ARCELORMITTAL AND ANOTHER v. CHINA ORIENTAL GROUP CO LTD AND OTHERS

HCMP 1163/2017

[2018] HKCFI 2066

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1163 OF 2017

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J U D G M E N T

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Introduction

1.  By an originating summons dated 18 May 2017, the Plaintiffs seek an Order under section 740 of the Companies Ordinance, Cap 622 (“CO”) that the Defendants do disclose and allow inspection of the documents set out in the Schedule attached thereto.  The Schedule has since been revised and, for ease of reference, a typed‑up clean version of the revised Schedule, setting out the 8 categories of documents sought, is appended to this judgment.  The documents sought concern a share placement completed on 27 January 2017 (“Placement”) whereby the 1^st Defendant (“Company”) placed 16.67% of its (enlarged) issued capital to not less than 6 placees, whose identities are unknown to the Plaintiffs, at the price of HK$1.30.

2.  The Company is an integrated iron and steel conglomerate incorporated in Bermuda with its operations based in the PRC.  Its shares are listed on the Main Board of the Hong Kong Stock Exchange.

3.  The Plaintiffs are substantial shareholders of the Company holding 39.16% of its issued shares as at 27 January 2017.  Prior to the Placement, the Plaintiffs’ shareholding in the Company was 46.99%.  Notwithstanding the Plaintiffs’ substantial shareholding, they only have 1 appointee on the Company’s Board viz Mr Ondra Otradovec as a non‑executive director.

4.  The 2^nd Defendant, Han Jingyuan (“Han Senior”) is the Chairman, executive director and CEO of the Company.  Through his associated companies, Han Senior holds 35.70% of the Company’s issued shares as at 27 January 2017.  Prior to the Placement, Han Senior’s shareholding in the Company was 45.04%.

5.  The 3^rd to the 6^th Defendants are executive directors of the Company.  The 3^rd Defendant is the son of Han Senior and Chief Financial Officer of the Company.  The 4^th Defendant is the Chief Operating Officer of the Company.  The 5^th and 6^th Defendants, as well as the 7^th Defendant, are members of the Share Issuance Committee of the Board (“SIC”).  The Plaintiffs claim, and it seems indisputable, that Han Senior has control over the Company’s Board (consisting of 9 directors) by being an executive director himself and the other 4 executive directors are associated with and/or were appointed by him.

6.  The 7^th to 9^th Defendants are independent non‑executive directors of the Company.  

The Law

7.  Section 740(1) to (4) of CO provides:

“ Court may order inspection of records or documents

(1) On application by a required number of a company’s members, the Court may make an order—

(a) authorizing a person who is the applicant or one of the applicants to inspect any record or document of the company; or

(b) authorizing a person who is not the applicant or one of the applicants to inspect any record or document of the company on behalf of the applicant or applicants.

(2) The Court may make an order authorizing a person to inspect a record or document if it is satisfied that—

(a) the application is made in good faith; and

(b) the inspection is for a proper purpose.

(3) If the Court makes an order authorizing a person to inspect a record or document, the person may, unless the Court otherwise orders, make copies of the record or document.

(4) If the Court makes an order authorizing a person to inspect a record or document, it may make any other order that it thinks fit, including—

(a) an order requiring the company, or an officer of the company, to produce any record or document to the person;

(b) an order specifying the record or document that may be inspected by the person;

(c) an order requiring the applicant to pay the expenses reasonably incurred by the company in the inspection; and

(d) an order permitting the person or, if the person is not the applicant, the applicant to disclose any information obtained as a result of the inspection to any other person specified in the order.”

8.  Section 740 confers on the court a discretion, upon the application of the requisite number of members ie 5 or more members or members representing at least 2.5% in value of the voting rights, to order the inspection of a company’s records or documents if the 2 requirements set out at section 740(2) are satisfied:

(1)  the application is made in good faith; and

(2)  the inspection is for a proper purpose.

9.  The meaning of the 2 requirements and how they are to be applied in a particular case have been considered in a number of authorities on section 740 and its predecessor ie section 152FA of the former Companies Ordinance, Cap 32.  For the present purpose, this court needs only refer to two.

