NATURAL SEASONING INTERNATIONAL (HK) LTD (formerly known as CHINA SEASONING INTERNATIONAL (HK) LTD) v. KEY SHINE GLOBAL HOLDINGS LTD AND OTHERS

HCA 2262/2019

[2021] HKCFI 1535

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2262 OF 2019

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R E A S O N S   F O R   D E C I S I O N

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I.  INTRODUCTION

1.  By an inter partes summons dated 9 June 2020 (the “Injunction Summons”), the plaintiff (“Natural Seasoning”) sought an interlocutory injunction (1) restraining the 1^st defendant (“Key Shine”) from exercising the voting rights attached to certain shares charged to Natural Seasoning (the “Charged Shares”) without Natural Seasoning’s consent; (2) requiring Key Shine to exercise the voting rights attached to the Charged Shares in accordance with Natural Seasoning’s directions; and (3) requiring Key Shine to execute a valid proxy form in favour of Natural Seasoning in respect of the Charged Shares for the purpose of an upcoming annual general meeting of the 3^rd defendant (“Honworld”) to be held on 29 June 2020 (the “AGM”).

2.  After hearing the parties, I ordered, inter alia, that Key Shine, whether acting by its directors, officers, associates, servants, employees or agents, shall:

(a)  Instruct the nominee of the Charged Shares, namely, China Tonghai Securities Limited (“Tonghai Securities”), to vote against resolutions 6, 7 and 8 stated in the notice of AGM dated 22 May 2020 (the “AGM Notice”) proposed to be considered and passed at the AGM or any adjourned meeting(s) thereof; and

(b)  Exercising the voting rights attached to the Charged Shares to vote against resolutions 6, 7 and 8 stated in the AGM Notice proposed to be considered and passed at the AGM or any adjourned meeting(s) thereof.

3.  I gave brief oral reasons at the hearing for the orders I made and indicated that I would reduce them into writing in due course, which I now do.

II.  BACKGROUND FACTS

The Parties, the Side Letters and the Share Charge

4.  Honworld is a Cayman Islands incorporated company listed on the Hong Kong Stock Exchange (stock code: 2226). Key Shine is the largest registered shareholder of Honworld, holding some 48.9% of the issued capital of Honworld. Key Shine is legally and beneficially owned by the 2^nd defendant (“Mr Chen”), who is also Honworld’s chief executive officer and executive director.

5.  On 1 June 2016, Natural Seasoning agreed to subscribe for 60,000,000 shares in Honworld pursuant to a subscription deed. Natural Seasoning, Key Shine and Mr Chen also executed side letters (collectively, the “Side Letters”) in tandem with Subscription Deed. The Side Letters included an “Operating Deed” and a “Share Disposal Deed” executed by Natural Seasoning and Key Shine and similarly worded agreements by Mr Chen personally and Natural Seasoning, referred to as the “Operating Agreement” and the “Share Disposal Agreement”, respectively.

6.  Clauses 2 and 3 of the Share Disposal Deed (“Clause 2” and “Clause 3”, respectively”) provided that (English translation by the parties):

“2. Disposal of Shares

The Parties must give notice to the other party 5 working days before any material steps are taken for disposal of shares held in [Honworld] (including but not limited to sale of shares, charging, transfer etc.). If any disposal of shares by [Key Shine] may lead to [Key Shine] losing its status as actual controller of [Honworld], or its status as controlling shareholder of [Honworld] which it controls, then [Key Shine] must obtain written approval of [Natural Seasoning] before taking such actions. This clause is not applicable to any disposal of shares caused by the Charging of the Shares of Key Shine disclosed by [Key Shine] before the signing of this Deed.

3. Liability for Breach of Contract

1. If any Party breaches the agreements in this Deed for any reason, or delays in performance of the obligations of this Deed, then the other Party may require the Party in breach to take remedial measures and compensate for its Loss.

2. [Key Shine] warrants that if [Key Shine] is in breach of an agreement under this Deed, and has not remedied the breach within 10 working days after [Natural Seasoning] has issued the written notice (“Notice of Breach”), [Key Shine] agrees to charge all chargeable shares held by [Key Shine] in [Honworld] to [Natural Seasoning] (the “Charge”). To ensure the enforceability of the Charge, the Parties agree to sign all relevant documents for the Charge on the date of this Deed, but the documentation will not have effect, and the Investor will retain the originals. [Key Shine] warrants and agrees that if [Key Shine] continues to be in breach on the eleventh (11^th) working day after the Notice of Breach has been issued, [Natural Seasoning] is allowed to date the documentation related to the Charge, and to register and execute the Charge.”

