RE PRUDENTIAL ENTERPRISES LTD.

FAMV No. 4 of 2002

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

MISCELLANEOUS PROCEEDINGS NO. 4 OF 2002 (CIVIL)

(ON APPLICATION FOR LEAVE TO APPEAL FROM
CACV NO. 865 OF 2001)

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D E T E R M I N A T I O N

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Mr Justice Ribeiro PJ:

1. Mr Samuel Tak Lee is the 1st respondent to a petition issued by fellow shareholders in The Prudential Enterprises, Limited seeking relief under section 168A of the Companies Ordinance (Cap. 32) and alternatively an order that the company be wound up on the just and equitable ground.

2. Numerous complaints are made by the Petitioners in support of their allegation that the affairs of the company, under the control of the 1st respondent, have been conducted in a manner unfairly prejudicial to their interests as minority shareholders.

3. Two of these complaints concern first, a rights issue in October 1998 alleged to have enabled the 1st respondent, his family and nominee company to establish control of the company by acquiring the new shares at what is said to have been a very substantial undervalue; and secondly, misappropriation of the company's assets and their transfer to a Guernsey company called Interstitial Holdings Limited, allegedly engineered by, among others, the 1st respondent in breach of fiduciary duty for the benefit of himself and his family. It is contended that the proceeds were partly used to fund the rights issue acquisition.

4. These complaints obviously have an important bearing on the present value of the company's shares and on the principal relief sought, that is, an order that the 1st respondent and his family should purchase the Petitioners' shares in the company at a valuation to be determined, on bases which acknowledge and take into account the alleged wrongfulness of the conduct involved in the rights issue and Interstitial transactions.

5. In March 2001, the 1st respondent issued an open offer (in a revised form after earlier offers) to purchase the Petitioners' shares. It was not accepted. This led to an application by the 1st respondent for the petition to be struck out or stayed as an abuse of the court's process. It was and is now contended that the offer provides the Petitioners with everything that they might reasonably expect to obtain if successful at trial.

6. The details of the offer are set out in the judgment of Madam Justice Chu ([2001] 2 HKC 686).

(a) It proceeds on the basis that the company materially has five assets: three landed properties and two choses in action comprising claims which are asserted in a derivative action (HCA 1240 of 2001) commenced by the minority in respect of the Interstitial transaction and the rights issue.

(b) The offer proposes a valuation of the landed properties by an independent valuer acting as an expert and determining for himself the method of valuation.

(c) In relation to the rights issue dispute, it proposes that the valuation proceed as if the new shares had not been issued. However, since the company had (controversially) received $257.8 million, it allows the valuer to take account of the company's liability to the 1st respondent for that sum "as the valuer considers appropriate".

(d) The valuer is not to concern himself with the Interstitial transaction until after that claim has been determined by the court. If wrongdoing is established, the initial valuation is to be adjusted accordingly.

7. Madam Justice Chu took the relevant test for summary disposal of the petition to be whether it was plain and obvious that the offer gives to the Petitioners all the relief they could realistically expect to obtain on the petition, making its rejection unreasonable and their persistence in the proceedings an abuse of process.

8. In assessing the reasonableness of the offer, her Ladyship adopted the guidance offered by Lord Hoffmann in O'Neill v Phillips [1999] 1 WLR 1092 at 1107-1108. She concluded for a variety of reasons that the offer did not pass the test. Two examples of the Petitioners' objections to the offer which were held to be reasonable may be given :-

(a) First, their objection to leaving to the valuer (as opposed to the court) the question whether the $257.8 million sum paid for the rights issue shares should be taken into account as a potential liability of the company to the 1st respondent in valuing its shares, particularly where the valuer is not to give reasons for his valuation either before or after determination of the writ action. As has been indicated, the source of those funds, in particular whether they were part of the assets misappropriated from the company, is controversial.

(b) Secondly, the criticism that the offer does not assure equality of arms. The Petitioners are not being offered free access to the company's books and records and so are likely to find it difficult to make effective representations to the valuer. This is a concern which the Petitioners emphasise, in the light of complaints made in the petition alleging wrongful suppression and denial of information by the 1st respondent.

9. Noting that even if the offer was accepted and implemented, the parties would still be faced with complex and costly litigation, Madam Justice Chu, exercising her discretion, refused to strike out or stay the petition. Her decision was upheld on like grounds by the Court of Appeal ([2002] 1 HKLRD 267). Leave to appeal to the Court of Final Appeal was refused by the Court of Appeal.

10. The 1st respondent now seeks leave to appeal on the ground that the case raises questions of great general or public importance, which have been formulated as follows :-

"1. Whether:

a. the appropriate test to be applied by the Court on an application to stay or strike out proceedings as an abuse of the process of the Court is the 'plain and obvious test', or some other test, and if so, what test; and

b. the basis upon which it is said that the proceedings are an abuse of the process of the Court is relevant in determining the test to be applied; ('The Test to be Applied');

2. Whether:

a. the Court should stay or strike out as an abuse of the process of the Court proceedings in which the Defendant/Respondent has offered to the Plaintiff/Petitioner all that he could realistically expect to achieve/obtain in the proceedings; or

b. the Court will only stay or strike out as an abuse of the process of the Court proceedings in which the Defendant/Respondent has offered to the Plaintiff/Petitioner all that he is asking for in his proceedings; ('The Entitlement Point');

3. What are the indicia of a reasonable offer made by a Respondent to purchase the shares of a Petitioner in proceedings seeking relief under Section 177 and/or Section 168A of the Companies Ordinance, Cap 32 which will have the effect of removing or remedying any unfairness in the conduct of a Respondent which is alleged to exist ('The Reasonable Offer Point');

4. The approach of the Court to an offer made in such proceedings by a Respondent to purchase the shares of a Petitioner ('The Case Management Point')."

11. The principles applicable where open offers for the sale or purchase of shares are made in the context of minority shareholder proceedings have been well-litigated in England and Wales and are commonly applied within this jurisdiction. Many of the relevant authorities are referred to in the judgments below and were adverted to by Mr Michael Todd QC in his submissions. We are, however, with respect, unable to accept that any material concern exists in commercial circles, in Hong Kong at least, as to lack of certainty in this area. Clearly, if the court is persuaded that the respondent's offer plainly and obviously delivers to the petitioner all the relief that he could reasonably expect to obtain if he were to succeed at trial, the proceedings should be stayed, avoiding unnecessary costs and expenditure of judicial resources. However, such a course can only be followed if the court is satisfied that it is able to dispose of the proceedings summarily without injustice to the petitioner. This appears to us to be the approach adopted by Lord Hoffmann in O'Neill v Phillips at p.1107.

12. The present offer cannot and does not simply propose sale of the Petitioners' shares at a valuation. It suggests an immediate, but partial, valuation to be followed by complex court proceedings and potentially a subsequent adjustment to the original valuation. This convoluted course is proposed because issues involving allegations of misfeasance by the 1st respondent having a direct bearing on present share values remain outstanding for judicial determination.

13. As has been noted, the principles affecting such open offers and the summary disposal of proceedings are well-known. In the present case, the questions raised concern the proper application of those principles and not their existence or content. We are not persuaded that any of the issues identified by the 1st respondent raise questions of great general or public importance.

14. Furthermore, in common with the courts below and for the reasons they have given ( particularly the two reasons previously identified ( we are not satisfied that the offer obviously provides all that the Petitioners could reasonably expect to achieve at trial.

15. Leave to appeal is therefore refused.