WAH LUN INTERNATIONAL DEVELOPMENT LTD v. LAU CHIU SHING

HCA 1429/2015

[2021] HKCFI 407

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1429 OF 2015

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J U D G M E N T

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A.   INTRODUCTION

1.  In the present action, Wah Lun International Development Limited (the “Plaintiff”) seeks a refund of RMB 20 million (the “Earnest Money”) from Mr Lau Chiu Shing (the “Defendant”) arising from an aborted sale and purchase of 51.44% shareholding (“Target Shareholding”) in e-Kong Group Limited (the “Target Company”), a company listed on the main board of the Hong Kong Stock Exchange (Stock Code: 0524).

2.  The main issue in this trial is a factual one, namely, whether the Plaintiff (through Mr Jia Bin (“Mr Jia”)) and the Defendant reached a binding oral agreement for the sale and purchase of the Target Shareholding during a discussion in a meeting held in early January 2015 (the “January 2015 Meeting”).

3.  The following are the agreed facts between the parties:

(1)  In late December 2014 to early January 2015, Ms Zhang Xiao Mei (“Ms Zhang”) introduced the Plaintiff to the Defendant for the purpose of acquiring a majority shareholding in the Target Company.

(2)  In January 2015, there was a meeting between Mr Jia of the Plaintiff and the Defendant on the acquisition of a majority shareholding in the Target Company.

(3)  During the meeting, it was agreed that the value of the Target Company arising from its listing on the Hong Kong Stock Exchange (“the Listing Value”) plus the value of the assets held by the Target Company (“the Assets Value”) were the composite elements of the purchase price.  Whether Mr Jia of the Plaintiff and the Defendant had entered into a binding agreement in the meeting is hotly disputed.

(4)  The Plaintiff and the Defendant had not signed any written agreement for the acquisition of the Target Shareholding.

(5)  On or about 28 January 2015, the Plaintiff and the Defendant entered into a due diligence agreement (the “Due Diligence Agreement”).

(6)  Pursuant to the Due Diligence Agreement, the Plaintiff deposited the Earnest Money into a bank account designated by the Defendant.

(7)  The Plaintiff appointed Messrs. PricewaterhouseCoopers and Messrs. Troutman Sanders to conduct the due diligence exercise on the Plaintiff’s behalf.

(8)  The due diligence exercise commenced on 2 February 2015.

(9)  On 27 or 28 February 2015, Mr Simon Chiu of the Plaintiff and the Defendant had a meeting.

(10)  In early March 2015, the Plaintiff instructed Haitong International Securities Group Limited (“Haitong”) as its agent.

(11)  On 20 March 2015, by way of text message, the Defendant sent an ultimatum to Mr Simon Chiu of the Plaintiff that he had to see the funding by 23 March 2015.  Mr Simon Chiu replied on behalf of the Plaintiff, by way of text message, that the funding would not be ready by 23 March 2015.  The Defendant informed the Plaintiff by way of text message of the Defendant’s decision to forfeit the Earnest Money.

(12)  On 16 or 27 March 2015, there was a meeting between Mr Jia and the Defendant.

(13)  On 30 March 2015, by way of text message, Mr Simon Chiu represented to the Defendant, inter alia, that the funding would be deposited with Haitong on the same day.  Subsequently, Mr Simon Chiu and the Defendant had a discussion on that day.

(14)  On 8 and 13 April 2015, by way of text messages, Mr Simon Chiu on behalf of the Plaintiff proposed to the Defendant concerning the purchase of an office premise by the Target Company.  The Defendant did not accept the proposal.

(15)  On 16 April 2015, by way of a letter under its name, the Plaintiff requested the Defendant to refund the Earnest Money for the reason that no agreement was reached for the share price, ratio of acquisition and the arrangement for payment.

(16)  On 29 May 2015, by way of a letter from Messrs. Haldanes, solicitors for the Plaintiff to the Defendant, the Plaintiff raised, inter alia, that the result of the due diligence exercise was not satisfactory and requested a refund of the Earnest Money.

4.  Both parties agree that if no binding oral agreement was concluded in the January 2015 Meeting between Mr Jia on behalf of the Plaintiff and the Defendant for the sale and purchase of the Target Shareholding, then the Earnest Money has to be returned to the Plaintiff on the basis that the Earnest Money could not be applied as deposit and/or part-payment to an agreement which never come into existence (See §9A of the Re-Amended Statement of Claim).  Mr Yin for the Plaintiff submitted that the consideration or special purpose for which the Earnest Money was paid over by the Plaintiff has failed and the money is repayable either as money had and received (at common law) or as money held on a resulting trust in favour of the Plaintiff (in equity) when the Earnest Money were paid over for a designated purpose which turns out to be impossible.

