ANTHONY A SPERANDEO v. GEORGE LENCSAK BARRINGTON STUDIOS LTD

HCMP 1022/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1022 OF 2013

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JUDGMENT
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Introduction

1.  The Company, which is the subject of this Petition carried on business, I understand that for all practical purposes it is now dormant, sourcing packaging manufactured in the Mainland.  It was formed at the instigation of the Petitioner, who prior to its incorporation in December 2004 had carried on a similar business through a company incorporated in the United States with the same name (“Barrington US”).  The Petitioner invited the 1^st Respondent and Kristen Burleigh, who unfortunately died suddenly on 11 February 2010, to join with him to expand his business. The 2^nd Respondent, which I shall refer to as the “Company”, was incorporated in December 2004 and commenced business in early 2005.  The way in which the Company’s share capital was held and dealt with is central to the dispute between the Parties.

2.  The Company’s subscriber shares and an additional share were held by corporate nominees controlled by Oldham, Li and Nie: Snap Services Limited (2 shares) and Golaw (Nominees) Limited (1 share).  It is common ground that they were held beneficially for the Petitioner, the 1^st Respondent and Ms. Burleigh equally. On 17 March 2009 both shares held by Snap were transferred to Ms. Burleigh, who made a written declaration of trust that she held one of the two shares on trust for the Petitioner.  On 25 April 2009 Ms. Burleigh executed an undertaking in the Petitioner’s favour that she would not vote to remove him from the Company for a period of 18 months commencing 24 April 2009.

3.  The share held by Golaw was transferred to the Petitioner on 25 June 2010.  On 25 June 2010 one of the shares registered in Ms. Burleigh’s name was transferred to the 1^st Respondent.  On 26 October 2011 the 1^st Respondent caused the issue of a further 774,999 shares to himself purportedly to capitalise a loan to the Company.  On 14 March 2012 Ms. Burleigh’s executor transferred the other share registered in Ms. Burleigh’s name to the Petitioner.  It will be appreciated that given the allotment in October 2011 the Petitioner’s shares are, if the allotment is valid, valueless.

4.  The Petition has the virtue of brevity.  In paragraph 5 it is asserted that: “Although no shareholder agreement was drawn up, each of the Petitioner, 1^st Respondent and Burleigh placed mutual trust and confidence in each other and agreed that responsibility for the Business would be divided among them”.  The Petition contains the following complaints:

(1) “From late 2008 and taking advantage of the fact that much of the Petitioner’s time and attention was then devoted to dealing with divorce proceedings, the 1^st Respondent exploited the situation and began taking decisions without reference to the Petitioner, excluding the Petitioner from the Business and encouraging Burleigh to support him in such efforts.”: paragraph 8.  The Petitioner complains in this paragraph about the 1^st Respondent and Ms. Burleigh increasing the commission paid to Barrington US in the face of his objection from 2009 onwards.

(2) On 29 January 2010 he was told during a telephone call that he had been voted out of the business: paragraph 11.

(3) His interest in the Company had been diluted by the allotment: paragraphs 15 to 18.

(4) The increase in commission decreased the Company’s profit: paragraph 20.

(5) The Company has never paid a dividend: paragraph 21.

(6) The exclusion from the Company and the dilution of his interest in it constitute unfairly prejudicial conduct.

5.  The prayer to the Petition seeks relief the import of which is that he be treated as having a one third interest in the Company and that the 1^st Respondent purchase his interest at a fair value, which is to be determined by a Hong Kong practicing certified public accountant acting as an expert.  This is all that is said about the valuation and betrays the normal lack of thought given by legal advisers to what is one of the most important elements of any unfair prejudice petition in which a buy‑out order is sought. The consequence of not thinking through what a valuation would involve is unfortunately illustrated by the present case.

6.  As I have already noted the Company’s sole customer was Barrington US. The 1^st Respondent and Ms. Burleigh became shareholders of Barrington US at about the same time as they became shareholders of the Company.  However, in the case of Barrington US the shareholders entered into a written shareholders agreement, which is dated 20 May 2005.  On the same day, 29 January 2010, that the Petitioner was told by the 1^st Respondent that he and Ms. Burleigh had decided to remove him from the management of the Company they gave him notice that they were terminating his employment with the Barrington US and exercising their right under the shareholders agreement to purchase his shares.  As a consequence the Petitioner shortly thereafter ceased to have an interest in Barrington US, the Company’s sole customer.  The ramifications of this for the valuation of the Petitioner’s interest in the Company, should he succeed in obtaining the order that he seeks, is considerable.  In answer to a question from me during his closing Mr. Brewer, who appeared for the Petitioner, told me that the Company had no contractual right to require Barrington US to do business with it.  Mr. Brewer had agreed with the 1^st Respondent’s submission that the date of any valuation should be the date of issue of the Petition, which was 10 May 2013.  It was the 1^st Respondent’s uncontested evidence that the Company has ceased to do new business before that date and self-evidently Barrington US has no intention of placing further orders with the Company.  It would thus appear that as at May 2013 the Company’s value was probably limited to the value of its realisable assets and receivables less expenses.  In practice this is likely to be minimal and will not justify the costs of these proceedings.  Even if one were to take the date of the alleged exclusion from management, namely, January 2010 it would seem likely to make little difference as without Barrington US, which one would have to assume would have been unlikely to have placed any new orders, the Company would have been little more than a shell. If this is correct it follows that these proceedings have served little, if any, commercial purpose.  Be that as it may the Court still has to decide the issue of liability.  I shall divide the remainder of this judgment into the following sections:

