張才奎所託管中國山水投資有限公司股份AND ANOTHER v. 張才奎AND ANOTHER

HCA 1661/2014,
HCA 1766/2014,
HCA 2191/2014,
HCA 623/2015,
HCA 939/2015 &
HCA 1564/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NOS 1661, 1766, 2191 OF 2014 &

623, 939 AND 1564 OF 2015

____________

____________

(Heard together)

____________

DECISION
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Introduction

1.  This is an application by the Receivers for directions from the court as to how to vote at an EGM in 7 days’ time.  The Receivers want to vote for the removal of some of the existing directors (including D1 and his son) of a listed company, which is objected to by D1.  D2 is absent in these proceedings.

Background

2.  By orders dated 20 May 2015 in the first 5 of these actions and another order on 14 July 2015, G Lam J and I appointed the Receivers in respect of a total of 456, 325 shares (“the Shares”) and the income arising therefrom. The Shares represent 45.6% of the issued shares in China Shanshui Investment Co Ltd (“CSI”), which were registered in the names of D1 (“Zhang Sr”) admittedly as a trustee.

3.  Upon transfer of the Shares to the Receivers, the shareholding  of CSI is as follows:

Receivers	45.6%
Zhang Sr	36.11%
Minority shareholders (including Yu Yuchuan)	18.26%

4.  As at 7 July 2015 when the Receivers were appointed to the board of CSI, the directorship is as follows:

(a) Zhang Sr;

(b) Zhang Bin (“Zhang Jr”), Zhang Sr’s son;

(c) Mr Yu;

(d) LIU Yiu Keung, Receiver;

(e) YEN Ching Wai David, Receiver;

(f) KOO Chi Sum, Receiver.

5.  CSI is not a trading company but its most valuable asset is approximately 25.09% of the issued capital of Shanshui Cement, a listed company in Hong Kong.

6.  The shares of Shanshui Cement are held as follows:

7.  The composition of the board of directors of Shanshui Cement is as stated in the table in paragraph 11 below.

8.  On 17 June 2015, whilst dealing with an application by Zhang Sr for leave to appeal against the first 5 receivership orders, Godfrey Lam J directed (in §18 of his decision) that the receivers should not seek to alter the composition of the board of directors of Shanshui Cement without further directions from the court (“the §18 direction”).  This direction was also incorporated into the receivership order that I granted.

9.  By a notice issued on 8 July 2015, Shanshui Cement gave notice that an EGM will be held next week on 29 July 2015, at 10:00 am (“the EGM”) upon requisition of its minority shareholders, Tianrui and Bliss Talent (its affiliate).  The proposed resolution is to remove all but one existing directors and appoint 7 new directors nominated by Tianrui to the board (“the Tianrui Resolutions”).

10.  CNBM and ACC have indicated that they will vote against the Tianrui Resolutions.  In other words, the CSI’s votes will have a determinative effect.

11.  With the assistance of professional advisors, the Receivers have prepared 2 Reports dated 18 and 20 July 2015 (“the earlier report” and “the latter report” respectively).  The latter was done upon receipt of further materials and after Zhang Sr has filed his affirmation in opposition to the present application.  The Receivers’ proposals in the 2 Reports have been summarized by Ms Wong SC (leading Ms Theresa Chow) as follows:

1	2	3	4	5
Name	Directorship	Resolutions proposed by Tianrui	Proposed Primary Vote of Receivers (under the latter report)	Proposed Alternative Vote of Receivers (under the earlier report)
Zhang Jnr (CSI)	ED & Chairman	Remove	For	Against
Zhang Snr (CSI)	ED	Remove	For	For
LI Cheung Hung (CSI)	ED	Remove	For	For
CHANG Zhangli (CNBM)	NED	Remove	Against	Against
WU Xiaoyun	INED	Remove	For	For
ZENG Xuemin	INED	Remove	For	Against
SHEN Bing	INED	Remove	For	Against

 

LI Liu Fa (Tianrui)	ED & Chairman	Appoint	For	For / Against*
LI Heping (Tianrui)	ED	Appoint	For	For
YANG Yongzheng (Tianrui)	ED	Appoint	For	For / Against*
LI Jiangming (Tianrui)	ED	Appoint	Against	Against
CHEUNG Yuk Ming	INED	Appoint	For	For
LAW Pui Cheung	INED	Appoint	For	Against
HO Man Kay, Angela	INED	Appoint	For	For
Lee Champion Kuan Chun	NED	No change	No change	No change

* The Receivers suggest appointing either one of these as director.

The shaded rows reflect the change of stance of the Receivers in their 2 Reports.

12.  In substance, the Primary Vote in column 4 removes all existing directors and will have the effect of leaving no CSI representative on the board.  The Alternative Vote in column 5 retains Zhang Jr and 2 INEDs to prevent the serious financial consequences of a “change of control”.

13.  The Plaintiffs support the Primary Vote.

14.  Zhang Sr opposes both of the Primary Vote and Alternative Vote on the ground that the Receivers have adopted the wrong approach. He invites the court to direct the Receivers to vote against all of the Tianrui Resolutions or allow the Receivers, Zhang Sr and other shareholders of CSI to vote separately at the EGM in accordance with their own wishes (“the Split Vote”).

The role of the Receivers

15.  It is important not to lose sight of the context in which the Receivers were appointed and the power given to them by court order. 

