CHEN ZHENMIN v. HARTANTO HADY AND ANOTHER

HCA 1829/2019

[2023] HKCFI 2123

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1829 OF 2019

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BETWEEN

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REASONS FOR DECISION

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1.  On 31 January 2023, Master KW Wong allowed the plaintiff (“P”)’s application (“the Discovery Application”) and made an order (“the Disclosure Order”) requiring the 1^st and the 2^nd defendants (“D1” and “D2” respectively, and “Ds” collectively) to disclose certain documents (“the Disputed Documents”) to P. This is Ds’ appeal against the Disclosure Order. In this hearing, P is represented by Mr Alexsander Wong, and Ds are represented by Mr Leon Ho.

2.  It is trite that an appeal from a master’s decision to a judge in chambers is a de novo hearing. Subject to the restriction in the Rules of the High Court, Order 58 rule 1(5), the hearing before me is an actual rehearing as if the application came before me for the first time.[1] Accordingly, in this appeal hearing, I have considered the Disclosure Application as if the same came before me for the first time.

3.  At the end of the hearing, I allowed Ds’ appeal with costs. These are my reasons.

The facts

4.  The background facts are not in dispute.

5.  P is a businessman in Mainland China. D1 is and was the director of D2. D2 is and was a company incorporated in BVI, carrying on the business of acquiring, launching and operating a satellite to provide connectivity services across the Asian continent.

6.  In about April 2015, P invested in D2 and transferred a total of US$2,000,000 to D2 to acquire about 7.14% shareholdings in D2. In early 2017, P made a request to D2 to withdraw his investment. P was content to first have US$1,000,000 returned with the remaining balance being returned in 3 months’ time. D2 agreed and did return US$1,000,000 to P in about April 2017.

7.  As of July 2019, the remaining balance in the sum of US$1,000,000 has not been returned to P. It is P’s case that on about 16 July 2019, in a telephone conversation between P and D1, P and D1 reached an oral agreement in respect of the remaining US$1,000,000 (“the Alleged Oral Agreement”) as follows:

(1) D1 would procure D2 to return the remaining US$1,000,000 to P;

(2) Upon receipt of the US$1,000,000 by P, P would surrender his shareholdings in D2;

(3) The repayment from D2 would be made as follows:

(a) US$50,000 within 7 days;

(b) US$200,000 on or before 16 August 2019; and

(c) US$750,000 on or before 20 September 2019.

8.  The existence of the Alleged Oral Agreement is denied by Ds.

9.  P’s case is that in breach of the Alleged Oral Agreement, D1 had failed and/or refused to procure D2 to return the US$1,000,000 to P. Alternatively, D1 entered into the Alleged Oral Agreement on behalf of D2 and D2 was in breach. As a further alternative, D1 and D2 were both parties to the Alleged Oral Agreement and were both in breach thereof.

10.  P claims for the following reliefs:

(1) Specific performance of the Alleged Oral Agreement[2];

(2) “Alternatively, …… damages for breach of [the Alleged Oral Agreement] by [D1] and/or [D2] to be assessed, being the difference between the sum of US$1,000,000 and the current value of [the Subject Shares] at the time of the breach.”[3]

11.  There is no dispute that the measure of damages upon a breach by a buyer of shares is the difference between the contract price and the market price at the date of breach. In the present case, the damages would be the difference between US$1,000,000 (ie the contract price) and the market value of P’s remaining 3.57% shareholdings in D2 (“the Subject Shares”) as at 20 September 2019 (ie the time of breach)[4].

12.  The audited financial statements of D2 for the year ended 31 December 2019 (“2019 AFS”) have already been disclosed in these proceedings. The Statement of Financial Position shows that the value of Non-Current Asset in the form of investments in subsidiaries was US$20,001,272. The total equity of D2 is US$21,102,823.