10.  First, in Re Bank of East Asia Ltd [2015] 4 HKC 137 at [25] and [26], Harris J summarized the relevant principles as follows:

(1)  The “good faith” and “proper purpose” requirements constitute two separate and independent tests.  The applicant must first, establish that he is acting in good faith and second, the court must believe the circumstances are such that the inspection sought is for a proper purpose.

(2)  The burden of proof is borne entirely by the applicant.

(3)  Section 740 is not an opportunity for shareholders to challenge the commercial decisions of the company’s management.

(4)  In order to satisfy the “proper purpose” criteria, it is not necessary to satisfy the court that the applicant has a specific or personal right that can only be protected through the inspection of records.  A wish to inspect documents to investigate a genuine and credible belief that there has been corporate mismanagement is capable of constituting a proper purpose.

(5)  Generally, where the court is satisfied that the “purpose” is germane to a shareholder’s economic interest in the company a “proper purpose” will have been satisfied.

(6)  The court should be inclined to a liberal interpretation of “proper purpose” with a view to advancing the protection of shareholder rights and interest and the maintenance of appropriate standards of corporate governance.  This is particularly true in the case of publicly listed companies.  The court should be more willing to grant inspection orders to protect the interests of members in publicly listed companies.

(7)  As part of establishing a proper purpose, the applicant has to show that there is “a sufficiently reasonable case for investigation” as regards past or future wrongful or other undesirable conduct.  The shareholder may fail to obtain inspection where he fails to make out on his own material some kind of case for investigation, or where the corporation is able by leading evidence to dispel whatever suspicion has reasonably been aroused.

(8)  Once the court is satisfied that the applicant has established a “proper purpose”, the company should be required to be transparent.

(9)  The court is not required and should not endeavor to reach conclusions about the merits of the matters relied on as constituting a “proper purpose”.  The court needs to be satisfied that a proper purpose has been established and that in the exercise of the court’s discretion it is a proper case in which to make an order for inspection. 

11.  Second, in Leung Chung Pun v Masterwise International Ltd [2014] 1 HKLRD 1129 at [25], Recorder Anderson Chow (as he then was) explained why the court should refrain from reaching conclusions on the merits of the applicant’s case on “proper purpose” and how the court should exercise its discretion once a proper purpose is established:

“ Where, as in the present case, the application for inspection of a company’s records is for the purpose of enabling the plaintiff to carry out investigation into alleged misconduct or maladministration, it would not be possible or appropriate for the court to reach a firm conclusion on each complaint raised because, amongst other things, the evidence would likely not be complete, it is unlikely that disputes of fact can be resolved on affidavit evidence alone, and the complaint may well be raised again in subsequent proceedings for adjudication. Accordingly, what I consider the court should do is to assess, on the basis of the available evidence, whether the plaintiff has made out a proper case for investigation taking into account such explanations as may be offered by the defendant. If the plaintiff is able to make out a proper case for investigation, the court should move on to consider whether, in the exercise of its discretion, the inspection sought ought nevertheless to be refused. The statute does not lay down any restriction as regards the matters which the court may take into account when exercising its discretion. Thus, the court is entitled to take into account a wide spectrum of matters. However, as cautioned by Harris J in Wong Kar Gee Mimi v Hung Kin Sang Raymond (supra), [34]‑[37], the court should strike a proper balance between (i) requiring the company to be transparent and (ii) not permitting the statutory jurisdiction to be used by a shareholder to challenge managerial or commercial decisions made by the board of directors of the company. How this balance should be struck in any given case can only be determined on a case by case basis.” (emphasis added)

Material Factual Background

12.  While the parties have gone to great length and the Defendants in particular have produced a substantial amount of documentary materials to inter alia explain in minute detail the running disputes between the Plaintiffs and Han Senior’s camp as well as the historical background from 2007 when the Plaintiffs acquired shares of the Company all the way to the completion of the Placement in January 2017, the genesis of the Placement can be traced back to a few key events.

13.  First, since late 2007 to early 2008, the Company no longer complied with its minimum public float requirement ie the minimum prescribed percentage of shares being held by public shareholders in accordance with Rule 8.08 of the Listing Rules.  Since then, various efforts have been made to restore the Company’s public float to the satisfaction of Stock Exchange but without success.

14.  Second, as a result of the Company’s failure to restore its public float, trading of the Company’s shares was suspended with effect from 29 April 2014.  At that time, the Company’s shares closed at HK$1.16.