5.  The Plaintiff’s case is that the Earnest Money was paid and the Due Diligence Agreement was signed before but in anticipation of the parties reaching an agreement on the essential terms necessary to form a binding contract for the sale and purchase of the Target Shareholding offered for sale by the Defendant.

6.  The possibility of the parties not reaching agreement on the essential terms necessary to form a binding contract for the sale and purchase of the majority shareholding offered for sale by the Defendant was not consciously being contemplated by the parties at the time of the payment of the Earnest Money and signing of the Due Diligence Agreement (and hence not expressly provided for in the Due Diligence Agreement).

7.  Instead, the parties were optimistic that they would in due course be able to reach agreement and enter into a binding contract for the sale and purchase of the shares and hence, the Due Diligence Agreement only provided for the eventualities of either refund of the Earnest Money if the Plaintiff promptly informed the Defendant that the result of the due diligence investigation was unsatisfactory and the Plaintiff had decided not to complete the sale and purchase of the shares or appropriation of the Earnest Money towards payment of the deposit or part-payment for the Target Shareholding if the Plaintiff should decide to proceed with the transaction.

8.  Given that the parties have failed to reach agreement on the essential terms necessary to form a binding contract for the sale and purchase of the majority shareholding offered for sale by the Defendant, the Earnest Money could not be appropriated to its intended use, with the result that the money is returnable to the Plaintiff either as money had and received (at common law) or as money held on a resulting trust for the Plaintiff (in equity) when its designated purpose could no longer be fulfilled.

9.  There is no dispute that if the Plaintiff succeeds on this argument, there would be no need to consider the subsequent question of whether the Earnest Money is refundable under the terms of the Due Diligence Agreement.

10.  The Defendant’s case is diametrically opposite to the Plaintiff’s. It is the Defendant’s case that the Plaintiff and the Defendant reached a binding oral agreement in mid or late January 2015 whereby the Plaintiff agreed to purchase the Target Shareholding at the price of HK$418,000,000 and, subject to the Plaintiff’s satisfaction of the result of the due diligence exercise, the acquisition was to be completed no later than 18 February 2015.

11.  The Plaintiff and the Defendant subsequently executed the Due Diligence Agreement, which provided that the Plaintiff should pay the Earnest Money to the Defendant as security for conducting the due diligence investigation into the Target Company and earnest money for its performance of obligations under the binding oral agreement.  It was further provided that the due diligence exercise was to take place between 2 and 6 February 2015.  The Plaintiff was obliged to inform the Defendant of whether it was satisfied with the results of the due diligence exercise within 7 days thereafter, ie, on or before 13 February 2015.

12.  If the Plaintiff was satisfied, the Earnest Money became non-refundable and would be applied as part of the purchase price.  If the Plaintiff was not satisfied, the Plaintiff could exit the transaction and obtain a refund of the Earnest Money within 3 days.

13.  By obvious and/or necessary implication, the Earnest Money was only refundable if the Plaintiff communicated its reasonable dissatisfaction in good faith to the Defendant within 7 days from the conclusion of due diligence investigation. Otherwise, the Plaintiff would be deemed to be satisfied with the due diligence investigation and have elected to proceed with the transaction.

14.  Even if the Plaintiff could not complete the due diligence exercise before 6 February 2015 as a result of the Defendant’s alleged failure to procure the Target Company to provide all necessary information on time, such scenario would only give rise to a postponement of the commencement of the 7-day period for the Plaintiff to opt out of the transaction upon the completion of the due diligence exercise. It would not thereby set the 7-day period at large.

15.  The Plaintiff had never informed the Defendant of its alleged dissatisfaction (and none of the purported grounds were reasonable in any event) after conducting the due diligence investigation or opted for the refund of the Earnest Money and the termination of the binding oral agreement under the Due Diligence Agreement.

16.  Instead, the Plaintiff had elected and re-confirmed its election to complete the transaction, and repeatedly asked the Defendant to postpone the completion date as the Plaintiff was unable to arrange funding in time to complete the transaction.

17.  After granting the Plaintiff multiple extensions of time, the Plaintiff admitted that it was unable to complete the transaction on the final extended completion date, viz, 20 March 2015, or the ultimatum period granted by the Defendant, viz, 23 March 2015. The reason given by the Plaintiff to the Defendant was the former’s inability to arrange funds on time. As a result, the Defendant refused to further extend the completion date and accepted the Plaintiff’s repudiation of the binding oral agreement and forfeited the Earnest Money on 20 March 2015.