· Legal Principles

· Witnesses

· The evidence and factual issues

· Relief

Legal Principles

7.  Section 168A(1) of the Companies Ordinance (Cap. 32) provides:

“(1) Any member of a specified corporation who complains that the affairs of the specified corporation are being or have been conducted in a manner unfairly prejudicial to the interests of the members generally or of some part of the members (including himself) or, in a case falling within section 147(2)(b), the Financial Secretary, may make an application to the court by petition for an order under this section.”

8.  Whether or not a particular act or omission is unfair and prejudicial, it being well established that there are 2 components to this test, is to be assessed by reference to the agreements that the shareholders have made between themselves and general principles of company law such as that which requires directors to use the powers given to them for a proper purpose.  The agreements between shareholders are to be found in the articles of agreement and any supplementary written or oral agreement that the shareholders make between themselves.  These principles are discussed more fully in paragraphs 51 to 55 of my judgment in Asia Television Limited [1].

9.  In the present case there are 2 complaints advanced in the Petition.  First, that the Petitioner was unfairly excluded from his role in the management of the Company.  Although, exclusion, against the Petitioner’s will and without compensation, from management will normally be inherently prejudicial, it does not follow that it is ipso facto unfair.  The Petition does not make it clear why the exclusion is said to be unfair, rather it approaches the issue obliquely.  In paragraphs 5 and 6 it is asserted that the shareholders agreed that responsibilities would be divided amongst themselves and (paragraph 6) “at all material times the Company was owned, directed and managed in the nature of a quasi-partnership among the Petitioner, the 1^st Respondent and Burleigh”.  This suggests that a “quasi-partnership” is some specific type of arrangement which engages particular rights and obligations including a right to have a role in managing the business venture.  It is not.  As I explained in Yung Kee Holdings Limited [2]:

“A quasi-partnership is not an independent form of business association which can be recognised by its legal characteristics in the same way that a company or a partnership can be recognised. The term “quasi‑partnership” is nothing more than a convenient label used to describe those circumstances surrounding the conduct of a company’s affairs which are such as to give rise to equitable constraints on the behaviour of other members going beyond the strict legal rights and obligations arising under the Companies Ordinance or the articles of association. This was explained in Fisher v Cadman [2006] 1 BCLC 499, where Sales J held at paragraph 84:

‘It is also clear that the term “quasi-partnership” is only intended as a useful shorthand label, which should not of itself govern the answer to be given to the underlying question, whether the circumstances surrounding the conduct of the affairs of a particular company are such as to give rise to equitable constraints upon the behaviour of other members going beyond the strict rights and obligations set out in the Companies Act and the articles of association… ’ ”

10.  It is necessary to establish an arrangement, normally an agreement other than the articles, which justify assessing the particular conduct complained of by reference to equitable considerations and not just by reference to the articles, the provisions of the Companies Ordinance and relevant general company law principles.  It is unhelpful and leads to forensic error to think in terms of there being a “quasi-partnership” which justifies assessing the parties’ conduct by reference to broad principles of fairness rather than in terms of breaches of specific obligations and established duties. For example, in the present case it is suggested that because the parties agreed to divide operational responsibilities between themselves it follows that the 1^st Respondent and Ms. Burleigh were not entitled to remove the Petitioner from his management position in the Company.  It does not follow, however, that the Petitioner was being given a guaranteed job for life.  It is reasonable to think that if the parties had turned their minds to the question when the Company was being established they would have qualified what was being said about the division of responsibilities in some way, probably stating that this was subject to satisfactory performance and the way the Company’s business developed.  As Briggs J observed in Sikorski v Sikorski [3] agreements between businessmen are ordinarily terminable on reasonable notice and that a departure from agreed arrangements between shareholders as to the conduct of a company’s affairs may not be unfair if, for example, they are caused by a change of circumstances not anticipated by them.

