KWONG SIU KUEN v. JORIS (INTERNATIONAL) LTD AND OTHERS

CACV 99/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 99 OF 2013

(ON APPEAL FROM HCMP NO. 2420 OF 2012)

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BETWEEN

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REASONS FOR JUDGMENT

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Hon Cheung JA :

1.  The issue in this appeal is whether the pre-emption provisions in the 1^st respondent’s (‘Joris’) articles of association had been engaged in respect of a transfer of shares by the 2^nd respondent (‘Yu’) to the applicant (‘Kwong’). Anthony Chan J held that it had. Kwong who contended that it had not, appealed. We dismissed the appeal at the conclusion of the hearing. I now give my reasons.

Facts

2.  The facts are straightforward and the Judge summarised them as follows :

2.1   Joris was a private company.  It was established in 1983 by Kwong’s husband, who had passed away (‘the Deceased’), together with three other persons.  As of 18 July 2007, the 400,000 issued shares of Joris were held by the Deceased, the 3^rd respondent (‘Kung’), Yu (the eldest son of the Deceased and Kwong) and Kung’s ex-wife (‘Chan’).  Their respective shareholding was 150,000, 150,000, 50,000 and 50,000.

2.2   On 19 July 2007, the Deceased transferred all his shares in Joris to Yu to hold on trust for him.  In 2011, Chan transferred all her shares to Kung.  From then on, Joris has only two shareholders, Kung and Yu, each holding 200,000 shares.  They are also the only directors of that company.

2.3   The Deceased passed away in August 2007.  Letters of Administration were granted to Kwong in June 2008 by which she became the sole administratrix of the estate of the Deceased.

2.4   In September 2010, Yu executed an instrument of transfer to transfer to Kwong the 150,000 shares that were held on trust by him.  In February 2011, Kwong lodged the transfer with Joris.  In December 2011, Joris refused to register the transfer.

2.5   Kwong sought a rectification of the register of members of Joris which was refused by the Judge.

The Articles

1)  Article 22

3.  The directors of Joris can refuse registration of transfer of shares under two articles.  First, under Article 22 which gives the directors an ‘absolute discretion’ to refuse registration.  However the notice of refusal must be given within two months after the lodging of the transfer.  It is common ground that Article 22 cannot be invoked in the present case because the notice of refusal was not given within the two month period.

2)  Article 25

4.1   The second article is Article 25 which contains the relevant pre-emption provisions. It is common ground that if the transfer is not in accordance with Article 25, Joris is not obliged to consider it, see : Tett v Phoenix Property and Investment Co Ltd & Ors [1986] BCLC 149.  Article 25(1) enables Joris to refuse a transfer of its shares to a non-member if an existing member is willing to purchase the shares at a fair value.  Article 25(2) requires the transferor to send a transfer notice to Joris setting out the price he has fixed as the fair value for the sale of the shares.

4.2   The whole of Article 25 is set out in full below :

‘ 25. (1) Save as provided by clause (6) hereof, no Share shall be transferred to a person who is not a Member so long as any Member (or any person selected by the Directors as one whom it is desirable in the interests of the Company to admit to membership) is willing to purchase the same at the fair value.

 (2)  Except where the transfer is made pursuant to clause (6) hereof, the person proposing to transfer any Share (hereinafter called the “proposing transferor”) shall give notice in writing (hereinafter called a “transfer notice”) to the Company that he desires to transfer the same.  Such notice shall specify the sum he fixes as the fair value, and shall constitute the Company his agent for the sale of the Share to any Member of the Company (or person selected as aforesaid) willing to purchase the Share (hereinafter called the “purchasing Member”) at the price so fixed, or, at the option of the purchasing Member, at the fair value to be fixed by the auditor in accordance with clause (4) hereof.  A transfer notice may include several Shares, and in such case shall operate as if it were a separate notice in respect of each.  A transfer notice shall not be revocable except with the sanction of the Directors

 (3) If the Company shall, within the space of twenty-eight days after being served with a transfer notice, find a purchasing Member and shall give notice thereof to the proposing transferor, he shall be bound upon payment of the fair value as fixed in accordance with clause (2) or (4) hereof, to transfer the Share to the purchasing Member.

