TSANG WAI LUN WAYLAND AND ANOTHER v. CHU KING FAI AND OTHERS

HCA 300/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 300 OF 2009

____________

BETWEEN

____________

______________

J U D G M E N T

______________

I. INTRODUCTION

1.  In these proceedings, I have to determine the validity of certain resolutions passed by Grand Field’s Board and by Grand Field’s shareholders in Special General Meeting (SGM).

2.  More specifically, I have to decide the following:-

(1) Whether 8 individuals (including Mr. Francis Lim) were validly appointed as additional directors by a 2 December 2008 SGM convened at the requisition of Rhenfield Development Corp.

(2) Whether the 7^th to 11^th Defendants were validly appointed as additional directors by a 27 November 2008 meeting of the 1^st to 6^th Defendants and Mr. Huang Bing Huang (who together then constituted Grand Field’s Board).

(3) Whether resolutions passed by the 1^st to 6^th Defendants and Mr. Huang on 19 August and 16 October 2008 conferring share options on themselves, Mr. Hui Zhi Hua and Mr. Yu Rong Cheng were valid exercises of the Board’s powers.

3.  For convenience, I shall refer collectively to Mr. Tsang and Ms. Kwok as “the Tsangs”; to the 1^st to 6^th Defendants and Mr. Huang as “the Board” (with a capital “B”); to the 7^th to 11^th Defendants as “the 5 Directors”; and to the 8 individuals as “the 8 Directors”. Mr. Huang resigned from the Board on 6 October 2008. Following that date, the expression “the Board” should be taken as referring to the 1^st to 6^th Defendants. Of the 5 Directors, Ms. Nancy Ho has since resigned and has played no significant part in these proceedings.

4.  In the course of this Judgment, I will need to discuss the powers and duties of Grand Field’s board of directors generally, without reference to any particular set of individuals. In such instances, I shall use the expression “the board” (with a low case “b”).

5.  Insofar as the Board is concerned, Mr. Chu King Fai has been and continues to be the Chairman and an executive director. Mr. Vincent Au has been and continues to be an executive director. Mr. Zhao Ju Qun has been and continues to be a non-executive director. Mr. Wong Yun Kuen, Mr. Yang Biao and Mr. Mok King Tong have been and continue to be independent non-executive directors.

6.  Mr. Hui nominally works as Mr. Chu’s “driver”. I say nominally because there was evidence from Mr. Au at trial that in reality Mr. Hui is a factotum who assists Grand Field in carrying out its Mainland operations. Mr. Yu works in a Mainland contractor company with which Grand Field does substantial business.

II. BACKGROUND

7.  Grand Field is a Bermuda-registered company.

8.  The Tsangs founded Grand Field which is now a Hong Kong listed company. The Tsangs and Rhenfield (a company controlled by the Tsangs) hold about 22% of Grand Field’s issued share capital. Mr. Chu and Mr. Huang directly or indirectly control a corresponding percentage of Grand Field’s shares.

9.  In July 2007 the Tsangs resigned as directors of Grand Field. At the time the ICAC was investigating their alleged involvement in a 2002 transaction involving Grand Field. In consequence of the investigation, trading in Grand Field’s shares had been suspended by the Stock Exchange. In consideration of the Tsangs resigning and distancing Grand Field from the ICAC’s investigation, the Stock Exchange agreed to lift the suspension in the trading of Grand Field’s shares. The Tsangs gave an undertaking on 11 July 2007 as part of this arrangement with the Stock Exchange. That undertaking was to the effect that the Tsangs would not “thereafter undertake any dealing management function of the Company and/or any of its subsidiaries”.

10.  Since the Tsangs’ resignation, there has been almost non-stop disagreement and litigation over the running of Grand Field between the Tsangs on the one hand and a faction represented by Mr. Chu, Mr. Huang and possibly others.

11.  In July 2008 Grand Field announced that it would place 100,000,000 shares with private parties. In response, Mr. Tsang obtained an ex parte injunction from this Court, restraining Grand Field from proceeding with the placement. It was Mr. Tsang’s contention that the placement was aimed at diluting his direct or indirect shareholding in Grand Field and that monies raised through the placement would be used for an improper purpose to the benefit of Mr. Chu.

12.  The Court gave directions for the inter partes hearing of Mr. Tsang’s injunction application. But those directions had the consequence that the injunction application would not be heard substantively until after the deadline for the placement exercise had passed. Accordingly, the substantive hearing date (12 December 2008) for the injunction application was eventually vacated by consent.

13.  On 19 August 2008 the Board voted in favour of granting each other a total of 85,000,000 share options (with Mr. Chu, Mr. Au and Mr. Zhao each receiving 25,000,000 share options and Mr. Wong, Mr. Yang, Mr. Mok and Mr. Huang each receiving 2,500,000 share options). The Board also granted a total of 37,900,000 share options to various Grand Field employees and associates, including 2,500,000 share options to Mr. Hui.

14.  On 25 September 2008 Rhenfield requisitioned the Board to convene an SGM pursuant to s.74 of the Bermuda Companies Act 1981. Rhenfield requested that 3 resolutions be put to the SGM, namely resolutions:-

(1) to revoke the Board’s general mandate to issue shares;

(2) to disapprove of Grand Field participating in the Yangzhou Project; and,

(3) to elect up to 9 persons (including the 8 Directors) as additional directors.

