SHANGHAI LIYOU INVESTMENT MANAGEMENT LTD v. NINGXIA ZHONGYINCASHMERE INTERNATIONAL GROUP CO LTD AND OTHERS

HCMP 3423/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 3423 OF 2015

__________________

__________________

__________________

__________________

D E C I S I O N

__________________

1.  There are four summonses before the court:

(1)   The summons dated 28 December 2015 (“Continuation Summons”) issued by the plaintiff for continuation of an ex parte injunction granted by Li J on 26 December 2015 (“Injunction Order”).

(2)   The summons dated 4 February 2016 (“Amendment Summons”) issued by the plaintiff for leave to amend the originating summons filed on 28 December 2015 (“OS”) to enable the plaintiff to claim an injunction beyond the scope of the Injunction Order and to seek an interlocutory injunction in the same terms against the defendants.

(3)   The summons dated 7 March 2016 issued by the plaintiff for leave to file the Fourth Affirmation of Wang Ji dated 7 March 2016 (“Wang 4^th”) in further support of the Continuation Summons and the Amendment Summons.

(4)   The summons dated 24 March 2016 (“Discharge Summons”) issued by the defendants for discharge of the Injunction Order and leave to file the Second Affirmation of Zhirui Wilfred Ho (“Ho 2^nd”) in support of such Summons.

Preliminary matters

2.  At the hearing, Mr Patrick Fung SC, counsel for the plaintiff, (leading Mr Jonathan Chang) complains about the delay on the part of the defendants in issuing the Discharge Summons which, he says, has deprived the plaintiff of the opportunity to deal with certain new factual allegations raised in Ho 2^nd although he is unable to point to any specific allegations which may be said to be new.

3.  On the other hand, Mr Russell Coleman SC, counsel for the defendants, invites the court to hear all the summonses on the basis that the arguments and the evidence relating to all summonses are largely identical.  Mr Coleman acknowledges that the Discharge Summons and Ho 2^nd were filed late but submits that the plaintiff will not be prejudiced as the arguments for discharge of the Injunction Order have already been canvassed by the parties in correspondence, and the defendants will not rely on any new factual allegations raised in Ho 2^nd.  That being the position, it is unnecessary to grant leave to the defendants to file Ho 2^nd.

4.  In light of the concession made by Mr Coleman, I consider that it is appropriate to deal with the Discharge Summons as the arguments relied on by the defendants have been dealt with by the parties in correspondence or in Mr Coleman’s skeleton argument.  Indeed, the plaintiff has in its reply submissions dated 30 March 2016 responded to the defendants’ arguments on the Discharge Summons.

5.  As for the summons to file Wang 4^th, Mr Coleman confirms that he does not object to the plaintiff filing this affirmation but makes clear that he does not accept that the matters stated therein provide any basis for the plaintiff to continue the Injunction Order or to seek an extended injunction.

Background facts

6.  The background facts relevant to the summonses are not in dispute.

7.  Capitalhold Limited (“Company”) is a Cayman Islands company.  It is a special purpose vehicle used by various investors to acquire and privatize Shanda Games Limited (“Shanda Games”), a leading online games developer, operator and publisher in Mainland China whose shares were then listed on NASDAQ Stock Exchange.

8.  The plaintiff is under the control of Mr Wang Ji (“Mr Wang”), who is its director and legal representative.  The plaintiff has three wholly owned subsidiaries, which are Orient Hongtai (Hong Kong) Limited (“Hongtai”), Orient Hongzhi (Hong Kong) Limited (“Hongzhi”) and Hao Ding International Limited (“Hao Ding”).

9.  The defendants are controlled by Mr Ma Shengming (“Mr Ma”) who is their legal representative and chairman.

10.  Ningxia Yilida Capital Investment Limited Partnership (“Partnership”) is a limited partnership established in the PRC and is controlled by Mr Zhang Yingfeng (“Mr Zhang”).  Mr Zhang is the chairman and CEO of Shanda Games and the sole director of the Company.

11.  By a cooperation agreement dated 12 March 2015 made between, inter alios, the plaintiff and the 1^st defendant (“Cooperation Agreement”), the parties agreed that the 1^st defendant shall be responsible for leading the consortium to complete the privatization of Shanda Games within 120 days and, thereafter, to inject Shanda Games into a company whose shares will be listed in the A‑Share stock market in the PRC.

12.  By a side letter dated 12 March 2015 issued by the plaintiff to the 1^st defendant, which was stated to have been accepted and agreed to by the defendants (“Side Letter”), the parties agreed, inter alia, as follows:

(1)   Clause 1 provides that each party:

“… warrants, confirms and agrees not to (and shall cause its respective affiliates, designees, assignees and transferees not to) … take the following actions without the prior written consent of each of Hongtai, Hongzhi and Hao Ding including, without limitation:

…

ii.  issue, deliver, sell, grant, pledge or otherwise dispose of or encumber any shares of [the Company’s] or any of its subsidiaries’ share capital, or any rights, convertible securities, warrants or options to acquire any such shares;

iii.  amend memorandum of association, articles of association and other formational documents of the [Company];

iv.  enter into an agreement with respect to or otherwise consummate any merger, consolidation, liquidation or business combination….”

