WONGS INVESTMENT DEVELOPMENT HOLDINGS GROUP LTD (In Liquidation) v. CHINA KINGSTONE MINING HOLDINGS LTD

HCMP 1472/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1472 OF 2015

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REASONS FOR DECISION
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1.  On 19 June 2015, I dismissed the petitioner’s urgent application for an injunction to restrain the respondent from proceeding with an open offer of shares and stated that I would later hand down my reasons in writing. These are my reasons and my order nisi on the costs of the application.

2.  The injunction that was sought by the petitioner was an injunction to restrain the respondent company from proceeding with or acting upon the open offer of its shares as described in its public announcement dated 14 May 2015, pending the final determination of the petition in these proceedings or further order.  The petitioner is a company incorporated in the British Virgin Islands and has been put into compulsory liquidation in Hong Kong in proceedings numbered HCCW 332/2012 by an order of the court dated 15 April 2013.  On 19 June 2013, Messrs Lam Hok Chung Rainier and Jong Yat Kit, both of PricewaterhouseCoopers, were appointed as the joint and several liquidators of the petitioner.  Prior to that, certain partners of Deloittes had acted as provisional liquidators of the petitioner. 

3.  At all times material to the open offer in question in these proceedings, the petitioner was the holder of 1,226,926,277 shares (representing approximately 50.56%) in the issued share capital of the respondent, China Kingstone Mining Holdings Limited (“China Kingstone”).

4.  China Kingstone is a company incorporated in the Cayman Islands and registered in Hong Kong under Part XI of the predecessor Companies Ordinance, Cap 32.  Its shares have since March 2011 been listed for trading on the Hong Kong Stock Exchange with the stock code 1380.  China Kingstone is itself an investment holding company.  The principal business and activities of the group of companies which it heads are the production and sale of marble and marble related products.  At the time of the application, China Kingstone had an issued share capital of HK$242,675,863.60 divided into 2,426,758,636 ordinary shares. 

5.  Apart from the petitioner, the shareholders of China Kingstone were a company called Jiang Tong holding approximately 6.11%, a company called Endless Joy holding approximately 9.50%, an individual Mr Sun Yunning holding approximately 1.65%, and public shareholders holding approximately 32.18% of the issued share capital. 

6.  The board of directors of China Kingstone at all material times consisted of seven individuals, four of whom were executive directors and three independent non-executive directors.  Apart from two of the executive directors who were recruited from the market based on their expertise, the directors were all nominated by the provisional liquidators of the petitioner.  There is no evidence that they had any connection with any of the shareholders of China Kingstone.

7.  The open offer which the petitioner sought to prevent was the subject matter of a public announcement on 14 May 2015.  China Kingstone announced that it proposed to make an open offer of its shares, whereby it proposed to raise approximately HK$121,337,931.80 to HK$138,843,791.80 by issuing not fewer than 1,213,379,318, but no more than 1,388,437,918 offer shares at the subscription price of HK$0.10 per offer share (ie at par value) on the basis of one offer share for every two existing shares.  According to the public announcement, the majority of the net proceeds of the open offer of shares would be used for the following purposes, namely:

(a) to pay the consideration for the acquisition of the Qilu Loan Note (see below);

(b) to pay the consideration for the acquisition of the interests in China Fortune Investment Holdings Limited; and

(c) for the general working capital of China Kingstone.

8.  The underwriter of the open offer is one Royal Moon International Limited, which will fully underwrite the offer shares on the terms and subject to the conditions of an underwriting agreement dated 13 May 2015.  Any offer shares in the open offer not taken up by the qualifying shareholders in accordance with their proportional allocations would not be made available for excess applications, and were instead to be taken up by Royal Moon as the underwriter pursuant to the terms of the underwriting agreement.

