張才奎所託管中國山水投資有限公司股份相關員工 AND OTHERS v. 張才奎 AND ANOTHER

HCA 1661, 1766, 2191/2014 &

HCA 623, 939, 1564/2015 (Consolidated)

[2018] HKCFI 195

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NOS 1661, 1766, 2191 OF 2014 AND 623, 939, 1564 OF 2015

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(Consolidated pursuant to the Order of The Honourable Mr Justice G Lam dated 20 August 2015)

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HCA 1282/2017

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1282 OF 2017

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J U D G M E N T

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I. Introduction

1.  The plaintiffs in these actions were employees who held interests under a staff investment scheme in a Mainland company, Shandong Shanshui (defined in §19 below).  As a result of the restructuring of the enterprise which culminated in the listing of China Shanshui Cement Group Limited (中國山水水泥集團有限公司) (“CSCG”) on the Main Board of the Hong Kong Stock Exchange (stock code 00691) in 2008, the plaintiffs’ interests in Shandong Shanshui were replaced by interests in the shares of a Hong Kong company called China Shanshui Investment Company Limited (中國山水投資有限公司) (“CSI”), which in turn now holds shares representing approximately 25.09% of the issued share capital of CSCG. 

2.  The 1^st defendant (張才奎) (“Zhang Snr”) and the 2^nd defendant (李延民) (“Li YM”) were the former heads of management of Shandong Shanshui as well as trustees of the shares in CSI.  Li YM, who was later substituted as trustee by Zhang Snr, has not been served with the writs and has never taken part in these proceedings. 

3.  The dispute between the plaintiffs and Zhang Snr centres round the nature of the plaintiffs’ interests in the relevant CSI shares.  The plaintiffs contend they are absolute beneficial and equitable owners of shares in CSI representing 45.6325% of the issued share capital of CSI.  In contrast, Zhang Snr contends the plaintiffs are not beneficial owners but merely members of the class of beneficiaries under two discretionary trusts on which the shares were settled.

4.  The plaintiffs were originally all represented by K & L Gates (“KLG”) under 6 actions consolidated by order in August 2015.  Starting from early 2017, some of them became represented by Stephenson Harwood (“SH”) and were permitted, in effect, to transfer their claims to a new action in 2017.  These actions have been tried together.  Where appropriate I shall refer to the 2 groups of plaintiffs as the “KLG plaintiffs” and the “SH plaintiffs” respectively.  As far as the issues in the trial are concerned, there is nothing that separates them. 

II.  RELEVANT FACTS AND EVENTS

5.  Most of the relevant facts and events are uncontroversial and are set out in this section.

Establishment of Jinan Shanshui

6.  In 1997, Jinan Construction Material Industrial Group Co Ltd (濟南建築材料工業集團有限公司) was set up as a state‑owned enterprise with the approval of the municipal government of Jinan, Shandong Province, for the purpose of managing a number of state‑owned enterprises including one named Shandong Cement Factory which had been entrusted to the municipal government to manage.  The company carried on business in the making of cement and related products.  It changed its name to Jinan Shanshui Group Limited (濟南山水集團有限公司) (“Jinan Shanshui”) in June 2000.

Employees Stock Ownership Scheme

7.  In October 2000, following the national policy of de‑nationalisation of state‑owned enterprises, Jinan Shanshui began to promote an Employees Stock Ownership Scheme (職工持股計劃) (“ESO Scheme”) by which its employees were given the opportunity of investing in the enterprise, in the form of taking part in a new company to be set up which would eventually take over the business.  A handbook was produced to inform the employees of the purposes and details of the scheme (“promotion handbook”), extracts from which are set out in §54 below.

8.  By around February 2001, a total of 2,518 employees of Jinan Shanshui (out of a total of 3,006 employees) had decided to take part in the ESO Scheme.  As the Company Law in force in the Mainland at the time confined the number of shareholders of a limited liability company to 50, the shares for which each of the participating employees subscribed had to be held by a representative.  Each of the employees who chose to participate (“participating employees”) signed an “Entrustment Agreement” (委託代理協議), whereby he entrusted one of 9 “employee shareholding representatives” to exercise shareholder’s rights on his behalf, acknowledging that the investment returns and risks were his.  The agreement was a short one and read as follows (in English translation):

“Entrustment Agreement

I hereby appoint Comrade XXX of the shareholders’ committee to exercise the powers of a shareholder on [my] behalf, but investment proceeds and risks shall be received and borne by the appointer.”[1]

9.  A receipt was given to each participating employee, and a register with the title “Jinan Chuangxin Investment Management Co Ltd Register of Members” (濟南創新投資管理有限公司股東登記表) was created in which the personal details and amounts of capital contribution of the participating employees were entered.

10.  The new company envisaged in the ESO Scheme was set up on 10 August 2001 with the name of Jinan Chuangxin Investment Management Co Ltd (濟南創新投資管理有限公司) (“Jinan Innovation”)[2] for the purpose of taking over the relevant business and assets of Jinan Shanshui.  Its initial registered capital was RMB 30,203,000, of which RMB 24,203,000 was funded from capital contributed by the 2,518 participating employees and RMB 6,000,000 by Jinan Shanshui.

11.  Between 2002 and 2003, further capital was raised, including approximately RMB 4,300,000 and RMB 2,000,000 from some of the existing participating employees in 2002 and 2003 respectively, RMB 42,600,000 from 50 senior employees, RMB 8,000,000 being dividends for the year 2002 re‑invested as capital contribution, and RMB 18,000,000 from 1,782 new employees who joined the group after 2001 as a result of acquisitions and mergers.

12.  On 28 July 2003, the registered capital of Jinan Innovation was increased from RMB 30,203,000 to RMB 105,287,161 (of which RMB 6,000,000, or approximately 5.70%, was attributable to Jinan Shanshui, and the rest to the participating employees).  By then, 353 participating employees had died, retired or transferred their interests to others.  As a result, the total number of participating employees had become 3,947 (ie 2,518 + 1,782 – 353). 5 of the 9 employee shareholding representatives were replaced in July 2003.  Another 2 were replaced in 2004. 

Domestic restructuring

13.  By late 2004, Jinan Innovation had engaged professional advisers for the purpose of furthering a plan to list the business in Hong Kong, including, among others, Morgan Stanley, and a Mainland law firm, Commerce & Finance Law Offices (“CFLO”).  In October 2004, the plan to privatise Jinan Shanshui was approved by the municipal government of Jinan.

14.  For the purpose of restructuring the group and, in particular, to take up the State’s remaining interest in the enterprise, two additional companies, called Jinan Shanshui Lixin Investment and Development Co., Ltd. (濟南山水立新投資發展有限公司) (“Lixin”) and Jinan Shanshui Jianxin Investment and Development Co., Ltd. (濟南山水建新投資發展有限公司) (“Jianxin”) respectively, were set up on 15 October 2004.  The registered capital of Lixin in the sum of RMB 31,806,000 and Jianxin in the sum of RMB 5,000,000 were paid up out of dividends declared by Jinan Innovation for the year 2003.  Accordingly, the participating employees’ interests in these 2 companies were in exactly the same proportions inter se as their interests in Jinan Innovation.  In November 2004, these two companies were used to acquire all the State’s interest in Jinan Shanshui.

15.  On 15 December 2004, for the purposes of further corporate restructuring for a listing in Hong Kong, the employee shareholding representatives and Jinan Shanshui entered into a “Share Transfer Agreement” with, and transferred (for no consideration) the 94.30% and 5.70% equity interests they respectively held in Jinan Innovation to, 9 individuals who became known as the “Management Shareholders”. They were senior employees involved in the management of Jinan Shanshui and included Zhang Snr and Li YM as well as 7 others specified in the next paragraph, all of whom had substantial beneficial interests of their own in Jinan Innovation.  The interests transferred to Zhang Snr and Li YM were to be held by them respectively on behalf of 3,940 participating employees including themselves.  The interests transferred to the other 7 Management Shareholders were those belonging to them and to be held for themselves beneficially.  I shall refer to these 7 individuals as the “Minority Shareholders”.

16.  As a result, the 9 Management Shareholders held the entire equity interest in Jinan Innovation as follows:

Name		Shareholding interests (in Rmb) out of the registered capital of Rmb 105,287,161	Equivalent Percentage of shareholding interests	Remarks
1	Zhang Snr	69,017,760	65.5519%	52.3668% held for 2,548 participating employees
				13.1851% held for Zhang Snr himself
2	Li YM	17,046,170	16.1902%	9.4001% held for 1,390 participating employees
				6.7901% held for Li YM himself
3	Yu Yuchuan (于玉川)	4,584,384	4.3542%	beneficially held for himself
4	Dong Chengtian (董承田)	4,397,266	4.1765%	beneficially held for himself
5	Zhao Liping (趙利平)	3,209,068	3.0479%	beneficially held for himself
6	Zhao Yongkui (趙永)	2,921,023	2.7743%	beneficially held for himself
7	Mi Jingtian (宓敬田)	1,645,349	1.5627%	beneficially held for himself
8	Li Maohuan (李茂桓)	1,606,686	1.5260%	beneficially held for himself
9	Wang Yongping (王永平)	859,455	0.8163%	beneficially held for himself
Total		105,287,161	100%

17.  In other words, 61.7669% (ie 52.3668% + 9.4001%) of the equity interest in Jinan Innovation was attributable to 3,938 participating employees (ie 3,947 less the 9 Management Shareholders).  It is significant to note that, as will be seen below, the shareholding in CSI was structured in exactly the same proportion as shown in this table.

18.  In around late January or early February 2005, each of the 3,938 participating employees signed a document called “Equity Entrustment Declaration” (股權委託聲明) whereby he entrusted either Zhang Snr or Li YM with the management of his equity interest in the 3 companies concerned.  The document (using the version that concerns Zhang Snr) provided as follows (in English translation):

“Equity Interest Entrustment Declaration

I, XXX, [gender], I.D. card numbered xxx

Actual contribution of capital was made to [Shandong Shanshui] in the sum of xxx yuan. After the value has been increased by xxx yuan, the equity interest held is in the sum of xxx;

The equity interest held at [Lixin] is in the sum of xxx yuan;

The equity interest held at [Jianxin] is in the sum of xxx yuan.