13.  In the explanatory notes in the 2019 AFS, details of the investments in subsidiaries are stated as follows:

Name of Subsidiary	Place of Incorporation	Proportion of ownership directly held
HCH Investments Limited (“HCH Investments”)	BVI	100%
Africa Bandwith Company Limited (“ABC”)	Hong Kong	100%
HCH Group Company Limited (“HCH Group”)	Hong Kong	99%

14.  In the 2019 AFS, the auditors of D2 (“the Auditors”) refrained from expressing an opinion of the financial statements for the year ended on 31 December 2019. The Auditors said:

“Because of the significance of the matter described in the Basis for Disclaimer of Opinion paragraph, we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion. Accordingly, we do not express an opinion on the financial statements for the year ended 31 December 2019 ……”

15.  The Auditors also said in the 2019 AFS:

“(a) Impairment on investments in subsidiaries

No impairment and provision has been recognized by the Company in the period against the Company’s investments in subsidiaries. In the absence of sufficient information relating to the subsidiaries, there were no other satisfactory audit procedures that we could adopt to satisfy ourselves that the amounts concerning the investments in subsidiaries in the Company’s financial statements as at 31 December 2019 and for the year then ended were free from material misstatements.”

16.  On 31 October 2022, P took out a summons seeking discovery of the Audited Financial Statements of D2 for the years ended 31 December 2017 and 2018, and the Management Accounts of D2 up to 20 September 2019. Subsequently, the Audited Financial Statements for 2017 and 2018 (“AFS 2017” and “AFS 2018”, in which the Auditors have given qualified opinions) were disclosed by Ds on 7 December 2022. Therefore, in the Discovery Application, P is seeking disclosure of the Management Accounts of D2 up to 20 September 2019. Apart from these, P is also seeking the following financial documents of the 3 subsidiaries (ie HCH Investments, ABC, and HCH Group):

(1) The Audited Financial Statements of HCH Investment, ABC, and HCH Group for years ended 31 December 2017, 2018, and 2019; and

(2) The Management Accounts of HCH Investment, ABC, and HCH Group up to 20 September 2019.

The documents targeted by the Discovery Application are the Disputed Documents.

17.  On 31 January 2023, the Discovery Application was heard by the Master. At the end of the hearing, the Master made the Disclosure Order, with costs to P.

Discussion

18.  Mr Ho for Ds submits that the Disputed Documents are irrelevant because information of the Disputed Documents is outside of the knowledge of the market, and cannot have affected the market value of the Subject Shares. In assessing the market price of the Shares, the experts are not expected to be omniscient, but should only have access to the information available at the market and the information available to P.

19.  Mr Ho is relying upon the House of Lords’ decision in Re Lynall[5] and submit that as a matter of principle, internal documents of companies that the companies are not obliged to make available to shareholders and outsiders are irrelevant to the assessment of market price of an asset. Accordingly, the Disputed Documents are irrelevant to the assessment of market value of the Subject Shares.

20.  In Lynall, estate duty was payable over certain ordinary shares of a private company, Linread Ltd. By section 7(5) of the Finance Act 1894, the principal value of any property shall be estimated to be the price which, in the opinion of the commissioners, such property would fetch if sold in the open market at the time of the death of the deceased. Private documents of the directors (defined as category B documents in Lynall) were in existence at the date of death of the deceased, indicating that a floatation of part of the capital was under consideration. One of the directors, however, if questioned at the date of death by a prospective purchaser as to the likelihood of a public issue, would have said that it was doubtful and remote. At issue is whether the category B documents were admissible for the purpose of estimating the value of the shares. The House of Lords unanimously held that the confidential information contained in the category B documents ought not to be regarded as available to a hypothetical purchaser, and the value of the shares was to be assessed without regard to the category B documents.

(1) Lord Reid said[6]:

“We must decide what the highest bidder would have offered in the hypothetical sale in the open market, which the Act requires us to imagine took place at the time of Mrs. Lynall’s death. The sum which any bidder will offer must depend on what he knows (or thinks he knows) about the property for which he bids. The decision of this case turns on the question what knowledge the hypothetical bidders must be supposed to have had about the affairs of Linread. One solution would be that they must be supposed to have been omniscient. But we have to consider what would in fact have happened if this imaginary sale had taken place, or at least—if we are looking for a general rule—what would happen in the event of a sale of this kind taking place. One thing which would not happen would be that the bidders would be omniscient. They would derive their knowledge from facts made available to them by the shareholder exposing the shares for sale. We must suppose that, being a willing seller and an honest man, he would give as much information as he was entitled to give. If he was not a director he would give the information which he could get as a shareholder. If he was a director and had confidential information, he could not disclose that information without the consent of the board of directors.” (Emphasis added)