The proceedings before me concern the third resolution.

15.  The Board did not convene an SGM as requisitioned.

16.  Consequently, pursuant to s.74(3) of the Bermuda Act, Rhenfield proceeded to convene an SGM on its own.

17.  On 16 October 2008 the Board resolved to grant a further 81,000,000 share options to various individuals (including many who had already been voted options in August 2008). As a result, Mr. Yu received 25,000,000 share options and Mr. Hui obtained a further 9,000,000 share options.

18.  On 14 November 2008 Rhenfield issued a Notice convening an SGM for 2 December 2008.

19.  On 27 November 2008 the Board resolved to apply to the High Court for an ex parte injunction restraining Worldgate Development Ltd. and Logistic China Enterprises Ltd. from voting at the SGM. Worldgate and Logistic together hold about 10.2% of Grand Field’s issued share capital. The objective of the injunction was to prevent Worldgate and Logistic from voting at the SGM.

20.  The Board took the view that Worldgate and Logistic had obtained their shares improperly and so it would be wrong for the 2 companies to be permitted to vote. Worldgate and Logistic appeared to the Board to have a close relationship with the Tsangs and to be likely in consequence to vote in favour of Rhenfield’s resolutions. It was the Tsangs who had caused Grand Field shares to be issued to Worldgate and Logistic and the ICAC was looking into such share issue as part of its investigations into the Tsangs.

21.  The injunction was obtained ex parte on 28 November 2008 (Friday).

22.  On 1 December 2008 (Monday) Worldgate and Logistic applied ex parte on notice to discharge the injunction. Kwan J ordered that the discharge application be heard inter partes in the morning of the following day.

23.  At 10.30 pm on 1 December 2008 the Board announced that the 5 Directors had been appointed at a meeting on 27 November 2008 (Thursday).

24.  In the morning of 2 December 2008 Kwan J discharged the injunction against Worldgate and Logistic. She held that there had been no good reason for the Board to have proceeded ex parte in obtaining that injunction.

25.  In the afternoon of the same day, the SGM took place. There 8 of the 9 persons nominated by Rhenfield (that is, the 8 Directors) were voted as additional directors.

26.  For a short time, Grand Field conducted itself on the footing that it had 19 validly appointed directors. But tensions and differences soon arose between the 8 Directors and the other directors in relation to the management of Grand Field. Queries were raised about the propriety of the election of the 8 Directors. This was because by a resolution of Grand Field’s then sole shareholder in General Meeting on 20 May 1999, it was resolved that “the maximum number of directors for the time being be 15”.

III. DISCUSSION

A. Status of the 8 Directors

27.  Grand Field being a Bermudan company, the validity of the 8 Directors’ appointment is governed by Bermudan law. By agreement among the parties, no oral expert evidence on Bermudan company law was adduced. This is because essentially Bermudan company law is similar to Hong Kong company law (both as to statutory provision and common law principle). To save time and cost, all counsel were content to put before me Bermudan company legislation and make submissions on those statutes in light of the common law. Several written legal opinions which Grand Field or various factions had procured on the validity of the 8 Directors’ appointment were also included in the trial bundle. The understanding was that, in light of the written materials available to the Court, I should directly assess the parties’ submissions on Bermuda law as if I were a judge hearing this case in Bermuda.

28.  Relevant articles in Grand Field’s Bye-laws (which perform a similar function to articles of association in Hong Kong law) are as follows:-

(1) Art.99 provides that the number of directors “shall be no fewer than two”.

(2) Art.113 provides that the Company in General Meeting “shall from time to time fix and may from time to time by Ordinary Resolution increase or decrease the maximum and minimum number of Directors”. But this is subject to the limitation that “the number of Directors shall not be fewer than two”.

(3) Art.114 provides that the Company in General Meeting “may from time to time ... elect any person to be a Director ... as an additional Director”.

(4) Art.115 provides that the Directors “shall have power ... at any time to appoint any person as Director ... as an additional Director”. But this is subject to the number of directors being so appointed not exceeding “the maximum number determined from time to time by the shareholders in general meeting”.

(5) Art.117 provides that the Company may by Special Resolution remove any director before the expiration of the latter’s period of office.

29.  It follows Arts.114 and 115 that the power to appoint additional directors resides in 2 of Grand Field’s organs. The first is the Company in General Meeting, the second is the board of directors. The number of additional directors which the former may appoint by Ordinary Resolution is potentially unlimited. On the other hand, Grand Field’s board of directors may only appoint additional directors up to the maximum number of directors set by the Company in General Meeting.

30.  Mr. Johnny Mok SC (appearing for the Plaintiffs) argues that the resolution passed by the SGM on 2 December must have impliedly increased the maximum of 15 originally resolved by the Company in General Meeting in 1999.

31.  Mr. Mok cites in support the following passage from Company Directors: Law and Liability (Release 2, September 1998) §4.70:-

“If the articles prescribe a maximum number of directors who may be appointed and do not provide for that number to be amended by ordinary resolution[,] appointments in excess of the maximum are void.... If the articles do allow for the maximum number to be increased by ordinary resolution[,] the appointment by ordinary resolution of a director in excess of the former maximum is taken to be an exercise of the power to increase the number of directors and is valid (Worcester Corsetry Ltd. v. Witting [1936] Ch 640).”

