TSUI LAI LAI LILY v. GRIMSTONE LTD

HCMP 490/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 490 OF 2011

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D E C I S I O N

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1. This is an application under section 152FA of the Companies Ordinance in respect of a company called Grimstone Limited. The company is involved in the manufacture and export sale of garments. The company was formerly owned wholly by a Mr Fok, who it appears set up the company. He was assisted in running the company by a number of employees.

2. In about 1992 or thereabouts, when Mr Fok decided to emigrate to Australia, he decided to leave the running of the company in the hands of his employees.  Subsequently, in about 1996, Mr Fok decided that he would wind down his involvement with the company, reduce his interest in it, and hand it over to his three most senior employees to run. Those employees were the applicant in this case, Miss Lily Tsui, and two other employees, one of whom was Mr Ngan Tak‑shing.  Mr Fok transferred 30 per cent of the shareholding of the company to each of the three employees in question, retaining 10 per cent for himself. 

3. Mr Fok has now passed away.

4. Following the transfer of shares, the company continued its operations for a period of time.  However, in about 2004/2005, the applicant decided to leave the company.  She resigned from her position, which was involved with merchandising, left and eventually, it seems, set up her own company conducting a similar business.  It is said by the applicant that the company that she has set up is on a fairly small scale, but I do not think that anything really turns on that.

5. Following the applicant’s departure from the company as an employee, she continued to remain a shareholder of the company.  However, from the time of her departure until quite recently, it appears that the company did not hold any annual general meetings and did not provide her with annual financial statements or financial statements that she would have been entitled to receive as a member of the company prior to the holding of the annual general meetings which should have been held.

6. Some years ago the applicant decided that it was not really in her interest to remain a shareholder of the company, and proposed that she should sell her shareholding in the company to Mr Fok and the two other shareholders.  At that time nothing seems to have come of that proposal.

7. It now appears that the other two main shareholders have come round to the view that perhaps they should buy out the applicant’s interest in the company.  However, the question of whether or not they should actually do so, and if so, the price at which a buyout should be effected is not something on which the parties have been able to agree.

8. The applicant has brought this application for the express purpose of ascertaining the value of her shares in the company so that she can advance her position in relation to the buyout by ascribing a value to her shares which she can propose to the other side in the hope that it may be possible to agree a price at which she can be bought out.

9. Initially she was met with a refusal to provide any documentation at all.  However, following some correspondence, the company supplied her with audited accounts which had been prepared (but which had not been laid before the members at annual general meetings as required by the provisions of the Companies Ordinance) for the financial year ending 31 March 2004 to the financial year ending 31 March 2009.  These documents were supplied to the applicant in about July 2010.

10. Thereafter, audited accounts covering the period ending 31 March 2010 were prepared and were supplied to the applicant in about April 2011.  Shortly before that happened, the applicant took out these proceedings.  By her originating summons she seeks inspection of a substantial range of the company’s documents and records.  The documents in question are:-

(1)  a true copy of the audited accounts for the financial year ending 31 March 2010, which has now been supplied;

(2)  copies of all notices and minutes of annual general meetings since the incorporation of the respondent - however, it having been indicated in the evidence that no such annual general meetings had in fact been held, this item is no longer pursued;

(3)  copies of notices and minutes of directors’ meetings of the respondent since its incorporation - in relation to this item, the evidence on affidavit from Mr Ngan (which is accepted by the applicant) is that because of the rather informal way in which the company was run, there were in fact no formal directors’ meetings and no minutes, and there were certainly no notices of such meetings or minutes thereof, and this item, too, is therefore no longer pursued; and

(4)  copies of all management accounts, ledgers, journals, vouchers, statements and other accounting records of the respondent since its incorporation (to be provided within seven days from the date of the order that might be made).

11. There have recently been two Hong Kong cases in which section 152FA has been considered.  These are Re Lehmann Brown and Wong Kar Gee Mimi v Hung Kin Sang Raymond.  Although the two cases suggest that there may be a difference of view as to the approach that the court is to take in relation to applications under section 152FA (in that in Lehmann Brown Deputy Judge Coleman indicated that successful applications under section 152FA would be expected to be the exception rather than the norm, whereas Mr Justice Harris in Wong v Hung indicated that the section was, generally speaking, a beneficial one and should be given a reasonably liberal interpretation so as to enhance a shareholder’s ability to obtain information for which he had a need in relation to the company in which he was a shareholder), it does not seem to me that this difference in approach is one that makes a difference to the outcome of this application.