(2)   Clause 2 provides that:

“… Hongtai, Hongzhi and Hao Ding shall have the right to designate one or two directors to the board. Such director(s) may only be removed or replaced by Hongtai, Hongzhi and Hao Ding. …”

(3)   Clause 10 provides that:

“… In the event of a restructuring, recapitalization or reorganization of substantially all of the assets of the [Company] and its subsidiaries (collectively, the “Restructuring”), [the 1^st defendant] (and its affiliates) shall ensure that [the plaintiff] (and its affiliates) will hold substantially the same economic interest and voting power in the entity holding the assets of the [Company] and its subsidiaries after the Restructuring as [the plaintiff] (and its affiliates) do in the [Company] and its subsidiaries immediately prior to the Restructuring. …”

(4)   Clause 11 provides that the 1^st defendant shall cause its affiliates, transferees, designees or assignees to be bound by the terms of the Side Letter.

(5)   Clause 14 provides that the Side Letter is governed by the laws of the State of New York.

(6)   Clause 15 provides that any disputes arising out of or in any way relating to the Side Letter shall be submitted to arbitration in Hong Kong.

13.  A few days later, the Partnership, the 1^st defendant, Hongzhi, Hongtai and Hao Ding entered into a consortium agreement dated 16 March 2015 (“Consortium Agreement”) to acquire and privatise the shares in Shanda Games.  The acquisition and privatisation was completed on 18 November 2015.  Since then, the Company has been the sole shareholder of Shanda Games.

14.  The shareholders of the Company are either parties to the Consortium Agreement or their affiliates and fall into three camps.  Their voting rights are as follows:

(1)   The plaintiff controls 16.33% voting rights which are held through Hongtai, Hongzhi and Hao Ding as to 4.37%, 4.37% and 7.59% respectively.

(2)   The defendants control 46.66% voting rights through the following companies:

(a)   The 1^st defendant, through two wholly owned subsidiaries, Zhongrong Legend Investment Holdings (Hong Kong) Limited (“Zhongrong Legend”) and Silkroad Investment Holdings (Hong Kong) Co, Limited (“Silkroad”), holds 2.03% and 4.47% voting rights respectively.

(b)   The 2^nd defendant holds 34.46%.

(c)   The 3^rd defendant holds 5.70%.

(3)   The Partnership controls 37.01% voting rights through its affiliated companies, Yili Shengda Investment Holdings (Hong Kong) Company Limited (“Yili”) and Zhengjun Investment Holdings (Hong Kong) Co, Limited (“Zhengjun”), holding 34.46% and 2.55% respectively.

Proposed merger

15.  By an Agreement and Plan of Merger dated 20 December 2015 (“Merger Agreement”) entered into between the Company, Ningxia Parent Limited (“Parent”) and Ningxia Merger Sub Limited (“Merger Sub”), the parties agree, inter alia, that:

(1)   Merger Sub shall be merged with the Company.

(2)   Upon merger, the Company will continue as the surviving corporation.

(3)  All the issued shares in the Company will be cancelled.  All new shares to be issued by the Company will be held by Parent.

(4)   The consideration for the cancellation of the shares held by the shareholders comes in two forms.

(a)   In the case of the plaintiff’s subsidiaries, their shares will be cancelled in exchange for a cash payment of US$3.55 per share.

(b)   As for the shares held by the other shareholders, namely Zhongrong Legend, Silkroad, the 2^nd and 3^rd defendants, Yili and Zhengjun (collectively “Excluded Shareholders”), they will be cancelled without any consideration.

16.  The plaintiff suggests that the Excluded Shareholders have received or will receive shares in Parent in exchange for cancellation of their shares in the Company.  This is not disputed by the defendants.

17.  On 21 December 2015, a Circular, together with a notice of an Extraordinary General Meeting (“EGM”) of the Company to be held on 29 December 2015 in Ningxia, the PRC, for the purpose of considering and approving the Merger Agreement and a letter from the chairman (signed by Mr Zhang as its sole director) (“Chairman’s Letter”), was sent to the shareholders.  It was stated in the Chairman’s Letter that:

(1)   On 18 December 2015, the Company received a proposal from its “major shareholder” to acquire all the shares in the Company at US$3.55 per share in cash.

(2)   The board approved the terms of the merger pursuant to the Merger Agreement, which was entered into by the parties on 20 December 2015.

(3)   The merger is part of a restructuring to streamline the Company, reduce costs and provide for enhanced management and operational efficiency.  The board considers that the present capital structure of the Company limits its strategic options going forward.  The merger will allow the Company to pursue its strategic alternatives while giving shareholders an opportunity to receive fair consideration for their investments in the Company in the form of immediate cash payment.

(4)   The board considers that the price of US$3.55 per share represents the fair value of each issued share in the Company.

(5)   The merger will only become effective if it is approved by two‑third of the votes cast by shareholders voting at the EGM.

(6)   Each share in the Merger Sub held by Parent will be converted into one issued share in the surviving Company and Parent will become the sole holder of all the shares in the surviving Company.

(7)   Each of the Excluded Shareholders has irrevocably undertaken to vote in favour of the Merger Agreement at the EGM.

(8)   Parent, as the sole shareholder of Merger Sub, has approved the Merger Agreement.