32.  Worcester involved the construction of a company’s articles. The question was whether an article specifically conferring a right upon the board to appoint additional directors meant that the company could not appoint additional directors in general meeting. An art.12 set the maximum number of directors at 7. It was argued by the Respondents that all the company in general meeting could do was “increase or reduce” the maximum number of directors under an art.83. It was suggested that the company in general meeting could not actually appoint specific individuals as additional directors.

33.  The Court of Appeal allowed the appeal and rejected the Respondents’ argument. Lawrence LJ stated:-

“Art.83 ... shows in the plainest terms that the company has power to increase or reduce the number of its board. It is said that that does not involve the nomination and appointment of particular gentlemen or ladies as directors, but it seems to me that that is necessarily implied in the provision of art.83. If, for instance, there have been four directors, within the maximum number of directors, and the board desire that two additional directors shall be appointed, it can convene, in my judgment, a meeting under art.83 for the purpose of increasing the number of directors by two named persons, appointing those two persons, and thereby increasing the number of directors....”

34.  Slesser LJ further explained:-

“The machinery for varying that number [of possible directors] is contained in art.12, because it says that the number of directors shall be not less than two nor more than seven until otherwise determined by a general meeting. That article contains within itself all the machinery for fixing the maximum and minimum number of directors. I put this question to Mr. Gavin Simonds [QC for the Respondents] for my information: Supposing the company increased the number of directors, or purported to do so, under art.83 and then the directors who, on Mr. Gavin Simonds’ argument, have power alone to make the appointment, do not make the appointment; have the company increased the number of directors or have they not, because in fact the increase which they had authorized under art.83 would never have been made? The more natural view of art.83 is that it is not redundant or merely introducing unnecessary machinery which is already provided by art.12 in dealing with the maximum and minimum, but, as Lawrence LJ has indicated, is itself conferring a power not only to increase the number but to increase that number by itself appointing directors to the extent to which it is intended to increase the number....”

35.  Mr. Maurellet (appearing for the 5 Directors and the 6 Directors with the exception of Ms. Ho) contends that, if the SGM wished to appoint additional directors beyond the limit set in 1999, it would first have to vote on an ordinary resolution increasing the maximum number of directors from 15 to 19.

36.  Without such an initial resolution, Mr. Maurellet suggests that a shareholder voting on the proposed directors one after the other would not know by how many persons in all it was sought to increase the number of directors. That shareholder would not be able to say what the new maximum was until after all the proposed additional directors had been voted upon. It would not be possible at any given time before then to say that a majority at the general meeting wished to increase the number of directors.

37.  Mr. William Wong (appearing for Grand Field) supported Mr. Maurellet’s argument.

38.  I am unable to accept Mr. Maurellet’s submission.

39.  As a matter of construction, the natural reading of Art.113 here is that it empowers the Company in General Meeting to increase the number of directors beyond the 1999 maximum simply by voting on specified candidates as additional directors. At the end of the General Meeting, the maximum number will have been impliedly increased by the extent to which the number of successful candidates taken in conjunction with the number of pre-existing directors exceeds the former maximum. There is nothing in the text of Art.113 (or for that matter Art.114) to suggest that, before voting on each named candidate, the General Meeting must first pass a resolution expressly increasing the maximum from that originally set.

40.  I am fortified in my reading of Arts.113 and 114 by the dicta of Lawrence and Slesser LJJ. Slesser LJ in particular accepted that, by necessary implication, Art.83 in Worcester (similar to Art.113 here) authorised the company there to vote directly on additional directors beyond any previous maximum.

41.  In contrast the board’s ability to vote additional directors is explicitly limited by any prevailing maximum which the Company in General Meeting has expressly or impliedly determined. If the board wished to appoint additional directors beyond that maximum, it would first have to obtain authorisation from the General Meeting.

42.  It follows that the appointment of the 8 Directors must have been valid. This is regardless of the 1999 resolution.

B. Status of the 5 Directors

43.  At its 27 November 2008 meeting, rightly or wrongly, the Board believed that Rhenfield’s requisition was an attempt by the Tsangs, in breach of their undertaking, to wrest control of management through the appointment of additional directors. Rightly or wrongly, the Board thought that these additional directors would be compliant (“puppets”) to the Tsangs’ wishes. The Board consequently thought that the appointment of Rhenfield’s proposed additional directors would be disastrous for Grand Field. The Board feared that the appointments would cause the Stock Exchange once more to suspend trading in Grand Field shares. This would seriously dent Grand Field’s credibility in the financial market and with the public.

44.  Mr. Au frankly deposed in his witness statement:-

“49. The situation did not leave us with any choice. The only way that the Company could prevent [the Tsangs] from usurping the management functions of the Company and breaching the Undertakings was to prevent [the Tsangs] from establishing a majority with the board.

50. Apart from this, the board had all along been in search of the right calibre to join the Company as directors. The Company needed new members of high calibre to add value to the board in order to take the opportunity in its expanding mainland properties market. Therefore, we also see this as the right timing to appoint new members to the Company’s board of directors.