7.  Key Shine also executed an undated share charge (i.e. the “Charge”) in respect of 100 million shares representing some 19.27% of the issued share capital of Honworld (i.e. the Charged Shares) to secure Key Shine and Mr Chen’s obligations under the Side Letters. Pursuant to the terms of the Side Letters, if Mr Chen or Key Shine were to breach their obligations and fail to remedy such breaches after being notified of the same, Natural Seasoning may date, register and enforce the Charge after giving the requisite notice.

Alleged breach of Clause 2

8.  Between April 2019 and July 2019, Key Shine charged its shares in Honworld to Wuxing City Investment HK Limited (“Wuxing”) and Meridian Harvest Limited (“Meridian”):

(a)  By a share charge dated 2 April 2019, Key Shine charged 229,424,000 of its Honworld shares to Wuxing (the “Wuxing Share Charge”).  The shares charged to Wuxing represented about 81.06% of the Honworld shares registered in Key Shine’s name and about 39.64% of Honworld’s issued share capital.

(b)  By a share charge dated 29 July 2019, Key Shine further charged 52,000,000 of its Honworld shares to Meridian (the “Meridian Share Charge”).  The shares charged to Meridian represent about 18.37% of the Honworld shares registered in Key Shine’s name and about 8.98% of Honworld’s issued share capital.

(c)  Hence, a total of 281,424,000 (229,424,000+ 52,000,000) shares representing approximately 99.43% of Key Shine’s shares in Honworld and 48.63% of Honworld’s total issued capital were charged to Wuxing and Meridian.

9.  Natural Seasoning thus submitted that inter alia:

(a)  Key Shine had disposed of its shares in Honworld in a manner that may lead to loss of control over Honworld in the event that Wuxing and Meridian were to enforce their rights under the respective share charges; and

(b)  Thus, Key Shine should have obtained Natural Seasoning’s written consent before granting the Wuxing and Meridian Share Charges, which they failed to do in breach of Clause 2.

10.  By letters dated 1 November 2019 and 5 November 2019, Natural Seasoning’s then solicitors issued a notice of default to Key Shine and Mr Chen to put on record, inter alia, that the Share Disposal Deed and the Share Disposal Agreement had been breached by reason of the Wuxing and Meridian Share Charges without Natural Seasoning’s written consent. 

11.  Notwithstanding Key Shine and Mr Chen being requested to take steps to remedy the said breach and to reverse the Wuxing and Meridian Share Charges, Key Shine and Mr Chen failed or refused to do so.

Dating of the Share Charge

12.  As Key Shine and Mr Chen had failed to rectify the alleged breaches, on 27 November 2019, Natural Seasoning sought to exercise its right pursuant to Clause 3 to date the Charge.  Thus, the Charge is said to have become effective on 27 November 2019 with the effect that Key Shine charged to Natural Seasoning its rights, title, interest and benefit in the Charged Shares.

13.  Clauses 4.4.8, 4.8.1 and 4.8.4 of the Charge allowed Natural Seasoning to, inter alia, require Key Shine to exercise (or refrain from exercising) the voting rights attached to the Charge in accordance with its directions.

14.  On 2 December 2019, in exercise of its power under Clause 4.8.3 of the Charge, Natural Seasoning executed an Instrument of Transfer and a Bought and Sold Note in the name of and on behalf of Key Shine to transfer around 4,276,750 of the Charged Shares to Natural Seasoning. The said transfer was submitted on 2 December 2019 to Tonghai Securities, being the custodian holding the Charged Shares.  However, Tonghai Securities refused to recognise the transfer.

15.  On 6 December 2019, Natural Seasoning issued the writ in the present action alleging breaches by Key Shine in relation to the Wuxing Share Charge and Meridian Share Charge and seeking remedies for the enforcement of the Charge.

June 2020 AGM

16.  After the commencement of the action, by the AGM Notice, Honworld announced that the AGM would be held at the Huzhou Dongwu New Century Grand Hotel, in Zhejiang China.  In the AGM Notice, shareholders of Honworld were asked to consider, inter alia, the following resolutions:

(a)  A general mandate to the directors of Honworld to allot, issue and deal with unauthorised and unissued shares in the capital of the company up to 20% of the total number of issued shares as at the date of the passing of the resolution (resolution 6).