16.  The Receivers were appointed in respect of a portion of shares (§37 of Lam J’s 2^nd decision dated 20 May 2015).  They are to protect and preserve the Shares including their value: 3^rd Lam J Decision dated 17 June 2015 and §§5(2) and (4) of each of the Receivership Orders.  They must exercise their powers in accordance with the purpose of their appointment. 

17.  The Receivers are not the receivers “and managers” of either CSI or Shanshui Cement.  On his own volition, G Lam J has specifically directed that the Receivers are not to achieve a complete change of management of Shanshui Cement: the §18 direction.

18.  As officers of the court, the Receivers are to act impartially and in accordance with the directions of the court, in administering the Shares.  It is a way to “hold the ring” between warring litigants until the disputed issues could be finally determined (§§6-7 of Lam J’s 2^nd decision).  He set out the role of the Receivers: 

“33. The receivers, acting independently of the parties and under the supervision of the court, could see how best to exercise voting rights in relation to the block of shares in question (approximately 38.5% counting the plaintiffs in the first 3 actions, or approximately 43.3% counting the plaintiffs in all 5 actions commenced so far). They could properly perform the function of trustee of a substantial parcel of shares in a company, i.e. act in a manner that is necessary to safeguard that investment (Bartlett v Barclays Trust Co [1980] 1 Ch 515, 532-534), without being bedevilled by the conflicts of interests that beset the 1st defendant. The 1st defendant would remain the registered holder and in control of the balance of the 81.74% (sic) interest he has hitherto held in CSI. The 7 minority shareholders would continue to hold their shares which in aggregate represent an 18.26% stake. As things stand the receivers would not have a controlling stake in CSI, but as substantial shareholders they would be able to influence the voting power that CSI in turn has in Shanshui Cement. They would be able to take a disinterested stance in how the affairs of CSI should be conducted, particularly in relation to the complaints and litigation against Mr Zhang and in relation to its investment in Shanshui Cement, preventing the invidious conflicts affecting Mr Zhang. They could ensure that an independent mind is brought to bear, from the point of view of a shareholder of CSI, on the grant of the share options to the Zhang’s. They would be able to help ensure that the relevant shares in CSI are not improperly encumbered or otherwise utilised for improper purposes and that any dividend income CSI receives and any dividend downstream are properly accounted for. It is true that CSI only has 25.09% in Shanshui Cement and that, as I shall refer to below, another shareholder has overtaken CSI as the largest shareholder of Shanshui Cement, but 25.09% is nevertheless a substantial interest in a listed company. If the affairs of Shanshui Cement are being prejudicially conducted, the receivers would be in a much better position than the plaintiffs to cause CSI as a shareholder to take action. The directors of Shanshui Cement would be kept in check. (emphasis added)

34. Furthermore, the receivers could ameliorate the position of the plaintiffs as far as the intimidation and bullying is concerned. By an order for the appointment of a receiver the court assumes control of the property affected, both in terms of the legal estate and any equitable title. No transfer of the relevant shares in CSI could take place without the involvement of the receivers. Any transfer of any equitable interest under the trust, if it could take place at all, would also properly have to involve the receivers who would have temporarily displaced the trustee. The receivers would of course be officers of this court. Any interference with them or with property in their possession would be a contempt of court: Angel v Smith (1804) 9 Ves 335. As such the receivers could insulate and give protection to the plaintiffs not only as against the 1^st defendant but also as against any other person trying to put pressure on them or intimidate them whether or not acting on behalf of the 1^st defendant.” (emphasis added)

19.  G Lam J’s decision on the function of the Receivers in this case is in line with the general observation made by Street J in Duffy v Super Centre Development Corp Ltd [1967] 1 NSWR 382, p 383-384:

“To some extent the privately appoint receiver, particularly in current commercial practice, makes an effort to restore the financial prosperity of the company whose affairs he has been appointed to administer by a debenture holder. A Court appointed receiver does not fill the same position. He is not so much what might be described as a company doctor, but rather his function is that of a company caretaker. His function is not so much to restore profitability. It is rather to preserve those assets of the company upon which its fortunes may be dependent, and to preserve its potentiality for earning profits in the future.” (with emphasis)

20.  Where all or a substantial part of the trust property is represented by a controlling holding in a limited company, the trustees are bound to see that the company’s assets are administered cautiously: Lewin on Trusts, (19^th ed) §34-057.

21.  The Receivers are bound to act in relation to the Shares and the controlling position which they conferred, in the same manner as a “prudent man of business”: Bartlett v Barclays Trust Co (No 1) [1980] 1 Ch 515, Brightman J (cited in §33 of Lam J’s 2^nd decision):

“The bank, as trustee, was bound to act in relation to the shares and the controlling position which they conferred, in the same manner as a prudent man of business. The prudent man of business will act in such manner as is necessary to safeguard his investment. He will do this in two ways. If facts come to his knowledge which tell him that the company’s affairs are not being conducted as they should be, or which put him on inquiry, he will take appropriate action. Appropriate action will no doubt consist in the first instance of inquiry of and consultation with the directors, and in the last but most unlikely resort, the convening of a general meeting to replace one or more directors. What the prudent man of business will not do is to content himself with the receipt of such information on the affairs of the company as a shareholder ordinarily receives at annual general meetings. Since he has the power to do so, he will go further and see that he has sufficient information to enable him to make a responsible decision from time to time either to let matters proceed as they are proceeding, or to intervene if he is dissatisfied. …” (original emphasis)

22.  The Receivers not only have a duty to keep themselves informed of the various factors affecting the Shares, but also a duty to intervene to safeguard such interests (Bartlett v Barclays Trust Co (No 1) [1980] 1 Ch 515 at 532E-G and 534B-535C). The means adopted to safeguard the Shares must take into account the practicalities of the situation, and the measures taken must be effective according to the circumstances of the case.