(9)   The shareholder has the right to dissent from the merger and receives payment of the fair value of their shares in accordance with section 238 of the Companies Law in Cayman Islands.

18.  Although the identity of the “majority shareholder” is not stated in the Chairman’s Letter, in Mr Zhang’s affirmation (§§14 – 15), he confirms that the proposed merger was put forward by the Excluded Shareholders to acquire all the outstanding shares not held by them (ie the shares held by the plaintiff’s subsidiaries).

19.  The plaintiff complains that the proposed merger and the Merger Agreement were put forward by the Excluded Shareholders without its knowledge or consent.  Moreover, neither in the Chairman’s Letter nor in Mr Zhang’s affirmation was there any explanation as to whether or how the proposed merger would benefit the Company in any way.  More importantly, the plaintiff contends that by giving an irrevocable undertaking to vote in favour of the Merger Agreement at the EGM, the 2^nd and 3^rd defendants acted in breach of the Side Letter, which required the 2^nd and 3^rd defendants to obtain the “prior written consent” of the plaintiff’s subsidiaries before they can cause or permit the Company to enter into the Merger Agreement.

Proceedings commenced by the plaintiff

20.  On 22 December 2015, the plaintiff through DaCheng Law Offices (“DLO”) issued a demand letter to the defendants requiring them to confirm by noon on 24 December 2015 that they would abide by the Side Letter and vote against the Merger Agreement at the EGM on 29 December 2015 (“Demand Letter”).  DLO stated that if no response is received within the stated time, the plaintiff will consider that the defendants do not intend to comply with the Side Letter and will “commence legal proceedings against [them] forthwith without further notice to [them], including but not limited to seeking urgent injunctive relief”.

21.  The defendants never responded to the Demand Letter.

22.  On 24 December 2015, Hongtai, Hongzhi and Hao Ding presented a winding up petition against the Company in the Grand Court of the Cayman Islands seeking, inter alia, an order that the Company be restrained from proceeding with the Merger Agreement or proposing any merger or consolidation without their consent and an order requiring the Company to permit them to appoint up to two directors in accordance with the Letter Agreement.  The petition together with a summons for directions and the supporting affidavits were served on the Company on the same day.

23.  Also on 24 December 2015, the plaintiff filed a notice of arbitration against the defendants pursuant to clause 15 of the Side Letter (“Arbitration”).  In the Arbitration, the plaintiff seeks to enjoin the 2^nd and 3^rd defendants (and the 1^st defendant from causing the 2^nd and 3^rd defendants) from voting in favour of the Merger Agreement without the prior written consent from the plaintiff’s subsidiaries.

24.  On 26 December 2015, the plaintiff applied for and obtained the Injunction Order in the following terms:

(1)   Each of the 2^nd and 3^rd defendants be restrained from authorizing, approving or adopting the Merger Agreement “or otherwise causing or permitting the Company to authorize, approve or adopt the Merger Agreement, including but not limited to voting in favour of any shareholders resolution to such effect at the [EGM] of the Company scheduled to take place on 29 December 2015 … or at any EGM of the Company, without prior written consent of each of [Hongtai], [Hongzhi] and [Dao Ding]”  (§1).

(2)   The 1^st defendant be restrained from “causing or otherwise permitting the 2^nd and/or 3^rd defendants to carry out any of the prohibited acts set out in paragraph 1 of this Order.”  (§2)

25.  On 28 December 2015, the plaintiff issued the OS under section 45(2) of the Arbitration Ordinance (Cap 609), in aid of the Arbitration.

26.  At the EGM held on 29 December 2015, Mr Zhang stated that in light of the Injunction Order and the petition presented against the Company, the EGM would be adjourned and rescheduled to another date to be specified.

27.  Upon the joint application of the parties, a consent order was made by Anthony Chan J on 7 January 2016 adjourning the Continuation Summons for argument and continuing the Injunction Order “until further order of the Court”.

Termination of the Merger Agreement

28.  By letter dated 18 January 2016, the defendants’ solicitors, Skadden, Arps, Slate, Meagher & Flom (“Skadden”) informed the plaintiff’s solicitors, Wilkinson & Grist (“W&G”), that the Merger Agreement had been terminated on 12 January 2016 as a result of the resolutions passed by Merger Sub and Parent to terminate the same.  Copies of the resolutions were provided to W&G.

29.  In the same letter, Skadden informed W&G that the defendants were “willing to undertake to the court not to proceed with the Merger Agreement” and invited the plaintiff to discontinue these proceedings in terms of a consent summons which provides that (1) the 2^nd and 3^rd defendants undertake not to authorise, approve or adopt the Merger Agreement without the prior written consent of Hongtai, Hongzhi and Hao Ding, (2) the 1^st defendant not to cause or otherwise permit the 2^nd and/or 3^rd defendants to carry out any prohibited acts set out in (1) and (3) each party bears its own costs.

