VERON INTERNATIONAL LTD v. RCG HOLDINGS LTD

HCMP 343/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 343 OF 2011

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J U D G M E N T

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1. In these proceedings, Veron Limited (“the Plaintiff”) seeks an order pursuant to section 152FA of the Companies Ordinance to enable it to inspect various records of RCG Holdings Limited (“the Company”), relating to two substantial investments made by the Company, by which the Company acquired (through a subsidiary) interests in companies called Vast Base Technology Limited (“Vast Base”) and Strong Aim Limited (“Strong Aim”).

Background to the application

2. The Company was listed on the AIM market of the London Stock Exchange on 2 July 2004 and on the PLUS market on the same stock exchange on 1 June 2007.  On 10 February 2009, it obtained a listing on the main board of the Hong Kong Stock Exchange (“HKSE”).

3. Between November 2005 and April 2007, the Plaintiff acquired a substantial shareholding in the Company, as the result of three purchases of shares, by which the Plaintiff acquired somewhat in excess of 64 million shares in the Company, representing 27.6% of its total issued share capital as at April 2007.  Since April 2007, as the result of new share issues made by the Company (as to which there is no complaint), the Plaintiff’s shareholding has been diluted, and now represents some 16% of the Company’s total issued share capital.

4. Between December 2007 and November 2008, the Company acquired (through its subsidiary RCG China Holdings Limited (“RCG China”)) an 80% shareholding in Vast Base, at a total consideration of HK$734.8 million.  This acquisition was made in three stages, with a 19.9% interest in Vast Base being acquired in December 2007, a further 40.1% interest being acquired in May 2008, and, finally, a further 20% interest being acquired in November 2008.  Vast Base was described in announcements and press releases made at the time of the acquisitions as a Singapore based provider of Radio Frequency Identification (“RFID”) technologies.  Such technologies enable data to be acquired and utilised via radio frequency transponders and a host system, and Vast Base’s business was said to consist of applications of RFID technology in connection with anti-counterfeiting applications (for example, in relation to ticketing systems for use at events such as concerts), and also in connection with health care systems (for example, in relation to patient identification and data).

5. In a press release dated 16 May 2008 relating to the second acquisition of shares in Vast Base, Vast Base’s business was described as the “provision of intelligent stadium solutions” and as having more recently expanded into “healthcare industry automation”, and Vast Base was said to have “secured major contracts for the design and supply of RFID tickets and tags, RFID enabled equipment, software and middleware to the event management and healthcare industry”.  The press release went on to state that in early 2008, Vast Base “secured contracts related to the provision of RFID patient tags to 19 major hospitals in the PRC” and naming some such hospitals.  In a section headed “Healthcare industry” the business model in relation to this aspect of Vast Base’s business was discussed, in terms that tended to suggest that Vast Base’s contracts were entered into directly with the hospitals concerned, such contracts being valued at some HK$448.4 million over a five year period. Similar information was given in relation to Vast Base’s business in respect of “Anti-counterfeiting tickets”, where it was said that Vast Base had secured several five year fixed contracts worth in total some HK$1 billion.

6. In another press release dated 17 November 2008 relating to the third acquisition of shares in Vast Base, there were similar descriptions of Vast Base’s business, together with information on Vast Base’s unaudited financial results for the first 10 months of 2008.  It was stated that the RFID anti-counterfeit ticketing business continued to be strong, while Vast Base was working on deploying its healthcare solutions in several hospitals in the PRC.

7. On 4 February 2009, the Company published its prospectus for its impending listing on the HKSE.  This was a substantial document, the main body of which ran to just over 200 pages, accompanied by seven appendices.  The latest practicable date for the ascertainment of information contained in the prospectus was stated to be 30 January 2009.

8. For present purposes, it is pertinent to note that the prospectus contained a considerable amount of detailed information as to the Company’s acquisition of its 80% interest in Vast Base, with nearly 15 pages (pages 31-32, 71-77 and 92-97) of the prospectus dealing with this investment. This information can be summarised as follows:-

(1)  In the section of the prospectus headed “Risk Factors”, under the heading “Risks related to the Business of the Group”, there were sections (at pages 31-32 of the prospectus) pointing out specific risks relating to (inter alia) Vast Base, making it clear that Vast Base was reliant on its existing and former owners to secure contracts with new customers.  It was pointed out that Vast Base’s existing and former owners had secured three long term contracts for it, and that if such owners, who at that point still retained an interest in and/or remained in management positions with Vast Base, should cease to do so in future, the RCG Group’s prospects might be adversely affected.  It was also explained that Vast Base was reliant on its customers honouring their contracts with it, and that a failure in this respect could also affect the RCG Group’s prospects.