(2) As to whether the directors would make available confidential information to the prospective purchaser, Lord Reid said:[7]

“They were under no legal obligation to make any confidential information available. Circumstances vary so much that I have some difficulty in seeing how we could lay down any general rule that the directors must be supposed to have done something which they were not obliged to do. The farthest we could possibly go would be to hold that the directors must be deemed to have done what all reasonable directors would do. Then it might be reasonable to say that they would disclose information provided that its disclosure could not possibly prejudice the interest of the company. But that would not be sufficient to enable the respondents to succeed.”

(3) Viscount Dilhorne held that where the actual directors of the company objected to disclosure of confidential information, such information would not be available at the market. His lordship said:[8]

“On a sale in the open market is it to be assumed that possible purchasers would have information as to the contents of the reports of McLintocks and Cazenoves? They were confidential to the directors. All the shareholders in Linread were directors but it is not to be assumed that they would disclose confidential information they possessed to the public without the consent of the board; nor is it to be supposed that the board would have given its consent to the disclosure of the contents of those reports. In the light of the evidence given by Mr. Alan Lynall whose evidence was tendered and accepted as evidence of the board, and accepted by Plowman J … it is clear that would not have been given.”

21.  Mr Ho has drawn my attention to the fact that the House of Lords’ decision in Re Lynall was subsequently applied by the English Court and the Australian Court in various cases.[9]

22.  Mr Ho argues that:

(1) HCH Investments, ABC, and HCH Group are private companies which D2 was either the sole shareholder or majority shareholder. P is neither a shareholder nor a director of HCH Investments, ABC, and HCH Group. P has no right to have access to the documents of these companies. Further, P is only a minority shareholder of D2 and has no general right to access management accounts of D2. A fortiori, prospective purchasers of the Subject Shares would have no right to access the Disputed Documents.

(2) Ds are not under any legal obligation to make available the Disputed Documents to P and any prospective purchasers of the Subject Shares.

(3) As the Disputed Documents are all confidential information which cannot be accessed by the general public, and Ds have refused to make available such information to P and any prospective purchaser of the Subject Shares, information of the Disputed Documents cannot possibly be available at the market. The value of the Subject Shares cannot depend on information in the Disputed Documents. Hence, the Disputed Documents are irrelevant in assessing the value of the Subject Shares.

(4) P’s case on discovery cannot stand. Suppose that P is selling the Subject Shares to a third party, both P and the third-party purchaser (who can be anyone other than Ds) would have no access to the information in the Disputed Documents, and the Disputed Documents would have no bearing on the sale price of the Subject Shares. It is wrong for P to say that when the Court is to assess the damages arising from a breach of the Alleged Oral Agreement, the Court is to assess the value of the Subject Shares on an omniscient basis, which would never happen in reality.

(5) P’s submission that a reasonable director of D2 would disclose the Disputed Documents to Ds should not be accepted. Scott J (as his Lordship then was) in Cardgrange[10] held that the sale should be assumed to be taking place in the real world. In the real world, Ds have already stated their position that they would not agree to disclosure of the Disputed Documents to P and any potential shareholder. Ds’ refusal to disclose the Disputed Documents to P and any potential purchaser of the Subject Shares, in the absence of bad faith (and none has been suggested), should be the end of the matter. As held by Viscount Dilhorne in Lynall, if the director of the company insisted that the confidential information should not be disclosed, it would not be for the Court to say that confidential information should have been disclosed.

(6) P says that disclosure of the Disputed Documents should be allowed because the Auditors expressed qualified opinion in the AFS 2017 and the AFS 2018, and made a disclaimer of opinion in AFS 2019. P then argues that the Disputed Documents, which might contain more reliable information, should be disclosed. These submissions should not be accepted for the following reasons:

(a) Even if it is assumed that information in the Disputed Documents is more reliable in ascertaining the value of the Shares on an omniscient basis, such information is not available at the market. The assessment of value of the Shares based on the Disputed Documents will not yield a more reliable assessment of the value of the Shares in the open market.

