaded, or from facts which have been pleaded but are consistent with honesty. There must be some fact which tilts the balance and justifies an inference of dishonesty, and this fact must be both pleaded and proved.” (emphasis added)

213.  The above principles were followed by the Court of Appeal in Peconic Industrial Development Ltd v Yu Ka Hong Paul Cheung [2006] 4 HKC 406, §33 (Cheung JA).

214.  Knowledge or recklessness are also matters which ought to be specifically pleaded (and in the case of recklessness, with full particulars): see Yong Weng Chye v Ho Yu Kuen (unrep., HCA 1303/2009, 17 March 2010) at §§64-72 (Master Ng, as Marlene Ng J then was).

Gross negligence

215.  The concept of “gross negligence” is not one which has been widely recognised in civil proceedings at common law and the authorities on what constitutes “gross negligence” (as distinguished from “negligence”) are relatively limited.

216.  In Armitage, supra, p.254B-D, Millett LJ (as he then was) said in the context of considering the question of whether at common law a trustee exemption clause can validly exclude liability for gross negligence (as to which he eventually held in the affirmative): “It would be very surprising if our law drew the line between liability for ordinary negligence and liability for gross negligence.  In this respect English law differs from civil law systems, for it has always drawn a sharp distinction between negligence, however gross, on the one hand and fraud, bad faith and wilful misconduct on the other… while we regard the difference between fraud on the one hand and mere negligence, however gross, on the other as a difference in kind, we regard the difference between negligence and gross negligence as merely one of degree.  English lawyers have always had a healthy disrespect for the latter distinction.”[emphasis added]

217.  I would accept that the plea of “gross negligence” is a legal conclusion based on the pleaded facts and that the difference between “negligence” and “gross negligence” is only one of degree and not kind.  This is in line with paragraph 73 of the Court of Appeal’s decision in CAMP 139 and 140/2018 (Reasons for Judgment dated 11/10/18)[34], affirming this court’s decision to allow the amendments to the statement of claim to plead, inter alia, gross negligence against the defendant.  Gross negligence is ordinary negligence with a vituperative epithet: see Armitage, supra, p.254DE.

218.  I do not, however, accept the further submission of the defendant that “gross negligence” can only mean conduct undertaken by the trustee with actual appreciation of the risks involved, or in serious disregard of or indifference to an obvious risk, although such conduct is obviously included. 

E2d.  Lack of properly pleaded allegations of wilful default or gross negligence

219.  In the plaintiff’s pleadings, she alleges that: –

(1)     the defendant “acted unreasonably, grossly negligently, and in wilful breach or wilful neglect of or in breach of its duties” by reason of its failures to attend or respond promptly to the plaintiff’s requests, properly or seriously consider the plaintiff’s requests, take serious account of the plaintiff’s requests as the primary or material consideration in deciding whether to implement them, take into account various relevant considerations, provide good or sufficient reason for failing to implement the plaintiff’s requests, and act with reasonable care and skill in the administration of the Trust;

(2)     the defendant “acted in breach of its duty not to allow itself to be placed in a position where its personal interest, or interest in another fiduciary capacity, conflicts or possibly may conflict with his duties as trustee of the Trust” by acting as trustee of both the Trust and the KSL Trust;

(3)     the defendant “wrongfully, unreasonably, grossly negligently, and in wilful breach or wilful neglect of or in breach of its duties acted for improper purposes, and capriciously and/or failed to act impartially in the exercise of its powers and discretions in the administration of the Trust” by deliberately exercising its powers as trustee of the Trust to favour KS’s interests over that of the plaintiff and other beneficiaries of the Trust.

220.  In respect of the second category of alleged misconduct above, ie alleged breach of duty not to place oneself in a position of conflict or possible conflict, there is no properly pleaded allegation that the defendant was acting in wilful default or was grossly negligent.  I agree with the defendant’s submission that on this basis alone, this aspect of the plaintiff’s claim should be dismissed.

221.  In respect of the first and third categories of alleged misconduct, the plaintiff pleads that the defendant had acted “unreasonably”,“grossly negligently”,and“in wilful breach or wilful neglect”.  As explained above, an allegation of wilful misconduct involves an allegation of dishonesty and must be distinctly particularised and proved; particulars of facts which are consistent with honesty are not sufficient.  The plaintiff’s reliance on the exact same particulars – which are consistent with honesty – in support of her claims against the defendant for “unreasonableness”, “gross negligence” and “wilful breach” plainly suggests that she had failed to properly particularise her purported allegations of “wilful breach” against the defendant. 

E3.    Alleged Failure to take into account Relevant Considerations

E3a.  Alleged Common Understanding

222.  The plaintiff alleges that the defendant in considering the requests in the plaintiff’s Letters failed to take into account the Alleged Common Understanding and the plaintiff’s legitimate expectations. 

223.  For the reasons explained in Section D above, the Alleged Common Understanding and the alleged legitimate expectations do not exist, and the plaintiff’s case in this regard must fail.

E3b.  Purpose of the Trust

224.  The plaintiff alleges that the defendant in considering the requests in the plaintiff’s Letters failed to take into account “the purpose of the Trust” (as pleaded in the statement of claim and the reply). 

225.  I agree with the defendant’s submission that the identification of the purpose or purposes of a trust (or that of a particular power of provision in a trust) is an exercise of construction.  The purpose or purposes of a trust is identified by way of an objective construction of the trust deed, with reference to the legal principles discussed in paragraphs 45 to 48 above.  This means that in the present case, the Trust Deed is conclusive as to the relationship between Mr Lo and the plaintiff (as de facto settlor) and the defendant, and one should focus on examining the terms of the Trust Deed – including what it provides and does not provide – in order to ascertain the purpose of the Trust.  The subjective intentions of Mr Lo and the plaintiff as to the purpose of the Trust is irrelevant, and any statements pertaining to such intentions are inadmissible.    

226.  Looking at the Trust Deed, it is clear that, as submitted by the defendant, the terms of the Trust were crafted in such a way to accommodate and avoid the consequences of estate duty under the estate duty regime in force at the time when passing on the assets settled into the Trust to future generations (for example, the definition of the Excluded Class which includes, among others, the settlor of the Trust and various persons relating to the settlor (clause 1(f)), the fact that Ms Christine So of JSM rather than Mr Lo and the plaintiff were named as settlors of the Trust).  The concept of generations of the Lo Family being intended to benefit from the Trust is plain on the face of the definition of Eligible Beneficiaries which includes “all such of the issue” of Mr Lo and the plaintiff (clause 1(c)), with “issue” being further defined as “all lineal descendants male and female and any person legally adopted (clause 1(j))”.  Further, it is also clear from the Trust Deed that apart from conferring the widest powers of appointment, applications, investment and management on the trustee to be exercised for the benefit of the beneficiaries in the trustee’s absolute and uncontrolled discretion, the document does not otherwise impose any strictures on the manner in which or objective for which the trustee shall exercise its powers.    

227.  On this basis, I agree that the purpose of the Trust as reflected by an objective interpretation of the Trust Deed is the avoidance of estate duty; succession planning; and the holding, management and application of the assets settled in the Trust for the benefit of the beneficiaries of the Trust, namely, members of generations of the Lo Family.

228.  The plaintiff however alleges that the Trust serves another specific purpose, namely, to preserve a “controlling shareholding” in GE within the Trust; and it is this alleged purpose which the plaintiff claims that the defendant had failed to take into account in considering her requests. 

229.  But I agree with the defendant that the plaintiff’s case in this regard is fundamentally flawed: it is not a purpose of the Trust to preserve a “controlling shareholding” in GE; in fact, the Trust did not have a “controlling shareholding” in GE ever since its shareholding was reduced from over 50% to around 30% in July 2004 (as explained below).

230.  The plaintiff in her Closing and the Reply Submissions now seeks to re-define the phrase “purpose of the Trust” to mean “the purpose for which the settlor conferred the powers of the trust on the trustee”.

231.  One looks in vain in the Trust Deed for any so-called “purpose” which (objectively assessed) governs the exercise of the discretionary powers (which are arguably conferred upon the defendant under that deed) in the way now alleged by the plaintiff. 

232.  As explained in paragraphs 44 to 47 above, when seeking to ascertain the expectations of the settlor of the trust, the courts are concerned with his/her objectively understood expectation, rather than his/her subjective intent.  It is plain that GE shares (whether in the form of “controlling” shareholding or otherwise) are not mentioned in the Trust Deed or any of the letters of wishes issued prior to 2016.

233.  The plaintiff relies heavily on Re Manisty’s Settlement [1974] 1 Ch 17, at 26in an apparent attempt to argue that the purpose of a trust can be gleaned from, inter alia, the settlor’s subjective intentions.  However, that is a misreading of the case.  What Templeman J said (in full) was: –

“In practice, the considerations which weigh with the trustees [of an intermediate power] will be no different from the considerations which will weigh with the trustees of a wide special power. In both cases reasonable trustees will endeavour, no doubt, to give effect to the intention of the settlor in making the settlement and will derive that intention not from the terms of the power necessarily or exclusively, but from all the terms of the settlement, the surrounding circumstances and their individual knowledge acquired or inherited. In both cases the trustees have an absolute discretion and cannot be obliged to take any form of action, save to consider the exercise of the power and a request from a person who is within the ambit of the power.”

234.  I agree with the defendant’s submission that Templeman J was dealing with a trustee’s exercise of discretionary powers, and he was saying in that context that a trustee “in practice” would “endeavour” to give effect to the settlor’s intentions, even though legally the trustee has “an absolute discretion”. Thus, Re Manisty's Settlement is: (i) not authority for the proposition that a trustee has a duty to give effect to a settlor’s subjective intentions; and (ii) entirely consistent with the well-established authorities cited at paragraphs 44 to 47 above.   

Meaning of “controlling shareholding”: the plaintiff’s shifting case

235.  As the plaintiff’s pleadings originally stood, it was ambiguous as to what she meant by a “controlling shareholding” in GE.  One possible interpretation – and arguably the interpretation which one would adopt based on the plain and ordinary meaning of the term – is that it means a majority shareholding. 

236.  However, whilst the Trust had once had a majority shareholding in GE (around 52%), its shareholding dropped to around 33% since the distribution in July 2004 (the “2004 Distribution”), and from then on, the Trust’s shareholding in GE has always been less than 50%.   

237.  The mechanics of the 2004 Distribution are explained in the Supplemental Witness Statement of KS, §§24-25; see also the contemporaneous letter from KS and Lu to the Securities and Futures Commission (“SFC”) dated 2 June 2004.  Basically, Shui Sing Holdings Ltd (“SSHL”) distributed, by way of dividends, all of the GE shares which it held to its shareholders, which were the Trust and six of the Children. 

238.  The effect of the 2004 Distribution was that the Trust’s shareholding in GE fell from around 53% to around 33%, whilst the shareholding in GE held personally by family members increased from around 10% to around 30%.  See: the table produced as Exhibit D3; and the letter from KS and Lu to SFC dated 2 June 2004 at §§3.3, 7.2.

239.  It appears to be undisputed that, after the 2004 Distribution, the Trust’s shareholding in GE fell from ‘over 50%’ to ‘less than 50%’.

240.  Also, Lu accepted in cross-examination that there was no understanding or agreement between the Trust and the Lo Family members which would have prevented the latter from selling their shares in GE (which was demonstrated by Lu’s sale of his 9% shareholding in 2006). 

241.  In light of the above facts, it was obscure how the plaintiff intended to prove that the Trust had a “controlling shareholding” in GE. 

242.  Upon the defendant’s request for clarification as to the alleged meaning of the term “controlling shareholding” in the plaintiff’s pleadings, the plaintiff filed further and better particulars dated 15 October 2018 to state that: –

(1)     “It is the Plaintiff's case that depending on the distribution and size of shares in the hands of the other shareholders, it is not necessary for a person to have over 50% of the shares of the Company to be a controlling shareholder”;

(2)     in relation to the sense in which the plaintiff purports to use the term “controlling shareholding” in the pleadings, the plaintiff avers that it is used “in the sense that under normal circumstances, the holder of a block of shares is able, by the way he votes at an AGM or EGM, to ensure that the vote will be passed or not passed”; and

(3)     as to the percentage above which a shareholding is said to be controlling and below which it is said to be not controlling for the purpose of the plaintiff’s case, the plaintiff says that “the percentage above which a shareholding is said to be controlling and below which it is said to be not controlling for the purposes of the Plaintiff's case will depend on the distribution and size of shares in the hands of the other shareholders”.

243.  In view of those particulars, the plaintiff’s case is that it is a purpose of the Trust to preserve within the Trust a shareholding in GE which is sufficient in size for the Trust itself to have actual control over the outcome of any shareholders’ meeting (regardless of whether the shareholding constitutes a majority shareholding or not). 

244.  It is important to emphasise the reference to preserving a controlling shareholding “within the Trust”, because the plaintiff or her witnesses have at times during the course of these proceedings confused the notion of preserving a controlling shareholding within the Trust with that of preserving a controlling shareholding within the Lo Family.  This distinction was pointed out by the court during Lu’s oral evidence:

“COURT: I'm just trying to understand your evidence, Mr Lo. Yesterday I have introduced the concept, two concepts, first is control through the trust.

…

COURT: The second concept is control through the trust and the children, and the family.

…

COURT: Now isn't it a fact that after the 2004 distribution, had the children holding -- according to the table [i.e. Exhibit D-3], 29.97 per cent, had they acted contrary to the wishes of the trust, it would pose a serious threat to the trust, wouldn't it?

…

COURT: Of course one would have to assume that the children will all revolt against the trust, which is very unlikely, but as a concept, isn't it right that after the 2004 distribution the fact of the reality is that the control of the company, is entrusted to the trust and the children?”

245.  Thus, in considering the plaintiff’s case it must be remembered that her pleaded allegation is that it is a purpose of the Trust to preserve within the Trust itself a controlling shareholding in GE, so that the Trust can on its own wield actual control over the company.  As explained below, there are a number of fundamental difficulties with this argument.

The Trust does not have a “controlling shareholding”

246.  To begin with, the defendant does not accept, and I agree the plaintiff has singularly failed to show, that the Trust’s 33% shareholding in GE after the 2004 Distribution remained a “controlling shareholding” in the sense that it continued to give the Trust actual control over the outcome of any shareholders’ meeting. 

247.  Whilst a majority shareholder having an over 50% stake in a company would certainly be able to control the outcome of any ordinary resolution to be passed in a shareholders’ meeting, the ability of a shareholder with a less than 50% stake to carry the day depends not only on the distribution of the shares in the hands of other shareholders, but also a variety of other factors such as the attitude or alignment of the shareholders, the total proportion of shareholders voting at the meetings, and so on.  On this basis, common sense suggests the plaintiff cannot without detailed analytical evidence pertaining to those factors demonstrate that the 33% shareholding held by the Trust gave it actual control over GE.

248.  Indeed, this was reflected in this court's query during the exchange with the plaintiff’s leading counsel on the plaintiff’s Opening Submissions, on 30 May 2018.

“COURT: The difficulty I have, maybe I am a babe in the woods, can you—

…

COURT:   Can you say a 33 per cent interest, when there is a competing – on your case, there is a competing, 28 plus interest, can the 33 per cent interest still be considered a controlling interest?  Do I need evidence to – do I take judicial notice?”

249.  This was also well expressed by Brent during cross-examination: –

“I think, public company, the management of the public company is through its board of directors, as a shareholder, you only have the ability to vote the shares that you have. Now, whether you have control would depend on a number of situations. It would depend on other shareholders, it would depend on percentage and number of shares that you have and the matters to be considered.”

250.  Indeed, it was also the position taken by the plaintiff’s counsel (see, for example, his cross-examination of KS): –

“But if you don’t have 50.1 per cent then the question of control is a matter of degree and hinges upon the relative size and distribution of shares held by the rest of the shareholders.”

251.  That is probably why the plaintiff had sought (albeit belatedly) to adduce expert evidence on the question of whether the Trust’s approximately 33% shareholding in GE constituted a “controlling shareholding” (in the sense of conferring actual control over the outcome of shareholders’ meetings).  The plaintiff’s application, which was made more than halfway through the trial of these actions, were dismissed by the court on the ground of lateness, lack of justification for the serious delay, and their prejudicial effect on the prompt and fair conduct of the proceedings: see Decision dated 14 November 2018[35].

252.  With the dismissal of the plaintiff’s seriously belated application to adduce expert evidence, the plaintiff’s case on how she intends to demonstrate that the Trust’s 33% shareholding constituted a controlling shareholding would presumably fall back on the arguments put forward on her behalf in opening, namely, that the Trust’s “controlling shareholding” is a matter provable with reference to “common sense” and “common knowledge”.  Specifically, it was argued on behalf of the plaintiff in opening that: –

(1)     Control is a“numbers game”; therefore, if one has a larger block of shares than any other shareholder of the company, then the chances of one being able to outvote the others would be much higher;

(2)     For publicly listed companies where a large amount of shares is in public hands, there is often “shareholder inertia”, ie the likelihood that a proportion of shareholders do not turn up to vote at shareholders’ meetings; and

(3)     Therefore, in the context of a listed company like GE, having 33% is “very good control”, unless there is a contender building up a competing stake.

253.  On a very high level of generality, it might be that control is a “numbers game”, but, as submitted by the defendant, I do not accept that the plaintiff is able to prove simply by reference to such general observations that the Trust’s 33% shareholding was a controlling shareholding on the specific facts of this case.

254.  First, as mentioned above, whether the Trust is capable of commanding actual control by virtue of its GE shareholding depends on a vast array of matters as to which there is no evidence (whether factual or expert), including for example the overall composition of the shareholders’ base of the company, the attitudes of and any alignment as between the shareholders, the proportion of shareholders voting at shareholders’ meetings and so on.  Proper evidence and analysis on such matters are required to identify on the facts whether the Trust’s 33% shareholding did in practice drive the result of past shareholders’ meetings.

255.  Second, apart from the absence of the aforesaid evidence and analysis before the court, as pointed out by the defendant, there is a matter within the limited facts before the court which casts serious doubt on the plaintiff’s allegation that the Trust’s 33% shareholding constitutes a controlling stake in GE.  That is the fact that the Trust and members of the Lo Family who received GE shares in the 2004 Distribution have been recognised by the SFC as a “concert group” in a letter dated 10 June 2004 (whereby the SFC granted a waiver to the SSHL shareholders from having to make a takeover offer as a result of the 2004 distribution).

256.  The term “concert group” is derived from the concept of “acting in concert” which is defined in the Codes on Takeovers and Mergers and Share Repurchases (the “Takeovers Code”) as “persons acting in concert comprise persons who, pursuant to an agreement or understanding (whether formal or informal), actively cooperate to obtain or consolidate “control”… of a company through the acquisition by any of them of voting rights of the company”. 

257.  According to note 3 of the definition of “acting in concert” under the Takeovers Code, “when a ruling or admission has been made that a group of persons is or has been acting in concert, it will be necessary for clear evidence to be presented before it can be accepted that they no longer act in concert” (Def-3).  In the present case, there is no such evidence that the concert group comprising the Trust and the Lo Family members had ceased acting in concert.  To the contrary, the existence and operation of the concert group was reaffirmed by the SFC by way of a phone call on or about 6 June 2018: Supplemental Witness Statement of KS §37(iv). 

