LAM KWOK KAI v. ORIENT VENTURE INVESTMENT LTD AND ANOTHER

HCCW 419/2019

[2021] HKCFI 1183

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO 419 OF 2019

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D E C I S I O N

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1.  On 31 December 2019 the Petitioner issued a petition seeking: (1) an order that the Company (the “1^st Respondent”) be wound up; (2) in the alternative, that the 2^nd Respondent be ordered to purchase the Petitioner’s shares in the Company. The Petition had the virtue of brevity. It only had twenty-one paragraphs and including the prayer for relief was three pages long. However, it was clearly demurrable because it failed to plead facts of matters capable of supporting the relief sought.

2.  In short, the complaint was that the Petitioner, who owns 15.8% of the Company’s shares, but was not a director, had his employment terminated on 6 November 2019 and the resulting exclusion from a role in a management of the Company was unfairly prejudicial.  It is well-established that lawful acts by a company which viewed from the perspective of a shareholder who has been impacted by them in a way to which the shareholder objects, is not entitled to have his or her shares purchased or the Company wound up in order to realise the value of the shareholding.

3.  The authorities demonstrate that the complaining shareholder needs to demonstrate some basis on which it can properly be said that the acts complained of engage the jurisdiction of the court to order relief pursuant to section 724 of the Companies Ordinance (Cap 622) or section 177(1)(f) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32).  This flaw having been brought to the Petitioner’s attention, the Petitioner sought to cure the problem by first, issuing a summons on 25 May 2020 seeking leave to amend the petition, then a second summons seeking leave to file and serve an amended petition within seven days.  That summons was issued on 2 June 2020.  And then finally, a new summons dated 20 January 2021 seeking leave to amend the petition in a different form.  The story did not end there, because yesterday a letter was sent to the court by the Petitioner’s solicitors attaching a new draft amended petition which added [22] to the version appended to the most recent of the earlier summonses.

4.  The first two summonses I have given leave to be withdrawn.  The costs of those summonses such as they may be, will be paid by the Petitioner to the Respondents forthwith.  The 2^nd Respondent issued a strike-out summons on 8 July 2020.  The grounds for doing so is that in the draft amended form then available to the 2^nd Respondent, the 2^nd Respondent took the position that the petition remained demurrable.  This is the position the 2^nd Respondent maintained before me today after the further attempts by the Petitioner’s legal team to cure its complaints.  I shall, determine the strike-out application on the basis of the amended petition as sent to the court yesterday.

5.  In broad terms, the 2^nd Respondent says: (1) the draft amended petition is demurrable because it still fails to plead facts and matters, capable of supporting the relief sought; (2) even if I disagree with that argument, the relief that the Company be wound up should be struck-out as there is no realistic prospect of the court making such an order because the 2^nd Respondent would comply with any order to buy the Petitioner’s shares.  I deal with each of these arguments in term.

6.  As even in the amended version the material parts of the petition are short, it is convenient simply to quote them rather than paraphrase them.

“4A. The Company is associated with the Johanson group of companies (‘the Johanson Group’) consisting of, inter alia, Johanson Venture Inc. (‘JVI’), Johanson Dielectrics Inc. (‘JDI’), Johanson Technology Inc. (‘JTI’) and Johanson (Hong Kong) Limited (‘JHK’). To the best of the Petitioner’s knowledge, the Johanson Group is ultimately owned by members of the Johanson family, consisting of, inter alia, Kurt William Johanson, John Eric Johanson, Lauren Kristin Johanson and Neil Lars Johanson, JDI and JTI are manufacturers of electronic components, such as multi-layer ceramic capacitors or surface mounted capacitors (‘MLCCs’).

4B. In or in about 1995, the Company was incorporated for the purpose of forming a joint venture with 广东风华高新科技股份有限公司 (‘Feng Hua China’) (previously a manufacturer and supplier of MLCCs and thus a competitor to the Johanson Group) and to establish and run the Johanson Group business of trading MLCCs in Asia (in particular Hong Kong and the Mainland), together with a certain Mr. James Wong.

4C. The Company was initially owned by the 2^nd Respondent (8,000 shares) and James Wong through Yukon Company Limited (1,000 shares) and James Wong was appointed a director of the Company on or about 20 February 1997. To the best of the Petitioner’s knowledge, at all material times, the 2^nd Respondent is and was owned by members of the Johanson family and the Johanson Hong Kong Family Trust, and Kurt William Johnason has been a director of the 2^nd Respondent at all material times and the trustee of the Johanson Hong Kong Family Trust since June 2018. It is averred that the Company was formed as a quasi-partnership between the 2^nd Respondent and James Wong to hold and manage the joint venture with Feng Hua China and to establish and run the Johanson Group business of selling electronic components in Asia.

