NEW SPARKLE ROLL INTERNATIONAL GROUP LTD AND ANOTHER v. SZE CHING LAU AND ANOTHER

CAMP 35/2024 & CACV 104/2024, [2024] HKCA 336

On appeal from [2024] HKCFI 419

(Heard together)

CAMP 35/2024

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

MISCELLANEOUS PROCEEDINGS NO 35 OF 2024

(ON AN INTENDED APPEAL FROM HCA NO 123 OF 2024)

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AND

CACV 104/2024

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 104 OF 2024

(ON APPEAL FROM HCA NO 123 OF 2024)

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REASONS FOR JUDGMENT

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Hon Kwan VP (giving the Reasons for Judgment of the Court):

1.  This is the 1^st defendant’s (“Sze”) renewed application for leave to appeal to the Court of Appeal against the decision of Lisa Wong J (“the judge”) on 6 February 2024 (“Decision”)^[1]. By the Decision, the judge granted an interlocutory injunction in an inter partes hearing to restrain Sze from proceeding or continuing to perform any acts to declare unconditional his voluntary conditional cash offers to acquire all of the issued shares in New Sparkle Roll International Group Ltd (“Company”), other than those shares already owned or to be acquired by him and parties acting in concert with him. This offer shall be referred to as “GO” and the offer price at $0.90 per share as “GO price”.

2.  The Company is the 1^st plaintiff in this action.  The 2^nd plaintiff is a shareholder holding 173,500 shares in the Company (about 0.044% of the issued shares).  The 2^nd defendant, which conducts IPO sponsor and underwriting business in the Hong Kong market, was mandated to act as the sole financial advisor of Sze in the GO and has dropped out of the picture as the plaintiffs’ application for interlocutory injunction against the 2^nd defendant was dismissed by the Decision.

3.  The judge refused leave to appeal against the Decision on 21 February 2024^[2]. Sze renewed his leave application to the Court of Appeal on the same day supported by a certificate of urgency signed by counsel.  By the same summons, he also sought leave to adduce several affirmations as evidence on appeal, if leave to appeal should be granted.

4.  As the extended deadline for the closing date of the GO fell on 21 February 2024 at 7 pm and the long-stop date^[3] of the GO would fall on 24 March 2024, I made a direction on 21 February to hold a rolled-up hearing of Sze’s summons on a date prior to 24 March 2024.

5.  After the rolled-up hearing on 12 March, we gave leave to appeal, granted leave to Sze to adduce evidence on appeal, and allowed the appeal.  These are the reasons of the court.

6.  The background matters will first be related, part of which has been set out in the Decision and will be supplemented with other relevant matters.

General background

7.  The Company was incorporated in Bermuda and its shares have been listed on the Stock Exchange of Hong Kong since 1997 under the stock code 970.  It is principally engaged in automobiles distribution business and luxury goods sales.

8.  Sze has been a shareholder of the Company since December 2020.  As at 9 November 2023, Sze and parties acting in concert with him together hold 104,690,187 shares (about 27.28% of the issued shares).

9.  In about September 2023, Sze unsuccessfully requisitioned a special general meeting with the view to removing the board of directors.  The chairman of the meeting and the CEO of the Company, Zheng Hao Jiang (“Zheng”) declared the votes concerning Sze’s shares invalid.  Sze objected to a placing of convertible bonds (“CBs”) by the board of directors at the conversion price of $0.95 per share and on 25 September 2023 obtained an interim injunction against the Company and eight other defendants to restrain the CB placing, complaining that the board resorted to this method to dilute his shareholdings^[4]. On the same date, Sze and another issued a derivative action against all the Company directors.  On 28 September 2023, he notified the Company of his intention to make the GO.

10.  The Company lodged a complaint with the Securities and Futures Commission (“SFC”) in September 2023 regarding a letter of complaint it had received of 14 trading activities which allegedly aimed at driving down the price of the shares.

11.  It is pertinent to have regard to the struggle for control of the Company between the two factions in considering the applications and the evidence before the court.

12.  As for the financial results of the Company, the annual financial statement for the year ended 31 March 2023 was published on 21 July 2023, and recorded losses of $53.1 million.  The interim financial results for six months up to 30 September 2023 were announced on 30 November 2023 and recorded losses of $50.6 million.

The GO and trading in shares thereafter

13.  On 5 October 2023, the 2^nd defendant announced the GO on behalf of Sze (“GO Announcement”).  The GO is subject to the satisfaction or waiver of a number of conditions on or before the closing date, which has been extended several times.  One condition which cannot be waived is the threshold holding condition.  This requires that the valid acceptances of the GO received would result in Sze and parties acting in concert with him holding more than 50% of the voting rights in the Company as at the closing date.

14.  Since the date of the GO Announcement, the shares never traded at below $1 per share.

15.  The Company made an announcement in response to the GO Announcement on 17 October 2023, giving information about Sze’s attempts to get control of the board.

16.  On 8 December 2023, the Company made an announcement producing the report of Amasse Capital Limited, its independent financial advisor, giving an opinion that the GO price of $0.90/share was neither fair nor reasonable and that the share price should be above $5/share based on the “unaudited consolidated NAV as at 30 September 2023”.

17.  On 12 December 2023, the Company’s total issued shares increased due to the exercise of option by option holders under schemes granted in 2012 and 2022.  The shares held by Sze and parties acting in concert were reduced to 26.79%. 

18.  From 19 December to 5 January 2024, there were sudden anomalously large increases in the trading volume of the shares.

19.  On 21 December 2023, the Company made an announcement it had obtained judgment against Thomas Shie (“Shie”), a business associate of Sze, of around $40 million.

20.  22 December 2023 was the closing date of the GO. By then, 14 acceptances of the GO were received, the voting rights of Sze and parties acting in concert went up to 38.86%.  Sze made an announcement extending the closing date to 12 January 2024.