258.  The existence of the concert group suggests that since the 2004 Distribution in July 2004, control over GE was not solely exercised by the Trust, but rather by the Trust as a participant in the concert group which exercised control of the company by virtue of its aggregate stake, which had always remained above 50% at all times since 2004.  Indeed, the fact that the “controlling interest” in GE has since 2004 been held by the Trust in combination with the Lo Family membersis something which the plaintiff and her lawyers clearly understood and expressly acknowledged, see letter to the defendant’s solicitors dated 22 July 2016, §3: –

“The controlling interest of Great Eagle should continue to be vested within the family as a whole, instead of to be controlled and/or manipulated by any particular individual or faction of the family. Your client should be fully aware of the fact that some family members of the Lo Family have increased their personal shareholding in Great Eagle significantly over time… This is in addition to their respective potential entitlement to the shareholding of Great Eagle held under the trust…” (emphasis added)

259.  At the plaintiff’s Closing and the plaintiff’s Reply Submissions, she cites the Takeovers Code (and the SFC’s Consultation Paper dated April 2001 relating thereto) to support her argument that the Trust’s 33% shareholding constituted a controlling shareholding.  However, I agree with the defendant that: –

(1)     Ultimately, it is a factual question whether in a particular case (such as with the Trust’s 33% shareholding in GE), a shareholder has effective control of a company.  The definition in the Takeovers Code, and the debate described in the SFC Consultation Paper, does not answer that question.  That is acknowledged in the Takeovers Code itself, which defines “control” (for the purposes of the Code and no further) as follows:

“Unless the context otherwise requires, control shall be deemed to mean a holding, or aggregate holdings, of 30% or more of the voting rights of a company, irrespective of whether that holding or holdings gives de facto control.”

(emphasis added)

(2)     Indeed, the authorities cited in the plaintiff’s Closing explain that various levels of shareholdings (such as 40%, 25%, 15%, or even 5%) may be sufficient to give effective control, depending on numerous other factors.  These authorities put paid to the plaintiff’s suggestion (in reliance on the Takeovers Code) that there is a ‘magic number’ of 30%, above which a shareholder gains effective control. 

260.  In the plaintiff’s Reply Submissions, she cites another SFC consultation paper to say “public shareholders may be apathetic”. Even assuming that were true, the level of such ‘apathy’ would obviously vary from company to company; and indeed, even within the same company, from proposal to proposal.  Thus, this generalised observation (even if valid) cannot assist the plaintiff in proving that the Trust’s 33% shareholding in fact amounted to effective control.

261.  In the plaintiff’s Closing and the plaintiff’s Reply Submissions, she relies on a case[36]which states, in passing, that a controlling interest “normally” has a premium value.  But what the plaintiff fails to show is that, on the specific circumstances of this case, the Trust’s 33% shareholding did in fact carry a premium value. 

262.  It should be remembered that the plaintiff herself has acknowledged the need for expert evidence to establish: –

(1)     whether the Trust’s shareholding constituted a “controlling interest”;

(2)     the relevance of the Takeovers Code to issue (1) above; and

(3)     whether the Trust’s shareholding carried a “premium value”.

The plaintiff expressly advanced her expert evidence application on the basis that these were “not matters which the Court can fairly, fully and properly consider without the assistance of a corporate finance expert.”  It is difficult to see how the plaintiff can now properly say that these are matters of common sense or knowledge that the court should simply accept. 

263.  In the plaintiff’s Closing and the plaintiff’s Reply Submissions, she refers to the defendant’s supposed concession at the defendant’s Written Opening §104[37]that the defendant had regarded the Trust’s 33% shareholding in GE as a controlling interest.  This has already been explained by the defendant’s counsel in oral submissions.  I accept that this was simply one sentence (out of an 86-page document) which, in hindsight, could have been better expressed. What the defendant meant was that, on the plaintiff’s own case, the defendant had a controlling stake.  It is obvious from the defendant’s pleadings and witness statements that it does not admit that the Trust had a controlling stake in GE.

264.  That GE has been controlled through a combination of the Trust’s shareholding and the personal shareholdings of members of the Lo Family is further supported by various beneficiaries’ understanding and evidence.

265.  Third, insofar as the plaintiff sought in her cross-examination of the defendant’s witnesses to suggest that they had perceived the Trust’s shareholding in GE as controlling, that is irrelevant.  As submitted by the defendant, whether the Trust has a “controlling shareholding” in GE is plainly a factual matter (which depends on the vast array of matters discussed at paragraph 254 above); it does not depend on what the defendant’s (or the plaintiff’s) views are on whether the Trust held a “controlling shareholding”.  The plaintiff’s arguments with reference to allegations as to the defendant’s perception of the nature of the Trust’s GE shareholding are therefore misconceived. 

266.  In any event, it is clear that the defendant’s witnesses did not consider that the Trust holds or has – at any point since July 2004 – held any “controlling shareholding” in GE.  Although the plaintiff’s counsel at numerous times sought to suggest to the defendant’s witnesses that the defendant itself had considered the Trust to hold the “controlling interest” in GE, all such suggestions have been firmly denied.  For example: –

(1)     In Paulina’s cross-examination, she was extremely clear that the Trust held only 33% of GE shares.  As such, the Trust could only exercise 33% of voting rights, and could not ensure that it had “the controlling right”in respect of GE in the sense of ensuring the passing of a particular resolution at an AGM or the appointment of a particular director to the GE board.

(2)     Paulina emphasised that there was a “huge difference”between the Trust being a majority shareholder (with over 50% of GE shares before July 2004) and the Trust being a 33% shareholder in GE (after July 2004).  This is because having only 33% GE shares meant that the Trust could be outvoted by the remaining 67% of GE shares, which meant that the Trust no longer held the control in GE.

(3)     Further, although the plaintiff’s counsel tried to rely on two meeting notes which referred to the Trust having a “majority shareholding” in GE to suggest to Paulina that the defendant had perceived the Trust as having a “controlling interest” in GE, this was expressly rejected by Paulina, who clarified a number of times that the actual words spoken were the Chinese words “大股東” – by which she meant “major” or “substantial” or “large” shareholder, even though by mistake she had written “majority shareholder” in the meeting notes.  I accept that Paulina’s account is: –

(a)     entirely consistent with the letters she sent to the beneficiaries dated 17 February 2009, where after referring to the 23 January 2009 meeting with the beneficiaries, Paulina stated: “Your parents have named their issue as the beneficiaries under the Trust Deed and have placed the family wealth including the substantial shareholding in Great Eagle Holdings Limited into the Trust for succession planning and Hong Kong estate duty planning.” (emphasis added); and

(b)     entirely consistent with how Paulina had translated the phrase “大股東” as “substantial shareholder” in the telephone note which she circulated to other members of Private Wealth Solutions (“PWS”), fifth paragraph from the bottom, referring to the conversation Paulina had with the plaintiff on 12 April 2016, where she stated 你地係大股東黎架”in the fourth box counting from the top; and

(c)     perfectly understandable and unsurprising in view of the inherent ambiguity in the Chinese phrase, which as this court and the court interpreter both acknowledged is difficult to translate into English and bears two potential meanings: (i) “major shareholder” or “majority shareholder”.

(4)     The plaintiff’s counsel also tried to rely on a meeting note of 24 May 2005at §4 to say that the phrase “[The plaintiff] wants the majority of shareholding now held in the Trust to remain intact”shows that the defendant knew it was holding the “majority shareholding”in GE.  But this is totally unfounded and the two concepts are obviously distinct.  As clarified by Paulina, she disagreed that the Trust held a majority shareholding of GE, as the Trust only held 33% of GE shares.  It was also misleading for the plaintiff to attempt to equate what was stated as “the majority of shareholding now held in the Trust” with what the plaintiff now tries to suggest as “majority interest in GE”.

(5)     During Brent’s cross-examination, the plaintiff’s counsel sought to rely on various letters containing allegations by certain beneficiaries that the Trust held a controlling shareholding and the defendant’s apparent failure to rebut such allegations. I accept that the defendant’s approach was perfectly understandable and does not lend support to the plaintiff’s case.  As Brent explained, the defendant was trying to work with, rather than antagonise, the beneficiaries: –

“Q. And he was saying something that you did not dispute or object to as being inaccurate, correct?

A. This meeting was to hear their views on the proposal, so this is accurate reflection of his views. It doesn't necessarily state that that was my view or I agreed with it.

Q. You didn't object to it or dissent from it or indicate any disagreement, correct?

A     Not at the meeting, no, because the purpose of the meeting was try and resolve some of the family conflict and to hear their views and work a way forward.  So to raise unnecessary objections would not have helped with the purpose of the meeting.”

267.  If the Trust simply did not have a controlling shareholding in GE since the 2004 Distribution, that entirely undermines the plaintiff’s case that it is a purpose of the Trust to preserve a controlling shareholding in GE.  It must be remembered that the plaintiff herself (and other beneficiaries of the Trust) had agreed to the 2004 Distribution whereby the Trust’s GE shareholding was reduced from 52.4% (8.7204% directly held, and 43.7159% through SSHL) to around 33% (directly held by the Trust).  See: note of meeting dated 28 April 2004 where the 2004 Distribution was discussed and agreed to by the plaintiff and other beneficiaries.

268.  As this court asked Lu during his cross-examination: –

“COURT: How is that [ie The 2004 Distribution] consistent with the idea that it was the intention of your parents to own a controlling interest of GE through the trust?”

269.  In fact, it is notable from Lu’s testimony that the reason why he had no objection to the Trust’s shareholding in GE falling under 50% after the 2004 Distribution was because he was satisfied that, after the distribution, the Lo Family would still have a controlling interest in GE, via the Trust plus their own shareholdings.[38] In other words, what was important to Lu was not that the Trust would maintain a controlling interest, but that the Lo Family would maintain a controlling interest.  This clearly undermines the plaintiff’s contention that it is a purpose of the Trust to maintain a controlling interest in GE in the Trust. 

270.  On a minor note, there is a dispute over the reason behind the 2004 Distribution.  Lu alleges that the 2004 Distribution was necessitated by the expiry of the 20-year accumulation period.  Lu’s apparent argument is that the 2004 Distribution was caused by a mere technical issue, and hence does not disprove that the purpose of the Trust was to maintain a controlling shareholding in GE.  However, I agree that Lu’s allegation was demonstrably incorrect: –

(1)     The true position is as explained in the Supplemental Witness Statement of KS §§30, 32-34, ie that the 2004 Distribution had nothing to do with the expiry of the accumulation period (which was a separate issue that arose in 2004, and which led to the incorporation of Powermax). 

(2)     This is shown in the letter from KS and Lu himself to the SFC dated 2 June 2004.  In the entire letter (including the section entitled “Reasons for the Proposal”), there is no mention of the accumulation period. 

(3)     It is further corroborated by the fact that the correspondence between Linda Iu of JSM, Michele Wong of the defendant, and Regina Ng (in-house counsel of GE) which discussed the accumulation period and the incorporation of Powermax took place in June, July, and September 2004.  This largely post-dated the discussions concerning the 2004 Distribution (which was discussed at the meeting on 28 April 2004 and was effected on 12 July 2004).

Not purpose of Trust to preserve “controlling shareholding”

271.  Apart from the fact that the plaintiff has failed to prove that the Trust did actually have a controlling shareholding since July 2004, there are a number of other matters which show that it was plainly not a purpose of the Trust for it to maintain a controlling shareholding in GE.

272.  First, as explained in paragraphs 45 to 48 above, identification of purpose of the Trust depends upon an objective interpretation of the Trust Deed.  An objective interpretation of the Trust Deed suggests that the purpose of the Trust is the avoidance of estate duty, succession planning, and the holding, management and application of the assets settled in the Trust for the benefit of the beneficiaries of the Trust, namely, members of generations of the Lo Family.  The Trust Deed does not mention GE, GE shares, or any form of interest – whether “controlling” or not – in GE.  It is not a purpose of the Trust for it to maintain a controlling shareholding in GE.

273.  Second, it is inherently improbable that the purpose of the Trust was for it to preserve a shareholding which provides “de facto” or “actual” control over GE as alleged by the plaintiff.  Whether a block of shares of a particular size is able to provide actual control over a listed company like GE is highly fact specific.  It would depend on the precise distribution of shares of the company at any given point in time, the attitudes of and alignments as between the shareholders, the composition of the management and so on. 

274.  This was illustrated, for example, by Lu’s theory of why he thought the Trust’s remaining 33% shareholding after the 2004 Distribution would still be a “controlling interest”: he suggested that it was because two of the other major shareholders (KS and Archie) only held around 10% and 5% respectively; thus even if KS and Archie had teamed up together, they would only have around 15% shareholding in total, which was insufficient to challenge the Trust.[39] Lu also claimed that the stance of the 33% shareholder would “rarely” be opposed by the outside shareholders, and only if there were “very good reasons” for opposition.  Hence, on Lu’s logic, whether a 33% shareholding amounted to a controlling interest would depend on: (i) how many shares were held by other shareholders; (ii) whether those other shareholders were acting together; and (iii) whether there were “very good reasons” for the other shareholders to oppose the 33% shareholder, as assessed at each particular point in time.  Therefore, on date X, a 33% shareholding may suffice to be controlling; but on a subsequent date Y, the same 33% shareholding may not be controlling (because of other shareholders having acquired more shares and/or deciding to team up with each other and/or having “very good reasons” to oppose the 33% shareholder).

275.  I agree with the defendant that it is inherently improbable for it to have been the intention of the parties to the Trust that the trustee of the Trust would have to continuously monitor and assess whether the GE shares held by the Trust was of sufficient size in view of the various circumstances of the company to enable the Trust to command actual control. That exercise involves highly complex and sophisticated analysis of corporate data on a day-to-day basis, and there is simply nothing from the Trust Deed or any of the surrounding circumstances at the time of the establishment of the Trust which would indicate that such a role was intended for the trustee.

276.  Third, in alleging that it is a “purpose” of the Trust to preserve a controlling shareholding, the plaintiff is trying to confound the purpose of the Trust with what are at most the wishes or subjective intentions of Mr Lo and herself as de facto settlors of the Trust.

277.  The plaintiff’s evidence is scattered with statements regarding Mr Lo’s and her wishes or intentions as to the future of the GE, see, for example: –

(1)     The Witness Statement of the plaintiff §10, suggesting that “It was the common intention of my late husband and me that Great Eagle should always be under our control.  After our passing, our controlling interests in the company should be jointly controlled and managed by our children together as a single whole.”;

(2)     The plaintiff’s evidence in cross-examination:

“[Q.] Should I have understood your answer, Madam Lo, to be this. You regard it best that all the children discuss and make decisions in running Great Eagle, but the position now is that one person has sole power?

A. Right. …

[Q.] And your view is that it should be the family as a whole that runs Great Eagle?

A. That’s the father’s wishes.”^[40]

278.  As explained in paragraphs 45 to 48 above, it is impermissible in the exercise of identifying the purpose of a trust to have regard to any declaration of the subjective intentions of the parties at the time of the establishment of the Trust.  Further, insofar as certain matters constitute wishes expressed by a de facto settlor after the establishment of the Trust, that is wholly distinct from what can properly be regarded as a purpose of the Trust.  For these reasons, the court must be astute not to take into account the evidence put forward by the plaintiff and her witnesses as to the purported subjective intentions and hopes and wishes of Mr Lo and the plaintiff herself in assessing what the real purposes of the Trust are.

279.  Fourth,even if there is evidence to suggest that Mr Lo’s and/or the plaintiff’s subjective intentions or wishes (which are wholly non-binding on the defendant) was for the Trust to retain the GE shares within the Trust as a long-term holding, the plaintiff is singularly unable to adduce any evidence to suggest that such intention involved or came anywhere close to the idea of maintaining a “controlling” stake in GE.

280.  Whilst the plaintiff has since 2004 from time to time expressed her wish for the Trust to retain the GE shares held by it (see, for example, Paulina’s evidence that initially, the plaintiff expressed her hope that the Trust would continue to hold its GE shares within her lifetime, and then later in 2009 and 2011, the plaintiff expressed her hope that the Trust would continue to hold its GE shares even beyond her lifetime), the concept of the Trust preserving a “controlling” stake in GE had never emerged before the events in 2016.  The concept of a “controlling” stake in GE had never been mentioned in any of the numerous meeting notes, discussions or letters which referred to the plaintiff’s wish to retain the GE shares within the Trust at least until April 2016. 

281.  Fifth,the plaintiff’s allegation regarding the purpose of the Trust is also inconsistent with another aspect of her case in these proceedings, namely her contention that the trustee of the Trust ought to treat her as the sole beneficiary of the Trust after Mr Lo’s passing, and to comply with her wishes and instructions in the administration of the Trust.  As confirmed by the plaintiff’s counsel in opening, the effect of this latter aspect of the plaintiff’s case means that the plaintiff is free during her lifetime to instruct the defendant to dispose of all the trust assets including the GE shares (ie not to maintain a controlling shareholding): –

“Court: […] So during her lifetime is she free to dispose of the whole thing as she wishes?

Mr Yu: That is the father’s intention. That is very clearly expressed in the letter of wishes.

Court: So she could have?

Mr Yu: Yes.”^[41]

282.  I agree with the defendant that the plaintiff’s case is therefore inherently inconsistent and fundamentally flawed.

283.  In view of all the above, it was plainly not a purpose of the Trust for it to maintain a controlling shareholding in GE within the Trust.

The witness testimony

284.  On proper analysis, the witness testimony on the alleged purpose of the Trust to preserve a controlling shareholding in GE matters very little because as explained above, the purpose of the Trust should be ascertained based on an objective construction of the Trust Deed, and statements as to subjective intention or understanding as to the alleged purpose of the Trust are irrelevant and inadmissible.

285.  Thus, the extensive efforts of the plaintiff’s counsel to extract evidence from various witnesses about the purpose for which the Trust was set up were simply unhelpful. 

286.  In any event, I agree the witness testimony in the present case do not support the plaintiff’s case as to the alleged purpose of the Trust.

287.  The plaintiff is on any view unable to provide any evidence which supports her case as to the alleged purpose of the Trust:

(1)     In the Supplemental Witness Statement of the plaintiff §26, the plaintiff purports to give evidence as to the purpose of the Trust by stating that she disagreed with Brent’s statement that it was not a purpose of the Trust to maintain a controlling stake in GE.  However, when the plaintiff was referred to this paragraph of her Supplemental Witness Statement during cross-examination, she stated that she had left all matters regarding the establishment of the Trust to Mr Lo and had no knowledge of what was intended at the time of the establishment of the Trust: –

“Q. Now you have told us today that you didn’t think about this at all at the time. Isn’t that right?

A. Right.

Q. And you have also told us that you didn’t really know what the trust contained or what the letter of wishes contained at the time. Isn’t that right?

A. Right.

Q. And you have told us that you didn’t have, or can’t remember, any discussions that you had with your husband at the time.

A. Right.

Q. So you don’t know what he thought, intended or knew either.

A. I don’t know, for most of them.

Q.     Should I understand that answer to mean, “No, I didn’t know what he thought?”

A. You mean I don’t know my husband?

Q. No. I mean you don’t know what he thought about the things you are saying in this sentence.

A. He briefly expressed to me, but then I told him to handle the matter, and I would not participate in it.

…

[Q.] … Did you know what your husband intended and knew, as you say in the sentence we are looking at, or did you not know?

