HOU HSIAO BING v. CHINA TECHNOLOGY SOLAR POWER HOLDINGS LTD

CACV 650/2020

[2021] HKCA 1548

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 650 OF 2020

(ON APPEAL FROM HCMP NO 1880 OF 2019)

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R E A S O N S  F O R  J U D G M E N T

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Hon Poon CJHC:

1.  I agree with the reasons for judgment of Yuen JA.

Hon Kwan VP:

2.  I agree with the reasons for judgment of Yuen JA.

Hon Yuen JA:

3.1. This is the appeal of Mr Hou Hsiao Bing (“the applicant”) from the judgment of DHCJ Burns SC (“the judge”) given in HCMP1880/2019 on 27 November 2020 (“the Judgment”) in which the judge refused to give him leave to intervene in HCA3017/2016 (“the 3017 action”) which had been instituted by China Technology Solar Power Holdings Ltd¹ (“the Company”), of which the applicant is a shareholder.

3.2.   At the conclusion of the hearing, the appeal was dismissed with costs.  My reasons appear below.

Introduction

4.1.   The Company is a Cayman Islands company which has been listed on the Growth Enterprise Market on the Hong Kong Stock Exchange (Stock Code 8111) since 3 January 2001. 

4.2.   On 18 November 2016, the Company instituted the 3017 action against two former directors: Zeng and Wang (for convenience, referred to in this Judgment as “D1” and “D2” respectively), and two former shareholders alleged to be shadow and/or de facto directors Li and Ren (“D3” and “D4” respectively).

4.3.   On 22 October 2019, the applicant filed an originating summons asking the court to grant him leave under ss.732 - 733 Companies Ordinance, Cap.622 (“CO”) to take over the prosecution of the 3017 action in place of the Company’s board of directors.  The Company opposed the application.

Background

5.  In view of the applicant’s contentions in support of his application, it is necessary to set out some factual background. 

6.1.   The applicant is a founding member of the Company.  At the time of the hearing before the judge, he held 7.15% of the shares, whereas the largest shareholder held 23.66%, with the rest being held by members of the public.  

6.2.   The applicant had been the Company’s chairman from 5 August 2002 to 6 April 2011, and an executive director from 5 August 2002 for a continuous period of 17 years until 26 August 2019 when he retired by rotation and was not re-elected as a director².

The Company’s acquisition of CTDC stock (the Subject Acquisition)

7.1.   The 3017 action concerns the Company’s acquisition of stock in a company (“the Subject Acquisition”).

7.2.   On or about 10 December 2010, D1 and D2 signed a cheque in the sum of HKD30 million which was transferred to the Company’s account with a securities company.

7.3.   From 14 - 20 December 2010, the Company acquired on the market 1,087,000 common stock in a company called China Technology Development Group Corporation (“CTDC”³), a BVI company listed on the Nasdaq Capital Market.

7.4.   The aggregate consideration was HKD24,249,861.98 which, according to the Company’s public announcement dated 14 January 2011⁴ (“the 2011 announcement”), represented the prevailing market price of the stock at the time of acquisition.

7.5.   Under the heading “reasons for and benefits of the acquisition”, the 2011 announcement contained the following statements:

-  (as disclosed by an earlier announcement on 10 November 2010), the directors were currently negotiating the possible acquisition of 51% interest of a company called Solar Market Ltd which, together with its subsidiaries, were principally engaged in “the production of solar energy investment and management in the PRC”;    

-  (as disclosed by an earlier announcement on 14 December 2010⁵), on 13 December 2010 the Company had entered into a conditional agreement with (among others) Chiu Tung Ping (“Chiu”) and his wife for the proposed acquisition of the entire share capital of a company then known as China Technology Solar Power Holdings Ltd which was the holding company of a Qinghai company which was principally engaged in “the business of power generation and the related power system integration for solar energy and biomass energy in the PRC”;

-  as CTDC (the Subject Acquisition) was principally engaged in “the production of solar energy products and solutions”, the Company’s investment in it “would enable the Company to be benefitted from the growing demand in energy in the PRC as well as the growing emphasis and awareness on renewable energy by the PRC government”.

