LUCK CONTINENT LTD v. CHENG CHEE TOCK THEODORE AND OTHERS

CACV 107/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 107 OF 2012

(ON APPEAL FROM HCMP NO. 702 OF 2010)

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BETWEEN

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JUDGMENT

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Hon Stock VP:

1.  I agree with the judgment of Lam JA.

Hon Lunn JA:

2.  I have had the benefit of reading the judgment of Lam JA in draft.  For the reasons he gives, I would dismiss the appeal and make the costs order nisi that he proposes.

Hon Lam JA:

3.  This appeal raised interesting and important questions in respect of the remedy under Section 168A of the Companies Ordinance in a rather unusual situation.  As Barma J (as he then was) remarked at the outset of his judgment of 25 April 2012, in contrast with a typical case where minority shareholders sought relief under this section, in this case the Petitioner is the largest shareholder of the company, CYF.  Another unusual feature is that CYF is a publicly listed company, listed on the Hong Kong Stock Exchange.  The Petitioner held 46.58% of CYF’s issued shares.  The 3^rd to 8^th Respondents were companies controlled by the 1^st and 2^nd Respondents. Between them, they held 25.211% of CYF’s issued shares.  I shall call them the Respondent Shareholders. The significance of that holding was that the Respondent Shareholders were able to block the passing of a special resolution of CYF.

4.  CYF is a company incorporated in Bermuda. Its Articles of Association contained a provision which requires a special resolution being passed before a director can be removed: Bye-law 86(4) [“the Bye-law”].  That was inconsistent with the requirements in para 4(3) of Appendix 3 of the Listing Rules of the Hong Kong Stock Exchange in that under that provision the power to remove a director is by ordinary resolution.  As a result, after the Stock Exchange had been alerted to the situation, it had since the end of 2009 urged CYF to rectify the situation by taking steps to amend the Bye-law accordingly.

5.  Since December 2009, there were several attempts by the Petitioner to achieve the amendment of the Bye-law.  It requisitioned a special general meeting of CYF on 30 December 2009.  The meeting was held on 26 February 2010 and the motion for amendment was defeated.  It was admitted at the trial that the Respondent Shareholders had voted against the motion.  After the petition was issued in these proceedings [“the Petition”] on 14 April 2010, a further special general meeting was held on 30 April 2010 and again the motion for the amendment of the Bye-law was defeated. On 2 July 2010, a third special general meeting was held for such purpose and again the motion was defeated.

6.  For reasons unconnected with the Bye-law issue, the Stock Exchange suspended the trading in CYF’s shares since 31 August 2010.  Barma J [“the Judge”] found that the suspension would unlikely be lifted until all regulatory concerns have been satisfactorily dealt with and one of the concerns was the failure to amend the Bye-law.

7.  The Petitioner contended that in the circumstances, the court should grant relief under s 168A to order the amendment of the Bye-law.  This was the crux of its complaint which formed the subject matter of this appeal.  However, the background of the case is much more complicated.  In essence, there had been a struggle for control in the management of CYF.  Since this appeal focused on the failure to amend the Bye-law, I shall be brief with the history of the power struggle between the two camps.  More details can be found in the judgment of the Judge.

8.  The main protagonists of the two camps were: Dato Poh and Cheng (the 1^st Respondent).  Dato Poh was the sole director and shareholder of the Petitioner.  Cheng and his wife Yung (the 2^nd Respondent) were in the other camp, the Respondent Shareholders.

9.  At first Dato Poh and Cheng were together when they were appointed as executive directors of CYF upon the Petitioner taking over CYF as a listed shell in early 2007.  Cheng was appointed as the chairman of CYF.  CYF’s main business was the development of computer games in the Mainland. Initially Cheng did not acquire any shares in CYF though through the 3^rd Respondent he had an interest in convertible notes giving it a right to subscribe up to 1.5 billion shares in CYF.  That right was exercised on 15 April 2009 and the 1.5 billion shares represented 21.524% of CYF’s issue shares. The 4^th to 8^th Respondents also acquired a total of 3.687% of the issued shares of CYF.

10.  Differences have arisen between Dato Poh and Cheng since 2009. Dato Poh resigned as executive director on 27 April 2009 and resigned as a director on 22 July 2009.  After his resignation, the Petitioner sought to secure control of the board in terms of removal of the existing directors.  It was then found out that the Bye-law required a special resolution to achieve that.

11.  Faced with such difficulty, the Petitioner gained control of the board through other means. The details of those attempts are set out in the judgment of the Judge and they are not germane to this appeal. In the end, the Petitioner had to get an order from the Bermudan court for convening the 2010 AGM of CYF by 5 April 2011.  The AGM was actually held on 6 April after the trial before the Judge had commenced. The Petitioner’s votes were excluded from consideration by the chairman on the ground that shortly before the meeting a person claimed that the Petitioner was beneficially owned by someone other than Dato Poh.  The Petitioner had to apply to the Bermudan court to have the result of that AGM avoided and to have the votes tallied on the basis of the Petitioner’s votes being taken into account.  The upshot was that the Petitioner obtained control of the board of CYF on 8 April 2011.  As Cheng was not required to retire by rotation at that meeting, he remained as a director.  Neither could he be removed because of the blocking of special resolution for his removal.  However, he was immediately suspended from his executive duties by the new board.

12.  In the Petition, apart from the blocking of the amendment of the Bye-law, other issues were raised including complaints in respect of several transactions and the relief claimed was more extensive.  They were summarized by the Judge at paras 18 and 20 of the judgment.  By the time of trial, the Petitioner only focused on the amendment of the Bye-law and advanced a submission with regard to what the Judge called the 17^th Floor Transaction to support an alternative basis to seek the same relief. The Judge was not impressed with that fall-back position.  He granted relief to the Petitioner on its primary case.  He ordered the amendment of the Bye-law replacing the requirement of special resolution with an ordinary resolution.

13.  The Respondent Shareholders appealed.  In the appeal, counsel focused on the amendment of the Bye-law.  Three grounds were advanced by Mr Joffe[1] to submit that the Judge was wrong in granting the relief :

(a)     The basis on which the Judge found unfair prejudice was different from the case pleaded in the Petition [“the pleading point”];

(b)     The defeat of the motion to amend the Bye-law was not  conduct of the affairs of CYF [“the affairs point”];

(c)     The defeat of the motion could not be regarded as unfairly prejudicial within the meaning of s168A [“the unfair prejudice point”].