A. I did not ask him.”^[42]

(2) When the plaintiff was cross-examined specifically in relation to the assertion in §26 of her Supplemental Witness Statement that she disagreed “that the Trust has never taken the maintenance of control over Great Eagle as its purpose”, she confirmed that the only purpose of the Trust that she knew about was the purpose of saving estate duty:

“Q. Right. Thank you Madam Lo. Let’s move on. In the same paragraph, paragraph 26 – I think we can deal with this quickly now – you give some more evidence. Would you look at the last two sentences of the paragraph, it is the last three lines of the Chinese text. Picking up in the English it says: “… I do not agree with what Brent York said in paragraph 56 of his witness statement, i.e …” I’m sorry, last five lines: “… that the Trust has never taken the maintenance of control over Great Eagle as its purpose.” I want to put this very simple question to you, Madam Lo. Am I right that the only purpose you know about is saving estate duty, because of what you have just told us?

A. Yes.”^[43]

(3) It was then put to the plaintiff that given her admission that the only purpose of the Trust she knew about was that of saving estate duty, there was no basis for her to say what she said in her Supplemental Witness Statement §26, ie that she disagreed with Brent’s evidence that the Trust did not serve the purpose of maintaining control over GE. The plaintiff was unable to provide any intelligible answer or explanation. In fact, the plaintiff went on to say that she did not know who Brent was and had no idea what he had said in his statement. She said in relation to her Supplemental Witness Statement §26 that she “did not write so many things”, and that she “haven’t read this document”. She also sought to evade the questions put to her by blaming the defendant’s counsel for “deliberately [stirring] up some trouble”.[44]

(4) In this context, the plaintiff also began to generally question the contents of her own Supplemental Witness Statement. She began to look at other parts of the statement (and in particular, §46 which refers to “Shui On”) and said that she had not read the document before and had no recollection of the circumstances in which she signed the statement. (During re-examination, although the plaintiff confirmed in answer to questions from her counsel that her Supplemental Witness Statement had been explained to her and she agreed to the contents before she signed it, when the court subsequently asked the plaintiff specifically about §46, the plaintiff repeated that she had never heard of the contents of such paragraph.[45])

(5) The plaintiff’s counsel sought to salvage the plaintiff’s purported evidence in §26 of her Supplemental Witness Statement by asking her in re-examination whether she understood and agreed that one of the purposes of the Trust was to maintain control of GE by the whole family. The plaintiff agreed. I agree with the defendant that this is of little, if any, probative value in light of what the plaintiff had clearly and repeatedly said during cross-examination that she had left all matters concerning the Trust to Mr Lo and had no knowledge of what was intended at the time of the establishment of the Trust. In fact, during re-examination, before the plaintiff’s counsel referred the plaintiff to §26 of her Supplemental Witness Statement, he asked her about her knowledge as to the size of the GE shares that she had injected into the Trust. The plaintiff’s answer was that she had “no idea”, “[b]ecause it was arranged by [Mr Lo]”.[46]It is clear that the plaintiff’s evidence on the alleged purpose of the Trust in this regard is of no assistance to the court.

288.  Further, as pointed out at paragraphs 236-246 and 267-270 above, one of the difficulties for the plaintiff’s case is the 2004 Distribution.  In an attempt to meet this difficulty, the plaintiff now tries to say that the plaintiff was not fully informed about the effect of the 2004 Distribution at the time.  However, this is untrue: –

(1)     This was not the plaintiff’s evidence at trial.  The only reference she made to the 2004 Distribution was in her Supplemental Witness Statement §26 where she appeared to record and affirm the 2004 Distribution. 

(2)     Further, the note of meeting dated 28 April 2004 clearly shows that the proposed distribution in 2004 was the subject of a “very important meeting” attended by the plaintiff, Nina, KS, Archie, Lu, and the defendant.  In that meeting, the plaintiff discussed the intention of the distribution of 255 million GE shares (§3), and it was agreed that the beneficiaries would further seek an opinion from JSM (the plaintiff’s then solicitors) (§6) to draft the appropriate documents. 

(3)     Moreover, there is no question that Lu agreed to the 2004 Distribution and in fact personally wrote to the SFC in respect of the proposal.  I agree that the evidence of Lu where he tried to disavow his position[47]is wholly incredible.

289.  YS’s evidence does not assist the plaintiff’s case as to the alleged purpose of the Trust either: –

(1)     YS insisted that his parents’ purpose in setting up the Trust was to maintain a controlling interest in GE. However, as submitted by the defendant, YS’s insistence was mere speculation, because (as he accepted) (i) he had no involvement in the setting up of the Trust in 1984; (ii) he was not aware of any discussions between Mr Lo and JSM in 1984; and (iii) from 1984 to 1989, he had no discussions with Mr Lo/the plaintiff about the Trust (because he had little contact with his family during that period).

(2)     YS relied on “common sense” and “general impression” as the source of his understanding.  Other than that, he could not give a cogent explanation of how he had derived such understanding.

(3)     During re-examination, the plaintiff’s counsel showed YS various documents, which YS claimed to be consistent with his understanding that his parents had always intended for the Trust to retain a controlling shareholding in GE.  However, YS did not say that these documents were the source of his understanding; he simply said that they were consistent with his understanding (which is a different thing). 

(4)     In the end, YS was still unable to give any sensible explanation of how he had derived such understanding. 

290.  Lu’s evidence is likewise unhelpful to the plaintiff’s case:

(1)     During his oral testimony, Lu consistently conflated the concept of control by the Trust and the concept of control by the Lo Family.  Just to take one example cited by the defendant, Lu explained that loss of control was not a concern even after the 2004 Distribution and after his own sale of his 9% GE shares in 2006 because: “…myself having sold those shares, the entire family added together was still over 50 per cent.  So control was not an issue at that time.”[48]

(2)     Indeed, Lu’s inability to distinguish between the two concepts was noted by this court: –  

“COURT: It is just that I feel that you may be confused between two different concepts. Controlling interest being retained in the trust, and controlling interest being retained in the family, meaning trust plus family members. And the 2004 distribution shows that your mother and your other family members were quite content to retain control in the trust and the family members, but the pleaded understanding in this case is that it was your parents' intention to keep the controlling interest in the trust. Two different concepts.”

(3)     Lu’s conflation of the two concepts could also be seen in his letter to the defendant dated 30 March 2017, in which he urged the defendant to purchase more GE shares.  Lu’s rationale was that: –

“Such purchase is for the purpose of enhancing and/or ensuring the controlling position of the Lo Family Trust (the Lo Family as a whole) in Great Eagle. The Lo Family and/or its trust must maintain its controlling interest in Great Eagle, which has always been the intention of our parents…”

(4)     Annie’s letter to the defendant dated 31 March 2017 contained similar wording (which again conflated the Trust and the Lo Family): “It is my parents' intention that the Lo Family and/or its Trust must maintain its controlling interest in Great Eagle.”

291.  Anna’s evidence clearly contradicts the plaintiff’s case that it is a purpose of the Trust to preserve a controlling shareholding in GE.  During her oral testimony, she repeatedly and firmly stated that throughout the time when she was involved in the administration of the Trust, she had never had in mind the notion that the Trust held a controlling interest in GE.  She fairly accepted that she was aware that the Trust was holding a very substantial amount of GE shares, but the concept of whether such stake amounted to a controlling interest in the company never crossed her mind.

292.  Paulina likewise gave clear evidence as to her understanding that it was not any part of the purpose of the Trust to preserve a “controlling shareholding” in GE within the Trust.  She rightly observed that there was no mention of a “controlling shareholding in GE” or even “GE shares” in the Trust Deed or the 1988 Letter.  She also explained that whenever a trust is being set up with the Original Trustee or the defendant, a description of the purpose of the trust should be entered into the system at the time of the establishment of the trust, and what was entered could not subsequently be changed.  Paulina said that her recollection was that in respect of the Trust, the purpose which was input into the system was “estate and financial planning”.

293.  As for Brent, despite the vigorous efforts of the plaintiff’s counsel to coax him into agreeing that the Trust had a controlling shareholding, he was clear that the Trust only had a “substantial”, but not “controlling”, shareholding in GE.^[49]

294.  KS also gave evidence that he had never understood in the past that it was supposed to be the purpose of the Trust to control GE (albeit his view was that the plaintiff and Mr Lo wanted for the Lo Family to retain control of GE).

295.  The attempted reliance by the plaintiff to rely on the testimonies of the defendant’s witnesses to establish that the Trust holds a “controlling” interest in GE also fails to assist the plaintiff’s case: –

(1)     As pointed out at paragraph 265 above, the views of the defendant’s witnesses are irrelevant to the issue of whether the Trust, as a matter of fact, held a controlling interest in GE. 

(2)     In any event: in respect of Vincent’s evidence which is cited by the plaintiff, there was simply no clear acceptance that a 30-odd% shareholder with a sufficiently large margin would be in a position of effective control.

(3)     As for KS’s testimony which is cited by the plaintiff, KS emphasised that whether a sub-majority shareholder has effective control would depend “on the issues and the shareholder distribution”– in other words, it would depend on numerous matters.  That is unsurprising and uncontroversial as a general proposition.  I agree the real problem for the plaintiff is that she cannot show, on the specific facts of this case, that the Trust’s 33% shareholding amounted to effective control.  

296.  In sum, I agree with the defendant that the plaintiff’s claim that the defendant had failed in considering her requests to take into account the alleged purpose of the Trust to maintain a controlling shareholding in GE is wholly misconceived – the Trust does not have such an alleged purpose, and the plaintiff has not even been able to prove that the Trust in fact held a controlling shareholding in GE despite the 2004 Distribution, which reduced the Trust’s shareholding from over 50% to around 33%.  Therefore, the plaintiff’s claim in this regard must fail. 

297.  Perhaps recognising her inability to prove that the Trust in fact held a controlling shareholding in GE since 2004, the plaintiff runs together and shifts between the concept of “controlling” shareholding and that of “single largest” shareholding.  The plaintiff’s Closing repeatedly employs the phrase “single largest / controlling shareholder” or similar disjunctive phrases.  However, I agree that this is problematic. 

298.  As for the plaintiff’s case on purpose of the Trust:

(1)     The plaintiff’s pleaded case is that the purpose of the Trust was to maintain a “controlling” stake in GE; her pleaded case is not that its purpose was to maintain the “single largest shareholding” in GE.

(2)     In any event, it makes no logical sense to say the purpose of the Trust is to hold the “single largest shareholding” simpliciter in GE (which means merely having at least 1 share more than any other shareholder).  To make any sense at all, the plaintiff’s contention, which she has to prove, must be that the purpose of the Trust is to hold the “single largest shareholding” with a sufficient margin that:

(a)     the Trust has effective control of GE; or

(b)     the Trust’s shares carry a premium value. 

299.  As for the plaintiff’s case on premium value:

(1)     In HCA 3246/2016, the plaintiff pleads that there is a “value” in the Trust’s “controlling shareholding”in GE.  The plaintiff’s pleaded case in that action is not that there is any special value in the Trust’s shares by virtue of it having the “single largest shareholding”.[50]

(2)     In HCA 355/2018, the plaintiff’s main pleaded case is still that the “value” of the Trust’s shareholding lies in the fact that it is a “controlling” shareholding.[51] In her particulars of loss, the plaintiff does claim damages for loss of the Trust’s “status as the single largest shareholder or controlling shareholding”[52].  However, there is no explanation of why there is any inherent value in the Trust being the “single largest shareholder” (as distinct from it having a controlling shareholding).  The reasoning behind this loss of value claim is especially obscure given that: (i) the Trust in fact remains the single largest shareholder of GE; and (ii) there is no intelligible threat to the Trust’s said status as single largest shareholder (see Section E3c below).

(3)     In any event, it again makes no logical sense to say that the “single largest shareholding” simpliciter in a company carries a premium value.  To make any sense at all, the plaintiff’s contention must be that the Trust held the single largest shareholding of GE with a sufficient margin that the Trust’s shares carry a premium value.

300.  Hence, despite the plaintiff’s invocation of the “single largest shareholder” concept (apparently as a separate concept from “controlling shareholder”), it is a confused notion which does not even make sense by itself. 

301.  In fact, it can be seen from the plaintiff’s Closing that all of her arguments on premium value are based on the concept of controlling shareholding, not on any separate concept of “single largest shareholding”.

302.  The plaintiff is unable to show that the Trust’s shareholding has a premium value by virtue of it being a controlling shareholding; but she has even greater difficulty in showing that the Trust’s shareholding has a premium value by the mere fact that it is the single largest shareholding (ie without control). 

E3c.   Alleged threat posed by KS

303.  The plaintiff alleges that the defendant in considering the requests in the plaintiff’s Letters failed to take into account (1) the alleged importance of maintaining the Trust’s “controlling shareholding” in GE and (2) the alleged jeopardy to such “controlling shareholding” posed by the gradual and continuous increase in KS’s shareholding in GE.

304.  The plaintiff’s claim is bound to fail because it is founded on the false premises that:

(1)     the Trust holds a “controlling shareholding” in GE;

(2)     it is the purpose of the Trust to maintain such a “controlling shareholding”; and

(3)     there is a “premium value” attached to the Trust’s “controlling interest” in GE.

305.  As explained above, all of these assumptions are fundamentally misconceived, and the plaintiff’s claim must fail for this reason alone.

306.  Furthermore, I agree with the defendant’s submission that KS in any event did not pose a “threat” to the Trust’s shareholding or interest in GE.

307.  First, the reason for KS’s regular purchase of GE shares over the years shows that far from posing a “threat” to the Trust’s interest, he was in fact doing the opposite of ensuring that the Lo Family’s control of GE as a whole could be maintained, and also for the benefit of GE. 

(1)     As KS explained (and consistent with the evidence of Archie and Vincent), which I accept, he has been regularly buying shares in GE on the open market since the 1980s, as he believes that such purchase is a display of confidence when the management of GE (which includes KS) personally invests in it, and KS explained that this has been a “confidence booster for investors”.

(2)     Moreover, a further reason why KS has been increasing his shareholding in GE following Mr Lo’s death in 2006 was motivated by his concern that the aggregate holding in GE by the Trust and the Lo Family members might one day fall beneath 50%, in light of Lu’s sale of approximately 55 million GE shares within one month of Mr Lo’s death, and in the event that other family members were to follow Lu’s example.  Hence, a reason for KS’s increase in GE shares was in fact to help uphold his parents’ wish for the control of GE to remain in the Lo Family as a whole.

(3)     KS also explained that another reason for his increased shareholding is that it opens up the possibility of obtaining a 50% shareholder consent required under the Listing Rules for major transactions and thereby dispensing with the need to hold a vote in a shareholders’ meeting, which is important for property companies in entering into bigger projects or joint ventures: KS’s Witness Statement §63. See also an example given by Archie during cross-examination of how the aggregate shareholding of the Trust, KS and Archie were sufficient to pass a resolution in 2008 with respect to Champion REIT which conferred substantial benefit on GE.[53]

308.  It is also important to note that KS’s purchase of shares throughout the years is no secret to the plaintiff or anybody else, and is in fact a matter of public record.

309.  Yet, there is no evidence at all to suggest that KS’s purchase of GE shares has been subject to any complaint or objection by any of the beneficiaries all these years until the subject disputes in these proceedings arose.  I agree that the characterisation of KS’s efforts to uphold his parents’ wishes and benefit GE as a “threat” to the Trust is entirely contrived and unjustified. 

310.  Second, as explained in paragraphs 255 to 258 above, the Trust and the Lo Family members have been recognised by the SFC as a “concert group” since June 2004, and this concert group subsists until today, in light of: –

(1)     the total absence of any evidence to suggest that the group comprising the Trust and the Lo Family members had ceased acting in concert; and

(2)     the confirmation by the SFC on or about 6 June 2018 of the subsistence and operation of this concert group.

311.  This is also consistent with Archie’s evidence that he and KS have always been voting alongside the defendant’s shareholding in order to implement investment objectives of GE efficiently and seamlessly, and that he has never seen KS’s purchase of shares as a threat to the defendant’s shareholding in GE.  Thus Archie gave an example of how in 2008, the aggregate shareholding of the Trust, KS and Archie were sufficient to approve a transaction involving the injection of Langham Place into Champion REIT, with a total of approximately HK$3.1 billion of net proceeds to GE.  I accept the true position is as reflected in Archie’s understanding: “The trustee’s shares are to work – to go hand-in-hand with the Lo family members’ shares, to further the interests of the Lo family as well as the Great Eagle company.”[54]

312.  This is further corroborated by Vincent’s evidence that he neither saw KS’s GE shareholding as a “threat” to the Trust’s shareholding nor saw KS as an “unfriendly party” to the Trust.

313.  As submitted by the defendant, if the Trust and KS (along with other Lo Family members) remain part of the same concert group, then it is simply impossible for KS’s shareholding to pose a “threat” to the Trust’s shareholding, since it is the concert group as a whole which has maintained and still maintains control of GE.

314.  In this connection, I agree it is pertinent to note that the plaintiff has been specifically barred from running a case (which she previously attempted) that the aggregate shareholding of the Trust and the Lo Family was threatened by the combined shareholding of KS, Archie, and Vincent.  See the Court of Appeal’s decision dated 11 October 2018[55]at §§23-27, 41. 

(1)     In any event, there is nothing to suggest that Archie and Vincent were building up a stake against the Trust, and Archie’s evidence is that throughout all the years he, KS and the Trust have always been working together.

(2)     Hence, the plaintiff’s case is strictly confined to a complaint that the GE shareholding of KS himself posed a threat to the Trust, which for the reasons set out herein, is wholly devoid of merit and must be rejected.

315.  Third, KS has given persuasive evidence, which I accept, that he neither has the intention to purchase GE shares beyond 30% of the issued capital of GE, nor does he in any event have the ability to do so.

(1)     In KS’s cross-examination, he emphatically repeated that he simply has no intention and in fact has never had the intention to purchase GE shares beyond 30% of the company’s holding.  In fact, as KS pointed out, over the past 35 years, there had been many opportunities he could have taken where the GE share prices were much lower had he really intended to go beyond the 30% shareholding of GE; but he did not.  His intention throughout was “to work with the family and keep the family together, the shareholdings that we control”.[56] 

(2)     Further, KS also gave clear evidence that he does not in any event have the ability to purchase beyond 30% of the GE shares, which would have compelled him to make a general offer or get a waiver from the SFC.[57]

316.  In the plaintiff’s seriously belated application for expert evidence issued on 18 October 2018, some of the issues on which the plaintiff sought to justify adducing expert evidence were precisely on this point, and include:

(1)     Whether the shares held by the Trust in GE constitute a “controlling shareholding” and/or single largest shareholding in GE, and“[i]f so, was such position under threat by reason of the increased shareholding (both direct and indirect) of [KS] in [GE] on the said dates and/or by reason of the fact that the Defendant did not acquire more shares in the Company pursuant to the instructions/requests of the Plaintiff.” (emphasis added) (Issue 1).

(2)     Whether the block of GE shares held by the Trust has a premium value over and above the aggregate of the price per share quoted on the Hong Kong Stock Exchange, and if so “was the premium value put at risk or reduced by reason of KS Lo’s increased shareholding (both direct and indirect) in [GE]”(emphasis added) (Issue 2).

(3)     In the event that KS is required to make a general offer to the shareholders of GE to purchase their shares, whether it would be possible for KS to raise finance to make such an offer (in light of the provisions of the Takeovers Code and the Listing Rules) (Issues 3 and 4).