(2)  In the section of the prospectus headed “History and Development”, there was a section devoted to the RCG Group’s acquisition of its interests in Vast Base (pages 71-77), in which the following matters were mentioned:-

  (a)  The rationale for the investment was said to be that the Company considered that there were possible advantages to be obtained from working with the founders of Vast Base to build upon their relationships with stadium operators, event organisers and hospital groups to develop an RFID based business.

  (b)  It was stated that the founders and management of Vast Base were independent of the Company and the Group.

  (c)  It was explained that in late October 2007, Vast Base entered into a long term contract with a customer called Bellson for the supply of RFID tickets, and having considered the potential for growth in this business, it was decided to invest in Vast Base in order to gain exposure to Vast Base’s contacts in the event management and healthcare industries in China.  However, as the amounts involved were large, it was decided to start with the acquisition of a 19.9% stake only.

  (d)  The basis on which the consideration paid for this acquisition was explained as being arrived at by reference to a valuation of Vast Base prepared by an independent valuer.

  (e)  Reference was then made to further long term contracts entered into by Vast Base with two other customers, Top Venture (which, like Bellson, was involved in event management) and Tianjin Huajian (which was involved in the healthcare sector).  In the light of these further contracts, it was decided to make a further investment in Vast Base, bringing the Company’s interest in it up to 60%, in about May 2008.

  (f)  As with the first acquisition, it was explained that the price paid for the second investment in Vast Base was determined by reference to an independent valuation.  It was also stated that the terms of the acquisition included a profit guarantee by the vendors, to the effect that the profit attributable to the 40.1% stake being acquired would be not less than HK$100 million in the first 12 months from the completion of the acquisition, and not less than HK$150 million in the second 12 month period after completion.  A call option was also granted to the Group to acquire a further 20% interest in Vast Base by the end of 2008, at a price to be determined by reference to a further independent valuation, subject to an upwards cap by reference to the price paid for the second investment.

  (g)  Having reviewed the performance of Vast Base as at November 2008, it was decided to exercise the call option.  Although the independent valuation of Vast Base was slightly higher than it had been in May 2008, it was agreed that the price per share would be kept at the same level as for the second investment.

  (h)  It was then stated that the Company considered that the individuals involved in setting up Vast Base had good contacts with stadium operators and hospital groups, and were capable of obtaining long term contracts for the supply of RFID products, which could be manufactured and supplied by the RCG Group.

  (i)  It was explained that Vast Base’s customers were systems integrators who in turn entered into contracts with end purchasers, that the Group (and Vast Base) had no direct relationship with the end users, and that the sales by Vast Base’s customers to the end users were what enabled those customers to meet their purchase commitments to Vast Base.

  (j)  An explanation was provided as to the valuations on which the purchase consideration was based.  The valuers were identified, and were described as an independent third party, and an explanation of the valuation methodology and the reasons for its adoption was given.  The assumptions underlying the valuations were explained, and a summary was provided of the information and factors reviewed by the valuers, which extended to the business nature of the enterprise, business licences, articles of association, business contracts and related documents, financial projections, product information, contractual sales quantities, with selling prices and cost information, and discussions with management.  It was stated that the valuers considered that they had been provided with sufficient information for the purposes of their valuation, and that no material information had, in their view, been withheld.

(3)  In the section of the prospectus headed “Business”, the business of Vast Base was described in more detail (at pages 92-97).  It was stated that Vast Base had four customers, and had entered into long term contracts with three of them (i.e., Bellson, Top Venture and Tianjin Huajian), while it did not have any such contract with its fourth customer, a company called Distant.  Further information was then provided as to each of the first three customers, together with information as to the expected level of sales of RFID products to them over the medium and long term.  In the case of Tianjin Huajian, which was involved in the healthcare sector, it was stated that there was a minimum purchase commitment for the supply by Vast Base to Tianjin Huajian of 0.4 million in-patient RFID tags, and 10 million out-patient RFID tags, per year for 10 years.  Information was also provided as to the directors and management of Vast Base (which had two directors with service contracts, but no other employees, as the persons working on its projects were employees of other Group companies), and flow charts which depicted the operation flow of the Group’s RFID business provided through Vast Base, in both the event management/ ticketing and healthcare sectors, were provided.