21.  From 22 December 2023 to 5 January 2024, there was an increase in the trading volume of the shares.  On 2 January 2024, the share price peaked at $1.95/share.  The Company made an announcement on 3 January that the share price might have been manipulated to reach the threshold holding condition of the GO.  In the Company’s announcement, it was stated that the board of directors was notified of the complaint letter lodged with the SFC in September 2023 concerning the allegation of at least 14 trading activities which aimed at driving down the share price and that the board will form an independent committee to investigate the allegation.

22.  On 5 January 2024, the Company submitted an application to the SFC for suspension of trading.  On 8 January, trading in the shares was suspended until further notice.

23.  On 11 January 2024, Zheng on behalf of the Company made a report to the SFC of a deceptive scheme of Sze who, through intermediaries, secretly approached shareholders and obtained from them acceptances of the GO with ‘under the table’ considerations in different forms over and above the GO price.  Zheng^[5] named these shareholders who had been approached: Wang Qiang (“WQ”), Zhang Ji, one surnamed Fang, FingerTango Inc, Liu Yu Quan.  The intermediaries named by Zheng were: Shie, Chen Tsz Suen Lily (“Lily Chen”), Wang Bang Yi (“Wang”), a securities brokerage called First Shanghai Securities Limited and Liu Qiang.

24.  On 12 January 2024 being the first extended closing date, the number of acceptances of the GO was increased to 19 and the voting rights of Sze and parties acting in concert rose to 42.61%.

The ex parte application for interlocutory injunction

25.  On 17 January 2024, the plaintiffs’ solicitors Jones Day issued a pre-action letter to Sze marked “without prejudice” alleging that after the GO Announcement, Sze had caused or procured through certain individuals including his “close associates” Wang and Shie, shareholders to be persuaded to accept the GO with additional proceeds above the GO price (“Alleged Arrangement”).  It was said that the Alleged Arrangement constituted conduct creating a false appearance of genuine sales at an artificially low price with the intention of maintaining the share price at the GO price as in line with the open market price.  Such conduct contravened Rule 25 of the TO, other market misconduct provisions under the Securities and Futures Ordinance, Cap 571 (“SFO”) and the Stamp Duty Ordinance, Cap 117 (“SDO”).  Jones Day gave notice to Sze that unless he and the 2^nd defendant should immediately cease from continuing and implementing the Alleged Arrangement and from declaring the offers made under the GO as unconditional by giving the undertakings sought in the letter, Jones Day had instructions to seek appropriate remedies without further notice.

26.  Sze replied by letter dated 18 January stating that although Wang and Shie are his “business contacts”, they are not his close associates as defined under the TO and asserting that the allegations regarding his involvement in the Alleged Arrangement were totally unfounded.  Sze denied any involvement and refused to give any undertaking to the plaintiffs.

27.  On 18 January, the plaintiffs applied to Anthony Chan J on an urgent ex parte basis without notice.  They sought an injunction to restrain Sze and the 2^nd defendant until the hearing of the inter partes summons from approaching any person holding shares for the purpose of acquiring shares at a price other than the GO price and offering any advantage for accepting the GO other than the GO price.  Anthony Chan J granted an interlocutory injunction against both defendants until the determination of the inter partes summons in terms of §§2 and 3 of the summons (restraining the defendants from procuring acceptances of the GO above the GO price) but not §1 (restraining the defendants from proceeding or continuing to perform any acts to declare the GO unconditional and/or to allow the GO to become unconditional and/or to implement or regard the GO as successfully completed).

28.  Six affirmations were produced to Anthony Chan J in support of the application: Zheng 1^st; Zheng 2^nd; two affirmations of Lily Chen; an affirmation of the 2^nd plaintiff; and an affirmation of Cheng Kai Sum dated 17 January (“Cheng 1^st”).

29.  Cheng is an independent consultant specialising in the analysis of stock market trading behaviours and Cheng 1^st was provided as expert evidence for the plaintiffs.  He gave an opinion that the GO price does not reflect the true value of the shares; that the goal of the defendants was to bring the GO over the 50% threshold with the lowest possible capital commitment; that the Alleged Arrangement would have adverse impact on the Company (in understating the true value of the Company’s shares in the eyes of public investors; and in future fund-raising exercises when conducted through instruments linked with the level of the share price); that if the Alleged Arrangement was orchestrated by persons connected to or associated with Sze, the defendants would be in breach of the TO; that if the defendants had coordinated buying and selling the shares on the market at specific levels, this would constitute false trading contrary to section 274 of the SFO; that if the Alleged Arrangement should involve selling shares on the market without recording the true higher consideration and if it is proven that the intention of the defendants and accomplices was to drive down the market price, this would constitute market manipulation in breach of section 278 of the SFO.

30.  On 18 January, the Company made an announcement of the interlocutory injunction granted by Anthony Chan J.  Trading in the shares of the Company resumed on 19 January.

The hearing of the inter partes summons on 26 January 2024

31.  On 19 January, the plaintiffs issued the writ in this action against Sze and the 2^nd defendant with an indorsement of claim.  The reliefs sought are: (1) damages and/or compensation for market misconduct pursuant to sections 281 and 305 of the SFO and/or Rule 25 of the TO; (2) an injunction restraining the continuation, implementation or completion of the GO by the defendants, pursuant to sections 281 and 305 of the SFO, without prejudice to the withdrawal rights of those shareholders who had accepted the GO; (3) alternatively, an injunction restraining the defendants from acquiring shares of the Company other than at a true price of $0.90/share and without offering other advantage in relation to such acquisition; (4) a declaration that the GO is tainted with illegality and therefore unlawful and void; and (5) damages for breach of statutory duty and/or conspiracy to defraud.

32.  An inter partes summons was issued on 19 January seeking interlocutory injunctions in terms of §§1 to 3 as described above.  The return date of the summons before the judge was 26 January 2024, with 30 minutes estimated.

33.  On 22 January 2024, the summons was served on Sze’s present solicitors, Michael Li & Co, who indicated that they had instructions to accept service.  The six affirmations adduced before Anthony Chan J were served.  An additional affirmation, being the 2^nd affirmation of Cheng dated 25 January (“Cheng 2^nd”), was served as well.