317.  In the plaintiff’s Skeleton Submissions dated 5 November 2018, the plaintiff took the clear stance that: –

(1)     “Expert evidence on such issues is necessary and will be great assistance to the Court in arriving at its decision on the Disputed Issues, which are not matters which the Court can fairly, fully and properly consider without the assistance of a corporate finance expert”(emphasis added) (§33); and

(2)     the issue of whether KS (and/or the Trust) would be able to purchase shares in GE in light of the requirements under the Takeovers Code were further singled out as matters which should be properly addressed by an expert: see §§35, 37, 39.

318.  In the premises, (1) the strong factual evidence shows that KS lacks both the intention and ability to purchase GE shares beyond 30% of the issued capital of GE, and (2) the plaintiff remains unable to prove that KS would in any event be able to finance the making of a mandatory general offer to surpass the 30% shareholding threshold, as acknowledged by her belated expert evidence summons. 

319.  Fourth, although the plaintiff sought to rely on a “threat” allegedly made by KS to fire his siblings from the board of GE, whether this allegation is true is irrelevant to the separate issue of whether KS’s shareholding in GE poses a “threat” to the Trust’s shareholding or interest in GE, or in fact to any issue of this case. 

320.  I accept that at most it was a “threat” made by KS to some of his siblings in the midst of a dispute.  But it is entirely obscure how this bears any relevance to whether his shareholding constitutes a “threat” to the Trust, and plainly is not something which the defendant is required to or should take sides on.

321.  In any event: –

(1)     KS did not have enough GE shares and could not have “fired” any of his siblings – as they were perfectly aware;

(2)     as explained by KS in the email dated 6 December 2015, “So in the heat of our argument [in December 2015] I said I could have fired some of you, but not really meaning it.” (emphasis added);

(3)     as explained in his Witness Statement §§69-72the context of the meeting was that KS was upset that some of his siblings had been “bad-mouthing” him and his son Alex;

(4)     but most importantly, the factual disputes concerning this email are simply not something which is relevant or necessary for the court’s determination.  In the premises, neither the court nor the defendant is called upon to make findings on these conflicting accounts or to take sides on the disputes amongst certain members of the family.

322.  Likewise, I agree with the defendant that the plaintiff’s purported reliance on the alleged conversation where KS told Lu that he could sell his stake to people like Soros is equally misguided and irrelevant to the issues of whether KS’s shareholding posed a “threat” to the Trust’s shareholding of interest in GE.  In any event, the alleged conversation is wholly misplaced: as KS explained, he was in fact making the opposite point to show the importance of his shareholding in protecting the Lo Family’s control over GE.  He was not suggesting that he would sell his shares to Soros, but he was demonstrating that if his GE shares “were not there”or if they were sold to somebody else, then the family’s control over GE would be much less certain.

323.  In conclusion, in light of the evidence before this court, I find that KS did not pose any threat to either the Trust or the Lo Family as a whole.  Whether or not KS was or has been in any dispute with some of his family members is simply not something which the court needs to be concerned with. 

E4.    Concentration risk: an irrelevant consideration?

E4a.  Introduction

324.  The plaintiff’s pleaded case in relation to concentration risk was that the defendant actedunreasonably, grossly negligently, and in wilful breachbecause concentration risk was simply an irrelevant factor which the defendant should have ignored in considering the requests in the plaintiff’s Letters.

325.  In other words, the attack made in the plaintiff’s pleadings (as well as her opening submission) was that the defendant ought not to have considered concentration risk at all.

326.  In cross-examination,the plaintiff’s counsel made a different suggestion, which is that, factually, concentration risk was not actually a reason that lay behind the defendant’s refusal to purchase more GE shares.  However, I agree it is difficult to see how that factual challenge can succeed: as explained in Section E4b below, there is overwhelming evidence that the defendant had been concerned for some time about the concentration of the Trust's investments in GE, and continued to carry that concern when it was considering what to do with the plaintiff’s Letters. 

327.  I agree the real issue is really the legal one, ie whether concentration risk is something that the defendant ought to have ignored.  As explained further in Section E4c below, I agree there was good reason for the defendant to have been concerned about concentration risk.  This was necessitated by its general duty of prudence, and it makes no difference that the statute in Hong Kong does not specifically require trustees to consider diversification.  It also does not matter that Clause 12(a) of the Trust Deed permits the trustee to invest the whole of the Trust fund into a single asset.  An investment which is permitted is not necessarily a prudent one.  Under section 4 of the Trustee Ordinance, Cap 29, a trustee is authorised to invest in any of the investments listed in Schedule 2 of the ordinance; however, a trustee is still duty-bound to go further and consider whether, in a particular case, it would be prudent to make such an investment. 

E4b.  Factual aspect: was concentration risk in fact a reason why the defendant declined to purchase GE shares?

328.  The defendant’s case is that it has long been concerned about the Trust’s concentrated shareholding in GE, whose undertaking was (and is) focused on the Hong Kong property market, and fluctuations in whose share price would (and will) have a substantial impact on the value of the Trust Fund as a result of the magnitude of the Trust’s shareholding.  As at 30 April 2016 (ie around the time of the Apr 2016 Letter), the Trust held some 223 million GE shares with a total value of approximately HK$7 billion, representing approximately 86.89% of the then aggregate value of the Trust.  In the circumstances, the defendant considered it was not in the interests of the beneficiaries of the Trust as a whole for the defendant to give effect to the request in the Apr 2016 Letter.

329.  That was explained by the defendant in its solicitors’ letter to the plaintiff’s solicitors dated 10 April 2017: –

“the Trustee has been and remains concerned at the concentration of the shareholding of the Trust in Great Eagle. The Trustee has been monitoring and looking to reduce the Trust's exposure to such concentration risk. Therefore, the Trustee's view is that it is not in the best interests of the beneficiaries and of the Trust as a whole for the Trustee to purchase more shares of Great Eagle.”

330.  The plaintiff is apparently inviting this court to find that that explanation was a complete and utter lie. 

331.  However, as shown by the evidence set out below as summarised by the defendant, I agree it is clear that the defendant’s above explanation was true as a matter of fact, as was long made known to the beneficiaries.

332.  Even before the global financial crisis in 2008, the defendant had already adopted a general rule that (subject to exceptions) not more than 10% of any trust fund should be invested in a single investment holding – ie a policy which guarded against concentration risk.  However, prior to 2008, and in respect of the Trust specifically, the defendant took the view that no proactive action in relation to concentration risk was required because of Clause 12(a) of the Trust Deed which ex facie permitted non-diversification.

333.  However, since the global financial crisis in 2008, the PWS globally had increased concerns posed by concentration risk.  As Brent explained in cross-examination:[58]

“…we had a policy applied for before 2009 and had been for some time - I'm not sure exactly when - the 10 per cent concentration threshold. The strict application of that had been not as tight. The events of 2008 with the financial crisis and that highlighted that this was an area of risk and exposure and it was an action that the trustee needed to do.”

334.  Thus, PWS issued directives to all its trustee entities to review all trusts for adherence to the “10% rule” (ie the rule that holdings in a particular investment should not exceed 10% of the value of the portfolio as a whole) and if necessary to take remedial action.

335.  Paulina’s recollection was that, for her, it was Bernard Rennell who issued a directive requiring actions to be taken more seriously in respect of trust accounts which were ex facie in breach of the 10% rule.  In respect of such trust accounts, Paulina explained that four main options were available, namely: selling down the concentrated holding in the trust fund to 10% or below; restructuring the trust; varying the trust deed; or seeking an indemnity.

336.  In respect of the Trust specifically, the defendant had, from 2009 onwards, been exploring various options to deal with the Trust’s concentration risk (as the Trust’s holdings in GE significantly exceeded 10%).  This process is clearly evidenced in the contemporaneous documents as well as the testimony given by the defendant’s witnesses. 

337.  In the Concentration Risk Monitor Form dated 30 June 2009, Paulina as the Trust relationship manager had noted under “Action to be Taken” that “The securities will be classified / categorized as ‘Core Assets’ or ‘Concentrated Holdings’ having completed all required documentation”with target completion date as 31 January 2010.

338.  On 15 October 2009, the defendant held a meeting with the plaintiff and KS (see the defendant’s internal note)whichinter alia discussed the concentrated holding in GE shares within the Trust.  At that meeting, the plaintiff expressed her wish that the defendant should hold onto the GE shares within the Trust for as long as permissible.  This left the concentration risk issue in the Trust unresolved.

339.  One of the proposals by the defendant was to restructure the Trust into a purpose trust, which would expressly state in its trust deed that the purpose of the trust was to retain GE shares.  However, KS expressed concerns with the resettlement proposal in light of the plaintiff’s advanced age at the time.  That proposal therefore did not go ahead. 

340.  Next, the defendant put forward a proposal to vary the Trust by a deed of variation, in order to provide for a “core asset”, in respect of which the trustee’s powers and duties in respect of the GE shares would be taken away in favour of a nominated person.

(1)     By letter dated 2 November 2009, the defendant wrote to KS, enclosing a draft letter of request and a draft deed of variation for the plaintiff’s signature.

(2)     However, by a letter dated 24 November 2009, the plaintiff wrote to the defendant in rather stern terms that the draft deed of variation was “entirely unacceptable”to her, and sought the defendant’s confirmation that it would never bring up the variation of the Trust Deed again.

(3)     Paulina understood that the beneficiaries were unable to agree on who should be the nominated person under the deed of variation responsible for the core assets.  Therefore, that proposal to vary the trust deed was abandoned in the end. 

(4)     The defendant replied to the plaintiff by letter dated 3 December 2009 noting the plaintiff’s request not to sell or dispose of GE shares during the subsistence of the Trust, and indicated that it would not bring up the proposed variation of the Trust Deed again but would look for other alternatives in consultation with the family with respect to the concentrated shareholding in GE within the Trust. 

341.  After the proposed deed of variation was abandoned, the defendant continued to look for other solutions in respect of the concentration risk in the Trust.

342.  Notwithstanding that the plaintiff had written a letter dated 13 November 2009 requesting the defendant to retain the GE shares and not to sell or dispose of them during the subsistence of the Trust, this letter was considered by the defendant as insufficient for alleviating its concern, since the defendant did not consider itself as being bound to follow the plaintiff’s request to retain the GE shares as expressed in the 13 November 2009 letter.

343.  The defendant therefore continued to seek ways to resolve the problem of concentration risk and put forward a lot of proposals.

344.  Thus, as recorded in the Concentration Risk Monitor Form dated 31 December 2009, the defendant then proceeded to send a draft waiver to “client’s in house counsel for review”.

345.  As at 30 June 2010, the defendant was still in the process of negotiating with the plaintiff and the Children concerning the signing of the waiver.

346.  At a portfolio review meeting held on 27 July 2010 with KS, Nina and Antony, Paulina reminded them that all beneficiaries would need to sign a waiver in respect of the core holding in GE shares within the Trust. 

347.  As at 31 December 2010, the senior management of the defendant was kept informed of the progress and the defendant was arranging for a “meeting with settlor to discuss”.

348.  Accordingly, a meeting was held between Paulina, Connie Ho, the plaintiff, and Nina on 29 March 2011 to review the Trust and discuss the concentration risk issue.  In that meeting, the plaintiff expressed her concern that if upon her passing, the Trust was terminated and the beneficiaries received distributions, they “would definitely sell the GE shares… and [the plaintiff] exactly did not want this to happen”.  The plaintiffexpressed her wish for the Trust to hold onto the GE shares as long as possible, and confirmed that both she and the defendant would discuss with KS on how to give effect to the plaintiff’s wishes.

349.  A few months later, on 30 June 2011, Paulina sent KS an email, attaching a trust proposal for his discussion with the plaintiff and the other beneficiaries.  This proposal was put forward as a way to resolve the concentration risk problem as well as to accommodate the plaintiff’s request for the Trust to hold GE shares in the long-term.

350.  Around the same time, the defendant was also in the process of seeking legal advice on whether it could go to the court to obtain an order to resolve the concentration risk problem in the Trust.

351.  The defendant then prepared a draft memorandum dated 25 July 2011 which sought to provide that the GE shareholding within the Trust should be retained and not sold or disposed of for a period of 20 years from the date of the plaintiff’s demise.  On 22 August 2011, the plaintiff wrote to the defendant stating that she had considered the draft memorandum and “found that it did not convey [her] wishes appropriately and hence should not be adopted”. 

352.  As it transpired during the plaintiff’s cross-examination, when the plaintiff was asked whether she conveyed the message as stated in her letter to the defendant dated 22 August 2011 because some of the Children did not want the shares to be held for 20 years after her death.  The plaintiff said “I think so. Maybe.”[59] This is consistent with the evidence and the defendant’s understanding that there has always been differing views between the beneficiaries as to whether the Trust should retain its level of GE shares in the long-term. 

353.  However, within a few days, the defendant received another letter from the plaintiff dated 24 August 2011, stating that the defendant should consider the 22 August 2011 letter “null and void”.The plaintiffclarified that she was still in the process of reviewing the draft memorandum dated 25 July 2011 and that she would let the defendant have her comments in due course.

354.  In late September 2011, the defendant was informed that some of the Children were opposed to the 20-year lock-in proposal, which therefore did not proceed in the end.  In the premises, the concentration risk issue of the Trust continued to remain unresolved. 

355.  The defendant’s continuing concern was clearly reflected in the Annual Trust Review Checklist dated 30 November 2011 where the outstanding issues included “concentrated holding in Great Eagle shares”which was “under regular review by FIRG”.

356.  Between December 2011 and January 2013, the defendant continued to put forward various action plans, hold internal meetings and arrange meetings with beneficiaries to resolve the concentration risk issue.

357.  By letter dated 17 January 2013, Paulina wrote to invite the beneficiaries to a meeting to discuss the concentration risk with respect to the Trust.

358.  A meeting was held on 1 March 2013.  In that meeting:

(1)     “Paulina highlighted the concentration issue faced by the trustee of the Trust with 84% of the trust assets invested in one single stock – GE”;

(2)     “[Paulina] explained that the 2008 financial crisis had highlighted the importance of risk management and investment diversification”and “urged the beneficiaries to solve the imminent concentration issue”;

(3)     In view of the plaintiff’s confirmation of her wish to retain the existing GE shareholding within the Trust, Paulina put forward three possible solutions to resolve the concentration risk issue, namely (i) to designate GE shares as core assets of the Trust and vest the investment power in GE in a designated person instead of the defendant, (ii) obtain waivers from beneficiaries in respect of the defendant’s retaining of GE shares, and (iii) restructuring of the Trust.

359.  Following that meeting, the defendant circulated draft deeds of waiver to the beneficiaries on 15 March 2013.

360.  Having not received any comments from the beneficiaries on the draft deeds of waiver, on 8 September 2013, Paulina sent a follow-up email seeking their agreement.  In that email Paulina specifically explained why the seeking of waivers from the beneficiaries was necessary and why Clause 12(a) of the Trust Deed was insufficient to resolve the concentration risk concern.  This is because Clause 12(a) of the Trust Deed is only a permissive provision which authorises the retaining of one type of assets.  But in order for the defendant not to be bound to diversify the concentrated holdings in GE, the defendant took the view that the Trust Deed ought to contain a specific provision directing the defendant to retain the specific concentrated holding or prohibiting the defendant from selling it (see further in Section E4c below).

361.  In September and October 2013, six of the beneficiaries[60]signed the waivers.  However, Nina, Gwen, Antony, Lu and Ron refused to sign the waivers, without providing any explanation to the defendant at the time.

362.  During the beneficiaries’ meeting on 27 November 2015, Paulina again highlighted the concentrated holding of GE shares within the Trust, which at that time had reached around 84% of the value of the Trust Fund and in fact “worsened” as a result of the 2015 distributions.  When the plaintiff asked Nina, Antony, and Gwen why they would not sign the waiver, Antony and Gwen replied that they would revert with a few revisions to Paulina, whilst Nina remained uncommitted to signing the waiver.

363.  Subsequently, Antony signed an amended version of the waiver in December 2015and Gwen signed a waiver in August 2017.

364.  However, Nina remained unwilling to sign a waiver.  In Nina’s letter to the defendant dated 14 December 2015 she restated that she was not agreeable to signing the deed of waiver, on the basis that it was unnecessary and in light of Clauses 9, 12, 13 and 19 of the Trust Deed.

365.  It was in those circumstances that, as at December 2015 (ie one month before receipt of the Jan 2016 Letter), the concentration risk issue in respect of the Trust remained unresolved and outstanding (notwithstanding the efforts of the defendant over the previous years). 

366.  As Brent summarised the overall situation in his cross-examination:

“And in respect of this particular case, I mean, this is one that had continued to be a concern for PWS and the trustee, and, I mean, there were various actions taken over the numerous years, and it still remained up until 2015 as a matter that we were trying to resolve.”

367.  On 14 December 2015, Nina sent a letter to the defendant which argued that the defendant’s concerns about concentration risk were based on a misunderstanding of the law in Hong Kong.  During cross-examination the plaintiff’s counsel sought to rely on this letter.  However, as Paulina explained even after the defendant received Nina’s letter, the concentration risk problem had not been resolved because the defendant’s in-house legal counsel and senior management had yet to agree on the matter before it could formally be agreed for the Trust to be taken off the “watch list”. 

368.  As of May 2016, the defendant’s thinking (as explained by Brent in cross-examination) was as follows:

“…The request [to purchase GE shares] was made in early April [2016]. My recollection, when that came in, it was forwarded to our legal department. And the advice and initial view was that we wouldn't buy those shares because of the concentration risk we had. Nevertheless, we should try and contact Madam Lo to discuss her reasoning for it and communicate -- reason for the request.”

369.  At the meeting on 15 June 2016 (when the defendant met with Antony, Annie, YS, Gwen, and Lu), Bernard Rennell explained that “the trust was not the best vehicle to further acquire GE shares with concentration issue in GE”(as recorded in the meeting note).

370.  At the meeting on 23 September 2016 (when the defendant met with Antony, Annie, YS, Gwen, and Lu), Brent expressly cited concentration risk as a reason why the defendant did not agree to purchase more GE shares as requested by the plaintiff.

371.  In the defendant’s letter to the plaintiff dated 10 April 2017, the defendant again cited concentration risk as a reason why the defendant did not agree to purchase GE shares.

372.  In an internal file note prepared by Brent in February 2018, the defendant recorded its decision not to accede to the plaintiff’s request in the Dec 2017 Letter due to the defendant’s concern about concentration risk:

“1. The Trustee has been and remains concerned at the concentration of shareholding of the Trust in GE. The Trustee has been monitoring and looking to reduce the Trust's exposure to such concentration risk. Purchase of further shares is contrary to the Trustee's overall approach to diversify.

2. The Trustee has previously requested waivers from all the beneficiaries in respect of the concentration risk arising from the existing holding of the shares of GE. Waivers were not forthcoming from all the beneficiaries.

3.  The Trustee has made a proposal to divide the trust fund into 9 separate trusts in Dec 2016 prior to Madam Lo issuing a Writ against the Trustee.  The Trustee remains mindful that it may proceed with such proposal should its defense be successful and hence has adjusted the investment time frame for the non GE assets held of up to three years and for the assets to be invested conservatively.  Accordingly HSBC does not consider the addition to the concentrated GE holding is consistent with this investment horizon.”

373.  In light of the above, I agree with the defendant that there is more than sufficient evidence to show, and I accept that: –

(1)     The defendant was genuinely concerned about concentration risk as of 8 April 2016 (when it received the Apr 2016 Letter);

(2)     The defendant remained concerned about concentration risk as of the time of the Dec 2016 Letter, the July 2017 Letter, and the Dec 2017 Letter; and

(3)     Concentration risk was in fact a reason why the defendant declined to purchase GE shares as requested by the plaintiff in those letters.