14.  The Respondent Shareholders also appealed against the Judge’s decision on costs.

The pleading point

15.  The essential pleas in the Petition regarding the blocking of the amendment of the Bye-law were to be found at these paragraphs :

(a)     Section B2 pleaded the Listing Rules, in particular at the end of the section paras 13 and 14 pleaded,

“13…

Any failure to comply with or breach of the Exchange Listing Rules was prejudicial to the interests of the members of the Company including the Petitioner.

14. It is the duty of the directors and shareholders of the Company to take all reasonable and necessary steps to ensure that the Company is and remains fully compliant at all times with the Listing Rules.”

(b)     Para 17 pleaded the common intention and shared understanding between the Petitioner and the Respondent Shareholders,

“16.17. Still further, based on the matters set out in Section C below, it was the common intention and the shared understanding of (i) Luck Continent of the one part and (ii) Theodore Cheng, Leonora Yung and the Corporate Vehicles of the other part, at the time when :-

(1) Luck Continent and Super Bonus initially agreed with the Company to acquire interests in the Company at the same time in December 2006;

(2) Luck Continent and Super Bonus subsequently subscribed for shares in the Company pursuant to the agreements referred to in Sub-Paragraph (1) above; and

(3) Leonora Yung subsequently acquired further interests in the Company.

that Luck Continent on the one hand and Theodore Cheng, Leonora Yung and their associates (including but not limited to the Corporate Vehicles) on the other hand would conduct the affairs of the Company and its subsidiaries in the compliance with the Listing Rules, and shall not do anything, allow anything to be done or omit to do anything which will or may cause the listing of the Company in the Stock Exchange to be cancelled or otherwise jeopardised or suspended unnecessarily without any good cause for any significant period or otherwise render the Company and/or its securities being subject to any sanction imposed by the Stock Exchange for breach of the Listing Rules (“the Common Intention and Understanding”).”

(c)     Section C pleaded the circumstances under which the company was acquired by the parties as a listed shell and para 21(3) and (4) pleaded,

“…

(3) Luck Continent intended that the Company would remain listed on the Stock Exchange after the close of the Offer and did not intend to exercise its rights to compulsorily acquire all the shares of the Company.

(4)   The director of Luck Continent and the new directors to be appointed to the Board, i.e. Dato Poh and Theodore Cheng, would jointly and severally undertake to the Stock Exchange to take appropriate steps following the close of the Offer to ensure that such number of shares of the Company as might be required by the Stock Exchange were held by the public.”

To the same effect is para 25(2) and (3).

(d)     The circumstances under which the 4^th to 8^th Respondents became shareholders of the company were pleaded under Section C2. The plea of common intention and shared understanding was extended to these Respondents, see paras 30 and 32;

(e)     Section F pleaded the battle for the control of the board, in particular Section F4 pleaded the frustrated attempts to change the Bye-Law to comply with the Listing Rules;

(f)     Para 98 pleaded the breach of common intention and understanding,

“G. BREACH OF COMMON INTENTION AND UNDERSTANDING

97.98.  In the circumstances set out in Sections D and F above, in breach of the duty set out in Paragraph 14 above and/or the Common Intention and Understanding there has been a failure by the 1^st to 8^th Respondents to ensure that the Company was and remained fully compliant at all times with the Listing Rules, leading to a risk that the listing of the Company may be cancelled or suspended or otherwise that the value of the securities in the Company be diminished.”

16.  Counsel for the Petitioner’s submission on unfair prejudice was summarized at para 85 of the judgment :

“85. Mr Sussex did not, I think, dissent from the suggestion that it was necessary to identify “something more” before it could be said that there was unfairness in the company doing (whether by its board or in general meeting) what it was permitted to under the articles of association. He identified as the “something more” in this case, the obligations assumed by CYF under the Listing Agreement, the terms of which were publicly accessible, and which governed the continued listing of the company, coupled with the importance, which would be readily understood by the company and all its shareholders, attaching to the continued existence of its listing, as the mechanism by which shareholders who acquired shares in the company could reasonably readily realise their investments through the Exchange.”

17.  The Judge’s findings on this aspect were at para 93 :

“93. While, as I have accepted, private understandings or arrangements between shareholders have no room to operate in the context of publicly listed companies, in this case, it is not suggested that there was some private arrangement or understanding of this sort. On the contrary, what is said is that CYF has agreed to be bound by the Listing Rules, the contents of which are readily accessible to the public, and to shareholders of listed companies. The concerns expressed by Jonathan Parker J in Re Astec to the effect that to permit private understandings to come into play in the context of listed companies might be a recipe for chaos would, for this reason, appear to be inapposite in the case of compliance with the Listing Rules. In addition, as Mr Sussex pointed out, the Listing Rules and the expectation that listed companies will abide by them so as not to jeopardise their listing are likely to form a part of the premise on which investors acquire shares in listed companies.”

18.  The pleading point was advanced at the court below and the Judge dealt with it at paras 95 and 96 :

“95. That being so, is it open to Luck Continent to contend that it is unfair for CYF to allow itself to remain in breach of the Listing Rules where this might affect its continued listing? Ms Chan says it is not, since none of the bases put forward by Mr Sussex for regarding CYF’s breach of the Listing Rules as unfair to the shareholders has been set out in Luck Continent’s petition, and it is not open to a petitioner under section 168A to rely on matters that do not appear in its petition.

96.  With respect, I think that this submission takes requirements of formality too far.  This is not a case in which some completely different form of allegedly unfairly prejudicial conduct, not mentioned in the petition, is sought to be relied upon at trial.  The essential factual allegations – that CYF has agreed to be bound by the Listing Rules, and is alleged to be in breach of them in respect of the failure to amend Bye‑law 86(4) are to be found in the petition.”