30.  By letter dated 19 January 2016, W&G stated that there was no sufficient evidence to prove that the Merger Agreement had been “put to a complete end with no prospect of its continuation or revival” primarily because there was no evidence to show that the Company had agreed to terminate the Merger Agreement and no legal opinion had been produced to prove that the resolutions had been duly passed and were binding on Merger Sub and Parent.  W&G rejected the defendants’ proposal on the grounds that (1) the defendants should consent to the continuation of the Injunction Order until final determination of the Arbitration, (2) the Continuation Summons had already been fixed to be heard on 31 March 2016, (3) the Injunction Order had been continued by a consent order and, as such, there was no basis for the defendants to demand the plaintiff to agree to the discharge of the Injunction Order, and (4) the plaintiff was “totally justified in applying for the Injunction Order and commencing these proceedings and, as such, the plaintiff’s costs should be borne by the defendants.

31.  In response, Skadden in its letter dated 20 January 2016, reiterated that as the Merger Agreement had already been terminated, the Injunction Order served no purpose.  In the same letter, Skadden enclosed:

(1)   A legal opinion provided by Conyers Dill & Pearman, which confirmed that (a) the resolutions passed by Merger Sub and Parent had been duly passed and were binding on them, and (b) the Merger Agreement had been terminated by Merger Sub and Parent.

(2)   A “Termination Agreement of Agreement and Plan of Merger” dated as of 20 January 2016 duly signed by Merger Sub, Parent and the Company (“Termination Agreement”), whereby the parties agreed to terminate the Merger Agreement and all the rights and obligations thereunder.

(3)   A revised consent summons for discontinuation of these proceedings, discharge of the Injunction Order, undertaking by the defendants not to authorise, approve or adopt the Merger Agreement and costs of the proceedings be to the plaintiff, to be taxed if not agreed.

32.  It appears that no further correspondence was exchanged until 9 March 2016 when Skadden wrote to W&G, stating that (1) there was no justification for the plaintiff to make the ex parte application or not to inform the defendants in advance that it would be making the application, and (2) counsel for the plaintiff had failed to draw to the attention of the Judge the established principles that even if there was genuine urgency in the application, the proper course would be to take out an inter partes application or to make ex parte application on notice to the other party.

Discharge Summons

33.  I first deal with the Discharge Summons.

34.  Mr Coleman submits that the Injunction Order should be discharged for the following reasons:

(1)   There was no proper basis on which the plaintiff could have applied ex parte without any notice to the defendants.

(2)   The plaintiff failed to comply with its duty of making full and frank disclosure in the ex parte application.

(3)   The alleged purpose for seeking the Injunction Order no longer exists as (a) the Merger Agreement has already been terminated and (b) in any event, the defendants have since 18 January 2016 stated that they are willing to provide formal undertakings to the court not to proceed with the Merger Agreement which are, in effect, the terms of the Injunction Order.

35.  It is well established that ex parte application without notice should only be made where either the delay would cause injustice to the applicant or the defendant would take action which may nullify the effect of the injunction (Ho Tak Eng t/a Hung Man Interior Design Co v Fame Brilliant Ltd [2006] 1 HKLRD 34, §8 per Rogers VP).

36.  Mr Coleman relies on the principles summarised in Hong Kong Civil Procedure 2016, Vol 1, at §29/1/50 as follows:

“The starting‑point is that applications for interlocutory injunctions should be made inter partes after the commencement of proceedings. It is contrary to the principles of natural justice that any judicial order adversely affecting a party’s interest should be made without the party being given a reasonable opportunity of being heard. Derogations are only permitted in certain limited and exceptional circumstances, the most obvious of which is a situation which concerns matters of such extreme urgency that there is no time to warn the defendant of what is proposed, or where the purpose of the injunction will or may well be frustrated if the defendant is informed of what is proposed, or where the defendant simply cannot be found. The exceptional nature of the circumstances for an ex parte application must be stressed. (TRP Ltd v. Thorley, (unrep., July 13, 1993, CA); SNE Engineering Co. Ltd v. Chim Kee Machinery Co. Ltd [2013] 1 H.K.L.R.D. 410.) Order 29, rr.1(2) and 1(3) make it clear that, however, in cases of urgency, the plaintiff may make the application ex parte on affidavit, even before the issue of proceedings. Such an ex parte injunction was set aside for failing to demonstrate the need for urgency in Luck Continent Ltd v. Leonora Yung (unrep., CACV 42/2010, [2010] H.K.E.C. 1660). See also Yifung Developments Ltd v. Liu Chi Keung Ricky [2014] 3 H.K.L.R.D. 483. …”

37.  The above principles have repeatedly been emphasised by the court as a reminder to the parties and the practitioners that ex parte application should only be made when it can be justified in the limited and exceptional circumstances.  See TRP Ltd v Thorley, 13 July 1993, Lexis transcripts, pp 2 – 3, per Hoffmann LJ (as he then was), pp 6 – 7, per Sir Thomas Bingham MR; Seapower Resources International Limited & ors v Lau Pak Shing, HCA 10715/1993, §§15 – 18, per Rogers J (as he then was); O’Farrell v O’Farrell [2012] EWHC 123, §§64, 66 – 67).

38.  In Luck Continent Ltd v Leonora Yung & ors, CACV 42/2010, a case concerning whether proper notice should have been given by the plaintiff of the ex parte application, Rogers VP held that the plaintiff had been aware of a special general meeting for some time but deliberately waited until the last possible minute to send a notice to the defendants informing them of the application, knowing that it would have been impossible for the defendants to attend the hearing.  The ex parte injunction was set aside on this ground alone.