(b) It is conceptually possible to assess value of an asset with reference to unreliable or imperfect information.[11]

(c) There is no evidence showing that it is impossible to assess the value of the Subject Shares with reference to AFS 2017 and AFS 2018. Even if this is the case, it does not change the fact that the market, particularly the prospective purchasers of the Subject Shares, do not have access to the Disputed Documents. The Disputed Documents are irrelevant regardless of the evidential value of AFS 2017 and AFS 2018.

23.  Mr Wong for P submits that:

(1) A hypothetical purchaser who is considering to but the Subject Shares would inquire about the financial position of D2. Once it was disclosed to the hypothetical purchaser that the 2017 to 2019 AFS have been qualified by the Auditors, the hypothetical purchaser would no doubt make inquiries regarding the financial position of D2 and its subsidiaries.

(2) The question is whether the hypothetical board would disclose the Disputed Documents to a hypothetical purchaser in a hypothetical sale. The hypothetical board must be one that is not hostile to the vendor or the purchaser, for otherwise no hypothetical sale could take place. For example, it could not be assumed that the board would not register the transfer. In fact, in the present case, the company was willing to disclose the 2017 to 2019 AFS, which showed the audited financial position of D2. The board clearly does not regard the financial figures in the 2017 to 2019 AFS to be confidential to a hypothetical purchaser. There is no reason to suppose that the financial figures stated on its management accounts or those for the subsidiary companies (which were purportedly already reflected in the 2017 to 2019 AFS) to be confidential. It would lie ill in the mouth of the board to say that the “disclaimed” accounts are not confidential, but the “undisclaimed” accounts are.

(3) In Re Lynall, the House of Lords reversed the decision of the Court of Appeal because the House of Lords took the view that the approach taken by the Court of Appeal is not consistent with an “open” market. “Open market” was the market specified and imposed by section 7(5) of the Finance Act 1894. In this case, there is no reason why in assessing the “market value” of the Subject Shares, that assessment must be in an “open market”. This is where Ds’ arguments based on Re Lynall breaks down:

(a) The sale of shares in a private company between commercial parties is not restricted by statute to a sale in an “open market”, which requires overlooking various restrictions and market practices in reality. The Court is required to assess damages as closely as it reflects reality, which entails all potential form of sales and not restricted to an “open market”.

(b) Without the cooperation of the board of D2, there would be no sale. Without the disclosure of information, no hypothetical purchaser would in reality buy into the company.

(c) The sale of the Subject Shares is a sale back to the company, a share buyback by D2. This is not in itself a sale in the “open market”, and there is simply no reason to insist that open market sale is the basis of assessing loss.

(4) The following factual circumstances must be taken into account:

(a) D1 and/or D2 were the contracting parties to the contract that was breached. The sale of the Subject Shares was to reduce any damages that would have been payable by them.

(b) To facilitate such a sale would be in the interest of D1 and D2. There is no commercially justifiable reason not to disclose the Disputed Documents to a potential purchaser (who might even be given the information in confidence).

(c) The purported confidential nature of the Disputed Documents is questionable given that the company was prepared to disclose the 2017 to 2019 AFS in relation to its financial affairs.

(5) In fact, P is extremely fair to have sought discovery from Ds such that it can realistically assess the value of the Subject Shares at the time of the breach of the Alleged Oral Agreement. Without the Disputed Documents, a hypothetical purchaser only having sight of the qualified or disclaimed 2017 to 2019 AFS would likely consider the Subject Shares to be valueless.

(6) It is arguable that on the valuation date, ie 20 September 2019, D2 might be willing to provide the Disputed Documents to P and to a potential purchaser in the market.

(7) Further, the Subject Shares are clearly relevant documents in the Peruvian Guano sense.

24.  Both Mr Ho and Mr Wong have put forward respectable submissions. Having considered their respective submissions carefully, I am in respectful agreement with Mr Ho.