23.  What steps does a reasonably prudent man who finds himself a majority shareholder in a private company take with regard to the management of the company’s affairs? Re Lucking’s Will Trusts [1968] 1 WLR 866, Cross J.

24.  Brightman J adopted a most cautious approach in the Bartlett case in considering Cross J’s ruling:

“I do not understand Cross J. to have been saying that in every case where trustees have a controlling interest in a company it is their duty to ensure that one of their number is a director or that they have a nominee on the board who will report from time to time on the affairs of the company. He was merely outlining convenient methods by which a prudent man of business (as also a trustee) with a controlling interest in a private company, can place himself in a position to make an informed decision whether any action is appropriate to be taken for the protection of his asset. Other methods may be equally satisfactory and convenient, depending upon the circumstances of the individual case. Alternatives which spring to mind are the receipt of copies of the agenda and minutes of board meetings if regularly held, the receipt of monthly management accounts in the case of a trading concern, or quarterly reports. Every case will depend on its own facts. The possibilities are endless. It would be useless, indeed misleading, to seek to lay down a general rule. The purpose to be achieved is not that of monitoring every move of the directors, but of making it reasonably probable, so far as circumstances permit, that the trustee or (as in the Lucking case) one of them will receive an adequate flow of information in time to enable the trustees to make use of their controlling interest should this be necessary for the protection of their trust asset, namely, the shareholding. The obtaining of information is not an end in itself, but merely a means of enabling the trustees to safeguard the interests of their beneficiaries.” (at p 533E-534A)

25.  Bearing in mind the role and duties of the Receivers, I proceed to consider the nature of the Receivers’ application made at this stage and its effect.  I shall then examine the facts underlying the Receivers’ application and examine the Primary Vote and Alternative Vote one by one.

The nature of the Receivers’ application

26.  One must not forget the undisputed situation:

(a) Shanshui Cement is not insolvent and is a trading, listed company;

(b) The board is functioning and not deadlocked; and the present board has only been constituted for about 2 months only;

(c) Shanshui Cement’s shares are owned respectively by CSI, Tianrui, ACC, CNBM and other minority shareholders from the public;

(d) The fortune of CSI and hence its value depends entirely on the fortune of Shanshui Cement;

(e) 10 actions are pending before the Court, including the present 6 and statutory derivative actions by minority shareholders of Shanshui Cement.

(f) The Receivers are appointed only on interim basis to hold the ring, with duties set out above.

27.  As directors of CSI, the Receivers are seeking directions to cause CSI to vote in a manner that will have a determinative effect on the outcome of the EGM.  If the directions are granted, its practical effect will be to fundamentally change the composition of the board of directors of a listed company.  Should the court do so?

Legal principles on ordering appointment of directors

28.  It is a well-established principle that the court will not make an interim order to disturb the composition of the board of directors in a listed company.

29.  In H v H [2011] 1 HKLRD 1048, at 1061-1062, a wife who was a shareholder sought an order to compel the husband to vote in a certain way in a listed company and to restore her directorship.  Yuen JA explained the rationale (in the context of an interlocutory application) as follows:

“61. … the crux of the matter is whether the Court should exercise its discretion to order the Husband to vote the shares in such a way that would lead to disruption on the board of a public company …

62. … It is not the function of this Court to decide disputes of fact …

63. As we have seen in the authorities discussed earlier (Pringle v Callard, Re Chime Corp Ltd, Muir v Lampl), the Court will not lightly impose a director on a company in controversial circumstances in interlocutory proceedings. Unlike Poon v. Poon[1], this is not a private family company. That factor was clearly material to Thorpe J’s judgment as he repeatedly emphasised it. In contrast, the Company here is a public company, with a substantial number of outside shareholders whose interests should also be taken into consideration.” (with emphasis).

30.  Rogers VP made a similar comment in the context of a final order in Re Chime Corp Ltd [2003] 2 HKLRD 905, 914D-G:

“25. … The Judge refused the order … He also considered that the appointment of the administrators to the board would be far more intrusive and was inappropriate for interlocutory relief.

26. Whilst not disagreeing with the Judge in this respect, I, for my part, also consider that it would be inappropriate for an order of that nature to be made. Although it is possible that the court could make an order which would have the effect of determining the composition of a board of directors as a matter of final relief on a s. 168A petition, I consider that it probably would only do so in very special circumstances. A company is a trading entity and those appointed to the board are there to supervise the company. The court would be in a difficult position to select those who were appropriate to conduct the commercial affairs of a company. A court should only interfere in current management of a company if it isabsolutely essential to do so.” (emphasis added)

Application of the legal principles on imposing a director on a listed company

31.  These actions are still at a very early stage.  There is dispute as to the nature and extent of the beneficial interest belonging to the plaintiffs.  There is even a dispute as to the number of plaintiffs involved.  The defences have not yet been filed.  The court is now asked, at an interlocutory stage, to make what is in effect a final order (without trial) to completely change the board of a listed company.  The new board of Shanshui Cement will make numerous decisions which will be difficult to reverse.  The Receivers’ application involves commercial consideration, assessment of integrity of existing directors and suitability of the nominated persons, assessment of financial situations both of Shanshui Cement and Tianrui (a competitor).  This is going to be based on materials that are disputed and not tested in cross-examination. 