19.  Though he did not appear below, Mr Joffe advanced essentially the same argument in the appeal. He submitted that it was not enough to have the material facts pleaded in the Petition.  Relying on In re Fildes Bros. Ltd [1970] 1 WLR 592 and Re Tourmaline Ltd [2000] 4 HKC 348, he contended that a petitioner was required to plead the precise formulation of his case on unfair prejudice.  Thus, he complained at para 65 of his skeleton submission that:

“The nature of the equitable restraints said to arise in the original pleaded case was wholly different from that contended at trial. In the original pleaded case, the unfairness was said to stem from the breach of Mr Cheng’s director’s duties and the equitable restraints were claimed to arise from the Common Intention and Understanding. However, at trial, the equitable restraints contended were against CYF and it was argued that they arose from the Listing Agreement, to which no reference whatsoever was made in the Amended Petition.”

20.  In his oral submission, Mr Joffe accepted that the relevant provision of the Listing Rules and its breach had been pleaded in the Petition.  He focused his criticism on the lack of clarity as to how the alleged unfairness arose against the background of a breach of the Listing Rules. He contrasted the allegation of Common Understanding between the shareholders (which he acknowledged to have been pleaded) with that of the implicit promise between the company and the shareholders (which was not pleaded).  He said had the case of the Petitioner been pleaded on the latter basis, the Respondent Shareholders would have called evidence of the understanding of the other shareholders, and expert evidence on Bermudan law on implicit promise and that the line of cross-examination might have been different.

21.  I am not impressed by the bald suggestion that the case would have been conducted differently.  After the Judge had ruled that the Petitioner could rely on the breach of the Listing Rules, there was no application on behalf of the Respondent Shareholders for adjournment to call other evidence.  As explained below, the Respondent Shareholders should have been well aware of the case of the Petitioner regarding the blocking of the amendment of the Bye-Law.  The precise forensic formulation should not have made any difference in terms of how the case was prepared and conducted by the Respondent Shareholders.

22.  Mr Joffe relied on the dicta of Megarry J (as he then was) in Re Fildes Bros Ltd, supra at p.597 G to 598C to support his contention that it was not enough to plead the essential facts.  He said this approach was adopted by Chu J (as she then was) in Re Tourmaline Ltd,supra.

23.  With respect, I do not think the authorities cited by Mr Joffe go as far as he suggested.  In Re Fildes Bros Ltd, Megarry J only held that a petitioner cannot “rely upon any new head not fairly covered by his petition” (see p.597G) and reiterated the principle adumbrated by Plowman J in the earlier case of In re Lundie Brothers Ltd [1965] 1 WLR 1051 at p.1058,

“It was suggested in the course of argument that it was really the evidence and not the allegations in the petition which was of importance in this matter. I entirely dissent from that proposition. It seems to me that it would be wrong for the court to travel outside the allegations in the petition …”

24.  That was also the understanding of Chu J when she held in Re Tourmaline Ltd,supra, that a petitioner could not supplement his petition with fresh allegations raised in the evidence.

25.  These authorities did not decide that allegations in the petition must contain the precise legal formulation or characterization of the forensic analysis relied upon.  Once the factual allegations are pleaded and established, it is a question of law whether they are sufficient to support a case for relief under s168A.

26.  The crux of Mr Joffe’s complaint in this regard was the lack of a plea of implicit promise between the company and the shareholders. More precisely, what Barma J said at para 93 of the judgment was as follows,

“… the Listing Rules and the expectation that listed companies will abide by them so as not to jeopardise their listing are likely to form a part of the premise on which investors acquire shares in listed companies.”

27.  Whether that finding provides a sound basis for holding unfair prejudice under s 168A is a matter for debate under the unfair prejudice point (which I shall deal with below).  However, I am of the clear and firm view that this argument is open to the Petitioner as all material allegations had been included in, or to use the expression of Megarry J, fairly covered by the Petition.  By no stretch of imagination can it be suggested that the breach of Listing Rules and the jeopardy to the listing status caused by the blocking of the amendment of the Bye-Law were not adequately set out in the Petition.

28.  I have no hesitation in rejecting the appeal on the pleading point.

The affairs point

29.  Section 168A(2) of the Companies Ordinance Cap 32 sets out what the court must be satisfied before granting relief to a petitioner. 

“(2) If on any petition under subsection (1) the court is of opinion that the specified corporation’s affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of the members generally or of some part of the members (including the member who presented the petition), whether or not such conduct consists of an isolated act or a series of acts –

(a) the court may, with a view to bringing to an end the matters complained of –

…

(iv) make such order as it thinks fit, whether for regulating the conduct of the specified corporation’s affairs in future …”

30.  The section restricts itself to such of the company’s affairs as are being or have been conducted in a manner that is unfairly prejudicial to the interests of the members.  Thus, the acts or conduct in question must be in respect of the company’s affairs.  It has been said that the court will construe the words “affairs of a company” liberally and will not adopt a technical or legalistic approach but will look at the business realities: see In re Neath Rugby Ltd (No 2) [2009] 2 BCLC 427 at para 50; McKillen v Misland (Cyprus) Investments Ltd [2012] EWHC 2343(Ch) paras 628-629. 

31.  Mr Joffe submitted that the blocking of the amendments of the Bye-law could not be regarded as the company’s affairs.  Rather, it was the exercise of the voting rights by the shareholders.  Counsel said the Bye-law, as the Article of Association of CYF, was a statutory contract between the members inter se.  A variation or blocking of a variation of that contract, by itself, would not be the affairs of the company. 

32.  Counsel accepted that there could be provisions in the Article of Association the variation of which would constitute the affairs of the company.  However, he did not accept that every article had such effect.  He said disputes between shareholders on articles which only confer rights on shareholders would not be the affairs of the company.  At para 29 of his skeleton submissions, Mr Joffe advanced this proposition,

“…articles which only govern the powers, entitlements and rights of shareholders vis-à-vis one another and the relationship between the shareholders inter se, do not deal with affairs of the company and ergo, resolutions amending the same could not constitute conduct of the affairs of the company.”

33.  He submitted that the Bye-law was an article which governs a private matter between the shareholders in respect of the power to remove directors.

34.  He said the Judge was wrong to hold that simply because the article also constitutes a contract between the company and the shareholders, its amendment was the affairs of the company.  He said the company was only a nominal party to the contract (at least in respect of matters which are private between the shareholders) and drew an analogy with the company being a nominal party to litigation which concerns shareholder disputes (citing Crossmore Electrical & Civil Engineering Ltd [1989] BCLC 137; Re Kenyon Swansea Ltd [1987] BCLC 514; Re a Company ex p Johnson [1991] BCLC 234 and Re Milgate Developments Ltd [1993] BCLC 291).