34.  In Cheng 2^nd, he deposed to the powers of the SFC if the Alleged Arrangement is proven and therefore found to be in breach of the TO.  The powers include: requesting the defendants to revise the GO by amending the GO price to match the highest price offered through the Alleged Arrangement; disciplinary actions (such as public reprimands); sanctions (such as cold shoulder orders); prosecutorial actions; and causing the GO to be made void as it is tainted with illegality.

35.  Sze made an announcement on 19 January stating that neither he nor any person acting in concert with him had purchased any shares in the Company within three months before the GO at above the GO price. Sze also denies involvement or awareness of the Alleged Arrangement.  He also mentioned that he considers it an “unusual phenomenon” that the shares were persistently traded at prices above the GO price after the GO Announcement and stated that the trend was not consistent with the overall performance of the market.

36.  On 23 January, Sze announced that the extended closing date of 23 January 2024 was further extended to 8 February 2024 with the consent of the SFC.  By then, the number of acceptances of the GO was 26 and the voting rights of Sze and the parties in concert rose to 46.86%.

37.  The plaintiffs served their skeleton submissions on 24 January, submitting among other things that the defendants had not indicated any defence or explanation as regards Sze’s connection with the various dealings relating to the Alleged Arrangement in the supporting affirmations of Zheng and Lily Chen.

38.  The 2^nd defendant filed an affidavit of Leung Kwok Kit Donald dated 25 January (“Leung 1^st”) requesting dismissal of the summons against it.  Leung is an employee of the 2^nd defendant.  The primary purpose of Leung 1^st is to explain it was unnecessary for the 2^nd defendant to be added as a party to this action.

39.  No evidence in opposition was filed by Sze.  His counsel, Mr Vincent Chiu, served his skeleton submissions on 25 January, indicating that Sze would oppose §1 of the summons and, without prejudice to Sze’s position that he did not carry out the conduct sought to be enjoined, would offer an undertaking in terms of §§2 and 3.  Counsel stated in his submissions he will “briefly set out his grounds of opposing §1 for the purpose of this hearing (while reserving his right to make further submissions if the Court is minded to adjourn the matter and gives directions for filing of evidence)”^[6]. The submissions then dealt with the higher evidential burden required to be met by the plaintiffs given the granting of injunctive relief would effectively dispose of the matter; the “extremely tenuous evidence” against Sze regarding the serious allegations; the failure of the Company to show pecuniary loss; the balance of convenience as firmly against the granting of an injunction in terms of §1; and the lack of meaningful protection by the cross-undertaking in damages offered by the plaintiffs.

40.  In the final paragraph of his submissions, he stated as follows:

“In the event that the Court takes the view that the matter should be adjourned, whether for substantive argument with more time reserved or for opposition evidence to be filed, D1 would respectfully request that the adjourned hearing do take place as soon as practicable and in any event before 8.2.2024 (ie the final date of acceptance of the GO).”

41.  The plaintiffs lodged a note of reply to Sze’s submissions dated 26 January.

42.  The hearing before the judge, with the three parties attending, lasted for two and a half hours.

43.  On the substantive merits, Mr Chiu drew the judge’s attention to Sze’s letter of reply dated 18 January 2024 to the pre-action letter of Jones Day dated 17 January.  He went on to say:

“So that is the response that my client has offered. It’s not the case that we went completely silent about it. Of course, one may say, well, we have not filed an affirmation prior to this hearing, but in light of the arguments that we are taking right now we do not find it necessary for the time being. But then, of course, if your Ladyship takes the view that this matter - - or defendants need to be heard on oath, then we are happy to seek directions to file further affirmations.

…

In relation to the prejudice - - that would be my submission on the substantive merits of the plaintiffs’ case. … Of course, today is not the occasion that we can substantively argue on those two paragraphs, but our client is happy to provide undertaking in terms of those two paragraphs [§§2 and 3 of the summons], save as to two matters.

Of course, first of all is until the substantive hearing of the summons. …”^[7]

44.  At the conclusion of the hearing, the judge said she would reserve her decision and the injunction granted by Anthony Chan J would continue pending her decision.  Upon the undertakings given by the 2^nd defendant through counsel in terms of the injunction, she ordered the injunction granted on 18 January against the 2^nd defendant be discharged forthwith.  Sze also gave similar undertakings through counsel and the injunction against him was not continued pending the judge’s determination of §1 of the summons.

45.  On 26 January (the day of the hearing), the price of the shares rose to $2.76, and the trading volume increased to 4,122,500 shares.  On 29 January (the trading day immediately after the hearing), the share price went up to $3.20 and the trading volume surged to 10,427,286 shares.  On 30 January, the price dropped to $2.64 and has since fallen off gradually.

46.  Jones Day wrote to the judge on 30 January drawing the court’s attention to the trading pattern after the hearing, stating that “the unusual surge in share price and volume may mean that the 1^st Defendant has received sufficient GO acceptances and can declare the GO as unconditional any time before the extended deadline which falls on 8 February 2024”.  The judge gave directions on the same day that the plaintiffs should elaborate on “the speculative assertion” by 31 January 11 am and that Sze should confirm in a short affidavit the number of acceptances under the GO he has received by 31 January 6 pm.

47.  Jones Day wrote to the judge accordingly on 31 January stating the plaintiffs have good reasons to believe that the current surge in trading volume “is highly likely to be representative of yet another round of acquisition by persons procured by D1”.  The plaintiffs have discovered that a supporter of Sze had acquired 52,000 shares in the open market on 25 January and have reasons to believe that this person is a party acting in concert.

48.  Sze made an affirmation which was filed on 1 February, confirming that as at 31 January the total number of GO acceptances was 26 which represented 20.1% of the total issued shares and that he did not receive any further acceptances after the hearing on 26 January.