 (4) In case any difference arises between the proposing transferor and the purchasing Member as to the fair value of a Share, the auditor shall, on the application of either party, certify in writing the sum which, in his opinion, is the fair value, and such sum shall be deemed to be the fair value.

 (5) If in any case the proposing transferor, after having become bound as aforesaid, makes default in transferring the Share, the Company may receive the purchase-money, and shall thereupon cause the name of the purchasing Member to be entered in the Register as the Holder of the Share, and shall hold the purchase-money in trust for the proposing transferor.  The receipt or the Company for the purchase-money shall be a good discharge to the purchasing Member, and after his name has been entered in the Register in purported exercise of the aforesaid power, the validity or the proceedings shall not be questioned by any person.

 (6) If the Company shall not, within the space of twenty-eight days after being served with a transfer notice, find a purchasing Member and give notice in manner aforesaid, the proposing transferor shall at any time within three months afterwards be at liberty subject to Article 22 hereof, to sell and transfer the Share (or where there are more Shares than one, those not placed) to any person and at any price.

 (7) The Directors may call on the executors or administrators of a deceased Member to transfer the Shares of the deceased to some person to be selected by such executors or administrators and approved by the Directors, and if the executors or administrators do not comply forthwith with such call within 60 days from the date of receipt of such call they shall be deemed to have served the Company with a transfer notice, under clause (2) hereof and to have specified therein a sum equal to the amount paid up on the Shares as the fair value, and the subsequent provisions of that clause and other clauses of this Article shall take effect.’

The approach

5.  A number of authorities had been referred to us by the parties.  While these authorities may provide some assistance on how the matter should be approached, ultimately the matter is one of construction of the relevant article to see whether on the facts of the case, the pre-emption provisions have been engaged.

5.1   The construction exercise must be purposive and contextual in nature : Fully Profit (Asia) Ltd v Secretary for Justice [2013] 6 HKC 374and Vallejos Evangeline Banao & Anor v Commissioner of Registration & Anor [2013] 2 HKLRD 533.  This approach was followed by this Court in Koo Shing Sun v. Hung Wing San, Tony and Another CACV 241/2012 & CACV 41/2013.  I wish to add that this approach does not mean that one should ignore the natural and ordinary meaning of words all together.  Rather the consideration of the context and purpose is, as the Court of Final Appeal decided, the starting point.

5.2   The authorities recognized the tension between the interest of the transferor on the one hand and the company and existing shareholders opposing the transfer on the other hand.  Mr Benjamin Chain, counsel for Kwong, referred to the judgment of Lord Hoffmann sitting as an additional judge of the High Court in Scotto v Petch [2001] BCC 889 at 893 :

‘ I have cited at some length from Lyle & Scott v Scott’s Trustees [1959] AC 763 because I think that its reasoning, and in particular that of Lord Reid, provides the most important guidance for the disposal of this case. The effect of the decision was to draw to the attention of lawyers, and in particular those advising on take-over bids, the danger that incautious, arrangements between a proposed bidder and the holders of shares subject to rights of pre-emption could trigger an enforceable obligation to give a notice under the articles before the parties wished to do so. As a result, lawyers advising bidders have exercised their ingenuity to devise agreements which go as far as possible to commit accepting shareholders to the bid without manifesting a desire or intention to transfer their shares within the meaning of the article, while lawyers advising the target company or dissentient shareholders have subjected these agreements to close scrutiny with a view to showing that they have overstepped the mark. I must refer to three cases since Lyle & Scott in which such agreements have been examined by the courts.’