35.  With respect, the line of cases cited by counsel only established that company’s funds should not be spent on disputes between shareholders.  It does not address the question whether the amendment of the articles can be regarded as the affairs of the company for the purpose of s 168A.

36.  Further, I do not agree that the company is only a nominal party to the statutory contract embodied in the articles of association.  The company is bound by such provisions as much as the shareholders.  It is also entitled to enforce such provisions in its own right. In other words, insofar as there is a contravention of an article, the company is bound to take heed of it.  Thus, in the example of pre-emptive right of acquisition of shares set out in an article, the company can refuse to register an application for a transfer of shares in contravention of such article.  The shareholder cannot insist on the registration of the transfer vis-à-vis the company on the ground that it is simply a private matter between the shareholders and the company is only a nominal party to that arrangement.

37.  Likewise, it is wrong to characterize the Bye-law as an article conferring only private rights between the shareholders.  The Bye-law deals with the power of the shareholders to remove a director.  If the Bye-law is not observed, the company could refuse to act on a resolution to remove a director.  If the Bye-law is observed, the company has no right to continue to recognize a removed person as its director.  Whether a director has been validly removed is plainly part of the affairs of a company.

38.  Having rejected the examples given by Mr Joffe on private matters between shareholders embodied in articles of association, I cannot envisage any cases where a provision in the articles of association can truly be characterized as private (in the sense that the company would not be concerned about it).  It is difficult to see why matters strictly private between shareholders, not intending to create rights and obligations on the part of the company, would be included in the articles of association, which is meant to be part of the constitution of the company.

39.  Mr Joffe also relied on Re Unisoft Group Ltd (No 3) [1994] 1 BCLC 609 at p.622-3.  Harman J emphasized the distinction between the exercise of voting right by the shareholders and the rights of the company as a corporate entity.  But his Lordship also recognized that the resolution in a general meeting could be regarded as the act of the company and form the basis of a petition under s 459 of the Companies Act 1985 (of which s168A of the Ordinance is the equivalent).  At p.623d :

“Further, a shareholder by exercising his own private right to vote his shares may cause the company to act, by the passing of some resolution in general meeting, in a matter alleged to be unfairly prejudicial to some members. Again it is not the act of the shareholder in voting that will found a petition but the result of that act if it produces action, or inaction, by the company.”

40.  The Judge adopted this approach at paras 65 to 69 of his judgment. To the same effect is the judgment of David Richards J in McKillen v Misland (Cyprus) Investments Ltd [2012] EWHC 2343(Ch) paras 626-629.  At the last paragraph, Richards J said :

“It no doubt goes without saying that the affairs of the company will also encompass matters which must go to the company in general meeting, rather than the board, for consideration.”

41.  Although the Respondent Shareholders had included a challenge to this holding in the supplemental Notice of Appeal and the skeleton submissions, Mr Joffe informed this court that he no longer pursued the same at the hearing.

42.  I do not see how Re Unisoft Group Ltd (No 3) can take the affairs point further.

43.  The Judge was correct in holding that the blocking of the amendment of the Bye-law was conduct of the affairs of CYF.

The unfair prejudice point

44.  In addition to para 93 of the judgment, the Judge further explained the juridical basis for finding unfairness in the present case at paras 97 and 98 :

“97.     This leads on to the question of whether or not it is, in fact, unfair for CYF to remain in breach of paragraph 4(3) of Appendix 3 of the Listing Rules.  Mr Sussex submits that, accepting that unfairness in this sense must mean (as Lord Hoffman said in O’Neill v Phillips [1999] 1 WLR 1092 unfairness in a sense recognised by general equitable principles, rather than some indefinite notion of unfairness according to the views of the particular court dealing with the matter, that it was unfair in the necessary sense for this state of affairs to continue.  This was because any company that obtains a listing on the Exchange must be understood to implicitly promise its shareholders that it will comply with the Listing Rules so as not to jeopardise its continued listing, which is the fundamental premise on which its shareholders will have become shareholders in the first place.  Here, the implicit promise is made by CYF itself to its shareholders, and can be regarded as:-

(1)  a collateral contract with its shareholders, or

(2)  an agreement with the Exchange made for the benefit of both the company and its shareholders, so as to make it inequitable for the company to break that agreement so as to prejudice the interests of the shareholders; or

(3)  an implied promise to the shareholders arising out of the listing agreement and undertaking, from which CYF is stopped from resiling.

98.  For my part, I think that the second of these analyses provides a valid basis for contending that it would be unfair for CYF to remain in breach of the Listing Rules.  As Lord Hoffman pointed out in O’Neill v Phillips (albeit in the context of what was a quasi-partnership company), that it is not necessary that promises should be independently enforceable as a matter of contract, so that promises may be binding in justice and equity even though not enforceable as a matter of law, for example because made in favour of a third party.  In this case, it seems to me that in agreeing with the Exchange to comply with the Listing Rules, the company can properly be regarded as having done so for the benefit of its shareholders as much as for itself, so as to entitle its shareholders to complain that it is unfair for the company to breach those rules where this would have prejudicial consequences for the shareholders.”

45.  It was common ground below (and it remains common ground in this appeal) that in order to establish unfairness in respect of the exercise of rights under the articles of association (including the exercise of the Respondent Shareholders’ voting right to block the motion to amend the Bye-law), the Petitioner needs to pinpoint some equitable constraints on such exercise of strict legal right.  The rationale for this proposition was explained by Lord Hoffmann in O’Neill v Phillips [1999] 1 WLR 1092 at 1098D to 1102B.  In particular, after His Lordship referred to two features of company law, he said at p.1098H to 1099B:

“The first of these two features leads to the conclusion that a member of a company will not ordinarily be entitled to complain of unfairness unless there has been some breach of the terms on which he agreed that the affairs of the company should be conducted. But the second leads to the conclusion that there will be cases in which equitable considerations make it unfair for those conducting the affairs of the company to rely upon their strict legal powers. Thus unfairness may consist in a breach of the rules in or in using the rules in a manner which equity would regard as contrary to good faith.”