4D. The Company’s joint venture with Feng Hua China was set up through the establishment of 肇庆科华电子科技有限公司 (‘Forward China’) to manufacture and produce MLCC. Both Feng Hua and Forward China operated factories in the Mainland which manufactured and produced MLCCs, which were in turn supplied to the Company to sell and distribute.

4E. In or in about May 1997, JHK was incorporated under JDI and subsequently transferred to be wholly owned by JVI. It was established also to run the Johanson Group business of trading MLCCs in Asia as more particularly explained and distinguished from the Company’s role in the following paragraphs. At all material times until about December 2019, the Petitioner was a director of JHK and the legal representatives of JHK’s wholly owned subsidiaries in Shenzhen and Taiwan, but was never a shareholder of JHK.

5. The Company is, was and at all material times responsible for the sale of MLCCs, supplied by Feng Hua China and Forward China as well as JDI and JTI (through JHK) to distributorship channels and trading agents in Asia. Up until around October 2018, the Company also sold MLCCs supplied by Feng Hua China and Forward China to JHK at cost and was also responsible for the management and provision of staff and services to JHK. On the other hand, JHK was responsible for sale of MLCCs supplied to it by the Company, JDI and JTI to direct customers in Asia and, until recently, paid management fees to the Company for the management services and provision of staff, rental, general expenses and services by the Company.

5A. In or about 1997, the Petitioner was employed as a regional sales manager of the Company.

6. In or about 2006, the Petitioner was promoted to President of the Company and was responsible for the management and operation of the Company, including overlooking regional business of the Company, choosing and managing suppliers and customers of the Company, hiring and managing personnel of the Company (e.g. salespersons and bookkeepers of the Company and setting their salaries), controlling and finances of the Company (the Petitioner was one of the bank signatories of the Company and was responsible for issuing cheques for the Company).

7. In 2008, as James Wong had been discovered to be acting against the interest of the Company and/or the Johanson Group by purchasing MLCCs from competitors, Norman Eric Johanson (as director and ultimate controller of the Company at the time) invited the Petitioner to replace James Wong/Yukon Company Limited, and the Petitioner was allotted 1,500 shares in the Company and the 1,000 shares held by Yukon Company Limited was repurchased by the Company on 24 December 2008 calculated based on the net asset value of the Company. It is averred that the allotment of 1,500 shares in the Company to the Petitioner was a reward for the many years of work, management and oversight of the Company by granting a stake in the Company to the Petitioner and to incentivize the Petitioner to help the business growth of the Company.

8. Although the Petitioner was never made a director of the Company, the Petitioner as President of the Company was responsible for and had the power to manage and operate the Company and was a de facto director of the Company at the material times. Further, although the Company never declared dividends or distributed profits to the 2^nd Respondent or the Petitioner as such, the Petitioner’s remuneration went from being fixed by Eric John Johanson when the Petitioner was a regional sales manager of the Company to being set by himself when the Petitioner became President of the Company (in full knowledge of and with the consent of the 2^nd Respondent). In particular, it is averred that the Petitioner’s remuneration was increased when the Petitioner was allotted shares in the Company and when the Company enjoyed higher or increased levels of profit.

8A.     For the reasons above, it is averred that the Company became a quasi-partnership between the 2^nd Respondent and the Petitioner since 2008, and/or the Petitioner had a legitimate expectation to be involved in the management of the Company and to share in the profits of the Company.”

7.  There is no suggestion in the present case that the Company acted unlawfully when it terminated the Petitioner’s employment, more generally there is no allegation that the 2^nd Respondent procured the 1^st Respondent to breach the articles of association or any provision of the Companies Ordinance when it decided to terminate his employment.

8.  As I have already mentioned a shareholder does not have any automatic right to have their shares acquired by other shareholders or a company when they are excluded from involvement with its management.  There must be some basis for asserting that the court should intervene pursuant to either the unfair prejudice provisions in the Companies Ordinance or by granting a winding up pursuant to the Companies (Winding Up and Miscellaneous Provisions) Ordinance.

9.  I summarised the legal position in my decision in [15], [16] and [26] of China Sonangol International Limited [1].

“15. Mr Joffe’s argument (adopted by Mr Ho on behalf of the 2^nd Respondent) can be summarised as follows. There are two grounds on which unfairly prejudicial conduct may be constituted in the context of section 724 of the Companies Ordinance, Cap 622. The first is where there has been a breach of the terms on which it has been agreed the affairs of a company should be conducted, such as a breach of the articles or a shareholders’ agreement. Secondly, where equitable considerations arising at the time of the commencement of the relationship, or subsequently, make it unfair for those conducting the affairs of a company to rely on their strict legal rights: using the rules in a manner which equity regards as contrary to good faith[2].