39.  The skeleton used at the ex parte application is not included in the bundle but Mr Fung confirms that the ex parte application was made on the ground of urgency, rather than secrecy.

40.  Mr Coleman submits that in making an ex parte application, the plaintiff was required to demonstrate that there was “literally no time” to inform the defendants in advance of the date/time of the hearing, but the plaintiff did not do so, nor could it have done so.  He relies on the following fact and matters:

(1)   The plaintiff had been preparing the application for a considerable period of time prior to 26 December 2015, evidenced by the length of Mr Wang’s affirmation and its exhibits, which take up about three bundles.

(2)   The plaintiff made its final decision to make the application no later than noon on 24 December 2015.  As the ex parte application was said to have been made at around 3pm on 26 December 2016, the plaintiff had more than 48 hours to give notice of its application to the defendants but did not do so.

(3)   The plaintiff’s failure was compounded by the fact that it had on 24 December 2015 presented a winding up petition against the Company and commenced the Arbitration against the defendants seeking similar relief to prevent the parties from proceeding with the Merger Agreement.

(4)   The plaintiff produced a legal opinion dated 25 December 2015 from DLO, which was stated to have been made in support of the ex parte application before the Hong Kong court.  This shows that the plaintiff made a conscious decision not to give notice to the defendants.

(5)   From the information provided by W&G in its letter dated 11 March 2016, the plaintiff had contacted the clerk to the duty judge for making the application at 11:30am on 26 December 2015 but the hearing only commenced at around 3pm and lasted for about an hour.  No attempt was made by the plaintiff to inform the defendants of the application before the hearing commenced.

41.  Mr Fung does not dispute the points made by Mr Coleman in §40(2) – (5) above.  He contends that W&G were only instructed in the afternoon of 23 December 2015 and plaintiff’s counsel only received preliminary instructions in the evening of the same day. Mr Fung accepts that the plaintiff did not take any step to notify the defendants of the ex parte application but submits that it was justified not to do so in light of:

(1)   the defendants’ failure to respond to the Demand Letter, such that it was “wholly impractical and artificial to request [the plaintiff] to give [the defendants] any further ‘notice’ before going to court”. Mr Fung argues that in the face of the Demand Letter, if the defendants wanted to be notified, they could have notified the plaintiff but they did not do so;

(2)   the plaintiff waited until 26 December 2015 to make the ex parte application given that it would require sufficient buffer period ahead of the EGM on 29 December 2015 to obtain the sealed order and make arrangements for personal service of the injunction on the defendants’ directors at the EGM in Ningxia, the PRC; and

(3)   a further letter to the defendants in the morning of 26 December 2015 “would have made no difference to the outcome” as the defendants’ clear stance is that they would not honour the Side Letter and would not vote against the Merger Agreement at the EGM.

42.  I am unable to accept Mr Fung’s argument as it is inconsistent with the established principles that the burden is on the applicant to demonstrate extreme urgency to justify the exceptional course of making the application on an ex parte basis.  It seems to me that Mr Fung’s argument is predicated on an erroneous assumption that the defendants had a duty to require the plaintiff to give notice of its ex parte application when it had no means to know that the plaintiff would in fact be making such an application.  In my view, the defendants were entitled to assume that the plaintiff would proceed with its application in the usual way by making an inter partes application or, at the very least, giving notice to them as and when the plaintiff decided to make an ex parte application.

43.  The fact and matters relied on by Mr Coleman, which I accept to be correct, all point to the fact that the plaintiff had adopted a deliberate tactic of not giving any notice of its ex parte application to the defendants when it had ample opportunity to do so.  For this reason alone, the Injunction Order must be discharged.

44.  Mr Fung contends that even if the Injunction Order is discharged, the court can still re‑grant an injunction against the defendants as it would be “wholly disproportionate to deprive [the plaintiff] of its badly needed protection by way of injunctions where [the defendants] have not shown to have any defence to [the plaintiff’s] claim and where [the defendants’] threat of further breach is both real and continuing”. It is therefore necessary to consider whether the plaintiff has failed in its duty to make full and frank disclosure at the ex parte application.

45.  It is well settled that in an ex parte application, the applicant has the duty to make full and frank disclosure of all the fact material to the application, the materiality of the fact is to be decided by the court and not by the assessment of the applicant or his legal advisers.  The applicant must make proper inquiries before making the application, as the duty of disclosure applies not only to material facts known to the applicant but also to additional facts which he would have known if he had made such inquiries.  If material non‑disclosure is established the court will be astute to ensure that a plaintiff who obtains an ex parte injunction without full disclosure is deprived of any advantage he may have derived by that breach of duty (Brink’s Mat Ltd v Elcombe [1988] 1 WLR 1350 at 1356G–1357C, per Ralph Gibson LJ).

46.  Further, although the court has jurisdiction to re‑grant the injunction, it should be exercised sparingly, and should take account of the need to protect the administration of justice and uphold the public interest in requiring full and fair disclosure.  The court should assess the degree and extent of the culpability with regard to non‑disclosure and the importance and significance to the outcome of the application for an injunction of the matters which were not disclosed to the court (Excel Courage Holdings Ltd v Wong Sin Lai [2014] 3 HKLRD 642 at §§56 – 58, per Kwan JA).