12. The stated reason for the applicant’s application is that she wishes to have information that would enable her to assess the value of her shareholding in the company with a view to seeking to agree a sale of her shareholding to the other two major shareholders.  I would accept that in principle that is a proper purpose for a shareholder to seek financial information as to the company of which he or she is a shareholder.  I would also accept that as long as it is shown that the shareholder has a genuine intention to pursue an attempt to dispose of his or her shares, that the application to seek information would be brought bona fide.

13. I think in that sense, therefore, the threshold criterion has been met.  It may be open for discussion as to whether the threshold criterion has to be met in respect of every single item of information sought or whether it is possible to say that the threshold having been met, the court should consider whether or not, in the exercise of its discretion, it should allow inspection of the specific documents sought.

14. That is a matter on which I do not propose to express a concluded view today, again because it seems to me that the outcome of the application would be the same whichever way that question was answered.

15. In the present case, Mr Leung, who appears for the respondent, has submitted that none of the documentation that had been asked for should be supplied under section 152FA because there has already been supplied to the applicant the audited accounts insofar as they exist up to the latest set covering the period up to 31 December 2010. Mr Leung suggests that that information should be sufficient to enable the applicant to make an assessment of the value of her shareholding sufficient for the purpose of starting negotiations in relation to a possible sale of her shareholding to the other two major shareholders.

16. Mr Leung suggests that in this case, there being no suggestion by the applicant that there is any reason to doubt the accuracy or the correctness of the audited accounts, that is all that the applicant should be entitled to see, and having already had the audited accounts, there is no further document that the applicant can make out a case in respect of which there is a proper purpose for her to have access to the documents sought.

17. Miss Lan, who appears for the applicant, submitted that it was necessary for the applicant, in order to come to a view as to the value of her shareholding, to have access to all of the underlying accounting records as sought by paragraph 1(d) of the originating summons.  She pointed out that the applicant had not had any involvement in the company and had not been supplied with the audited accounts or asked to attend any annual general meetings at all over the course of the last several years.  She said that in those circumstances, the applicant has not been able to exercise the right which she would have had to raise questions as to the accounts at the annual general meetings, and in those circumstances she should be entitled to look at all the underlying documentation in respect of the company’s financial affairs.

18. I am afraid that I cannot agree with that submission.  The applicant has in fact had audited accounts for the period up to and including 31 March 2009 for nearly some 18 months.  She has also had the audited accounts for the period ending 31 March 2010 since April this year, a period of some seven or eight months.  At no time, and in none of her evidence for the purpose of these proceedings, has the applicant suggested that there is any reason to doubt the accuracy of the audited accounts; nor has there been any reason suggested as to there being any cause for doubt as to the process by which the accounts were audited.

19. That being the case, it seems to me that the audited accounts must be taken as providing a true and fair view of the company’s financial situation as at the date of each of the respective sets of accounts.  Absent any reason for supposing that there is some problem with the audited accounts (and if that were to be suggested, it would be something that would have to be supported by evidence and by pointing out the respects in which it was considered that the audited accounts were insufficient), it seems to me that the court should proceed on the basis that the audited accounts are accurate for present purposes, and on that basis it seems to me that the audited accounts, showing as they do the financial position of the company from year to year, should be sufficient for the applicant to be able to make an assessment of the value of her shareholding in the company subject only to one matter, which relates to the position after the date of the latest set of audited accounts.

20. Although the applicant suggested that the information could be made available to an independent third party to express an opinion as to the value of the shares, it seems to me that on the evidence that is currently before me, there is no reason to suppose that the audited accounts will not be sufficient to form the basis of a valuation of the company.

21. The applicant has in her evidence put forward an expression of a view by accountants whom she has approached for the purpose of valuing the company to the effect that the audited accounts are insufficient for this purpose.  However, that opinion states simply that they require to have access to all of the documents which are indicated in paragraph 1(d) of the originating summons without any explanation as to the reason why this is so.  Thus, for example, although reference is made to a market valuation approach for the purpose of valuing the company, no explanation is given as to what that approach involves, what material it would be necessary to look at for the purpose of preparing a valuation on that basis, and in particular why any particular items of the documents that are sought would be required for that purpose.