32.  Based on the legal principles in H v H and Re Chime Corp Ltd, this court declines to give directions to the Receivers that will have the effect of imposing new directors on the board of the listed company.

33.  Even in situations not involving appointment of directors, the court may not necessarily give directions on how to vote at a meeting of a listed company.  In Executor Trustee Australia Ltd v Henderson [2005] SASC 446, the deceased’s estate owned many shares in a listed company. Beneficiaries from different camps fought over the beneficial ownership in those shares under the deceased’s will and Perry J (of the Supreme Court of South Australia) appointed an administrator pendente lite to take over the shares in dispute. The administrator pendente lite subsequently applied to Perry J for permission to vote at the EGM against a take-over proposal on the ground that it would best preserve the value of the shares. Perry J refused the application and the administrator pendente lite was not allowed to vote at the EGM. The decision was upheld by a majority of 2:1 of the Full Court of South Australia (See: Re Rondahl (2005) 226 ALR 475).  The majority took the view that the administrator pendente lite should act in an impartial manner and not prefer one class of beneficiaries over another.  He holds the shares in much the same capacity as a stakeholder until the entitlement to the shares has been determined by the resolution of the litigation. The court was unable to give directions to the administrator pendente lite as to how the exercise the voting rights.  (at §§43-45, 61, 120-124).

34.  This is sufficient to dispose of the Receivers’ application.

35.  Assuming I am wrong, I now proceeded to analyze the factual bases of the Receivers’ proposals to see if there are very special circumstances to make it necessary for the court to exercise the discretion in favour of the Receivers.

The factual bases of the Receivers’ proposals

36.  Purportedly as prudent man of business, faced with the Tianrui Resolutions, the Receivers consider that the proper protection of the Shares and their value may require the Receivers to (a) keep the directors of Shanshui Cement in check through CSI’s voting powers as one of Shanshui Cement’s significant shareholders; and (b) to cause CSI as shareholder of Shanshui Cement to take action if the affairs of Shanshui Cement are being prejudicially conducted.  See §33 of G Lam J’s 2^nd decision.  The Receivers came to the view that there is a case for reconstitution of the board of Shanshui Cement.  They then considered the suitability/non-suitability of each of the proposed outgoing and incoming directors.

37.  I have read the 2 Receivers’ Reports.  Underlying the Receivers’ views is a series of matters revealing: 

(1) the misconduct and incompetence of the existing management of Shanshui Cement in managing the business and affairs of that company;

(2) the lack of integrity of some members of the existing management of Shanshui Cement.

38.  Firstly, suspicious transactions including those set out in §§7‑8 of my decision dated 14 July 2015.  In summary, Harris J found that there were serious issues to be tried as to whether a subscription agreement and options scheme were introduced for impermissible reasons and without proper consideration by the board of Shanshui Cement.  (Reasons for Decision dated 17 March 2015, §§21-30 and 38-40.)  G Lam J also found serious issues to be tried as to whether or not Zhang Sr has involved himself in positions of conflict of his duties as trustees.  He treated Shanshui Cement as his own and proposed a repurchase plan to buy out the participating employees’ interest in 3 terms of 10 years each by using funds belonging to them.  Zhang Sr caused Shanshui Cement to enter into deals that have the effect of diluting CSI’s interests in Shanshui Cement.  There are also 2020 Notes whose timing of issue was most suspicious.

39.  Secondly, the Receivers rely on a complaint letter dated 7 June 2015 from the minority shareholders (“the Complaint Letter”) to the directors and shareholders of Shanshui Cement, the Receivers, SFC, the CCB. The complaints covered serious allegations from the breach of trading regulations of suppliers nominated by Zhang Jr, nominating inexperienced companies at unreasonable prices, commencing construction without first obtaining approval, altering terms of contracts, deliberate non-disclosure of sensitive information that affects share price, conspiracy to make false declarations and misappropriation of company assets.  However, Zhang Sr has not given any substantive response to it so far.  I doubt if he could have effectively done so within only 6 weeks in view of the contents and recipients whom he had to address.

40.  Thirdly, the Receivers have written to Zhang Sr on 18 June 2015 concerning the CNBM Share Placement under which CNBM was to subscribe for shares at HK$2.77 per share in October and November 2014, a discount of 32% from the net asset value.  There was no constructive response from Zhang Sr.  Instead, by a summons dated 3 July 2015, Zhang Sr has sought to prevent the Receivers from investigating the CNBM Share Placement and the complaint letter.  Zhang Sr was seen as being obstructive.

41.  Fourthly, Zhang Sr or his associates have put pressure on the plaintiffs to withdraw their actions.  This has been referred to in §§22-30 of the 2^nd Lam J Decision and §8 of my decision dated 14 July 2015. Such pressure and bullying has intensified since.

(a) There are continued signing of Notices to Act and Notices of Discontinuance from withdrawing plaintiffs. 

(b) Zhang Sr have procured some of the withdrawing plaintiffs to explain that they have withdrawn from the actions voluntarily.  However, there was a deafening silence in their affirmations as to how they ever got into contact with Messrs Chan, Wong & Lam in the first place, to sign what appears to be standard withdrawal letters and subsequently make affirmations in similar terms (eg the affirmations of 鄭岱光、唐景洲). 