The Decision

49.  The Decision was handed down on 6 February 2024. The judge granted an interlocutory injunction against Sze in terms of §1 of the summons.

50.  The judge referred to the serious allegations against Sze regarding the Alleged Arrangement in the affirmations of Lily Chen and Zheng^[8], and the plaintiffs’ case on loss and damage^[9].

51.  The judge recognised that given the GO would lapse at 7 pm on 8 February 2024, the interlocutory injunction sought under §1 of the summons, if granted, would yield to the Company the remedy it requires before the trial of this action and obviate the need for a trial.  Once the GO lapses, there would be no reason for the plaintiffs to continue with this action^[10]. The judge referred to the judgment of Chow J (as he then was) in BMC Global Ltd & Anr v TOR Asia Credit Master Fund LP & Ors, HCA 2392/2016, 14 October 2016 at §§35 to 39, for the proper approach to be adopted where an interlocutory injunction will, or will practically, have the effect of disposing of a substantive claim^[11].

52.  Chow J’s analysis may be summarised as follows. In this kind of situation, the court “will have more regard to the plaintiff’s prospect of success, this being treated as a factor in the consideration of the balance of convenience”.  Various tests have been formulated in relation to this higher regard to the prospect of success, such as, whether the defendant has “no real chance of succeeding at the trial”, whether the plaintiff is “at least likely to succeed at trial”, whether the plaintiff has shown “an overwhelming balance on the merits” in its favour.  It is neither possible, nor appropriate, for the court to seek to formulate a precise threshold the plaintiff must meet before an injunction may be granted in this situation.  The case is one that the court has to approach on a broad principle: what can the court do in its best endeavour to avoid injustice?  The significance of the merits of the plaintiff’s case as a factor in considering the issue of balance of convenience would vary according to the particular context and circumstance of each case.  Ultimately, the court’s task is to arrive at a result which would carry the lowest risk of injustice as a result of the grant or refusal of an injunction. 

53.  The judge came to the view that the present case is “one of the rare cases in which the court is obliged to take a closer look at the merits of the plaintiff’s claim”^[12]. Applying the various tests summarised by Chow J, the judge was persuaded, on the evidence before her, that the plaintiffs’ claim has “sufficient merits” to support an order in terms of §1 of the summons right away.  She gave two reasons for this holding^[13]:

(1) In light of the records of trading of the shares after the GO Announcement, the judge took the view “it defies common sense, and it is inherently improbable”, that a shareholder would prefer selling under the GO at the GO price to selling in the open market at a price that would most likely be higher than the GO price.

(2) The plaintiffs’ affidavit evidence was “surprisingly not controverted by Mr Sze who has instead chosen not to adduce any evidence^[14] at all.  There is not even a bare denial of the matters attributed to him or the basis upon which they are attributed to him.  It is not sufficient for counsel to just state in submission that his client did not act in the ways sought to be enjoined. On matters as at fact, the court has to act on the evidence actually adduced by the parties.”

54.  The judge went on to consider adequacy of damages and was prepared to accept, and to proceed on the basis, that damages would or may not be adequate remedy to the Company or to Sze and the parties acting in concert with him.  In respect of the plaintiffs, she referred to Cheng 1^st on the adverse impact of the Alleged Arrangement and came to the view that the loss and damage as postulated by Cheng would be difficult to quantify and hence the Company may or would not be adequately compensated by damages.  As for Sze, following the halt of the GO, he would have to wait 12 months before another GO could be made, during which circumstances may change in ways that cannot be predicted in an informed manner^[15].

55.  Turning to balance of convenience, the judge bore in mind the court should adopt the course that involves the least injustice.  She took the view that “the existence of (unchallenged) evidence on the strength of the plaintiffs’ case and the complete lack of evidence of a meritorious defence by Mr Sze is, to [her] mind, the decisive factor that tilts the balance decidedly in favour of the plaintiffs.”^[16]

56.  Another consideration that weighed “heavily” with the judge is that “allowing Mr Sze to proceed with what appears, on evidence, to be an illegality which, if completed, may not be reversed.”^[17]

57.  For the above reasons, the judge granted the interlocutory injunction against Sze.

The application before the judge for leave to appeal

58.  The day after the Decision, on 7 February 2024, Sze issued a summons for leave to appeal.

59.  On 8 February, the trading volume of the shares decreased to 826,500 and the share price fell to $1.34.  On that day, Sze made an announcement that the level of acceptances of the GO (32 in total) exceeded 50% of the issued share capital but he was bound by the injunction in the Decision and was unable to declare the GO unconditional as to acceptances.  The judge was informed of this by a letter of Jones Day dated 14 February.

60.  On 9 February, the SFC granted a second extension of the 60-day rule for publication of the announcement of unconditionality until 21 February 2024, which was the date fixed for the hearing of the leave application before the judge.

61.  Also on 9 February, Sze made a requisition for an extraordinary general meeting to remove the board of directors.

62.  Four broad grounds were raised in the draft notice of appeal of Sze: (1) procedural unfairness; (2) no viable cause of action; (3) adequacy of damages; and (4) balance of convenience with regard to the role of the SFC as the regulatory authority and the inadequacy of the plaintiffs’ cross-undertaking in damages.

63.  The complaint of procedural unfairness is that Sze was served with six affirmations on 22 January (an additional affirmation was served on 25 January).  He only had three clear days before the hearing on 26 January and this was plainly insufficient for him to traverse the serious allegations raised by the affirmations.  Whilst he contended that on the plaintiffs’ own case they failed to satisfy the requirements for the granting of the injunction, he had made clear that his submissions were without prejudice to his right to file evidence in opposition.  The judge granted the injunction on the mistaken assumption he had “chosen not to adduce any evidence at all”.  The effect of such error is that the court granted the injunction without providing a fair and reasonable opportunity for Sze to prepare and present his evidence.