9. On 26 April 2010, the Company announced that it had acquired (again through RCG China) a 70% interest in Strong Aim for a consideration of HK$185 million, to be satisfied partly in cash, and partly by the issue of new shares in the Company.  Strong Aim’s business also involved the use of RFID technology, but in connection with mobile phones, and a 60% owned subsidiary of Strong Aim, called Stepfull Limited, was said to be in the process of seeking a patent registration in respect of an RFID module which would enable a mobile phone to function as an RFID reading device.

10. The announcement of this acquisition provided information as to the factors that were taken into account in arriving at the consideration agreed, these being an independent valuation of Strong Aim, the value of confirmed order books held by Strong Aim, and the reasons for the acquisition.  Information was given as to the valuation, which included an explanation of the valuation methodology used, and details of the assumptions which had been made.  The reasons for the acquisition were also explained, these being that it was thought that the RFID mobile phone would be complementary to the Group’s existing products, and could be used in business sectors in which the Group was already provided RFID based solutions.

11. A few weeks before the announcement of the Strong Aim acquisition, an article was published in East Week Magazine, a tabloid magazine circulating in Hong Kong, which raised questions as to the Vast Base acquisition.  The article set out what it suggested were suspicious circumstances regarding the existence of Vast Base, and contracts it was said to have with hospitals in the PRC.  The article appears to have focused on the statements made in the press release accompanying the second investment in Vast Base in May 2008, and indicated that a number of the hospitals named in the press release did not appear to exist, and that in other cases, “responsible persons” at the hospitals had stated that RFID tags were not in use, and that there were no contracts with the Company, Vast Base or Tianjin Huajian.

12. The Plaintiff says that this article caused it to be concerned as to its investment in the Company.  On 3 May 2010, the Plaintiff’s solicitors wrote to the Company raising various concerns as to the investments by the Company in Vast Base and Strong Aim.  They said that given the limited information contained in the press releases, the Plaintiff, as a substantial shareholder was entitled to know what had happened, and to be given the full picture as to the two investments, asking for a range of documents to be provided.  In a later letter dated 29 June 2010, the Plaintiff’s solicitors expressed concern as to the fact that substantial investments had been made in companies with no track record, and no assets other than future contracts which might be of little value, if the counterparties did not exist. In these circumstances, it was said, the Plaintiff was legitimately concerned as to whether or not the Company’s directors had performed adequate due diligence in relation to the acquisitions, and whether or not they might have breached their duties to the Company in this regard.

13. For its part, the Company, through its solicitors, indicated that it would not be appropriate to disclose the material sought to the Plaintiff, as it constituted price sensitive material which could not be disclosed to a single shareholder.  It was stated that if the Company felt it appropriate to disclose further information, it would do so by way of public announcements.  No further information was, however, provided, whether by way of announcement or otherwise.

14. Thereafter, the Plaintiff commissioned a report from a firm of investigators, International Risk Limited.  The investigators provided a report to the Plaintiff dated 22 September 2010, in which they stated that two of the hospitals named in the May 2008 press release did not appear to exist, and that a number of hospital staff interviewed by the investigators said that they had not heard of Vast Base, the Company or Tianjin Huajian, and that their hospitals did not use products supplied by them.  It appears from the report that the investigators sought to gain access to hospital staff on the pretext of carrying out a marketing survey, and that for the most part, the hospital staff members they approached were not particularly willing to assist, and declined to provide any official confirmation of the matters stated.