11.  This is relevant to the question of fairness. Excluding a shareholder from management may be prejudicial, but it is not necessarily unfair.  Even if the agreement between the parties which gives right to a continuing involvement in the management of a company, and possibly paid employment by it, is unqualified at the time it is reached it does not follow that prima facie breach of the agreement gives rise to unfair prejudice.  The Court is not being asked to determine whether or not an agreement had been breached, but whether a shareholder had been prejudiced in a manner which is unfair.  A shareholder who has over time failed to carry out his duties as a director or employee of a company satisfactorily and is, as a result, removed from office or employment is unlikely to have been unfairly treated.  This will be true if it can be demonstrated that the shareholder’s poor performance is itself prejudicial to the interests of the Company because it impacts materially on its commercial performance.  The matter is to be judged objectively viewed against the background of the parties agreements and understandings and the way in which the business of the company has developed. So much is clear from the authorities, which are usefully summarised in paragraphs 7‑76 to 7‑79 of Shareholders’ Rights, Hollington, 6^th ed.  In practical terms once it has been established that shareholders have reached an understanding that they, or at least the relevant shareholder, would be involved in the management of the company, removal from management will on the face of it be unfairly prejudicial and the persuasive burden will initially fall on the remaining shareholders to establish that their decision was fair.  This is consistent with Lord Hoffman’s observation in O’Neill v Philips [4]

“The Law Commission Report on Shareholder Remedies, pp. 30‑37, paras 3.26-56 has recommended that in a private company limited by shares in which substantially all members are directors , there should be a statutory presumption that the removal of a shareholder as a director, or from substantially all his functions as a director, is unfairly prejudicial conduct. This does not seem to me very different in practice from the present law”

12.  The second complaint concerns the allotment. The board of directors of a company, who are given the power to allot shares, must exercise that power for the general benefit of the company, most commonly to raise further capital.  They must take into account the impact that it will have on existing shareholders and in particular a shareholder’s voting rights, which will be diluted as a result of an increase in issued share capital[5].  It follows that if I am satisfied that the allotment in the present case was not made for the general benefit of the Company, but with a view, as the Petitioner suggests, to diluting his interest in the Company, this is a matter which is prejudicial to his interest in the Company and unfairly so.

Witnesses

13.  Only 2 witnesses gave evidence; the Petitioner and the 1^st Respondent.  The Petitioner in my view was an unsatisfactory witness.  There were 2 principle problems with his evidence.  First, in cross‑examination he changed material parts of the evidence appearing in his affidavits.  For example, in paragraph 8 of the Petition it says that “From  late 2008 and taking advantage of the fact that much of the Petitioner’s time and attention was then devoted to dealing with divorce proceedings ….”, which is repeated in his affidavits, which include in paragraph 12 of his 1^st affidavit the statement that:

“I refer to paragraphs 10 to 12 of the Petition. Following steps taken by Lencsak to exploit the fact that much of my time and attention was then occupied by my divorce proceedings and steadily to reduce my involvement in the Business I expressed to Burleigh my fears that I would soon be excluded altogether, while still being required to act as guarantor to secure the Company’s banking facilities. In order to ensure my continued cooperation, on 25 April 2009 Burleigh caused her staff to prepare and she then executed in my favour a written undertaking not to vote to remove me from the Company for the period of 18 months from 24 April 2009 to 24 September 2010, by which time I expected to be able to resume devoting my full attention to the Business.”

Realising, perhaps, that this was consistent with the 1^st Respondent’s case that he had been neglecting the Company’s business, during cross‑examination the Petitioner attempted to downplay the impact of his divorce proceedings and said that it had taken up “some” rather than “much” of his time.

14.  In paragraph 14 of his 2^nd affirmation he suggests that it had been agreed by him, the 1^st Respondent and Mr. Burleigh when the Company was established that major decisions would be made by unanimous decision.  During cross-examination he, even before it was suggested to him, said that decisions would be made by a majority unless the matter was urgent, in which case it could be made unilaterally.  Although this change of evidence was not helpful to his case, it suggests, as does the previous example that I have given, that his affidavit evidence was tailored to support what he thought was his best case rather than attempt to set out accurately what had been agreed and transpired.

15.  Secondly, was the Petitioner’s evidence in what he accepted were his acrimonious divorce proceedings before the Twenty‑Second Judicial Circuit, McHenry Count, Illinois (“divorce proceedings”).  In these proceedings it is the Petitioner’s case that he was all along the beneficial owner of one share in the Company.  At a hearing before Judge Suzanne C Mangiamele on 11 September 2007 his position was very different.  He gave the following evidence:

“Q. Now, it’s your position that you have no interest in Barrington, Studios Limited, Hong Kong?

A. That’s correct.

Q. It’s also your position that Barrington Studios Limited, USA, has no interest in Barrington Studios Limited, Hong Kong, correct?

A. Correct.

….

Q. Sir, who owns Barrington Studios Limited, Hong Kong?

A. Golaw and Snap Corporation.

THE COURT: Who’s is it? Gold?

THE WITNESS: Golaw and Snap Corporation.