22. So far as I am aware, when it is necessary to assess the value of a company for the purpose of ascribing a value to shareholdings in it, usually in the context of proceedings in which one set of shareholders is being asked to buy out another, valuers generally use one of two approaches.  They either use an income-based approach or an asset‑based approach.  The latter involves looking at the value of the assets of the company, netting off its liabilities and assessing the company by reference to the value of its net assets.

23. That may not always be the appropriate basis for valuation, because there are companies in which the value in the company lies less in the value of its physical assets or assets of any form as its ability to generate income.  In that situation, it may be more appropriate to adopt an income‑based approach.  Usually what is done in those situations is to base the valuation on a multiple of a certain number of years’ income of the company as representing the value of the company to its shareholders.

24. But whichever approach is adopted, it seems to me that in general, the audited accounts will provide adequate information from which a valuation can be derived.  It does not seem to me that it would be necessary to have regard to all the underlying documents of the company. Although more extensive disclosure is often ordered in the context of a court-ordered buyout, it should be borne in mind that in those situations there are often allegations of wrongdoing and impropriety which will be made (with some specificity) which will have been investigated in the course of proceedings and which may mean that it is both necessary and appropriate for the court to order a valuation that takes into account the various complaints that have been made, to the extent that they have been found to be established, and for that purpose it may be necessary to go considerably beyond the audited financial statements in relation to the company concerned.

25. This is not such a case.  There is no suggestion of any impropriety or wrongdoing in relation to the running of the company under the stewardship of the other two shareholders, although Miss Lan does make the point that her client knows little about the internal workings of the company and has had little information as to the company’s affairs other than the accounts which were rather belatedly provided to her.

26. It does seem to me that having had those accounts now for some considerable period of time, and no question having been raised save as to one matter which was raised very late in the course of Miss Lan’s submissions as to the possible effect of a failure to consolidate the financial statements of a subsidiary of the company with those of the company, a point which I think was raised far too late for it to be relied on by the applicant, there having been no explanation as to why it was not raised at a much earlier stage when it was a point which was apparently available and discernible from the accounts which had been provided, there is nothing to suggest that there is any problem with the audited accounts at all.

27. In those circumstances, it does seem to me that it should be said that the application in this case, insofar as it relates to documents other than the audited accounts and other than the management accounts for the period from 1 April 2010 onwards, is not an application that is made for a proper purpose.  Alternatively, if it is nonetheless an application that is, in principle, made for a proper purpose, it seems to me that in the exercise of discretion it would be quite inappropriate for the court to order the disclosure of a wide range of the company’s financial information for which no proper basis has been made out in the context of the stated purpose for which the information is required.

28. In other words, given that the purpose which has been put forward by the applicant for which she wishes to obtain information is that of obtaining a valuation of the company, it seems to me that in the absence of any evidence on her side as to the reasons why documentation which is not self‑evidently necessary for that purpose should be disclosed to her, the court should hold that such documentation is not needed for any proper purpose, or alternatively, as I have said, is not sufficiently necessary to justify an order being made in the court’s discretion.

29. Miss Lan did refer me to a number of Australian authorities in which the courts appear to have granted access to all the financial records of the company for the purpose of valuing the company concerned, under the Australian equivalent of our section 152FA.

30. However, I have to say that I do not find those authorities to be of great assistance since in one case it was apparent that the shareholder seeking information had not been provided with any information (not even the audited accounts) and in the other case, it was not clear whether the audited accounts had been prepared or provided.

31. It seems to me in any event that it is necessary to consider whether each of the categories of documents that are sought are documents that are properly needed for the purpose which is identified, and in this case, for the reasons which I have endeavoured to give, it does not seem to me that in the absence of any challenge to the accuracy or propriety of the audited accounts that any basis has been shown for suggesting that there is a need to see the other documentation for the periods up to and including 31 March 2010.

32. However, it seems to me that the position is different after that date in that there are no audited accounts to cover any time after 31 March 2010. I am of the view that in order to arrive at a valuation of the company, that being the purpose for which inspection is sought, the valuation should be one that should be carried out as at the present.  In order to arrive at a valuation of the company as at now, it seems to me that it is clearly necessary for whoever is going to do the valuation to have access to the management accounts of the company during the period after date as at which the last set of audited accounts were prepared.

33. On the basis that the management accounts are likely to contain information as to the income, expenditure and assets and liabilities of the company, probably on a monthly basis from month to month from the date of the last set of audited accounts, it seems to me that those accounts should provide sufficient information for a valuation of the company to be arrived at.