The documents sought

15. On 4 March 2011, the Plaintiff made this application.  Its Originating Summons was amended on 5 July 2011, and, as amended, sought disclosure of the following records of the Company:-

(1)  In relation to the Vast Base acquisition:-

  (a)  copies of the sale and purchase agreements relating to each of the three transactions by which the Company acquired shares in Vast Base;

  (b)  copies of the valuation reports in respect of Vast Base obtained in connection with each of the said three transactions;

  (c)  copies of the due diligence documents obtained by the Company when conducting its due diligence in connection with each of the said three transactions;

  (d)  copies of agreements and contracts entered into by Vast Base with the 19 hospitals referred to in the May 2008 press release, or with any distributors of its products in the healthcare sector as at the date of each of the said three transactions; and

  (e)  copies of agreements and contracts between Vast Base’s distributors and end users of its products in the healthcare sector.

(2)  In relation to the Strong Aim acquisition:-

  (a)  copies of the sale and purchase agreements relating to the acquisition by RCG China of interests in Strong Aim;

  (b)  a copy of the valuation report obtained in connection with such acquisition;

  (c)  a copy of research mentioned in the announcement of 26 April 2010;

  (d)  copies of the due diligence documents obtained by the Company when conducting its due diligence in connection the acquisition of the interest in Strong Aim;

  (e)  copies of Stepfull’s application for patent registration in respect of the RFID phone;

  (f)  copies of contracts entered into by Strong Aim with Stepfull in relation to the RFID phone; and

  (g)  copies of contracts entered into by Strong Aim in relation to the RFID phone and tag, and of all confirmed sales orders placed by customers with Strong Aim for the RFID phone and tag.

16. At the hearing, the Plaintiff was represented by Mr Harry, while Mr Coleman SC and Mr Lam appeared for the Company. The evidence in support of the application consisted of two affidavits of Mr Clark, the solicitor acting for the Plaintiff, and two affirmations of Mr Hui Yip Wing, a director of the Plaintiff.  The Company’s evidence consisted of an affirmation of Mr Lee Boon Han, and two affirmations of Mr Ying Kam Man, directors of the Company.

The law

17. Section 152FA, pursuant to which the application is made, is in the following terms:-

“(1)  Subject to sections 152FD and 152FE, on application by such number of members of a specified corporation as is specified in subsection (2) (in this section referred to as “applicant”), the court may make an order –

  (a)  authorising the applicant or any one or more of such members applying as applicant to inspect any records of the specified corporation; or

  (b)  authorising a person (whether or not a member of the specified corporation) other than the applicant to inspect any such records on behalf of the applicant.

…

(3)  The court may only make an order under subsection (1) if it is satisfied that –

  (a)  the application is made in good faith; and

  (b)  the inspection applied for is for a proper purpose.”

18. As has been pointed out in Lehman & Co Management Ltd v Effiscient Ltd (unreported, Court of Appeal, CACV 140/2011, 3 October 2011), section 152FA is based on Australian legislation to similar effect, which in turn has its origins in American jurisprudence.  There have been three recent Hong Kong authorities in which section 152FA has been considered: Re Lehman Brown Ltd [2011] 4 HKLRD 237 (a decision of Deputy Judge Coleman SC); Wong Kar Gee Mimi v Hung Kin Sang Raymond [2011] 5 HKLRD 241 (a decision of Harris J); and Lehman & Co Management Ltd v Effiscient Ltd (supra), a judgment given dismissing an application for leave to appeal from the judgment of Deputy Judge Coleman SC in Re Lehman Brown.  Although Deputy Judge Coleman and Harris J expressed differing views as to the readiness with which the court should grant orders under section 152FA, I do not think that anything turns on this particular difference in the present case.

19. For present purposes, a convenient starting point is the summary of the principles applicable to such applications by Debelle J in the Australian case of Acehill Investments Pty Ltd v Incitec [2002] SASC 344, at paragraph 29 of his judgment, which was adopted by the Court of Appeal in Lehman & Co Management Ltd (at paragraph 31 of the judgment in that case).  That summary is in the following terms:-

“1. The requirement that the applicant is acting in good faith and that the inspection is to be made for a proper purpose expresses a composite notion and the court will determine whether each has been demonstrated by applying an objective test: Barrack Mines Ltd v Grants Patch Mining Ltd [1988] 1 Qd R 606; Knightswood Nominees Pty Ltd v Sherwin Pastoral Company Ltd (1989) 7 ACLC 536 at 540-541.

2. The onus is on the applicant to demonstrate that he is acting in good faith and that the inspection is for a proper purpose: Intercapital Holdings Ltd v M E H Ltd (1988) 6 ACLC 1068 at 1074.