46.  Further down at p.1099H after adverting to the need to strike a balance between the breadth of the discretion given to the court and the principle of legal certainty, Lord Hoffmann referred to Lord Wilberforce’s observation in In re Westbourne Galleries Ltd [1973] AC 360 on the impossibility and undesirability of defining the circumstances in which equitable principles might make it unfair, and continued :

“This of course is right. But that does not mean that there are no principles by which those circumstances may be identified. The way in which such equitable principles operate is tolerably well settled and in my view it would be wrong to abandon them in favour of some wholly indefinite notion of fairness.”

47.  At p.1101D to F, Lord Hoffmann referred to a formulation by Jonathan Parker J in In re Astec (BSR) plc [1998] 2 BCLC 556 at p.588.  I need to come back to that formulation later. Lord Hoffmann said he had no difficulty with that formulation and continued :

“But I think that one useful cross-check in a case like this is to ask whether the exercise of the power in question would be contrary to what the parties, by words or conduct, have actually agreed. Would it conflict with the promises which they appear to have exchanged? In Blisset v Daniel the limits were found in the ‘general meaning’ of the partnership articles themselves. In a quasi-partnership company, they will usually be found in the understandings between the members at the time they entered into association. But there may be later promises, by words or conduct, which it would be unfair to allow a member to ignore. Nor is it necessary that such promises should be independently enforceable as a matter of contract. A promise may be binding as a matter of justice and equity although for one reason or another (for example, because in favour of a third party) it would not be enforceable in law.”

48.  Lord Hoffmann also emphasized that exercising rights in breach of some promise or undertaking is not the only form of unfair conduct, see p.1101H.

49.  At p.1102B to F, His Lordship explained why the concept of legitimate expectation in this context (introduced in In re Saul D Harrison & Sons plc [1995] 1 BCLC 14) should not be allowed to lead a life of its own to supplant the traditional equitable principles in identifying unfairness under this statutory remedy.  Thus, on the facts of O’Neill v Phillips, supra., though Mr O’Neill had a legitimate expectation of being allotted more shares, that was not enough to lead to a conclusion that Mr Phillips behaved unfairly in not proceeding with the negotiation for that purpose, see p.1103D to F.

50.  In the recent case of Maidment v Attwood [2012] EWCA Civ 998 para 21, Arden LJ explained the concept of unfair prejudice in section 994(1) of the Companies Act 2006, the UK equivalent of our s 168A as follows :

“The key phrase in section 994(1), ‘unfairly prejudicial’, comprises two elements, unfairness and prejudice but both of these must be understood in the context of company law. The concept of fairness inherent in this phrase is flexible and open-textured but it is not unbounded. The courts must act on a principled basis even though the concept is to be approached flexibly. They cannot decide whether to grant or refuse relief from unfair prejudice on the basis of palm-tree justice.”

51.  Her Ladyship then referred to the speech of Lord Hoffmann in O’Neill v Phillips and continued at para 22 :

“One of the most important matters to which the courts will have regard is thus the terms on which the parties agreed to do business together. These are commonly found in the company's articles. They also include any applicable rights conferred by statute. In addition, the terms on which the parties agreed to do business together include by implication an agreement that any party who is a director will perform his duties as a director. Primary among these duties are the seven duties now codified in sections 171 to 177 of the Companies Act 2006. Under these duties, a director must act in the way which he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. There is also the well-known duty to avoid conflicts of interest and duty: a director must avoid a situation in which he has an interest which conflicts with that of the company. Six out of seven of these duties are fiduciary duties, that is, duties imposed by law on persons who exercise powers for the benefit of others. Non-compliance by the respondent shareholders with their duties will generally indicate that unfair prejudice has occurred.”

52.  Again, the primary focus was on the agreement of the parties as to how they associate with each other in the company.  For present purpose, it is important to note that apart from the articles of association, Her Ladyship recognized that there could be agreement by implication and she alluded to the implication arising from directors’ duties. 

53.  At para 28 Arden LJ referred to the adaptability of this remedy :

“The dominant characteristic of the unfair prejudice remedy, both in statute and case law, is its adaptability. This enables the courts to produce a just remedy where minority shareholders can show wrongdoing that prejudices their interests. It also makes the unfair prejudice remedy important as a means of encouraging proper corporate behaviour in the management of smaller companies and building up the confidence of investors in them. This policy aim is as important today as it has always been since the original version of what is now the unfair prejudice remedy was introduced in the Companies Act 1947.”

54.  Though that was said in respect of a minority in small companies, s 168A itself has not limited its application to minority shareholder or small companies. Whether it is adaptable to deal with unfairness in large listed companies is one of the contentious issues in this appeal.  In principle, the question should hinge on whether unfairness can be established as opposed to whether the company is a small company or a large listed company[2].

55.  Though Mr Joffe relied on dicta in Re Blue Arrow plc [1987] BCLC 585, Re Astec (BSR) plc supra., Re Benfield Greig Group plc [2000] BCLC 488 in his submissions, his contention focused on whether there could be agreement giving rise to the necessary equitable consideration to support a case of unfairness.

56.  Counsel’s basic argument was that an agreement which gave rise to equitable constraint over the exercise of power under the articles of association has to be an agreement stemming from a private personal relationship or understanding between the shareholders.  Counsel took the starting point from the speech of Lord Wilberforce in In re Westbourne Galleries Ltd [1973] AC 360 at p.379 and the judgment of Hoffmann LJ (as he then was) in Re Saul D Harrison & Sons, supra., at p.19-20 where it was said that in subjecting the exercise of legal rights to equitable considerations the court is giving effect to considerations of a personal character between one individual to another.  In Astec (BSR) plc supra., Jonathan Parker J summarized the effect of these authorities at p.588d as follows,

“… in order to give rise to an equitable constraint based on ‘legitimate expectation’ what is required is a personal relationship or personal dealings of some kind between the party seeking to exercise the legal right and the party seeking to restrain such exercise, such as will affect the conscience of the former. In my judgment, in the absence of a personal relationship or personal dealings of that kind a shareholder can reasonably and legitimately expect no more than that the board of the company will act in accordance with its fiduciary duties and that the affairs of the company will be conducted in accordance with its articles of association and with the Act. Such expectations merely affirm the existence of the shareholders’ legal rights. They do not constrain the exercise of those rights.”

57.  In O’Neill v Phillips, supra., Lord Hoffmann said he agreed with the first part of this dicta.  But he added a useful cross-check which I have already cited above. Further, he also jettisoned the analysis by reference to legitimate expectation.  Perhaps that explained why Lord Hoffmann did not allude to the second part of this dicta.

