LI GUOZHU v. NEW CENTURY IATRICAL INV. MANAGEMENT LTD AND OTHERS

CACV 174/2018

[2021] HKCA 651

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 174 OF 2018

(ON APPEAL FROM HCMP NO 3353 OF 2014)

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J U D G M E N T

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Hon Kwan VP (giving the Judgment of the Court):

1.   This is an application for leave to appeal to the Court of Final Appeal against our judgment on 15 June 2020 (“CA Judgment”; [2020] 3 HKLRD 464) regarding the directions made by G Lam J on 26 April 2018 in a buy-out order (“Judgment”) for a petition brought pursuant to sections 724 and 725 of the Companies Ordinance, Cap 622 for unfairly prejudicial conduct. We dismissed the petitioner’s appeal and upheld the judge’s directions.

2.  The directions sought to be impugned by the petitioner concerned the basis of the valuation of the shares of the company and the date of valuation of the shares.

The notice of motion

3.  In the notice of motion filed by the petitioner on 13 July 2020 for leave to appeal, these two questions are formulated as questions of great general or public importance:

(1)  “What is the proper approach to the exercise of discretion in relation to the valuation of shares?  In particular, where the Court has found that the unfairly prejudicial conduct consisted of, inter alia, the respondents’ having breached the petitioner’s pre-emption rights under a shareholders’ agreement, whether the valuation should, prima facie, be made on the basis of giving effect to such pre-emption rights as if the unfairly prejudicial conduct had not occurred (“Question 1”)”;

(2)  “What is the proper approach to the exercise of discretion in relation to the date of valuation of shares?  In particular, in a “purchase order” situation, whether it is correct to adopt as a starting point that ‘an interest in a going concern ought to be valued at the date on which it is ordered to be purchased’, or indeed to adopt any starting point at all, when the wrongdoer‑respondents were found after trial to have unjustifiably resisted the petitioner’s claim to buy out their shares (“Question 2”)”.

4.  On Question 1, the petitioner’s position is that where the unfairly prejudicial conduct involves a breach of the petitioner’s pre‑emption rights, fairness requires the valuation to be conducted on the basis of giving effect to such pre-emption rights as if the said conduct had not occurred, so as to “put right” the wrong that had been done to the petitioner.  This was rejected in the Judgment at §129 and in the CA Judgment at §§33 to 41.

5.  As for Question 2, the petitioner’s position is that the court erred in adopting as a starting point that “prima facie, an interest in a going concern ought to be valued at the date on which it is ordered to be purchased” in a “purchase order” situation where the delinquent respondents were found to have “unjustifiably resisted” the petitioner’s claim to buy out their shares.  The valuation date should not be the date of the judgment (26 April 2018) but should be the date of exclusion of the petitioner from the management of the company (26 August 2009), alternatively the date of the presentation of the petition (30 December 2014).  This contention was rejected in the Judgment at §§130 to 132 and in the CA Judgment at §§42 to 52.

6.  The petitioner also seeks leave to appeal on the ‘or otherwise’ limb contending that the Court of Final Appeal should intervene because he has suffered serious injustice due to the error made by the Court of Appeal and because it is desirable for the Court of Final Appeal to give guidance on the proper approach to the basis of valuation of shares and the valuation date.

Questions 1 and 2

7.  We are not persuaded leave to appeal should be given for Questions 1 and 2.

8.  These questions do not appear to us to raise questions of law or principle.  They do not raise any question of great general or public importance.  They are application of well-established principles to the fact situation of the present case. As rightly submitted by Mr Shieh, SC for the respondents, which of the various approaches to the valuation of a shareholding should be adopted depends on all the circumstances and is to be determined by what fairness in a particular case requires.  Further, matters of discretion are inherently not susceptible to immutable rules, that apply to the basis of valuation as well as to the date of valuation.  The court is at liberty to take into account other factors apart from those urged by the petitioner in the exercise of its discretion in the valuation of shares to arrive at a decision which reflects the demand of the overall fairness of the case. The cases relied on by the petitioner^[1] are fact specific.

9.  We are also not persuaded that the positions taken by Mr Ho, SC for the petitioner on these questions are reasonably arguable.

10.  In this instance, the remedies prescribed in section 725(2) of Cap 622 is to redress the situation of the petitioner having been excluded from the management of the company, not merely for breach of the petitioner’s pre-emption rights. A sale in breach of pre-emption rights under a shareholders’ agreement is not, by itself, unfairly prejudicial conduct under section 724(1) as this is not conduct in the company’s own affairs.  There is no immutable rule or principle that in the present fact situation, the court should “put right” the wrong by giving effect to the petitioner’s pre-emption rights as the basis of valuation.  The breach of pre-emption rights was considered by the judge and on appeal but the courts did not regard this as a matter of such importance that would override all other considerations in the exercise of the discretion in choosing an appropriate basis for valuation to do what is fair and equitable to both parties in all the circumstances.

11.  As for the date of valuation, Profinance Trust SA v Gladstone [2002] 1 BCLC 211 at §60 is authority for the proposition that the starting point, prima facie, is that an interest in a going concern ought to be valued at the date on which it is ordered to be purchased, subject to the overriding requirement that the valuation should be fair on the facts of the particular case.  The judge had taken into account all relevant matters and given valid reasons for declining to choose an earlier date as the valuation date. Applying well-established principles for an appeal against the exercise of discretion, there is no basis to interfere with his exercise of discretion. 

‘Or otherwise’ limb

12.  The matters set out in the notice of motion are merely an attempt to argue again the merits of the case and do not amount to “exceptional circumstances” for the exercise of discretion under the ‘or otherwise’ limb.

13.  Further, it is the practice of the Court of Appeal to defer to the Appeal Committee of the Court of Final Appeal as to whether leave to appeal should be granted on the ‘or otherwise’ limb.

Conclusion and costs

14.  For the above reasons, we decline to give leave to appeal to the Court of Final Appeal.

15.  We order the petitioner to pay the respondents’ costs of this application, with a certificate for two counsel.

16.  Having considered the respondents’ statement of costs for summary assessment, we assess the reasonable costs at $774,275.