The ownership of the aforesaid equity interests belongs to me; I am hereby willing to entrust the management of the aforesaid equity interests to Zhang Caikui who will handle it on my behalf.”[3]

19.  On 6 February 2005, Jinan Innovation, which had changed its name to Jinan Shanshui Innovation on 28 July 2003, changed its name again to Shandong Shanshui Cement Group Company Limited (山東山水水泥集團有限公司) (“Shandong Shanshui”). 

Overseas restructuring

20.  The overseas part of the restructuring began in 2005. As an integral part of that exercise, CSI was incorporated as a private company in Hong Kong on 25 January 2005, with an authorised capital of HK$10,000 divided into 1,000,000 shares of HK$0.01 each. 

21.  When CSI was first incorporated, only one share was held by LFDI Nominees Ltd as the subscriber; on the date of incorporation, a further 999,999 shares were issued and allotted at par to MS Cement Ltd. Both were apparently service companies made available by the professionals engaged in the restructuring.  A few days later, LFDI Nominees Ltd transferred its 1 share to MS Cement Ltd, which became the holder of all the 1,000,000 issued shares of CSI.

22.  On the same date of 25 January 2005, 2 other Hong Kong companies, namely, China Shanshui Cement Group Co Ltd (中國山水水泥集團有限公司)[4] (“CSHK”) and China Pioneer Cement (Hong Kong) Co Ltd (中國先鋒水泥(香港)有限公司) (“Pioneer”), were also incorporated.  CSHK had 2 issued shares of HK$0.01 each, held by MS Cement Ltd and MS Cement II Ltd respectively.  Pioneer was incorporated with 1 share of HK$0.01 issued to LFDI Nominees Ltd, which was transferred to CSHK on 31 January 2005 when Pioneer, therefore, became wholly‑owned by CSHK. 

23.  At that time all 3 companies (CSI, CSHK and Pioneer) were bare corporate shells with no valuable asset, having just been established in preparation for the subsequent transactions, with LFDI Nominees Ltd, MS Cement Ltd and MS Cement II Ltd being nominee corporate vehicles used for the restructuring exercise.

24.  On 11 April 2005, the entire issued share capital of CSI was transferred by MS Cement Ltd to the 9 Management Shareholders in the proportion set out in §16 above.  The total consideration for the transfer was said to be HK$1.  Accordingly, Zhang Snr and Li YM each became a holder of 655,519 shares and 161,902 shares in CSI respectively (of which 523,668 shares and 94,001 shares respectively were attributable to the 3,938 participating employees who had entrusted them with their shares in Shandong Shanshui), and the 7 Minority Shareholders also became holders of CSI shares in the proportion set out in §16 above.  As the argument developed, the principal dispute emerged to be whether, on 11 April 2005, Zhang Snr and Li YM established discretionary trusts under the laws of the British Virgin Islands (“BVI”) over 617,669 CSI shares (viz 523,668 shares + 94,001 shares) or whether they established Hong Kong fixed trusts over those shares for the benefit of the participating employees.  This key issue will be discussed in section VI.B below.

25.  The injection of assets into Pioneer and CSI took place in September 2005.  By then, Jinan Shanshui had transferred its remaining cement business, related assets and employees to Shandong Shanshui.  On 5 September, Pioneer entered into an “Equity Transfer Agreement” with the 9 Management Shareholders to acquire from them the entire equity interest in Shandong Shanshui at a consideration of RMB 162.8 million to be funded from the subscription monies paid by the Investors referred to in §26 below.  The completion date was stipulated to be the date of payment by Pioneer, to be made within 3 months after Shandong Shanshui was converted into and licensed as a wholly foreign-owned enterprise.  It appears that the business licence was converted on 19 October 2005.

26.  On 9 September 2005, CSI acquired the entire issued share capital (ie 2 shares) of and in CSHK (which in turn held Pioneer) from MS Cement Ltd and MS Cement II Ltd for a total consideration of HK$2.  Towards the end of November 2005, CSHK allotted new shares to CSI and institutional investors (“Investors”), with the result that CSI held 51% and the Investors held 49% of CSHK.  In return, the Investors paid approximately US$51 million to CSHK.  These proceeds were injected into Pioneer to fund, inter alia, the acquisition of Shandong Shanshui from the 9 Management Shareholders mentioned above and the increase of capital of Shandong Shanshui by approximately RMB 167.3 million to RMB 272.6 million.

27.  It is not entirely clear when exactly the price of RMB 162.8 million was paid to the 9 Management Shareholders, or how the sale proceeds were deployed afterwards (except for RMB 86.2 million which went to Lixin and Jianxin for the acquisition of the State’s stake in Jinan Shanshui (see §14 above)).  It was common ground, however, that they were not paid into the pockets of the 9 Management Shareholders but ploughed back into the group in the Mainland.

28.  As a result of these transactions, as shown in the diagram below, Shandong Shanshui became 100% owned by Pioneer (which was wholly owned by CSHK, which in turn was owned by CSI and the Investors as to 51% and 49% respectively) and therefore a wholly foreign‑owned enterprise, and the ESO Scheme came to an end.

BVI trusts

29.  On about 28 November 2005, Zhang Snr and Li YM executed 2 trust deeds respectively.  It is said that by these deeds, Zhang Snr and Li YM “confirmed” the trusts on which they held the shares in CSI, called the “Zhang Trust” and the “Li Trust” respectively.  In the deed of the Zhang Trust, Zhang Snr was stated to be the settlor and trustee of 655,519 CSI shares.  The beneficiaries were 2,549 participating employees named in the schedule (including Zhang Snr himself as the first‑named beneficiary).  The terms of the deed of the Li Trust were materially identical, with Li YM being the settlor and trustee of 161,902 CSI shares and another 1,391 participating employees named in the schedule (including Li YM himself) as beneficiaries.  I shall refer to the two trusts together as the “BVI trusts”.

30.  For present purposes, the following features of each of the BVI trusts are of note:

(1) The trust is an irrevocable one for the period of 100 years.

(2) It is an absolute discretionary trust, in that the trustee may appoint that he holds the trust property for the benefit of any beneficiaries on such terms as he thinks fit.  The powers of the trustee may be exercised at his absolute discretion.

(3) The trustee may appoint new or additional trustees.

(4) The trustee has the power to transfer any trust property to be held on another trust for the benefit of any one or more of the original beneficiaries, to be held on the terms of the new settlement, freed and released from the terms of the BVI trusts.

(5) Subject to the trustee’s power to amend, the trust is governed by BVI law and the BVI courts have “exclusive jurisdiction in any proceedings involving rights or obligations under the settlement”.

(6) The trustee may amend the governing law of the trust and the courts which have exclusive jurisdiction in any proceedings involving rights or obligations under the trust. 

31.  Accompanying the deeds of trust were non‑binding letters of wishes for the Zhang Trust and the Li Trust respectively.  The contents of each represented the “current wishes” of the settlor.  The letter is “not intended to be binding on the trustees but is intended to guide them in the exercise of their discretions”, and states that settlor’s firm wish is that the beneficiaries listed in the schedule to the letter should receive the proportion of the dividends on the shares corresponding to the amounts listed in the schedule.  The amounts listed for the beneficiaries are in proportion to their entitlements as participating employees under the ESO Scheme.

32.  Between December 2005 and September 2007, 11 participating employees ceased to be employees of Shandong Shanshui and apparently “transferred” their “interests” to other participating employees, though it is not clear how such transfers were actually implemented.

The listing in Hong Kong

33.  For the purpose of a public offer of shares, CSCG was incorporated in the Cayman Islands in 2006 as the company to become listed.  In September 2007, CSI and the Investors exchanged their shares in CSHK for the same number of shares in CSCG, with the result that CSCG was interposed as the 100% immediate holding company of CSHK. 

34.  In April 2008, each of the participating employees was procured to sign a letter of confirmation (“2008 Confirmation”). Much reliance was placed by Zhang Snr on this document as a ratification of the BVI trusts.  The arguments are dealt with in section VI.E below.

35.  The prospectus of the public offer of CSCG’s shares was published in June 2008 (“IPO Prospectus”).  The shares began to be listed on the Main Board of the Hong Kong Stock Exchange on 4 July 2008.  Zhang Snr was the chairman of the board of directors and an executive director of CSCG.  The corporate structure immediately after the listing was as follows:

Mr Li’s resignation

36.  In July 2010, Li YM resigned as director of the companies in the group.  Without the knowledge or consent of the participating employees, he also retired, and was replaced by Zhang Snr, as trustee of the Li Trust.  The CSI shares held in Li YM’s name for the Li Trust were transferred to Zhang Snr in January 2011.

The repurchase plan

37.  In November 2013, Zhang Snr presented a proposal to the participating employees effectively to buy them out from the BVI trusts.  Under the plan, the purchase price would be calculated with reference to the share price of the listed company, but at a discount.  The payment would be completed in 3 terms of 10 years each.  The capital payments would be derived from and funded by the income of the trusts, ie dividends received by the trustee from CSI.  The plaintiffs suspected that the plan would involve Zhang Snr using “their money” to buy them out.  According to the plaintiffs, this was the first time they became aware that the relevant shares in CSI were said to be held on absolute discretionary trusts.

38.  Many of the participating employees opposed and boycotted the repurchase plan.  They lodged complaints with the Mainland authorities, rejecting the repurchase plan, and demanded the termination of the trust arrangements and requested that the shares in CSI be returned to them individually.  Eventually their Hong Kong solicitors, KLG, issued a letter of demand on 22 August 2014.  On the same date, Zhang Snr’s Hong Kong solicitors denied all the allegations on his behalf. 