58.  Coming back to Astec, Jonathan Parker J referred to two further authorities and concluded at p.589 a to b :

“In my judgment, as the authorities stand today, the concept of ‘legitimate expectation’ as explained by Hoffmann LJ in Re Saul D Harrison & Sons plc can have no place in the context of public listed companies. Moreover, its introduction in that context would, as it seems to me, in all probability prove to be a recipe for chaos. If the market in a company’s shares is to have any credibility members of the public dealing in that market must it seems to me to be entitled to proceed on the footing that the constitution of the company is as it appears in the company’s public documents, unaffected by any extraneous equitable considerations and constraints.”

59.  The Judge referred to this concern at para 93 of the judgment.

60.  A concern to similar effect was expressed by Vinelott J in Re Blue Arrow plc [1987] BCLC 585 at 590 :

“Outside investors were entitled to assume that the whole of the constitution was contained in the articles, read, of course, together with the Companies Acts. There is in these circumstances no room for any legitimate expectation founded on some agreement or arrangement made between the directors and kept up their sleeves and not disclosed to those placing the shares with the public through the Unlisted Securities Market.”

61.  In Astec, Jonathan Parker J specifically addressed the question why a breach of the Listing Rules, the City Code and the Cadbury Code could not be the kind of unfair prejudicial conduct in s 168A at p.589h-590e.  Apart from the general proposition that the concept of legitimate expectation could not be applied in the context of a public listed company, he said,

“So far as corporate governance is concerned, members of the public buying shares in a listed company may well expect that all relevant rules and codes of best practice will be complied with in relation to the company. But that expectation cannot, in my judgment, give rise to an equitable constraint on the exercise of legal rights conferred by the company’s constitution (of which the Listing Rules, the City Code and the Cadbury Code form no part) so as to found a petition under s 459. It is in essence little more than an expectation that the company’s affairs will not be conducted in a manner which is unfairly prejudicial to the interests of the members generally, or of some part of its members, an expectation which one would expect to be present in virtually every case.”

62.  In Re Benfield Greig Group plc, supra., Arden J (as she then was) dealt with a public company with a wide spread of shareholdings (see p.500i to 501a).  Mr Joffe placed reliance on para 43 of the judgment, in particular sub-paras (6) and (7).  Referring to O’Neill v Phillips, Her Ladyship said in these sub-paragraphs,

“(6) In some cases, there may be equitable considerations which make it unfair for a party to rely on the articles. Such considerations arise from dealings between the members. [Then she cited the judgment of Lord Hoffmann.]

Accordingly, such expectations are seldom if ever found in companies with a large share ownership: [citing Re Blue Arrow plc and Astec]. There are no relevant dealings between the members relied on in this case.

(7) In the absence of relevant dealings between the members, Mr Oliver submitted that the company (acting by its board) could     make a promise of the relevant kind on behalf of the other members. But the articles give directors powers to manage the company’s business. These powers do not include entering into understandings on behalf of members of the kind required for the purposes of s 459. …”

63.  Thus, Mr Joffe submitted, the relevant kind of agreement giving rise to equitable constraint must be an agreement between the shareholders (as opposed to an agreement between the company and the shareholders) and it can only be founded upon shareholders having personal relationship with each other (as opposed to shareholders in a listed company having no personal dealings between them).

64.  On the first aspect, admittedly there were dicta apparently suggesting that the relevant agreement or dealings are those between shareholders, notably that of Arden J in Re Benfield Greig Group plc, supra., cited above.  In O’Neill v Phillips, supra. p.1098G to 1099E, Lord Hoffmann explained that the equitable consideration, whether in the context of s168A remedy or in just and equitable winding up, emanated from  the recognition  that behind the structure of corporate entity, there are individuals with rights, expectations and obligations inter se which are not necessarily submerged in the company structure.  Thus, it can be readily understood why primarily the relevant agreement or dealings are those between the shareholders.  Naturally, Mr Joffe emphasized the reference to the rights, expectations and obligations between the shareholders inter se.

65.  However, on closer examination, I do not think the authorities foreclose any equitable consideration stemming from understanding or agreement between shareholders and the company provided that such understanding or agreement could properly be characterized as a tripartite one: involving shareholders inter se as well as the shareholders and the company.  This would be akin to the statutory contract in the form of the articles of association. In principle, I cannot see any reason why such a tripartite understanding or agreement cannot give rise to equitable consideration solely because the company was also a party to it.

66.  Thus in in Re Saul D Harrison & Sons, supra., p.19f, Hoffmann LJ referred to :

“the personal relationship between a shareholder and those who control the company may entitle him to say that it would in certain circumstances be unfair for them to exercise a power conferred by the articles upon the board or the company in general meeting.” (Emphasis added)

See also p.18b where Hoffmann LJ referred to the board acting for ulterior purpose as stepping outside the terms of the bargain between the shareholders and the company.

67.  In the same case, Neill LJ said at p.31h :

“Though in general members of a company have no legitimate expectations going beyond the legal rights conferred on them by the constitution of the company, additional legitimate expectations may be superimposed in certain circumstances. These may arise from agreements or understandings between the members or between the members and the directors.” (my emphasis)

I do not accept Mr Joffe’s submission that this statement of Neill LJ was incorrect in law.

68.  On analysis, the real difficulty of equitable consideration arising from arrangement made between some directors and some shareholders (as in Re Benfield Greig Group plc) is the lack of privity, viz. it would not be unfair for those shareholders who were not privy to the arrangement to exercise their legal rights without any regard to such arrangement.  That was the objection pinpointed by Vinelott J in Re Blue Arrow plc, supra., and likewise by Jonathan Parker J in Astec at p.589b when he referred to the credibility of the dealing in the shares of public listed company built on the footing that the constitution of the company was in the company’s public documents unaffected by extraneous constraints.

69.  On the facts of Re Benfield Greig Group plc, this objection is apparent from para 13 of the judgment :

“… what is alleged is not that there was a contract between the company and the executors as to the choosing of the valuer or any other matter related to the sale of the executors’ shareholding or indeed that there was any estoppel arising from what was said on behalf of the company. On the contrary, what is alleged is that there were assurances given by some of the directors and that the company has failed to honour these assurances …”

And at para 42 :

“It is not said that the assurances amounted to a binding contract or that the company is precluded from acting in breach of them by any estoppel. Moreover, it is not suggested that, by not honouring their assurances to the executors, the directors were in breach of their fiduciary duty of loyalty. In effect it is accepted that the non-observance of the assurances was consistent with the proper performance by the directors of their duties.”