15.  Third, since the suspension of trading of the Company’s shares, the Company, the Plaintiffs and Han Senior had engaged in ongoing discussions in order to address the public float issue.  As far as the Company is concerned:

(1)  On 10 March 2015, the Board unanimously resolved to establish the SIC, consisting of the 5^th to 7^th Defendants, for the issue of new shares of the Company.

(2)  The work undertaken by the SIC included inter alia

(i)  identifying and discussing with financial advisers on the issue of new shares — in a meeting of the SIC held on 7 December 2015 (“December 2015 meeting”), the SIC received reports of the feedback from Deutsche Bank, JP Morgan, Macquarie Bank and CIMB Securities.  The SIC was also informed that the Company would contact Nomura International (HK) Ltd to see if it could provide some proposals on the issue of new shares and prepare investors’ presentation materials;

(ii)  identifying viable proposals to resolve the public float issue - in a meeting of the SIC held on 12 April 2016 (“April 2016 meeting”), the financial controller of the Company Mr Lam Pak Kan (“Lam”) reported that, other than the issue of new shares, ING has proposed another solution to the public float issue ie the issue of bonus shares and bonus convertible notes; since then, the Company and the SIC in particular have been exploring with financial advisers the two options of issuing new shares and the issue of bonus shares and bonus convertible notes;

(iii)  as recorded in the minutes of the April 2016 meeting, discussing with the Company’s financial advisers Macquarie, ING, CIMB Securities and Cinda International Capital on the viability of the proposed solutions and receiving their reports of their preliminary contact with potential investors to gauge market sentiment.

16.  Nevertheless, owing to the Company’s poor financial performance in 2015, recording a loss of RMB 767 million, and, importantly, the weak market sentiment and investors interest, up to mid‑2016, little progress was made on the issuance of new shares or finding other viable solution to resolve the public float issue.  At a Board meeting on 8 June 2016,Mr Otradovec agreed that it appeared to him to be very difficult to restore the Company’s public float by issuing new shares in light of the then market environment. 

17.  Fourth, the Company’s performance significantly turned around and recorded a big increase in profit for the 6 months ended 30 June 2016 so much so that it published a positive profit alert pursuant to Rule 13.09(2)(a) of the Listing Rules on 15 July 2016. 

18.  Fifth, on 27 July 2016, the Stock Exchange published an announcement that it required the Company to remedy the public float issue by 27 January 2017.  Should the Company failed to do so, the Stock Exchange might proceed with cancelling its listing status.

19.  Sixth, at a meeting held on 2 August 2016, the Board agreed that the Company should continue to discuss with the financial advisers on the proposed new shares issue.  At that time, the Board was informed that Macquarie was the only investment bank which had prepared a more formal valuation of the Company based on the expected result for the current year ie 2016.  According to Macquarie, the Company was valued at between US$1.5 billion to US$2 billion, the midpoint of which ie US$1.75 billion would give a value per share of HK$4.68. Even with a deeper than normal discount of 20%, the issuance price would still be around HK$3.00.  On 10 August 2016, the Company published an announcement that, in view of the expected improved financial results, the Company would continue to discuss with financial advisers on the proposed share issue at a reasonable price level.

20.  Seventh, meanwhile, Macquarie continued to carry out preliminary ground work in order to bring about a new share issue which, by mid‑October 2016, was the majority shareholders’ preferred option to deal with the public float issue.  In October and November 2016, Macquarie provided inter alia a draft engagement letter, work timetable, due diligence questionnaire and a draft pitch book to the Company and entered into discussions with the Company on the terms of engagement.  But negotiations were not smooth and the engagement letter of Macquarie was never signed.  In a letter dated 16 November 2016, the Company updated the Stock Exchange on its discussions with Macquarie regarding the proposed new share issue and the difficulties encountered (principally on fees and reimbursements).

21.  Eighth, on 8 December 2016, the Board held a meeting where the progress of the new share issue was discussed.  Prior to that, the Company’s management had met with and begun discussions with Shenwen Hongyuan Securities (HK) Ltd (“SWS”) regarding the new share issue.  One day before the said Board meeting, on 7 December 2016, the Plaintiffs received from the Company a share issue proposal of SWS.  According to the draft minutes of that Board meeting^[1]:

(1)  The Board was informed that both Macquarie and SWS valued the Company’s shares, on a preliminary basis, at HK$3.00 although concerns were expressed as to whether a share placement at that price was achievable.