3. The section operates where the applicant seeks to protect some specific or personal right by the making of the order. Examples are where a shareholder contemplates proceedings under s 233 of the Corporations Act (the statutory successor of s 320 of the Companies Code); Re Augold NL [1987] 2 Qd R 297 at 308-309; Re Humes Ltd [1987] VicRp 43; (1987) 5 ACLC 64 at 68-69; Grants Patch Mining at 107; or where a shareholder reasonably takes the view that a transaction could adversely affect his investment and he seeks to investigate the transaction for the purpose of determining what action he should take: Intercapital Holdings at 1074-1075; or where a shareholder seeks to ascertain facts for the purpose of considering a takeover offer: Knightswood Nominees Pty Ltd v Sherwin Pastoral Company Ltd at 539. Other examples are provided in a number of the cases listed in the appendix.

4. If the applicant's primary or dominant purpose is a proper purpose, it is not to the point that an inspection may be of benefit to the applicant for some other purpose: Re Humes Ltd at 70; Grants Patch Mining at 109-110; Cescastle Pty Ltd v Renak Holdings Ltd (1991) 9 ACLC 1333 at 1335.

5. The rights provided by s 247A should not be regarded as affecting the basic rule of company law that a shareholder should not ordinarily have recourse to the courts to challenge a managerial decision made by or with the approval of the directors: Re Humes Ltd at 68-69; Grants Patch Mining Ltd at 614.

6. Since every shareholder has a right to apply under the section for an inspection order, it is no answer to an application that, if an order is made, the applicant may acquire information not available to other shareholders and thereby be in a more advantageous position than those shareholders: Re Humes Ltd at 70; Grants Patch Mining at 615.

7. Applicants do not necessarily lack a proper purpose merely because

(a) they are hostile to other directors; or

(b) they will, after inspection, have more information than other members: Re Humes Ltd at 70.

8. The procedure under s 247A is not intended to be a process as wide-ranging as the process of discovery of documents so that, as a general rule, inspection will be confined to, say, the results of decisions of directors rather than all the documents such as board papers leading to decisions: Re Claremont Petroleum NL (No 2) [1990] 2 Qd R 310 at 314. I emphasize that this is a general rule. There may be occasions where it is proper to admit inspection of board papers. I examine this question in a moment.

9.   Even where an applicant is acting bona fide and has shown a proper purpose, the court has a discretion whether to order inspection: Re Humes Ltd at 70.”

20. The Court of Appeal went on to say (in paragraphs 32 to 35 of its judgment) that section 152FA did not give a shareholder a right of inspection, as it was for the shareholder to satisfy the court that he sought inspection in good faith and for a proper purpose, there being no presumption that this was the case, and that while the section expressed a composite notion so that the inspection had to be sought both in good faith and for a proper purpose, it did not follow that merely because a proper purpose was shown, a finding of good faith would necessarily follow.  As Mr Coleman submitted before me, while the concepts of “proper purpose” and “good faith” would probably colour one another, it was necessary for the court to be satisfied as to both before its discretion as to whether or not to make an order for inspection would be triggered.  Further, the “proper purpose” must be something that is related to the applicant’s capacity as a member of the company in question.

21. Also of relevance for present purposes are the views expressed by Brooking J in Knightswood Nominees Pty Ltd v Sherwin Pastoral Co Ltd [1989] 15 ACLR 151, where he said (at page 157):

“In the MEH case, and in my reasons thus far in the present case, reference is made to whether the plaintiff has established a case for investigation without any express explanation of how that question arises or may arise, on an application under this section. The explanation, obvious enough, is this: an application must show that the inspection is to be made for a proper purpose. Often the applicant’s case will be that he wishes to inspect the books because something wrongful or untoward has occurred or is going to occur in relation to the company’s affairs, or because he believes that there has been or will be such an occurrence. As part of his proofs in establishing a proper purpose the applicant seeks to show that there is at least a case for investigation as regards past or future wrongful or other undesirable conduct. If he is unable to show that he has some reasonable ground for believing that misconduct or maladministration (or whatever else is suggested) has taken place, or is going to take place, he may well fail to establish the prerequisite to the making of an order, namely, that he is acting in good faith and that the inspection is to be made for a proper purpose. And even if he establishes the prerequisite, the court may, as a matter of discretion, consider that not enough is shown to warrant its intervention, there not being a sufficient prospect that anything useful will come out of the proposed inspection. …”