See also the submission advanced at para 28 of the judgment.

70.  Hence, these cases did not address the situation where the agreement or understanding was achieved between the company and the shareholders embodied in public documents binding on all shareholders. In the latter situation, when it can fairly be said that the agreement or understanding is a tripartite one (and thus binding on all the shareholders inter se as well as the company), I do not think the authorities preclude the court from holding that equitable consideration may arise simply because the company (as opposed to only some directors and some shareholders) is one of the parties.

71.  Thus, the true question is whether the agreement or understanding should bind all shareholders, irrespective of whether they arose from dealings between the shareholders inter se or from dealings between the company and the shareholders.

72.  This analysis also addresses Mr Joffe’s contention based on the need to have a personal relationship or understanding before there could be scope for equitable consideration. So long as all shareholders are privy to the arrangement, they are bound by it irrespective of the lack of direct personal relationship between one shareholder and another.  Equity would operate to hold them to their bargain and restrain them from exercising their strict legal rights in breach of it.   

73.  Mr Joffe referred to the judgment of David Richards J in McKillen v Misland (Cyprus) Investments Ltd [2012] EWHC 2343(Ch) paras 635 to 636 and contended that equitable considerations could not arise unless there was a prior relationship between the shareholders.  That was one of the features identified by the judge in that case to explain why equitable considerations could not arise.  As I see it, that decision was very much on the facts of that case which were very different from our case. I do not think it supports the proposition that as a matter of law no equitable considerations could arise unless the shareholders had personal dealings with each other.  Much depends on the facts.

74.  Before I address the observation of Jonathan Parker J in Astec that a breach of Listing Rules could not be the basis of unfair prejudice, it is necessary to remind ourselves what the Judge found to be the unfair prejudicial conduct.  It is not the mere breach of the Listing Rules, although he referred to the Listing Rules as a relevant aspect of the unfairness, he also alluded to the following important aspects of the case :

(a)  The investors acquired shares on the premise that the listing status of CYF would be not be jeopardized (para 93);

(b)  CYF made an implicit promise to the shareholders that it would comply with the Listing Rules so as not to jeopardized its continued listing (para 97);

(c)  CYF’s agreement with the Stock Exchange to comply with the Listing Rules was entered into for the benefit of its shareholders (para 98).

75.  And these findings should be considered against the following background set out in other parts of the judgment :

(a)  The Petitioner acquired the company as a listed shell;

(b)  The Respondent Shareholders acquired shares of the company when it was listed;

(c)  After the acquisition of the shares in the company by the Petitioner, placement shares were issued to maintain its listing status as a public company;

(d)  The set of bye-laws of CYF registered with the Companies Registry did not require the passing of a special resolution for removal of directors;

(e)  It was only when the Petitioner sought to remove the existing directors in November 2009 that the set of bye-laws registered with the Bermudan Companies Registry (which contained the Bye-law) came into light as far as the Petitioner was concerned;

(f)  The Stock Exchange took the view that the Bye-law was in conflict with the Listing Rules;

(g)  Repeated attempts had been made to change the Bye-law at general meetings but without success;

(h)  The Stock Exchange had suspended the trading of the shares of the company;

(i)  The Stock Exchange would not allow the resumption of trading of the shares unless the Bye-law is amended to comply with the Listing Rules.

76.  From the materials in the appeal bundle, it is not clear which version of the bye-laws were submitted by CYF when it applied for listing and who was responsible for submitting the wrong version for registration at the Companies Registry in Hong Kong. In any event, it would appear that the Petitioner as well as the Stock Exchange had been misled.  Indirectly, those members of the public who acquired shares of CYF in the stock market on the basis of its listing status were likewise misled.

77.  Thus, this is not simply a case of a breach of the Listing Rules without other consequences.  This is a case where the listing status of CYF was affected and would continue to be affected until the Bye-law is amended to comply with the Listing Rules.

78.  On this point, the Judge found the dicta of Dillon J (as he then was) in Re St Piran Ltd [1981] 1 WLR 1300 at p.1037F-G to be relevant :

“The provisions of the City Code set out a code of conduct which has been laid down by responsible and experienced persons in the City as being fair and reasonable conduct in relation to companies which like St Piran have obtained the benefit of a listing on the Stock Exchange. If the directors of a publicly quoted company or the principal shareholders in such a company choose to flout that code of fair and reasonable conduct and to ignore without good reason the consequent directions of the City Panel, and minority shareholders are injured by the withdrawal of the Stock Exchange quotation for the company’s shares, then it seems to me that it could very well be just and equitable in the natural sense of those words that the company should be wound up …”

79.  The application before Dillon J was an application to strike out a petition to wind up a company on the just and equitable ground.  The petition was based on findings made by the inspectors appointed by the Secretary of State for Trade. In the report of the inspectors, it was suggested that the Secretary might consider whether it would be in the public interest to petition the court to wind up the company.  The Secretary did not do so. Instead, a shareholder issued the petition. The complaint was that a director and those companies under his control which owned substantial shareholding in the company failed to comply with the direction of the City Panel on Takeovers and Mergers to make a general offer to purchase the whole of the issued share capital in the company.  As a result of that and the findings in the report, the Stock Exchange had suspended the trading of the shares of the company.       

80.  Counsel for the company contended that the direction of the City Panel had no legislative sanction and the failure to comply with that direction could not be a ground for a just and equitable winding up. Dillon J disagreed and said that the words “just and equitable” were wide general words to be construed generally. The dictum cited by the Judge was said in that context.

81.  That was said in 1981, before Re Saul D Harrison & Sons, Astec and O’Neill v Phillips. In Wong Man Yin v Ricacorp Properties Ltd [2003] 3 HKLRD 75 paras 40 to 44, our Court of Final Appeal adopted the principles laid down in O’Neill v Phillips as those our courts must apply in the exercise of discretion under s 168A.

82.  Thus, it is necessary to identify the juridical basis giving rise to the equitable consideration to constrain the exercise of the strict legal rights of the Respondent Shareholders in terms of their voting against the motion to amend the Bye-law.

