TEMPUS FUBAO INDUSTRIAL (ASIA) CO LTD v. JUMBO STAR DEVELOPMENT LTD

HCMP 1350/2017

[2019] HKCFI 1629

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1350 OF 2017

________________

_______________

_______________

__________________

J U D G M E N T

__________________

INTRODUCTION

1.  The plaintiff commenced this action in June 2017.  In essence, this action seeks:

(a)   the bought and sold note dated 1 March 2017 and instrument of transfer with the same date (concerning 10% of the defendant’s shares) to be declared valid and enforceable;

(b)   the defendant to be compelled to assist the stamp duty assessment of the said share transfer, and to reasonably assist the completion of the said share transfer.

The above is contested by the defendant, who seeks the share transfer to be declared invalid.

BACKGROUND

2.  The background summarized below is largely undisputed.

3.  Both parties are companies incorporated in Hong Kong.  The plaintiff was incorporated in November 2016 whereas the defendant was incorporated in March 2004.

4.  The defendant’s shareholders in March 2004 included:

(1)   a Mr Yang (“Yang”);

(2)   a Mr Zhou (“Zhou”);

(3)   a Mr Chen (“Chen”);

(4)   a Mr Wu (“Wu”);

(5)   a Mr Xu (“Xu”).

10% of the defendant’s shares, owned by Xu, is the subject-matter of the share transfer agreement which brought about this action (see para 7 below).

5.  The defendant’s wholly-owned subsidiary in Shenzhen is the owner of its main asset, a warehouse building in Shenzhen (from which rental income has been generated).

6.  There was an earlier share transfer agreement between Xu, as the vendor, and Yang, Zhou, Wu and Chen, as the purchasers (collectively “the shareholder buyers”):

(a)   an agreement dated 2 November 2016;

(b)   a supplemental agreement dated 8 November 2016.

(“the Nov 2016 agreement”) The price stated in the Nov 2016 agreement was RMB31.5 million.

7.  The plaintiff subsequently entered into an agreement dated 28 February 2017 with Xu whereby Xu was to sell his shares in the defendant for RMB42 million (“the subject agreement”).

8.  Xu sent a notice of revocation to the shareholder buyers on about 10 March 2017 to terminate the Nov 2016 agreement.

9.  On 20 March 2017, the plaintiff sent share transfer documents to the defendant, and asked for accounting documents for stamp duty assessment purpose.  The request was refused by the defendant stating in effect:

(1)   the defendant’s board of directors had the absolute discretion to refuse to register share transfer without giving reasons for the refusal;

(2)   the subject agreement was invalid because of the Nov 2016 agreement.

(letters from the defendant’s solicitors respectively dated 7 March 2017 and 5 April 2017)

MAIN ISSUES

10.  As can be inferred from the background summarized above, the main dispute between the parties is whether the share transfer contemplated by the subject agreement is legally effective (other ancillary issues are set out below).

11.  On the plaintiff’s part, the plaintiff contends:

(a)   the subject agreement is legally valid;

(b)   accordingly, the defendant should register the share transfer;

(c)   in this connection, the defendant is obliged by s 151, Companies Ordinance (Cap 622) to do so.

12.  On the defendant’s part, the defendant contends:

(1)   the defendant has the absolute discretion to refuse to register the share transfer;

(2)   further, the defendant’s refusal to register the transfer was bona fide because Xu’s shares have already been sold to the shareholder buyers pursuant to the Nov 2016 agreement.

13.  Further related issues arising from the above are:

(a)   whether the shareholder buyers who were also the defendant’s directors are in a position of conflict of interest;

(b)   whether the plaintiff only possesses an equitable interest in Xu’s shares; further, whether it already knew of the Nov 2016 agreement before the subject agreement was made.  If the answer to either of these is in the affirmation, the plaintiff was not a bona fide purchaser without notice.

WITNESSES’ CREDIBILITY AND FINDINGS OF FACT

14.  The following witnesses testified for the plaintiff at trial:

(1)   Ms Liu, the legal consultant engaged by the plaintiff to negotiate the share transfer which resulted in the subject agreement (“Ms Liu”);

(2)   Xu Hao, the financial consultant engaged by the plaintiff to negotiate the share transfer which resulted in the subject agreement (“Xu Hao”);

(3)   Xu;

(4)   Xia Guohua, who witnessed the subject agreement.