(2)  The Board examined some of the main terms of engagement and the comparative merits between SWS and Macquarie including SWS’s greater familiarity with PRC and Hong Kong investors who would have a better understanding of the Company and the PRC steel industry.  Some Board members also expressed concern that Macquarie’s plans for targeting international investors and global roadshows might not be feasible given the deadline imposed by the Stock Exchange.  Detailed reasons were given by the 2^nd to 6^th Defendants for preferring SWS over Macquarie.  

22.  Further, according to the draft minutes, it was resolved that the SIC continued to negotiate with and appoint SWS to resolve the Company’s public float issue.  This is disputed by the Plaintiffs and the draft minutes have not been approved by them.  What is not in dispute is that ultimately SWS was chosen to be the Company’s placing agent.

The Appointment of SWS and the Placement

23.  How SWS came to be appointed and the work they had undertaken since their appointment were set out in detail in the affirmation of the 3^rd Defendant.  The following is a brief summary mainly taken from that affirmation as well as from the affirmations of the 6^th and 7^th Defendants.

24.  By early December 2016, the Company had still been unable to agree the terms of engagement with Macquarie and there were no proposals from any other investment banks for a share placement.  It was in these circumstances that the 3^rd Defendant approached SWS who were recommended to him by a friend.

25.  On or around 4 December 2016, SWS had an initial meeting with Han Senior, the 3^rd Defendant and Lam.  SWS expressed at this initial meeting that they were able to arrange a non‑deal roadshow for the Company to meet with some institutional investors in the PRC and Hong Kong, and that they were willing and able to proceed with a share placement and were confident of completing the same before 27 January 2017.  At this meeting, SWS provided the Company with their credentials from which it was apparent that SWS were one of the largest securities dealers in the PRC and had been advising a number of listed companies in Hong Kong in 2016.[2] They also had established sales offices in 45 major cities in the PRC, four branch offices in Hong Kong, and regional offices in Japan, Korea, and Singapore.

26.  On 5 December 2016, SWS provided their initial draft terms of engagement to act as the Company’s exclusive placing agent.  The Company had only one round of negotiations with SWS on such terms, and SWS were agreeable to charging a 2.5% commission and for its disbursements and being eligible for a discretionary 0.5% bonus only upon a successful placing.  Further, SWS were agreeable to charging for a non‑deal roadshow for the Company only upon a successful placing.

27.  On 8 December 2016, the Board held a meeting as aforesaid.

28.  On 9 December 2016, the Company formally engaged SWS as its exclusive placing agent.  SWS then began to conduct due diligence on the Company through meetings with the SIC and issuing due diligence questionnaires. 

29.  By an email dated 16 December 2016, Mr Otradovec wrote to Han Senior and other Board members expressing his concern about SWS being able to carry out the placement on their own and said whilst he respected and supported the decision to engage SWS for the free float restoration, he strongly believed the Company would be best served by having one of the top international investment banks to work alongside SWS.  He then suggested HSBC in addition to Macquarie in the email.

30.  On 21 December 2016, SWS finalized its Research Report.  Under the section “Valuation”, SWS’s conclusion on the Company’s fair value was this:

“ … as the company’s market cap is just US$408m and small cap stocks trade at a significant discount in the Hong Kong market, we believe that a 40‑45% discount is fair. In addition, the company has suspended trading for two years. As there is some uncertainty related to its stock price when it resumes trading, we do not expect liquidity to improve. Therefore, we believe that the company’s valuation requires an additional discount of 15‑20% for such risk. Hence, we believe that company’s fair value is within HK$1.25‑1.42, representing 0.41x‑0.46xPB and 7.8%‑22.5% upside potential.” (emphasis added)

31.  From late December 2016 to early January 2017, SWS arranged a non‑deal roadshow for the Company to meet with thirty to forty potential investors in Shanghai, Shenzhen and Hong Kong.  Such potential investors included institutional investors, private equity and insurance funds based in PRC, Hong Kong and abroad and were selected by SWS.