III.  The actions brought in the name of the participating employees

39.  On 23 August 2014, the first action, ie HCA 1661/2014, was brought in the name of 761 participating employees against Zhang Snr and Li YM.  In the following months, 5 further actions were commenced against Zhang Snr and Li YM in the name of additional groups of participating employees.  The total number of plaintiffs grew to 2,631, who together laid claim to 456,325 shares (45.6325% of the issued share capital) of CSI.  These 6 actions were consolidated by an order in August 2015.  Receivers were appointed by this court on 20 May 2015 over those 456,325 shares which have since been registered in the Receivers’ name.

40.  In the first few months of 2017, a number of plaintiffs signed documents to terminate their retainer of KLG and to instruct SH to represent them in these actions.  There was a dispute whether, because of a special mandate in KLG’s retainer, it could only be terminated by the clients in person in Hong Kong.  To avoid that argument, 5 of the plaintiffs flew to Hong Kong to sign the requisite documents.  Represented by SH, they instituted a new action (HCA 1282/2017) against the same 2 defendants and ceased to be plaintiffs in the consolidated actions. 

41.  By June 2017, another 1,073 plaintiffs had also signed documents in the Mainland to similar effect and, although the authority of SH to act for them was initially disputed by KLG,[5] the challenge was later withdrawn and on 9 October 2017, those 1,073 plaintiffs, as well as 6 additional plaintiffs who had come to Hong Kong to sign documents, switched from the consolidated actions to become the 6^th to 1,084^th plaintiffs in HCA 1282/2017.

42.  On 14 November 2017, summonses were filed for another 935 plaintiffs to leave the consolidated actions and join HCA 1282/2017 instead.  Following confirmation on 4 December 2017 (Day 5 of the trial) that there was no objection from anyone, the applications were allowed.  They became the 1,085^th to 2,019^th plaintiffs in the new action.

43.  Accordingly, SH on record now act for 2,019 plaintiffs[6], who were represented at trial by Mr Simon Westbrook SC (leading Mr Alexander Tang and Mr Kevin Lau), whereas KLG on record act for 612 plaintiffs[7], who were represented by Ms Audrey Eu SC, leading Mr MC Law.  Despite being separately representated, the KLG plaintiffs and SH plaintiffs have shared the same pleadings and a single expert and their submissions are largely aligned.

IV.  Strike‑out application under O 41A r 6

44.  By a summons dated 24 December 2015, Zhang Snr has applied for an order under O 41A r 6 to strike out the claims of those plaintiffs who have not filed statements of truth for their pleadings.  The position has developed since and by now only a very small portion of the plaintiffs have not filed statements of truth. 

45.  As stated by Rogers VP (sitting as an additional CFI judge) in Tong Kin Hing v Autron Mauritius Corp [2010] 1 HKLRD 77 at §19:

“The requirement of a statement of truth is important. Its purpose is to focus the mind of the relevant party and to deter sloppy or speculative pleadings and prevent dishonest cases being put forward. It is a very important part of the Court’s process in applying the Rules.”

46.  In my discretion, nevertheless, I decline to strike out their claims on this ground because (i) whilst not abandoned, the application was only faintly pursued by counsel for Zhang Snr at trial; (ii) there are a very large number of plaintiffs all resident in the Mainland, with associated logistical difficulties in getting every plaintiff to sign statements of truth; (iii) all the plaintiffs’ contentions and interests are identical; (iv) the pleadings have been verified by the vast majority of the plaintiffs; (v) there is nothing to indicate that the case of those plaintiffs who have not signed the statements of truth are somehow different and not reflected by the pleadings; and (vi) to strike out the claims would in my judgment be a disproportionately draconian response; see eg Adams v Ford [2012] 1 WLR 3211 at §§40–42 & 48–53.

V.  The evidence

47.  There is no major dispute between the parties as to the underlying history and primary facts relating to the restructuring and listing exercise set out above, which are evidenced by the documents.  There are 2 issues of fact concerning the nature and terms of the trust set up in April 2005 (see section VI.B below) and the extent of the plaintiffs’ knowledge and consent (see section VI.E below). 

48.  Mr Liu Xianliang was called on behalf of the SH plaintiffs.  He came across as a collected and coherent witness and I find his evidence generally credible.  Obviously, however, he was only one of 2,631 plaintiffs and even though he was in a fairly senior supervisory position, his answers cannot necessarily be taken to reflect the position of every plaintiff.

49.  The KLG plaintiffs had filed statements of 2 factual witnesses, namely, Zhao Yongkui (“Zhao YK”) (one of the 7 Minority Shareholders) and Gao Yong (one of the KLG plaintiffs).  Neither of them, however, attended the trial to give evidence in circumstances beyond their control as explained in solicitors’ affirmations.  The admission of their statements as hearsay evidence was objected to on behalf of Zhang Snr but I decline to exclude them altogether because I am not satisfied in all the circumstances that exclusion of such evidence is not prejudicial to the interests of justice.  In relation to any parts of the statements that are significant and contentious, however, I bear in mind they have not been tested and the weight to be accorded them must be adjusted accordingly.

50.  Only one factual witness was called on behalf of Zhang Snr, namely, Mr Tang Boxian, a Mainland lawyer who was at the material times with CFLO which acted as the Mainland legal advisers to Shandong Shanshui.  Much of his statement consisted of comment on events and documents of which he had no or very limited personal knowledge.  No explanation has been given why Zhang Snr did not give evidence.

51.  The plaintiffs and Zhang Snr had each arranged for one expert to opine on 3 specified questions of Mainland law but, for reasons I need not go into, neither of the experts attended the trial. Their reports were admitted into evidence as hearsay without objection.  There is no dispute that the proper approach in evaluating expert evidence on the law of a different jurisdiction is that set out in Full Wisdom Holdings Ltd v Traffic Stream Infrastructure Co Ltd [2004] 2 HKLRD 1016 (CA) at §23 and (2004) 7 HKCFAR 442 at §§21–22, and MCC Proceeds Inc v Bishopsgate Investment Trust [1999] CLC 417 at §§13 & 19–20, as adopted in Shenzhen Development Bank Co Ltd v New Century Int’l (Holdings) Ltd (HCA 2976/2001; 31 July 2002), §25.  The laws of other jurisdictions are, in Hong Kong proceedings, treated as facts, but they are facts of a special kind.  The judge is obliged to use his legal training where it has a bearing in determining such facts, especially where the concepts are not very different from Hong Kong law, and where appropriate may form his own view as to the meaning of the statutes of another jurisdiction.

VI.  Analysis of the legal position

52.  Since the ESO Scheme, domestic restructuring, overseas restructuring, BVI trusts and listing of CSCG took place successively over a prolonged period of time, I shall approach the ultimate issue by analysing in turn the legal relationship between the parties at the following stages:

(1) 2001 to 11 April 2005;

(2) 11 April 2005 to 5 September 2005;

(3) 5 September 2005 to 28 November 2005;

(4) 28 November 2005 to 7 April 2008; and

(5) after 7 April 2008.

A.  2001 to 11 April 2005

53.  This is the period from the inception of the ESO Scheme until the transfer of the 1 million CSI shares to the 9 Management Shareholders for $1.  There is no real dispute as to what happened in fact during this period of time.  It is common ground that Mainland law governed the relationship between the parties, but it is not entirely clear what the terms of the ESO Scheme were and there is a dispute over the proper legal characterisation of the relationship and its incidents.

54.  The ESO Scheme was not formally embodied in any single written document put before this court.  In the promotion handbook, one could find the following descriptions (in English translation):

“I. Explanation relevant to establishing the company

…

3. What are the advantages to the Group and individuals by establishing a company for asset and investment management? What is the prospect?

After the establishment of the company, it will mainly engage in capital operation, and will invest on products of high‑technology with subsidiary investment in other industries and participate in businesses such as listed company operation and securities investment and so on, making use of the flexible investment and management systems to maximize the profits so as to bring shareholders higher returns and profits from investments. The employees become asset proprietors in the company in which they work and will earn wages in return for work and profits in return for investment at the same time. This may be said to be beneficial to the development of the Group and providing the employees with a legitimate channel to make better profits from investment, benefiting both the country and the people.

…

II. Explanation about the scheme of establishing the company

1. What is the nature of the company?

The company is a legal person in the form of a corporation making diversified investments as the main business with various financial elements co‑existing, and individual employees of the Group will hold shares.[8] It will be a company of limited liabilities. All shareholders would bear limited liabilities and gain profits proportionate to their capital contribution.

…

4. How would shareholders’ contribution and individuals’ shareholding be regulated?

For all shareholders, subscription of shares of the company shall be made in cash. Shareholders enjoy rights and bear liabilities in proportion to their capital contribution.[9] Shareholders cannot withdraw from holding their shares after capital contribution, but shares are transferable amongst members of the company.

Individual shareholding will be carried out by way of a shareholders’ council who will be appointed to exercise shareholders’ rights on their behalf with dividends belonging to individuals.[10]

…

11. How will company profits be distributed?

The company will distribute dividends annually. Profits after tax and withdrawal of provident funds and charity funds in accordance with the law will be distributed to the shareholders in proportion to their individual capital contribution. The dividend distribution scheme shall be formulated by the Board of Directors and put to the vote of the Shareholders’ General Meeting for approval. Dividends for individual shareholding will be distributed after unified collection by the shareholders’ council.

12. What is the operating period of the company, and how would the assets be dealt with after the company has been terminated or dissolved?

The term of operation of the company is ten years. Upon expiry, it will be put to the vote of the Shareholders’ Meeting to decide if the operation will continue. Should the company be terminated or dissolved, settlement/liquidation would be proceeded with pursuant to the Company Law and the articles of association, and shareholders shall be entitled to distribution of the company assets in proportion to their capital contribution.

III. Management of Individual Shareholders

1. Who can subscribe to shares to invest on an individual basis?

Individual subscription is limited to serving employees of the Group, including all serving employees of the institutions of the Group and their subsidiary units, whereas those outside the Group and employees not serving within the Group cannot participate.