15.  The shareholder buyers testified for the defendant at trial.

16.  The main factual disputes arising out of the witnesses’ testimony are:

(a)   whether the plaintiff knew about the Nov 2016 agreement before entering into the subject agreement;

(b)   whether the defendant’s directors (who were also some of the shareholder buyers) were acting in good faith when they resolved to refuse the share transfer registration (in the capacity as the defendant’s directors).

(a)   Plaintiff’s knowledge of the Nov 2016 agreement

17.  This part of the plaintiff’s case is that the plaintiff has no knowledge of the Nov 2016 agreement when it entered into the subject agreement with Xu.

18.  The defendant contends that:

(1)   the plaintiff has actual or constructive notice of the Nov 2016 agreement;

(2)   in any event, the plaintiff’s knowledge of the Nov 2016 agreement is irrelevant because the plaintiff did not acquire legal title to Xu’s shares; hence, the plaintiff never falls into the “bona fide purchaser of legal title” category (this will be further discussed under the sub-heading “(b) Defendant’s refusal to register the share transfer” below).

19.  The defendant relies on the testimony of Zhou and Chen as evidence of the plaintiff’s knowledge of the Nov 2016 agreement.

20.  Zhou testified to the effect he was told by Xu that Xu had told Ms Liu and Xu Hao about the Nov 2016 agreement.  Besides being hearsay evidence, the assertion is inherently implausible.  Xu, holding himself out as the legal and beneficial share owner, would have no incentive to tell the representatives of a potential purchaser that his shares have earlier been sold to others.

21.  Insofar as it may be suggested Xu may be using the Nov 2016 agreement as a bargaining tactic, this has not been put during cross-examination.  Further, the defendant is a private company, and a potential rival claim to Xu’s shares by the existing shareholders would put a potential subsequent sale at substantial risk.  Thus, Xu could be putting at risk his sale to a subsequent buyer because the subsequent buyer may not accept such risk.

22.  That the matter set out in para 20 above was not something the defendant knew as a fact is shown by Chen’s testimony: he put that matter as a mere possibility, rather than as a fact (para 11, Chen’s 2^nd affirmation).

23.  Contrary to what the defendant contends, Chen’s testimony is not that he has in fact told Ms Liu or Xu Hao about the Nov 2016 agreement, but only that he inferred from what Ms Liu and/or Xu Hao said that they must have been told about the Nov 2016 agreement.

24.  On the other hand, Ms Liu and Xu Hao deny they have been told, or they know, of the Nov 2016 agreement before the subject agreement.  I accept this part of their testimony to be true and reliable.

25.  I also disagree with the defendant’s argument about the plaintiff’s alleged constructive notice of the Nov 2016 agreement.  Merely because the plaintiff has engaged Hong Kong lawyers to perform a due diligence analysis does not necessarily mean the Hong Kong lawyers, as the plaintiff’s agents, ought reasonably have known of the Nov 2016 agreement.

(b)   Defendant’s refusal to register share transfer

26.  The main plank of this part of the plaintiff’s case (the other issues raised will be discussed below) is that, except Xu, the defendant’s directors (who were the same as the shareholder buyers) were in a position of conflict of interest when they voted to refuse the share transfer at the board meeting of 11 April 2017 (“the Apr 2017 resolution”).  Consequently, the Apr 2017 resolution should be treated as invalid.

27.  The plaintiff cited, in support of the above, the decisions in:

(a)   Pleasure International Ltd and 3 Others v Kao Wai Ho Francis and Another, HCA 1753/2008 (25 June 2009);

(b)   Poon Ka Man Jason v Cheng Wai Tao and 32 Others, HCA 304/2011 (18 April 2019).

The Pleasure International decision restated the general principles that the board of directors’ powers should not be exercised improperly, and directors should not place themselves in a position of conflict of interest.

28.  Among the documents in the trial bundles are the defendant’s annual returns made up to 15 March 2016 and 15 March 2017 respectively:

(1)   as at 15 March 2016, the defendant’s directors were Zhou, Wu and Yang; the defendant’s shareholders were the shareholder buyers and Xu (respectively holding 90% collectively and 10% of the defendant’s shares);

(2)   as at 15 March 2017, the defendant’s directors and shareholders remained the same.