374.  It must also be borne in mind that throughout the years, the defendant had received differing views from the beneficiaries on whether it was desirable for the Trust to maintain GE shares, and that some of the more senior beneficiaries had indicated their preference for distributions to be made from the Trust Fund.  This was reflected in (i) the considerable difficulty faced by the defendant over the past years in seeking the deeds of waivers from all the principal beneficiaries (of which Nina remains unwilling to execute); as well as (ii) the various discussions and interactions with beneficiaries.  See for example: –

(1)     Note of meeting on 20 December 2005(§1: KS explained that Antony was “waiting for distribution”);

(2)     Note of meeting on 12 December 2008(Vincent expressed his hope that the defendant could later explore the possibility of persuading the other beneficiaries not to sell GE shares right away upon their mother’s death);

(3)     Note of meeting on 23 January 2009 (§§4, 9, 10, 12: Nina pressed for distribution of all the liquid assets from the Trust);

(4)     Note of meeting on 15 October 2009 (§1: the plaintiff explained she was angry that Nina had pressed for termination of the Trust and for distribution of all the Trust assets; §2: the plaintiff commented that her children would “definitely sell GE shares upon receipt of distribution”; last para: KS stated that Nina, Antony and Lu would definitely like to have immediate distribution);

(5)     The plaintiff’s letter to the defendant dated 22 August 2011stating that she had considered the defendant’s draft memorandum dated 25 July 2011 (providing that the Trust should retain the GE shares within the Trust for a period of 20 years from the date of the plaintiff’s demise), and “found that it did not convey [her] wishes appropriately and hence should not be adopted”.  During the plaintiff’s cross-examination, when asked whether she wrote the letter dated 22 August 2011 because some of the Children did not want the shares to be held for 20 years after her death.  The plaintiff said “I think so. Maybe.”

(6)     Discussion amongst the Children in relation to the fixed deposit in August 2015 and CNY CD of Powermax maturing 8 September 2015.  See KS’s email to his siblings dated 10 Sept 2015, 1:20pm (which was later forwarded to Paulina): “… Nina prefers to buy Great Eagle // Lu told me he does not prefer to buy our own controlled shares which although have high yields, are not very liquid, and may concentrate too much on our own companies”;and Lu’s email dated 4 September 2015:“I think trust already has substantial investment in GE group of companies, therefore it’d be better to look for investments that are outside.  There must be quite a lot of choices given the market has dropped so much.”

375.  The plaintiff’s counsel mounted various arguments to suggest that the defendant was not genuinely concerned about concentration risk when it decided not to purchase GE shares as requested by the plaintiff.

376.  First, the plaintiff pointed to the fact that the defendant had on past occasions been prepared to elect scrip dividends from GE.

377.  However, as Paulina clearly explained during her evidence:

(1)     Different considerations applied in deciding whether to accede to the Apr 2016 Letter request as compared to whether to elect scrip dividends;

(a)     In respect of scrip dividends, if the defendant did not elect scrip but other shareholders elected scrip, then the Trust’s percentage of GE shareholding would drop. 

(b)     By contrast, in respect of a request to purchase more GE shares: (i) the same consideration does not apply; and (ii) it would also involve the defendant to exercise its discretion by utilising the available cash in the Trust Fund.

(2)     In general, in considering whether to elect scrip dividends, the defendant had to consider a lot of things before making a decision, of which concentration risk (even though it remained a problem for the Trust) was one factor.  It is also of relevance that:

(a)     the concentrated holding of GE shares within the Trust at the relevant times had far exceeded the threshold of 10% of the value of the Trust Fund, and the taking of scrip dividend (amounting to less than 1% of the value of the Trust Fund) would not materially change the concentration risk situation in the Trust; and

(b)     this has to be balanced against the desirability for the Trust to remain the single largest shareholder and maintain above 30% of shareholding in GE.

378.  The above is further supported by Brent’s evidence, where he explained that the defendant has elected scrip on most occasions, since:

(1)     Often it is a prudent investment decision to take scrip rather than cash;

(2)     The importance for the Trust of maintaining a shareholding of 30% in GE is a relevant consideration;

(3)     The election of scrip would not materially alter the concentrated position of the GE shares held within the trust fund.

379.  Second, the plaintiff’s counsel pointed out that there is no evidence to show that, when the defendant made distributions in 2008, 2009, and 2015, the defendant took into account the issue of concentration risk (ie whether the distributions would aggravate the concentration risk contained in the Trust funds).

380.  However, as explained by Brent, when a trustee is considering whether or not to make a distribution to beneficiaries, there would be other considerations apart from merely concentration risk.  I agree that explanation made perfect sense: when faced with widely contrasting views from different beneficiaries about the desirability of making distributions, the defendant did not have the luxury of focusing only on concentration risk when deciding on distribution. 

381.  Third, the plaintiff’s counsel referred Paulina to an Annual Trust Review Checklist dated 30 November 2010, and suggested that the ticking of “X”next to the question “Are there any outstanding issues/action items from the previous review”meant that as at that time, the defendant no longer considered concentration risk in the Trust to be an outstanding issue.

382.  But I agree this suggestion was obviously wrong. As Paulina explained, concentration risk remained an issue at that time, but it was no longer covered in this review because it was covered by another special review exercise.

383.  Fourth,during Paulina’s cross-examination, the plaintiff’s counsel suggested that the reason the defendant never considered selling the GE shares held within the Trust was because the defendant regarded these shares as being held for long term and not to be disposed of.

384.  Paulina agreed that as far as she was aware, the defendant had never pursued the option of selling down the GE shares held within the Trust as a way of resolving the concentration risk problem in the Trust.  However, this was perfectly understandable and does not in any way show that concentration risk was not a genuine concern held by the defendant: –

(1)     As Paulina testified, this issue had been discussed with the beneficiaries and in fact, they and the defendant all understood it to be a very difficult situation.

(2)     Paulina explained that the value of GE shares within the Trust was over 80% and it was very difficult to reduce this to below 10%.  She further explained that in order to sell down a sufficient amount of GE shares to meet the 10% rule, the defendant would have needed to sell some 30% of GE shares, thereby going from a 33% substantial shareholder to a holder of around 3% GE shares.  This would have been a very drastic decision with potential impact on the share price.

(3)     Further, from 2009 to 2011, the plaintiff continued to reinstate her wish for the defendant to retain the GE shares within the Trust as long as possible.

(4)     The fact that the defendant never considered selling GE shares was also completely reasonable and eminently appropriate in light of the plaintiff’s many repeated expressions of her wish and hope for the Trust to retain the GE shares within the Trust and any further shares to be acquired as long as possible, during and beyond her lifetime. 

(5)     Similarly, Brent (while fairly accepting that the defendant did not have any plan to sell down the GE shares in the Trust) emphasised that the defendant had been taking other action with a view to mitigating the concerns about concentration risk, such as the seeking of waivers and the proposal to restructure the Trust.

(6)     Hence, I agree the mere fact that the defendant had never considered selling GE shares in the Trust does not mean that concentration risk ceased to be a genuine concern or relevant consideration in the defendant’s consideration of the plaintiff’s requests.

385.  The plaintiff’s counsel further highlighted that, after receiving the plaintiff’s requests to purchase, the defendant did not actually do any calculations to check how that would worsen the concentration position.  However, this point hardly assists the plaintiff.  As Brent explained, the defendant had already considered the concentration risk to be a major concern for the Trust and a reason for not acceding to the plaintiff’s requests, and this was plain even without any need for calculations. It is also recalled that the plaintiff had during the 12 April 2016 telephone conversation asked Paulina to withhold implementation of the Apr 2016 Letter – in those circumstances, there was clearly no reason at all why the defendant would have done any form of calculations as the plaintiff suggests.

386.  Finally, the plaintiff’s counsel also tried to insinuate that the waivers sought by the defendant were “for the protection of the trustee”, ie that the defendant was trying to cover itself rather than working to advance the interests of the beneficiaries.  However, this is misconceived.  The defendant is keen to act in the interests of the beneficiaries, but at the same time the defendant recognises that it must act within the bounds of its duties.  The defendant cannot possibly be criticised for trying to ensure that it could both act for the benefit of the beneficiaries and within its duties (which are mutually consistent aims). 

E4c.   Legal aspect: is concentration risk an irrelevant factor?

387.  As to the legal aspect, on a proper analysis, I agree concentration risk was and is a perfectly valid factor for the defendant to take into account.

388.  The plaintiff relies on four matters to argue that concentration risk was an irrelevant consideration for the defendant in deciding whether to purchase GE shares as requested by the plaintiff: –

(1)     In Hong Kong (unlike in England), a trustee has no statutory duty to consider the need for diversification.  Further, Clause 12(a) of the Trust Deed relieves the defendant of any duty to diversify.

(2)     The Trust is not an investment trust.  The defendant’s responsibility was simply to hold the GE shares for good as instructed by Mr Lo and the plaintiff.

(3)     As a matter of fact, the Trust has been investing in a single stock (GE) since its inception.  There is no evidence of any investment policy in relation to the Trust designed to diversify the Trust Fund.

(4)     Despite its purported concern about concentration risk, the defendant has nevertheless been opting for scrip dividends. 

389.  As for the first matter (§388(1) above), it is trite at common law that a trustee has a general duty of prudence in exercising powers of investment.  In particular, he must “take such care as an ordinary prudent man would take if he were minded to make an investment for the benefit of other people for whom he felt morally bound to provide”: Cowan v Scargill [1985] Ch 270, 289B (Megarry VC).  See also Nestle v National Westminster Bank [1994] 1 All ER 118, 125j-126c (Dillon LJ), 140b-d (Leggatt LJ). 

390.  It is true that the Trustee Ordinance in Hong Kong does not contain an express requirement to consider diversification of investments (cf. the UK Trustee Act 2000).  Nonetheless, as part of the general duty to exercise prudence, a trustee in Hong Kong would be obliged to take into account the possibility of diversification.  This is because, as is now widely recognised, diversification has the important effect of reducing risk and thus it is generally desirable for trustees to look towards diversification when making investments. 

391.  This was expressed by Lord Walker NPJ in Secretary for Justice v Joseph Lo Kin Ching (2015) 18 HKCFAR 169, §64:

“Experience shows that it is prudent for trustees to achieve some degree of diversification of their investments…”

392.  The learned editors ofFord & Lee: Principles of the Law of Trusts, observe at §10.2560: –

“Sound diversification is fundamental to risk management and is therefore ordinarily required of trustees. The larger the portfolio the more desirable it is for the managing entity to pursue a policy of diversification of investments, with the object of reducing both risk and cost.”

393.  The desirability of diversification is a well-established tenet of modern portfolio theory.  A portfolio which invests exclusively in the shares of a single company suffers from ‘uncompensated risk’. As explained in Ford & Lee, ibid, §10.20020:

“Diversification reduces and can eliminate risk.  An investor who invests exclusively in shares in company A does so in the hope, more probably belief, that company A will do better than any other company in the market place.  But that investor takes the risk that company A will do worse than any other company in the market.  That risk is described as uncompensated.  These hopes and risks are reduced progressively if investors invest in 10, 30, or 100 companies.  The United States author Brearley RA, in his work An Introduction to Risk and Return from Common Stocks (2nd ed, 1983) estimated (at 112) that as few as ten well selected stocks can achieve 87% diversification; 20 such stocks, 93%, 50 such 97% and 100 such, 98% (cited in Langbein, "The Uniform Prudent Investor Act and the Future of Trust Investing" [1996] 81 Iowa LR 641-669).  Risk is eliminated altogether in a portfolio that invests proportionately in all listed companies - although it cannot avoid systemic price variations: they are minimised by holding on to the investments.  Such a portfolio neither underperforms nor outperforms the share market.” (emphasis added)

394.  A trustee is obliged to have regard to modern portfolio theory as part of his general duty of prudence, which includes a duty to keep up-to-date with modern investment knowledge and practices.  As explained in Ford & Lee, ibid, §10.20300:

“The findings of modern portfolio theory are unequivocal and, subject to any contrary purpose, confront every trustee of a large fund.  Trustees who in the past were unaware of its lessons cannot be held liable for losses caused to trust estates for failure to act on them.  But for the future it is hard to resist the proposition that trustees who ignore what is now known, and who adhere to out of date investment practices, may find their positions less tenable than they were.  So in Re Mulligan [1998] 1 NZLR 481, professional trustees and a lay trustee were held liable for failing to move into equities.  It had deferred to the wishes of the beneficia1ies and chose not to approach the court.  It is significant that the court's decision was based on existing law, not the new legislation; and that it accepted evidence that the professional trustees considered themselves under an obligation to maintain the real value of funds.” (emphasis added)

395.  As indicated by the underlined words above, a trustee can be held liable for a failure to diversify even where (as under the former legislation in New Zealand and under the present legislation in Hong Kong) there is no express requirement in the statute to consider diversification. 

396.  Hence, it is wrong to say that in Hong Kong, trustees are generally not required to take into account the desirability of diversifying their investments. 

397.  The above statements also accord with the defendant’s understanding.  As explained by Brent in cross-examination:[61]

“…from an investment point of view, it's quite well respected that a diversified portfolio is going to provide -- it will have less volatility and will, over the longer term, provide sort of stable returns, where having your trust fund all concentrated in one single asset, I don't think would be in the best interest of the beneficiaries over the long term, given the nature of this trust and how it was set up as a discretionary trust, the terms of the trust deed and the powers under the trust deed that we have.”

398.  As for Clause 12(a) of the Trust Deed, I agree with the defendant’s submission: –

(1)     That simply means that under the Trust Deed the defendant is not under an absolute duty to diversify and that it is permissible for the defendant to put all of the Trust Fund into one asset. 

(2)     However, it does not absolve the defendant from its more general duty of prudent investment. 

(3)     Hence, despite Clause 12(a), there would be many situations where it is imprudent for the defendant to invest wholly in one asset.  It may be legitimate for the defendant (by virtue of Clause 12(a)) to put all of the Trust Fund into a safe investment such as US Treasury bonds; but it would not be prudent (despite Clause 12(a)) for the defendant to put all of the Trust Fund into a risky investment such as a volatile stock. 

(4)     As stated in Underhill & Hayton, 19^th edn., §49.55: “A trustee is not necessarily safeguarded merely because the investments he makes are authorised by the settlement or by statute.”  Thus, even though Clause 12(a) authorises the defendant to invest all of the Trust Fund into a single asset, it does not mean that the defendant would be protected against all liability resulting from any such investment. 

(5)     In short, I agree with the defendant that despite Clause 12(a), it still depends on the asset in question.  In the instant case, GE is a company which is focused on the Hong Kong property market, and fluctuations in its share price would have a significant impact on the value of the Trust fund due to the magnitude of the Trust’s holdings.  Hence, it was perfectly reasonable for the defendant, in discharge of its general duty of prudence, to look for ways to reduce the concentration in GE shares.

399.  As for the second matter (§388(2) above), that has already been addressed in Section E3b (§§224-302) above. 

400.  As for the third matter (§388(3) above) this is really a challenge to whether the defendant in fact had been concerned about concentration risk.  That has been addressed at length in §§328-386 above. 

401.  The plaintiff criticises the defendant’s Closing for citing various authorities on the desirability of diversification.  The plaintiff points to the fact that the defendant did not have a plan for selling down and diversifying away from the Trust’s GE shareholding.  However, I agree with the defendant the point is not that the defendant had an absolute duty to diversify.  Rather, it was prudent for the defendant as a trustee to consider the advantage of diversification (the flip side of which is the disadvantage of maintaining or increasing a highly concentrated portfolio), which is exactly what the defendant did when it decided what to do in relation to the plaintiff’s requests to purchase more shares.

402.  As for the fourth matter (§388(4) above, regarding scrip dividend), that has been addressed in §§376-378 above. 

403.  The plaintiff also argues at length that the various measures that the defendant tried to implement over the years were aimed at self-protection rather than reducing concentration risk for the benefit of the beneficiaries.  However:

(1)     It is important to bear in mind what the plaintiff’s actual pleaded case is:

(a)     The plaintiff’s pleaded case is that the defendant, in declining to purchase GE shares (i) wrongly took into account the irrelevant factor of concentration risk; and/or (ii) was in fact motivated by the improper purpose of favouring KS (rather than any concern about concentration risk).

(b)     It is not the plaintiff’s pleaded case that the defendant acted wrongfully in looking to protect itself (whether in 2016-2017 when it declined to purchase GE shares, or in 2009-2015 when it explored various measures to alleviate the concerns about concentration risk).

(2)     As submitted by the defendant, even assuming that the defendant was trying to protect itself from liability, this does not advance either of the plaintiff’s pleaded points above: –

(a)     It has nothing to do with whether concentration risk is a relevant factor.  That is a question of law.

(b)     It would also not assist the plaintiff in showing that the defendant had no genuine concern about concentration risk.  Indeed, the fact that the defendant tried to explore these various measures shows that it was concerned.  

(3)     For the sake of completeness, the defendant was aiming (as explained by Brent) both to act in the interests of the beneficiaries and to ensure that it did not incur liability:[62]

“Q…The question I asked Paulina Lau…was: ‘This is really to protect the trustee from any possible claim by reason of concentration risk, right, issue?" And the answer is ‘yes.’ You agree with her, right?

A.  Yes. But it's also it would enable the trustee to be able to continue to sort of hold these – the Great Eagle shareholding.  I mean, the trust is a discretionary trust.  It's got wide powers on investment, and we have a duty in respect of all of the beneficiaries.  So this was one of the concerns we had when we were trying to deal with concentration risk.”

These are two mutually consistent aims, and it was entirely proper for the defendant to have both of them in mind. 

404.  In the circumstances, I agree the defendant had perfectly valid reasons for taking into account concentration risk.  In any event, it cannot be said that the defendant’s conduct was so fundamentally flawed as to deprive the defendant’s decision of any rational basis and hence justify the court’s intervention (see the principles at §§196-200 above). 

E5.    Alleged Failure to Respond Promptly to the Plaintiff’s Requests Etc

405.  The plaintiff makes various general allegations as to the defendant’s handling of the plaintiff’s requests as contained in her Letters set out above, ie that the defendant failed to (i) “attend or respond promptly” to them, (ii) “properly or seriously consider” them, (iii) “take serious account” of them “as the primary or material consideration”, (iv) failed to implement them “without any good, legitimate and/or sufficient reason”, and (v) failed to provide “any or good, legitimate and/or sufficient reasons or explanations for its failure and/or refusal to implement” them.

406.  All these allegations must be assessed in light of legal principles discussed in Section E2 above, including in particular the principles that: –

(1)     there is no duty on a trustee to act “reasonably” (see §198 above);

(2)     trustees are not obliged to give reasons for their decisions (see Section E2b above);

(3)     the weight to be given to any particular relevant consideration is a matter for the trustee (see §§201-203 above); and

(4)     the court should not substitute its own opinion for the opinion of trustees on what was fair or what was a valid reason for their decisions (see §199 above).

407.  In view of the above principles: –

(1)     I do not accept that there was any duty on the Trustee to “attend or respond promptly” to the plaintiff’s requests, to consider them “as the primary or material consideration” in the exercise of the Trustee’s powers, or to provide “good, legitimate and/or sufficient reason” for any refusal to implement the requests.