51. In order to protect the interests of the Company and its shareholders, and to properly perform the director’s duties owed to the Company, the board resolved in the 27 November 2008 board meeting to appoint five more persons to be the directors of the Company, ... which would take effect on 1 December 2008, i.e. one day before 2nd December SGM, as the board was entitled under paragraph 115 of the Company’s Bye-laws...”

52. In deciding to appoint the Five New Directors, I and all the other members of the board (in particular 1st, the 4th to 6th, 9th and 11th Defendants) who voted to pass the resolution, did what we thought to be in the best interests of the Company and in order to protect it.”

45.  In cross-examination, Mr. Au was hard-pressed to deny that preventing the 9 persons proposed by Rhenfield from constituting a majority bloc in Grand Field’s board was the predominant motive in the appointment of the 5 Directors. Mr. Au repeated that there had been other considerations, such as the Board’s need for expertise in a variety of fields including good governance, audit and public relations. But in the end I think that he was constrained to accept that at the 27 November 2008 meeting it was a “major concern” of the Board that Rhenfield’s 9 proposed directors were likely to be appointed and so could wrest control of the Board away from Mr. Chu and others in his faction.

46.  There was thus a “pressing need” upon the Board on 27 November to do something quickly to forestall Rhenfield’s proposed directors from forming a majority bloc of directors within Grand Field’s management. I find that it was for this predominant reason that the 5 Directors were appointed on 27 November with their appointments taking effect from 1 December.

47.  The 5 Directors were appointed on the assumption that the SGM could not affect the limit of 15 directors imposed in 1999. The Board’s calculation was that, given the limit of 15 and the new directors hastily appointed on 27 November, at most only 4 of the persons proposed by Rhenfield could successfully be appointed directors at the SGM on 2 December. Indeed, even if all 9 persons proposed by Rhenfield were appointed by the SGM, the latter could still be outvoted by the Board and the 5 Directors in conjunction.

48.  I am prepared to accept that, in so acting, the Board was acting in good faith. The evidence is that the Board may have sincerely believed that this was the best way to stave off disaster for Grand Field in the form of another suspension of share trading. The Board assumed that the persons proposed by Rhenfield were puppets who would simply do the Tsang’s bidding. The Board saw Rhenfield’s proposal as an attempt by the Tsangs, in breach of their undertaking, to take over Grand Field’s management.

49.  I should stress that, in holding that the Board acted in good faith, I should not be taken to be finding that the Board’s beliefs were right or even well-founded.

50.  Thus, for instance, as we have seen, insofar as the SGM appointed the 8 Directors, the maximum number of permissible directors was impliedly changed from 15 to 19. To the extent that the Board calculated that, by appointing the 5 Directors, the SGM would be prevented from appointing more than 4 additional directors, the Board would have been wrong.

51.  Further, on the evidence before me, there is no basis for suggesting that the persons proposed by Rhenfield were mere puppets of the Tsangs. On the contrary, the evidence suggests that the 8 Directors are all independent of the Tsangs’ influence.

52.  Finally, it is far from clear that in making a requisition through Rhenfield for the appointment of additional directors, the Tsangs were breaching their undertaking to the Stock Exchange.

53.  Mr. Wong urged me to determine whether the undertaking was breached by such requisition for the appointment of additional directors.

54.  But the undertaking is cryptic. It was given to the Stock Exchange, which is likely to have understood it in a particular way. It is presumably for the Stock Exchange to enforce the undertaking in the first instance. Complaint has been made to the Stock Exchange. But the Stock Exchange has not so far taken any steps to censure the Tsangs about the making of the requisition. Nor have I heard evidence as to the precise factual matrix in which the undertaking was given. In those circumstances, I do not think that it would be right for me to determine the ambit of the undertaking in these proceedings.

55.  In any event, I do not think that it is necessary for me to decide whether the undertaking was breached. Regardless of the rights or wrongs of its belief, I have found that the Board acted in good faith. Accordingly, the material question is whether, even given good faith on the Board’s part, the predominant motive of appointing the 5 Directors to forestall Rhenfield’s proposed directors from forming a majority bloc, constituted an abuse of the Board’s fiduciary power and so was an improper and void act?

56.  In my view the answer to this material question is “yes”.

57.  Under s.16(1) of the Bermuda Act, a company’s bye-laws:-

“shall bind the company and the members thereof to the same extent as if they respectively had been signed and sealed by each member, and contained covenants on the part of each member to observe all the provisions ... of the bye-laws.”

58.  By s.16(1), Grand Field’s Bye-Laws are therefore a binding contract among Grand Field and its individual shareholders. Grand Field cannot unilaterally vary the terms of such contract.

59.  As we have seen, Art.114 of Grand Field’s Bye-Laws gives shareholders the right in General Meeting to appoint additional directors by ordinary resolution from time to time.

60.  Art.115 also confers a power on Grand Field’s board of directors to appoint additional directors. That power may be exercised for wholly legitimate purposes. For instance, it may be felt that Grand Field would benefit from having an expert on accounting on its board and so an accountant is appointed as an additional director.