MR. COSTELLO:

Q. Can you spell that, please?

A. S-n-a-p. I believe you have it in here. S-n-a-p, Snap Corporation; and Golaw is G-o-l-a-w.

Q. And do you know if those entities are nominee shareholders?

A. I don’t believe they are, but I have no idea.

Q. Do you know what Barrington Studios Limited, Hong Kong, manufacturers?

A. Barrington Studios Limited, Hong Kong, is not a manufacturing company.

Q. Do they manufacturer anything?

A. Um, I don’t know if they manufacturer other products or not.

Q. Do they sell anything?

A. Do they sell anything? I don’t know. I don’t know what Barrington -- I -- I -- I don’t have anything to do with Barrington Studios, Hong Kong, so I’m not aware of what they do do.

….

Q. So in fact you do have an interest in Barrington Studios Limited?

A. No, we do not.”

16.  In paragraph 7 of the Petition it states the opposite:

“7. Snap and Golaw were appointed directors of the Company on 3 January 2005 and as nominees for the Petitioner, 1^st Respondent and Burleigh. Also on 3 January 2005 Snap was allotted one further share, increasing the Company’s issued share capital to three shares. The Petitioner understood that the two shares registered in the name of Snap were held on behalf of the Petitioner and Burleigh, also that the one share registered in the name of Golaw was held on behalf of the 1^st Respondent.”

The truth of this is confirmed in the Petitioner’s 1^st affidavit.

17.  It seems to me quite clear that the Petitioner’s evidence to the court in his divorce proceedings was untrue.  In cross-examination the Petitioner tried to justify his evidence in the divorce proceedings by saying he “looked at it technically” and he “did not feel I was holding stock”.  In re-examination he told the court that he thought he did not technically own stock if it was not registered in his name.

18.  The 1^st Respondent and Ms. Burleigh also gave evidence at the divorce proceedings and both gave substantially the same evidence in respect of ownership of the Company.  Before me the 1^st Respondent readily admitted that this was false and that he was embarrassed that he answered the questions in the way he had.  He explained that he and Ms. Burleigh gave such evidence because they were trying to protect the Company.

19.  It seems to me quite clear that the Petitioner lied to the court in his divorce proceedings in order to protect his interest in the Company from being included amongst his assets for the purposes of his divorce.  It also seems to me that he has also been untruthful before this court in refusing to admit that he lied in the divorce proceedings.  I find him to be an unreliable witness.  A peculiar feature of this case is that it has come to trial at all.  I would have thought it would have been appreciated that one consequence of putting the transcripts of the divorce proceedings before this court (and they were adduced by the Petitioner not the 1^st Respondent) would be that I would be alerted to the fact that another court would appear to have been lied to and would, as I will, send my judgment to Judge Mangiamele for her to consider what, if any, action she should take.

20.  Although the 1^st Respondent also gave false evidence in the divorce proceedings I found his evidence before me to be more coherent and persuasive than that of the Petitioner.

The factual issues and evidence

21.  As I have already explained there are 2 complaints: wrongful exclusion and the allotment.  So far as the first issue is concerned the dispute between the parties is clear.  The 1^st Respondent says that he and Ms. Burleigh concluded by the end of 2009 that the Petitioner was not contributing satisfactorily to the Company.  They thought that he had been distracted by his divorce. Initially they addressed this issue by having Mr. Burleigh take over some of his responsibilities, but they became increasing frustrated by his failure to bring his focus back to the business, which Ms. Burleigh seems to have thought was at least partly attributable to a new romantic relationship.  In particular the 1^st Respondent says they were concerned that the Petitioner’s lack of attention had resulted in problems with delays in the delivery of products to customers, which had resulted in the Company incurring additional air freight charges in 2007 and 2008 exceeding US$500,000.  So much is clear from emails dated 15 July 2008 and 1 January 2010 respectively from Ms. Burleigh to the 1^st Respondent in which she says this:

“Good talking to you. Really sorry to have to get you out there. Yes I’m in agreement Tony cannot do production again. I don’t know where his place in the company will be if any after this.

It’s really tough because the employees don’t have any respect for him and clearly the factories don’t. I do know one thing in all of this, we have to take some responsibility back here for not getting the right information out to the factories in a way they can work with it. Not just AC1. We can resolve this but it’s going to take some compromise on both our parts as to how we go about this.

I’ve felt all along this was about Tony trying to do the job without much support staff in the USA. But I can see that is not really the issue. Last year his mind was on the divorce and this year it’s on the affair. I think there is just too much personal baggage for him to do this job. Divorce, Children, Lovers, etc. He can’t keep on point.

You and I will have to work this out together but I have some reservations because we both come with a boat load of experience and two different schools of thought on the process.

….

Hello George:

This is what I think are the main reasons without going into detail why Tony needs to leave the Company. This is a rough draft. These are my raw thoughts and if you have anymore to add then let me know. I think the attorney should get our thoughts and construct the letter to Tony. Let me know.

….

Tony Sperandeo over the last four years has not contributed either in a professional capacity or in a financial capacity to the well being of Barrington Studios Ltd., and it’s success. It is evident over the last four years Tony has not made any contributions either in the way of fiscal responsibility or in the area of sales and or marketing of the Company. Tony has not been available to many of the responsibilities required to be a working partner of Barrington Studios Ltd.