47.  In his skeleton argument, Mr Coleman submits that the plaintiff failed to make full and frank disclosure at the ex parte hearing in respect of the following matters:

(1)   The principles governing ex parte application, in particular the need for the plaintiff to demonstrate exceptional circumstances to justify its decision in not giving any notice to the defendants.

(2)   The fact that the Cooperation Agreement is governed by PRC law and any dispute shall be submitted to Shanghai Arbitration Commission.

(3)   The Side Letter is not an adjunct to the Cooperation Agreement but to the Consortium Agreement.

48.  At the hearing, I ask why the matters set out in §47(2) – (3) were relevant to the application bearing in mind that the plaintiff’s case was based on a breach of the Side Letter, rather than the Cooperation Agreement or the Consortium Agreement.  Mr Coleman does not persist on those points.

49.  Mr Coleman submits that the plaintiff failed to draw to the attention of the Judge the principles governing ex parte application and the absence of exceptional circumstances for the plaintiff not to give notice to the defendants, which are plainly material to the Judge’s consideration as to whether or not to hear the application and to make the Injunction Order.  Mr Coleman points out that as the transcripts of the ex parte hearing show, the plaintiff’s counsel did not address the Judge on the basis of making the application ex parte.  Mr Fung does not dispute this.

50.  In my view, the plaintiff has failed to discharge its duty of making full and frank disclosure in the ex parte application by failing to draw to the Judge’s attention the principles governing ex parte application and the lack of exceptional circumstances for the plaintiff not to give any notice to the defendants.  The non‑disclosure was serious and had an important bearing on the outcome.  Had the Judge been told about these matters, he would have declined to entertain the ex parte application until proper notice was given to the defendants.  As stated in §43 above, I consider that it was a deliberate tactic on the part of the plaintiff in not giving any notice to the defendants.  It follows that the non‑disclosure was also deliberate.  For this additional reason, the Injunction Order should be discharged.  I refuse to exercise my discretion to re‑grant an injunction against the defendants on the same terms as the Injunction Order.

51.  I should add that Mr Coleman also makes the submission that the plaintiff could and should have made the application before an emergency arbitrator which, he says, is a procedure expressly provided for under the HKIAC rules.  As I consider that the Injunction Order should be discharged, it is unnecessary to decide the point.

Continuation Summons

52.  In light of my conclusion that the Injunction Order should be discharged and my refusal to re‑grant an injunction in the terms of the Injunction Order, the Continuation Summons must be dismissed.

Amendment Summons

53.  Mr Coleman does not oppose the application for amendment of the OS but submits that there is no basis for the plaintiff to seek an extended injunction against the defendants.

54.  In the Amendment Summons, the plaintiff seeks an interlocutory injunction against the defendants in very wide terms as follows:

(1)   the 2^nd and 3^rd defendants be enjoined from doing any of the acts without the prior written consent of each of Hongtai, Hongzhi and Hao Ding:

(a)   “taking any steps to promote or to engage in any actions involving the merger or transfer of any capital stock or asset of [the Company]… (including the transfer of any stock or asset of its subsidiaries) or of the same or similar effect as the [Merger Agreement] entered into by the Company”;

(b)   “taking any further part in a consortium purportedly formed on or about 18 December 2015 with, inter alia, members of the management of [Shanda Games]; or

(c)   “causing or permitting the Company to carry out any of the acts set out in Clause 1(i) to (viii) of the Side Letter… .”

(2)   the 1^st defendant from causing or otherwise permitting the 2^nd and/or 3^rd defendants to carry out any of the prohibited acts in §(1) above;

(3)   each of the defendants be restrained from “acting in breach of their duty of good faith and fair dealing and breach of the terms of the Side Letter including but not limited to carrying out any of the following acts”:

(a)   any of the prohibited acts under §§(1) – (2) above;

(b)   “any act which would deprive the [plaintiff] of the benefits or ability to control or direct the transfer of all the assets of Shanda Games into a China quoted company”;

(c)   “any act which would deny or prevent implementing the [plaintiff’s] rights in the Side Letter including but not limited to:‑

i.   designating up to two directors to the board of the Company;

ii.   having the pre‑emptive rights to purchase proportionate shares of any new securities that may be issued by the Company and in any share transfer;

iii.   timely receipt of annual and quarterly financial statements from the Company pursuant to the timetable under the Side Letter;

iv.   entering of a shareholders agreement;

v.   refusing to co‑operate with the [plaintiff] to stop and/or prevent the Company or any of its subsidiaries from carrying out any of the acts under Clause 1(i) to (viii) of the Side Letter.”

55.  Mr Fung acknowledges that the terms of the extended injunction sought are very wide, but submits that the plaintiff needs the “widest possible protection” from the court to safeguard its rights under the Side Letter to which it is entitled under New York law.  The bases for seeking such an injunction may be summarised as follows:

(1)   The plaintiff has “serious doubt” about whether the Merger Agreement has in fact been terminated.  Although the defendants produced the Termination Agreement, which was signed by Mr Zhang on behalf of the Company, no board resolution of the Company has been produced, nor has the Company informed the shareholders of the termination of the Merger Agreement.

(2)   The plaintiff’s doubt is reinforced by an announcement made on 25 February 2016 by Ningxia Zhongyin (“Announcement”), a company listed in Shenzhen Stock Exchange and a subsidiary of the 1^st defendant, which described the adjournment of the EGM of the Company but did not mention the termination of the proposed merger or the Merger Agreement.

