XCHRX PERENNIAL INVESTMENTS (H.K.) LTD. v. UNION BRIDGE INVESTMENT LTD. AND OTHERS

HCA 10119/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 10119 OF 1999

____________

___________________________________

REASONS FOR DECISION

___________________________________

The 2nd Defendant is the focus of this action. Apparently it has potential to be a successful business undertaking and has the backing of a leading local bank ("the bank"). However, it is in financial difficulties and is beset by in-fighting. The promoters of the 2nd Defendant have split into two antagonistic camps, one being the Plaintiff and the other being the 1st Defendant with the other individual Defendants. The real issue in the action herein is which camp may obtain majority shareholding in (and thus control of) the 2nd Defendant. Each camp contends that it is entitled under a Shareholders' Agreement to acquire controlling shares in the 2nd Defendant and there are cross allegations of breach of the shareholders' agreement.

2. The parties first came before me on 8th December 1999 on a different summons because two of the directors nominated by the Plaintiff to sit on the board of the 2nd Defendant and a financial controller appointed by the Plaintiff for the 2nd Defendant were removed from their office allegedly contrary to the said Shareholder's Agreement. On that occasion, I was given the impression that the bank believed that the 2nd Defendant would not be able to trade effectively with much bickering between the two camps at the board level. I was informed that the bank would continue to support the 2nd Defendant only if the 2nd Defendant would not be further hampered by internal conflict. On the other hand, the Plaintiff contended that it was entitled to safeguard the interests of its investment in the 2nd Defendant. In the premises, I made an order which was a kind of compromise and at the same time preserve as far as practicable the status quo until trial of the action. The order was in these terms:-

"1. The 1st, 2nd, 3rd and 4th Defendants do take all such steps as may be necessary to appoint up to 2 nominees of the Plaintiff who are practising Certified Public Accountants as directors of the 2nd Defendant provided that such nominees shall not have been objected to by The Hongkong and Shanghai Banking Corporation Limited within 7 days of the nomination. The Plaintiff undertakes to procure the resignation or concur in the removal of such directors or any one of them, if subsequent to their appointment, The Hongkong and Shanghai Banking Corporation Limited requires his or their resignation or removal. In such event, the 1st, 2nd, 3rd and 4th Defendants shall take all such steps as may be necessary to appoint a replacement director or directors, as the case may be, provided such replacement should not have been objected to by the Hongkong and Shanghai Banking Corporation Limited within 7 days of nomination. The Plaintiff undertakes to procure the resignation or concur in the removal of such replacement director or directors if The Hongkong and Shanghai Banking Corporation Limited requires his or their removal or resignation.

2. The 2nd Defendant do supply to the directors so appointed or failing them the Plaintiff a list of all payment in excess of HK$10,000.00 together with their supporting vouchers within 48 hours of their payment by the 2nd Defendant.

3. The Plaintiff undertakes that they shall keep any information supplied to or obtained by them or as a result of paragraphs 1 or 2 above confidential and, without the leave of the Court, not to use them save for the purpose of these proceedings.

4. The 1st, 2nd, 3rd and 4th Defendants be restrained from selling or in anyway of disposing the shares now purportedly held by them as a result of the purported compulsory purchase of the Plaintiff's shares.

5. The 2nd Defendant be restrained from paying, undertaking or incurring any of the costs of any of the other Defendants in this action.

6. The 2nd Defendant undertakes to give to the Plaintiff at least 5 days notice before the 2nd Defendant issues or agrees to issue any of its share or registered capital or grants any option over or right to acquire any of its share or registered capital.

7. The 2nd Defendant undertakes to give to the Plaintiff at least 5 days notice before the 2nd Defendant permits or suffers Popbridge Manufacturing Limited and Dongguan Popbridge Electronic Company Limited to issue any of its shares or registered capital or grant any option over or right to acquire any of its share or registered capital.