(c) On the date of the last hearing (14 July 2015), at a meeting called by Zhang Sr.  He told the participating employees that if they did not withdraw their claims in Hong Kong, “they must resign immediately”.  The employees are not sophisticated people.  Such a serious threat to their only livelihood would no doubt cause undue pressure on them to withdraw the litigation. 

42.  The Receivers have made independent investigation of the withdrawing employees.  There appears to have been phone calls from Zhang Sr himself to the employees, denial of opportunities of legal consultation, dismissal, demotion and/or transferral.  See the East Associates Report dated 20 July 2015 which reported on interviews of 14 withdrawing plaintiffs by a solicitors firm in PRC; draft 7^th affirmation of Gao Yong.

43.  On the other hand, Zhang Sr also produced evidence of coercion by the plaintiffs’ representatives to some of the withdrawing plaintiffs, compelling the latter to continue their actions against Zhang Sr, stating that the withdrawing plaintiffs would lose all their interest and benefits in their shares if they refused to do so.

44.  It is not for the court to weigh the truthfulness of each side’s story at this stage.  Suffice it to say that the Receivers have raised serious issues to be tried.

45.  Fifthly, in their 2 Reports, the Receivers have stated in very clear terms that Zhang Jr deserves to be removed as chairman and director of Shanshui Cement and that but for the uncertainties arising from the terms of the 2016 Notes and 2020 Notes and other loan facilities, the Receivers would have supported the removal of Zhang Jr and the appointment of another representative to represent CSI in the board of Shanshui Cement.  Despite that, the Zhangs have misrepresented to the Plaintiffs and other PRC employees of Shanshui Cement that the Receivers supported Zhang Jr’s continued appointment as chairman of the Shanshui Cement board. It was also suggested that CNBM would continue to provide opportunities for the employees to realise their interests in the shares. Plainly, CNBM is acting in concert with the Zhangs.  In so doing, the Zhangs had attempted to further bully them into supporting the current management of Shanshui Cement and withdraw the actions.  The Receivers’ earlier report was used to intimidate the very people that the Receivers were appointed to protect, all to further the interests of the Zhangs.  The position of the plaintiffs were not ameliorated as far as the intimidation and bullying were concerned.

46.  Sixthly, the financial performance of Shanshui Cement has deteriorated in recent years under the guidance of Zhang Jr. See the IFA analyses which shows that the Listco has been underperforming and net profit has declined substantially; this is in stark contrast with the considerable growth by comparable companies in the PRC market.  The Receivers are not asking the court to adjudicate on this.  They merely say that the poor financial results of Shanshui Cement is but one of the matters prompting the Receivers to propose to reconstitute its Board.  As submitted by Mr Joffe, even taking D1’s case at its highest, mere performance in line with market expectations can hardly be a reason to justify retaining Zhang Jr, who has always acted in line with his father and is hopelessly in a position of conflict.

47.  Seventhly, Mr Joffe relies on the fact that Zhang Jr was incompetent and not equipped with the necessary managerial skills to lead Shanshui Cement.  He has no integrity or commercial morality.  He had given false evidence in proceedings before Harris J in HCMP360/2015 and HCMP 593/2015.

48.  Eighthly, the Receivers consider the existing directors as follows:

(a) Zhang Sr and Zhang Jr are instigators and perpetrators in almost all the transactions and matters giving rise to the Receivers’ concerns and hence the suggestion to reconstitute the board.

(b) Li Cheung Hung and Wu Xiaoyan were directors at the time of the CNBM Share Placement and the grant of share options to various persons including the Zhangs on 27 January 2015.  Those 2 events have diluted the shareholding of CSI.  Those 2 directors did nothing in response to the Complaint Letter dated 7 June 2015.

(c) Other directors are seen to be standing behind the Zhangs rubber stamping their decision.  None of them, including the INEDs are seen to be looking into any of the complaints of the Receivers and it is questionable whether they have been properly discharging their duties.

49.  I have disregarded the report of ISS as inadmissible opinion evidence, of which the evidentiary basis is not clear.

50.  Mr Lam SC fairly agrees that there are matters giving rise to concerns on the part of the Receivers, although I also note that he disputes those concerns on the merits.

51.  These concerns of the Receivers’ at best form serious issues to be tried.  Their factual bases are seriously contested. Neither the Receivers nor the plaintiffs are able to show that there is an overwhelming case on the merits to justify the drastic directions sought at an interlocutory stage.  However strong the plaintiff’s case might appear to be, one must not forget the surprising outcome that litigation may bring about.  In this respect, it is apt to remember the words of Godfrey J (as he then was) in Hutchvision Asia Ltd v Asia Television Ltd, HCA6757/1992 (8 September 1993), §17:

“That is a formidable case, no doubt. But any lawyer with any experience of private practice will be able to remember, only too well, those cases which appeared to be certainties but which, to his surprise, nevertheless failed and, by the same token, those cases which seemed bound to fail but which, to his surprise, nevertheless succeeded.”

52.  Further, Li Cheung Hung (executive director) and Wu Xiaoyan (INED) have only been appointed on 16 May 2015, for 2 months.  Apart from an inference drawn from their inaction stated in paragraph 48(b) above, there is nothing to show misconduct or that they lacked integrity or competence.