5.3   The Judge below also referred to the three principles set out in Hurst v Crampton Bros (Coopers) Ltd & Ors [2003] 1 BCLC 304 at 308h to 309f, namely,

‘ [14] First then, there are two principles which are somewhat in contradiction of one another. The first principle is based on the fact that a share is property. People are entitled to do what they like with their profits, subject to any restraints. Restraints must be accordingly construed restrictively. This is the Greenhalgh v Mallard principle [1943] 2 All ER 234. Lord Greene MR said (at 237):

“ Questions of construction of this kind are always difficult, but in the case of the restriction of transfer of shares I think it is right for the court to remember that a share, being personal property, is prima facie transferable, although the conditions of the transfer are to be found in the terms laid down in the articles. If the right of transfer, which is inherent in property of this kind, is to be taken away or cut down, it seems to me that it should be done by language of sufficient clarity to make it apparent that that was the intention.”

[15] The counter-principle runs thus: clauses restricting who may be members of a company such as a small private company have the clear purpose of keeping the membership to the privileged class defined in the article - an outsider can only come in if no member is willing to buy. This principle was best expressed by Lord Reid in Lyle & Scott Ltd v Scott’s Trustees [1959] 2 All ER 661 at 667, [1959] AC 763 at 777:

“The purpose of the article is plain: to prevent sales of shares to strangers so long as other members of the appellant company are willing to buy them ...”

[16] Next there is the principle that this sort of clause should be construed as a business document:

“ I think that the articles of association of the company should be regarded as a business document and should be construed so as to give them reasonable business efficacy, where a construction tending to that result is admissible on the language of the article, in preference to a result which would or might prove unworkable. (per Jenkins LJ in Holmes v Keyes [1958] 2 All ER 129 at 138, [1959] Ch 199 at 215).” ’

Mr Chain’s argument 

6.  Mr. Chain argued with force that Article 25 only applies to a sale of shares and does not apply to a situation like the present case where a member who held the shares as a trustee i.e. Yu is transferring the shares to the beneficiary i.e. Kwong who is the administratrix of the estate of the Deceased.  He referred to Article 25(2) where the transfer notice has to specify a fair value sum and the provision for constituting Joris as an agent for the sale.  He submitted that these provisions are only applicable to a voluntary sale of shares to a non-member and they are not applicable to an involuntary transfer like the present case where there is no intention to divest the ownership of the shares.  The provisions, if followed, would prevent Yu from transferring the shares back to the beneficiary.  He argued Joris could have refused the transfer by Article 22 without resorting to Article 25.

My view

7.1   The starting point of the analysis is to consider the purpose of Article 25 and the context in which this article is to be construed.  The purpose of Article 25 is to ensure a non-member would not become a member of Joris without the existing member being given an opportunity to acquire the shares of the intended transferor first.  The context obviously includes, first, an instrument of transfer had been executed by Yu for the transfer and second, another important provision of the articles namely, Article 10 by which Joris does not recognize any trust, equity or equitable claim in its shares :

‘ 10. The Company shall be entitled to treat the person whose name appears upon the Register in respect of any Share as the absolute owner thereof, and shall not be under any obligation to recognise any trust or equity or equitable claim to or partial interest in such Share, whether or not it shall have express or other notice thereof.’

7.2   In terms of the wording of Article 25(1), no share shall be transferred to a person who is not a member must be given a business meaning.  As can be seen from the cases that I will refer to later on, a ‘transfer of a share’ in the ordinary sense of that expression is a transfer of the legal title to the share with the rights and liabilities attached to it.  This is what Ms Audrey Eu SC and Mr Jeffrey Chau, counsel for Joris and Kung, described as the golden thread that runs through the cases on pre-emption rights.  In this case Yu was not an administrator of the estate of the Deceased.  Yu was not transferring only the beneficial interest of the shares to Kwong.  Kwong was a non-member. She was not a beneficiary of the estate of the Deceased.  Yu was transferring the legal title of the shares to Kwong in her capacity as the administratrix of the estate of the Deceased.  Once the transfer had been effected then Kwong would become the legal owner of the shares.  In my view the transfer must be a transfer within the meaning of Article 25(1). 

7.3   Further on the basis that Joris was not concerned with any trust, equity or beneficiary interest in a share, there really is nothing further to challenge the transfer by Yu to Kwong was a transfer within the meaning of Article 25(1).  This being the case the requirement of Yu serving a transfer notice stipulated by Article 25(2) must be observed.