61.  But suppose that the power under Art.115 is exercised for the exclusive or predominant purpose of preventing Grand Field’s shareholders in General Meeting from exercising their right to appoint additional directors under Art.114. It seems to me that such exercise of the power under Art.115 would constitute a unilateral interference with a constitutional right given by the Bye-Laws to Grand Field’s shareholders. Such interference would therefore be impermissible. The power under Art.115 is being exercised solely or primarily to keep out such additional directors as the General Meeting (in the exercise of its rights) may appoint. That would be contrary to the covenant in Art.114 of the Bye-Laws.

62.  In Piercy v. Mills [1920] 1 Ch 77, Peterson J stated (at 84-5):-

“[D]irectors are not entitled to use their powers of issuing shares merely for the purpose of maintaining their control or the control of themselves and their friends over the affairs of the company, or merely for the purpose of defeating the wishes of the existing majority of shareholders. That is, however, exactly what has happened in the present case. With the merits of the dispute as between the directors and the plaintiff I have no concern whatever. The plaintiff and his friends held a majority of the shares of the company, and they were entitled, so long as that majority remained, to have their views prevail in accordance with the regulations of the company; and it was not, in my opinion, open to the directors, for the purpose of converting a minority into a majority, and solely for the purpose of defeating the wishes of the existing majority, to issue the shares which are in dispute in the present action.”

63.  Piercy concerned an issue of shares which was solely or predominantly motivated by a board’s desire to prevent a majority shareholder plaintiff from nominating himself and his brothers as directors. The board sought to shut out the plaintiff by using the board’s power to issue shares in such a way as to dilute the plaintiff’s majority shareholding. Peterson J held that was an abuse of the power entrusted to the board. The power to issue shares was to be used when the company needed additional capital. The company not requiring more capital, it was wrong to issue shares merely to entrench the board’s control of the company. Such wrongful issue was a breach of the majority shareholder’s right under the company’ articles to push through a resolution for the appointment of certain persons as directors in the course of an annual general meeting.

64.  The present situation is analogous.

65.  Of course, the Board could appoint additional directors to strengthen its expertise. But where the Board’s predominant purpose was to keep out the appointment by an SGM of additional directors and thereby to entrench control of management by the Board and the 5 Directors, the Board was acting in contravention of the contract contained in the Bye-Laws. The Board was attempting to stop Grand Field’s shareholders from expressing their views in accordance with the Bye-Laws as to who should be on the Board.

66.  In Hogg v. Cramphorn Ltd. [1967] Ch 254, Buckley J said this (at 268, after citing the passage from Piercy just discussed):-

“With those observations I respectfully agree. Unless a majority in a company is acting oppressively towards the minority, this court should not and will not itself interfere with the exercise by the majority of its constitutional rights or embark upon an inquiry into the respective merits of the views held or policies favoured by the majority and the minority. Nor will this court permit directors to exercise powers, which have been delegated to them by the company in circumstances which put the directors in a fiduciary position when exercising those powers, in such a way as to interfere with the exercise by the majority of its constitutional rights; and in a case of this kind also, in my judgment, the court should not investigate the rival merits of the views or policies of the parties.... It is not, in my judgment, open to the directors in such a case to say, ‘We genuinely believe that what we seek to prevent the majority from doing will harm the company and therefore our act in arming ourselves or our party with sufficient shares to outvote the majority is a conscientious exercise of our powers under the articles, which should not be interfered with.”

67.  Hogg involved the issue by the board of preference voting shares with the predominant purpose of ensuring that the board remained in control of the company. The issue of the preference shares meant that the directors could always out-vote the majority shareholders in a general meeting. The board throughout acted in good faith in what they thought was the best interest of the company. But, as Buckley J pointed out, it was a wrongful use of the directors’ power to issue shares for the primary purpose of interfering with the voting rights of the majority.

68.  In Hogg Buckley J found that the directors had acted in good faith. That, however, was insufficient to validate a preference share scheme which had the effect of the company through the board unilaterally contravening the majority’s right under the articles to have its views prevail in general meeting.

69.  Similarly, here, the fact that the Board was acting in good faith in what it thought was in Grand Field’s best interest, cannot by itself validate the misuse of the power to appoint additional directors.

70.  In Howard Smith Ltd. v. Ampol Petroleum Ltd. [1974] AC 821 (PC on appeal from NSW), counsel stressed that the board had acted bona fide in what they believed was in the company’s interest. The board had there issued shares for the principal purpose of diluting the shareholding of A and B.

71.  Lord Wilberforce observed that the mere fact that the directors had acted in good faith in causing the shares to be issued was not enough. The directors’ absence of self-interest alone could not justify an improper use of a power which the articles had conferred on the board. He said (at 834H):-

“Further, it is correct to say that where the self-interest of the directors is involved, they will not be permitted to assert that their action was bona fide thought to be, or was, in the interest of the company; pleas to this effect have invariably been rejected ... -- just as trustees who buy trust property are not permitted to assert that they paid a good price.

But it does not follow from this, as the appellants assert, that the absence of any element of self-interest is enough to make an issue valid. Self-interest is the only one, though no doubt the commonest, instance of improper motive: and, before one can say that a fiduciary power has been exercised for the purpose for which it was conferred, a wider investigation may have to be made....”