The parties’ respective positions

22. In this case, Mr Harry submitted, relying principally on the East Week article and the investigator’s report, that there were real and substantial reasons for concern as to the way in which the investments by the Company in Vast Base had been made, and that, having regard to what he described as the very limited information contained in the announcement of 26 April 2010, there were equally strong reasons for concern in relation to the acquisition of Strong Aim.  He said that in these circumstances, the purpose for which the Plaintiff sought inspection of the documents identified in the Amended Originating Summons was to investigate whether or not there had been (as the Plaintiff’s solicitors suggested in their letter of 29 June 2010) proper and adequate due diligence by the board of the Company prior to the investments being made, and whether the board or some of its members had failed in their duties to the Company in this regard.

23. Mr Coleman, for the Company, submitted that:-

(1)  Having regard to the totality of the material before the court, and in particular the material contained in the prospectus, it could not be said that there was any case for investigation in relation to the Vast Base acquisition.

(2)  Still less, he submitted, was there any case for investigation in relation to the Strong Aim acquisition.

(3)  That being so, the Plaintiff could not demonstrate any proper purpose for which inspection was sought, and inspection ought therefore to be refused.

(4)  As to the requirement of good faith, Mr Coleman pointed out that the Company’s evidence was to the effect that the Company believed that the application was not made in good faith, but was made for an ulterior purpose – that purpose being connected with the recent probate proceedings related to the estate of the late Nina Wang, since the Plaintiff was controlled by the Chinachem Foundation, while Mr Tony Chan Chun Chuen was a major shareholder in the Company.  It was suggested that the objective of the Plaintiff was to cause difficulties for the Company in the hope that this might adversely impact on the value of Mr Chan’s stake in it, thus providing the Plaintiff with an advantage in its litigation with him.  However, Mr Coleman accepted that this was a matter that was hotly disputed on the evidence, and that it was unrealistic to expect the court to be able to form a view on this. He therefore did not press this argument, which can be put to one side for the purposes of this decision.

(5)  Mr Coleman went on, however, to submit that even if I were to form the view that there might be a proper purpose to the inspection sought, and that the application was made in good faith, I should nonetheless decline to exercise my discretion in favour of ordering inspection, both because the likelihood of anything worthwhile emerging was small, and because of particular factors in relation to the information sought.

24. Both counsel agreed, I think, that the key question was whether or not a case for investigation had been made out.

25. In my view, such a case has not been made out by the Plaintiff.  I shall deal with this in relation to the Vast Base and Strong Aim acquisitions separately.

Whether there is a case for investigation in relation to the Vast Base acquisition

26. Dealing first with the Vast Base acquisition, the fundamental difficulty facing the Plaintiff is its failure to address the substantial amount of information provided in the prospectus as to this acquisition and the process by which it came to be made.  Although the prospectus contained considerable and detailed information as to the acquisition (as I have summarised in paragraph 8 above), the Plaintiff (which must, as an existing shareholder of the Company, been provided with a copy of the prospectus when it was issued) made little reference to the prospectus in its own evidence, focussing its criticisms instead on the questions that it said were raised as to the existence of the hospital contracts that Vast Base was thought to have.

27. I agree with Mr Coleman’s submission that the East Week article and the investigators’ report cannot be regarded as being either substantiated or particularly reliable.

28. Neither appears to have considered the material set out in the prospectus, and as a result have proceeded on the assumption that Vast Base had itself entered into contracts with the hospitals concerned for the supply of RFID equipment.  As the prospectus makes clear, the business model that was adopted by Vast Base was to enter into contracts with a limited number of distributors, who in turn entered into contracts with end users. Thus, in the case of the healthcare sector, Vast Base’s relationship was not with the hospitals, but with Tianjin Huajian, which had entered into minimum purchase commitments for RFID patient tags over a substantial period of time.