Views of minority shareholders

53.  ACC and CNBM have indicated that they will vote against the Tianrui Resolutions. In a letter issued to the Receivers dated 17 July 2015, CNBM explained in detail why they would oppose the Tianrui Resolutions and specifically requested the Receivers to draw the Court’s attention to this letter.  In summary, its views are that the Tianrui Resolutions are strategic moves of Tianrui to strengthen and embed its control over Shanshui Cement to the exclusion of the other substantial shareholders.  It was a hostile move. The proposed appointment of Tianrui’s nominated directors is likely to be subject to the approval of the PRC Ministry of Commerce under the PRC’s Anti-Monopoly Law.  There will be financial consequences triggered upon “change of control”. 

54.  Further, it was pointed out by CNBM in that letter that there are pending actions between shareholders of CSI and Shanshui Cement, which affect the ability of minority shareholders in exercising rights in both CSI and Shanshui Cement.  Once Tianrui’s representatives are put into the board, it will be difficult for minority shareholders in CSI and Shanshui Cement to resist a change of management.

55.  These are legitimate concerns of the minority shareholders. The pending actions between shareholders cannot be resolved before the EGM.  Although the Receivers have obtained a legal opinion stating that the Tianrui Resolutions will not trigger Anti-Monopoly Law, again this is moot at this point in time.

56.  On 20 July 2015, ACC and CNBM informed the Shanshui Cement board and made a voluntary cash general offer (“VCGO”) for the shares of Shanshui Cement.  It is anticipated that the VCGO will be completed in 6 months.  The VCGO may change the shareholding of existing shareholders and adds to the delicacy of the situation.

57.  The VCGO was made at a time when the offerors already know about the Receivers’ current application and hence willing to face the risk of an undesirable outcome.  For present purposes, I disregard the VCGO.  There are ample matters in the scale and I do not think that VCGO will affect my decision.

Overall assessment

58.  What the Receivers seek to achieve will be to restore the proper management of Shanshui Cement and hence its profitability, something more than just being a caretaker.  They are not just preserving the share value but one trying like a doctor to make the company better.  It will lead to complete reconstitution of the board of a listed company.  It will oust Zhang Sr even before his entitlement to the Shares are determined in the present actions. 

59.  This is going much beyond the original purpose for which G Lam J appointed them.  They are not just protecting the value of a parcel of shares but also indirectly managing CSI and Shanshui Cement.  Their intended investigation of the outgoing board members will duplicate the subject matter of some of the court actions.

60.  It also requires the court to make a commercial decision and judgment on character of persons which will determine the fate of Shanshui Cement, without a proper trial.  The consequences are too drastic at an interlocutory stage.  Adopting an extremely cautious approach, it is not appropriate to grant the application.

61.  Assuming I am wrong, I have proceeded to consider the 2 Proposed Votes of the Receivers.

The Primary Vote of the Receivers (“Primary Vote”)

62.  The Receivers believe that all 4 major shareholders (namely Tianrui, CSI, ACC and CNBM) should be represented so that the Shanshui Cement Board will provide a platform for all of them to communicate and deliberate on the affairs of Shanshui Cement.  Tianrui has, by a letter dated 20.7.2015, indicated willingness not to remove Chang Zhangli as CNBM’s representative.  However, it can be seen from the table in paragraph 11 above that the Primary Vote will leave CSI with no representative on the board of Shanshui Cement. Tianrui will have 3.  ACC and CNBM will each have one.  There will be 3 INEDs whose suitability is not really in dispute.  

63.  The Primary Vote gives rise to 3 concerns of the court:

(1) How it can be in the interest of CSI (not just the plaintiffs) to leave CSI with no voice on the board?

(2) Why should Tianrui, who holds a similar percentage of shares as CSI, have 3 representatives on the board?

(3) How are the potential financial consequences upon a “change of control” of the board to be dealt with?

64.  With regard to the 1^st concern, Mr Joffe submits that it is better protection for the plaintiffs to have none of CSI’s representatives on the board than having any of the Zhangs.  With respect, the Receivers’ role as directors is not limited to safeguarding the interests of the plaintiffs.

65.  The Receivers explain that the maximum number of directors is 9.  It is hoped that the new board will appoint someone from CSI, whether one of the Receivers or not.  There is a serious indication from Tianrui that there will be such an appointment.

66.  With respect, the Receivers are leaving the interest of CSI to the mercy of the new board.  Whilst Tianrui may be willing (or even enter into an agreement with CSI) to nominate CSI as a director, there is no certainty over the votes of other shareholders of Shanshui Cement and when the voting will occur.  Leaving the INEDs to check and balance against the 3 Tianrui directors is not good enough.  On the other hand, if the present composition is maintained, the Receivers (as directors of CSI) could at least procure CSI to call for general meetings of Shanshui Cement pursuant to Article 12.3 of the Articles of Association of Shanshui Cement.  This may be a less intrusive way of checking on any abuse of power by existing CSI directors than replacing them with Tianrui directors whose interests may be different from that of CSI’s.  For reasons in this paragraph alone, the Primary Vote cannot be approved by the court.

67.  With regard to the 2^nd concern, the Receivers justifies it by the fact that Tianrui’s strong financial position will be beneficial to Shanshui Cement, given that CSI has no financial ability, and ACC and CNBM have no plans to assist Shanshui Cement in overcoming current difficulties.