25.  The question as formulated by Mr Wong is “whether the hypothetical board would disclose the Disputed Documents to a hypothetical purchaser in a hypothetical sale”[12]. With respect, the hypothetical sale is not a sale back to D2. It is not a share buyback by D2 as submitted by Mr Wong. If there is a share buyback by D2, that in fact would be specific performance of the Alleged Oral Agreement. However, the assessment of the value of the Subject Shares is done for the claim for damages in [20] of the Re-Amended Statement of Claim, which is alternative to the primary claim for specific performance in [19] of the Re-Amended Statement of Claim. The hypothetical sale for the purpose of [20] of the Re-Amended Statement of Claim should not be a share buyback by D2. Based upon the parties’ respective pleadings, there is no reason to say that while the Court has refused to order the specific performance claimed in [19] of the Re-Amended Statement of Claim, the Court should then consider that for the purpose of [20] of the Re-Amended Statement of Claim, the hypothetical sale should be a sale to D2. In my view, the hypothetical sale should be a sale of the Subject Shares by P to a potential purchaser in the market.

26.  As to the “hypothetical board” argument put forward by Mr Wong, I agree with Mr Ho that the argument is not in line with the authorities. In the light of the House of Lords’s decision in Re Lynall, the real question is what information the actual board of the company would provide to a hypothetical purchaser. The true meaning of Re Lynall has been summarized in Clark v Green[13]:

“At first instance Plowman J considered what information would have been available to a hypothetical purchaser and identified four possible tests or standards (see [1969] 1 Ch 421 at 435 – 436, 47 TC 375 at 380 – 381).

The first was to assume that all the facts, which were facts at the date of death, were available. This has been called the ‘omniscience’ standard.

The second was to assume that the only information available was the company’s accounts together with any other information made available to all the shareholders.

This has been called the ‘published information’ standard.

The third was to assume that the purchaser obtained both the published information and any information which the directors of that company would have given in answer to any reasonable question likely to be asked by any vendor-shareholder or intending purchaser. As this test depends on considerations of what that actual board would have supplied it has been called the ‘subjective’ standard.

The fourth was to assume that the purchaser obtained both the published information and any additional information which a hypothetical reasonable board would have disclosed in answer to any reasonable inquiries which the vendor or the intending purchaser or his advisers might have made. As this does not require any consideration of what the actual board would have done it has been called the ‘objective’ standard.

Plowman J ([1969] 1 Ch 421 at 443 – 444, 47 TC 375 at 386) concluded that information in the accounts for the year ending after the date of death, and the contents of a speech made by the chairman of the company after the date of death, could not be taken into account. Relying on the evidence of a witness who spoke on behalf of the board, and who said that he would not disclose any board minutes or other confidential documents and who, if asked by a purchaser about the prospect of a public issue would have replied that the prospect was doubtful and remote, he concluded that the information about the proposed flotation could not be taken into account either, since that information was neither published information nor information which would in fact have been elicited from the board on inquiry.

Accordingly, after the hearing at first instance, the decision in Lynall was authority for the ‘subjective’ standard.

On appeal, the Court of Appeal ([1970] Ch 138, 47 TC 375) found in favour of the Revenue and adopted a version of the objective standard. Specifically, they decided that the information deemed to be available to a purchaser did not depend on what a particular board would do. Instead it was to be assumed that the purchaser would receive true and factual answers to all his reasonable enquiries. Also, it had to be assumed that any provisions in the articles which prohibited the directors from supplying confidential information were waived for the purposes of the hypothetical sale in the same way as any provisions in the articles restricting the transfer of shares were also waived for the same purposes.

The House of Lords, however, held that the objective standard should not be applied and valued the shares on the assumption that the information about the proposed flotation was not available. Lord Reid ([1972] AC 680 at 695, 47 TC 375 at 407 – 408) said that the evidence which had been adduced relating to the way in which confidential information would be disclosed by a board of directors to a purchaser’s advisers in confidence was irrelevant because that kind of sale was not a sale in the open market. It was a sale by private treaty. Also, the directors were under no legal obligation to make any confidential information available. There was difficulty in laying down a general rule that directors must be supposed to have done something which they were not obliged to do. He continued ([1972] AC 680 at 696, 47 TC 375 at 408):

‘The farthest we could possibly go would be to hold that directors must be deemed to have done what all reasonable directors would do. Then it might be reasonable to say that they would disclose information provided that its disclosure could not possibly prejudice the interests of the company.’