29. Further, it is clear from the investigators’ report that the pretext used by the investigators to try to obtain information was that of a market survey.  It is far from clear whether the hospital staff to whom they spoke would have taken such a survey seriously, or would have been prepared to disclose information relating to the hospitals’ operations to persons holding themselves out as market researchers (and I have noted that for the most part, staff who responded seemed unwilling to do so in any official capacity).  It is also far from clear whether or not the staff who were approached were necessarily in a position to provide useful or relevant information, even if they were willing to cooperate.  Similar observations can, I think, be made in relation to the East Week article, save that it is not clear what pretext the reporters used to seek to obtain information.

30. Viewed in terms of the suggested reason for investigation – namely, concerns as to the quality of due diligence that was carried out in relation to the acquisitions of interests in Vast Base, it is to be observed that the prospectus sets out the factors that were considered by the board in deciding to make the investments, and makes it clear that the investments were made after having obtained independent valuations of Vast Base which supported the consideration paid.  Details of the valuations were provided – these included the identity of the valuers (who were independent third parties), the valuation methodology adopted, the assumptions on which the valuations were based, and the information obtained by the valuers for the purposes of the valuation, which included corporate information and business contracts, from which it would appear that the valuers had access to at least Vast Base’s contracts with its customers.

31. Further, it is, I think, relevant to note that the investments in Vast Base were made on a staged basis, with the increased stakes being taken up after review of Vast Base’s performance, and that a profit guarantee, secured by the deposit of funds, was provided in respect of the second investment.  Both of these matters suggest that the approach taken to the investment was a reasonably careful one.

32. In these circumstances, there is available a substantial amount of information as to what due diligence was carried out at the time of the investigations, and such information does not, on the face of it, suggest that the due diligence and consideration given to the acquisitions fell short of the standard to be expected of the directors of the Company.

33. Mr Harry submitted that the prospectus was of no real relevance, since it was prepared some time after the investments were made.  With respect, I do not agree with this submission.  The prospectus was issued in early February 2009, while the investments in Vast Base were made in October 2007, May 2008 and November 2008.  The time lapse is not, I think, particularly significant.  But more importantly, the prospectus does not, when dealing with the investments in Vast Base, so much seek to provide a justification for the investments as at the date of the prospectus itself, but to set out, as a matter of history, the investments made by the Company, including the investments in Vast Base, the reasons for them, and the considerations and material taken into account when the investments were made. It therefore forms a record of the process by which the investments were made, and of the underlying business structure of Vast Base, and is thus highly relevant when considering whether or not there is any real basis for thinking that the directors were remiss in carrying out their due diligence in relation to the investment.  Further, the contents of the prospectus are likely to be accurate and reliable, as the prospectus itself would have had to have been examined and vetted by the Company, its legal advisers, and its corporate finance advisers before it was issued.

34. Mr Harry also submitted that there were inconsistencies between the press announcements of May and November 2008 and the prospectus, in that the former suggested that there were direct contracts between Vast Base and the end-user hospitals.  As to this, Mr Coleman acknowledged that the press announcements were not particularly well drafted – although some parts could be understood as referring to the actual business model operated by Vast Base, they were at best ambiguous as to whether or not Vast Base had direct contracts with the hospitals, and other statements did suggest that such direct contracts existed.  I would agree with Mr Harry that the press releases were inconsistent with the prospectus, but do not think that this takes him any further in establishing a case for investigation, because it seems to me that the detailed information in the prospectus, which can, I think be expected to be more accurate (not least because of its far greater detail), is what leads to the conclusion that there is not, in fact, a case for investigation here.

35. Mr Harry also commented that it was surprising that the Company had not made the points which it now makes in relation to the prospectus, and the information contained in it, when first approached by the Plaintiff with its request for inspection.  However, given that the information in the prospectus was in clear terms, and could have been expected to have been in the possession of the Plaintiff, I do not see that it was incumbent on the Company to explain the contents of the prospectus to the Plaintiff.

36. I would also accept Mr Coleman’s submission that it is not open to the Plaintiff simply to assert a concern, and then seek to suggest that the Company’s failure to respond gives substance to the concern. As I have already stated, the onus of showing a proper purpose for inspection lies throughout with the Plaintiff.