7.4   Mr Chain relied on the following two paragraphs of the judgment of Chadwick LJ in Scotto who heard the appeal from Lord Hoffmann :

‘ 28. The provisions of the six additional articles determinative of this appeal are found in art. 23(a), 23(b), 23(e) and 23(f). So far as material the provisions are these:

“ 23(a) Except as hereinafter provided no shares in the Company shall be transferred unless and until the rights of pre-emption hereinafter conferred shall have been exhausted.

23(b) Every member…who intends to transfer shares…shall give notice to the Board of his intention…

23(e) In the event of the whole of the said shares [the subject of a notice under article 23(b)] not being sold under article 23(b) the vendor may at any time within six calendar months ... transfer the shares not so sold to any person ... and at any price.

23(f) Articles 23(a), (b), (c), (d) and (e) hereof shall not apply to a transfer to a person who is already a member of the Company, nor to a child, son-in-law, daughter-in-law, father, mother, brother, sister, wife, or husband of a member, nor to a transfer merely for the purpose of effectuating the appointment of new trustees nor to a transfer by ... a trustee to a beneficiary, provided it is proved to the satisfaction of the Board that the transfer bona fide falls within one of these exceptions.”

29. …..It is, perhaps, obvious - but it is essential to keep in mind - that art. 23(b) is ancillary to art. 23(a); as are art. 23(c) and 23(d).  Those three articles have no purpose which is independent of art. 23(a).  Their only purpose is to define and prescribe “the rights of pre-emption hereinafter conferred’ which, in a case to which art. 23(a) applies, have to be ‘exhausted” before shares in the company can be transferred.’  (emphasis added)

7.5   I do not see how Chadwick LJ’s judgment will assist Mr Chain in the construction of Article 25.  Like Article 23(2) in Scotto, Article 25(2) in the present case is ancillary to Article 25(1), as are the other relevant provisions of Article 25.  Article 25(1) sets out the parameter for a transfer of the shares and the other articles provide the steps that have to be observed before the transfer can be effected.  Mr Chain’s argument on Article 25(2) begs the question of whether the transaction was in the first place a transfer within the meaning of Article 25(1).

7.6   In Scotto, Company A was a private company whose articles of association conferred pre-emption rights and required a member who ‘intends to transfer shares’ in the company to give notice to the board which would offer them to the other members at a price to be agreed between the vendor and board or determined as a fair value by the company’s auditors.  The pre-emption provisions permitted transfers to existing members and their families.  A minority shareholder ‘S’ held some 21.3 per cent of the shares and the respondents held about 76.4 per cent.  In 1998 another company B, made an offer to buy the shares in Company A.  The respondents agreed to sell their shares under agreements which provided for a sale of the entire equitable interest in their shares and a declaration of trust in relation to the shares in favour of Company B.  The respondents also undertook to exercise their votes and other rights at the direction of Company B unless that would contravene the pre-emption rights.  The respondents claimed that the agreements did not trigger the rights of pre-emption.  Lord Hoffmann upheld that contention.  S appealed to the Court of Appeal which dismissed the appeal.

7.7   Lord Hoffmann at page 896 held that,

‘ With these principles in mind, I return to the terms of the old documentation. The vendors agree to sell the beneficial interest in their shares to [Company B]. Mr Richards accepts, for the purposes of these preliminary issues, that “transfer” in art. 23(b) means a transfer of the legal title to the shares and that a sale of a beneficial interest, whereby the vendor becomes trustee of the shares for the purchaser, does not of itself infringe the articles. What makes it an infringement is the fact that, as Mr Richards submits, the beneficial ownership of [Company B] entitles it to demand a transfer of the legal title and puts him in the same position as if it had been granted an option to acquire the shares.