64.  The judge heard the leave application on 21 February 2024 and refused leave to appeal against the Decision after hearing submissions.  On the ground of procedural unfairness, the judge had this to say in the leave decision:

“3. The only new point is ground 1. The 1^st defendant failed to persuade the court to accept his submissions made without reference to evidence. He now suggests that the court owes him an opportunity to adduce evidence and then to re-argue the Ps Summons on the basis of his evidence. The 1^st defendant never proposed at or before the hearing on 26 January 2024 that the Ps summons should be dealt with in this truncated and cumbersome manner. Had he done so, he would have faced strenuous opposition from the plaintiffs and strong disapproval from the court.

4. A party in the position of the 1^st defendant should have moved the court to adjourn the hearing of the Ps Summons and to give directions for the filing and service of affidavit evidence by the parties. This was not done. It is not the court’s duty to decide for a party whether or not a hearing should be proceeded with right away without evidence or that the hearing should be adjourned with an opportunity to all parties to adduce all relevant evidence.

5.  Leaving aside the Ladd v Marshall hurdle, granting a second bite of the cherry to the 1^st defendant would defeat the express underlying objectives of our civil procedures to promote proportionality and procedural economy, to save time and costs, and to fairly distribute the court’s resources.” 

65.  Sze renewed his application for leave to appeal by his summons to the Court of Appeal on the same day.  The draft notice of appeal annexed to his summons is identical to that placed before the judge.  As mentioned, he also sought leave to adduce evidence on appeal, if leave to appeal be granted.

Relevant legal principles

66.  The relevant legal principles concerning the granting of an interlocutory injunction which would practically dispose of the substantive claim and the question of balance of convenience were correctly stated in the Decision, and have been summarised above.

67.  For granting leave to appeal to the Court of Appeal under section 14AA of the High Court Ordinance, Cap 4, the court must be satisfied that the intended appeal has reasonable prospect of success or there is some other reason in the interests of justice that the matter should be heard on appeal.  Reasonable prospect involves the notion that the prospect must be more than fanciful without having to be probable.

68.  For an appeal against the granting of an interlocutory injunction, which is an exercise of discretion of the court, the well-established principles are that the appeal court must defer to the judge’s exercise of discretion and not interfere with it merely on the ground that it would have exercised the discretion differently.  The appeal court will not disturb the judge’s exercise of discretion unless one or more of these grounds are established: the judge had misdirected himself with regard to the principles or the evidence in accordance with which his discretion had to be exercised; he had taken into account irrelevant matters; he failed to take into account relevant ones; his exercise of discretion is so plainly wrong that it is outside the generous ambit within which reasonable disagreement is possible.  It is only if and after the appeal court has reached the conclusion that the judge’s exercise of discretion must be set aside for one or other of these reasons that it becomes entitled to exercise an original discretion of its own^[18].

Leave to appeal should be granted

69.  We are satisfied of the prospect of success in the intended appeal on the grounds advanced in the draft notice of appeal.  We are also satisfied it is reasonably arguable that leave would be granted to Sze to adduce evidence on appeal in accordance with the requirements in Ladd v Marshall [1954] 1 WLR 1489 at 1491.  We will deal with the merits of the grounds of appeal when we address the appeal in the latter part of these reasons.

70.  Sze has since filed a notice of appeal (CACV 104/2024) pursuant to the leave granted by this court on 12 March.

Leave to adduce evidence on appeal should be granted

71.  Sze sought leave to adduce on appeal these affirmations: his 2^nd affirmation dated 20 February 2024 (“Sze 2^nd”), the 1^st affirmation of Cheung Hang Lam dated 20 February 2024 (which exhibited the 1^st affirmation of WQ dated 19 February 2024 (“WQ 1^st”) and the 1^st affirmation of Yu Wei dated 19 February 2024 (“YW 1^st”); and the 2^nd affidavit of Leung dated 20 February 2024 (“Leung 2^nd”).  In support of his application to adduce evidence on appeal, he filed his 3^rd affirmation dated 27 February (“Sze 3^rd”).

72.  In Sze 3^rd, he explained that insofar as Sze 2^nd deposed to the level of acceptances of the GO after the hearing of the inter partes summons on 26 January and the accepting shareholders’ concerns and views raised with him after the Decision was handed down on 6 February, these matters arose after the hearing and should be admissible on appeal.  This applies to WQ 1^st and YW 1^st.  WQ and YW are two shareholders who approached Sze after the Decision to tell him why they accepted the GO, their identities were not known to Sze until they approached him on their own.

73.  As for the other matters addressed in Sze 2^nd, he asserted that he could not have filed an affirmation for the hearing of the inter partes summons with reasonable diligence.  He only had three clear days prior to the hearing on 26 January 2024 to answer the six affirmations served by the plaintiffs on 22 January, as well as a seventh affirmation served on 25 January. There was insufficient time for him to fully review the plaintiffs’ affirmations, provide full instructions to his solicitors, and identify and locate evidence from other sources to support his case.  Futhermore, he was away from Hong Kong for most of the time between 21 and 26 January in performance of his public duties.

74.  Leung 2^nd was provided to give an analysis of the trading pattern of the Company’s shares before and after the hearing on 26 January and to explain the rationale for the pricing of the GO.  Evidence on the analysis of the trading pattern of the shares after the hearing should be allowed on appeal.  As for the other matters canvassed by Leung, it was asserted that his affidavit evidence could not have been adduced in time with reasonable diligence for the same reason as Sze’s evidence.  Further, Sze claimed that he was unable to obtain evidence from Leung at the time to support his case, as the 2^nd defendant was pre-occupied with preparing evidence for its own purpose in seeking to discharge the ex parte injunction on its own grounds.

75.  The plaintiffs filed two affirmations on 5 March to oppose Sze’s application to adduce evidence on appeal, being Cheng 3^rd and Mak 1^st[19].  Cheng’s previous affirmations were given in the nature of expert evidence.  As an expert witness, it is not for him to assert that Sze could have procured Leung to provide an affidavit on the lines of Leung 2^nd in time for the hearing of the inter partes summons, or query why certain evidence could not have been adduced by Leung earlier, or make observations that Leung 2^nd is unnecessary.  Nor is it for him to say that the evidence in YW 1^st and WQ 1^st is incredible, based on his mindset of how a “rational investor” should behave.  If it is thought that adducing such evidence from an expert would somehow strengthen the arguments made by the plaintiffs’ counsel, this is not a proper use of evidence from an expert^[20]. 