34. So far as other underlying accounting documents such as ledgers, journals, vouchers, statements and other accounting records are concerned, it does not seem to me that those are documents that would need to be inspected for the purpose of ascertaining the financial position of the company even after 1 April 2010, and I do not think that any good or adequate case has been made for allowing inspection of those documents to take place.

35. In those circumstances, I propose to order on this application that the applicant be allowed to inspect the management accounts of the company covering the period from 1 April 2010 to the present.

36. One last matter that needs to be considered is whether or not that inspection should be provided to the applicant herself or to professional accountants appointed by her for that purpose.  In this context, the company has submitted that it would be detrimental to its interest for information to be provided to the applicant directly since she is or was interested in a competing business in which, even if she is no longer a shareholder and director, it appears that her husband is a shareholder and director.

37. The applicant has indicated that she would be content for any documentation, inspection of which is ordered, to be provided to her nominated accountants and not to herself in order to avoid any question arising as to the use to which such information has or may be put. Given her acceptance of such a restriction, it seems to me that it would be appropriate to order that the documents that I have indicated should be made available for inspection by the accountants appointed by her for the purpose of providing a valuation of the company to her and that they should not be disclosed to the applicant herself unless there is some good reason for doing so, and for that purpose, I will provide in the order for liberty to apply for that purpose and the parties can come back if there thought to be a need for the material to be shown to the applicant but this is not agreed to by the company.

38. However, I would say that if, as I expect, the information that is contained in the management accounts does not disclose any information that could be said to be confidential or that could be said to be potentially detrimental if released, I would think that it would be in order for the applicant to see that material.

39. So in the event, I shall make an order that the company is to allow inspection of management accounts of the company from 1 April 2010 up to today insofar as they are available to the accountants nominated by the applicant for the purpose of such inspection, but that such accountants should not disclose such material to the applicant without the consent of the company or the leave of the court.

40. I suppose I should add that one matter that Miss Lan did press was the suggestion that to make a limited order or no order would not be consistent with the approach that the courts are enjoined to adopt following the implementation of Civil Justice Reform in that she suggests that it would not lead to the expeditious and economical disposition of the dispute between the parties.

41. With respect, it seems to me that at this stage, the only dispute between the parties is as to the extent of any inspection that should be ordered.  Although it may be the applicant’s earnest hope that the results of her proposing a figure for valuation of the company by reference to a valuation placed on the company by independent accountants might lead to the resolution of any possible future dispute between herself and her co‑shareholders in that it may obviate the need for her to bring proceedings under section 168A to have her shares bought out by the other shareholders, it seems to me that it is far too early at this stage to say whether any such objective could be achieved.  The fact is that at this stage the parties are at a very preliminary stage in their negotiations, although they have been going on and off apparently for some time.

42. At this stage, there is no concrete offer on the table one way or another, and there is no indication as to whether or not the other shareholders would be prepared to buy out the applicant at a valuation arrived at by an apparently independent accountant, and, as Mr Leung pointed out, there may be a number of reasons why the other shareholders might decline to accept such a valuation.  First, they would not have agreed to do so; second, they may disagree with the valuation that is eventually arrived at; third, they may simply consider that they are under no obligation to acquire her shares and may decide that whatever their views as to the valuation, they do not wish to do so or are unable to do so.

43. If that situation were to arise, it would then be necessary for the applicant to take out proceedings under section 168A if it was thought that she had a case for obtaining a buyout order as against the other shareholders.

44. I do not see that the making of a wider order would somehow obviate all of those possibilities arising and would somehow result in the expeditious resolution of the situation in a way that would have a result that would be acceptable to the applicant.

45. In those circumstances, I do not think that this point really advances matters any further or should cause me to come to any different view than the view to which I have come.

(Submissions on costs)

46. Although I have some sympathy for the company’s point of view, it does seem to me that I have made an order that the application should have a certain amount of information which the company was not otherwise prepared to give her, and I think also it is fair to say that as far as the application itself is concerned, although items A, B and C in paragraph 1 of the originating summons were not pursued today, the reason for their non‑pursuit, as it were, was because of information that was forthcoming after the application was taken out.

47. All things considered, if one looks at the application as a whole, I do not think it can be said that the application has failed to such an extent that she should be regarded as being the overall loser.

48. In all of the circumstances, I think that no order as to costs would be the appropriate order to make.