29.  In the factual context of this action, the plaintiff’s allegation that the personal interest of Zhou, Wu and Yang conflicted with the defendant’s is difficult to understand.  First:

(a)   the share sale and purchase was between Xu and the shareholder buyers under the Nov 2016 agreement, and between Xu and the plaintiff under the subject agreement;

(b)   the price of the share transfer is not payable to the defendant, but to Xu (whether Xu’s shares were transferred pursuant to the Nov 2016 agreement or the subject agreement).

Thus, the defendant was not itself a party to any of the share transfer agreements (para 6 and 7 above), nor was it the recipient of any of the benefits conferred by those agreements.

30.  Secondly, in a company such as the defendant, which is operated more like a partnership, and where there is a substantial overlap between the shareholders and the directors, it is inapt to speak of a conflict of interest between the defendant and its directors in relation to a share transfer among the shareholders themselves.

31.  It is because of what has been stated in para 29 and 30 above the plaintiff’s reliance on the Poon Ka Man Jason decision is misplaced:

(1)   that action was commenced as a derivative action where the plaintiff sued the biggest shareholder (and the only director) for breach of duties;

(2)   having successfully established liability against the biggest shareholder, money judgment was awarded in favour of the defendant company;

(3)   the biggest shareholder (and other companies related to him) filed a notice of sanctioned payment;

(4)   further, shortly before an extraordinary general meeting (to accept the sanctioned payment in full settlement of the claim against the biggest shareholder), the biggest shareholder transferred most of his shares to two other shareholders;

(5)   as a result, the transferee shareholders held more than half of the defendant’s shares, and voted at the said general meeting to accept the sanctioned payment.

It was in the above circumstances the court held that the share transfer was made:

(a)   to overcome the biggest shareholder’s inability to vote at the said general meeting by enabling the transferee shareholders to accept the sanctioned payment on the biggest shareholder’s behalf;

(b)   the share transfer was thus made for an improper purpose, and not in the best interest of the defendant company.

As regards sub-para (b) above, the court said in the Poon Ka Man Jason decision:

“Irrespective of what he thought was the correct figure for the account, [the biggest shareholder] must have understood that there was at least a significant risk … that he would be required to account for a figure rather in excess of [the sanctioned payment]. … ” (para 199 thereof)

It was in effect based on the quoted passage that the court concluded the share transfer was not properly approved (para 200 to 204 thereof) (that is, the transfer was to enable a resolution to be passed which would put the defendant company’s financial interest at risk, and to the biggest shareholder’s benefit).

32.  As set out in para 29 to 31 above, the facts in this action and those in the Poon Ka Man Jason decision are vastly different, and the considerations involved are accordingly also different.  To conclude, I do not find the plaintiff to be able to establish a case of conflict between the defendant’s interests and those of the shareholder buyers.

33.  The plaintiff has levied other criticisms against the Apr 2017 resolution:

(1)   the plaintiff having lodged the transfer with the defendant in March 2017, the defendant has failed to send a notice of refusal (s 151(2)(b), Cap 622) (this is denied by the defendant, who relies on letters sent in April 2017);

(2)   Xu, as the transferor, has requested the defendant to state its reasons for refusing to register the share transfer (s 151(3), Cap 622) but the defendant has failed to send a statement of reasons for refusal (s 151(4), Cap 622);

(3)   the authenticity of the Apr 2017 resolution is doubtful in view the written record was only mentioned in June 2018, much later than, but never mentioned in, the defendant’s witness statement filed in September 2017, or the defendant solicitors’ letter sent in April 2017. Further, Yang testified to the effect the final decision to refuse to register the share transfer was made in June 2017.

34.  Because it is not part of the plaintiff’s case:

(a)   the defendant has lost its right to refuse to register the share transfer (or to give reasons for refusal) beyond the period prescribed by s 151, Cap 622;

(b)   the defendant has otherwise waived its right to refuse to register the share transfer (or to give reasons for refusal),

none of the criticisms set out in para 33 above is of practical importance.  The fact that this action has been commenced by the plaintiff, and is resisted by the defendant, speaks for itself; as long as the share transfer is disputed by the parties, the court’s jurisdiction, conferred by s 152, Cap 622 (to order the share transfer to be registered if this action is well-founded), is engaged.