No contribution to sales or marketing in the last four years

No contribution to fiscal responsibility and needs over the last four years

Contributions made in the area of production were poor and resulted in negative outcome for the Company with Tony taking no responsibility for the outcome

It is my opinion Tony Sperandeo by his actions no longer wants to be a working partner and participate in all that is required to maintain the well being and growth of Barrington Studios Ltd. His lack of interest in the day to day management is evident in his lack of communication with the partners. This has reached a point of irreconcilable differences to develop any kind of ongoing working relationship that would be healthy for the Company.

It would be my suggestion Tony Sperandeo leave Barrington Studios Ltd. without any prejudice.”

22.  These emails cover a lengthy period of time and are consistent with Ms. Burleigh and the 1^st Respondent becoming increasingly frustrated with the Petitioner.  This lead in turn to their decision, which was implemented on 29 January 2010, to remove the Petitioner from Barrington US and the Company.  Their reasons for doing so are contained in the letter of that date, which formally gave notice that they were terminating his employment with Barrington US and instigating the provisions in the shareholders agreement for buying out his interest in Barrington US.  Although the letter is directed to his position within Barrington US the substance of the complaints relate to his alleged failures in respect of the Company, which he was also informed of by a telephone conversation on the same date in which the 1^st Respondent read out the letter to the Petitioner, and which resulted in his exclusion from the management of the Company.  The relevant sections read as follows:

“Confirming our conversation earlier today, the purpose of this letter is to inform you that your employment with Barrington Studios Limited, USA (the “Company”) is hereby terminated.

When we acquired ownership in the business five years ago, we did so with the expectation that, as owners with equal shares, all three of us would shoulder an equal share of the burdens and responsibilities of running and promoting the business of the Company.

Unfortunately, for the last four years, you have not lived up to your end of that bargain. Within a year of our joining you as owners, we were essentially forced to assume your corporate and administrative duties on a day-to-day basis because you no longer wished to perform them. However, in doing so, as you know, we did not agree to relieve you of all responsibilities or from an active role in the Company – indeed, you agreed to continue to participate in decision–making regarding the business and to support production efforts, including visiting and inspecting factories and scheduling production. Not only did you make very poor production decisions causing substantial losses to the Company, but we discovered that, in your numerous trips to Asia in which you were supposed to be visiting and inspecting our factories there, you never, in fact, visited those factories unless one of us was also present on the trip. Indeed, during our most recent trip to Asia this month, you would not even speak with us or our business contacts during meetings, which was extremely awkward and disruptive to our efforts. You have also continuously failed to communicate with us accurately regarding production information. These failures have been severely and continuously disruptive to the business of the Company.

When it became clear that you had failed to perform your production responsibilities, in 2008 you were asked to contribute to sales and marketing. To date, you have made no contributions to speak of to our sales and marketing efforts and have failed to communicate with us accurately regarding sales information, while also failing to meet timelines in the quoting process for customers for which you had assumed responsibility.

In addition to these failures, you have failed to keep records of your activities and expenses, failed to follow the Company’s expense policies and improperly used Company funds to pay personal expenses. To top it off, you have frequently disappeared from the Company for weeks at a time with no communication. Not only do these absences represent a failure to devote your full business time and efforts to the business of the Company, as required by your Employment Agreement (as defined below), but we have long suspected that you have been pursuing business interests unrelated to and competitive with the business of the Company in violation of your Employment Agreement and your fiduciary duties to us. We have recently uncovered evidence that this is, indeed, the case.

Your activities, and failures to act, over the last four years have been enormously disruptive and detrimental to the Company’s business. In sum, you have failed to act as a contributing, responsible and equal partner in the business of the Company.”

23.  The Petitioner in cross-examination seemed to suggest that Ms. Burleigh’s position in relation to him and his performance was equivocal and that the 1^st Respondent had engineered a result that was beneficial to him personally.  He referred to an exchange of emails dated 9 May 2008 between him and Ms. Burleigh in which she suggests that the 1^st Respondent intended that she leave the Company and makes some unflattering comments about him.  He also referred to a written undertaking dated 25 April 2009 given to him by Ms. Burleigh not to vote for a period of 18 months to remove him from Barrington US or the Company and that his removal had never been under consideration.  The existence of this letter suggests that the Petitioner appreciated that the 1^st Respondent, and possibly Ms. Burleigh, were unhappy with him otherwise there was no need for the undertaking.  The final paragraph of the undertaking suggests that it was given in exchange for the Petitioner confirming that he would sign documents necessary for the funding of the business.  There is, however, no suggestion that the 1^st Respondent knew of the undertaking.