7.6.   The 2011 announcement stated that the Company specializes in the business of ATM and other banking equipment, but from the contents of 2011 announcement, it would appear that at that time, the Company was interested in some other investments (not only the Subject Acquisition) involving solar energy in the PRC.

7.7.   Although the 2011 announcement stated that the board “intends to hold the Common Stock for short-term investment purposes”, the stock was not disposed of before CTDC was de-listed the following year.

8.1.   At the time of the Subject Acquisition, there were 8 directors of the Company including the applicant, D1 and D2.  The applicant was present at the board meeting on 14 January 2011 at which the 2011 announcement was decided.⁶   Chiu was not a director at either time.  He became chairman of the board of directors subsequently on 8 June 2011.

8.2.   D1 and D2 ceased to be directors of the Company on 9 December 2011 and 16 March 2012 respectively.  In 2014, the applicant proposed a board meeting to investigate whether they were acting outside the scope of their authority in entering into the Subject Acquisition, but then postponed it⁷.    

HCA3017/2016

9.1.   On 28 October 2016, the board unanimously resolved to “investigate and make enquiries regarding the Subject Acquisition”⁸.  The board included Chiu, the applicant, and 6 other directors, including 3 independent non-executive directors.

9.2.   On 18 November 2016, the Company issued the writ in the 3017 action against D1-D4.  It appears from the Re-Amended Statement of Claim⁹ that the Company is alleging the following:

-  D1 and D2 were D3 and D4’s respective nominees;

-  D3 and D4 were shadow and/or de facto directors of the Company;

-  D3 and D4 had shareholdings in CTDC, but did not disclose the same;

-  the defendants did not call a board meeting to obtain approval for the Subject Acquisition as they knew no approval would have been given for reasons including: CTDC’s net worth, the scheduled deployment of the Company’s general working capital, CTDC’s financial record, and the defendants’ conflict of interests;

-  the Subject Acquisition was not in the best interests of the Company;

-  the defendants were thus liable for breach of fiduciary duty, misfeasance, fraudulent conspiracy to breach fiduciary duties, and fraudulent conspiracy to injure.

9.3.   The procedural chronology of the 3017 proceedings have been set out in §§9 - 28 of the Judgment (spanning events from November 2016 to October 2020, a few days before the hearing) and will not be reproduced here. 

9.4.   D1 and D3 have been served and have filed Defences in 2018, but D2 and D4 (who are in the PRC) have not been served, pending agreement between the Department of Justice and the PRC Supreme People’s Court on substituted service.

9.5.   After the Judgment, a case management conference in the 3017 action took place in April 2021.

Applicant’s 1^st application to intervene and appointment as Company’s representative

10.  Meanwhile, in October 2017, the applicant had issued an application under ss.732-733 CO to intervene in the 3017 action.  He withdrew the application on 25 April 2018 after he (then a director) was appointed the Company’s sole representative¹⁰ to deal with all matters in relation to the 3017 action.  The appointment was made after a unanimous resolution of the board at a meeting on 10 April 2018¹¹ at which Chiu and 3 other directors (in addition to the applicant) were present.  It would thus be seen that Chiu did not obstruct the applicant in his pursuit of the conduct of the action.

Applicant not re-elected as director

11.1.  On 26 August 2019, the Company held its AGM.  The applicant was not re-elected as director.  It would be noted that three other directors who were eligible for re-election were re-elected unanimously¹², which obviously included the votes cast by the applicant.   

11.2.  At the board meeting the next day, it was unanimously resolved that Hu Xin (“Hu”) who has been an executive director since 19 March 2012¹³, be appointed the Company’s sole representative to deal with all matters in relation to the 3017 action in place of the applicant.

Applicant’s 2^nd application to intervene

12.  Shortly thereafter, on 22 October 2019 the applicant issued the OS in HCMP1880/2019 for leave to intervene in the 3017 action under ss.732-733 CO.  The Company objected to the application. 

