ABLE SUCCESS ASIA LTD v. CHINA PACKAGING GROUP CO LTD AND OTHERS

HCA 1120/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1120 OF 2014

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D E C I S I O N

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1.  This is an application for an injunction arising from an open offer of shares made by China Packaging Group Company Limited, the 1^st defendant herein, which is a listed company in Hong Kong.

2.  The background to this matter has been set out in my judgment in HCMP 1091/2014, given on 15 May 2014, to which I refer and which will not be repeated here.  In that episode, the plaintiff, Able Success, sought an injunction to prevent the company from proceeding with a pari passu, one new share for two existing shares open offer.  In the result, I refused to grant that injunction and the open offer accordingly proceeded. 

3.  On 22 May 2014, the 1^st defendant announced the revised timetable for the open offer, extending the latest time for acceptance to 4 pm on 10 June. 

4.  On 26 May 2014, the prospectus for the open offer was despatched to the shareholders. 

5.  On 29 May 2014, Able Success’s solicitors wrote to Skyway’s solicitors (Skyway being the chargee of a large part of the shares held by Able Success and the 8^th defendant herein) stating that Able Success wished to explore whether Skyway would be prepared to provide financing to Able Success to subscribe for new shares under the open offer.  It was indicated that Able Success was prepared to consider detailed financing terms, including possibly the pledge of the newly subscribed shares in Skyway’s favour. 

6.  On 3 June 2014, Skyway’s solicitors faxed a letter dated 29 May to Able Success.  The letter stated that Able Success should not, before repaying all the indebtedness to Skyway, deal with the charged shares, including subscribing for shares under the open offer, without Skyway’s consent. 

7.  On 9 June 2014, Skyway’s solicitors informed Able Success’s solicitors that they were taking instructions from Skyway on Able Success’s solicitors’ letter of 29 May 2014.

8.  Able Success did not receive the prospectus despatched to qualifying shareholders and, on 9 June, it asked Computershare for a replacement application form.  Computershare never responded to that request.  At around the same time, Able Success’s solicitors telephoned Mr Lau Cheuk-pun, the company secretary of the 1^st defendant, to inquire if he would be able to provide an original application form. Mr Lau, however, refused to do so.

9.  On 10 June, the 1^st defendant wrote to Able Success stating that it must use the original form for the subscription of shares under the open offer.

10.  Able Success’s solicitors then wrote to Computershare stating that if no original application form was provided, Able Success would have to submit a form downloaded from the website of the stock exchange, HKEx.

11.  On 10 June 2014, Able Success lodged a form downloaded from HKEx’s website, together with two cashier’s orders in the total sum of HK$21,944,192.08 for the subscription price of 548,604,802 new shares.  A clerk of Able Success’s solicitors delivered the documents to the offices of Computershare at Units 1712-1716 on the 17^th floor of Hopewell Centre, but was directed to proceed to the reception of Computershare at 17M floor in the same building, which she did.  The staff of Computershare there took the documents and time-stamped them for receipt.

12.  On 11 June, Skyway presented a petition to the High Court for the winding-up of Able Success.

13.  Also on 11 June, the 1^st defendant’s solicitors wrote to Able Success raising concerns about the acceptance of the open offer because:

(1) the original form was not used;

(2) the documents were delivered to the 17M floor instead of units 1712-1716 of Hopewell Centre; and

(3) the signature of Mr He did not match the record of Computershare. 

The letter also stated that the 2^nd defendant, who was the underwriter of the open offer, had an interest in the unsubscribed offer shares.

14.  By a further letter of 12 June, the 1^st defendant referred to the fact that Skyway had not consented to Able Success’s acceptance of the open offer and stated that until a satisfactory response was received in that regard, the company could not give further consideration to Able Success’s subscription for shares. 

15.  In the event, the 1^st defendant refused to issue shares to Able Success under the open offer.  That was clear from the announcement made late on 16 June 2014.  The open offer was under-subscribed in that valid acceptance was received for a total of 423,324,331 shares, as a result of which, 671,838,335 offered shares were unsubscribed for and the 2^nd defendant, as underwriter, would be entitled to procure other parties to subscribe for them.

16.  On 17 June 2014, at 9.34 pm, the 1^st defendant faxed a letter to Able Success’s solicitors confirming that the company had decided to reject Able Success’s subscription for the open offer for a number of reasons.  Apart from the matters I have already mentioned, the 1^st defendant also relied on other matters for not recognising Able Success’s acceptance of the open offer.  Reference was made to the winding-up petition presented by Skyway and to a Mareva injunction obtained by certain third parties against Able Success in High Court Action 2292 of 2013.

17.  On 18 June 2014, Able Success’s solicitors wrote to the 1^st and 2^nd defendants asking them for an undertaking not to deal with the shares in question.