(2)     It must also be borne in mind that by virtue of the express provisions for exclusion of liability for the trustee under the Trust Deed, in order for any failing on the part of the defendant to be actionable by the plaintiff, it must amount to either wilful misconduct or at least gross negligence.  There is simply no basis for any such claim.

408.  Therefore, the plaintiff’s allegations in this regard must fail.

E6.    Conclusion regarding the Plaintiff’s case against the Defendant for breach of duties

409.  As to the plaintiff’s contention that the defendant was grossly negligent or in wilful default (which must be her case, since Clause 19(b) of the Trust Deed precludes any claim based on ordinary negligence) in not appreciating and acting upon the control premium value allegedly contained in the Trust’s GE shareholding and the threat posed by KS to that control and value, I find that: –

(1)     The plaintiff was entirely unable to show that:

(a)     the Trust in fact had a “controlling” shareholding in GE;

(b)     the Trust’s shareholding in GE had a “premium value”; or

(c)     KS’s stake in GE posed a threat to the Trust’s controlling shareholding and its premium value.

(2)     In any event, the plaintiff failed to show that: (a) the above matters were obvious (and hence should have been known by the defendant); or (b) the above matters were actually known to the defendant. 

(3)     In the circumstances, the plaintiff cannot establish that the defendant was grossly negligent or in wilful default. 

410.  As to the plaintiff’s argument that this court should intervene in the defendant’s decision not to purchase further GE shares because: (i) the defendant was not genuinely concerned, or alternatively ought not to have been concerned, about concentration risk; and/or (ii) the defendant’s decision failed to give effect or to take into account the “purpose” of the Trust, ie to preserve the “controlling shareholding” of GE within the Trust: –

(1)     There is abundant factual evidence that:

(a)     The defendant was genuinely concerned about concentration risk as of 8 April 2016 (when it received the Apr 2016 Letter);

(b)     The defendant remained concerned about concentration risk as of the time of the Dec 2016 Letter, the July 2017 Letter, and the Dec 2017 Letter; and

(c)     Concentration risk was a reason why the defendant declined to purchase GE shares as requested by the plaintiff in those Letters.

(2)     Concentration risk was a perfectly valid factor for the defendant to take into account.  This was part of the defendant’s general duty of prudence in exercising its power of investment.  The desirability of diversification is well-established in modern portfolio theory, and as a prudent trustee, the defendant was justified in taking that into account. 

(3)     As for the alleged “purpose” of the Trust: the plaintiff argued that the purpose of the Trust was to maintain a controlling shareholding in GE.  However, she was entirely unable to show this:

(a)     The plaintiff was unable to show that the Trust in fact had a controlling shareholding in GE (which ran contrary to her contention that the Trust’s purpose was to maintain that controlling shareholding);

(b)     In any event, the identification of the purpose of the Trust depends upon an objective interpretation of the Trust Deed, and that document does nothing to support the purpose alleged by the plaintiff. 

(c)     The plaintiff’s attempt to rely on the subjective intentions of herself and Mr Lo was legally unsound.  In any event, the plaintiff was not even able to show that, subjectively, she and Mr Lo intended for the Trust to maintain a “controlling” shareholding in GE (as opposed to holding GE shares generally). 

(d)     The other witnesses’ testimony on the alleged purpose of the Trust was legally irrelevant.  But in any event, their evidence did not support the plaintiff’s case as to the alleged purpose.

(e)     The alleged purpose is also contrary to inherent probabilities, because it would have required the Trustee of the Trust to continuously and laboriously monitor the size of the Trust’s shareholding; the size of other shareholders’ shareholding; the relationships between the other shareholders inter se; and the relationships between the other shareholders and the Trust – this was highly unlikely to have been the role intended for the Trustee. 

F.     ALLEGED CONFLICT OF INTEREST

411.  In this section I will consider the plaintiff’s claims that the defendant has placed itself in a position of conflict of interest by acting as trustee of both the Trust and a discretionary trust of which KS was the founder (“KSL Trust”).  The plaintiff alleges that such conflict or possible conflict arose (1) by the time when the plaintiff’s Letters were issued, or (2) during the period between July 2016 and December 2016 when the defendant made the proposal to restructure the Trust into 9 separate sub-trusts for each of the Children and their descendants. 

F1.    The Scope of the Duty

412.  A fiduciary should not place himself in a position where his duty to one principal conflicts or may potentially conflict with his duty to another.  See Bristol and West Building Society v Mothew [1998] Ch 1, 18H-19A (Millett LJ, as he then was): –

“A fiduciary who acts for two principals with potentially conflicting interests without the informed consent of both is in breach of the obligation of undivided loyalty; he puts himself in a position where his duty to one principal may conflict with his duty to the other: see Clark Boyce v Mouat [1994] 1 AC 428 and the cases there cited. This is sometimes described as ‘the double employment rule’. Breach of the rule automatically constitutes a breach of fiduciary duty.” (original emphasis)

413.  The notion of “potentially” conflicting interests, as explained by Lord Upjohn in Boardman v Phipps [1967] 2 AC 46, 124C “means that the reasonable man looking at the relevant facts and circumstances of the particular case would think that there was a real sensible possibility of conflict; not that you could imagine some situation arising which might, in some conceivable possibility in events not contemplated as real sensible possibilities by any reasonable person, result in a conflict.” (emphasis added). 

414.  This test was adopted in Poon Ka Man Jason v Cheng Wai To (2016) 19 HKCFAR 144 at §§74 and 105 (Spigelman NPJ).

415.  Further, it is important to recognise that the application of the duty not to act under a conflict of interest must be determined by reference to the nature and character of the particular relationship in question.  As explained by Ma J (as he then was) in Kao Lee & Yip v Koo Hoi Yan [2003] 3 HKLRD 296, §48: –

“Generalities aside, it is important to recognise that how these duties are applied to the facts in any given case can only be determined by reference to the nature and character of the particular relationship in question … For example, there are many different types of solicitors’ firms. In some firms, the solicitors are partners or solicitors work solely for the firm. In others, some of the partners and solicitors may also work for other firms. How these fundamental fiduciary duties are to be applied in any given case will depend on factors such as the contents of the relevant partnership deed or contract of employment or the way in which the firm’s activities are carried out…”

416.  Therefore, as submitted by the defendant, in considering whether the defendant had acted in breach of duty by acting as trustee of both the Trust and the KSL Trust, it is vital to examine the specific terms on which the defendant had assumed trusteeship in respect of the two trusts. 

F2.    No Actual or Potential Conflict

F2a.  The plaintiff’s case

417.  The plaintiff’s case as to the time at which actual or potential conflict had arisen between the defendant’s duties to the Trust and the KSL Trust respectively has been imprecise and shifting.  The plaintiff alleges that the alleged conflict or alleged potential conflict arose either:

(1)     when the plaintiff’s Letters were issued – which span a long period of time from January 2016 to December 2017 see RRASOC §52D(3); or

(2)     when the plaintiff put forward proposals to restructure the Trust from July 2016 to December 2016: see RRASOC §52D(4); or

(3)     since KS accumulated a “substantial” number of GE shares: see the plaintiff’s Opening §204(4).

418.  However, I agree with the defendant’s submission that none of these allegations has any merit. 

419.  First, in respect of RRASOC §52D(3), the plaintiff’s allegations are all predicated on some fundamentally misguided assumption that: –

(1)     (RRASOC §52D(3)(a)), the defendant as trustee of the Trust owes duties to ensure that GE would be owned and managed jointly by the Children rather than some of the Children; or

(2)     (RRASOC §52D(3)(b)):  

(a)     the Trust held a “controlling shareholding” in GE; and

(b)     the defendant owes duties to ensure that such “controlling shareholding” of GE held by the Trust can be maintained. 

420.  However, for the reasons set out in Section E3b (§§224-302) above, all such assumptions are demonstrably incorrect.

(1)     Factually, the Trust does not hold and has not since July 2004 held any “controlling shareholding” in GE.

(2)     Legally, the defendant does not owe any duties either (i) to ensure the joint ownership and management of GE by the Children, or (ii) to ensure that the alleged “controlling shareholding” of GE can be maintained by the Trust. 

421.  Second, in respect of RRASOC §52D(4):

(1)     RRASOC §52D(4)(a) is misguided, since as explained above, the Trust does not hold any “controlling interest” in GE.

(2)     RRASOC §52D(4)(b) is equally unfounded, in circumstances where: (i) Options One and Two were expressly predicated on the sub-trusts being party to arrangements that preserve and regulated the Trust’s shareholding in GE and enabled it to remain under the control of the family as a whole; (ii) throughout the consultations between the defendant and the beneficiaries, the defendant had been considering the powers which might be conferred on the plaintiff or even the possibility of conferring greater powers on the plaintiff under the new trust structure; (iii) under the defendant’s December 2016 Proposal, the plaintiff would be added as a beneficiary in each of the nine sub-trusts.

(3)     RRASOC §52D(4)(c) also necessarily fails, given that (i) even if the July or December 2016 proposals were implemented, KS’s shareholding in GE would fall far short of 50% and unable to have “control”[63]; and (ii) in any event, the defendant has no duty to ensure the joint control of GE by all the Children. 

422.  In the plaintiff’s Reply Submissions, she now contends that the plaintiff’s case on conflict does not depend on the court accepting that the GE shares held by the Trust commands a controlling stake or a premium value, on the basis that it is sufficient to show that the Trust held the single largest shareholding in GE and that it would be “desirable” to maintain that position. 

(1)     First, this position is a wholesale departure from the plaintiff’s pleaded case at RRASOC §52D which is premised on (i) an alleged duty that the defendant had to ensure that GE would be owned and managed jointly by the Children; (ii) the Trust held a “controlling shareholding” in GE; and (iii) an alleged duty to main such “controlling shareholding” of GE.  See §§417-421 above.  

(2)     Further, it remains entirely obscure why the defendant (or any trustee) would have a duty to retain a single largest shareholding which holds neither a “controlling stake” in a company nor any “premium value”.  See paragraphs 297 to 302 above.

(3)     The plaintiff also seeks to rely on the matters set out at paragraph 377(2)(b) above to show an alleged conflict of interest on the basis of an alleged duty for the Trust to remain the largest single shareholder of GE.  However, I agree with the defendant that the reference to Paulina’s evidence is entirely misplaced, as it was given in a completely different context in explaining some relevant considerations of the defendant when deciding whether to elect scrip or cash dividends.  This cannot assist the plaintiff in proving that there is a general duty in law for the defendant to maintain the Trust’s status as largest single shareholder, or that such considerations when deciding the form of dividends could give rise to a real possibility of conflict of interest – especially in light of the problems faced by the plaintiff in countenancing the terms of, and the defendant’s role under, the KSL Trust Deed (see §§427-434 below).

423.  In any event, the Trust has always been and remains the single largest shareholder. As such, there is no threat that this status would be jeopardised or at risk of being jeopardised by KS.  KS is unable to surpass the 30% GE shareholding threshold unless he (i) made a mandatory general offer or (ii) obtained a waiver from the SFC.  There is simply no evidence which shows either of the above is possible.  Further, there is also no evidence at all that KS had the intention or desire to become the single largest or controlling shareholder of GE – in fact, only evidence to the contrary has been adduced (see §315 above).

424.  Faced with the difficulty of proving that KS posed a “threat” to the Trust, the plaintiff’s Closing made an impermissible attempt to expand her case based on a “threat” posed by the combined shareholdingsof KS, Vincent, and Archie.

425.  However:

(1)     This is not part of the plaintiff’s pleaded case on the alleged conflict of interest (see RRASOC §52D) or indeed any of the plaintiff’s other claims, and must be rejected. 

(2)     Further, as noted in §314 above, the plaintiff had tried belatedly to introduce by amendment the idea of a combined threat posed by KS, Vincent, and Archie.  That attempt was rejected by this court and again by the Court of Appeal.  The plaintiff cannot now try to slip in a case on which she is specifically barred from running.

In any event, the plaintiff’s allegation is devoid of merit and based on mere speculation.  There is simply no cogent evidence to support this allegation: see §314 above. 

426.  Third, in any event, I agree there is no actual or potential conflict in the defendant’s acceptance and continuation in office as trustee of Trust and the KSL Trust, for the reasons set out in paragraphs 427 to 434 below. 

F2b.  The defendant’s role as trustee of the KSL Trust

427.  The defendant does not hold any shares in GE directly in its capacity as trustee of the KSL Trust.  The only assets held by the defendant as trustee of the KSL Trust are shares in two BVI companies. 

428.  Under the terms of the KSL Trust: –

(1)     the defendant has no power or responsibility for investment decision-making;

(2)     the defendant is and has at all material times been obliged to leave the administration, management, and conduct of the business and affairs of those two BVI companies to their directors and officers; and

(3)     the defendant is proscribed in any dealing with such company by a requirement that it may only do so in accordance with the direction of the protector of the KSL Trust. 

See Clauses 27 and 39(c) of the KSL Trust Deed.

429.  Further:

(1)     the defendant is not and has never been either a director or an officer of such BVI companies; and

(2)     neither the defendant nor any associate of it is or has ever been or can ever be the protector of the KSL Trust. 

See the Sixth Schedule to the KSL Trust Deed.

430.  Hence, whilst these two BVI companies did in 2016 hold an approximately 8.74% interest in GE, such interest was not acquired by or at the direction of or with any involvement of the defendant.

431.  In fact, since the defendant has no investment responsibility in respect of the KSL Trust, it is regarded as a special company trust that is not subject to any investment review (such as concentration risk review) by the defendant.  See Clause 39 of the KSL Trust Deed and Brent Witness Statement §126.

432.  The above evidence was:

(1)     supported by Brent in his witness statement;

(2)     elaborated on by Paulina in her oral evidence, where she explained that the defendant’s involvement in the administration of the KSL Trust was limited to compliance with SDI requirements and receipt of financial accounts and statements from the two special companies; and

(3)     corroborated by the documentary evidence, which shows Paulina’s and the defendant’s involvement in the KSL Trust being distinctly limited to the defendant’s compliance of its SDI disclosure obligations with respect to KSL Trust’s GE shareholding.

433.  In the premises, I agree it is plain that the plaintiff’s allegation about conflict of interest is fundamentally misconceived. In short, and as submitted by the defendant: –

(1)     In order to sustain a valid claim for conflict of interest, one needs to find some incompatibility between the duty owed by the trustee in its capacity as trustee of one trust, with the duty owed under another trust; and this conflict has to be real rather than theoretical, and substantial as opposed to insubstantial.

(2)     This is most obviously demonstrated by the position of any large trust corporation that invests on behalf of its clients in quoted companies.  It cannot be the case and is a plainly wrong proposition that just because one trust corporation has two trusts that are invested in the same quoted securities, that it could only invest by one of those trusts in the quoted securities.

(3)     The plaintiff is wholly unable to show any real sense of conflict of compatibility between any of the duties owed by the defendant to the Trust and the KSL Trust respectively.  In particular, all the investment decisions in respect of the latter trust are made and could only be made at the special company level – all the defendant is doing under the KSL Trust is to hold the shares of the BVI companies.  The defendant has no duty or in fact any power at all to make any decisions in respect of the GE shares held by the BVI companies.

434.  In the absence of any “real sensible possibility of conflict”, the plaintiff’s allegation simply cannot get off ground and must necessarily fail.

F2c.   Other fundamental problems with the plaintiff’s allegations

435.  In any event, I agree with the defendant’s submission that there are a number of other fundamental problems with the plaintiff’s claim with respect to conflict of interest.

436.  As part of the shifting nature of the plaintiff’s claims in these proceedings and of this alleged conflict claim in particular, the plaintiff in her oral and written opening submissions (though not in her pleadings) sought to rely on a number of propositions to substantiate the alleged conflict of interest.  However, all of these are wholly misguided.

437.  During the course of the plaintiff’s opening submissions, she sought to argue that the alleged conflict of interest arose because: –

(1)     Substantial blocks of GE shares are valued at a significant premium from the exchange price (plaintiff’s Written Opening §204(3)).

(2)     Such alleged premium increases with the relative size of the GE shareholding and the extent of “control” (plaintiff’s Written Opening §204(3)).

(3)     It is then said there are “two dimensions” involved in the alleged conflict.

(a)     First, the plaintiff says that increase in the Trust’s GE shareholding and relative voting power and control in GE would restrict or result in a corresponding decrease in the relative voting power and control in GE held by the KSL Trust, and vice versa; and this is apparently because of the limit on the number of GE shares which are available on the market at any material time.

(b)     Second, the plaintiff says that the defendant’s GE shareholding – by adding up the holding of the Trust and holding of the KSL Trust – was between 30% and 50%, and is therefore subject to the “2% creeper provision” under rule 26.1 of the Takeovers Code. Unless there was a desire for the defendant to trigger the obligation to make a mandatory general offer thereunder, the ability of the Trust to increase its holding in GE shares is hampered by KSL Trust’s ability to do the same.

438.  These propositions are either unfounded or premised on incorrect assumptions. 

(1)     As set out in §§299-302 above, the plaintiff is wholly unable to show either the existence of any “premium value” or that such alleged premium increases as a function of the size of GE shareholding. 

(2)     There is also no evidence there was ever any “threat” posed on the Trust by the interest of KS or the KSL Trust, such as to warrant a consideration of the Trust’s GE shareholding as an interest which is “competing” (in terms of size and value) with the shareholding held by KS or the KSL Trust.  See Section E3c above.

(3)     Furthermore, the plaintiff’s claim is predicated on an incorrect assumption that there is a duty on the defendant’s part to either increaseits GE shareholding or to continue to purchase as many GE shares as possible.  There is none.  The idea suggested by the plaintiff that the defendant is somehow obligated or would desire to increase the Trust’s GE shareholding as much as possible to the exclusion of the KSL Trust is entirely illusory. 

F2d.  The plaintiff’s consent

439.  Further still, the fact that the defendant is a trustee of the KSL Trust, and the KSL Trust’s shareholding in GE, are both facts disclosed in publicly available documents.  Thus, the plaintiff has at all material times been aware of the defendant’s trusteeship in respect of the KSL Trust and the KSL Trust’s interest in GE shares.  See for example GE’s annual reports since 2008, which showed: –

Annual Report	Shares held under the KSL Trust
2008	71,522,898 (11.73%)
2009	73,540,895 (11.82%)
2010	73,540,895 (11.81%)
2011	74,634,227 (11.86%)
2012	75,954,787 (12.03%)
2013	79,009,153 (12.36%)
2014	81,788,219 (12.47%)
2015	83,208,257 (12.52%)
2016	59,218,519 (8.74%)

440.  Neither the plaintiff nor the Children has ever raised any objection or concern in relation to such matters in all the years past and prior to the commencement of these proceedings.  In fact, the complaint about the defendant acting as trustee of the KSL Trust was only first raised in the Amended Statement of Claim in HCA 3426/2016, filed on 17 July 2017 (see §52D).

441.  Thus, even if (which is not the case) there was any inherent problem with the defendant acting as the trustee of the KSL Trust, the plaintiff should in any event be taken to have given informed consent to the same. 

442.  For all these reasons, and for the reason stated at paragraph 220 above, the plaintiff’s claim on the alleged conflict of interest must fail.

F3.    Conclusion regarding the Plaintiff’s case against the Defendant for Conflict of Interest

443.  As to the plaintiff’s contention that the defendant was in a position of conflict because it was also the trustee of the KSL Trust:

(1)     The test is whether the reasonable man would think that there was a real sensible possibility of conflict.