(3)   The Announcement revealed that on 22 February 2016, the 1^st defendant had purportedly given an irrevocable undertaking to the effect that Ningxia Zhongyin would have the priority to acquire the 1^st defendant’s 41.19% indirect interest in Shanda Games in the event that it makes a proposal to acquire such interest from the 1^st defendant. It is said that this irrevocable undertaking constitutes a breach of clause 5 of the Side Letter.

(4)   The defendants have shown their clear and continuing intention to deprive or undermine the plaintiff’s interest in the Company.  The defendants’ continuing failure to comply with the Side Letter shows that they have no intention to honour their obligations under the Side Letter.  Such conduct, says Mr Fung, constitutes a clear breach of the Side Letter and the implied covenant of good faith and their fair dealing under New York law, as the plaintiff’s bargain (reflected in the Cooperation Agreement) was a right to control Shanda Games through a China listed company.

(5)   The defendants have not shown that they have an arguable defence to the plaintiff’s claim for breach of the Side Letter.  The court does not need to consider balance of convenience.  Even if balance of convenience is relevant, there can be no serious prejudice to the defendants as the terms of the injunction sought mirror the defendants’ obligations under the Side Letter.

(6)   The defendants in recent correspondence assert that they did not accept the validity of the Side Letter and the Cooperation Agreement.

(7)   Ningxia Zhongyin has been under investigation by the Securities Regulatory Commission in the PRC and trading of its shares have been suspended for a long time.

(8)   Mr Ma Shenguo, the controlling shareholder of the 1^st defendant and former Chairman of Ningxia Zhongyin, has been under criminal investigation for fraud in the PRC and his shareholding in the 1^st defendant and its subsidiaries have been frozen by the authorities.

56.  Mr Coleman submits that the court should refuse to grant the extended injunction for the following reasons:

(1)   The 2^nd and 3^rd defendants were not parties to the Side Letter.  As such, the extended injunction cannot be granted against them.

(2)   It is wholly inapt for the plaintiff to seek an extended injunction on the basis of an application which is unnecessary and spent, as the Merger Agreement has already been terminated.  In any event, the undertaking offered by the defendants is sufficient to address any concern which the plaintiff may have about the Merger Agreement.

(3)   The present proceedings are in aid of the Arbitration, which is the agreed dispute mechanism chosen by the parties.  The plaintiff could and should have applied for an extended injunction before the Arbitration Tribunal when constituted, particularly when there is no urgency in seeking such relief.  It is much more appropriate for interlocutory matters to be adjudicated by the Arbitration Tribunal, which is the forum where the substantive dispute has been and will be fought.

(4)   The terms of the extended injunction are too wide and unworkable.  In particular, the injunction seeks to restrain the defendants from “acting in breach of their duty of good faith and fair dealing”, a concept unknown to the law of Hong Kong.  The Arbitration Tribunal, which has relevant experience in New York law, is better placed to receive assess whether the plaintiff is entitled to such relief on an interlocutory basis.

(5)   The terms of the extended injunction are inappropriate and cannot form the basis of an order to be made by the court.  This includes (a) the proposed requirement that the defendants should be “restrained from acting in … breach of the terms of the Side Letter, (b) the use of the formula “including but not limited to”, (c) the use of vague language such as “the benefits or ability to control or direct the transfer of all the assets of Shanda Games into a China quoted company”, (d) the apparent mere illustrations in §54(3)(c)(i) – (v) of the manner in which the prohibition might be infringed, (e) the inclusion of disguised mandatory requirements to be imposed upon the defendants, including that they should enter into a shareholders agreement.

(6)   The injunction sought in §54(3)(c)(i) – (v) is in the nature of a mandatory injunction but dressed up as a prohibitory injunction.  To succeed in obtaining such injunction, the plaintiff must satisfy the higher threshold and demonstrate that it is likely to succeed in trial.

(7)   The plaintiff cannot ask the court to grant an injunction to protect it from anything which might happen, particularly when it has not been able to identify any specific act which has interfered with its rights under the Side Letter.

57.  So far as the first part of the application is concerned (set out in §54(1)(a) and (2) above), they are based on the same allegations that the Merger Agreement and the defendants’ undertaking to vote in favour of the Merger Agreement at the EGM constituted a breach of the Side Letter.  As I have declined to exercise my discretion to re‑grant an injunction on the same terms as the Injunction Order, it would be wrong for me to grant an injunction in terms of §54(1)(a).  The same applies to an application under §54(2) insofar as it relates to the Merger Agreement.

58.  Even if I am wrong in refusing to grant an injunction in terms of §54(1)(a) and §54(2) (insofar as it relates to the Merger Agreement), the evidence before the court shows that the Merger Agreement has already been terminated by all parties.  The fact that no board resolution of the Company has been produced by the defendants is neither here nor there, as the sole director of the Company (Mr Zhang) has already signed the Termination Agreement.  In my view, it is both unnecessary and otiose for the court to grant an injunction to restrain the defendants from proceeding with the Merger Agreement when such Agreement has already been terminated.  In any event, in light of the undertaking offered by the defendants to the court, it is impossible to see how the defendants can take any further steps in respect of the Merger Agreement.