(b)  Authority be granted to the directors to exercise the powers of the Honworld to repurchase its shares on The Stock Exchange of Hong Kong Limited provided that the total number of shares to be repurchased shall not exceed 10% of the total number of issued shares as at the date of passing this resolution (resolution 7).

(c)  Conditional upon the passing of resolutions 6 and 7 above, the mandate in resolution 6 be extended by the addition of an amount representing the number of shares repurchased by the company pursuant to the authority in resolution 7 (resolution 8).

(the “Proposed Mandate Resolutions”)

17.  Natural Seasoning submitted that, in addition to its rights under the Charge, if Key Shine and Mr Chen were to vote in favour of the above resolutions at the AGM, Key Shine and Mr Chen would be in breach of clause 2 of the Operating Deed, as Natural Seasoning’s consent is required for any changes in the share capital of Honworld (including any allotment of new shares and the buyback of existing shares). Clause 2 of the Operating Deed provided that inter alia:

“Material Events of the Company

[Key Shine] agrees that with respect to the following material events of the Company, [Key Shine] shall consult with the Investor and shall only exercise its rights after obtaining consent from [Natural Seasoning]:

…

2.  Changing and issuing shares/securities of any Group Company (including but not limited to issuing new shares/securities, issuing new equity linked products, capital increase, capital decrease, establishing new companies, liquidation and dissolution of [Honworld] and its subsidiaries etc.)”

18.  By two letters dated 1 and 4 June 2020 from Natural Seasoning’s solicitors, Oldham Li and Nie (“OLN”), to Key Shine’s solicitors, Allen & Overy (“A&O”), Natural Seasoning requested Key Shine to appoint Natural Seasoning’s representatives as its proxy such that it could exercise the voting rights attached to the Charged Shares at the AGM.  None of Key Shine, Mr Chen or A&O responded to the letters.

19.  Hence, on 9 June 2020, as mentioned above, Natural Seasoning issued the Injunction Summons.

III.     DISCUSSION

20.  The principles governing interlocutory injunctive relief are well established and need not repeated here. In his submissions, Mr John Hui, counsel for Natural Seasoning, referred me to the decision of Lisa Wong J in Gu Zhuoheng & Anor v Huang Wei Mr Cheng [2019] HKCFI 381 and the well-known decision of Ma J (as he then was) in Music Advance Ltd v IO of Argyle Centre Phase I [2010] 2 HKLRD 1041.

Natural Seasoning’s Case

21.  Mr Hui submitted that by reason of Key Shine’s failure to obtain Natural Seasoning’s written consent before granting the Wuxing Share Charge and/or the Meridian Share Charge and its failure to take steps to remedy the said breaches and reverse the said charges, Key Shine and Mr Chen had breached Clauses 2 and 3.  In the circumstances, Natural Seasoning was entitled to date and enforce the Charge pursuant to Clause 3 of the Share Disposal Deed and did so on 27 November 2019.

22.  Furthermore, it is clear that an “Event of Default” within the meaning of Clause 1.1 of the Charge had occurred and was continuing. “Event of Default” is defined as:

“any breach or violation of any of the Obligors’ obligations [i.e. the obligations of Key Shine and Mr Chen] in the Side Letters, or any events, circumstances or matters occurred which amount or constitute, or can be reasonably expected to amount to or constitute, any such breach or violation”.

23.  Clause 4.8 of the Charge provided that:

“At any time on or after the occurrence of an Event of Default, [Natural Seasoning] may in such manner and on such terms as it sees fit (in the name of [Key Shine] or otherwise and without the need for further consent from [Key Shine]):

4.8.1 exercise (or refrain from exercising) any voting rights in respect of the Charged Assets or, as the case may be, require [Key Shine] to exercise (or refrain from exercising) any such voting rights in accordance with the directions of [Natural Seasoning] (in which event, [Key Shine] shall comply with all such directions of [Natural Seasoning]); and/or…

4.8.3 without prejudice to any other provision of this Deed, transfer the Charged Assets into the name of a nominee or transferee of the Secured Party as the Secured Party may require; and/or

4.8.4 exercise (or refrain from exercising) all of any of the powers and rights conferred upon or exercisable by the legal or beneficial owners of the Charge Assets…”

24.  “Charged Assets” were defined as “the assets mortgaged, charged or assigned pursuant to Clause 3” which included but was not limited to a fixed charge (and, to the extent that the Charged Shares could not be charged by way of a fixed charge, a floating charge) over the Charge Shares.