76.  Mr Tong, SC^[21] submitted for the plaintiffs that the requirements in Ladd v Marshall are not met for all of the affirmations sought to be adduced on appeal.

77.  In respect of Leung 2^nd, he contended that Leung did not suggest he could not have given such evidence at the hearing, and that the bulk of his evidence simply re-introduces materials presented in the plaintiffs’ evidence and have been referred to in the Decision. Relying on Cheng 3^rd[22], Mr Tong criticised Leung’s opinion on (1) possible reasons why independent shareholders might choose to accept the GO rather than dispose of their shares in open market, and (2) possible market manipulation and false trading activities between 19 January and 6 February for the purpose of frustrating the GO, as “wholly speculative” and “unsound”.

78.  We do not agree with his submissions.

79.  Insofar as Leung 2^nd deposed to matters after the hearing, such evidence should be admissible on appeal.  We are inclined to think that in the particular circumstances, Sze could not have procured Leung to provide an affidavit in time with the exercise of reasonable diligence.  The fact that certain trading data have been adduced in Cheng 1^st and were referred to in the Decision is beside the point, as Leung was seeking to provide his own remarks and analysis on the data.  As for the criticisms of Leung’s opinion in Cheng 3^rd, quite clearly the court cannot form a view summarily on the affirmations whether Leung’s opinion is “groundless” and “cannot withstand scrutiny” as asserted by Cheng.  For the purpose of admitting such evidence on appeal, the threshold is apparent credibility and not incontrovertibility.  It seems to us this has been met.  We are also satisfied that the evidence in Leung 2^nd would probably have an important influence on the outcome of the appeal, although not necessarily a decisive one.

80.  With regard to WQ 1^st and YW 1^st, Mr Tong submitted that the explanations given by these shareholders why they accepted the GO “defies logic and common sense” and hence would be unlikely to have an impact on the Decision even if raised in time.  He went so far as to suggest that YW’s acceptance of the GO is “entirely absurd” and WQ’s acceptance was “wholly nonsensical”, and it was “illogical” that WQ and YW did not withdraw their acceptances of the GO when the trading volume had risen.  This is not a view that the court can reasonably come to at present, on the untested evidence of WQ and YW against the queries and doubts raised by Cheng.  We are inclined to think that the threshold of apparent credibility is met, and likewise the requirement that their evidence would likely to have an impact on the outcome of the appeal.  There is no dispute that the requirement of reasonable diligence is satisfied.

81.  As for Sze 2^nd, Mr Tong contended that Sze could have adduced his affirmation at the hearing below.  As for Sze’s response to the allegations of Lily Chen and Zheng concerning the Alleged Arrangement, Mr Tong made the point that Sze’s associates Shie and Wang have not made any affirmations to depose to their involvement.  He also criticised certain parts of Sze 2^nd disputing Lily Chen’s allegations as “unconvincing”.  We do not think we can form the view at this stage that Sze’s denial in his affirmation of any knowledge and involvement in the Alleged Arrangement is incredible.  We think his evidence on affirmation is prima facie credible.  We are satisfied that all three requirements for adducing evidence on appeal have been met.

82.  We therefore allowed Sze to adduce the affirmations/affidavit as sought in this appeal.

If there was procedural unfairness^[23]

83.  Mr William Wong, SC^[24] submitted that the judge erred in proceeding on an erroneous basis that the plaintiffs’ affidavit evidence “is surprisingly not controverted by Mr Sze who has chosen not to adduce any evidence at all”^[25]. Sze did not choose not to adduce evidence.  In the written^[26] and oral^[27] submissions of his counsel Mr Vincent Chiu, it was submitted that whilst no evidence in opposition was filed for the time being, and counsel was prepared to argue the matter on the basis of the materials before the court, if the judge should be of the view that the summons should be adjourned, he was prepared to file evidence in opposition and would seek directions from the judge to do so. 

84.  The judge did not appear to have understood the above to be the stance of Sze’s counsel, see her statement in the Decision that Sze has “chosen not to adduce any evidence at all”.  Or if she did understand him correctly, she did not disabuse him from taking that stance (as appeared from the transcripts of proceedings of the two hearings on 26 January 2024 and 21 February 2024) as she would have disapproved of it, as indicated in her leave decision at §3:

“The 1^st defendant failed to persuade the court to accept his submissions made without reference to evidence. He now suggests that the court owes him an opportunity to adduce evidence and then to re-argue the Ps Summons on the basis of his evidence. The 1^st defendant never proposed at or before the hearing on 26 January 2024 that the Ps summons should be dealt with in this truncated and cumbersome manner. Had he done so, he would have faced strenuous opposition from the plaintiffs and strong disapproval from the court.”^[28]

85.  The judge went on to say in §4 that it is not the court’s duty to decide for a party whether to proceed with a hearing without evidence or seek an adjournment to adduce evidence.  Whilst we do not disagree with this, it is important that parties should know where they stand with the court, if embarking on one course of action instead of another would lead to a result that affects materially the application with no second opportunity to the party concerned to make amends. 

86.  The judge refused leave on the ground of appeal raising procedural unfairness, taking the view that granting a second bite of the cherry would defeat the underlying objectives of our civil procedures to promote proportionality and procedural economy, to save time and costs, and to fairly distribute the court’s resources^[29]. In applying the underlying objectives in these particular circumstances, we think it is important that the court should also recognise that the primary aim is to secure the just resolution of disputes in accordance with the substantive rights of the parties^[30].

87.  We do not agree with Mr Tong’s contention it is a “travesty of facts” to argue that Sze was unfairly treated procedurally, having considered the written submissions of counsel on both sides lodged for the hearings on 26 January and 21 February and the transcripts of those two hearings.