59.  As to Mr Coleman’s submission that the 2^nd and 3^rd defendants were not parties to the Side Letter, this was not a point taken by the defendants in the Answers filed in the Arbitration.  Nor was it raised by the defendants in correspondence or addressed by Mr Coleman in his skeleton argument.  It would be unfair to allow the defendants to raise a point which has not hitherto been raised as the plaintiff could have filed expert evidence on New York law to address the point.

60.  I agree with Mr Coleman that the application for extended injunction should have been made to the Arbitration Tribunal, which is the agreed forum of the parties and is best placed to assess the merit of the parties’ contentions, particularly when such contentions are based on New York law.

61.  It must be remembered that these proceedings are ancillary proceedings and were commenced by the plaintiff in aid of the Arbitration.  It is not in dispute that the HKIAC rules can be used by the plaintiff to apply to the Arbitration Tribunal for an extended injunction against the defendants.  Nor is there any dispute that the injunction, if granted, would be effective in enjoining the defendants from acting in breach of such injunction.

62.  That being the position, it is difficult to see why the plaintiff should be allowed to apply for an extended injunction from the court, rather than making the application to the Arbitration Tribunal.  This accords with the principle expounded in Deiulemar Shipping SpA v Transfield ER Futures Ltd [2011] 1 HKLRD 75, a case on section 21M of the High Court Ordinance (Cap 4), in which the Court of Appeal held that where the parties had commenced proceedings in another forum to determine their dispute, the applicant would be required to explain why an application for interlocutory injunction was not initially mounted in that forum, particularly when such forum had been intimately involved and was likely to have an excellent “feel” for the case (at §§48 – 50).

63.  The only reason advanced by Mr Fung is that the defendants have not raised any objection to the plaintiff’s application until Mr Coleman lodged his skeleton argument.  I do not accept that the non‑objection by the defendants provides a justification for the plaintiff not to make the application to the Arbitration Tribunal, particularly when such proceedings have been afoot for more than three months and the parties have already pleaded their respective cases.  In the absence of any justification for making the application to the court, rather than to the Arbitration Tribunal, I do not think it is right or appropriate for the court to consider the application for extended injunction and the same should be refused.

64.  Even if I were wrong in my conclusion that the plaintiff should make the application to the Arbitration Tribunal, I would still refuse to grant the extended injunction for the following reasons:

(1)   As regards the injunction sought in §54(1)(b) above, it has not been explained, let alone established, why the defendants “taking any further part in a consortium purportedly formed on or about 18 December 2015 with, inter alia, members of the management of [Shanda Games]” has or will constitute a breach of the Side Letter.

(2)   The injunction sought in §54(1)(c), (3)(b) – (c) above is in the nature of a mandatory injunction.  I do not think that the plaintiff has met the higher threshold for the grant of such injunction, which requires the plaintiff to satisfy the court that the defendants have “no real chance of succeeding at the trial” (Mak Chi Sing v A&A Continental Commodities Ltd [1983] HKLR 403 (CA)).

(3)   Further, as Mr Fung accepts, the application is not an application for a quia timet injunction.  It is made on the basis that the defendants have acted in breach of the Side Letter such that the plaintiff has a cause of action against them.  For the reasons stated in §58 above, the Merger Agreement insofar as it may constitute a breach of the Side Letter, has already come to an end.  Other than the Merger Agreement, there is no evidence whatsoever in support of the plaintiff’s suggestion that the defendants have acted or will act in breach of the Side Letter.  There is thus no basis for the plaintiff to seek an injunction in terms of §54(1)(c), (3)(b) – (c) above.

65.  I am also inclined to agree with Mr Coleman that the wordings of the injunction sought are too wide and vague, which are inappropriate to form the basis of an injunction.

66.  For the above reasons, I refuse to grant an extended injunction in terms of §§2 – 4 of the Amendment Summons.

Conclusion

67.  I make the following order in respect of the four summonses:

(1)   Leave to the plaintiff to file Wang 4^th and to rely on the same at the hearing on 31 March 2016.

(2)   An order in terms of §1 of the Discharge Summons.

(3)   §2 of the Discharge Summons be dismissed.

(4)   The Continuation Summons be dismissed.

(5)   Leave to the plaintiff to amend the OS as per the draft annexed to the Amendment Summons.

(6)   §§2 – 4 of the Amendment Summons be dismissed.

68.  As for costs, I make a costs order nisi that:

(1)   the plaintiff do pay to the defendants the costs of and occasioned by §1 of the Discharge Summons on an indemnity basis, to be taxed if not agreed and be paid forthwith.  For the avoidance of doubt, such costs do not include the costs of and occasioned by Ho 2^nd;

(2)   the plaintiff do pay to the defendants the costs of and occasioned by §1 of the Discharge Summons on a party and party basis, to be taxed if not agreed and be paid forthwith;

(3)   the costs of and occasioned by §1 of the Amendment Summons be paid by the plaintiff to the defendants on a party and party basis, to be taxed if not agreed; and

(4)   the costs of and occasioned by §§2 – 4 of the Amendment Summons be paid by the plaintiff to the defendants on a party and party basis, to be taxed if not agreed and be paid forthwith.