2. How can employees subscribe for shares on an individual basis?

Employees of the Group may subscribe for shares voluntarily by contributing in cash. Each contribution of 1000 yuan is considered as one unit. Upon receipt of the capital contributed by individuals, the company will issue certificates of contribution as proof, and the individuals’ names would be registered as shareholders of the company. They enjoy rights and bear liabilities proportionate to their individual contributions.

3. Can one withdraw from shareholding after subscription?

Individuals cannot withdraw from shareholding after subscribing for shares.

4. Are equity rights freely transferable? How?

Equity rights may be transferred amongst shareholders inside the company but not to any outsider. Transfer price is to be fixed upon negotiation by the two sides. The company will announce reference transfer price annually for guidance purpose. Transfer procedures are to be dealt with by the individual shareholders’ council. Equity rights of individual shareholders can be transmitted to successors pursuant to the Law of Succession.[11]

5. How will problems about the exercise of rights by individual shareholders be solved?

In view of the large number of scattered individual shareholders, an individual shareholders’ council will be set up so that their interests can be practically protected, and they can effectively take part in making policies for the company and exercising the rights of shareholders.

…

8. What is the entrusting procedures between individual shareholders and the council?

Individual shareholders shall sign an equity interest entrustment declaration with the council, with investment proceeds and risks to be received and borne by the individual shareholders themselves. The council shall set up a register to put the entrustment by individual shareholders on record.” (emphasis added)

55.  The ESO Scheme duly started in 2001 but the way in which it was implemented did not in every respect match the description in the promotion handbook.  The evidence shows that in practice:

(1) As anticipated in §III.8 of the promotion handbook, the individual shareholders did sign an entrustment agreement in January or February 2001, in terms set out in §8 above.

(2) As envisaged in §III.8, a register was indeed set up where the details of the participating employees together with their capital contribution were recorded (see §9 above).  Contrary to §III.2, however, the participating employees were not formally registered as shareholders of the company.  It was not possible to have them registered as such because the Company Law limited the number of shareholders to 50.

(3) As stated in §II.4 and §III.4, transfers of equity interests were permitted between employees, and widows and children could inherit the interests of deceased employees.  It appears that the price for the transfer was negotiable: it was dollar‑for‑dollar for the capital contribution in some cases but a different, negotiated figure in other cases.  It appears that the company did not publish any indicative prices.

(4) As stated in §II.11, it was recognised that the participating employees were entitled to dividends in proportion to their capital contribution.  As stated in §§11 & 14 above, the dividends (for the years 2002 and 2003) declared and notionally paid in 2003 and 2004 were ploughed back into the group.  The fact that the participating employees did not receive any dividend in cash between 2001 and 2004 was consistent with the statement in the promotion handbook that the dividend plan would be decided by the directors and approved by the shareholders.

(5) While the promotion handbook envisaged there would be a “council” of individual shareholders consisting of 3 persons to be elected by the individual shareholders, in practice there were 9 employee shareholding representatives who were apparently not elected by the participating employees either initially or upon replacement in 2003 and 2004.

56.  Mr Paul Lam SC, who appeared for Zhang Snr, was in my view correct in submitting that subsequent conduct may be relied upon for the purpose of finding what the terms of a contract (which is not wholly in writing) are, as opposed to construing the known terms of a contract: Lewison, The Interpretation of Contracts (6^th ed), pp 179 & 183–4. However, in the circumstances of this case, the weight that can be placed on such conduct is limited because (i) the participating employees, as subordinates to the senior management, were likely to take a subservient attitude towards the views of the latter; and (ii) unless their interests were invaded, the participating employees might not feel any need to take an active interest in how the company was run.  Accordingly, it seems to me the fact that they acquiesced in the way in which the affairs of the company were conducted is not probative of limitations on their entitlements under the ESO Scheme.  Furthermore, there is evidence that the participating employees were consulted from time to time in relation to matters to be decided at shareholders’ meetings.

57.  As far as the characterisation of the legal relationship between the parties to the ESO Scheme is concerned, the plaintiffs’ expert, Mr Huang Hui, took the view that it was a relationship of contract of entrustment (委託代理合同), while the defence expert, Mr Gao Zongze, considered that it was a relationship of “completely anonymous investment” (完全隱名投資). In the ultimate analysis, it seems to me the difference between them is narrower than it might first appear, and may be attributed to the different perspectives from which one approaches the question.  Mr Westbrook neatly rationalised their difference by suggesting that while Mr Gao focussed on the external aspect of the entrustment relationship, Mr Huang’s analysis was centred on the internal aspect of that relationship.

58.  For present purposes, in my opinion, there was clearly a contract of entrustment under Mainland law between each participating employee and his employee shareholding representative (who became either Zhang Snr or Li YM in December 2004).  This was confirmed in the legal due diligence report prepared by CFLO for the listing and in the IPO Prospectus.

59.  Under that contract of entrustment, the shareholding or equity interest of the participating employee in Jinan Innovation (later renamed Shandong Shanshui) was entrusted to the employee shareholding representative, who alone was registered in the company’s formal record as a shareholder in respect of those shares.  It is common ground that the Trust Law of the Mainland (where trust is a highly specific concept with specific requirements) did not apply to this relationship.

60.  The result was that, under the Company Law of the Mainland, the participating employee was the “actual contributor” (實際出資人) whereas the employee shareholding representative was the “nominal contributor” (名義出資人) or “nominal shareholder” (名義股東).  In this context, their respective rights and obligations were dealt with in Articles 24 and 25 of the “Provisions of the Supreme People’s Court on Several Issues concerning the Application of the Company Law of the People’s Republic of China (III) (2014 Amendment)” (最高人民法院關於適用《中華人民共和國公司法》若干問題的規定(三)(2014修正)) (“SPC Provisions on Company Law (III)”), which had retrospective effect (back to 1 October 1999 when the Company Law was enacted) and provided (in English translation):

“Article 24 Where the actual contributor of a limited liability company enters into a contract with the nominal contributor specifying that the actual contributor shall make capital contribution and be entitled to investment interests and that the nominal contributor shall be the nominal shareholder, if the actual contributor and the nominal shareholder dispute over the validity of the contract, the People’s Court shall determine the contract as valid so long as none of the circumstances prescribed in Article 52 of the Contract Law exist.

Where there arises any dispute between the actual contributor with the nominal shareholder referred to in the preceding paragraph over the ownership of investment interests, the People’s Court shall support the claim of rights made by the actual contributor against the nominal shareholder on the ground that he has performed the actual capital contribution obligation. The People’s Court shall not support the nominal shareholder denying the rights of the actual contributor by relying on the record of the register of shareholders or the registration with the companies registration authority.

The People’s Court shall not support the request made by the actual contributor, without the consent of more than half of all other shareholders of the company, for the company to change its shareholders, issue a capital contribution certificate, record him in the register of shareholders, record him in the company’s articles of association, and to register with the companies registration authority.

Article 25 Where a nominal shareholder transfers, pledges or otherwise disposes of the equities registered under his name, and the actual contributor, on the ground that he has the actual entitlement to the equities, requests the People’s Court to determine the equity disposal as invalid, the People’s Court may handle the case with reference to Article 106 of the Property Law.

If the actual contributor suffers losses because of the equity disposal made by the nominal shareholder, the People’s Court shall support the claim made by the actual contributor requesting the nominal shareholder to bear the liability for compensation.”[12]

61.  These provisions, which elaborate upon the Company Law, have in turn been authoritatively explained by the Second Civil Division of the Supreme People’s Court in a text named “Annotations on Provisions of the Supreme People’s Court on the Company Law (III)” (最高人民法院關於公司法解釋清算紀要（三）理解與適用［注釋版］) (“Annotations”). The Annotations confirm that shareholders’ rights can only be directly exercised by the nominal shareholder.  It is open to the actual contributor and the nominal shareholder to agree between themselves that the former can indirectly through the latter exercise all shareholders’ rights, or that the former shall simply receive the income leaving to the latter a discretion in the exercise of other shareholders’ rights.  Such agreement has effect, however, only between the actual contributor and the nominal shareholder and not externally.  Where the actual contributor seeks to be registered as shareholder in place of the nominal shareholder, the general provision[13] that requires the consent of over half of the other shareholders will apply.

62.  Where the relationship of actual contributor and nominal shareholder has arisen from an agreement, its precise incidents are a matter of contract.  There are general provisions under the Contract Law of the Mainland (Chapter 21) applicable to contracts of entrustment, including Article 410 which provides that both the entrustor and entrustee can terminate the contract at will, but it seems to me they have to be read together with any specific terms agreed between the parties.

63.  So far as the ownership of the shares is concerned, on the evidence it is, in my view, clear that as between a participating employee and his employee shareholding representative, it was intended that the former was the real owner of the shares.

(1) Numerous passages in the promotion handbook made it clear that a participating employee became owner of the shares (see those underlined in §54 above).  After all, even the IPO Prospectus referred to the scheme as the “Employee Stock Ownership Plan”.

(2) While the 2001 entrustment agreement did not expressly mention ownership of the shares, it made clear that the participating employee bore both the risks and the benefits of the investment — the hallmarks of ownership.

(3) In the notice issued by Jinan Innovation to the participating employees in June 2003 regarding the capitalisation of dividends, they were notified that their shareholding (股權) had increased proportionately.