88.  It is most unfortunate that Sze’s counsel had laboured under a misapprehension that the judge would give him an opportunity to file evidence on affidavit in the event that his submissions without any evidence adduced on behalf of Sze did not find favour with her.  Whether counsel should make submissions without filing evidence of his own is a matter for him.  But it is procedurally unfair to hold him to the consequence of an ‘election’ when he did not know that effectively he was being put to one.  Sze had not, through his legal representatives, “exercised the informed choice not to file any evidence”, as contended on behalf of the plaintiffs^[31].

89.  In assessing the merits of the plaintiffs’ claim and weighing the balance of convenience, the judge placed significant weight on her erroneous understanding that Sze had “chosen” not to file any evidence and there was “not even a bare denial”^[32] of the serious allegations against him.  The existence of “(unchallenged) evidence on the strength of the plaintiffs’ case and the complete lack of evidence of a meritorious defence” was, to the judge’s mind, “the decisive factor that tilts the balance decidedly in favour of the plaintiffs.”^[33]

90.  The judge’s error permeates her decision in granting the interlocutory injunction.  She made adverse findings against Sze on the merits and the balance of convenience when he did not have an opportunity to file evidence in opposition and present his case properly with the benefit of evidence to refute the factual and expert evidence adduced by the plaintiffs.  The procedural unfairness complained of is substantial.

91.  For the above reasons, the interlocutory injunction granted in the judge’s exercise of discretion must be set aside and it falls on the appeal court to exercise the discretion afresh.

If the injunction sought should be granted afresh

92.  The first matter for consideration is whether the plaintiffs’ case is of sufficient merits for this interlocutory mandatory injunction to be granted when it would in effect dispose of a substantive claim in the action.  With the evidence admitted on appeal in the affirmations and affidavit adduced on behalf of Sze, we are not persuaded that this threshold has been met.  As it is likely that this action may proceed further, it is not appropriate to set out our preliminary analysis of the strengths and weaknesses of the case of each side.  Suffice it to say there are serious disputes on the facts and the law.  It is not necessary for us to determine if the plaintiffs have no viable cause of action, as contended by Mr Wong^[34].

93.  The factual disputes on the affirmations would need to be resolved at the trial, after discovery and oral examination of the existing and further witnesses that may be called.  Mr Wong took issue with the allegation that the GO price of $0.90/share understated the true value of the Company on the plaintiffs’ own evidence (the Company had sought to carry out the CB placing in September 2023 just before the GO with the conversion price of $0.95/share) and in light of the new evidence on appeal of Leung 2^nd[35]. There is evidence adduced by Sze on appeal to support his contention that the GO could be a legitimate exit option for the shareholders^[36].  The inference of the judge in §40(1) of the Decision (that it is inherently improbable a shareholder would prefer selling under the GO at the GO price to selling in the open market at a price most likely to be higher) would require reconsideration.

94.  As to the law, Mr Wong contended that the claims pleaded in the indorsement of claim in respect of market misconduct pursuant to sections 281 and 305 of the SFO and/or Rule 25 of the TO do not constitute viable causes of action.

95.  He submitted that the alleged breach of Rule 25 of the TO does not give rise to any civil claim since the TO does not have the force of law^[37], and the proper party to enforce the TO is the SFC.

96.  As for sections 281 and 305, sections 280(1) and 305(1) require a claimant of compensation by way of damages to demonstrate that he has sustained “pecuniary loss” arising from the false trading or market manipulation.  He submitted that the Company (being the 1^st plaintiff) did not suffer pecuniary loss and it was the shareholders who had allegedly suffered personal loss on the plaintiffs’ case.  The alleged loss as postulated in Cheng 1^st (understating the true value of the shares in the eyes of public investors and affecting the Company’s future fundraising exercises when conducted through instruments linked with the level of the share price) is speculative at best.  As the subject company of a takeover, the Company could not have a cause of action for the conduct complained of.

97.  As for the injunctions claimed in the indorsement of claim, the jurisdiction to grant injunctions is “in addition to, or in substitution for, damages” as provided in sections 281(6) and 305(5).  Hence, unless the plaintiffs can demonstrate their entitlement to damages, they would not be able to obtain the injunctions sought pursuant to sections 281 and 305.

98.  Furthermore, the complaint of false trading or market manipulation is based on the allegation that the GO price was designed to suppress the share price as part of the Alleged Arrangement.  Mr Wong argued that this is untenable because sections 274 and 278 require trading in the market and there is no evidence of this from the plaintiffs.  There is no evidence that Sze had engineered the share price to be trading at above the GO price.  Moreover, in Cheng 3^rd[38], it is acknowledged that even an unusual upsurge of trading volume and share price by itself, without evidence of “wash trading”^[39] or “matching order”^[40], would not amount to false trading or market manipulation.

99.  In respect of the claim for damages for breach of statutory duty, Mr Wong submitted that it has not been made clear which statutory provision (whether under SDO or otherwise) would confer on the Company a private right to bring a civil claim.  For the claim of damages for conspiracy to defraud, it has not been shown how the essential elements of the tort of conspiracy are satisfied (such as intention to injure the Company; that damage was caused to the Company).

100.  Mr Tong submitted that Sze should not be allowed to raise new points on appeal, being points which he could have raised at the hearing but did not.  Insofar as factual disputes are concerned, with the admission of new evidence on appeal, Sze should be allowed to do so.  As for new points of law (no civil claim in respect of breaches of the TO; the complaint of false trading or market manipulation is untenable on the existing evidence), we consider it appropriate that new points of law should be taken into account in these circumstances, as this court is required to exercise the discretion afresh whether the injunction should be granted and its discretion should not be circumscribed by the points of law raised before the judge.  Besides, some of the law points are intertwined with the new evidence.

