SHIN HO ELECTRIC WIRE & CABLE CO LTD AND ANOTHER v. HITACHI CABLE, LTD AND OTHERS

HCMP 2979/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2979 OF 2004

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D E C I S I O N

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1.  This is an application to strike out an entire petition for relief under section 168A of the Companies Ordinance, Cap. 32, on the ground that it discloses no reasonable cause of action, or is frivolous or vexatious, or is an abuse of the process of the court.  By virtue of Order 18 rule 19(3) of the Rules of the High Court, Order 18 rule 19 applies to a petition.  The summons was issued by Yoshito Handa, the 2^nd respondent herein.

2.  I mindful of the approach in an application of this kind.  The burden is for the applicant to show that it is plain and obvious that the petition is bound to fail.  For the purpose of this application, it will be assumed that the allegations made in the petition will be established.

3.  The facts and matters relevant to this application may be stated as follows.

4.  The company in question, Hitachi Shin Din Cable, Limited (“the Company”), is engaged in the business of manufacture and sale of electric wires and cables.  It is a joint venture formed between two groups, each owning 50% of the shares.  Hitachi Cable, Limited (“HCL”), the 1^st respondent herein, is a member of the Hitachi group of companies, holding 50% of the shares in the Company.  Shin Ho Electric Wire & Cable Company Limited and Shin Ho Cable (Holdings) Company Limited, the petitioners herein, hold the remaining 50%.  The petitioners are owned by Chan Wing Hon Peter (“Mr Chan”) and members of his family.

5.  The current directors of the Company are 8 in number, 4 are nominated by HCL, being the 2^nd to 5^th respondents herein, and 4 are nominated by the petitioners, being Mr Chan, his wife and their children.  I will call the latter “the Chan directors”.  The 2^nd to 5^th respondents and their predecessors nominated to the board by HCL will be called “the HCL directors”.

6.  HCL and its subsidiaries have also been engaged in the same line of business as that of the Company for quite some time.  That had been the position when HCL first became a shareholder in the Company.

7.  The day-to-day management of the Company is with the Chan directors.

8.  HCL and its wholly owned subsidiary acquired a 50% stake in the Company as a result of a joint venture agreement (“the Joint Venture Agreement”) and a share sale agreement both entered into on 13 July 1987.  The scope of the joint venture, as limited by Article 2.1 in the Joint Venture Agreement, is to carry on business in common with each of the parties to that agreement in Hong Kong and at such other places as agreed upon between them in writing.  Thus, specific agreement is required to extend the business outside Hong Kong.  This is important to understanding the allegations in this petition.  I do not think this clear provision in the Joint Venture Agreement was altered by Article II.1 in the licence and technical assistance agreement signed subsequently on 11 September 1987.

9.  The Joint Venture Agreement contained provisions on the composition of the board of the directors and resolutions at meetings of the board of directors and at general meetings.  These provisions are important because they govern the relationship of the shareholders and they are reflected in the amendments made to the Articles of Association of the Company.

10.  I set out the relevant provisions in the Articles of Association as amended:

“Article 27

“The Chairman of the board of the directors shall be nominated by [HCL and its subsidiary] and shall have no casting vote at any meeting of the board of directors…”

Article 28

“[Mr Chan and his wife] shall be appointed or remain in office as the managing director and the financial director of the Company respectively.”

Article 29

“The board of the directors of the Company shall consist of 8 directors, 4 of whom shall be nominated by [the petitioners] and the other 4 by [HCL and its subsidiary].”

Article 31

“At least 5 of the directors or their alternates present are necessary to constitute a quorum for a meeting of the board of directors of the Company.”

Article 41

“Resolutions concerning the following shall have to be passed by the affirmative vote of not less than 5 directors at a meeting of the board of directors of the Company:

(a)	any borrowing or expenditure in excess of HK$1 million;
(b)	creating any encumbrance over or sale of the assets of the Company;
(c)	giving any guarantee to any person;
(d)	employment and dismissal of employee holding managerial or executive position;
(e)	nomination of managing director, financial director, auditor and company secretary; and
(f)	any other action which is not in the ordinary course of the Company’s business activities.”

Article 49

“…A quorum for a general meeting of members shall be 2 or more members holding not less than three-quarters of the issued shares of the Company, the holders of which are entitled to vote.”

Article 55

“In the case of an equality of votes at any general meeting, whether upon a show of hands or on a poll, the Chairman of the meeting shall not be entitled to a second or casting vote.””