(4) In a speech to employees’ representatives in January 2004, Zhang Snr said (in English translation):

“Another point is that we still have to work for the welfare of our employees so that they can change from being a member of the proletariat to that of the bourgeoisie, becoming the real owner of the enterprise. In 2001, we established Jinan Innovation with investments from the serving employees of the Group. … After the company had operated for 2 years, everybody got the first sum of dividend last year and, with full confidence in it, continues to increase their investment and expand their shareholding.”[14]

(5) This was repeated in a speech made at a meeting of employees’ representatives on 4 August 2004, where Zhang Snr said (in English translation):

“Because after restructuring, nearly all the employees of Shanshui are its shareholders, and the enterprise is closely connected with the individuals.”[15]

At the same meeting, Li YM made clear in his speech that the state‑owned stake in the enterprise was to be transferred to Lixin and Jianxin, which were both wholly funded by the employees (in English translation):

“Our registered capital comes from the dividends of Jinan Innovation in 2003. That is to say, nearly all of our employees are the shareholders of the two companies the subject of acquisition. They are the indirect holders of the assets of the Shanshui Group after restructuring. They have realized the change from being a member of the proletariat to that of the bourgeoisie.”[16]

(6) The 2005 entrustment declaration, expressly stating that “ownership” (所有權) belonged to the participating employee, could not have been in clearer terms.  This is a term with established meaning in Mainland law (see Article 39 of the Property Law and Article 71 of the General Principles of Civil Law).

64.  There was in my view nothing in Mainland law that prevented this clear intention of the parties from taking effect as between them.  While it is common ground that Mainland law embraces the principle of “one thing, one right (of ownership)” (一物一權) and that formal separation of legal and beneficial ownership is not recognised, Mainland law also recognises that in this context there may be “double standards, since internal and external relationships differ” (內外有別，雙重標準).

65.  In fact, the reference in Article 25 of the SPC Provisions on Company Law (III) to Article 106 of the Property Law is telling, for it provides:

“Where a person transfers to a transferee immovables or movables which he has no right to dispose of, the owner shall have the right to recover them …

Where a transferee acquires the ownership of the immovables or movables in accordance with the provisions in the preceding paragraph, the original owner shall have the right to request the person who has no right of disposition to compensate for the losses. …” (emphasis added)

This suggests that unless the actual contributor agrees, the nominal shareholder has no right of disposal over the shares, which is of course an important indicia of ownership: see Article 71 of the General Principles of Civil Law; Article 39 of the Property Law.  The experts were agreed that the right of disposal was the “core” right and power of an owner.  Instead, Article 25 the SPC Provisions on Company Law (III) proceeds on the basis that the actual contributor has the final say over disposal.  He is the person capable of invoking Article 106 of the Property Law against the nominal shareholder and a third party transferee; he can recover the shares purportedly disposed of unless the transferee is a bona fide registered transferee for reasonable value.  This is confirmed in the following passage that appears at p 393 of the Annotations in the explanation of Article 25 (in English translation):

“The nominal shareholder has agreed with the actual contributor for him to exercise the equity interest. However, since such equity interest is obtained only by virtue of the capital contribution made by the actual contributor, it is ultimately vested in the actual contributor. The nominal shareholder may exercise the right of a shareholder but cannot dispose of such equity interest without authority, and no equity interest may be disposed of unless the actual contributor has given consent. When the actual contributor has not authorized the nominal shareholder to dispose of the equity interest, the nominal shareholder is not entitled to dispose of that part of the equity interest, and his conduct in disposing of it is unauthorized disposition.”[17] (emphasis added)

66.  It seems to me Mr Gao’s conclusion that the relationship between the plaintiffs and defendants was one of “completely anonymous investment” (完全隱名投資) was based on his assumption that all the rights other than the right to receive dividends had by agreement been conferred on the defendants.  His opinion that vis‑à‑vis the company and third parties, it is the nominal shareholder who is for all intents and purposes the shareholder, is unobjectionable.  Insofar as he reasoned from the external position to the conclusion that the nominal shareholder is the owner of the shares and the actual contributor is not, that analysis is, with respect, unconvincing.  He did not cite any statute to support his distinction between “completely anonymous investment” and “incompletely anonymous investment”.  He relied on statutory provisions that concern Sino‑foreign or wholly foreign‑owned enterprises, which had no application to Jinan Innovation which was, until September 2005, a wholly domestic enterprise.  The concept of “completely anonymous investment” was not alluded to in the judicial decisions he relied upon.  Moreover, the investment could hardly on the facts of the present case be said to be completely anonymous or undisclosed.  Jinan Innovation was set up pursuant to the ESO Scheme; it issued receipts to the participating employees, entered their names in a register and notified them of the capitalisation of their dividends.

67.  On behalf of Zhang Snr, and in a similar vein to Mr Gao’s approach, Mr Lam relied on a number of contemporaneous documents whose wording suggested that the employee shareholding representatives were actual owners of shares in Jinan Innovation, such as (i) the application for incorporation of Jinan Innovation in August 2001; (ii) capital injection verification reports; (iii) agreements for the transfer of shares executed upon changes of employee shareholding representatives; (iv) the Share Transfer Agreement dated 15 December 2004 (see §15 above) and the acknowledgments signed by the transferors; and (v) the Equity Transfer Agreement dated 5 September 2005 (see §25 above).  In my view, these documents do not assist Zhang Snr.  They merely show that externally, vis‑à‑vis the company and other third parties, the participating employees were not entitled to be regarded as shareholders.  Mainland law, like Hong Kong law, treats the share register as evidence of shareholding and does not allow an unregistered person directly to assert shareholders’ rights against the company.  These documents did not purport to deal with the legal relationship between the participating employees and the registered shareholders and do not detract from the above analysis of their relationship inter se.

68.  Accordingly, I find that the position under Mainland law was in summary as follows:

(1) Vis-à-vis Shandong Shanshui and third parties, Zhang Snr and Li YM were the shareholders who alone were entitled directly to exercise shareholders’ rights. 

(2) The participating employees had ownership rights to the shares entrusted with Zhang Snr and Li YM.  The latter, as nominal shareholders, were not entitled to deal with the entrusted shares without the consent and approval of the former.  If they dealt with the shares without authority, the participating employees had the right to demand the specific return of the shares.  This right would prevail against third parties except those who had received the shares bona fide for a reasonable price and been registered as transferees.

(3) The participating employees were entitled to demand from the nominal shareholders all the financial benefits arising out of the entrusted shares, including all dividends.

(4) The participating employees could transfer their equity interests to other employees and their interests could upon their death be inherited by family members.

69.  The legal relationship under Mainland law during this period continued, with respect to the shares in Shandong Shanshui, until those shares were transferred to Pioneer pursuant to the Equity Transfer Agreement dated 5 September 2005 (see §25 above). Meanwhile, however, a new relationship with respect to the shares in CSI came into being on 11 April 2005 (see section B below).

B.  11 April 2005 to 5 September 2005

70.  This is the period from the transfer by MS Cement Ltd of the 1 million CSI shares to the 9 Management Shareholders to the date of the Equity Transfer Agreement for the sale of the shareholding interests they held in Shandong Shanshui to Pioneer.  The plaintiffs and Zhang Snr agree that upon acquisition, the 523,668 shares and 94,001 shares in CSI were held by Zhang Snr and Li YM on trust respectively.  The dispute is what trust it was.  I shall deal first with Zhang Snr’s contention that the shares were subject to the BVI trusts from 11 April 2005 onwards.

(1)  Whether the BVI trusts were set up in April 2005

71.  There are 2 arguments raised on behalf of Zhang Snr, namely: (i) on 11 April 2005, Zhang Snr and Li YM in fact declared and established 2 trusts of CSI shares substantially on the terms of the BVI trusts; (ii) alternatively, by executing the BVI trust deeds on 28 November 2005, Zhang Snr and Li YM retrospectively declared the BVI trusts with effect from 11 April 2005.

(a)  Express declaration of BVI trusts on 11 April 2005

72.  I do not accept that discretionary trusts, whether substantially in the terms of the BVI trusts or otherwise, were specifically and expressly established on 11 April 2005.

(1) There is no evidence from any witness having relevant personal knowledge to suggest that this actually happened.  Zhang Snr, who would be the best person to testify if there was such a trust set up, did not give evidence at all.

(2) As referred to in §81(4) below, such restructuring documents as were disclosed show that what was contemplated was simply an “extraterritorial” (境外) trust (and it was clear from the documentation that that description could refer to a trust established in Hong Kong).  The first contemporaneous documents that mentioned any discretionary trust were the BVI trust deeds executed on 28 November 2005.

(3) The BVI trusts each recited in its preamble:

“The Original Trustee has, since he acquired the Original Shares on 11 April 2005, held them upon trust for the Beneficiaries and wishes to confirm the trusts on which he holds them.”

This cryptic recital, whilst doubtless a confirmation that the relevant CSI shares had been held on trust since 11 April 2005, is, in my view, far from clear evidence that there was a declaration in terms of the BVI trusts as early as in April 2005.  In any event, assuming it is admissible,[18] the weight that should be placed on it, as a subsequent, self‑serving pronouncement, is highly limited.

(4) The IPO Prospectus stated that the BVI trusts were established “when the Management Shareholders acquired [CSI] in April 2005” and that the trusts “were formally recorded and documented in writing in November 2005”[19], but the prospectus was only published in June 2008 and did not state the source of information for that statement.

(5) There is no evidence that documents containing substantially the terms of the BVI trusts were provided to Zhang Snr and Li YM for them to declare trusts on 11 April 2005.  It is extremely improbable that in the absence of any such assistance, Zhang Snr and Li YM could have declared trusts in terms foreshadowing the BVI Trusts.  There is nothing to show that either of them had even heard of “discretionary trust” prior to 28 November 2005.

73.  Mr Lam placed reliance on a draft trust deed as at 28 April 2005 prepared by Paul, Weiss, Rifkind, Wharton & Garrison LLP (“Paul Weiss draft”) as evidence of the alleged intention to create a discretionary trust in April 2005.  This draft was subsequently attached to an email of 21 October 2005 from Morgan Stanley which asked that it be executed by Zhang Snr and Li YM.  Upon closer examination, however, the draft seems to me to have been one for a fixed trust instead of a discretionary trust.