24.  It would appear that during the remainder of the year Ms. Burleigh became sufficiently unhappy with the Petitioner that she changed her mind.  It seems to me clear from the emails between Ms. Burleigh and the 1^st Respondent that they were both frustrated by the Petitioner’s performance and that whatever differences existed between them eventually their patience with the Petitioner ran out.  The material issue is whether or this was justified.

25.  It seems quite clear even on the Petitioner’s own evidence that there was a period when he was not devoting all his time and energy to the Company’s business, because he was distracted by his personal affairs.  The 1^st Respondent and Ms. Burleigh initially seemed to have tolerated this situation and tried to accommodate the Petitioner.  It is the 1^st Respondent’s case that 2 series of events caused this to change.  The  first concerned the Petitioner failure to work effectively with the factories and ensure that deadlines were met. 

26.  It is not in dispute that there were late shipments to Walmart in 2007 and 2008, which caused excess freight charges to be paid by the Company.  During cross-examination of the 1^st Respondent it was suggested to him that freight invoices and purchase orders for 2007 do not match and I accept that there are apparent discrepancies that the 1^st Respondent could not explain, but I also accept Mr. Lam’s submission that there is no dispute between the parties that there were delays in the shipments to Walmart; the issue is who was responsible.  The only contemporaneous documents that have been produced are the purchase orders and the invoices for the additional freight charges.  It is not possible to ascertain from those documents who, if anybody, is to be blamed for additional freight charges being incurred or who was blamed at the time.  However, it was the Petitioner’s responsibility to deal with the factories and shipments and a failure to pay sufficient attention to the progress with orders is consistent with his own affirmation evidence in which he says he was distracted during the relevant period by his divorce.

27.  The second area of complaint is more general, namely, that the Petitioner did very little between 2007 and 2009 and that this required the 1^st Respondent and Ms. Burleigh to visit the Mainland and deal with manufacturers in 2007 and 2009 respectively, which was the Petitioner’s responsibly. It seems to me to be fairly clear from the emails between Ms. Burleigh and the 1^st Respondent from which I have quoted earlier that this is what they thought.  It is for the 1^st Respondent to prove why the Petitioner was removed, although I recognise that it can be difficult to prove inactivity. 

28.  I accept that the Ms. Burleigh and the 1^st Respondent felt that the Petitioner’s contribution to the Company and Barrington US had become unacceptably poor for the reasons that the 1^st Respondent has advanced before me.  Activity is rather easier to demonstrate than inactivity and it seems to me that a striking feature of the Petitioner’s case is how vague his evidence is explaining what he did do despite the fact that he and his solicitors knew by the time that they came to compile his affidavit that his inactivity and ineffectiveness was the reason why the 1^st Respondent alleged it has been decided to remove him.

29.  His affidavits contain no description of what he did between 2007 and the end of 2009.  The court is not even told where he was based and if he had an office.  There is little more than this, which is in paragraph 5 of his 2^nd affirmation: “I continued my active involvement in the business, including attending to frequent travel in Asia for locating factories to produce gift bags and boxes for the business” 

30.  He has produced a series of emails from June 2009 to January 2010 to show what he was doing.  They run to 80 pages.  It is not clear from the way in which they are introduced in the Petitioner’s 3^rd affirmation what precisely they are said to demonstrate.  They for the most part record isolated and unsuccessful attempts to solicit new orders from potential customers in the United States.  Reading them, as the Court is left to do, without any background information they appear to demonstrate little of any substance being done by the Petitioner.  It was the 1^st Respondent’s evidence in cross-examination that for the most part they recorded attempts to interest potential customers who it was clear were not very interested in doing business with Barrington US.  The fact that nothing came of the Petitioner’s efforts is consistent with this.

31.  He also produced travel records, which record him spending 21 days between 20 January 2007 and 5 October 2010 in Hong Kong and China.  This is very little given that the Petitioner’s particular area of responsibility was dealing with manufacturing and shipments.  The Petitioner suggested in cross-examination that the details, that he had produced, were incomplete because he had not taken into account some special entry card that he had which allowed him easy entry to Hong Kong.  The Petitioner could have obtained complete records from Immigration if had wanted to do so and given what I have found to be his unreliability as a witness I give this little weight to that evidence. 

32.  I accept the 1^st Respondent’s evidence that the Petitioner had been distracted by his divorce and perhaps other personal matters from focusing adequate attention on the Company’s business and that remained the case even after the divorce proceedings were completed.  The material question is whether excluding the Petitioner from the Company was not only prejudicial, which it self-evidently was, but was also unfair.  This involves assessing whether the Petitioner’s failure to devote himself sufficiently and effectively to the Company’s affairs was sufficiently detrimental to the legitimate interests of his business partners, or, to approach it slightly differently, sufficiently inconsistent from the expectations all the parties must be taken to have had when the Company was formed, to warrant his removal. In making this assessment regard has to be had to the fact that removal does not just result in the excluded shareholder losing any right he might have to a salary or director’s fee, he finds his capital tied up in a venture over which he no longer has any managerial involvement and it is this which principally constitutes the unfairness in cases of exclusion[6].  The unfairness will be ameliorated if the dominant shareholders offer to buy out the excluded shareholders at a reasonable price.  Exclusion without any offer to buy out is likely to require stronger justification then exclusion with a fair offer to purchase shares.  An example of the latter would be dishonesty or diverting corporate opportunities.