32.  The feedback was not positive — some investors indicated their expectation that the placing price would be discounted or at least would not deviate much from the last closing price of HK$1.16 per share in April 2014.  In early January 2017, after the roadshow, SWS reported back to the Company’s management that on the basis of inter alia its internal research into the valuation of the Company and the feedback from the non‑deal roadshow, the market was unlikely to have an appetite for a placing price above HK$1.30 per share.

33.  In early January 2017, the Company, via Lam, obtained the views of the asset management teams of Huarong International Holdings Limited (“Huarong”) and Shanghai Pudong Development Bank (“SPDB”) as to what might be the best indicative share price for the Company’s placing.

(1)  Huarong opined that the best indicative share price for the Company’s placing would be HK$1.25, taking the Company’s last closing price of HK$1.16 as a basis, and factoring in the historically low trading volume of its shares, uncertainties with the Company’s share price after its shares resume trading from an almost 3‑year trading suspension, and the price range of other Hong Kong listed steel companies such as Maanshan and Angang.

(2)  SPDB referred to the Company’s last closing price of HK$1.16 and expressed the view that the same would be the best indicative share price in the circumstances.

34.  The SIC further engaged Gram Capital as its independent financial adviser on the placing price of its shares.  For that purpose, Gram Capital engaged in correspondence and dialogue with the Stock Exchange.  By mid‑January 2017, the Stock Exchange had no further comments and Gram Capital’s opinion was the finalized.  In its letter dated 20 January 2017, Gram Capital opined that the placing price of HK$1.30 per share was fair and reasonable in light of the following circumstances:

(1)  the trading volume of the Company’s shares had historically been very thin;

(2)  the placing price represented a premium over the last closing price of the Company’s shares ie HK$1.16;

(3)  the Company’s shares had historically traded at a substantial discount to its net asset value per share, and the placing price represented a commensurate discount to the Company’s unaudited consolidated net asset value per share as at 30 June 2016;

(4)  the price to earnings before interest, tax, depreciation and amortisation ie EBITDA per share ratio as derived from the placing price was higher than that derived from historical figures; and

(5)  whilst the price to book ratio of the Company as derived from the placing price was very slightly below the range of the same ratio in respect of other comparable Hong Kong listed companies in the steel industry, the same was justified in light of the Company’s long trading suspension and being subject to a tight deadline to restore its public float.

35.  On 19 January 2017, the Listing Division of the Stock Exchange orally confirmed that it had no further comments on the Placement as proposed by the Company.

36.  At the Board meeting held on 19 January 2017, ie just over 1 week before the delisting deadline, the views expressed by Huarong and SPDB set out above were discussed.  Further, representatives of SWS and Gram Capital were invited to join the Board meeting to explain SWS’s setting of the placing price at HK$1.30 per share.  Upon the recommendation of the SIC, the Board, with the exception of Mr Otradovec, approved the Company to enter into the placing agreement with SWS and the completion of the placing. 

37.  On 20 January 2017, the Company commenced the Placement by SWS.  On 27 January 2017, the Placement was completed and trading of the Company’s shares was resumed on 1 February 2017.

Good Faith

38.  Although paragraph 2 of the Company’s skeleton submissions suggests the application is opposed on the ground that it is not made in good faith nor with proper purpose, it is reasonably clear from the substance of the submissions that the only real difference between the parties is whether the Plaintiffs can satisfy the “proper purpose” requirement.  As far as the 2^nd to 9^th Defendants are concerned, they frankly submit at paragraph 6 of their skeleton submissions that their ground of opposition is that Plaintiffs have failed to establish a proper purpose for the application.  In these circumstances, no useful purpose will be served by dwelling on the good faith requirement of section 740 — rather, the court should immediately proceed to examine whether a “proper purpose” has been shown.

Proper Purpose

39.  At paragraph 3.9 of the affirmation of Guillaume Vercaemer for the Plaintiffs, it was stated that the Plaintiffs had 3 grave concerns about the Placement viz:

(1)  the propriety of the process (in particular the Board’s deliberation and purported resolutions) in which the Company decided in haste to appoint SWS in place of Macquarie;

(2)  whether the Board had been provided with sufficient information and options for consideration at the Board meeting of 19 January 2017;

(3)  the artificially deflated placing price and the opaqueness as to the identity of the Placees, which raises serious questions as to whether the Company’s shares had been placed at a significantly undervalued price to its detriment for the personal benefit of certain directors and shareholders.