35.  On that note, consideration should be given to whether the Apr 2017 resolution (or, assuming the plaintiff is correct that there was no Apr 2017 resolution, the defendant’s decision to refuse (in either case, (“the defendant’s refusal”))) was correctly made.  On the authorities cited by the parties on this point, this would necessitate consideration to be given to whether the defendant’s refusal was made in good faith.

36.  Having invited the court not to determine whether the Nov 2016 agreement by Xu is still subsisting (on the ground that dispute is yet to be resolved between the shareholder buyers and Xu in another action), the plaintiff invites me to find that the Nov 2016 agreement is not specifically enforceable.

37.  The relevant clause in the Nov 2016 agreement is clause 8 thereof:

“違約責任: 若[the shareholder buyers]無法按期歸還本息,視為違約, … 每日5%罰息, … [Xu]有權收回轉讓的投權。若[Xu]未能依時辦理股權轉移登記手續,視為違約。按[the shareholder buyers]已付給[Xu]的金額, … 以每日5%處罰[Xu]的違約金。至收回[the shareholder buyers]所有資金為止。”

38.  Further to clause 8, clause 7 thereof provided in effect the defendant’s assets, debts and shareholders’ rights would cease to have anything to do with Xu since the execution of the Nov 2016 agreement.

39.  Reading clauses 7 and 8 (especially the part of clause 8 concerning Xu’s right to retrieve the shares’ voting rights if there was non-payment), I find that the Nov 2016 agreement has intended the share transfer to take place (and the rights incidental to the ownership of Xu’s shares being exercisable by the shareholder buyers) before full payment.  With that in mind, I disagree with the plaintiff that the 5% daily default interest was intended to be a contractually exclusive remedy in the event Xu breached the Nov 2016 agreement; to so construe clause 8 would risk creating undue limits to the potential loss which may be recoverable by the innocent contracting party.

40.  This being the conclusion, Xu’s attempt to terminate the Nov 2016 agreement by giving a notice of revocation in March 2017 cannot validly deprive the shareholder buyers of remedies other than damages pursuant to the Nov 2016 agreement.

41.  Such being the case, I also agree with the defendant the plaintiff has not adduced proper evidence to show Xu’s purported revocation notice could validly bring the Nov 2016 agreement to an end.

42.  It is undisputed that, the doctrine “where the equities are equal, the first in time prevails” is applicable to the Nov 2016 agreement and the subject agreement.  The plaintiff seeks to overcome that doctrine by arguing that, if the court grants a decree of specific performance in its favour, that would complete the subject agreement, and confer legal title to Xu’s shares onto the plaintiff.

43.  I do not agree with this argument, which is in essence nothing much more trying to “pull oneself up by one’s bootstraps”.  Consequently, I am not satisfied that the plaintiff was a bona fide purchaser of Xu’s shares.

44.  For this reason, the finding that the plaintiff has no knowledge of the Nov 2016 agreement at the time of the subject agreement (para 24 and 25 above) cannot advance the plaintiff’s case.

45.  Further, in relation to the defendant’s refusal, there were other good grounds to support the defendant’s refusal:

(1)   there were news reports about the financial problems of the plaintiff’s parent company in the past.  The potential financial difficulties (or uncertainties) of a share transferee is within the range of matters which a reasonable board of directors could take into account;

(2)   as stated in para 30 above (the defendant being in the nature of a quasi-partnership), that the plaintiff was a stranger who never had past dealings with the defendant is also something which a reasonable board of directors could take into account.

46.  By reason of the above matters, I am not satisfied that the plaintiff has established that the defendant’s refusal was made other than in good faith.

CONCLUSION

47.  The plaintiff’s claim is dismissed. 

OTHER MATTERS

48.  The parties’ written submissions also mentioned various other points.  These have not been expressly set out or dealt with above.  This is so only because of the need to balance between the length of the judgment and its easier comprehension.  It does not mean those other points are thought to be irrelevant (or have been overlooked).  To avoid doubt, those other points have also been considered.

COSTS ORDER

49.  The parties agree that costs of this action should follow the event.  There will accordingly be a costs order that the costs of this action (including any reserved costs) are to be paid by the plaintiff to the defendant to be taxed if not agreed.