18.  On the morning of 20 June 2014, I granted an interim injunction on an ex parte on notice application which sought to restrain the 1^st defendant from disposing of, dealing with, or trading any of the 548,604,802 shares which had not been issued or allotted by the 1^st defendant and to restrain the 2^nd defendant from disposing of, dealing with or trading the same insofar as those shares had been issued or allotted to the 2^nd defendant or to its order, including any subscribers or sub-subscribers thereof.

19.  I also ordered disclosure pursuant to which the 1^st and 2^nd defendant had disclosed certain information about the under-subscribed shares.

20.  Today is the return date of the inter-partes summons taken out by Able Success for continuation of the injunction.  It needs to be urgently dealt with as there is an AGM of the company next Monday, 30 June.  Miss Eva Sit, who appears for Able Success, asks for the continuation of the injunction on varied terms.  The 2^nd defendant has filed evidence and Mr Alan Leong, on its behalf, opposes the application.  The 1^st defendant, however, has chosen not to file any evidence so far.  Mr Ronny Tong takes the position on its behalf that, on the evidence filed, there is no basis for the injunction to continue.  He has indicated that if the injunction is continued, the company will make an application to discharge it, on which I shall not comment.  The 3^rd to 8^th defendants have not been served with this application and have not appeared.

21.  The evidence which has become available since last Friday shows that the 2^nd defendant procured an individual called Cai Tian and a company called Lucky Shine to subscribe for 62 million and 149,838,335 shares respectively.  A company called Sun Growth, who had a sub-underwriting agreement with the 2^nd defendant, procured a person called Chu Ka-kui to subscribe for 460 million shares.  Together, these three parcels account for the entirety of the under-subscribed shares in the open offer. These shares were issued and allotted on around 17 June and deposited into the CCASS accounts of the 2^nd defendant and Sun Growth respectively and registered in the name of HKSCC Nominee Limited.

22.  The evidence also suggests that, on 19 June, the 2^nd defendant disposed of 10 million shares which appear to have found their way to Skyway.  On 20 June, the day the injunction was granted, the 2^nd defendant disposed, probably out of the shares held on account of Mr Cai, of 52 million shares.  On the same day, Skyway acquired 42.76 million shares.

23.  On 23 June, after having been notified of the injunction, Sun Growth, on behalf of Mr Chu, disposed of all the 460 million shares.  At the same time, Skyway acquired 110 million shares.  As of now, out of the shares allotted pursuant to the open offer, only 149,838,335 shares remained in the CCASS account of the 2^nd defendant. 

24.  Miss Sit, who appears for Able Success, submits there may have been breaches of the injunction granted, especially in relation to the disposition of 460 million shares by Sun Growth on 23 June, but, for the purposes of today, Able Success seeks to continue the injunction only in relation to the 149,838,335 shares that remained in the CCASS account of the 2^nd defendant.

25.  In seems to me that I should approach the application on the usual American Cyanamid principles.  Mr Leung submits that I should adopt a higher standard but I see no basis for it, there being no reason to think that an interim injunction would be dispositive of the action altogether.

26.  Able Success’s case is that there was a valid acceptance of the open offer of shares.  The binding contract which thereupon came into existence is specifically enforceable in equity.  Able Success has become equitable owner of the shares in question.  Able Success can therefore follow the shares into the hands of any third party, including the 2^nd defendant, except a bona fide purchaser of the legal estate in the shares for value without notice.  There were 671,838,335 under-subscribed shares of which Able Success’s portion was 548,604,802; that is approximately 81.65 per cent. Although the shares issued to the 2^nd defendant or to its order may therefore be said to be a mixture of shares to which Able Success is entitled in equity and other shares, there are rules for determining how Able Success’s interest in the shares may be followed:  see Goff & Jones, ‘The Law of Unjust Enrichment’ 8^th edition, paragraphs 7-11 to 7-15.

27.  In my view, there is a serious issue raised as to whether Able Success validly accepted the open offer.  Mr Tong, SC, for the 1^st defendant, says it plainly did not because the application form was not the original form.  He refers to the definition of ‘Application Forms’ at page 1 of the prospectus, being:  “The forms of application in respect of the open offer issued to the qualifying shareholders to apply for the offer shares” and says the form downloaded by Able Success is not that form.  I do not think the matter is as clear as he contends.  Chitty on Contracts, 31^st edition, volume 1, paragraph 2-067 suggests that an acceptance that accomplishes the object sought to be achieved by the stipulations as to the mode of acceptance may bind the offeror.  Miss Sit submits that the object of the requirement of using the application form provided was to ensure that the applicant was a qualifying shareholder.  There is, in this case, no suggestion that anyone has submitted the original application form, or indeed any other competing application form, for Able Success’s share entitlement.

