張才奎所託管中國山水投資有限公司股份 AND ANOTHER v. 張才奎 AND ANOTHER

HCA 1661, 1766, 2191/2014 &
HCA 623, 939, 1564/2015 (Consolidated)

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NOS 1661, 1766, 2191 OF 2014 AND
623, 939, 1564 OF 2015

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(Consolidated pursuant to the Order of
The Honourable Mr Justice G Lam dated 20 August 2015)

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R E A S O N S F O R D E C I S I O N

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1.  This matter had come before me in short order. There was a summons taken out apparently on behalf of 2,346 plaintiffs (out of a total of 2,631 plaintiffs) in this consolidated action, though the authority of the solicitors, Stephenson Harwood, is disputed by the original solicitors on record for all the plaintiffs, K & L Gates, who have applied in response to strike out the former’s notice to act. There was another summons taken out on behalf of the 1^st defendant, Mr Zhang Snr.

2.  The matter that I needed to deal with urgently on 16 February 2017 was whether to give directions to the receivers in respect of 45.63% of the shares of CSI (i.e. China Shanshui Investment Company Limited) as to how they (insofar as it was within their power) should cause CSI to vote on the resolutions at an EGM of the listed company, CSCG (i.e. China Shanshui Cement Group Limited), which was to be held at 10 am the following day. The receivers have since their appointment registered themselves as holders of the 45.63% shares in CSI and are themselves 3 out of its 8 directors with another 2 directors nominated by them.

3.  The purpose of the EGM of CSCG was to decide whether a conditional placing agreement between CSCG and certain placing agents for the placement of its shares and the transactions contemplated thereunder should be approved and whether the directors should be given the mandate to allot and issue shares under that placement agreement. 

4.  The terms of the proposed placement are that: between 910m and 950m shares are to be placed (representing 21.22% to 21.94% of the enlarged share capital assuming the placement has proceeded); the placees will be professional, institutional and other investors selected and procured by or on behalf of the placing agents; the placing price will be not less than HK$0.50 per share.  It is anticipated that the proceeds will range from HK$455m and HK$475m.  It is said that the net proceeds will be applied to settle outstanding indebtedness of the group.

5.  The main reason given for the placement was to restore the public float of CSCG.  The existing shareholding structure of CSCG was reported in the public announcement to be as follows:

Shareholder	Number of shares	Proportion
Tianrui[1]	951,462,000	28.16%
CSI	847,908,316	25.09%
ACC[2]	708,263,500	20.96%
CNMB[3]	563,190,040	16.67%
Yu Yuan[4]	142,643,000	4.22%
Public shareholders	165,673,384	4.90%
Total	3,379.140,240	100.00%

6.  As recorded in §42 of my decision in these proceedings dated 20 May 2015, Tianrui had acquired shares from the market to become the largest shareholder in CSCG by 15 April 2015.  Because there was insufficient public float as a result, the shares have since been suspended from trading.

7.  At the end of the hearing I gave a direction as follows:

“The Receivers be directed to exercise the rights attached to the shares in receivership in China Shanshui Investment Company Limited (CSI) with a view to causing CSI:

(1) to seek an adjournment of the Extraordinary General Meeting of China Shanshui Cement Group Limited to be held on 17 February 2017 for 4 weeks or such longer period of time as is sufficient to allow the Receivers to ascertain the position of the plaintiffs with respect to the resolutions put forward in the Notice of Extraordinary General Meeting dated 30 December 2016; and

(2) upon failing to obtain such adjournment, to vote against the resolutions.”