(2)     The plaintiff has failed to show any real sensible possibility of conflict, especially because:

(a)     The plaintiff cannot show: (i) that it was the purpose of the Trust to maintain a controlling shareholding in GE; (ii) that the Trust in fact had a controlling shareholding in GE; or (iii) that the defendant had a duty to ensure that GE would be owned and managed jointly by the Children. 

(b)     Under the KSL Trust: (i) the defendant has no power or responsibility for investment decision-making; (ii) all the defendant does is to hold the shares of two BVI companies; and (iii) the defendant is not involved in the management of those BVI companies.

(c)     The plaintiff has at all material times been aware of the defendant’s trusteeship in respect of the KSL Trust and the KSL Trust’s interest in GE shares.  Neither the plaintiff nor the Children has ever raised any objection until the present disputes arose. 

G.     ALLEGED IMPROPER PURPOSES, CAPRICIOUSNESS AND FAILURE TO ACT IMPARTIALLY

444.  In this section I will consider the plaintiff’s claims in RRASOC §52E and HCA 355 ASOC at §§62(6)-(7) that the defendant has acted for improper purposes, capriciously and/or failed to act impartially by favouring KS’s interests over those of the plaintiff and other beneficiaries of the Trust, by: –

(1)     failing to purchase GE shares in accordance with the requests in the Apr 2016 Letter, Dec 2016 Letter, July 2017 Letter and Dec 2017 Letter;[64]

(2)     putting forward and insisting on pursuing the defendant’s proposals to restructure the Trust;[65]

(3)     failing to exercise the voting powers in respect of the Trust’s GE shares at the Annual General Meeting (“AGM”) of GE on 10 May 2017;[66]and

(4)     failing to act in accordance with the requests in the Jan 2016 Letter, Feb 2016 Letter, Apr 2016 Letter, May 2016 Letter and Sep 2016 Letter.[67]

G1.    General Remarks

445.  This part of the plaintiff’s case is an explicit attack on the integrity of the defendant for a deliberate breach of duty in favouring KS.  It is a very serious allegation, and there are stringent requirements for asking this court to draw an inference that the defendant has done so: see §75 above.

446.  It bears emphasis that the plaintiff’s pleaded case (RRASOC §52E; HCA 335 ASOC §62(7)) is that she asks the court to infer that the defendant had acted in a way which favours KS’s interest from the four specific matters set out at paragraph 444 above.

447.  As shown below, I agree with the defendant that in light of the evidence at trial, the plaintiff has come nowhere close to proving that the defendant deliberately favoured KS generally or in respect of any of these four specific matters.  This claim ought to be rejected.

448.  At trial, the plaintiff’s counsel pursued a line of cross-examination which was apparently aimed at arguing that an adverse inference should be drawn from the defendant’s alleged failure to call witnesses.

449.  The plaintiff’s Closing at §§27, 187 assert that because Bernard Rennell and Chris Marquis of the defendant did not attend the trial to give evidence, the court should draw adverse inference that “the improper purpose of favouring KS would be exposed” if they came to testify at the trial truthfully. 

450.  I agree with the defendant that this is the wrong approach.  Before the court is entitled to draw the adverse inference, there must be a reasonable basis for contending the hypothesis (namely, that Bernard Rennell and Chris Marquis actually favoured KS) in the existing evidence: Pacific Electric Wire & Cable Co Ltd v Texan Management Ltd,unrep., 17 September 2013, CACV 90/2012, §§106-107 (Kwan JA, as she then was).  The court cannot draw adverse inference to fill gaps in the evidence, or to convert conjecture or suspicion into inference.  There is no evidence at all that either Bernard Rennell and Chris Marquis favoured KS, and therefore the court is not entitled to draw the adverse inference sought by the plaintiff. 

451.  In any event, there is simply no failure on the defendant’s part to call any witnesses.  What the defendant needs to do is to call sufficient witnesses to cover the relevant areas of its defence; the defendant is not required to call all of its staff and former staff who were involved in the discussions and decisions.  I agree the defendant’s witnesses are adequate to cover the defendant’s areas of defence.  In particular, the defendant has called Brent, who: –

(1)     was a senior member of the management of the defendant;

(2)     supervised Paulina’s administration of the Trust from 2008 to 2012 (in his role as Director and Head of Trust Relationship Management), and thereby would have knowledge of the background matters concerning the Trust;

(3)     was, as part of the senior management of the defendant, directly involved in the discussions (both internal and external) and the decision-making processes which occurred in relation to the plaintiff’s Letters;

(4)     was involved in the defendant’s decision not to remove KS and Archie as beneficiaries; the defendant’s decision not to purchase GE shares; and the defendant’s decision not to distribute the whole of the Trust fund to the plaintiff.  He participated in various of the meetings held in 2016 and 2017 between the defendant and the beneficiaries;

(5)     was, as part of the senior management of the defendant, directly involved in the formulation of the defendant’s restructuring proposals in July 2016 and December 2016; and

(6)     was the author of the several file notes recording the basis upon which the defendant made its decisions and therefore was the best person to explain those notes.

G2.    The Scope of the Duties

G2a.  Duty to act for proper purposes

452.  The classic authority for the proposition that a donee of a fiduciary power must act for proper purposes is Duke of Portland v Topham (1864) 11 HL Cas 32, where the power in issue was a special power to appoint a fund between two daughters of the donee of the power.  Lord Westbury LC said at p.54:  

“I think we must all feel that the settled principles of the law upon this subject must be upheld, namely, that the donee, the appointor under the power, shall, at the time of the exercise of that power, and for any purpose for which it is used, act with good faith and sincerity, and with an entire and single view to the real purpose and object of the power, and not for the purpose of accomplishing or carrying into effect any bye or sinister object (I mean sinister in the sense of its being beyond the purpose and intent of the power) which he may desire to effect in the exercise of the power.” (emphasis added)

453.  To similar effect, Lord St. Leonards said at pp. 55-56:

“My Lords, the rules on this subject are so well settled that it is quite unnecessary to go through any authorities on the subject. A party having a power like this must fairly and honestly execute it without having any ulterior object to be accomplished. He cannot carry into execution any indirect object, or acquire any benefit for himself, directly or indirectly. It may be subject to limitations and directions, but it must be a pure, straightforward, honest dedication of the property, as property, to the person to whom he affects, or attempts, to give it in that character.” (emphasis added)

G2b.  Duty to not to act capriciously

454.  Trustees must not act capriciously.  Acting capriciously means acting for reasons which could be said to be irrational or perverse: Lewin, supra, §29-153.  It refers to the “exceptional instances where the exercise cannot be said, on any reasonable view, to be for the benefit of the objects or beneficiaries or in furtherance of the purpose for which the power was actually created.  They are cases which go well beyond mere error of judgment and in which the conduct of the trustees has been capricious, arbitrary, absurd, wanton, oppressive, vexatious, mischievous, or ruinous.”: Thomas & Hudson, supra,§11.80.

G2c.  Duty to act impartially

455.  It is common ground that a trustee has a duty to act impartially between beneficiaries.

456.  The classic formulation of the duty on a trustee to act impartially is found in Re Tempest (1866) 1 Ch App 485, 487-488, where Turner LJ stated that: –

“…it is of the essence of the duty of every trustee to hold an even hand between the parties interested under the trust. Every trustee is in duty bound to look to the interests of all, and not of any particular member or class of members of his cestuis que trusts”.

457.  However, it needs to be emphasised that a trustee’s primary duty is to the trust as a whole, even if the effect of fulfilling that duty is to disadvantage one beneficiary in favour of another: see Lewin, supra,§29-181; Re Charteris [1917] 2 Ch 379, 388-389 (Swinfen Eady LJ), 397 (Bankes LJ) and 398-399 (Warrington LJ); and Re Hayes’ Will Trusts [1971] 1 WLR 758, 764E-767C (Ungoed-Thomas J).

458.  Further, the duty to act impartially does not apply where the settlement authorises the trustees to discriminate, as in the case of discretionary dispositive powers.  In such cases the very discretion conferred on the trustee is to prefer one over another, and unfairness cannot be a ground of challenge: Lewin, supra,§29-183.

459.  This was explained in Edge v Pensions Ombudsman [1998] Ch 512, 533F-H, where Scott VC stated: –

“In Cowan v Scargill [1985] Ch 270, 286-287 Sir Robert Megarry VC referred to ‘the duty of trustees to exercise their powers in the best interests of the trust, holding the scales impartially between different classes of beneficiaries’. … But Sir Robert Megarry VC was dealing with an issue regarding the exercise by pension fund trustees of an investment power. He was not dealing with the exercise of a discretionary power to choose which beneficiaries, or which classes of beneficiaries, should be the recipients of trust benefits. In relation to a discretionary power of that character it is, in my opinion, meaningless to speak of a duty on the trustees to act impartially. Trustees, when exercising a discretionary power to choose, must of course not take into account irrelevant, irrational or improper factors. But, provided they avoid doing so, they are entitled to choose and to prefer some beneficiaries over others.” (emphasis added)

460.  The case of Edge v Pensions Ombudsman itself concerned an appeal from a decision of the Pension Ombudsman in which he had annulled an amendment by trustees of the rules of a pension scheme so as to use surplus funds to benefit members of the scheme, without providing any benefit at all to pensioners.  The Pension Ombudsman held that the trustees were in breach of their duty to act impartially by acting with “undue impartiality”.  Scott VC reversed the decision and stated at p.534B-D:

“What is ‘undue partiality’? The trustees are entitled to be partial. They are entitled to exclude some beneficiaries from particular benefits and to prefer others. If what is meant by ‘undue partiality’ is that the trustees have taken into account irrelevant or improper or irrational factors, their exercise of their discretion may well be flawed. But it is not flawed simply because someone else, whether or not a judge, regards their partiality as ‘undue’. It is the trustees’ discretion that is to be exercised.”

461.  Scott VC’s decision was upheld by the Court of Appeal in [2000] Ch 602, where Chadwick LJ stated at p 627E-F that:

“[p]roperly understood, the so-called duty to act impartially… is no more than the ordinary duty which the law imposes on a person who is entrusted with the exercise of a discretionary power: that he exercises the power for the purpose for which it is given, giving proper consideration to the matters which are relevant and excluding from consideration matters which are irrelevant. If pension fund trustees do that, they cannot be criticised if they reach a decision which appears to prefer the claims of one interest – whether that of employers, current employees or pensioners – over others. The preference will be the result of a proper exercise of the discretionary power.” (emphasis added).

462.  The plaintiff’s claim that the defendant had acted in breach of trust by deliberately favouring KS’s interests is a very serious allegation.  The court would have to examine and make findings as to the defendant’s intentions in undertaking the various acts in question, and in doing so it is relevant to bear in mind the principles set out in §75 above regarding the drawing of inferences for the purpose of reaching conclusions as to allegations of serious wrongdoing.

G3.    The Defendant did not Act for Improper Purposes, Capriciously or Fail to Act Impartially

463.  As pointed out above, the plaintiff relies on four matters to suggest that the court should infer that the defendant was deliberately favouring KS’s interests over those of the plaintiff and the other beneficiaries of the Trust, but I agree with the defendant that none of those matters justifies such inference.

G3a.  Relationship between the defendant and KS: general points

464.  Before delving into the four specific matters on which the plaintiff bases her claim, as submitted by the defendant, it is pertinent to make the following general observations which inform the court of the proper context of the plaintiff’s allegations, and to rebut some of the unmeritorious ones at the outset. 

465.  The plaintiff makes a general allegation that the defendant and/or Paulina had an inappropriately close relationship which somehow meant that KS was able to exert some improper influence on the defendant in its decision-making process and discharge of duties as trustee of the Trust.  I agree this allegation is wholly unjustified. 

466.  First, KS is and has since the early 2000s been a key contact point for the defendant in respect of the Trust.  This is a fact which is well-known to the beneficiaries throughout the past years, and had not been the subject of any complaint or objection, and one which the defendant openly accepts. 

467.  Contrary to the plaintiff’s insinuations, there is nothing wrong with this.  As shown below, that KS is a key or primary contact of the Trust is (i) perfectly reasonable and understandable, (ii) in fact something which the plaintiff had always wanted and made known to the defendant; and (iii) consistent with the explanations and evidence before the court.

468.  Firstly, it is clear that Mr Lo during his lifetime and the plaintiff have always, until the recent disputes, both placed a high degree of trust in KS.  They have always seen KS as Mr Lo’s natural successor of the family business, and assigned him various important roles and responsibilities in the management of GE as well as the Trust.  By way of example: –

(1)     KS was named as one of the Appointors and Guardians.

(2)     Under the 1988 Letter, KS (and, in the event of KS’s death, Archie) was the person entitled to exercise the voting rights attached to a deceased beneficiary’s share until the successor of the share is ascertained. 

(3)     Under the 1988 Letter, KS was also entrusted by Mr Lo and the plaintiff as the sole advisor to the charity (and, in the event of KS’s death, Archie would take his place).

(4)     As a reflection of the above, KS was also given the largest share of the Trust assets under the 1988 Letter.

(5)     Back in May 2005, the plaintiff had told the defendant that she entrusted KS to manage GE and its underlying groups, and that she had already mentioned this to KS.

(6)     This is consistent with Paulina’s evidence that she knew the plaintiff put a lot of trust in KS (“亦都知道羅老太畀咗好多信任即係 Dr KS Lo”).[68]

469.  In particular, the plaintiff had expressly informed the defendant of her wish that the defendant should speak with KS in respect of her wishes regarding certain trust matters.

(1)     Thus, Paulina gave evidence that the plaintiff had told the trustee “You talk about it to Ah Ka” (“你同阿家講喇”) in respect of the plaintiff’s wish for the Trust to continue holding GE shares.^[69]

(2)     This is further reflected in the note of meeting held on 15 October 2009, where the plaintiff was recorded to have said that only KS was aware of her wish to retain the GE shares within the Trust at that time.

(3)     Again, during the meeting on 29 March 2011“Mdm Lo confirmed she would discuss with Dr KS Lo and we [ie Trustee] would discuss with KShow to implement her wishes”.

470.  It is therefore entirely unsurprising and in fact wholly appropriate that the defendant would treat KS as a primary contact of the Trust, in accordance with the plaintiff’s express wishes and the way in which the Trust had been administered over the past years without any complaint or problem.

471.  It follows naturally that: –

(1)     when KS updated the defendant about the family matters, Paulina had no reason to refuse receiving KS’s calls or emails, and would in fact thank KS for updating the trustee with such information;[70]

(2)     more generally, she and the defendant trust KS and they had “nothing to doubt about him”.[71]

472.  Secondly, the contact maintained between the defendant and KS throughout the years was neither a secret nor to the exclusion of other family members. 

(1)     As testified by Paulina, her contact with KS throughout the years was not kept a secret, and other beneficiaries were aware of the fact that she had contact with KS.[72]

(2)     Until 2016, Paulina never heard any protests or objections of her having contact with KS.[73]

(3)     Although KS was a primary contact of the Trust, Paulina testified that this did not mean she would contact KS for everything.[74]

(4)     Further, KS was not the only contact of the Trust, and Paulina in fact maintained contact with other beneficiaries as well in relation to the administration of the Trust.  Apart from KS, other beneficiaries would also update the defendant about what was happening with the family, and the defendant would also have close and regular contact with other beneficiaries such as Nina, Lu and Antony.

(5)     The defendant naturally also consulted repeatedly with the Appointors and Guardians.

(6)     In fact, Paulina gave evidence that depending on the period of time, certain other beneficiaries had the most contact with the trustee.  For example, it was Archie who made the most contact with the trustee in 2007, and Nina between 2009 and 2015 concerning investment matters.

(7)     Although Paulina agreed that leaving aside investment matters, KS was the one who had the most contact with Paulina over the years, if one includes investment matters, in fact most of the contact was made with Nina.

473.  Second, the plaintiff refers to the fact that the defendant is accustomed to giving KS “heads up” calls and tries to insinuate that this is somehow improper or reflects an inappropriately close relationship between them.  But I agree this again is unjustified in light of the clear evidence before the court.

(1)     As explained by Paulina, prior to 2006, it had been KS who arranged all the meetings between the defendant on the one hand and the plaintiff or the beneficiaries on the other.

(2)     Specifically, in respect of the issues of (i) concentration risk and (ii) the plaintiff’s wish to retain the GE shareholding within the Trust: –

(a)     Paulina testified that “[The plaintiff] said that if we got anything to say, we should say it to Ah Ka and therefore we also respond in that way.”[75]

(b)     Hence, Paulina explained why, for example, in her email dated 12 July 2012 it was recorded that she would call up KS for “head-up and ask for arrangement of meeting with Madam Lo” in respect of the concentration risk issue.  First, the defendant had met with the plaintiff in 2009 concerning the concentration risk issue and subsequently sent the draft deed of variation to KS for the plaintiff’s signature.  That was why when the defendant suggested the signing of waivers by beneficiaries, the defendant wanted to go through the details with KS first.  Second, Paulina explained that “[i]n 2009, when meeting Madam Lo concerning the concentration risk and also the continuation of the trust in Great Eagle, she said that we should approach Ah Ka, therefore we approached him to inform him what would be done in near future.”[76]

(3)     Paulina also testified that usually after meeting with the plaintiff, she would call KS within one or two days because he had been the one to arrange the meeting, and KS had been worried about the defendant meeting with the plaintiff alone.

(4)     Moreover, if there were anything untoward in the relationship or “heads-up” contact between the defendant and KS, such contact would plainly not have been so clearly documented and recorded in the numerous meeting notes and internal records on which the plaintiff is relying.

474.  Third, although the plaintiff sought to refer to Paulina’s attendance of GE board meetings over the past years to suggest that this was something inappropriate, this also does not assist the plaintiff’s case when: –

(1)     Paulina had been attending GE board meetings since 2006 and continued to do so until 2015;

(2)     Given that many of the other beneficiaries were also on the GE board and would also attend those meetings, this was plainly not a secret held against the beneficiaries;

(3)     And yet throughout those years, there is no evidence suggesting that any of the beneficiaries had raised a complaint or objection to Paulina’s attendance of the same.

475.  Fourth, the plaintiff tried to rely on the fact that Paulina had called KS in the morning of 7 January 2016, and revealed certain contents of the Jan 2016 Letter to him, before she had obtained consent from the plaintiff for disclosing the same and before she circulated the Jan 2016 Letter to the beneficiaries later that day.

476.  However, I agree with the defendant that this again was wholly understandable in the circumstances and especially in light of the nature of KS’s role in respect of the administration of the Trust, as well as the plaintiff’s reliance and trust in KS throughout all the years and which – as at January 2016 – the defendant had no reason to challenge.

(1)     As Paulina explained, after she received the Jan 2016 Letter, she contacted KS to try to ascertain the relevant background, how the letter came about, and whether KS had received the same or not.[77]

(2)     Later in the morning, KS returned a telephone call to Paulina.[78] During this second telephone conversation, Paulina informed KS that there were various changes proposed by the plaintiff to the 1988 Letter, and it became increasingly clear that the Jan 2016 Letter came as a surprise as much to certain of the beneficiaries (such as KS) as it did to the defendant.

477.  This is entirely consistent with the evidence adduced before this court, and does not assist the plaintiff in showing any inappropriate relationship as between the defendant and KS at all.  Further, the Jan 2016 Letter obviously involved technical and complex trust issues, and of a sort which the plaintiff had for so many years asked the defendant to liaise directly with KS.  In all, the plaintiff’s various general allegations about the close relationship between the defendant and KS lack substance and are accordingly rejected.