8. There be general liberty to apply on 48 hours notice."

3. Thereafter, some time in January 2000, two board meetings of the 2nd Defendant were held in which, allegedly, the board decided to make a general offer of convertible bonds to all existing shareholders pro rata their respective percentage of shareholdings. This prompted the Plaintiff to come back to me with an urgent summons ("the urgent summons") for an order in the following terms:-

"(1) An order that the 1st, 3rd and 4th Defendants their agents or servants or whosoever otherwise be restrained from issuing or causing the 2nd Defendant to issue an additional 8,000,000 shares at $1.00 each provided in the Convertible Bonds Agreement entered into between the 1st and 2nd Defendants ("the Convertible Bonds Agreement") or any shares of the 1st Defendant in any other quantity or denomination or to allot the same to the 1st Defendant;

(2) An order that the 1st Defendant its agent or servants or whosoever otherwise be restrained from submitting or applying to the 2nd Defendant subscribing for 8,000,000 convertible bonds at $1.00 each provided in the Convertible Bonds Agreement or any other convertible bonds of the 2nd Defendant in any other quantity or denomination;

(3) An order that the 1st Defendant its agents or servant or whosoever otherwise be restrained from demanding, charging or receiving payment of any interests in respect of the loan of $8,000,000.00 lent or advanced or to be lent or advanced to the 2nd Defendant save and except reasonable commercial lending interest as the Hongkong and Shanghai Banking Corporation or other banks in Hong Kong; and

(4) An order that the 1st Defendant its agents or servant or whosoever otherwise be restrained from giving any notice to the 2nd Defendant or to any other party action on its behalf to convert any of the aforesaid convertible or other bonds of the 2nd Defendant into ordinary or other shares of the 2nd Defendant;

until the hearing of the Action herein or until further order."

4. True to form, before I could start to hear arguments on the merits of the urgent summons, the parties began to fight over another issue. Mr Wong, counsel for the 2nd Defendant, complained that the Plaintiff had not served the 2nd Defendant with papers relating to the urgent summons. The Plaintiff contended that, because the terms of the order being sought are not directed at the 2nd Defendant and because moreover the question of which camp ought to have control of the 2nd Defendant had not been determined by the court yet, the 2nd Defendant could not engage legal representation which is an unjustified expenditure.

5. It is trite law that before the court makes any injunctive order that may affect a party, that party ought to be given the opportunity to make representations. Here the order being sought would have the effect of preventing the 2nd Defendant from raising money by one means. Clearly the 2nd Defendant was entitled to be heard if it wished. Accordingly, I ruled that the 2nd Defendant could present its case in respect of the urgent summons and all parties were warned to desist from conducting themselves in this action with any tint of bigotry.

6. As to the merits of the urgent summons, Mr Ho for the Plaintiff suggested, and it is conceded by Mr Wong for the 2nd Defendant, that the 2nd Defendant could not issue the convertible bonds without a resolution of the general meeting of the 2nd Defendant.

7. Mr Wong for the 2nd Defendant confirmed that the proposal to issue convertible bonds had not yet been put before a general meeting and no bond had yet been issued. Issuing of convertible bonds was just one of several means the 2nd Defendant had been considering to raise trading capital. In any event, Mr Wong argued, the issue of convertible bonds to shareholders pro rata their respective percentage of shareholdings was a fair measure. The Plaintiff, for instance, could decide to take up or reject the offer as it wished.

8. In my view, offering convertible bonds at this stage, even though pro rata respective percentage of shareholdings, could not be appropriate because the percentage of shareholding the parties herein are entitled to is the very bone of contention in the action. If some of the shareholders, including the parties herein, are prepared to inject trading capital into the 2nd Defendant, they may be issued debentures rather than bonds convertible to shares. The proposal to issue convertible bonds would give the impression that it may be designed to upset the status quo and even pre-empt the result of trial. As I have indicated during the earlier hearing on 8th December 1999, the court should preserve the status quo as far as practicable.

9. On the other hand, the Plaintiff's urgent summons for injunction to restrain issue of convertible bonds was premature. All that the Plaintiff had was information that the board of directors of the 2nd Defendant decided to issue convertible bonds. There is not yet board minutes to confirm what was the decision, if any. Even if the board had decided, a general meeting had yet to be convened to authorize the issue of convertible bonds. If, as the Plaintiff feared, the 2nd Defendant were to issue convertible bonds without requisite resolution of general meeting, the issue would be invalid anyway and may be set aside at any time.

10. In the premises, I made no order on the urgent summons. The hearing was adjourned sine die so that it may be revived in case the Defendants proceed to arrange the issue of convertible bonds. Since after all the urgent summons was premature, I ordered the Plaintiff to bear the Defendants' costs of the hearing before me on 3rd February 2000.