28.  In any event, the plaintiff’s evidence, thus far uncontradicted, is that Mr Lau, the company’s secretary, has been named by Able Success as the recipient of all documents to be despatched by the company to it as shareholder.  Presumably, the prospectus and original application form of Able Success were held by him for Able Success.  But despite requests, he had refused to produce them or to provide another form to Able Success.  Even if it was necessary to use the original form, the inability of Able Success to do so appears to have stemmed from the act of the company’s officer.  In these circumstances, I cannot conclude at this stage that the use of a downloaded form is fatal to the plaintiff’s case.

29.  Mr Tong also relies on the procedure at page 15 of the prospectus which stated that the form must be lodged “with the Registrar at Shops 1712-1716, 17/F, Hopewell Centre” and says that it has not been complied with because Able Success’s solicitors’ clerk took the documents to 17M floor.  I do not think this point gets off the ground in the light of the uncontradicted evidence filed, namely, that the cover letter was correctly addressed and the clerk did take the documents to Shop 1712-1716 first but was redirected by Computershare’s staff to 17M floor.  In my opinion, there is, to say the least, a serious argument that this does not vitiate the acceptance by Able Success.

30.  Mr Tong submits that even if a binding contract came into existence upon 10 June, it is not specifically enforceable because specific performance of a contract for a sale of shares will generally not be granted if there is an adequate market for the shares.  For this proposition he relies on Spry, ‘The Principles of Equitable Remedies’, 9^th edition, 2014, page 66.  However, the same passage there goes on to say: 

“So if shares are not listed for quotation, or the parcel in question is a controlling interest or is of such a size or nature that to acquire it elsewhere would involve undue difficulty or uncertain expenditure, damages may be regarded as inappropriate ... Nonetheless even if there is an available market, the size of the relevant parcel, for example, or uncertainty in the amount that the plaintiff would be required to pay, or the risk that to seek to purchase it might prejudice or inconvenience unduly the plaintiff or third parties, may bring about a different position.”

31.  The contract that is said to exist and relied upon by Able Success relates to the subscription for over 548 million new shares representing approximately 16.69 per cent of the enlarged issued share capital of the company.  It seems to me that this amount of shares is, arguably, not readily available on the market without difficulty and uncertain expense.

32.  In addition, if Able Success, who now holds 33.40 per cent of the capital, were to go into the market and acquire an equivalent 548 million shares, it would have to make a general offer under the Code on Takeovers and Mergers and Share Repurchases, Rule 26.  That would not be necessary if Able Success could subscribe in the open offer on a pari passu basis, retaining the 50.09 per cent stake it held immediately before the offer.

33.  Mr Tong also submits that even if the contract is specifically enforceable, no beneficial interest arises in favour of Able Success because no shares have been allotted to it and the shares allotted to the actual subscribers, such as the 2^nd defendant, cannot be said to be the shares from Able Success’s entitlement.  In my view, it is clear on the facts that the shares newly allotted to the 2^nd defendant and Sun Growth are the under-subscribed shares.  In fact, the company admitted it in its disclosure made pursuant to my order of 20 June.  The shares allotted are based on a one-for-two pari passu share offer.  The quantity of shares is readily ascertainable.  It was not a discretionary application for allotment.  The only uncertainty is that, as I have already mentioned just now, Able Success’s part accounts for 81.65 per cent of the under-subscribed shares, but this gives rise to no impediment to a claim in equity.

34.  I should also mention something about Skyway’s consent, although that is not being relied upon by Mr Tong in his argument. 

35.  The evidence shows that, on 20 June, Skyway obtained 42.76 million shares, possibly out of the 52 million shares disposed of by Mr Cai Tian. 

36.  On 23 June, Skyway acquired 110 million shares, possibly from the 460 million shares disposed of by Mr Chu through Sun Growth. 

37.  The situation is this, that Skyway has, on the one hand, sat on Able Success’s request for its consent to subscribe in the open offer and, on the other hand, acquired shares which appeared to have, in large part, originated from the under-subscribed portion of Able Success’s entitlement. 

38.  It is not surprising that Mr Tong has not relied on this point today.  As he submitted to me, when opposing the injunction sought in HCMP 1091/2014, a company does not take notice of the interests behind the share register:  see Re Universal Horizon Investment Limited [2000] 3 HKC 627 at 630C to E.  It is thus surprising that the 1^st defendant has relied on the absence of Skyway’s consent as a reason for rejecting Able Success’s acceptance.

39.  Mr Tong also makes the point that the signature on Able Success’s form was suspicious.  However, plainly, the question of the authenticity or authority of the signature on the form is not something I can determine now.  There is no evidence that Mr He’s incarceration in Guangzhou means that he is unable to sign anything or give authority for anything.