(1) It was a declaration that the trustee held

“UPON TRUST for the Beneficiaries or their respective successor in title such number of Shares as shown in the Schedule attached hereto, subject to the terms and conditions set out in this Declaration of Trust” (emphasis added)

(totalling 523,668 and 94,001 shares in the case of Zhang Snr and Li YM respectively).  The schedule to the draft deed set out a table containing the names and, importantly, a column headed “Trust Assets held on trust for the Beneficiaries” setting out separately what was evidently the number of CSI shares to which each of the beneficiaries was entitled.

(2) Clause 7 provided a power of altering the terms of the trust which was subject to the proviso that

“no such alteration or amendments shall deprive the Beneficiaries or any of them of their respective beneficial ownership interest of the Trust Assets without the written consent of the Beneficiaries affected thereby.” (emphasis added)

(3) The draft deed envisaged that the beneficiaries could transfer or create security interests over the beneficial interests. Thus clause 8 provided:

“The Beneficiaries shall not transfer, mortgage, pledge, charge or otherwise dispose of their beneficial interests under this Declaration of Trust except with the written consent of the Registered Holder.” (emphasis added)

Clause 13 provided:

“The successors in title and assigns of the Beneficiaries to any right or benefit hereunder shall be bound by the terms and obligations set forth herein.”

(4) The provisions in clauses 3 and 6 simply gave the trustee a discretion “to determine whether and when” to transfer the trust assets or their sale proceeds to the beneficiaries.  They did not give the trustee the power to decide how to apportion the trust assets or the income as among the beneficiaries.

74.  Far from supporting Zhang Snr’s case, the fact that this draft was created on 28 April 2005 (as, apparently, a third draft) and was still being put forward on 21 October 2005 for signature is, in my view, strong evidence that there was no prior intention to create any discretionary trust.  There is no evidence as to when, how or why the idea of setting up a discretionary trust appeared after 21 October 2005 which led to the abandonment of the Paul Weiss draft and the eventual adoption of the BVI trust deeds (which were prepared instead by the law firm Maples & Calder).

75.  The clear conclusion to which the evidence overwhelmingly points is that there was no specific and express declaration of the BVI trusts or, indeed, any discretionary trust, in April 2005, and I so find.

(b)  Retrospective declaration of BVI trusts

76.  Mr Lam submitted that by executing the BVI trusts on 28 November 2005, with the trust deeds containing the recital referred to in §72(3) above, the BVI trusts were “retrospectively declared” with effect from 11 April 2005.  No authority was cited for the proposition that one can retrospectively alter the history of the legal rights and obligations as existed between the parties in this manner.  As a matter of principle I am unable to accept the submission.

77.  In addition, for the reasons given below, it seems to me that a different trust, and one that was more favourable to the participating employees than the BVI trusts, had come into being in April 2005. It was not open to the defendants in November 2005 to declare a less favourable trust of the same assets, retrospectively or otherwise.

(2)  Whether fixed trusts were set up under Hong Kong law

78.  While there is no direct evidence of an express declaration of trust on 11 April 2005 over the 617,669 CSI shares, the plaintiffs are in my opinion correct in submitting that, as a matter of Hong Kong law, a trust can be inferred in appropriate circumstances.  There is no dispute that this is a question governed by Hong Kong law.[20]  As stated in Snell’s Equity (33^rd ed) at §22–013:

“No particular form of expression is necessary for the creation of a trust if, on the whole, it can be gathered that a trust was intended. … Indeed, the settlor need not even understand that his words or conduct have created a trust if they have this effect on their proper legal construction.”

79.  Mr Lam argued that the plaintiffs’ case went beyond Paul v Constance [1977] 1 WLR 527, which was cited in Snell’s as authority for the last sentence in the quotation above.  He pointed out that Paul v Constance was a case where the court found there were frequent utterings to the plaintiff by the deceased, referring to the money in a bank account in his name, that “The money is as much yours as mine”.  It was held that, although it was not easy to pin‑point a specific moment of declaration, in all the circumstances it was the intention of the deceased and the plaintiff to create a trust in which both of them were interested and the use of those words constituted an express declaration of trust.

80.  While there were express utterances in Paul v Constance, a trust may also in my view be inferred from conduct, the transaction and the whole of the circumstances including the relationship between the parties (there being no formal requirement for the creation of a trust over shares in Hong Kong law).  The matter is one of intention, and it is the intention collected from an objective approach that is material.  What is required is evidence in the nature of an outward manifestation of an intention to create a relationship that the law recognises as one of trust.  The unexpressed subjective intentions of the settlor are irrelevant: Twinsectra Ltd v Yardley [2002] 2 AC 164 at §71 per Lord Millett; Bellis v Challinor [2015] EWCA Civ 59 at §58 per Briggs LJ.

81.  In this context the following matters are of significance:

(1) Under the ESO Scheme, as concluded in section VI.A above, neither Zhang Snr nor Li YM was the real owner of the 61.7669% interest in Jinan Innovation as a matter of Mainland law.  They were only the nominal shareholders (名義股東).  The share ownership belonged to each of the participating employees as the “actual contributor” (實際出資人) in respect of the shareholding attributable to his investment. 

(2) As evidenced in the 2005 entrustment declaration, they mutually agreed and intended that the share ownership remained with the employees.

(3) As is common ground, CSI was set up and transferred to the 9 Management Shareholders on 11 April 2005 as a vehicle for a restructuring which was intended to be an extension of and to mirror the substance of the ESO Scheme.  Liu Xianliang’s evidence also shows that the general understanding was that the same relationship, where shares were held on behalf of the employees, would in substance continue.  For the portion beyond their personal entitlement, Zhang Snr’s and Li YM’s acquisition of the shares in CSI was, from the outset, coloured by the entrustment arrangement.

(4) Of the few restructuring documents adduced in evidence, one was a draft memorandum on the offshore re‑organisation as at 17 February 2005, which broadly reflected the shape of the transactions that eventually took place.  It referred to the setting up of a Hong Kong company with 1,000,000 shares (obviously CSI) as part of the first step, and the transfer of such shares to members of the management for HK$1 as the second step. It was stated that they would hold shares in this Hong Kong company in accordance with the beneficial ownership of the shares in Jinan Innovation.[21]  It was also stated that the interests of the registered and unregistered shareholders in Jinan Innovation would be held by Zhang Snr and Li YM by way of trust.[22]  Having regard to the table in §16 above, this in my view demonstrated an intention that 523,668 shares and 94,001 shares would be held by Zhang Snr and Li YM respectively on trust for the participating employees.  The third step was to involve a formal declaration of trust by Zhang Snr and Li YM, the timing of which was to be confirmed and would depend on accounting requirements.

82.  It seems to me clear that the intention was that from the inception of the holding of the CSI shares, Zhang Snr and Li YM should have the 523,668 shares and 94,001 shares in their custody and administration on behalf and for the benefit of the participating employees — in other words, as their trustees in the ordinary sense: Taylor v Davies [1920] AC 636, 651.

83.  It is not open to Zhang Snr to argue that the shares were beneficially held by him and Li YM until a formal, written declaration of trust was made, since (i) it was his pleaded case that the CSI shares were settled on trusts, albeit the BVI trusts; (ii) it was accepted on behalf of Zhang Snr at trial that from the moment the CSI shares were transferred to him and Li YM, they did not hold any beneficial interest in those 617,669 shares; and (iii) any such argument would be contrary to their admission in the BVI trust deed (see §72(3) above) that, since 11 April 2005, the shares had been held by them on trust.

84.  Given the evidence of intention, and the admission that the relevant CSI shares had from 11 April 2005 never been held by Zhang Snr or Li YM beneficially, the conclusion seems to me inevitable that the equitable interest was from the outset vested in the participating employees, for (i) it could not “remain in the air” (see Vandervell v Inland Revenue Commissioners [1967] 2 AC 291, 329C); (ii) it could not have remained with MS Cement Ltd as the transferor, which has not been suggested by anyone and would be contrary to the intention of all the parties involved at the time; and (iii) it was not the subject of discretionary trusts for all the participating employees as a class, as concluded above.  It follows that an aliquot number of CSI shares, in proportion to his interest under the ESO Scheme, were held on trust for each participating employee.  The precise numbers were set out in the schedules attached to the Paul Weiss draft as well as the schedules attached to the letters of wishes that accompanied the BVI trusts.

85.  For completeness, I should mention that although only part of the CSI shares transferred to Zhang Snr and Li YM were held on trust for the participating employees and those shares were indistinguishable from the shares beneficially owned by Zhang Snr and Li YM, no argument has been raised that there was want of certainty of subject matter. As stated by Yuen J (as she then was) in Re CA Pacific Finance Ltd [1999] 2 HKLRD 1 at 17G–18F, in the case of shares which are all the same ranking pari passu, it is unnecessary to have segregation of each beneficiary’s shares for there to be sufficient certainty of subject matter, so long as the quantity of shares to which each beneficiary is entitled is known.

C.  5 September 2005 to 28 November 2005

86.  This is the period from the Equity Transfer Agreement dated 5 September 2005 whereby the 9 Management Shareholders agreed to sell the shareholding interests in Shandong Shanshui to Pioneer until the date of the BVI trust deeds.

87.  On the above analysis, what took place on 9 September 2005 (see §26 above) was simply the injection into CSI of the shares in CSHK, which held Pioneer, which in turn had only 4 days earlier (on 5 September) entered into the Equity Transfer Agreement to acquire the entire shareholding of and in Shandong Shanshui (see §25 above).  These transactions in no way altered the beneficial entitlement to the shares of CSI, which had since 11 April 2005 been held in the same proportions as Shandong Shanshui as set out in the table in §16 above, but had the effect of augmenting the value of the trust assets, ie CSI shares.

88.  Upon completion of the Equity Transfer Agreement, Shandong Shanshui became wholly owned by Pioneer, and the ESO Scheme came to an end.  The price of RMB 162.8 million was paid by Pioneer but it was, as explained above, ploughed back into the group.  Value was derived by the beneficial owners in the disposition of Shandong Shanshui not so much from the price as from the increased worth of CSI, which now indirectly held Shandong Shanshui.  The overall effect was akin to a share swap (in which Shandong Shanshui shares were given up in return for CSI shares) albeit the CSI shares had been acquired some 5 months earlier.