40.  In the Plaintiffs’ skeleton submissions at sections E(1)‑(5), it is submitted that proper purpose can be shown in that there is at least a reasonable case for investigation of the following matters:

(1)  Questionable formulation of the placing price (“Case 1”).

(2)  The Board’s blinkered approval of the placing price (“Case 2”).

(3)  Sudden choice of SWS over Macquarie (“Case 3”).

(4)  Corporate governance concerns relating to the appointment of and dealing with SWS (“Case 4”).

(5)  Identities of the Placees (“Case 5”).

41.  In essence, the Plaintiffs’ case for investigation can be divided into 3 broad categories.  Arranged in a more logical sequence, they are:

(1)  The Board’s “sudden U‑turn” and “rushed to engage SWS” in place of Macquarie and its handling of the appointment process — Cases 3 & 4.

(2)  The way in which SWS formulated the placing price and the manner in which the management gave its approval — Cases 1 & 2.

(3)  The reluctance of the management to disclose the identities of the Placees which raises concern about their independence — Case 5.

42.  As a general observation, this court notes that in her skeleton submissions, Ms Sit is at pains to emphasise that the Plaintiffs accept that a share placement had to be undertaken and the present application is not a challenge against the wisdom of a commercial decision.  The Defendants, on the other hand, differ and argue that the Plaintiffs are simply unhappy that their preferred candidate viz Macquarie was not appointed and their preferred placing price of HK$3 or above (which Mr Otradovec indicated at the board meeting held on 2 August 2016 was very acceptable in his opinion) was not adopted.

Choice of SWS

43.  Notwithstanding Ms Sit’s detailed criticisms of (i) what she described as a sudden change of tack of the Company in early December 2016 of abandoning discussions with Macquarie, (ii) the reasons given for the Board’s preference of SWS over Macquarie, and (iii) the SIC having allegedly been sidelined in the selection of SWS, and her dressing up such criticisms as corporate governance issues, this court agrees with Mr Manzoni SC that this is plainly a challenge by the Plaintiffs to a managerial decision and does not demonstrate a proper purpose.  The reasons are these.

44.  First, the so‑called “rushed” decision to replace SWS with Macquarie must be seen not just in the events of December 2016, but must be assessed in light of what happened much earlier.

45.  While the SIC had been in discussions with various financial advisers including in particular Macquarie throughout 2016, the fact of the matter was that as at early December 2016, less than 2 months from the Stock Exchange deadline, the Company had still been unable to agree the terms of engagement with Macquarie and there were no proposals from any other investment banks for a share placement.  On the other hand, SWS were a reputable and sizable securities dealer.  They were confident of completing the Placement before the deadline, which they eventually did, and were accommodating on fees.  Even if Macquarie subsequently made a concession on fees that matched those of SWS, the Company’s management was still entitled to pick the one rather than the other based on considerations other than fees.  It cannot be argued that just because the fees of 2 firms of financial advisers are the same or substantially the same, the management must appoint both, otherwise, their preference of one over the other is a cause for investigation.

46.  Second, on the available evidence, the SIC had not been sidelined at all in the selection of SWS, even though the initial meeting with SWS was attended by Han Senior, the 3^rd Defendant and Lam.  At the Board meeting held on 8 December 2016, 2 members of the SIC were present[3] and, as revealed in the draft Board minutes, the Board had a thorough discussion of the considerations favouring SWS rather than Macquarie.  At paragraphs 67 and 68 of the 6^th Defendant’s affirmation, he explained why he, as well as inter alia another member of the SIC viz the 5^th Defendant considered SWS to be more suitable than Macquarie to act as the Company’s placing agent and hence made a recommendation to that effect at the 8 December 2016 Board meeting.  In the 7^th Defendant’s affirmation at paragraph 63, he explained he had no concerns with the Board’s decision to appoint SWS instead of Macquarie.

47.  Essentially, the factors favouring SWS over Macquarie were that the SIC (and some other Board members) had reservations over Macquarie’s ability in achieving the placing price it proposed, they were not pleased with the fee discussions with Macquarie and they were unsure about the indicative valuation in Macquarie’s September 2016 Proposal.  The SIC were concerned about the optimistic placing price against the risk of the Company being delisted for failing to restore the public float, which would be disastrous for the Company’s shareholders.  On the other hand, the SIC were impressed with the credentials of SWS, particularly their large client base of institutional investors in the PRC and their swift negotiations regarding their terms of engagement.