25.  In the light of Key Shine’s breaches, an Event of Default had occurred, and accordingly, Natural Seasoning was entitled to exercise its rights under Clause 4.8 of the Charge, including but not limited to requiring Key Shine to exercise (or refrain from exercising) any such voting rights attached to the Charged Shares in accordance with Natural Seasoning’s directions.

26.  Further, Natural Seasoning submitted that Clause 4.8 of the Chargewas broad enough to allow Natural Seasoning to require Key Shine to execute a valid form of proxy appointing Natural Seasoning or its representative to act as Key Shine’s proxy to vote on the Charged Shares at the AGM or any adjournment thereof. A “Form of Irrevocable Proxy” was in fact included in Schedule 4 of the Charge. Moreover, pursuant to Clause 4.1.3(ii) of the Charge, Key Shine (as Chargor) had undertaken to deliver to Natural Seasoning a signed and undated proxy form set out in Schedule 4.

Key Shine’s Case

27.  Key Shine’s defences to Natural Seasoning’s claims in the action were set out in a draft affidavit made by Mr Chen (who was in Mainland China) and which was exhibited to an affirmation made by an associate of Key Shine’s solicitors. In summary, Mr Chen contended that:

(a)  Key Shine was not in fact in breach of Clause 2 in granting the Wuxing and Meridian Share Charges, as the purpose of the charges was for funds to be raised to redeem the CCB Share Charge and thus prevent Key Shine from defaulting on its loan from CCB.

(b)  Further, prior to Key Shine granting the Wuxing and Meridian Share Charges, Natural Seasoning’s representatives had in fact consented to the charges.

(c)  Natural Seasoning’s solicitors handling the Side Letters misled Mr Chen into signing the Side Letters with inter alia the promise that the documents would merely be retained and not enforced.

(d)  In the circumstances, there had been no default of Clause 2 and the Charge was therefore not effective.

28.  Mr Hui submitted that Mr Chen’s contentions were inherently incredible, unsupported by the contemporaneous documentary evidence and had only been raised at the last possible moment. On the other hand, Mr Joshua Chan, counsel for Key Shine, countered that Mr Chen’s evidence cannot be summarily dismissed and that there were at least serious issues to be tried in respect of Key Shine’s defences.

29.  It is unnecessary for me to delve into the arguments as to the merits of the parties’ respective cases in detail here. Suffice it to say that whilst there is considerable force to Mr Hui’s arguments, I would accept for present purposes that the issues should be resolved at trial.

Balance of Convenience

30.  The focus of Mr Chan’s submissions was that the balance of convenience weighed against the reliefs sought in the Injunction Summons. He submitted that, inter alia:

(a)  The only irremediable prejudice identified by Natural Seasoning was the alleged threat that Honworld’s board of directors (the “Board”) would use the mandate to allot up to 20% of the unissued share capital of Honworld to (i) disturb Honworld’s shareholding, or (ii) facilitate the 4^th and 5^th defendants taking over control of Honworld triggering a general offer under the Takeovers Code.

(b)  The Proposed Mandate Resolutions in the AGM Notice were standard mandates which have been granted to the Board at every annual general meeting of Honworld since 2014. Further, the mandates were not granted to Mr Chen personally, but the Board, which had a duty to act in the best interests of Honworld. If the Board intended to use the mandate to trigger a general offer or to alter the balance of Honworld’s shareholding, it could and would already have done so.

(c)  In any event, even if the Proposed Mandate Resolutions did give rise to a threat of irremediable harm to Natural Seasoning, which was denied, that could be resolved simply by granting an order to restrain Key Shine from voting in favour of the Resolutions at the June AGM. It was unnecessary to go so far as to grant Natural Seasoning general control by proxy over the voting rights attached to the Charged Shares before the trial.