Sections 732 and 733 CO

13.  The material parts of these sections provide:

Section 732(3):

“If, because of misconduct committed against the company, a company fails to diligently continue ... proceedings, a member of the company ... may, with leave of the Court granted under section 733, intervene in the proceedings before the court for the purpose of continuing ... those proceedings on behalf of the company”.

Section 733(1):

“On application by a member of a company ... the Court may grant leave for the purposes of section 732(3) if it is satisfied that –

(a) on the face of the application, it appears to be in the company’s interests that leave be granted to the member;

(b) in the case of – ...

(ii) an application for leave to intervene in proceedings under s.732(3), the company has not diligently continued ... the proceedings; and

(c) ... the member has served a written notice on the company ...”.

14.  In his affirmations in support of the application, the applicant alleged that:

(1)  the Company has not diligently conducted the proceedings in the 3017 action, both before and after the writ was issued;

(2)  he has “concern over the impartiality or independence of the existing Board, including both the executive directors and independent non-executive directors”¹⁴ (emphasis added) as:

(a)  Chiu “had business dealings” with D3¹⁵.  “Therefore, he [Chiu] has been reluctant to investigate the matters concerning the Acquisition and commence legal actions against the defendants in the HCA3017/2016 Action to avoid embarrassment and deep down investigation”¹⁶, and “Chiu does have a self-interest not to proceed with the HCA3017/2016 Action diligently”¹⁷;

(b)  “the other executive directors ... have a close relationship with [Chiu] and therefore do not object to [Chiu’s] way in dealing with the matter”¹⁸, Hu is Chiu’s “puppet”¹⁹ and Chiu is “controlling the board”²⁰;

(3)  “surprisingly and without any prior indication”, he was “removed from the board”²¹ on 26 August 2019, which he says “is clearly a calculated move to remove me as the sole representative ... so that the Company can continue to conduct the HCA3017/2016 Action in a dilatory manner as before”²² (emphasis added);

(4)  it was prima facie in the interests of the Company for leave to intervene to be granted because the Company has a strong case against the defendants in the 3017 action.         

The judge’s Judgment

15.  In his Judgment, the judge found:

(1)  in §36, that the Company has not pursued the 3017 action as diligently as it should have done but “it does not follow from this fact alone” that the court should accede to the application;

(2)  in §37, that:

“Prima facie it is the board of directors of a company which is charged with the responsibility of managing the company’s affairs including the conduct of litigation to which it is party. In a case like the present where proceedings are already in train and the litigation is being conducted by the Company (albeit in a dilatory fashion), something more than lack of diligence in the prosecution of the proceedings is required before the Court should exercise its powers under sections 732 & 733 to grant leave to a member of the Company to take over the conduct of the litigation, such as evidence that the board of directors has not been acting bona fide, the existence of serious conflicts of interest or evidence that the Company is or has been motivated by improper purposes. Cogent evidence of these matters is required if an application to intervene in proceedings which have already commenced and which are in progress is to succeed” (emphasis added);

(3)  in §38, that the evidence adduced by the applicant fell short of what was required before the court could be reasonably satisfied that it was in the Company’s interests that its board of directors should be stripped of the responsibility of conducting the action.  The judge took the view that the evidence was circumstantial and did not demonstrate that Chiu had obstructed the conduct or prosecution of the action.  In any case, Chiu was only one director “and the suggestion that the other directors are mere puppets has not been substantiated”;

(4)  in §39, the judge said “on any basis” there were serious questions as to whether it would be appropriate to allow the applicant to take over the conduct of the action as:

.1  the applicant was the chairman of the board at the time of the Subject Acquisition whereas none of the members of the present board were;

.2  the applicant may well have a personal grievance in relation to the Subject Acquisition as “the funds for it were sourced from his personal investment in the Company through a share subscription and convertible bond”;

.3  as a result, the applicant’s motivations may not align with those of the board or with the interests of the Company; and

.4  in any case, the applicant is no longer a director and is only a 7% shareholder.

Accordingly, the application was dismissed with costs.