16. The type of circumstances in which equitable considerations can arise are explained by Lord Wilberforce in his well-known judgment in Ebrahimi v Westbourne Galleries Ltd[3] in which he identifies as a central component ‘an association formed or continued on the basis of personal relationship, involving mutual confidence–this element will often be found where a pre-existing partnership has been converted into a limited company’. In my view necessarily it cannot be sufficient to demonstrate that the shareholders who come together to form a company trusted one another: it would be rare for a company to be formed if they did not. Something more will almost always be necessary before the second basis can be established.

…

26.     I, therefore, agree with Mr Joffe that the entire premise of the Petition is flawed and that it fails to demonstrate a serious issue to be tried.  The drafting of the Petition betrays a failure to appreciate that section 724 does not give the court jurisdiction to grant relief whenever the judge feels that it would be fair, in the loose layman’s sense of the word, to do so.  As Arden LJ explains in Re Tobian Properties Ltd[4], and I quote in [52] to [54] of my decision in Re Asia Television Ltd[5] in which I address this very point, unfair prejudice must be understood in the context of company law and the courts must act on a principled basis even though the concept is to be approached flexibly.  Her Ladyship then goes onto to explain the relevant principles by reference to Lord Hoffmann’s judgment in O’Neill v Phillips supra. Despite the admonitions in these judgments drafters of petitions continue to fail to pay attention to the relevant principles when formulating their clients’ cases.  The present case is the most recent in a long and undistinguished list of examples.”

10.  As this is a strike-out application, there is no controversy that I should proceed for present purposes on the basis that the facts and matters asserted in the draft amended petition are correct.  It can be seen from the passages from the amended petition that I have quoted that it is not asserted that the Petitioner and the 2^nd Respondent entered into any form of shareholder’s agreement.  Not only it is not asserted that there was an express agreement, it is not even asserted that some understanding arose between the parties by virtue of their dealings together.  What seems to be asserted is that it was implicit in the allotment of shares to the Petitioner in 2008, that he would be entitled to be employed, presumably, in a major management role, indefinitely.  It seems to me that this conclusion simply does not follow from the very limited information that has been pleaded.  As a matter of commercial common sense, unless there is reason to think otherwise, it seems to me that it must be assumed that a company employs staff on the basis that circumstances may develop overtime which makes it commercially prudent to terminate a member of staff’s employment.  It does not matter how senior the employee might be.  It is illustrative of how vague and ill thought through the formulation of the Petitioner’s case is that it does not address this point and, for example, address the obvious concomitant question of the Petitioner’s right to realise the value of the shares.  By this I mean, for example, that given the fact that the Petitioner’s position seems to be largely based on his subjective view of his rights, it might had been expected for him to contend that if his employment was terminated other than for cause, he would be entitled to have his shares purchased.

11.  It does not seem to me even if the matters that have been pleaded are all proved at trial, the court could properly conclude that the relief that is sought can properly be granted.  To the extent that there are additional complaints that are introduced in the draft in [15]–[15B] concerning the conduct of representatives of the Johanson Group from November 2019 onwards, these are matters that relate to management and could be cured by a derivative action, particularly as by November the Petitioner had ceased to be employed by the Company.  For the purposes of an assessment of whether this pleaded basis for seeking relief is demurrable, it has to be assumed that termination of employment does not of itself constitute sufficient ground for the court to intervene.  In the form sought in the prayer, it seems to me to follow that [15]–[15B] are not sufficient to justify granting unfair prejudice relief.  The appropriate cure for these complaints of breach of duty would be a derivative action.

12.  The second complaint advanced by Mr Ho on behalf of the 2^nd Respondent, namely, the inclusion of a prayer for a winding up order in circumstances where realistically there is no prospect of such an order ever being granted, I do not strictly have to deal with as I take the view that the amended petition is demurrable and, therefore, the proceedings should be struck-out with costs.  However, if I had taken the alternative view, I would have concluded that there is no realistic prospect of the court making a winding up order.  The evidence that has been filed suggests that given the financial state of the Company and its associated businesses, the 1^stRespondent, albeit it is simply a corporate vehicle holding the Johanson Group’s interest in the Company, would be able to finance any order that the relatively small interest held by the Petitioner be purchased by it or its nominee.

13.  From the above reasons, I will dismiss the petition and the summons to amend the Petition.