101.  Having considered Mr Tong’s submissions, we are firmly of the view it could not be said at this stage that Sze would have “no real chance of succeeding at the trial”, or that the plaintiffs are “at least likely to succeed at trial”, or that the plaintiffs have shown “an overwhelming balance on the merits” in their favour.

102.  On this basis alone, we would not have exercised the discretion to grant the interlocutory mandatory injunction, bearing in mind that the court’s task here is to arrive at a result which would carry the lowest risk of injustice as a result of granting or refusing the injunction.

103.  We will deal with the adequacy of damages and the balance of convenience succinctly.

104.  The judge was prepared to accept and proceed on the basis that damages would or may not be an adequate remedy to either the Company or Sze and the parties acting in concert with him^[41].  It was because of her view on the strength of the plaintiffs’ case and the complete lack of evidence of a meritorious defence that she found the balance of convenience tilted decidedly in favour of the plaintiffs, leading her to exercise her discretion in favour of granting the injunction^[42].  The judge also mentioned that another factor that weighed heavily on her mind is that allowing Sze to proceed with what appears, on evidence, to be an illegality which, if completed, may not be reversed^[43].

105.  As explained above, the decisive factor in favour of the plaintiffs on account of the strength of their case is nullified. 

106.  Mr Wong disputed that damages would not be adequate for the Company^[44], contending that the Company does not suffer pecuniary loss.  Any pecuniary loss suffered by the 2^nd plaintiff, who holds 0.044% of the shares, would sound in damages of a very small amount and can easily be met.  And even if breach of Rule 25 of the TO were established, the Takeovers and Mergers Panel (“Panel”) can require a person to pay such amount as it thinks just and reasonable to ensure shareholders receive what they would have been entitled if the rule had been complied with^[45]. The alleged loss arising from suppression of the GO price would be rectified by the Panel and hence, there is no need for the injunction.  In light of this provision and the flexible and extensive powers of the SFC as the regulatory authority in takeovers^[46], such as restraining Sze from declaring the GO unconditional, requiring him to adjust upwardly the GO price, causing the GO to be made void if it is found to be tainted with illegality^[47], the plaintiffs would not be prejudiced by the refusal of the interlocutory injunction^[48].

107.  Mr Wong emphasised that the GO would be derailed if the injunction was to be granted.  Sze and the parties acting in concert with him would not be able to make another GO for 12 months^[49], they would not be likely to remove the current management, and the current management would likely attempt to dilute the shareholdings of Sze and the parties acting in concert to entrench their control.  Such harm and prejudice cannot be adequately compensated by damages.  He also submitted there is serious risk that Sze would not be able to enforce the cross-undertaking in damages against the Company^[50] , as this is essentially a dispute between two camps and the court may take the view that it would not be equitable for a publicly listed company with independent shareholders to bear the loss of Sze.

108.  We do not agree with Mr Tong the injunction sought was not targeted to void the GO but merely to hold the ring with the possible effect of delaying completion of the GO until after the trial.  The objective effect of this is clear.

109.  Mr Tong contended that the judge had considered the “alleged inaction of the SFC” and nevertheless concluded that she should exercise the discretion in granting the injunction.  That is not apparent from the Decision, albeit that Sze’s counsel Mr Chiu had addressed the judge on the various regulatory powers of the SFC mentioned in Cheng 2^nd §6^[51]. The judge did mention in the Decision a factor that weighed heavily with her was that allowing Sze to proceed with what appears to be an illegality may not be reversed if completed.  Insofar as she has taken that view, she would appear to have overlooked the flexible and extensive powers of the SFC mentioned above. In weighing the balance of convenience, the judge did not appear to have taken into consideration the role and extensive powers of the SFC as the regulator of takeovers.  This is not to say that the court must invariably refuse an interlocutory injunction just because of the regulatory powers of the SFC.  We regard this as a factor that may tilt the balance against the granting of the injunction and it ought to be taken into account in the weighing exercise.

110.  Sze and the 2^nd defendant have provided undertakings to the court in terms of §§2 and 3 of the plaintiffs’ summons.  We are not persuaded that the interim protection given to the plaintiffs by these undertakings are insufficient and that granting the mandatory injunction sought in §1 would carry the lowest risk of injustice.

111.  For all the above reasons, we refuse to exercise our discretion to grant the mandatory interlocutory injunction sought.

Orders

112.  We made the following orders at the conclusion of the rolled‑up hearing:

(1) leave to appeal against the decision of Lisa Wong J made on 6 February 2024 granted, the 1^st defendant to file and serve a notice of appeal as per the draft annexed to his summons filed on 21 February 2024 within three days thereof;

(2) the hearing on 12 March 2024 be treated as the substantive hearing of the 1^st defendant’s appeal;

(3) leave granted to the 1^st defendant to adduce the following affirmations/affidavit on appeal: the 2^nd affirmation of the 1^st defendant dated 20 February 2024; the 1^st affirmation of Cheung Hang Lam dated 20 February 2024; the 1^st affirmation of Wang Qiang dated 19 February 2024; the 1^st affirmation of Yu Wei dated 19 February 2024; and the 2^nd affidavit of Leung Kwok Kit Donald dated 20 February 2024;

(4) the appeal against the decision of Lisa Wong J made on 6 February 2024 be allowed, the injunction granted in terms of §1 of the plaintiffs’ summons dated 19 January 2024 be set aside and §1 of that summons be dismissed;

(5) the costs of the application for leave to appeal before Lisa Wong J be set aside; the costs of that leave application before the judge and the costs of the application for leave to appeal in CAMP 35/2024 be in cause of the appeal;

(6) the costs of the appeal be to the 1^st defendant with a certificate for two counsel; and

(7) the costs below of the plaintiffs’ application for interlocutory injunction be dealt with on paper; the 1^st defendant is to lodge his submissions on costs of not more than five pages within 14 days of the handing down of the reasons for judgment of the appeal, the plaintiffs are to lodge their submissions in answer of not more than five pages within 14 days thereafter, the 1^st defendant is to lodge his submissions in reply (if so advised) of not more than two pages within seven days thereafter.