9.  By a letter dated 24 May 2015, the liquidators of the petitioner stated to the company that the proposed open offer and the Qilu Loan Note acquisition were not in China Kingstone’s best interests and were also prejudicial to the interests of the petitioner as a shareholder of China Kingstone, and requested the board of China Kingstone immediately to suspend the proposed transactions.  The letter also raised certain queries concerning the China Fortune acquisition and requested China Kingstone’s board to provide further information concerning that transaction.  The petitioner received a holding response from China Kingstone on 26 May 2015. 

10.  On 5 June 2015, China Kingstone issued a prospectus containing the open offer of shares to all qualifying shareholders. According to the prospectus, the latest time for acceptance of and payment for the offer shares was 4 pm on Monday, 22 June 2015, and the announcement of results of acceptance of the offer shares would be made by Friday, 26 June 2015, with dealings in the offer shares to commence on Tuesday, 30 June 2015.

11.  On 16 June 2015, the petitioner presented the petition in these proceedings to the court alleging that the open offer was made by the board for the improper purpose of diluting the petitioner’s majority shareholding in China Kingstone and of circumventing the petitioner’s ability to veto the China Fortune acquisition.  It is averred that the open offer was made by the board in breach of their fiduciary duties to the company and that the affairs of China Kingstone were being or had been conducted in a manner unfairly prejudicial to the interests of the petitioner.  On the same day, the petitioner took out a summons for the interim injunction in question returnable on 19 June 2015, Friday.

12.  The papers were served on the respondent in the late afternoon of 16 June 2015.  In the time available, the respondent had filed and prepared an affirmation by Mr Pak Wai Keung Martin, its Chief Financial Officer and Company Secretary on 18 June 2015, and a further affirmation by the same Mr Pak on the morning of 19 June 2015. 

13.  The matters relied upon in support of the case that the directors of China Kingstone were acting for the improper purpose of diluting the majority shareholding of the petitioner were summarised in the skeleton argument of Mr Joffe and Mr Law as follows:

“(1) The Board knew that Wongs [i.e. the petitioner] would not be able to take up the shares in the Open Offer.

(2) China Kingstone has no genuine need of funding.

(3) The Open Offer and the Underwriting Agreement contains a plethora of problematic features. In particular, whilst it is normal to involve a professional independent underwriter, no professional independent underwriter is willing to underwrite “given the unimpressive financial status, uncertainty about business prospects and majority ownership”.

(4) There is no excess arrangement, so that all the shares not be taken up by Wongs would of necessity be offered to Royal Moon.

(5) There is a substantial discount to the share price offered under the Open Offer.

(6) In the premises, the effect of the entire arrangement is to make Royal Moon a substantial shareholder of China Kingstone, at a substantial discount to the share price.

(7) Given Wongs’ majority shareholding, one would have expected the Board to have consulted Wongs before making the Open Offer, especially when the Open Offer would have the effect of diluting Wongs’ majority shareholding in China Kingstone.  Nonetheless, although other major shareholders were consulted, Wongs was not consulted at all.”

14.  Despite what was sought by the petitioner was an interim injunction, it was clear that such an injunction would put a final end to the open offer and the underwriting arrangement in the present form.  It might further have an adverse impact on China Kingstone’s ability to raise funds by any renewed open offer of shares pending the final determination of the petition.  In these circumstances, Mr Joffe fairly accepted, and there was no dispute, that the court ought to look more closely at the prospect of success of the petitioner and require more than merely a serious triable issue to be demonstrated: see Lansing Linde Ltd v Kerr [1991] 1 WLR 251 at 258H; Able Success Asia Ltd v China Packaging Group Company Ltd, HCMP 1091/2014, 15 May 2014, at §35.

15.  In my view, based on the materials available, there was no real evidence that the petitioner would be unable to subscribe for the new shares, which would require funds in the amount of about $61 million.  Mr Joffe asserted that given that the petitioner was a company in insolvent liquidation, it obviously had no money to subscribe.  As a general proposition this conclusion does not necessarily follow from the premise, there being no evidence placed before the court as to the finances of the liquidation. Moreover, the shares held by the petitioner in China Kingstone were for the most part unencumbered.  Nothing has been said in evidence why they could not be used as security for a loan to fund the subscription if necessary.  I concluded therefore that there was no sufficient evidence that the petitioner would not be able to subscribe for shares pursuant to the open offer.  On that footing, the petitioner’s allegation that China Kingstone’s directors knew that the petitioner would not be able to take up the shares could not be taken at face value and would require to be further substantiated at trial.