33.  Whether or not the removal of the Petitioner was fair in the present case is not easy to decide on the insubstantial evidence adduced by the Parties, but on balance I conclude that it was.  The original arrangement gave the Petitioner a 1/3 interest in both companies.  He was to be responsible for production and shipment.  It was this anticipated continuing contribution that justified him being paid a salary.  It must be anticipated that the extent to which any person will be effective in carrying out his job will ebb and flow over time.  At any one point in time the value of the contributions of different partners to a business venture will vary.  They will not always be exactly the same.  This appears to have been accepted by Ms. Burleigh and the 1^st Respondent, who made allowance for, and accommodated, the Petitioner’s divorce proceedings.  I accept, however, that by the beginning of 2010 they had reached, genuinely, the opinion that enough allowance had been made and that he was failing to contribute sufficiently that he should be removed.  The Petitioner was told of the 1^st Respondent and Ms. Burleigh’s decision shortly before Ms. Burleigh’s death.  In the case of Barrington US they proceeded, in accordance with the terms of the shareholders agreement, to buy his shares.  However, there was no shareholders agreement for the Company and the Petitioner was not, as I understand it, employed by it.  The arrangement seems to have been that the profit generated by the business operated by Barrington US and the Company would be distributed through Barrington US out of the profit it made from, amongst  other things, the commission paid to it by the Company.  The  Petitioner was not employed by the Company.  I have already explained that given the fact that the Company’s sole customer was Barrington US, the commercial reality was that once the Petitioner had been bought out of Barrington US whether he was excluded from the Company was academic as the Company had no commercial value as it is not suggested that either Barrington US or the 1^st Respondent was under any obligation to continue to do business with the Company, finance it or otherwise assist it.  It seems to me that, therefore, any exclusion even if prejudicial was not unfair because the reality was the resolution of any dispute between the Petitioner, the 1^st Respondent and Ms. Burleigh was achieved under the Barrington US shareholders agreement and it is not suggested that there was anything unfair in the way that operated.  Unfortunately this appears not to have been recognised.

34.  In case I am wrong about that I will deal with the complaints that are advanced in the Petition other than exclusion from the business, which for the reasons I have given, in my view was a genuine decision the consequences of which were properly addressed the by the operation of the Barrington US shareholders agreement.

35.  It is alleged in paragraphs 19 and 21 of the Petition that the Company was profitable for each year up to 31 December 2011 other than in its first year of trading (24/12/04 to 31/23/05) in which it made a loss of US$5,519.  However, its profits were small because of the commission paid to Barrington US and no dividends were distributed.  It is alleged this was unfair to the Petitioner.  This overlooks the fact that it does not appear to be disputed that it was not prejudicial to the Petitioner all the time the he was a shareholder in Barrington US and receiving dividends.  The accounts for the years 2006 to 2011 show the following:

(1) 2006: after tax profit (excluding the accumulated loss of US$5,519) US$65,126 on revenue of US$157,041.  The detailed income statement does not refer to commission.

(2) 2007: after tax profit of US$227,341 on revenue of US$6,850,449.  The previous year’s profit was retained.  Note 10 to the accounts records commission to Barrington US of US$733,134 and a management fee of US$150,000.  It also appears from that note that the revenue of US$157,041 in 2006 was derived from a handling services fee paid by Barrington US.

(3) 2008: after tax profit of US$94,075 on revenue of US$7,020,974.  The previous year’s profits were again retained.  The notes do not record any payments of commission or management fees to Barrington US.

(4) 2009: after tax profit of US$34,232 on revenue of US$5,468,891.  Profits were again retained.  The schedule to the income statement records commission of US$944,797.

(5) 2010: after tax profit of US$47,341 on a revenue of US$5,514,952.  Some profits were retained and the total shown in the balance sheet was US$462,596.  The schedule to the income statement records commission of US$1,049,495.

(6) 2011: after tax profit of US$6,646 on a revenue of US$4,974,661.  Retained profits stood at US$469,242, although it is clear from the accounts that this is simply an accounting item representing the total of accumulated profits in the previous years and does not represent a realisable and valuable asset.  No commission is referred to expressly in the accounts although it is probably included in the selling expenses.  In 2010 those totalled US$1,127,109 of which it is clear from the notes that US$1,049,495 was commission.  It seems reasonable to assume that a similar percentage of the selling expenses consisted of commission.

36.  I would note that the Petitioner has provided no analysis at all of the accounts.  Neither has he provided any information about the valuation of the buy out of his interest in Barrington US to see to what extent the commission paid in 2010 and the anticipated commission for 2011 were taken into account.  I find that the Petitioner has failed to demonstrate how the arrangement in respect of commission prejudiced him.