G3b.  Alleged failure to purchase more GE shares

478.  The plaintiff relies on the defendant’s decisions not to purchase more GE shares in accordance with the requests in the Apr 2016 Letter, Dec 2016 Letter, Jul 2017 Letter and Dec 2017 Letter.

479.  However, as explained in Section E4 above, the defendant had considered such requests properly, carefully and in good faith; there is simply no basis to infer that the defendant acted in any way to favour the interests of or to show any bias towards KS. 

G3c.  Proposal to restructure the Trust

480.  The second matter on which the plaintiff seeks to rely is the defendant’s December 2016 Proposal to restructure the Trust into nine sub-trusts.  It is further alleged that the defendant had deliberately favoured KS’s interests by unreasonably putting forward a tight deadline of 12 December 2016 (later extended to 16 December 2016) by which time if no agreement could be reached amongst the family members the defendant would make an application to the court for the proposal to be approved.[79] I agree with the defendant’s submission that this is wholly unwarranted.

481.  First, it is recalled that the defendant’s December 2016 Proposal was a refined form of the proposals first put forward by the defendant back in July 2016, and which had been the result of extensive and ongoing consultations with the beneficiaries since around May 2016.

482.  As explained above, the defendant’s July and December 2016 Proposals were formulated in circumstances where the growing discord and conflict between the Lo Family members made it increasingly difficult for the defendant to continue the effective administration of the Trust in its existing form.  Hence, since around May 2016, the defendant had engaged extensively with the different Principal Beneficiaries of the Trust, with a view to exploring a trust restructuring that could assist with the family dynamics and better accommodate the changing needs of the beneficiaries.

483.  As Brent explained in his cross-examination (regarding the situation as of July 2016):[80]

“Our thinking was that the current trust and structure was not really fit for purpose to achieve those objectives. The family dynamics had broken down quite considerably, that the trust was becoming increasingly more difficult as a trustee as well because we didn’t have agreement on joint appointors and guardians as well, that for the best interests of the beneficiaries as a whole, we needed to take steps to try and restructure this or come to a solution. So, at this stage, we were trying to still keep open communications channels with Madam Lo and the beneficiaries and were still hoping that we would be able to reach some sort of consensus that would allow us to agree a proposal or decide on a proposal to go forward.”

484.  The defendant’s July 2016 Proposals (on which the December 2016 Proposal was based) were therefore formulated by the senior management of the defendant after careful consideration of the matters which had arisen from the beneficiaries’ consultation, such as the changing circumstances of the various family members over the years, and the interests of the third and fourth generations in the growing class of eligible beneficiaries.

485.  It is plain that in putting forward the July 2016 Proposals, the defendant acted in good faith and in the best interest of all the beneficiaries and the Trust as a whole.  In particular, the defendant sought to confer on the plaintiff specific powers which had not previously been available to her under the existing trust structure, and there is no basis at all for inferring any improper conduct or motive of favouring KS’s or any other beneficiary’s interest over the others’.  Hence, it was proposed that:

(1)     Under Option 1, the plaintiff would be given specific powers she did not possess under the existing Trust Deed, which would in the longer term be passed to the Principal Beneficiaries of each stirpital branch.  The plaintiff would also be made a beneficiary of each sub-trust and a “protector” under the new structure. 

(2)     Under Option 2, the plaintiff would also be made a beneficiary of each separate trust along with the Principal Beneficiaries, and the plaintiff would be on the “protector committee” which has the right to be notified by the trustee in respect of a wide range of matters and has specific powers to instruct the trustee on voting and investment matters.

486.  The defendant also made it clear that it did not insist on continuing to be the trustee of the restructured trust; though the defendant understood that it could not in those circumstances simply resign and thereby abdicate its fiduciary duties owed to the wide class of beneficiaries.

487.  Throughout the subsequent months of consultation with the beneficiaries, the defendant continued to discuss the possibility of conferring more extensive powers to the plaintiff under the new trust structure and for any division of the assets in the Trust to be in the proportion as set out in the 1988 Letter distribution table. 

488.  Moreover, it will be recalled that the defendant kept seeking to meet with the plaintiff to listen to her views; yet much to the defendant’s disappointment and despite its best efforts to persuade her otherwise, it was the plaintiff who declined to attend the meeting held on 7 December 2016 for further discussions of the refined proposal. 

489.  At the 7 December 2016 meeting, the defendant presented the December 2016 Proposal which had been refined in light of the aforementioned consultations and developments.  Once again, the substance of the proposal shows that the defendant had carefully formulated it in the best interest of all the beneficiaries, and I agree there is no basis for inferring any improper conduct or favouring of KS’s interests over the plaintiff’s. 

(1)     The defendant proposed that the plaintiff would be made a beneficiary of each of the nine sub-trusts throughout her lifetime in addition to receiving a lump sum distribution of HK$100 million. 

(2)     The defendant again did not insist on being the trustee of the sub-trusts, proposed to confer on the plaintiff certain veto powers over, for example, the sale of GE shares, suggested dividing the assets of the Trust in accordance with Mr Lo’s and the plaintiff’s wishes expressed in the 1988 Letter. 

490.  It is therefore plain that the defendant had acted in good faith and in the best interest of all the beneficiaries in formulating and refining its trust restructuring proposals.  The plaintiff’s serious allegation that the defendant had acted to favour KS’s interests over the plaintiff’s or the other beneficiaries’ is entirely unfounded.

491.  Second, I agree there is no basis for criticising the timeframe suggested by the defendant for the beneficiaries to provide their comments by 12 December 2016, in circumstances where: –

(1)     The consultation process on which the December 2016 Proposal was based had been put in motion and made known to the beneficiaries for a number of months;

(2)     The defendant had made it clear that what it was seeking from the beneficiaries by way of comment within the timeframe was simply their indication whether or not they were in-principle comfortable with the concept proposed by the defendant of restructuring the Trust into nine sub-trusts, in which case there would not be any need for the defendant to proceed with any court application and instead enable the defendant to move matters forward;

(3)     The defendant expressly emphasised that the detailed arrangements regarding the sub-trusts could be discussed further if there was in-principle agreement between the family members regarding the concept of division of the Trust into sub-trusts;

(4)     The timeframe proposed was extendable and in fact extended (to 16 December 2016);

(5)     In any event, the timeframe was not one which involved an immediate restructuring upon the proposed deadline; the defendant simply indicated that it would put into motion a court process to seek the court’s approval of the proposed restructuring of the Trust, which process would in itself take a significant period of time, and it was only pursuant to the completion of that process that the defendant would act if authorised by the court so to do;

(6)     the nature of the court process contemplated was not adversarial in nature, but was concerned with enabling the defendant to obtain directions as regards the exercise by it of the trustee discretions vested in it;

(7)     the possibility of seeking the court’s directions in the event that no agreement could be reached had been mentioned at various meetings previously and was not a new proposal; and

(8)     in light of all the circumstances, there was a real need for the defendant to move the matters forward for the proper and due administration of the Trust. 

492.  Third, in the course of Brent’s cross-examination, the plaintiff tried to suggest that it must have been obvious to the defendant in December 2016 that there was no chance for its “refined” proposal being agreed by the two sides of the Lo Family. The apparent insinuation being made by the plaintiff was that the defendant’s true motive in making the proposal was to help KS become the largest shareholder or to favour KS’s interests over those of the plaintiff and the other beneficiaries.  However: –

(1)     The plaintiff’s own recognition that the Lo Family members were so irreconcilably in conflict serves only to validate the defendant’s bona fide proposal for a trust restructuring that was envisaged to lead the beneficiaries out of the quagmire of disputes;

(2)     The plaintiff’s argument is in any event illogical: if there was no chance of the proposal being agreed by the beneficiaries, it is unclear how the defendant could have intended to use that to help KS become the largest shareholder of GE or otherwise advance KS’s personal interest over those of the other beneficiaries;

(3)     As explained by Brent, the simple truth was that the defendant put forward the proposal in a good faith attempt to reach a solution between the beneficiaries:[81]

“Well, I think at the time we put the proposals to them, we had not given up on the option of trying to reach some agreement. Now, these were proposals for discussion. We had wanted to keep open lines of communication with all the respective branches and Madam Lo, trying to consult and hear their views, and we gave them all equal opportunity to do so.”

G3d.  The 2017 AGM

493.  The third matter on which the plaintiff seeks to rely is the plaintiff’s alleged failure to exercise its voting powers at the AGM of GE on 10 May 2017 (“the 2017 AGM”) (at the conclusion of which Lu was not reappointed as director of GE) to suggest that there should be an inference that the defendant was deliberately favouring KS.^[82] Again I agree that is both far-fetched and unjustified. 

494.  First, the defendant’s inability to vote resulted purely from a logistical issue.

(1)     The defendant only received a copy of the notice of the 2017 AGM when GE’s company secretary sent it to the defendant by email on 21 April 2017 (ie 19 days before the AGM).  The defendant did not otherwise receive any AGM notice before then.  The plaintiff’s counsel, in cross-examining Brent, did not challenge the fact that the defendant only received a copy of the AGM notice on 21 April 2017.

(2)     Upon receipt of the notice, together with the other materials relating to the 2017 AGM, the defendant considered the matter and reached the decision to vote in favour of all of the proposed resolutions (including the re-appointment of Lu as a director).[83]

(3)     The defendant then promptly wrote to the Appointors and Guardians (ie KS, Nina, and Lu) on 24 April 2017 to seek a waiver of the 30-day notice period in respect of the exercise of its voting rights (pursuant to clauses 29(1) and (2) of the Trust Deed). 

(4)     However, KS expressly refused to provide the requested waiver: see KS’s letter to the defendant dated 26 April 2017, in which he set out his reasons (for example, that Lu had shown little interest in GE and had failed to act in its best interests).

(5)     That being the case, the defendant was (by virtue of clauses 29(1) and (2) of the Trust Deed) legally unable to exercise its voting rights at the 2017 AGM.

(6)     Thus, it was an entirely logistical issue which prevented the defendant from voting at the 2017 AGM.  I agree the allegation that an inference of bias and bad faith should be made from such incident is wholly unwarranted.

495.  Second, the plaintiff’s counsel sought to rely on an earlier document issued by GE, viz., its Annual Results Announcement dated 28 February 2017, which stated that: –

“The 2017 AGM of the Company will be held on Wednesday, 10 May 2017. The notice of 2017 AGM together with the 2016 Annual Report and all other relevant documents (the "Documents") will be despatched to the Shareholders by or around the end of March 2017.”

496.  The plaintiff’s counsel suggested (during cross-examination of Brent) that, when the defendant saw the said Annual Results Announcement dated 28 February 2017, the defendant ought to have given notice to the Appointors and Guardians of the defendant’s intention to exercise its voting powers at the AGM on 10 May 2017.

497.  However, as Brent explained,[84]the defendant’s approach (which was its usual practice) was to wait until it had received the actual AGM notice and proxy form (as opposed to a set of financial results mentioning such AGM) before it wrote to the Appointors and Guardians.  I agree this was a wholly reasonable course of action on the defendant’s part: –

(1)     The purpose of the Annual Results Announcement (which consisted of 44 pages)was to announce the financial results of GE for the year ended 31 December 2016.  It may have briefly mentioned the forthcoming 2017 AGM (on 2 of its 44 pages), but that was not the subject matter of the document.  It made complete sense for the defendant to wait until it received the documents which actually centred on the 2017 AGM (ie the AGM notice, proxy form, and supporting documents) before writing to the Appointors and Guardians about the defendant’s intention to vote thereat. 

(2)     The Annual Results Announcement did not even state what matters would be debated and resolved at the 2017 AGM.  Even though the defendant could have a fair guess at some of the matters (for example, re-election of directors; approval of financial statements; and re-appointment of auditors), it made sense for the defendant to wait until the actual list of matters was published by GE before writing to the joint Appointors and Guardians. It would have been senseless for the defendant to write to the joint Appointors and Guardians in circumstances where the defendant at best would have been able to say that: (i) GE had not yet announced the list of matters to be discussed at the 2017 AGM, but (ii) the defendant could guess at some of the potential matters on the agenda, and (iii) in the circumstances, the defendant was notifying them of its intention to vote thereat.  If the defendant had done that, the Appointors and Guardians would have been entitled to seriously question how the defendant could have properly reached a decision to vote even before GE had published the list of matters to be voted on. 

(3)     Further, the Annual Results Announcement did not attach any supporting documents for the 2017 AGM. This further increases the senselessness of the defendant writing to the Appointors and Guardians about voting at the 2017 AGM as soon as the defendant saw the Annual Results Announcement.  The defendant would effectively be saying: “GE has not yet announced the list of matters to be discussed at the 2017 AGM, and we have not received any supporting documents – but nonetheless, we hereby notify you of our intention to vote thereat.”  It is difficult to see why the defendant should have done that, and I agree the defendant was right not to have done so. 

(4)     Yet further, the Annual Results Announcement stated that the AGM notice and supporting documents would be issued to shareholders “by or around the end of March 2017”.  If GE had adhered to that schedule (and there was no reason for the defendant to have doubted that GE would do so) then the defendant would have been in a position to give notice to the Appointors and Guardians more than 30 days before the 2017 AGM.  In the circumstances, it was more logical for the defendant to wait until it received the AGM notice and supporting documents than to write to the Appointors and Guardians as soon as it saw the Annual Results Announcements (which, as mentioned already, did not specify the agenda of the 2017 AGM or attach the supporting documents therefor). 

498.  In any event, I agree it should be borne in mind that the plaintiff’s pleaded case is that the defendant had deliberately chosen not to vote at the 2017 AGM because the defendant was favouring KS’s interests over those of the plaintiff and the other beneficiaries.  Hence, even if (contrary to the findings at §§494-497 above) the defendant could be criticised for not writing to the Appointors and Guardians as soon as it saw the Annual Results Announcement, this is, at the very most, a ground for alleging negligence on the defendant’s part.  There is absolutely no basis to draw an inference that the defendant had deliberately refrained from writing to the Appointors and Guardians because of some sinister plan to prevent itself from voting at the 2017 AGM, especially in light of: –

(1)     the stringent standard for drawing such inferences (see §75 above);

(2)     the matters in §§495-497 above;

(3)     the fact that the defendant wrote promptly to the Appointors and Guardians (on 24 April 2017) after receiving the AGM notice on 21 April 2017 (22 and 23 April 2017 being Saturday and Sunday) (§494(3) above); and

(4)     in the draft proxy form attached to the letter dated 24 April 2017 the defendanthad in fact indicated its proposal to vote for all of the resolutions, including the re-election of Lu’s directorship. 

499.  Third, the plaintiff’s counsel also relied on a print-out from the Hong Kong Stock Exchange’s website, which apparently showed that the proxy form for the 2017 AGM could have been downloaded from the website as early as 5 April 2017.  As mentioned at §494(1) above, the plaintiff’s counsel did not challenge the fact that the defendant only received the AGM notice on 21 April 2017.  Hence, the plaintiff’s argument here appears to be that the defendant should have downloaded the proxy form from the Hong Kong Stock Exchange website on or shortly after 5 April 2017, and then issued a notice to the Appointors and Guardians immediately thereafter. 

500.  However, whether there has been any breach of the defendant’s duties or improper conduct on its part must be viewed in light of the fact (as rightly observed by Brent) that under the Trust Deed, the defendant has no duty to attend or vote at any AGMs of GE: see also Clause 13 of the Trust Deed.  A fortiori there is no duty on the defendant to ensure it was in a position to exercise its voting powers at the 2017 AGM nor to continuously monitor the website(s) of Hong Kong Stock Exchange (“HKEx”) and/or the GE and have downloaded the proxy form immediately after the proxy form was made available for downloading from the HKEx and/or GE's website.  It is therefore unclear how this fact could assist in the plaintiff’s case. 

501.  Furthermore, again, even if the defendant had failed in downloading the proxy form and writing to the Appointors and Guardians shortly after 5 April 2017, this is, taken at its highest, a possible ground for alleging negligence on the defendant’s part (which is not pleaded by the plaintiff).  But there remains absolutely no basis – nor has any been suggested – to infer that the defendant had deliberately refrained from downloading the proxy form with a view to preventing itself from voting at the 2017 AGM so that Lu would be voted off the GE board. 

502.  Fourth, the plaintiff tried to rely on the fact that for a number of years prior to 2017, Paulina had received a schedule of regular meetings and AGM of GE from the company secretary of GE, and yet Paulina stopped receiving such a schedule for the meetings in 2017.  The apparent insinuation was that the defendant was somehow responsible for this change or for “engineering” a situation where the defendant could not, unlike in previous years, be notified of the date of the 2017 AGM earlier.  I agree this is again wholly unjustified.  As Paulina explained in her oral evidence, the simple and only reason that Paulina did not receive the tentative schedule of meetings for 2017, was that she had started to step aside from the administration of the Trust since February 2016, and ceased her role as the Trust relationship manager in May 2016.[85] And this in turn was to a large part due to the complaint lodged by the plaintiff, Lu and some of his other siblings in February 2016.  This point plainly does not assist the plaintiff.

503.  Lastly, it is notable that Lu was not re-elected even though, at the 2017 AGM, KS abstained the vast majority of his shares.[86] It turned out that out of the 193.8 million shares which were voted, approximately 166.9 million (86.1%) were voted against Lu’s re-election.  Thus, it is simply wrong as a matter of fact to accuse the defendant of “stepping aside” at the 2017 AGM so that KS could vote Lu off the board.  It was other shareholders, and not KS, who voted Lu off the board of directors. 

G3e.  Alleged failure to act in accordance with the plaintiff’s wishes

504.  Finally, the plaintiff also relies on the defendant’s refusal to comply with her requests in the Jan 2016 Letter, Feb 2016 Letter, Apr 2016 Letter, May 2016 Letter and Sep 2016 Letter to suggest that the defendant was biased in favour of KS.^[87]  I agree on the whole of the evidence in this case, there is no basis for any inference other than that the defendant was acting in proper discharge of its duties and in good faith.

G4.    Conclusion regarding the Plaintiff’s case against the Defendant for acting with the Improper Purpose of favouring KS

505.  As to the plaintiff’s case that the defendant was (from January 2016 onwards) effectively doing the bidding of KS or otherwise deliberately acting with the improper purpose of favouring KS’s interests:

(1)     There is no basis for this court to infer that the defendant dealt with the plaintiff’s Letters in the way it did because it was doing the bidding of KS or deliberately intending to favour KS’s interests.  Instead, a detailed examination of the circumstances in which the defendant dealt with the plaintiff’s Letters show that the defendant acted carefully and properly in response to a delicate, difficult, and mercurial situation. 

(2)     Likewise, there were legitimate grounds (and no basis for inferring any improper purpose) behind the defendant’s actions in relation to: (i) the proposed restructuring of the Trust; and (ii) the 2017 AGM. 

H.     CONCLUSION

506.  For the reasons stated above, I hold that the plaintiff has failed to achieve a positive answer to any of the 6 questions posed in paragraph 31 above.  Accordingly, I order that the plaintiff’s claim against the defendant in both actions be dismissed.

507.  I further order that the costs of both actions be paid by the plaintiff to the defendant, such costs are to be taxed if not agreed with a certificate for 3 counsel.

508.  The above order as to costs is nisi and shall become absolute in the absence of any application within 21 days to vary the same.

509.  Lastly, I express my gratitude to counsel on both sides for their detailed submissions and helpful assistance in these matters.