Appeal

16.  The applicant appealed.  Mr Alan Ng²³ acknowledged that the Judgment was given in the exercise of the court’s discretion²⁴, but submitted that it may be impeached by reason of 2 main points:

(1)  the judge erred in law in applying a higher and more onerous threshold than legally required;

(2)  in §39, the judge took into account irrelevant matters.

Discussion

17.1.  In relation to point (1), Mr Ng submitted that the lack of diligence and the dilatory manner on the part of the Company in commencing and conducting the 3017 action in the past years is per se a strong factor suggesting that “the board of directors presided over by Chiu has not been acting in the interests of the Company, and it must follow that it would be prima facie in the interests of the Company for leave to be granted for the proposed intervention”²⁵ (emphasis added). 

17.2.  Mr Douglas Lam SC²⁶ for the Company acknowledges that it is possible that lack of diligence by a board might in some cases be sufficient by itself to warrant the court’s intervention to protect the interests of the company, but the judge properly did not regard this as such a case.

18.  It is clear that a finding that the company has not diligently continued the proceedings satisfies only the requirement in s.733(1)(b)(ii).  The applicant must also satisfy the court of the requirement in s.733(1)(a) - that on the face of the application, it appears to be in the Company’s interests for leave to be granted to the member.

19.1.  After recounting the procedural chronology of the 3017 action, the judge accepted that the Company has not pursued the action “as diligently as it should have done”, but he considered that it did not follow from that fact alone that he should grant leave to the applicant to intervene.  Obviously the judge did not consider the lack of diligence so egregious that, irrespective of the board, leave to intervene should be granted to the applicant, a shareholder.  Indeed it did not appear from Mr Ng’s skeleton argument before the judge that he was arguing that s.733(1)(a) was satisfied by the fact of delay alone.

19.2.  The applicant’s case before the judge was that the lack of diligence was the deliberate policy of the board, and thus it was in the Company’s interests for him to take over the 3017 action from the board.  He alleged that Chiu “did have a motive to cover up the matter and deal with the 3017 action sluggishly”²⁷ and the applicant also alleged that Hu was a “mere puppet” of Chiu and that he (the applicant) had “concern over the impartiality or independence of the existing Board, including both the executive directors and independent non-executive directors”²⁸.   

20.1.  It can thus be seen that the applicant was making serious allegations of lack of bona fides, conflict of interests and motivation by improper purposes against Chiu, Hu and all the members of the board (including the independent non-executive directors).  This was the case which the applicant himself advanced to support his argument that it would be in the interests of the Company for him to replace the board in the conduct of the 3017 action, and this was the case which the judge therefore had to consider.

20.2.  The judge found in §38 that the evidence did not

“demonstrate that Mr Chiu has in any way obstructed the conduct or prosecution of the Action. In any case, Mr Chiu is only one director on the board and the suggestion that the other directors are mere puppets has not been substantiated”.

20.3.  There is no appeal by the applicant that the judge was plainly wrong in these findings.  As far as Chiu was concerned, he had voted to appoint the applicant (then a director) as the sole representative of the Company in April 2018.  The applicant has not adduced any evidence to show that Chiu attempted to stultify his conduct of the action. 

20.4.  As for the other members of the board, the applicant has only made bare assertions against their impartiality and independence, with no evidence in support of his serious allegations.  It is material to note that, contrary to his assertion that the rest of the board were not independent, the other directors eligible for re-election at the AGM in August 2019 were all re-elected unanimously, meaning that the applicant had voted to re-elect these allegedly “partial and non-independent” persons as directors.

21.1.  Further, the applicant’s assertion that at the same AGM he was “removed from the board”²⁹ as “a calculated move to remove me as the sole representative ... so that the Company can continue to conduct the HCA3017/2016 Action in a dilatory manner as before”³⁰ (emphasis added) was also not borne out by the evidence. 

21.2.  The Company records show that the applicant was not “removed”; he retired and was not re-elected, and there was simply no evidence that the shareholders of this public company who voted 77.4% against his re-election were motivated by the reasons he ascribes to them.