8.  I gave that direction on the basis that there was material to indicate that both the 1^st defendant and prima facie a large number of the plaintiffs are against the resolutions.  One must not lose sight of the fact that the receivers have been appointed as a kind of interim custodians, to hold the ring, pending the resolution of the consolidated actions.  I accept the receivers are not agents of the parties.  But they have no independent cause for existence outside the context of the actions.  The actions are a contest between the 1^st defendant, who says the 45.63% shares in CSI are held on discretionary BVI trusts, and the plaintiffs, who say they are held on constructive trust for their absolute benefit.  At the end of the day either the plaintiffs are right or the 1^st defendant is right.  It follows that if both sides are agreed on their opposition to the proposed resolution, that in my view can provide a cogent reason why the receivers should exercise the rights flowing from the shares in receivership accordingly; see by analogy Henderson v Executor Trustee Australia Ltd (2005) 226 ALR 475, §58, a case concerning an administrator pendente lite of a deceased person’s estate.  The receivers are there to preserve the subject matter of the litigation for the benefit of those entitled to it.

9.  I need not say that in every case a receiver must as a matter of law follow the joint wishes of the parties to the lis. It is not necessary to go that far.  But it should be recognised that the property in receivership is generally the property of one side to the litigation or the other, and that their property rights should not be unnecessarily thwarted.  Usually the parties are the best judge of what they want and where their interests lie.  If they both desire a certain course to be taken with respect to the property, then it seems to me there has to be some special reason to justify why that course should not be taken. 

10.  Whether the receivers think that such course is in the interests of CSCG is not the focus.  As owner of shares, the parties to the consolidated action, for whose benefit the receivership has been created, do not owe any fiduciary duty to CSI, let alone to CSCG.  Shareholders are generally entitled to vote their shares in their own interest as they see it: Eclairs Group Ltd v JKX Oil & Gas plc [2015] UKSC 71 at §40. 

11.  Accordingly, in considering the proposed resolutions of CSCG, the parties are entitled to prefer their own interests as CSI shareholders.  They are entitled to be concerned that the proposed placement would dilute CSI’s shareholding in CSCG from 25.09% to 19.59% or 19.77%, the very thing the plaintiffs complained of when applying for the appointment of interim receivers in 2015; see §§19, 20 and 31 of my decision dated 20 May 2015 on the appointment of receivers.  Concern has also been expressed about the placing price, being HK$0.50 per share which is a discount of 55.0% to the unaudited consolidated net assets per share of HK$1.11 as at 30 June 2016 and a discount of 92.1% to the closing price of HK$6.29 per share on 15 April 2015, the last trading day before the suspension.  It should also be noted that the net assets value has been affected by substantial impairments recognised in the 2015 accounts. 

12.  Irrespective of whether the board of directors of CSCG considered the placement to be commercially wise or sensible, if the parties because of their concerns both object to the placement, their wish should be taken into account on how their own shares should be voted.  It is in my view not to the point for the court to ask itself whether it agrees with those concerns.  Suffice it to say that I was not at this stage in a position to dismiss these concerns as irrational. 

13.  Some of these concerns have been voiced in a letter to the receivers dated 12 October 2016 apparently signed by a large number of plaintiffs in response to a proposed placement along similar lines announced on 12 September 2016.  The same committee for rights protection which issued the letter had also voiced concerns to the receivers against a “1 share for 4 shares” open offer by CSCG canvassed in mid 2016, an offer which could drastically dilute CSI’s stake in CSCG unless CSI could raise about HK$1 billion to subscribe for new shares in the offer.

14.  The receivers have apparently not dealt with the concerns and their objections expressed by or in the name of the plaintiffs before proposing the resolutions for the EGM.  Mr Barlow SC in answer to my question said that the receivers just did not know whether the views were voluntarily expressed by the plaintiffs or not.  In my opinion, one cannot infer from their opposition to the placement that they had been bullied or misled into doing so.  Rational and informed shareholders in a company could, acting independently, be opposed to a large placement at a steep discount to NAV that would dilute their stake from above 25% to below 20%, even if the company needed the cash.