31.  On the other hand, there was a “concrete risk of irremediable prejudice” to Honworld and its shareholders if the injunction were granted:

(a)  If the Proposed Mandate Resolutions could not pass, Honworld would lose a valuable and flexible means which can be used to raise capital and acquire assets. This would result in substantial harm to Honworld’s development and business operations;

(b)  Mr Chen and the other members of Honworld’s existing senior management were highly experienced officers who had contributed to Honworld’s success in the past and were familiar with Honworld’s business and operations;

(c)  If Natural Seasoning were given full control of the voting rights attached to the Charged Shares, there was a risk that it would seize control of the Board and Honworld’s business would be thrown into disarray. Substantial hardship would be caused to Honworld and its shareholders, including Key Shine and Mr Chen.

(d)  Not only would the prejudice be difficult to assess with any certainty, but it was unclear whether Natural Seasoning had sufficient assets to make good its undertaking in damages.

32.  Mr Chan also complained of Natural Seasoning’s delay in making the application. Natural Seasoning had complained of the alleged threat of the Board using its general mandate to change the balance of control of Honworld in favour of the 4^th and 5^th defendants back in November 2019. Even though the AGM Notice had only been issued 22 May 2020, as mentioned above, the Board had similar mandates which had been granted at every AGM since 2014.

IV.  DECISION

33.  I accept that the purpose of a general mandate such as that proposed in the Proposed Mandate Resolutions, namely, to enable directors the flexibility to raise capital by the issue of shares without the need to call a further general meeting, is well established and such mandates are commonplace for listed companies in Hong Kong. However, it is ultimately a matter for the shareholders whether to grant such a mandate to the board, or to retain the right to be consulted in general meeting if and when a specific need arose to raise capital.

34.  As mentioned above, the Operating Deed and the Charge on their face required Natural Seasoning’s consent before Key Shine could exercise its voting rights in the Charged Shares to support such a mandate, which would have at least the potential effect of altering the balance of Honworld’s shareholding. Moreover, it is well established that a chargee or equitable mortgagee of shares is entitled to direct how the shares are voted unless at the time the equitable mortgage was created the parties agreed otherwise. See e.g. Sunlink International Holdings Limited (Provisional Liquidators Appointed) & Ors v Wong Shu Wing & Ors [2011] 2 HKC 8 at para 12.

35.  In the present case, Honworld has not put forward any immediate for a general mandate or to raise capital for any specific purpose. Had such a purpose been contemplated, given Key Shine’s close association with the Board, I would have expected evidence from an independent director or an independent committee of the Board to explain to the Court the need for such mandate or for additional capital at this time (see e.g. Leung Pik Wa, the Administratrix of the estate of Kok Teng Nam, deceased v Poh Po Lian & Anor [2011] HKCU 1706, 4 July 2011, at para 14.

36.  In the absence of such evidence and given Natural Seasoning’s legitimate concerns and opposition to such a mandate, the prudent course would be to require Key Shine to vote against the Proposed Mandate Resolutions in respect of the Charged Shares. As mentioned above, the Charged Shares represent only 19.2% of the issued share capital of Honworld. Even if those shares were to vote against the Proposed Mandate Resolutions, the resolutions may, at least in theory, still be able to pass with the support of Honworld’s other shareholders.

37.  In any event, if an actual and specific need to raise capital by way of share issue were to arise in the future, a further application can be made (whether by Key Shine and/or Honworld) to the Court. As mentioned above, I would expect in any such application evidence from an independent director or independent committee of the Board setting out for the Court’s consideration, inter alia, detailed reasons for proposed share issue, its potential impact on existing shareholders, why other methods of raising capital could not reasonably be employed and details as to whom the shares were intended to be issued. Only then would the Court be in a proper position to assess the merits of such an application.

38.  As to the order requiring Key Shine to execute a proxy in favour of Natural Seasoning in relation to the Charged Shares, I agreed with Mr Chan that, on balance, there was no immediate need to do so to preserve the status quo at this stage.

39.  I had also considered Mr Chan’s arguments on delay and was not persuaded that there was any obstacle to the limited reliefs that I decided to grant. Whilst Natural Seasoning could arguably have anticipated the Proposed Mandate Resolutions earlier, I did not believe that that had any effect on the merits of the Injunction Summons. Finally, given the limited reliefs granted, there was no reason to believe that Natural Seasoning would not be able to meet its cross-undertaking in damages.

40.  I therefore made the orders I have set out above, with costs in the cause.

41.  Last but not least, I thank both counsel for their assistance.