 In my view the sale of the beneficial ownership by the old documentation was so qualified that (unlike the option in Owens v G R A Property Trust Ltd) it did not give [Company B] the right to call upon a shareholder to do anything inconsistent with the pre-emption rights.’  (emphasis added)

7.8   Nourse LJ at paragraph 17 held that,

‘ ….Here I should emphasise that it has throughout been accepted on all sides that wherever the word “transfer” appears in the pre-emption provisions it refers to a transfer of legal title. About that there can be no doubt.’ (emphasis added)

7.9   The basis of the decision in Scotto is that the sale of the beneficial interest in the shares did not amount to a transfer.  The situation in the present case is entirely different. 

7.10   In Safeguard Industrial Investments Ltd. v National Westminster Bank Ltd. [1982] 1 WLR 589, the relevant pre-emption provisions are as follows :

‘ 7(B) A member shall not be entitled to transfer an Ordinary Share except subject to clause 3 of Part II of Table A and in accordance with the following provisions: (a) An Ordinary Share may be transferred by a member or other person entitled to transfer to the other members in the proportions between them (if more than one) as nearly as may be to the number of Ordinary Shares held by them respectively, but no Ordinary Share shall be transferred to a person who is not a member as long as any member is willing to purchase the same at the fair value. (b) Except where the transfer made is pursuant to Article 8 hereof, in order to ascertain whether any member is willing to purchase an Ordinary Share, the proposing transferor shall give notice in writing (hereinafter called “the transfer notice”) to the Company that he desires to transfer the same. Such notice shall constitute the Company his agent for the sale of such share to any member of the Company at the fair value.’

7.11   In that case a shareholder died.  His will appointed the bank as the executors (following a deed of family arrangement) leaving shares to two strangers.  The bank became registered as a shareholder, which was permissible under the articles.  The bank said that it held the shares on trust for the strangers who did not want a transfer to them ‒ they were content to remain as equitable owners.  The question was whether there had been a breach of the article.  Vinelott J [1981] 1 WLR 286 and the Court of Appeal held that it had not.  All that had passed was an equitable interest in the shares.

7.12   Vinelott J at 297-298 held that,

‘ Faced with these conflicting observations in the House of Lords I must decide which to follow. Although it may seem at first sight unduly restrictive to read the word “transfer” as referring only to a transfer of the legal interest in a share leaving, as Lord Sorn put it, the “obvious manoeuvre” of a sale of the beneficial interest unprohibited, art 7 seems to me wholly inapt to “catch” transfers of beneficial interests. A “transfer of a share” in the ordinary sense of that expression is a transfer of the legal title to the share with the rights and liabilities attaching to it, on registration of the transfer the transferor ceases to be, and the transferee becomes, a member of the company in right of that share. A member who desires to transfer a share will carry his intention into effect by executing a transfer and lodging it for registration. At that stage the restrictions in the pre-emption provisions come into operation. To treat the references to the transfer of a share as comprehending a transfer or disposition of a beneficial interest in a share is to give the expression “transfer of a share” a meaning wider than it would ordinarily bear. No doubt there are contexts in which that extension would readily be made. But this context of art 7 and 8 points, if anything, in the opposite direction. Any number of equitable interests can be carved out of the equitable ownership of a share. But it is impossible to construe art 7 as applying to any disposition of a beneficial interest in a share however small. And if the article is construed as applying to a disposition of the entire beneficial interest in a share but not to a disposition of part of the beneficial interest it may operate in a way that is both capricious and which in practice would afford little protection against the “obvious manoeuvre” of a shareholder determined to defeat the pre-emption provisions.’ (emphasis added)

7.13   Oliver LJ at 597, after referring to Vinelott J’s view held that,

‘ I do not, for my part, propose to add to them. I agree with the Judge’s conclusion and I think that he rightly rejected this submission. Whatever may be said about the effect of an uncompleted agreement to sell shares — and it is unnecessary for the purposes of this appeal to express any concluded view about that—I find myself quite unable to construe the article in the instant case in a way which would make a person who involuntarily comes under an obligation to transfer, if called upon, a “proposing transferor”.’