83.  I agree with Jonathan Parker J that the mere breach of the Listing Rules by a public company per se cannot automatically give rise to unfair prejudice.  But I do not consider His Lordship’s judgment pre-empted regard being paid to the breach of Listing Rules as one relevant circumstance to be taken into account, especially when such breach led to the suspension of trading of the shares and the real complaint is about the failure to take remedial step to procure resumption of trading.  The relevant breach of the Listing Rules which was the subject of complaint and the factual matrix in Astec were set out at p.578 to 581.  That was obviously very different from the factual matrix in the present case, which I have sought to summarize above.  Most significantly, there was no suspension of the trading of the shares of the company, nor was there any refusal to comply with a condition to facilitate the resumption of trading.  Further, there had not been any misleading of all the shareholders by the public registration of the wrong version of articles of association.

84.  In my judgment, the crucial issues in our case are (a) whether there is any basis for the Judge’s findings at paras 93 and 98; and (b) whether those findings were sufficient as a matter of law to support a case of unfair prejudice in terms of giving rise to an equitable constraint over the exercise of the voting right by the Respondent Shareholders in the motion to amend the Bye-law.

85.  As far as (a) is concerned, apart from the pleading point, I do not understand Mr Joffe to have challenged the findings at paras 93 and 98. In any event, given his findings on the primary facts (as set out above), I cannot see how the Judge could be criticized for his conclusion on the listing status not to be jeopardized being a premise on which the shareholders acquired the shares in the company.  Mr Joffe’s attack focused on (b).

86.  What are the terms on which the parties agreed to do business together?  More precisely, in the context of a listed company, what are the terms on which the shareholders acquired the shares of the company? In my view, in the context of CYF, one of the fundamental terms must be that it should maintain its listing status.  That must be the common understanding of all the shareholders when they acquired the shares of CYF.  That common understanding can properly be described as a common understanding inter se between the shareholders. 

87.  Applying Lord Hoffmann’s cross-check, I ask myself whether the Respondent Shareholders’ exercise of their voting power was contrary to what the parties, by words or conduct, have actually agreed. In the present circumstances, I have no difficulty in answering in the affirmative.  The blocking of the amendment of the Bye-law would prevent the resumption of trading of the shares and jeopardize the listing status of the company.  The shareholders would be locked into the company (with no exit through the market due to the suspension of the trading) which was not what they had bargained for.

88.  At paras 97 and 98 of the judgment, the Judge started from the implicit promise made by CYF to its shareholders and adopted the analysis that the agreement with the Stock Exchange was made for the benefit of the shareholders as the juridical basis for holding unfairness. For my part, I would start from a different angle.  It would be more consistent with the principles laid down in O’Neill v Phillips to start with the view that the maintenance of the listing status was a tripartite agreement, a fundamental premise on which all the shareholders in CYF acquired its shares.

89.  In Re Saul D Harrison & Sons, supra., p.18h to 19b, Hoffmann LJ referred to the rationale for the choice of the term “unfairly prejudicial” :

“In choosing the term ‘unfairly prejudicial’, the Jenkins Committee (para 204) equated it with Lord Cooper’s understanding of ‘oppression’ in Elder v Elder and Watson 1952 SC 49:

‘a visible departure from the standards of fair dealing and a violation of the conditions of fair play on which every shareholder who entrusts his money to a company is entitled to rely.’

…

Not only may conduct be technically unlawful without being unfair: it can also be unfair without being unlawful. In a commercial context, this may at first seem surprising. How can it be unfair to act in accordance with what the parties have agreed? As a general rule, it is not. But there are cases in which the letter of the articles does not fully reflect the understandings upon which the shareholders are associated.”

90.  And further down the page, at p.19g, His Lordship referred to how the equitable consideration may arise :

“It often arises out of a fundamental understanding between the shareholders which formed the basis of their association but was not put into contractual form …”

91.  In substance, this approach is not that different from the one adopted in New Zealand, see Latimer Holdings Ltd v SEA Holdings NZ Ltd [2005] 2 NZLR 328 at para 66 where the test for unfairness was stated as follows :

“For unfairness in this broad sense to be grounded, there must be a ‘visible departure’ from the standards of fair dealing, ‘viewed in the light of the history and structure of the particular company, and the reasonable expectations of its members’.”

92.  I see no difficulty in holding in the present case that the blocking of the amendment of the Bye-law to facilitate the resumption of trading of the shares of CYF was in breach of a fundamental understanding between the shareholders in associating together and this gave rise to ground for equitable intervention by the court. The Judge was correct in finding that there was unfair prejudice in the present case.  

Appeal on costs

93.  The Judge did not give the Petitioner all the costs of the petition. He excluded the following costs from the liability of the Respondent Shareholders to pay the Petitioner’s costs :

“(a) any costs incurred in relation to the complaints relating to the 17^th Floor Transaction;

(b) any costs incurred in relation to any other transactions of which complaint was made in the Petition but which were not pursued at the trial;

(c) any costs incurred in relation to the IIA Summons; or

(d) any costs incurred in relation to the Receivership Summons.”

94.  He gave a very comprehensive judgment on 19 October 2012 explaining his decision on costs.

95.  In this appeal, Mr Joffe submitted that as the Judge rejected the 17^th Floor Transaction as a viable alternative basis for relief, it should be regarded as an irrelevant issue and the Respondent Shareholders should have the costs relating to that.

96.  The Judge had borne in mind his view on the relevance of the 17^th Floor Transaction and explained at para 17 of his judgment 19 October 2012 why he decided to make no order as to costs as opposed to give such costs to the Respondent Shareholders.  The Judge was of the view that the Petitioner did not act unreasonably in introducing these matters.

97.  In my view, the Judge’s decision in this respect is perfectly within the range of reasonable options in the exercise of his discretion as to costs.  I do not think it can be suggested that the Judge erred in principle in so ordering. There is no basis for this court to intervene.

Disposition

98.  For these reasons, I am of the view that the appeal should be dismissed.  There should also be a costs order nisi that the Respondent Shareholders should pay the costs of the Petitioner in this appeal, such costs to be taxed if not agreed. 

Hon Stock VP:

99.  Accordingly the appeal is dismissed with the orders referred to in para 98 above.