15.  I reminded myself that in the present context the court should not simply put itself in the position of the board of CSCG. The subject matter of the receivership is shares in CSI, which is but a 25.09% shareholder in CSCG.  There are other substantial shareholders in CSCG, namely, Tianrui, ACC and CNMB, who would also be entitled to vote in accordance with what they perceive to be in their best interest.  Apart from Tianrui, they did not appear to be in support of the proposed placement.

16.  Stephenson Harwood now claim to represent 2,346 of the plaintiffs, interested in 401,630 shares in CSI.  Their authority is disputed by K & L Gates.  However, I noted that while K & L Gates had challenged the authority of Stephenson Harwood to act for those plaintiffs, they had not said that any of those 2,346 plaintiffs (or indeed the remaining plaintiffs) in fact either support or are not opposed to the resolutions or the proposed placement.

17.  It appears that the other holders of shares in CSI, namely, the 1^st defendant (in respect of shares he holds beneficially for himself) and the 7 minority shareholders referred to in §§13-14 of my decision dated 13 May 2015, were also opposed to the proposed placement.  The minority shareholders had requisitioned an EGM of CSI for that purpose to be held on 16 February 2017 but it appears that various impediments had since been raised against their voting their shares at that EGM.

18.  I should mention that in the affirmations of one Mr Chen Zhongsheng and one Mr Zhao Dongwei respectively filed by Stephenson Harwood, it was said that:

(1) Tianrui was interested in acquiring the interests of the plaintiffs in CSI beginning in August 2015 and to that end had proposed an arrangement whereby (i) the plaintiffs would nominate certain representatives to acquire the plaintiffs’ interests in CSI; (ii) Tianrui would lend money to these representatives; (iii) the acquisition price would be calculated based on the last trading price of CSCG shares i e HK$6.29 per share; (iv) the representatives would pay 70% of the price to the plaintiffs, with the balance of 30% to be paid after the plaintiffs have acquired full title to the shares from Mr Zhang Snr.

(2) Of the 2,631 plaintiffs on record, 2,142 had signed agreements to sell their interest in the CSI shares, though the consideration and purchaser were left blank.

(3) 11 representatives, who were also plaintiffs herein themselves, were involved in making payment to the seller plaintiffs.  Tianrui arranged for a loan to be granted to the 11 representatives. It is said that the loan agreements they signed had the lender and the loan amount left blank.  The funds seem to have taken a tortuous route to reach the 11 representatives and then to the seller plaintiffs.

(4) 1,937 of the 2,142 plaintiffs had been paid 70% of the price under the agreements they signed.  Together they had interests in 298,618 CSI shares representing approximately 29.86% of the capital of CSI.

(5) The loan agreement signed by one of the 11 representatives was exhibited.  The lender was stated there to be one Mr Chen Hongqing.  (A pledge agreement between the lender and the borrower had been exhibited by the receivers, whereby the plaintiffs’ interests in the shares of CSI that the borrower had acquired were pledged to the lender as security.)

18.  Mr Barlow SC submitted that it follows that the 1,937 plaintiffs (who had been paid 70% of the price) had effectively become nominal plaintiffs.  But it seems to me this issue has not been fully investigated and, in any event, even if the beneficial interest had passed to the 11 representatives as purchasers, those 11 representatives are among the plaintiffs apparently represented by Stephenson Harwood.  Although they might in turn have mortgaged their interests in favour of Chen Hongqing or other lenders, they would retain their beneficial interest unless the lenders had foreclosed.

19.  In these circumstances I considered that the receivers ought to ascertain the position of the parties, in particular the plaintiffs, with respect to the resolutions in deciding how to exercise the rights attached to the CSI shares in receivership.  Hence the direction I gave at the end of the hearing.

20.  Separately, I did not think that the 1^st defendant had made out a case for his application for a direction that the receivers abstain from voting on all the resolutions at the EGM of CSI to be held at 3 pm on 16 February 2017, including those which would affect the composition of the board of CSI.  Accordingly I did not such give a direction in the terms sought by the 1^st defendant.