11.  This petition was presented on 15 November 2004.  Prior to this, on 27 September 2004, the 2^nd to 5^th respondents brought proceedings against the Chan directors and the Company in HCMP No. 2471 of 2004, seeking an order to inspect and take copies of the books of account of the Company.  On 12 October 2004, the Chan directors filed an acknowledgment of service stating that they did not intend to defend the action save as to costs.  On 19 October 2004, an order for inspection (“the Inspection Order”) was made by Suffiad J without any opposition of the Chan directors in respect of the books of account as set out therein.  The argument on costs was adjourned.

12.  The HCL directors commenced inspection of the books of account on 13 October 2004 until the petitioners and the Chan directors terminated the inspection process, which was not completed, on 5 November 2004.  On 7 November 2004, the solicitors for the Chan directors wrote to the solicitors for the HCL directors stating that an application would be made to vary the Inspection Order if the HCL directors did not agree to sign the enclosed draft summons to vary the Inspection Order.  In summary, the variations sought by the Chan directors in the draft summons were as follows: inspection was to be limited to the HCL directors personally or their professional accountants; the period of accounts provided for inspection should be limited to the period from 1 January 2002 onwards; inspection was to be suspended until HCL and the Chan directors have reached agreement for the buy out of the shares of HCL or until 31 December 2004, whichever was the sooner; and the HCL directors could make copies of the documents inspected except those which related to products of the Company currently manufactured or marketed by HCL. 

13.  A summons has been taken out in HCMP No. 2471 of 2004 on 24 January 2005 to discharge or vary the Inspection Order.  This is due to be heard on 14 February 2005.  It would appear from the supporting affirmation of the Chan directors in that application that they sought to ventilate the same complaints made in paragraphs 38 to 71 of the petition herein.

14.  In the meantime, this petition was presented alleging unfairly prejudicial conduct in the affairs of the Company.  The petitioners seek an order that the 2^nd to 5^th respondents be removed as directors, that the shares of the Company be valued, that HCL is to sell all its shares in the Company to the petitioners at a fair value as determined by the court, and that the respondents should keep all “proprietary information”, as defined in the Joint Venture Agreement, confidential.

15.  The petition consists of 83 paragraphs.  In a painstaking submission for the 2^nd respondent, Mr Johnny Mok gave a thorough analysis of the allegations in the petition.  His attack may be grouped under 5 broad grounds and is along these lines:

(1)

The petitioners hold 50% of the shares in the Company.  By virtue of the provisions in the Articles of Association, which mirrored the provisions in the Joint Venture Agreement, the petitioners have nominated 4 directors to the board of directors and can exercise a blocking vote in respect of any resolution proposed by the HCL directors, and thus have the means to end any unfairly prejudicial conduct complained of.  As stated by Knox J in Re Baltic Real Estate Limited (No. 2) [1993] BCLC 503 at 507g:

“Even the wider phrase ‘unfair prejudice’ however in my judgment is not apt to encompass prejudice from which the person whose interests are said to be prejudiced can readily rid himself.”

See also Re Legal Costs Negotiators Limited [1999] 2 BCLC 171 at 197e, per Peter Gibson LJ:

“…prejudice will not be unfair to the petitioner’s interests where the petitioner had available to him a method of bringing that prejudicial state of affairs to an end.”

I refer also to a subsequent passage of this judgment at 200i to 201g.  The remedy in section 168A is not apt to be invoked in the situation where the petitioners, by reason of their ownership of 50% shares in the Company and their rights under the Articles of Association which mirrored their rights in the Joint Venture Agreement, would always have the power to block the passing of any resolution at board meetings and general meetings and so bring an end to any prejudicial state of affairs and had in fact done so in a number of instances as appeared from this petition.