22.  The applicant having pitched such a high case challenging the impartiality and independence of the board, with no evidence in support, it is not surprising that the judge found against him.

23.  What the applicant submitted on appeal is that the judge was wrong in law to require him to show “cogent” evidence (§37) of the serious allegations he had made against the board.  Mr Ng argued that this threshold was too high, since all that is required for the grant of leave is that the applicant establish on a prima facie basis that his proposed intervention is in the interests of the Company³¹. 

24.1.  This court has often reminded practitioners that words in a judgment are not to be read as if they had been drafted like a statute, and that words must be read in context.  In §§33-35 of the Judgment, the judge had set out the applicant’s case of conflict of interests, improper motives and collusion.  Then at §§36-38, the judge addressed that case, holding that:

-  prima facie it is the board of directors which has the responsibility of managing a company’s litigation;

-  bare assertions of conflict of interests, improper motives and collusion (of the type advanced by the applicant) against the board are not sufficient; these are serious allegations of bad faith, and there should be relevant evidence which logically support the allegations made, because evidence which is consistent also with good faith is insufficient; and

-  in the absence of such relevant evidence, the applicant has not made out a prima facie case that the board was not impartial and independent and thus should no longer conduct the 3017 action.

24.2.  It is clear from §§36-38 that the judge’s focus was on the presence or absence of evidence supporting the applicant’s case, and at no stage did he discuss or formulate a legal threshold other than the statutory one.

25.1.  In relation to point (2), Mr Ng submitted that the judge had taken irrelevant matters into account.  In §39.2 of the Judgment, the judge took the view that the applicant may well have a personal grievance in relation to the Subject Acquisition on account of the fact that the funds for it were sourced “from his personal investment in the Company through a share subscription and convertible bond”. Mr Ng submitted that the applicant’s investment was only by way of a share subscription and not by way of a convertible bond.  Mr Lam agreed that there was no evidence that the applicant had invested in the latter. 

25.2.  In my view, that inaccuracy does not detract from the point made by the judge, which was of the applicant’s personal grievance stemming from the loss of his investment.  The method of investment is not pertinent.  Nor can it be said that his investment was of such a small amount³² as to be de minimis.

26.1.  Mr Ng also submitted that the judge was wrong in §39.4 of the Judgment to have taken into account the fact that the applicant was no longer a director and was only a 7% shareholder. 

26.2.  Mr Ng is of course correct to say that a member is entitled to make an application under ss.732-732 CO, but I do not read §39.4 as saying that the fact that the applicant is not a director disentitled him from making the application.  Rather, the judge was putting into the balance the impracticality of giving the conduct of litigation to a person who was not on the board, when the board was (on the judge’s earlier findings) impartial, independent and competent to direct the course of the litigation.  The relatively small size of the applicant’s shareholding is also a factor that may legitimately be put into the balance. 

27.1.  In respect of matters taken into account (or not), the grounds of appeal included the complaint that the judge had not taken into account Hu’s email to the applicant dated 20 April 2018³³ in which she said she could not replace him and the Company still needs his cooperation and to provide information for the action.

27.2.  In this regard, Hu had said in her affirmation that the applicant could furnish necessary information to the Company and could even be a witness for it³⁴.  The applicant did not indicate in his affirmation in reply that he would not do so.  Mr Ng also informed this court that he had no instructions that the applicant would refuse to assist the board in the preparation of the action should he fail to obtain leave to intervene, so there is nothing in the point. 

28.  Finally, as a matter of completeness, Mr Ng also argued at the appeal that the applicant had not received a reply from the Company to his written notice. This was not in his grounds of appeal, and he did not provide any authorities to support his argument that the company was required (by statute or otherwise) to reply.  On the contrary, Harris J in Re New-Asia Optical Co Ltd ³⁵ held that the purpose of the notice is to warn the company of the proposed application, so that it can decide whether to acquiesce or object to it.  In the present case, the Company decided to object to it.

Order

29.  For the above reasons, the appeal was dismissed with costs with certificate for two counsel.