48.  For these reasons, this court finds the first category of the Plaintiffs’ complaint to be without merits.

Choice of the Placement Price of HK$1.30

49.  At the risk of stating the obvious, valuation of shares is not an exact science.  While the market price of shares traded on a recognized stock exchange can easily be ascertained, anyone with any experience in arranging an IPO (especially of tech companies, start‑ups, or firms operating in emerging markets) or arranging a private placement will appreciate the difficulties involved in doing so.  Market sentiments have a big part to play in influencing potential investors’ decision whether or not to take up the shares that a company wishes to place.  This explains the lack of progress on the issuance of new shares in the first half of 2016 and was acknowledged by Mr Otradovec at the Board meeting held on 8 June 2016.  It is true that the Company’s July 2016 Profit Alert raised some hope for optimism but the SIC were entitled to be cautious given the immense significance of avoiding a delisting of the Company’s shares, the Stock Exchange’s deadline and its effect on market sentiment.

50.  In Macquarie’s Suggested Options to the Company by email dated 12 August 2016, one of the downsides of share placement mentioned in it was that “Heavy discount is expected for such placement” and that share placement was a less feasible option than issuing bonus shares.  The heavy discount was understood by the Company as discount to the last closing price of its shares.  It is true that Macquarie subsequently recommended a higher indicative valuation in its September 2016 Proposal to the Company, and then, in December 2016, both Macquarie and SWS valued the Company’s shares, on a preliminary basis, at HK$3.00.  But, as far as SWS were concerned, this was before they conducted more extensive due diligence on the Company and the non‑deal roadshow from late December 2016 to early January 2017 during which SWS received negative feedback from potential investors.

51.  The Plaintiffs’ Case 1 is in essence concerned with SWS’s allegedly questionable formulation of the placing price — it is not a corporate governance issue at all.  Instead, it is about the professionalism of SWS as a financial adviser and placing agent and the soundness of its methodology in setting the placing price.  Investigating SWS’s professionalism and methodology is not the Plaintiffs’ stated objective of the present application and, on the authorities, is in any event not a “proper purpose” within section 740.

52.  The Plaintiffs’ Case 2 is on its face a complaint about the Defendants’ failure to properly consider the placing price of HK$1.30 before approving it.  But in essence this is another challenge to a commercial decision taken by the Board.  That decision was based on the advice of SWS and supported by input from Gram Capital, Huarong and SPDB, recommended by the SIC and was taken at the Board meeting held on 19 January 2017.  

53.  The discussions of the Board members were set out in detail in the draft minutes.  Among the factors influencing the SIC and the Board as a whole (other than Mr Otradovec) were:

(1)  the placing price was set after a valuation report from SWS and obtaining feedback from the market at the roadshow (which Macquarie had not done);

(2)  Gram Capital opined that the placing price was fair and reasonable in the circumstances;

(3)  there was only one week left until the delisting deadline; and

(4)  the Stock Exchange had indicated its approval of the Placement.

54.  The SIC’s recommendation and the Board’s decision must be judged against the exigencies existing at the time of that meeting ie the Stock Exchange’s deadline was just over 1 week away.  It seems to this court entirely reasonable and in the interests of the Company that the SIC and the Board decided to opt for the prudent approach of adopting a safer placing price so as to reduce the risk of the flopping of the Placement and the Company’s shares being delisted.  As it turned out, the Board’s prudent approach paid off and the Company’s paramount objective of avoiding delisting of its shares was achieved.  

55.  Of course it goes without saying that the Company would have been better off financially from a placing price of HK$3.00, if achieved, than a placing price of HK$1.30.  But the Plaintiffs’ suggestion of placing the shares at HK$3.00 might or might not be achievable and, if it was not, the consequences for the Company would be extremely serious. 

56.  For these reasons, this court also finds this category of the Plaintiffs’ complaint to be without merits.

Identities of Placees

57.  The Plaintiffs’ submissions on this last category of complaint are quite economical and for ease of reference are quoted verbatim below:

“ (E.5) Identities of placees

78. In light of the serious and legitimate questions raised above with respect to the formulation of the placing price of HK$1.30 and the appointment of SWS, the independence of the placees from Han Snr becomes a matter of great significance in safeguarding the interests of the existing shareholders, including Ps.