72.  What sort of investigation needs to be made? Lord Wilberforce continued as follows 835D-H):-

“.... To define in advance exact limits beyond which directors must not pass is, in their Lordships’ view, impossible. This clearly cannot be done by enumeration, since the variety of situations facing directors of different types of company in different situations cannot be anticipated. No more, in their Lordships’ view, can this be done by the use of a phrase -- such as ‘bona fide in the interest of the company as a whole,’ or ‘for some corporate purpose.’ Such phrases, if they do anything more than restate the general principle applicable to fiduciary powers, at best serve, negatively, to exclude from the area of validity cases where the directors are acting sectionally, or partially: i.e. improperly favouring one section of the shareholders against another. Of such cases it has been said:-

‘The question which arises is sometimes not a question of the interest of the company at all, but a question of what is fair as between different classes of shareholders. Where such a case arises some other test than that of the ‘interests of the company’ must be applied...’ (Mills v. Mills, 60 CLR 150, 164, per Latham CJ)’

In their Lordships’ opinion it is necessary to start with a consideration of the power whose exercise is in question, in this case a power to issue shares. Having ascertained, on a fair view, the nature of this power, and having defined as can best be done in the light of modern conditions the, or some, limits within which it may be exercised, it is then necessary for the court, if a particular exercise of it is challenged, to examine the substantial purpose for which it was exercised, and to reach a conclusion whether that purpose was proper or not. In doing so it will necessarily give credit to the bona fide opinion of the directors, if such is found to exist, and will respect their judgment as to matters of management; having done this, the ultimate conclusion has to be as to the side of a fairly broad line on which the case falls.”

73.  The test is therefore to consider the relevant power exercised by the Board. If the question is whether the use of a power for some specific purpose is invalid, the Court must first broadly evaluate the range of permissible uses of the relevant power. The Court then examines whether the predominant purpose for which the power was exercised falls within or without the broad range of permissible uses of the power. In so proceeding, the Court may encounter grey areas where different persons may reasonably disagree as to whether the exercise of a power falls within or without the range identified. In such situation, the Court may well defer to bona fide judgments by directors in relation to matters of management.

74.  Having stated the applicable test, Lord Wilberforce applied it as follows (at 837F-838A):-

“The constitution of a limited company normally provides for directors, with powers of management, and shareholders, with defined voting powers having power to appoint the directors, and to take, in general meeting, by majority vote, decisions on matters not reserved for management. Just as it is established that directors, within their management powers, may take decisions against the wishes of the majority of shareholders, and indeed that the majority of shareholders cannot control them in the exercise of these powers while they remain in office..., so it must be unconstitutional for directors to use their fiduciary powers over the shares in the company purely for the purpose of destroying an existing majority, or creating an new majority which did not previously exist. To do so is to interfere with that element of the company’s constitution which is separate from and set against their powers. If there is added, moreover, to this immediate purpose, an ulterior purpose to enable an offer for shares to proceed which the existing majority was in a position to block, the departure from the legitimate use of the fiduciary power becomes not less, but all the greater. The right to dispose of shares at a given price is essentially an individual right to be exercised on individual decision and on which a majority, in the absence of oppression or similar impropriety, is entitled to prevail....”

75.  Much the same analysis can be applied here.

76.  Art.130 of Grand Field’s Bye-Laws vests the function of management on the board of directors as opposed to the general meeting. The majority of shareholders accordingly cannot control the directors in the proper exercise of such function.

77.  Conversely, the directors cannot seek to use their powers to obstruct the proper exercise by shareholders in general meeting of a right vested in them by the company’s articles. In such case, the directors would be straying outside of the management function which is properly theirs and trespassing onto the constitutional rights of the shareholders in general meeting.

78.  Art.114 confers on shareholders a constitutional right to appoint additional directors by a majority in general meeting. It could not be a proper use of the directors’ powers under Art.115 to attempt to prevent shareholders from exercising such constitutional right. Such would be the directors “interfer[ing] with that element of the company’s constitution which is separate from and set against their powers”. Such could not be within the permissible range of uses of the power under Art.115. On the contrary, such would be an abuse of the power under Art.115 which was presumably conferred to enable a board to enhance the range of ability, competence or expertise available to it for the better execution of the management function vested by Art.130.

79.  Mr. Maurellet stresses the Board’s bona fides in acting as it did. But, for the reasons just discussed, I am unable to accept that good faith alone is enough to validate the appointment of the 5 Directors.

80.  Mr. Wong, on the other hand, took a more formalistic objection. He submitted that Mr. Tsang was not entitled to complain about the appointment of the 5 Directors at all, whether by way of a derivative or a personal action.

81.  Insofar as these proceedings are brought as a derivative action, I would agree with Mr. Wong. I do not think that, properly analysed, the wrong complained of here is one done to the company, as opposed to a wrong done by the company (acting through the Board) to the shareholders.

82.  Mr. Mok faintly argued that the appointment of the 5 Directors constituted a wrong to Grand Field which could not be righted because the Board (the putative wrongdoer) was in control. However, there is simply no evidence that the majority of shareholders are under the Board’s control, so that the Company in General Meeting could not ratify or take action against some supposed wrong by the Board.