40.  I consider, therefore, that Able Success arguably has a specifically enforceable right to the 548,604,802 shares and an equitable interest which may arguably be followed or traced into the 149,838,335 shares now held in the 2^nd defendant’s CCASS account with HKSCC Nominee Limited being the legal holder.

41.  Mr Leong for the 2^nd defendant argues that there is no basis to say that it is liable for knowing receipt.  He says that tracing or following does not give rise to a cause of action. However, as I understand the position, the plaintiff is seeking to assert property rights.  In a case like this, it is sufficient for the plaintiff to establish equitable ownership.  The plaintiff then claims the property that it follows or traces in the hands of a defendant.  It is not necessary for the plaintiff to prove that the defendant is liable personally as a constructive trustee arising from knowing receipt. To defeat the claim, it is for the defendant to establish that it is a bona fide purchaser of the legal interest in the property for value without notice. In the writ of summons, the relevant claim against the 2^nd defendant seems to me to be paragraph 3, namely, a declaration that the 2^nd defendant, including any persons subscribing the shares or any part thereof through the 2^nd defendant, holds the shares or any part thereof, including any dividend, profits or benefits derived from or accrued thereon subject to the aforesaid equity of the plaintiff.

42.  Mr Tong submits that, in any event, damages are an adequate remedy for Able Success as it can readily acquire on the market the 149 million-odd shares it wishes now to enjoin.  But as Miss Sit points out, the usual trading volume of the company’s shares before Able Success sought the injunction was only in the range of a few million shares per day.  The high volume in the last week or so was apparently due to Sun Growth’s selling shares obtained from the open offer.  A parcel of 149 million may not be readily available on the market.  More importantly, as a person holding more than 30 per cent in the issued share capital of the company, Able Success would have to make a general offer if it acquired anything more than 2 per cent in the issued share capital, pursuant to Rule 26 of the Code on Takeovers and Mergers.  The suggestion by Mr Tong that the requirement may be waived by the regulators seems to me to be speculative.

43.  Further, in circumstances where, if Able Success is right, its property has been wrongfully denied to it, it does not seem to me to be just to confine it to the remedy of damages, particularly given that the party said to be liable for breach of contract is the company itself which the plaintiff owns, at least as to 30 per cent.

44.  Mr Tong submits that the injunction should not be continued as against the company.  Mr Leong, however, does not entirely agree with Mr Tong’s approach.  He suggests that the injunction against the two defendants should stand or fall together.  Moreover, in view of what has happened in the last 10 days in relation to the other shares, it seems to me it is better to have an order that is as watertight as possible.

45.  Finally, Mr Tong and Mr Leong submit that fortification should be required for the plaintiff’s undertaking as to damages.  This is not an exact science and a broad-brush approach has to be taken.  In the circumstances, I consider that the interests of justice would be served by requiring Able Success to pay into court, or provide a bank guarantee in the amount of, HK$3 million as fortification for the undertaking as to damages.

46.  I shall therefore grant the following injunction:

1.1 Insofar as the 548,604,802 shares in the 1^st defendant for which the plaintiff is entitled to subscribe pursuant to the open offer as described in the prospectus issued by the 1^st defendant on 26 May 2014 in respect of which the plaintiff has issued a letter of acceptance dated 10 June 2014, or any part thereof, have been issued or allotted to the 2^nd defendant or to the 2^nd defendant’s order (including any subscribers or sub-subscribers thereof) the 2^nd defendant (whether acting by itself, its servants or agents or otherwise howsoever) be restrained from disposing of, dealing with or trading the same;

1.2 the 1^st and 2^nd defendants be restrained, whether acting by themselves, their servants or agents or otherwise howsoever from exercising or recognising the exercise of any voting rights attached to the 149,838,335 shares in the 1^st defendant issued to the 2^nd defendant on 17 June 2014 and held in the name of the 2^nd defendant by HKSCC Nominee Limited (D2 shares); and

1.3 the 1^st and 2^nd defendants be restrained, whether acting by themselves, their servants or agents or otherwise howsoever registering or procuring the registration of the transfer of the D2 shares in favour of any party.

2. The 2^nd defendant do by 5 pm on 4 July 2014 inform the plaintiff in writing so far as it is within its knowledge or power, of the names and addresses (if available) of the persons or entities to whom any part of the 62 million shares in the 1^st defendant disposed of through the 2^nd defendant on 19 and 20 June 2014 have been transferred.

(Submissions on fortification and costs)

47.  There will be an order that the plaintiff do provide fortification for its undertaking as to damages within 14 days hereof by payment into court, or in the form of a bank guarantee, in the sum of HK$3 million, failing which the injunction shall lapse.

(Submissions on liberty to apply, speedy trial and costs)

48.  I give general liberty to apply.

(Further submissions)

49.  I order the plaintiff’s costs to be in the cause.  That will include the previous hearing.  And I give a certificate for two counsel.