68.  Zhang Sr questions the financial strength of Tianruim, its poor credit rating, its conflict of interest as a competitor of Shanshui Cement and negative press reports as to the management style of the intended incoming directors.  Although some of these are based on hearsay newspaper cuttings which usually are inadmissible or do not carry much weight anyway, one has to recognize that the time available before this hearing for collation of evidence is limited.  Zhang Sr relies on Tianrui’s 2014 audited accounts and a Veda Capital’s Report.  Those accounts have been overtaken by the 30/6/15 Accounts. His produced evidence (through the 2^nd and 3^rd affirmations of Li Hengwen) that staff members at the Head Office and Shandong Branch of ABC have stated that Tianrui may not be able to obtain facilities of over RMB5 billion and that the facilities made available by ABC to Tianrui is only RMB1.4 billion and for one year only.  The makers of those statements have not been identified and the statements lack particulars.  However, these matters raised by Zhang Sr remain unresolved disputes of facts.

69.  With regard to the 3^rd concern, the removal of Zhang Jr as chairman, Zeng Xuemin and Shen Bing as independent directors may give rise to serious financial consequences for Shanshui Cement:

(a) There is a “change in control” clause in what are called the 2016 and 2020 Notes, whereupon Shanshui Cement would be obliged to offer to repurchase the outstanding amount of those Notes (“the Repurchase Offer”).

(b) There is a further fear that a “change of board majority” might trigger events of default under loan agreements entered into by Shanshui Cement with various Mainland PRC banks and of Shanshui Cement’s repayment obligations thereunder.

(c) There is lack of sufficient financial resources on the part of Shanshui Cement (with cash and cash equivalent of just RMB2.85 billion as of 20 June 2015) to meet the aforesaid repayment obligations which, if all materialised, would require RMB9.44 billion, according to Zhang Sr.

70.  The Receivers rely heavily on proposals of Tianrui to negotiate terms with the Notes holders and existing principal bankers of Shanshui Cement.  When required, Tianrui will provide loans or collaterals to Shanshui Cement.  Tianrui has cash, cash equivalent and unused loan facilities totaling RMB16.25 billion (confirmed by 3 banks by letters).  Tianrui is willing to give undertakings to the Receivers and the court to cause Shanshui Cement to have sufficient funds to repurchase the 2020 Notes, if required to do so, including providing shareholders’ loans or acting as co-guarantor.  It will also provide a bank guarantee of not less than RMB3 billion from a Mainland bank within 45 days after the triggering of the “change of control” clause in the 2020 notes.

71.  The Receivers try to impress upon this court that having put up HK$4 billion in purchasing 28% stake in Shanshui Cement, and hence became the single largest shareholder, the interests of Tianrui and Shanshui Cement should be aligned.

72.  Even if I were to ignore Zhang Sr’ views, I find the Receivers’ reliance on the financial proposals of Tianrui to be unsafe:

(a) Till now, the court has not been provided with a draft undertaking from Tianrui.  A promise to do so is not sufficient to press for the drastic order sought by the Receivers.

(b) Even Ms Wong SC agrees that the Receivers do not have sight of the 2020 Notes.  In the shortness of time from now until the EGM, it is doubtful if the boards of Tianrui and CSI can have sufficient time to consider and approve an undertaking that meets the needs of the 2020 Notes.

(c) The banks’ letters merely show that Tianrui has unused credit facilities.  There is no guarantee that the banks will grant Tianrui loans for the purpose of meeting the repurchase offer or in any way assisting Shanshui Cement.

(d) For it to be enforceable by Shanshui Cement, the undertaking has to be disclosed not only to Zhang Sr but also other shareholders of Shanshui Cement for approval.  As pointed out by CNBM in its letter to the Receivers dated 17 July 2015, Tianrui has made no substantial public statement at all on as to how it intends to manage the risks attendant upon the change of control.

Receivers’ Alternative Vote (“the Alternative Vote”)

73.  Under the Alternative Vote, there will be 1 director from CSI (Zhang Jr as chairman), 1 from CNBM, 1 from ACC, 2 from Tianrui.  Two existing INEDs (Zeng Xuemin and Shen Bing) will remain.  Two new INEDs nominated by Tianrui will be appointed.  Notwithstanding that it may avoid the evils of triggering the “change of control” clause, the Alternative Vote still allows Tianrui to have more representatives than CSI.  Even then, it is the intention of the Receivers to move the new board to suspend the powers and duties of the CSI chairman.  That means less or no voice of CSI on the board.  That cannot be in the interest of CSI.  All the more so as Tianrui is Shanshui Cement’s competitor.

74.  Mr Lam SC rightly points out in his skeleton submission that the Primary Vote and Alternative Vote actually invited the court to hand over management control to Tianrui, a minority shareholder.  With less than 30% shareholding, Tianrui will not even be required to make a take-over bid for shares before it could take over control of the board.  The Receivers’ original vote greatly favoured Tianrui, although it might not have been done intentionally.  It was only at the very last moment before this hearing that Tianrui conceded to give up one director and retain CNBM’s director.