7.14   Again the situation in the present case is different.  The reference by Oliver LJ to ‘a person who involuntarily comes under an obligation to transfer’ is a response to the argument that the word ‘transfer’ is apt also to embrace any transaction or combination of circumstances producing the result that the whole beneficial interest previously vested in a member becomes vested in another person even though the legal title is not transferred at all.  The statement by Oliver LJ does not assist Mr Chain where Yu was transferring the legal title of the shares to Kwong.

7.15   Hurst v Crampton Bros [2003] 1 BCLC 304 illustrates how a transfer was caught by the pre-emption provisions. In that case the deceased held 1,500 shares in the company.  In October 1998 she executed a share transfer form, prepared by the company’s auditors, in respect of 400 shares in favour of her nephew, H.  Acting on the deceased’s instructions the auditors wrote to H telling him that the deceased had instructed them to transfer 400 shares to him and that no action was required on his part.  The deceased died in November 1998 and in proceedings brought by her executors, in whose name the 1,500 shares had been registered, the Court of Appeal found that they held the 400 shares for H on the basis that the transfer form was fully effective and not an incomplete gift.  The claimant, who owned one share in the company, claimed that there had been a transfer of the 400 shares to H in breach of the pre-emption clause in the company’s articles of association which provided by clause 8(B) that a share ‘shall not be transferred otherwise than as provided in paragraph (A) of this Article unless it first be offered to the members at a fair value to be fixed by the Company’s Auditors’.  The executors argued that there had not been a transfer of shares within the clause, only a disposition of an equitable interest in the shares.  The deputy master gave judgment against the claimant on the basis that there had been no triggering event and that what had happened was not a transfer within clause 8(B).  The claimant appealed.

7.16   Jacob J allowed the appeal and held that the pre-emption provisions were engaged.  The relevant part of Clause 8(B) reads,

‘ (1) A share shall not be transferred otherwise than as provided in paragraph (A) of this Article unless it first be offered to the members at a fair value to be fixed by the Company’s Auditors.

(2) Any member desiring to sell a share (hereinafter referred to as a “retiring member”) shall give notice thereof in writing to the Company (hereinafter referred to as a “sale notice”) constituting the Company his agent for the purpose of such sale…..’

[For ease of reading I have numbered the two sentences.]

7.17   In respect of clause 8(B) Jacob J held at 313 :

‘ [31]…..The second sentence onwards applies to what happens when a member wants to sell. But on top of that the first sentence imposes an overriding requirement. It is expressed in the passive, but any fair business reading of it imposes positive obligations and duties on the members. It is fair to read it as “no member shall transfer”. That does not mean a member cannot deal with his beneficial interest. But where a member goes further than that, and actually gives a transferee a signed transfer form, it seems to me rational and businesslike to say that the member has transferred the share to the transferee. It is what the form actually said – “I hereby transfer”. Once a member has done that, he has lost all control over the share. Whether the transferee is actually registered in the company’s books is no longer his business. The share is no longer the transferor’s in any meaningful business sense.’ (emphasis added)

7.18   This statement is apposite to the present case.  In my view the Judge was correct in his judgment. 

Other articles

8.  The Judge also referred to other articles to support his construction of Article 25.  In view of my decision on Article 25, it is not necessary for me to address them.

Article 20

9.  Another issue in this appeal is that the signatures of Yu and Kwong on instrument of transfer were not attested which is required by Article 20.  The Judge dealt with the issue as follows :

‘ 26. There is a controversy concerning the non-compliance with Art. 20. It is undisputed that the instrument of transfer filed by Kwong was not duly attested. Although I have some sympathy with Mr Chain’s submission that it was a simple matter and had any objection been raised at the material time it would have been put right easily, I do not see that there is an answer to this deficiency. It is not suggested that there is any estoppel or any legal reason why Joris or Kung cannot rely on the strict compliance of Art. 20.’

9.1   I agree with the Judge’s view.

Conclusion

10.  Accordingly the appeal was dismissed with costs to Joris and Kung.  I will grant certificate for one counsel.

Hon Barma JA :

11.  I agree with the Reasons for Judgment of Cheung JA.

Hon McWalters J:

12.  I agree with the Reasons for Judgment of Cheung JA.