89.  In this way the participating employees’ beneficial interests in Shandong Shanshui under the ESO Scheme were seamlessly transposed to CSI and transformed into proportionate beneficial interests in CSI’s shares.

D.  28 November 2005 to 7 April 2008

90.  This is the period from the execution of the BVI trust deeds to the 2008 Confirmation.

91.  It follows from the above analysis that insofar as the 617,669 CSI shares held for the participating employees were concerned, what Zhang Snr and Li YM did on 28 November 2005 was to attempt to re‑settle on discretionary trusts assets that were already subject to fixed trusts in favour of the participating employees.[23]

92.  At §58 of the decision of mine dated 13 May 2015 on the jurisdictional challenges of Zhang Snr in the first 3 actions herein (“jurisdiction decision”), I stated:

“There is no dispute that under a discretionary trust such as the BVI trusts, individual ‘beneficiaries’ have no proprietary interest in the trust assets or capital, and no right to a definable part of the trust income. They merely have a hope or expectancy that the trustee will exercise his discretion and make a disposition of property in his favour. It is meaningless to speak of a duty to act impartially between the beneficiaries: PLTO v KLK [2013] 2 HKLRD 1089, §40.[24] Indeed, the expert opinion on BVI law adduced by Mr Zhang himself states that under a discretionary trust, no beneficiary or beneficiaries have any entitlement to any trust property. From the point of view of the participating employees, the letters of wishes issued by Mr Zhang and Mr Li, which are expressly stated to be non‑binding and can be revoked or changed at any time, are worth little more than the paper they are written on.”

This passage still seems to me to be a broadly accurate statement of the position. 

93.  As Ribeiro PJ stated in Kan Lai Kwan v Poon Lok To Otto (2014) 17 HKCFAR 414 at §70, trustees of discretionary trusts are entitled to take account of settlors’ wishes while not being bound by them.  The letters of wishes here are therefore of very limited comfort to the plaintiffs.  Mr Lam submitted that there is no evidence Zhang Snr intended to depart from the letters of wishes and there is no dispute that the participating employees received dividends for the years 2011, 2012 and 2013 in the proportions set out in the letters of wishes.[25] The problem, however, is that under a discretionary trust they would have no right but have to depend on the trustee’s exercise of discretion.  As Ms Eu submitted, the repurchase plan in 2013 illustrated what could happen if the shares were held on discretionary trust.

94.  In a submission that sought to highlight the rights of the participating employees under the BVI trusts, Mr Lam said the trustees cannot remove any of the beneficiaries from the list unilaterally.  That is true, but under clause 3.2 of the BVI trusts the trustee has the power to transfer any trust property to be held on another trust for the benefit of any one or more of the original beneficiaries, to be held on the terms of the new settlement, freed and released from the terms of the BVI trusts.  In effect, therefore, any person can be removed by the trustee from the list of objects by a re-settlement that leaves him out.

95.  While it has been said that what the object of a discretionary trust has is an expectancy or a mere spes, this is not intended to suggest that the trustee has no duty whatsoever: see Re Estate of Mui Yim Fong [2010] 4 HKLRD 69 at §§13, 64–67.  In In re Munro’s Settlement Trusts [1963] 1 WLR 145 at 148, Wilberforce J approved the following sentence in Snell’s Equity (25^th ed), p 129:

“The beneficiary thus has no more than a hope that the discretion will be exercised in his favour”.[26]

Nevertheless, in Gartside v Inland Revenue Commissioners [1968] AC 553 at 617–618, Lord Wilberforce explained that an object of a discretionary trust:

“… has a right to be considered as a potential recipient of benefit by the trustees and a right to have his interest protected by a court of equity. Certainly that is so, and when it is said that he has a right to have the trustees exercise their discretion ‘fairly’ or ‘reasonably’ or ‘properly’ that indicates clearly enough that some objective consideration (not stated explicitly in declaring the discretionary trust, but latent in it) must be applied by the trustees and that the right is more than a mere spes.”

96.  Mr Lam further relied on Lewin on Trusts (19^th ed) §1–061 to submit that:

“A discretionary interest includes a right to be considered for the exercise of the trustees’ discretion; a right to compel the due administration of the trust; a prima facie right to obtain information and accounts from the trustees; and a right to bring a claim for breach of trust, including a right to compel a third party recipient of trust assets to restore them to the trustees. It has been suggested that an object of a discretionary trust may have a legitimate expectation of being consulted before a regular payment is stopped, or at least given the opportunity to persuade the trustees to continue the payments.”

I do not dispute these propositions but in my view there is a world of difference between a right to be considered for the exercise of discretion and equitable ownership under a fixed trust.

97.  Mr Lam further submitted that a discretionary interest could be assigned for value.  This is suggested in Lewin on Trusts (19^th ed) §1‑062, but the statement is heavily qualified in §§33–010 and 33–011 of the same work.  Thus, for instance, it is stated at §33–011(3) that despite the assignment, any exercise of discretionary power by the trustee for the purpose of benefitting the assignee (as opposed to the original beneficiary) would be void as a fraud on the power: see also Ong v Ping [2015] EWHC 1742 (Ch) at §§106–112.  This is not surprising because the assignment does not make the assignee an object of the discretionary trust in place of the assignor.  Whether in reality a beneficiary can obtain significant value by assigning an expectancy under a discretionary trust must therefore be questionable.  Moreover, as Mr Lam had to admit, a beneficiary’s expectancy under the BVI trusts terminates upon his death and does not pass by succession to persons interested in his estate.

98.  Mr Lam sought to argue that the rights of the participating employees under the BVI trusts were not all that different from their rights under the ESO Scheme.  The simple point, however, which is incontrovertible in my view, is that under the BVI trusts, as full discretionary trusts, the participating employees had no right to a fixed portion of the capital and income and the trustees had the absolute discretion to appoint any part of the capital or income to any beneficiaries in any proportion they see fit.  This would have been abhorrent to the participants in the ESO Scheme.

99.  In fact, the effect of the BVI trusts was the subject of enquiry from the Stock Exchange of Hong Kong prior to the listing.  The Listing Division raised some highly pertinent questions including whether Zhang Snr and Li YM could effectively take over the equity interests and economic benefits of the participating employees and whether the participating employees were fully aware that the equity interests and economic benefits attributable to them were subject to variation by the trustees so that they could be varied to nil at the trustees’ discretion.  Although the sponsors’ answers at the time suggested there was some limit on the trustees’ powers in light of their “common law fiduciary duties as trustees”, Mr Lam has not been able to identify any such restriction, especially given that Zhang Snr and Li YM were both themselves members of the class of beneficiaries under the two BVI trusts respectively.

100.  In my judgment, in the absence of authority from the participating employees, there was simply no power on the part of Zhang Snr and Li YM, as trustees of the pre‑existing trusts arising under Hong Kong law, to “re‑settle” the CSI shares on the BVI trusts.  This purported exercise therefore had no effect, at any rate as between trustees and beneficiaries, so that the CSI shares in question remained in the hands of Zhang Snr and Li YM subject to the original trusts created in April 2005: Bond (Inspector of Taxes) v Pickford [1983] STC 517, 522–3.

101.  Zhang Snr relied on the fact that Zhao YK knew of the establishment of the BVI trusts.  There is, however, nothing to show that he was acting as agent of the plaintiffs at the time or that he notified the plaintiffs of the fact or that his knowledge should somehow be imputed to them.  On the contrary, the evidence shows that as the contact person with CFLO, Zhao YK was acting as representative of the group rather than the participating employees.  In addition, as the email of 6 April 2008 referred to in §104(3) below shows, he had not passed on his knowledge of the BVI trusts to the employees.  There was hardly any informed consent after full and proper disclosure: Lewin on Trusts (19^th ed), §§20‑105 – 20‑107, 20‑140 & 39‑123.

E.  After 7 April 2008

102.  This is the period after the date of the 2008 Confirmation.  Zhang Snr placed great store on that document.  The version that was eventually adopted and presented to the participating employees for signature was as follows (using the version relating to Zhang Snr) (in English translation):

“I, XXX, being an employee participating in the Employees Stock Ownership Scheme, hereby confirm the entrustment of the employee shareholding representatives and related matters as follows:

1. On 15 December 2004, the original employee shareholding representatives of Shandong Shanshui Cement Group Ltd (‘Shanshui Group’), Jinan Shanshui Lixin Investment Management Ltd (‘Shanshui Lixin’) and Jinan Shanshui Jianxin Investment Management Ltd (‘Shanshui Jianxin’) had already transferred the equity rights of the abovementioned three companies, which had been entrusted to them, to the new employee shareholding representatives: Mr Zhang Caikui and Mr Li Yanmin. Mr Zhang Caikui and Mr Li Yanmin, as new employee shareholding representatives, have been entrusted with the relevant shareholders’ rights previously held by the original employee shareholding representatives as registered shareholders of the above three enterprises;

2. I, as an employee participating in the Employees Stock Ownership Scheme of the Shanshui Group, have appointed Mr Zhang Caikui, as a shareholding representative of Shanshui Group, Shanshui Lixin and Shanshui Jianxin, to inject the capital paid by me into Shanshui Group, Shanshui Lixin and Shanshui Jianxin as capital contributed by me to the abovementioned three enterprises. Mr Zhang Caikui as an entrusted registered shareholder of the abovementioned three enterprises is entitled to all rights and interests of a shareholder including, inter alia, substantial policy making, distribution of profit from assets and selection of management personnel and so on. I am entitled to the same financial benefits as the shareholding representatives proportionate to the contribution of capital delivered.