75.  Mr Joffe and Ms Wong SC appear to suggest that the Receivers’ proposals are commercial decisions.  Unless shown to be plainly wrong, the court should respect it.  The burden is on Zhang Sr who challenges them to show “defects” in the decision.  In Duffy v Super Centre Development Corp Ltd [1967] 1 NSWR 382, at 383, Street J held that:

“To the extent to which he (ie the receiver and manger) makes decisions from time to time, they are in effect made under the authority of the Court itself, and they are subject to review and control by the Court should a proper case be made out requiring such intervention. Whilst the Court does, therefore, have an ultimate control over the day-to-day actions of a receiver and manager, it is a control which is not in my view to be too freely exercised. If, of course, there can be shown to be some defect in the manner in which the receiver and manager is conducting his duties – a defect arising either out of some want of good faith or out of some erroneous approach in law or in principle – then that is clearly a ground on which the Court would entertain an application by one of the interested parties for appropriate directions or some other form of remedial order. Where, however, the challenge made is that there is an absence of prudence and wisdom in the receiver’s decision, a far heavier onus rests upon the party who seeks to challenge the decision in question. The Court will not concern itself with minor and ordinary decisions that he may have made: it must be shown that there is a decision of real significance in the affairs of the company and as to which there are real and substantial grounds for questioning its correctness before the Court will embark upon an investigation of what, if any, directions, ought to be given.”

76.  The Duffy case may be appropriate where the Receivers also exercise duties as managers.  The directions that the Receivers now seek are clearly matters of real significance and not just decisions (even commercial ones) in daily execution of their duties.  The bar to their changing the constitution of the Shanshui Cement board has been imposed by G Lam J.  The court is entitled to examine the Receivers’ proposed Votes.  For the reasons given under the topics of Primary Vote and Alternative Vote, there are “defects” in principle of the kind described in the Duffy case.  I decline to give my approval to either of the 2 Votes.

Split Voting

77.  I deal with Split Voting briefly for completeness sake.

78.  Zhang Sr relies on Article 14.1 of the Articles of Association of Shanshui Cement which provides that a member entitled to more than one vote is under no obligation to cast all his votes in the same way. Zhang Sr holds 36.11% of the shares in CSI.  He is against the idea of the court directing CSI to vote as a whole.  Split Voting will ensure the defeat of the Tianrui Resolutions by reducing the Receivers and other shareholders’ voting powers to 16.03%.

79.  This court has clarified from the Receivers at the hearing that any order that the court makes shall bind only the Receivers but not CSI as such.  It is intended that there will be a board meeting of CSI before the EGM.  In fact, that was also the position of Lam SC at the last hearing before me on 14 July 2015 Zhang Sr’s application to press the Receivers for a stance on the Tianrui Resolutions was made.

80.  In my view, Zhang Sr’s suggestion overlooks Article 84 of the Articles of Association of CSI which vests all the powers of CSI in the management of its business and affairs in its directors.  This is consistent with John Shaw & Sons (Salford) Ltd v Shaw [1935] 2 KB 113 at 134, Greer LJ:

“A company is an entity distinct alike from its shareholders and its directors. Some of its powers may, according to its articles, be exercised by directors, certain other powers may be reserved for the shareholders in general meeting. If powers of management are vested in the directors, they and they alone can exercise these powers. The only way in which the general body of the shareholders can control the exercise of the powers vested by the articles in the directors is by altering their articles, or, if opportunity arises under the articles, by refusing to re-elect the directors of whose actions they disapprove. They cannot themselves usurp the powers which by the articles are vested in the directors any more than the directors can usurp the powers vested by the articles in the general body of shareholders.” (emphasis added)

81.  Accordingly, the decision of how CSI should vote on the Tianrui Resolutions is vested in the CSI board and not its shareholders.  A board meeting of CSI has to be held before the EGM.  Directors of CSI should vote in the best interest of CSI as a whole, rather than preferring one camp of shareholders to another.

82.  Further, the suggestion of Split Voting is illogical.  If this court considers any of the Receivers’ Votes to be in the interest of CSI, it will be self-defeating and contradictory to permit other shareholders of CSI to vote otherwise.  Mr Lam SC does not press on, rightly in my view, with this point.

83.  The request for a direction on Split Voting is thus declined.

Conclusion

84.  There are no special circumstances that will cause me to exercise the discretion to approve appointment of directors.  I decline to give the directions sought by the Receivers or the Split Voting sought by Zhang Sr.  The Receivers should not be blamed for making this application, apparently in good faith.  The great pressure of time leaves them with little room for more detailed consideration and collation of materials.

85.  In coming to this decision, I make it absolutely clear, like the Receivers do, that this court is not supporting the appointment or continuation of the appointment of Zhang Jr (and indeed other existing directors) to the board of Shanshui Cement.  This decision is purely based on principles and the materials now before the court, for the Receivers to hold the ring on the terms of the receivership until final adjudication of the disputes in these actions.  Any representation of a contrary position by anyone (as depicted in the messages to the Shanshui Cement employees) is clearly a misrepresentation.  Likewise, the court states its position that there is no finding that the participating employees have not been pressurized or bullied. It remains a question to be tried.  Given the cross-allegations that pressure has come from Zhang Sr and his associates, and the plaintiffs’ own representatives, and given that the Receivership Orders are in place, participating employees should think carefully before deciding whether to continue or withdraw their actions.  This decision does not bar the Receivers from taking appropriate action or applying to court for directions within the terms of their appointment.

86.  On a nisi basis, I order that D1’s costs be in the cause; the plaintiffs shall bear their own costs and the Receivers’ cost will be borne out of the trust assets.  There will be certificates for 2 counsel for all parties.

87.  I thank all lawyers and the Receivers for their hard work in the limited time available and their great assistance to the court.