……

It seems to me that, following the decision of the House of Lords, the decision in Lynall was authority for the view that the information deemed to be available to a prospective purchaser of unquoted shares in a private company did not include confidential information. That was not information which would be available on a sale in the open market but rather it was information which might be made available on a sale by private treaty. Also, it was confidential information which the directors were under no legal obligation to make available.” (Emphasis added)

27.  In this case, D2 is resisting the Discovery Application. It is plain and obvious that the actual board of D2 is unwilling to provide the Disputed Documents to P. With respect, the argument put forward by Mr Wong that D2 might be willing to provide the Disputed Documents to P and to a potential purchaser in the market on 20 September 2019 is a mere speculation and a non-starter. There is no evidence showing that this argument is something arguable.

28.  In his submissions, Mr Wong says that in assessing the market value of the Subject Shares, it could not be assumed that the board of D2 would refuse to register the transfer. With respect, in my view, there is no basis in support of this position. That an application for registration of the transfer of the Subject Shares may be refused by the board of D2 is a risk that the potential purchaser would always need to bear in mind, and the purchase price may be adversely affected by this inherent risk. In the event that registration is refused, after completing the sale and purchase, the purchaser can only be a beneficial owner of the Subject Shares, which are being held by P on trust for the purchaser.

29.  Ds accept that P, being a shareholder of D2, is entitled to have access to AFS of D2 in the capacity of a shareholder. Ds also accept that Ds cannot prevent P from making available the AFS of D2 to any potential purchaser. Accordingly, the AFS can be considered for assessing the value of the Subject Shares.

30.  There is no basis upon which P may say that he or any third party would have a right to access the Disputed Documents. In this sense, the Disputed Documents are confidential.

31.  Ds’ stance is not that “qualified” or “disclaimed” accounts are not confidential, and “unqualified” or “undisclaimed” accounts are confidential. Ds’ stance is that all information that is not available to P and the world at large are confidential. I see no problem in the stance adopted by Ds.

32.  As to P’s argument that it is not necessary to carry out the assessment of the value of the Subject Shares by reference to an open market, with respect, P’s alternative suggestion is unknown. Further, as submitted by Mr Ho, whether the assessment should be done by reference to an open market is a red herring. In Lynall, the appellant shareholders were directors of the company as well as executors. As the shareholders / sellers knew about the confidential information, whether the sale should be conducted on open market basis (where the sellers would not provide information in confidence) as opposed to private treaty basis (where the sellers may provide information in confidence) would yield different prices. However, in this case, both P and the prospective purchaser of the Subject Shares have never seen the information in the Disputed Documents. Whether P is going to sell the Subject Shares in an open market or by a private treaty or by some other means, P and the potential purchaser of the Subject Shares would still do not have access to the Disputed Documents.

33.  I agree with Mr Ho that the Disputed Documents are irrelevant for the assessment of the market value of the Subject Shares for the purpose of [20] of the Re-Amended Statement of Claim, for the information in the Disputed Documents would not be available to P and to any potential purchaser in the market. In my judgment, Ds’ appeal ought to be allowed, and the Disclosure Order should be set aside.

34.  If any expert is of the view that without the Disputed Documents, no purchaser in the market would be willing to buy the Subject Shares, the expert may say so in his report. If the expert’s evidence is accepted by the Court in the trial, the Court would then consider what relief should be granted on the basis of the evidence accepted by the Court.

Disposition

35.  For the reason above, I have allowed Ds’ appeal and set aside the Disclosure Order. I also set aside the costs order made by the Master. Since Ds have succeeded in this appeal, in respect of the costs of the Discovery Application, costs here and below (with a certificate for counsel) should be paid by P to Ds forthwith. I so order. Those costs have been summarily assessed at HK$230,000.

36.  I thank both Mr Wong and Mr Ho for the assistance provided to the Court.