37. Mr Harry made two further points:-

(1)  He pointed out that there was no concrete evidence to show that RFID tags were in fact in use at the hospitals. However, as Mr Coleman pointed out, the key factor was Vast Base’s customers’ obligations to Vast Base, and not the obligations of the hospitals to Vast Base’s customer.  Further, Mr Ying has said in his evidence that it has not been practicable for the Company to obtain such information as its relationship with Vast Base’s customers and the end users has been adversely impacted by the negative publicity associated with the East Week article and the approaches to the hospitals made by East Week and the investigators.

(2)  He also pointed out that Vast Base did not appear to have any substantial assets.  However, as Mr Coleman submitted (and I accept), this is not particularly unusual in the case of a recent start up business, particularly in the information technology field.

38. I would also observe that although it would seem from the press releases, and the prospectus, that Vast Base’s more established business relates to the ticketing and event management uses of RFID enabled products, there is no criticism made in respect of this aspect of Vast Base’s business, and that the documentation sought in relation to underlying contracts of Vast Base and its customers are limited to those relating to the healthcare field.  This suggests that the basis of the Plaintiff’s application is to be found mainly in the East Week article, which is not, in my view, a sufficient basis for making out a case for investigation.

39. For all of these reasons, I do not think that the Plaintiff has made out a case for investigation in relation to the Vast Base acquisition.

40. I should add that in mid-April 2012, after judgment had been reserved, the Plaintiff’s solicitors wrote to the court (with a copy to the Company’s legal representatives) enclosing information as to a recent announcement by the Company that it had substantially written down and disposed of its investment in Vast Base.  However, I do not think that this material is something that should be taken into account for the purposes of this application, as the relevant question is whether or not a case for investigation has been made out in relation to the due diligence conducted by the Company when acquiring Vast Base.  The fact that the investment may, some three to four years later, be regarded as having been unsuccessful or loss making does not imply that it was an improper one to have made in the first place, or that the due diligence in respect of it at the time of the acquisition was somehow faulty or lacking in some way.

Whether there is a case for investigation in relation to the Strong Aim acquisition

41. Turning to the Strong Aim acquisition, it seems to me that the position is no better for the Plaintiff.  Contrary to Mr Harry’s submission, the announcement of 26 April 2010 did provide fairly detailed information as to the reasons for the acquisition, and the steps taken by the Company to satisfy itself as to the desirability of the investment. Information was provided as to the independent valuation which had been obtained, and as to the methodology used and assumptions adopted by the valuers.  The fact that Strong Aim had no established track record was, as Mr Coleman submitted, not surprising, given that it was initially an investment vehicle, into which the orders and contracts forming its order book were injected for the purpose of the acquisition.

42. The Plaintiff’s queries as to the patent application for the RFID mobile phone component have been answered in the Company’s evidence, where it is pointed out that Stepfull has in fact successfully obtained a form of patent protection for it.  Further the suggestion that the Company has only a 42% attributable interest in Stepfull is, I think, met by the fact that this is arrived at by way of a controlling interest in Strong Aim (of 70%) which in turn has a controlling interest in Stepfull (of 60%), so that the Company is able, through Strong Aim to control Stepfull.

43. I therefore do not think that there is any case for investigation shown in respect of the Company’s due diligence in connection with the Strong Aim investment either.

Disposition and costs

44. It follows from this that no proper purpose for inspection has been made out, and that the application falls to be dismissed. It is therefore not necessary to consider, in relation to each of the categories of documents requested, whether or not inspection of such documents should be allowed.  However, having regard to the nature of the concern expressed by the Plaintiff, I would have thought that had there been a case for investigation in relation to the due diligence conducted by the Company in respect of either or both of the Vast Base or Strong Aim acquisitions, such documentation should be limited to the relevant contractual documents in relation to the acquisitions, the valuations obtained, and the due diligence documentation.  I do not think that it would be necessary for this purpose for the Plaintiff to have sight of underlying contracts and orders, or the patent application by Stepfull if these were not documents provided to the Company as part of the due diligence process, and retained by it in its records.

45. For the reasons I have given, therefore, the application is dismissed.  So far as costs are concerned, these should follow the event, and I shall make an order nisi that the costs of these proceedings are to be paid by the Plaintiff to the Company, to be taxed on the party and party basis if not agreed.  I have considered, for the purpose of the costs order nisi,whether or not the matter should be certified as being fit for two counsel, but have come to the view that on balance it should not.