(2)	Some of the grievances complained of do not constitute conduct of the affairs of the Company and cannot found a petition under section 168A (Re Unisoft Group Limited (No.3) [1994] 1 BCLC 609 at 611 d-g, 622g to 623f).  Examples are the complaints as regards the relationship and obligations of the parties as governed by the Joint Venture Agreement, and allegations of ulterior motive relating to the inspection of books of account of the Company due to the negotiations for the sale of the shares of HCL to the petitioners.
(3)	Some of the matters complained of did not go beyond the stage of discussion or proposal and did not materialize as the matters or acts proposed by HCL were rejected by the Chan directors, such as HCL’s proposal to restructure the Joint Venture Agreement and the management policy of the Company, and HCL’s proposal to conduct an internal audit, to fall in line with the changes made to other companies in the Hitachi group.  Such complaints cannot found a petition for unfairly prejudicial conduct.  To paraphrase Jonathan Parker J in Re Astec (BSR) plc [1998] 2 BCLC 556 at 570a to d, it is a requirement under section 168A that the company’s affairs are being, or have been conducted, in a manner which is unfairly prejudicial to the petitioner; the stance taken by a dissentient in the stage leading up to the taking of a collective board decision cannot amount to conduct unfairly prejudicial, for the simple reason that the views of the dissentient are not reflected in the ensuing collective decision, see also 571a to c.
(4)	In some instances, the matters complained of are merely disagreements on matters of commercial judgment, they do not constitute serious misconduct and cannot be the basis of complaint for a petition of this nature (Re Elgindata Limited [1991] BCLC 959 at 994c to f and 995b).
(5)	In respect of the allegations regarding improper ulterior motives for which the HCL directors carried out inspection of the books of account of the Company under the Inspection Order, an application has been made by the Chan directors to discharge or vary the Inspection Order in separate proceedings in HCMP No. 2471 of 2004 on the same complaints.  It is inappropriate or unnecessary for relief to be granted in a petition under section 168A.

16.  I am in agreement with Mr Mok’s submissions.  It does not appear to me that Mr James Cheng, who appeared for the petitioners, has addressed the objections made to the petition at all.

17.  I do not propose to give a narrative of each of the paragraphs of the petition.  I will merely indicate under which of the 5 broad grounds set out above that the paragraph or paragraphs in question must be struck out.  I will use the same headings as in the petition by which the matters complained of as constituting unfairly prejudicial conduct have been grouped under.

(1)	Attempts of HCL to control sales of the Company for the benefit of HCL
	Paragraph 17 – grounds (2) and (4)
	Paragraph 18 – grounds (1) to (4)
	Paragraphs 19 to 25 – grounds (1), (3) and (4)
(2)	HCL’s intention to terminate the Joint Venture Agreement
	Paragraphs 26 to 30 – grounds (1) to (4)
(3)	HCL strifled the Company’s expansion plan
	Paragraph 32 – grounds (1) to (4)
(4)	Buy-out and re-structure negotiations
	Paragraph 36 – ground (2)
	Paragraph 37 – This relates to an allegation that the HCL directors refused to approve the audited accounts for the year 2003 unless they were allowed to inspect the books of account.  This in itself does not amount to unfairly prejudicial conduct.
(5)	Inspection of accounts and ulterior motive
	Paragraphs 38 to 61 – ground (5)
	Paragraphs 39 to 46 – ground (2)
(6)	Events leading to temporary suspension of inspection
	Paragraphs 47 to 52 – ground (2)
(7)	Ulterior motive of inspection
	Paragraph 53 – ground (5)
	Paragraph 56 – ground (2)
	Paragraphs 57 to 59 – grounds (2) and (5)
(8)	Further evidence of ulterior motive of HCL
	Paragraphs 60 to 72 – grounds (2) and (5)
	Paragraph 60 – ground (1)
	Paragraphs 65 to 71 – ground (5)
(9)	Summary of the petitioners’ grievance
	Paragraph 73 – ground (2)
	Paragraph 74 – This is an unparticularised allegation that the board meetings of the Company often ended in deadlock. There is no allegation that HCL was responsible for the deadlock.  Besides, if there was deadlock, this was due to provisions in the Joint Venture Agreement and the Articles of Association.  There is no apparent basis for an allegation of unfairly prejudicial conduct.
	Paragraphs 75 and 76 – grounds (2) and (4)
	Paragraph 77 – grounds (2) and (5)
	Paragraphs 78 and 79 – ground (2)
	Paragraphs 80 and 81 – ground (2)
	Paragraph 82 – This is a general allegation that the respondents caused loss of mutual trust and confidence which destroyed the spirit and basis of the Joint Venture Agreement.  If a petitioner cannot establish unfairly prejudicial conduct in the affairs of the company, he has no right to relief even if there is a breakdown in trust and confidence, as there is no entitlement to a “no-fault divorce”.  Further, there is no allegation in the petition of a quasi-partnership.  The relationship of the shareholders in this instance was governed by the Joint Venture Agreement and other agreements made between them in 1987 and by the Articles of Association as amended.

18.  The paragraphs I have not struck out in the petition are mostly background matters or other innocuous matters.  The petition is clearly beyond salvage and must be dismissed.

19.  I therefore grant the application of the 2^nd respondent.  I award costs of this application to the 2^nd respondent, to be taxed if not agreed.