3. The amounts of capital I contributed in the abovementioned three enterprises are respectively:

(1) RMB_______ contributed to Shanshui Group, partaking in dividend distribution on the basis of a contribution of RMB______;

(2) RMB_______ contributed to Shanshui Lixin, partaking in dividend distribution on the basis of a contribution of RMB_______;

(3) RMB_______ to be contributed to Shanshui Jianxin, partaking in dividend distribution on the basis of a contribution of RMB_______;

4. The above entrustment took effect from 15 December 2004 and was valid until the replacement of this entrustment with a new relevant arrangement. Such entrustment was an irrevocable trust arrangement during the above effective period.

5. I understand and agree that the aforesaid entrustment ceased as Shandong Shanshui changed its status to a wholly foreign‑owned enterprise in 2005. Mr Zhang Caikui and Mr Li Yanmin therefore set up a trust scheme overseas to enable me to maintain all the capital contributions owned (by me) in Shandong Shanshui and continue enjoying all the corresponding economic benefits.

6. I understand and agree that Mr Zhang Caikui is responsible for managing all the matters relating to all the capital contributions made by me to Shandong Shanshui. I believe that Mr Zhang Caikui, being the person to whom entrustment is made, will manage and protect my economic interests in a fair, just and selfless manner.”[27]

103.  It was contended that, by signing this document, each of the participating employees was to be taken to have ratified the settlement of the relevant CSI shares on the BVI trusts.

104.  To assess whether the document did have that effect, it is necessary to have regard to its context and history.  It appears that the document was prepared as part of the legal due diligence for the listing of CSCG.  The first draft, prepared by CFLO, appeared on 5 March 2008.  Thereafter it underwent various amendments until early April.  The significant amendments for present purposes are the following which took place shortly before the final version was settled.

(1) As at 31 March 2008, clauses 5 and 6 of the draft confirmation read as follows (in English translation):

“5. … I also understand that since the entrustment in Shanshui Group has been terminated, Mr Zhang Caikui and Mr Li Yanmin set up discretionary trust overseas, and the main purpose of the trust is, when the laws and regulations concerned are complied with, to have the spirit and essence of the trust arrangement in the territory continued, so that I can continue to enjoy the outcome from the operation of Shanshui Group and the relevant economic benefits.

6. I understand and agree that Mr Zhang and Mr Li have full power in the management of my interests in Shanshui Group (including altering in their discretion my distribution of economic benefits in Shanshui Group). I believe that Mr Zhang and Mr Li as trustees of the trust would do their utmost to manage and safeguard my interests in Shanshui Group in a fair, just and selfless manner.”[28] (emphasis added)

(2) On 4 April, these 2 clauses were revised to the following (in English translation):

“5. … I also understand that since the entrustment in Shanshui Group has been terminated, Mr Zhang Caikui and Mr Li Yanmin set up discretionary trust overseas, and the main purpose of the trust is, when the laws and regulations concerned are complied with, to have the spirit and essence of the trust arrangement in the territory continued, so that I can continue to enjoy all the contributed capital owned in Shanshui Group and all the corresponding economic benefits.

6. I understand and agree that Mr Zhang has full power in the management of all my contributions in Shanshui Group. I believe that Mr Zhang Caikui as trustee of the trust would do his utmost to manage and safeguard my interests in Shanshui Group in a fair, just and selfless manner.”[29] (emphasis added)

(3) On 6 April, Zhao YK circulated a further amended draft which was adopted as the final version as set out in §102 above. At the same time, Zhao YK wrote to Tang Boxian, stating (in English translation):

“Lawyer Tang: With a view to having the employees sign smoothly without objection, the entrustment letter has been amended again as the company advised. Please examine and forward it to the agent concerned. …”[30]

105.  What strikes one from this history is that all express references to the discretionary nature of the trusts and to the power of the trustees to vary the distributions, which was the hallmark of a discretionary trust, were deleted from the final version.  Far from setting out the full position in order to obtain the participating employees’ informed consent, the 2008 Confirmation presented a partial picture in which critical information was suppressed.

106.  The reason it was suppressed was, as Zhao YK’s email of 6 April 2008 shows, that the rank and file participating employees would have been surprised by, and would have dissented from, any suggestion that the trusts were discretionary in nature or that the trustees had power to vary the proportion of their entitlements.

107.  There was plainly no full informed consent on the part of the participating employees when they signed the 2008 Confirmation. They could not be expected or assumed to have any knowledge of the features of the BVI trusts.  Even Tang Boxian, trained as a lawyer, admitted that he had no idea of the technicalities of the BVI trusts at the time.

108.  Nor was the 2008 Confirmation, objectively construed, a clear ratification of the BVI trusts.  There was no mention whatsoever of BVI or discretionary trust.  The statement in clause 5 that there was an overseas trust plan to enable the participating employee in question to “maintain all the capital contributions owned [by him] in Shandong Shanshui”[31] was, in my view, equally consistent with there being a Hong Kong trust, and indeed more consistent with a fixed trust than a discretionary trust because an object of a discretionary trust can hardly be said to “own” any part of the capital or income.

109.  Mr Lam relied on Ming Shiu Chung v Ming Shiu Sum (2006) 9 HKCFAR 334 at §84 to submit that the 2008 Confirmation was legally binding on the participating employees, there being nothing pleaded or proved to vitiate it.  With respect, this missed the point.  The issue is not whether the participating employees could repudiate the document, but what effect it has on its proper construction and in particular whether it is an effective ratification of the BVI trusts.  For the reasons already given, I find that it is not.

110.  Finally, when the IPO Prospectus was published in June 2008, the only references to “discretionary trust” that Mr Lam could point to in the 500‑page tome were a few sentences under “History and Corporate Structure”, and even there, the Chinese version did not describe the trusts with the phrase “酌情” (discretionary) but instead used the phrase “全權” (fully authorised).  Anyhow, there is no evidence that any of the participating employees were asked to or did read the IPO Prospectus in any detail. Nor was there any act thereafter on their part which could unequivocally be taken as ratification of the BVI trusts.

VII.  An alternative analysis

111.  On behalf of the SH plaintiffs, Mr Westbrook offered an alternative analysis, alluded to in §96 of the jurisdiction decision. Assuming that by September 2005, the CSI shares were already held on trust in terms of the BVI trusts, the result of the dispositions on 5 and 9 September 2005 (see §§25–26 above) was to place the participating employees’ shareholding interest in Shandong Shanshui into a vehicle (namely, Pioneer) in which the employees were only indirectly interested (via CSHK, CSI and the BVI trusts) as objects of a discretionary trust. 

112.  Such disposition without the consent and approval of the participating employees, according to the argument, was a breach of the duties of the defendants arising from the ESO Scheme under Mainland law.  In this regard I prefer the opinion of the plaintiffs’ expert, which accords with logic and common sense, because the BVI trusts purported to turn the hitherto fixed entitlement of the employees into an expectancy for a favour at the absolute discretion of the trustees.  The contrary opinion of the defence expert was based on his view that there was no material difference between the rights of the participating employees under the ESO Scheme and their rights under the BVI trusts, which I cannot accept. 

113.  As explained in the Annotations, the nominal shareholder is not entitled to dispose of the shares without the consent of the actual contributor.[32]  Mr Westbrook submitted that, therefore, the Hong Kong court should impose a constructive trust over the relevant CSI shares, which, he argued, represented the traceable substitute of the Shandong Shanshui shares if one regards the overseas restructuring as in substance one coordinated transaction overall: Brazil v Durant [2016] AC 297.

114.  The problem with the argument is that, as the Court of Appeal held in First Laser Ltd v Fujian Enterprises (Holdings) Co Ltd [2011] 2 HKLRD 45 at §71.6 and Hong Jing Co Ltd v Zhuhai Kwok Yuen Investment Co Ltd [2013] 1 HKLRD 441 at §§72.6–72.8, in this context the plaintiffs have to demonstrate that Mainland law imposed on the defendants an obligation to disgorge the benefit they obtained from the breach of duty.  I do not think the plaintiffs have sufficiently discharged this burden.  The evidence of Mainland law adduced shows that the actual contributor might be able to recover the shares disposed of without authority,[33] or, if property in the shares had validly passed to the transferee, to recover compensation from the nominal shareholder[34] (see Article 106 of the Property Law), but nowhere does the evidence state that the nominal shareholder could be required to disgorge the benefit obtained (such as the consideration received) as a result of the disposition of the shares in breach of duty.  It follows that this alternative argument of the plaintiffs is not established.

VIII.  Conclusion and orders

115.  In summary, I find that the participating employees in the ESO Scheme were actual contributors and owners of relevant shareholding interests in Shandong Shanshui and that Zhang Snr and Li YM were merely nominal shareholders under Mainland law.  When the relevant CSI shares were transferred to Zhang Snr and Li YM on 11 April 2005, they became trustees thereof for the participating employees in the same proportion as their interests under the ESO Scheme.  The transfer of Shandong Shanshui shares to Pioneer (held by CSHK) and the transfer of CSHK shares to CSI in September 2005 augmented the value of the trust assets but did not alter the nature or structure of the trusts.  By November 2005, Zhang Snr and Li YM lacked power to re‑settle on the BVI trusts CSI shares which were already held on fixed trusts under Hong Kong law in favour of the participating employees, and the BVI trusts were therefore not valid as against them.  Zhang Snr has failed to prove any ratification of the BVI trusts by the participating employees with informed consent, whether by way of the 2008 Confirmation or otherwise.

116.  For these reasons, there will be:

(1) a declaration that Zhang Snr held 456,325 shares of and in CSI on trust for the plaintiffs individually in the proportion set out in the schedules to the statements of claim;

(2) an order that the Receivers (and Zhang Snr to any extent necessary) do take steps forthwith to transfer the 456,325 shares in CSI currently registered in the Receivers’ name to the plaintiffs or to persons nominated by them;[35]

(3) liberty to apply for the purpose of carrying out the orders.

117.  Since the Receivers were appointed until the final determination of the consolidated actions, their appointment should now cease.

118.  There will be an order nisi that the plaintiffs do have the costs of the action and of the strike out application referred to in §§44–46 above, limited however to one set of costs, with a certificate for two counsel.