37.  The final matter is the allegation that the 1^st Respondent diluted the Petitioner’s interest in the Company by the allotment of 774,999 shares on 26 October 2011. The Petitioner argues that this was unnecessary and simply done to dilute his shareholding to the point it became valueless.  As I have explained earlier in terms of valuation of his interest in the Company as going concern at the date of issue of the Petition the dilution is immaterial.  Looking at the 2011 accounts it seems likely that if the business had been closed down and the Company put into voluntary liquidation there would have been little if anything available for the shareholders, but this is not something that has been considered before me.

38.  The 1^st Respondent says that the reason for the allotment was as follows.  The Company’s bankers, Shanghai Commercial Bank, required the individual shareholders to open accounts with it and deposit funds to support guarantees of the Company’s banking facility.  Shortly  after he was removed from Barrington US and the Company, the Petitioner withdrew his deposit.  This is not in dispute.  This created an ongoing financing issue.  The 1^st Respondent addressed the issue in August 2011 by depositing US$100,000 with the bank.  This he treated as a loan to the Company made on terms that in the event that it could not be repaid it could be capitalised and this is what happened when it became clear that the Company’s financial position made release of the deposit impractical. 

39.  The Petitioner argues that it is clear from the accounts that the Company did not need any loan and that it does not record one being made by the 1^st Respondent.  I disagree with both these points.

40.  First, given the level of cash recorded in the accounts for both 2010 and 2011 it seems to me likely that Company could only operate with a banking facility.  It is clear from the facility letter that the guarantees needed to be supported by cash deposits of US$620,000.  It is not in dispute that the Petitioner withdrew US$246,509.42 from his account with the bank.  Clearly the Company needed a loan.  That is not the issue.  The issue is whether or not the 1^st Respondent made one and, if so, it was reasonable for him to procure the Company to capitalise it.

41.  The 2011 accounts record, for the first time, an amount due from the 1^st Respondent of US$100,000.  If what the 1^st Respondent says is correct one would expect to see in the balance for the financial position of the Company as at 31 December 2011 (which in note 14 records the allotment in October) nothing due to or from the 1^st Respondent.  The explanation for this not being the case became apparent in answer to a question from me at the end of the 1^st Respondent’s cross‑examination.

Question: Is what you did take out US$100,000 from the Company and place it in your personal account with the Shanghai Commercial Bank as collateral for its facility with the Company?

Answer: Yes

42.  This being the case it was entirely artificial to treat the deposit as a loan to the Company justifying the allotment of which the Petitioner complains.  This suggests that the allotment was done to dilute to the Petitioner rather than for a genuine commercial reason.  It seems to me that having decided to exclude the Petitioner from the business of the Company by early 2010 (which as I have already indicated I do not find of itself to be unfairly prejudicial) the 1^st Respondent decided to prevent him exercising any control over the Company’s affairs and ensure that he had no interest of economic value in the Company.  This was clearly prejudicial.  For the reasons I have already given it seems to me that this was probably unnecessary as the 1^st Respondent was in a position to render the Petitioner’s interest in the Company valueless perfectly lawfully simply by causing Barrington US to cease doing business with it.  Does this mean that although prejudicial the allotment was not unfair?  In my view it was unfair.  Whether or not it made much difference in terms of dollars and cents it was still an attempt to fundamentally undermine the Petitioner’s interest in a company that at the material time was a going concern.

Relief

43.  The Petitioner has asked for a declaration that notwithstanding the allotment the Petitioner remains beneficially interested in 1/3 of the Company.  In my view this is the wrong order.  The correct order is that the allotment be set aside and I so order.

44.  The Petitioner also seeks an order that the Petitioner’s share in the Company be valued at the date of the issue of the Petition, namely, 10 May 2013.  As I have already explained it seems to me that this is pointless.  I have considered if there is a more appropriate date to use.  One  possibility would be the date of the allotment, 26 October 2011, which is the date of the unfairly prejudicial conduct of 1^st Respondent.  I  doubt if it would make very much difference.  It seems to me quite possible that whatever date is taken on or after 26 October 2011 the value will not be sufficient to justify the costs of preparing it, but I cannot be certain.

45.  I will make an order that the 1^st Respondent buys the Petitioner’s share in the Company.  The valuation shall be as at 31 December 2011 without discount for minority interest.  I have taken 31 December 2011 as there are accounts prepared at that date and it will make the valuation straightforward.

Costs

46.  I make a costs order nisi that the 1^st Respondent pays half the Petitioner’s costs of what seems to me to have been a pointless piece of litigation, which might have been avoided if the claim and defence had been properly analysed.  Given that the Petitioner has succeeded only on one part of his claim, although he has obtained the relief he sought it seems to me appropriate to only award him half of his costs.  A considerable amount of time has been taken up on issues in respect of which he has been unsuccessful.