16.  I was also concerned that the application was brought very late indeed.  The open offer was announced on 14 May with all the principal details disclosed including the identity of the underwriter.  The expected timetable was set out indicating that the prospectus would be despatched on 5 June and the latest time for acceptance of the offer would be 4pm on 22 June.  Yet the petition and the application for injunction were not issued until 16 June, and then only for a hearing on 19 June, Friday, the last working day before the offer closed.  By then many qualifying shareholders had presumably put in their acceptance of the open offer, some perhaps having raised funds in order to do so.  Numerous binding contracts had probably come into existence for the allotment of shares.  The shares in China Kingstone had been trading cum-entitlement for some time.  It would be highly disruptive of the market, unfairly defeat legitimate expectations of the investing public, and perhaps even upset contractual entitlements of accepting qualifying shareholders, to put an indefinite stop to the open offer at that stage.  There was, in my view, no satisfactory explanation for the delay on the part of the petitioner. The petitioner’s request for an extraordinary general meeting did not explain the delay for the meeting was not intended to deal with the open offer.  Nor could a general meeting undo the offer once accepted or the resulting allotment of shares.  It was incumbent on an applicant in this sort of situation to act with promptitude.  In my opinion the failure of the petitioner in this regard and the creation of intervening third party rights and expectations in the setting of an active, volatile stock market leant heavily against the petitioner’s application.

17.  Coupled with this is the uncertainty over the petitioner’s allegation that the Qilu Loan Note and the China Fortune transactions were such that the court should conclude they were but stratagems being used to achieve impermissible purposes.  In this regard the petitioner was effectively alleging fraud and bad faith. 

18.  By the Qilu Loan Note transaction it was proposed that China Kingstone acquired from Qilu International Investment Ltd a loan note issued by Magnificent Century Ltd in the amount of US$10 million. The relevant public announcement stated that China Kingstone had learnt that the issuer was seeking partners for expanding its business in the production of natural gas and that China Kingstone hoped to build up a good relationship with the issuer.  The petitioner alleged that the Qilu Loan Note was a transaction no reasonable directors would have approved, and that it was but a device for ulterior purposes.  From the materials I have seen, however, the existing business of China Kingstone was not profitable.  Due diligence had been conducted with respect to the issuer of the note.  The note was secured on the shares of a subsidiary of the issuer which held natural gas plants in the Mainland.  While questions might be raised about that transaction, I did not think that the matter was so clear that I could in effect summarily conclude that the directors had engineered it solely in order to create the need for funds and in turn to justify the open offer. 

19.  As for the China Fortune transaction, again while legitimate queries and concerns could be raised, the position was in my view insufficiently conclusive for present purposes.  When the transaction came up for a vote in a previous extraordinary general meeting, the petitioner asked for further information rather than peremptorily vetoed it as being against the interests of China Kingstone.  Moreover, an independent financial adviser had advised that the terms of the transaction were normal commercial terms and fair and reasonable as far as independent shareholders were concerned.  In all the circumstances I did not feel able to infer, to a sufficient degree of certainty for the purposes of the application for interim injunction which would be tantamount to final relief, that having regard to the nature of the China Fortune transaction, China Kingstone’s directors must have, acting in bad faith, devised the open offer in order to dilute the petitioner’s shareholding so as to prevent it from vetoing the China Fortune transaction.

20.  For all these reasons, I concluded that the application should be dismissed.

21.  I make an order nisi that the petitioner do pay the respondent forthwith the costs of and occasioned by the petitioner’s summons dated 16 June 2015 with a certificate for two counsel.