83.  Insofar as these proceedings are brought as a personal action by Mr. Tsang for breach of his contractual rights as manifested in Brand Field’s Bye-Laws, I would disagree with Mr. Wong. As explained, it seems to me that the appointment of the 5 Directors constituted an impermissible attempt to block shareholders from exercising their rights under Art.114.

84.  It is true that Mr. Tsang has brought this action on his own behalf and on behalf of all Grand Field’s shareholders. But, contrary to Mr. Wong’s suggestion, I do not think that such fact alone makes this a derivative action. Mr. Tsang is entitled to bring this action as a representative action. This allows the Court’s finding as to any breach by Grand Field of its contractual obligations under the Bye-Law to be binding on all shareholders.

85.  The difference between a derivative action (brought as an exception to the rule in Foss v. Harbottle (1843) 2 Hare 461) and an action brought by a shareholder to vindicate a personal right is succinctly brought out in a dictum of the Supreme Court of South Australia. In Residues Treatment & Trading Co. Ltd. v. Southern Resources Ltd. (No.4) (1988) 14 ACLR 569 that Court (King CJ, Matheson and Bollen JJ) stated:-

“Diminution of voting power stands on a fundamentally different footing from other detriments resulting from abuse of directors. A member’s voting rights and the rights of participation which they provide in the decision-making of the company are a fundamental attribute of membership and are rights which the member should be able to protect by legal action against improper diminution. The rule in Foss v. Harbottle has no application where individual membership rights as opposed o corporate rights are involved...

It must be acknowledged that there has often been a lack of clear differentiation in the cases between the situation in which the company is the only proper plaintiff, the situations in which a shareholder may prosecute a derivative action for a remedy in favour of the company and situations in which a shareholder may bring an action on his own behalf for a personal remedy. There is also a lack of clarity as to the basis upon which the individual shareholders have been allowed to sue to have allotments of shares made for improper purpose set aside. I think, however, that there is a clear trend in cases of the highest authority tending to indicate the existence of a personal right in a shareholder, grounded upon equitable principles, to have the voting power of his shares undiminished by improper actions on the part of the directors and his locus standi to institute and prosecute proceedings to protect that right. I think that the time has come for the courts to give unequivocal recognition of such right....”

86.  Mr. Wong repeatedly stressed that directors do not owe fiduciary duties to shareholders. That may be true. But it does not follow that Mr. Tsang is not entitled to join the directors as parties or bring this action.

87.  The Board and the 5 Directors were made parties so that they would be bound by any ruling of the Court and so that they might, if they wished, defend their actions. Mr. Lim was joined as a plaintiff in order to represent the 8 Directors so that they, too, might be bound by any ruling of this Court.

88.  One might, perhaps, be forgiven for thinking that this case was a derivative action, at least in outward form. That mistake may be partly attributable to the “lack of differentiation” in case law to which the Supreme Court of South Australia alluded. But looked at more closely it seems to me that the present proceedings concern a personal grievance of Mr. Tsang as shareholder against Grand Field.

89.  For those reasons, I conclude that the appointment of the 5 Directors was invalid. I should set aside their appointment. In so doing, I should not be taken to have made any finding as to the personal suitability or unsuitability of the 5 Directors to act as directors. That is not a relevant issue before me. My setting aside the appointment of 5 Directors is therefore without prejudice to any resolution by the present board of directors or the Company in General Meeting to re-appoint one or more of the 5 Directors as directors in the future.

C. Status of the share options

90.  Grand Field’s board of directors is authorised to grant share options to directors, employees, consultants, customers, suppliers, contractors and other persons related to Grand Field and its subsidiaries. Under the relevant scheme, options being granted to directors have to be approved by the company’s independent non-executive directors, excluding those who are themselves grantees. In certain circumstances where the grant of share options might give a substantial shareholder or independent director the possibility of holding or acquiring over 0.1% of the nominal amount of Grand Field’s issued capital, the giving of options must also be approved by the Company in General Meeting.

91.  Here then the Board undoubtedly had authority to grant share options (for example) as an incentive for employees to remain with Grand Field or for associates to do business with the company. This (as Mr. Au said in evidence and I accept) was the main reason why the share options queried by the Tsangs in these proceedings were granted by the Board

92.  The Tsangs contend that the share options were a means of entrenching the Board’s control over any general meeting of Grand Field’s shareholders.

93.  But, as Mr. Maurellet points out, insofar as the grant of share options to the Board are concerned, the 85,000,000 share options being queried would (if exercised) only involve 3.29% of the 2.5 billion shares issued by Grand Field. It is hard to see (Mr. Maurellet observes) how a 3.29% shareholding could have the effect of entrenching anyone’s control of Grand Field. There is no suggestion that such small proportion of shareholding could empower the members of the Board (acting as shareholders) to pass or veto any particular resolution in a general meeting. We are thus far away from the situations encountered in Piercy, Hogg or Howard Smith.

94.  Mr. Maurellet adds that, in any event, the exercise price for the share options substantially exceeds the current market price of Grand Field’s shares. If anyone really wanted to obtain control, the cheapest way would not be to exercise the share options, but simply to buy shares in the market.

95.  Mr. Mok in closing accepted that there was force to Mr. Maurellet’s submission.

96.  I see no case here for suggesting that the grant of the queried share options constituted an infringement of a shareholder’s personal right to push through resolutions in a general meeting by a majority vote. In voting the share options, the Board did not transgress beyond its management function and trespass into the constitutional rights of general meeting.