79. However, the Company has steadfastly refused to disclose the identities of the placees, in circumstances where it is in possession of the list of placees (Han Li §32 [A/8/113]) and where such information is not ascertainable by Ps (see §45 above).  The bald assertion by Han Jnr that the placees are not listed on the Company’s list of connected persons offers no comfort to Ps, when the concern is that the placees are associated with Han Snr.”

58.  Assuming the independence of the Placees from Han Senior is a matter of great significance, the Plaintiffs must still establish by evidence “a sufficiently reasonable case for investigation”.  A mere suspicion, even if genuinely held by the Plaintiffs, is not good enough.

59.  Mr Manzoni SC submits that there is no evidence whatsoever that the Placees might in fact be linked or connected with Han Senior.  There is not even evidence in support of the Plaintiffs’ suspicion.

60.  From paragraph 78 of the Plaintiffs’ submissions, it would appear that they are using their complaints about the appointment of SWS and the adoption of the placing price at HK$1.30 to justify questioning the independence of the Placees.  But as this court has concluded above, the Plaintiffs’ first two categories of complaint are unjustified and it is difficult to see how two unjustified complaints can themselves justify questioning the independence of the Placees.

61.  From paragraph 79 of the Plaintiffs’ submissions, it would appear the Plaintiffs are also relying on the Company’s steadfast refusal to disclose the identities of the Placees even when it is in possession of the list to justify questioning their independence.  But the reason for the Company’s refusal to disclose the list has already been explained by the 3^rd Defendant in his affirmation at paragraph 32 as follows:

“ 32. In light of the Plaintiffs’ letter dated 20 January 2017 expressing its various complaints against the Placing, including its groundless speculation regarding the lack of independence of the proposed placees, the Company had, on the eve of the completion of the Placing, made an unusual request to SWS to be provided with its list of placees to the Placing, including the placees’ identities (the “Placees List”).  SWS initially refused because, as SWS explained, the market practice and expectations were that the identity of the placees would be kept confidential save only as to disclosure to the placing agent and the Stock Exchange.  SWS further explained that placees are customarily allotted the placing shares in the name of a nominee, such as CCASS (ie HKSCC Nominees Limited) or the placing agent, thus keeping the placees’ identities confidential even from shareholder registries.  Ultimately, however, and in the light of the circumstances as I explained to them, SWS agreed to provide the Placees List (being the same list that it submitted to the Stock Exchange) to the Company, but warned that the same must not be disseminated outside the Company for confidentiality reasons.”

62.  In any event, SWS had conducted its own due diligence to ensure the independence of the Placees and, as a condition precedent to the completion of the Placement, SWS had obtained from each Placee its executed declaration as to independence.  Such declarations were delivered to SWS who then submitted the same to the Stock Exchange.   

63.  To conclude, as submitted by Mr Manzoni SC, this court agrees that this last complaint is a mere fishing exercise by the Plaintiffs.  It is wholly devoid of merits and ought to be rejected.

Disposition and costs order nisi

64.  For all the above reasons, the Plaintiffs’ application under section 740 of the Companies Ordinance is hereby dismissed.

65.  There shall be an order nisi that costs be to the Defendants, to be taxed if not agreed, and paid by the Plaintiffs forthwith.

66.  Lastly, this court thanks the legal representatives of all parties for their helpful assistance.

Appendix

(1) The final signed SWS Placing Agreement and the Sub‑Placing Agreement signed with Yuexiu Securities.

(2) The minutes of any meetings and associated resolutions relating to the appointment of SWS (save for the draft minutes of the Board meetings on 8 December 2016 and 19 January 2017).

(3) Any written communications between the directors with respect to the placement, the Placing Agreement and the opinion from Gram Capital regarding the proposed placing price.

(4) The correspondence between the Company and SWS, and any other potential financial advisers concerning the SWS Placement, and Gram Capital concerning its opinion as regards the proposed placing price.

(5) Any written feedback from the non‑deal roadshows involving the Company referenced in the HKEx Announcement of 16 January 2017.

(6) The correspondence between the Company and the HKEx concerning the SWS Placement.

(7) The list of placees in the SWS Placement.

(8) All the independence confirmations provided by the placees provided for in the SWS Placement.