97.  Mr. Mok suggested that the Tsangs had a legitimate concern over the way in which the share options were voted. He said that this concern had arisen as a result of what Mr. Au said in cross-examination.

98.  Mr. Au’s evidence was that he personally relied on the assessment of the independent directors. Having received those directors’ recommendation in relation to the grant of share options to particular individuals, Mr. Au accepted the same after a quick review of the individuals’ resumes. Mr. Au said that he had to trust the wisdom and experience of the independent directors. He was far too busy to look into the matter himself in any minute detail.

99.  On the face of it, there seems nothing objectionable in what Mr. Au has stated. There is no basis for a personal right of action by Mr. Tsang in relation to the grant of the share options.

100.  The independent directors considered the grant of the share options to the other directors. In the case of each independent director, the other 2 independent directors approved the grant of share options to him. Mr. Mok queries the way in which the independent directors voted on the share options when they themselves had an interest in the matter. But it appears to me that the independent directors proceeded in accordance with the terms of the scheme.

101.  All the directors considered the grant of the share options to Mr. Yu and Mr. Hui. Both are within the wide terms of the scheme: Mr. Hui as an employee within the Grand Field Group and Mr. Yu as an employee of a contractor. Mr. Mok said that the Tsangs were entitled to ask why options were granted to Mr. Yu as opposed to his company. But such grant is within the legitimate province of the directors. They may (for instance) have wished to give an incentive to Mr. Yu as someone in the contractor company with whom Grand Field (say) usually dealt.

102.  I am also far from persuaded that any procedural irregularity (on the assumption that there was such) could not readily be ratified by Grand Field’s board of directors itself or (if need be) by the shareholders in general meeting. Thus, as Mr. Wong submits, I do not think that the grant of share options justifies the bringing of a derivative action either.

103.  In my view, the share options in question were validly granted. I decline to set them aside.

IV. CONCLUSION

104.  There will be the following reliefs:-

(1) A Declaration that the 8 Directors were validly appointed by the SGM on 2 December 2009.

(2) An Order that the appointment of the 5 Directors be set aside, without prejudice to their possible re-appointment as directors in the future.

105.  There will also be an Order Nisi as follows:-

(1) Mr. Tsang is to have 70% of his costs against all the Defendants except Ms. Nancy Ho.

(2) There will be no order as to the costs of Mr. Lim or Ms. Ho.

(3) Costs are to be taxed if not agreed.

106.  I believe that Mr. Tsang should only have 70% of his costs, because he has failed on the question of the share options and derivative action. I note that Mr. Mok never wholly abandoned the suggestion that these proceedings were also a derivative action. There should be no order in relation to Mr. Lim’s costs, because (not being a shareholder himself) he appears to have been joined as a plaintiff simply to represent the 8 Directors. Ms. Ho has not participated actively in these proceedings and so it would be unfair that she should bear any costs.

107.  Finally, I should say a word about bundles.

108.  The trial bundle consisted of 25 lever arch files. Most of the documents included were, on any view, unnecessary or peripheral to determining the real issues in dispute. There were multiple copies of a number of documents, some of them lengthy. The actual number of documents referred to, or which were necessary for a proper understanding of the issues, could probably have taken up no more than 5 or 6 lever arch files.

109.  It is now generally acknowledged that paper and the trees from which they come are a scarce resource. Accordingly, there is a pressing need for lawyers (judges, barristers and solicitors) to recognise and accept some responsibility for minimising unnecessary copying. Everyone needs to conserve paper and trees. A failure to accept such responsibility will lead to tragic waste.

110.  Speaking personally, it is unfair to ask a judge to go through numerous files when most are unnecessary or irrelevant to a case. That is to waste a judge’s time. It is part of a lawyer’s professional duty, especially after CJR, to sift through available documents and only select those that are absolutely necessary and relevant to the issues for inclusion in the bundle. One does not discharge such duty by indiscriminately placing an undigested jumble of documents before the Court.

111.  I recognise that it may involve some expenditure of time and money to have a lawyer or clerk rigorously go through a proposed trial bundle, to weed out irrelevant material and ensure that there is no unnecessary duplication of documents. But one cannot merely pay lip service to the need to preserve natural resources. The expenditure of some money in the short term may simply be the modest premium for averting serious environmental problem in the future.

112.  It is possible that, as a result of a robust weeding-out process, an important document is inadvertently left out of the trial bundle. There is no great harm in that, as the document can be inserted in the course of trial. Such method of proceeding seems preferable to stuffing a trial bundle with everything just in case a given document turns out to be useful.

113.  The Court typically penalises one side or another in costs for not weeding out unnecessary material from a trial bundle. I do not think that is a fair approach here, where all parties seem to have treated the 25 lever arch file trial bundle as acceptable.

114.  Instead, I suggest that in the future during (say) a pre-trial review the Court routinely ask the lawyers appearing before it for an assurance that every effort has been taken to minimise the bulk of the trial bundle. Where (despite assurance) the trial bundle turns out to be needlessly bulky, the Court may seriously have to consider whether the parties or their lawyers should bear the costs of such waste personally.