18.  Given that the Plaintiff has wrongfully repudiated the binding oral agreement, the Plaintiff has no right to demand the refund of the Earnest Money after the same was forfeited by the Defendant on 20 March 2015 and upon his acceptance of the Plaintiff’s repudiation.

19.  I am of the view, and the parties agree, that the most critical issue in the present case is whether there is a binding oral agreement between the Plaintiff and the Defendant or not. For if there is no binding oral agreement, there can be no repudiation on the part of the Plaintiff.  If there is a binding oral agreement, the Court needs to analyse which party has breached the same and the corresponding consequential relief.

B. ORAL AGREEMENT

20.  The parties’ case on the binding oral agreement is diametrically opposite to each other.  Mr Jia on behalf of the Plaintiff gave evidence to this Court and repeated his testimony that he only agreed to some general directional terms with the Defendant in the January 2015 Meeting but no concluded agreement was ever reached.  His case is that pending the due diligence exercise, in particular, an assessment of the assets and liabilities position of the Target Company, it was impossible that he would have agreed to any concrete price, let alone HK$418 million, at the first meeting in January.

21.  The Defendant’s case is that, as an experienced businessman, if no price was ever agreed, he would not even allow the Plaintiff to carry out the due diligence exercise.  The due diligence exercise was premised upon an agreed price at HK$418 million.

C. APPROACH TO ASSESSING ORAL TESTIMONY

22.  In Lee Fu Wing v Yan Paul Po Ting [2009] 5 HKLRD 513, Deputy High Court Judge Au (as he then was) at p 524 helpfully set out the well-established approach on assessment of witnesses as follows:

(1)  whether the party’s case is inherently plausible or implausible; 

(2)  whether the party’s case is, in a material way, contradicted by other evidence (documentary or otherwise) which is undisputed or indisputable;

(3)  where it is shown that a witness has been discredited over one or more matters to which he has given evidence using the above tests.  This is relevant to the assessment of his overall credibility; and

(4)  the demeanour of the witnesses.

23.  Lord Bingham in his book The Business of Judging at pp 5 – 6 insightfully said:

“Let me then turn to the central questions. Faced with a conflict of evidence on an issue substantially effecting the outcome of an action, often knowing that a decision this way or that will have momentous consequences on the parties’ lives or fortune, how can and should the judge set about his task of resolving it? How is he to resolve which witness is honest and which dishonest, which reliable and which unreliable? How, as between competing experts in a field not his own, is a judge to determine where the truth lies? Is our existing way of resolving expert conflicts the best way? I shall begin by considering the resolution of issues of primary fact, the choice between first-hand eye-witnesses. Then I shall turn to expert evidence.

The normal first step in resolving issues of primary fact is, I feel sure, to add to what is common ground between the parties (which the pleadings in the action should have identified, but often do not) such facts as shown to be incontrovertible. In many cases, letter or minutes written well before there was any breath of dispute between the parties may throw a very clear light on their knowledge and intentions at a particular time ….

The most compendious statement known to me of the judicial process involved in assessing the credibility of an oral witness is to be found in the dissenting speech of Lord Pearce in the House of Lords in Onassis v Vergottis. In this he touches on so many of the matters which I wish to mention that I may perhaps be forgiven for citing the relevant passage in full:

‘Credibility’ involves wider problems than mere ‘demeanour’ which is mostly concerned with whether the witness appears to be telling the truth as he now believes it to be. Credibility covers the following problem. First, is the witness a truthful or untruthful person? Secondly, is he, though a truthful person, telling something less than the truth on this issue, or, though an untruthful person, telling the truth on this issue? Thirdly, though he is a truthful person telling the truth as he sees it, did he register the intentions of the conversation correctly and, if so, has his memory correctly retained them? Also, has his recollection even subsequently altered by unconscious bias or wishful thinking or by over-much discussion of it with others? Witnesses, especially those who are emotional, who think that they are morally in the right, tend very easily and unconsciously to conjure up a legal right that did not exist. It is a truism, often used in accident cases, that with every day that passes the memory becomes fainter and the imagination becomes more active. For that reason a witness, however honest, rarely persuades a Judge that his present recollection is preferable to that which was taken down in writing immediately after the accident occurred. Therefore, contemporary documents are always of the utmost importance. And lastly, although the honest witness believes he heard or saw this or that, is it so improbable that it is on balance more likely that he was mistaken? On this point it is essential that the balance of probability is put correctly into the scales in weighing the credibility of a witness. And motive is one aspect of probability. All these problems compendiously are entailed when a Judge assesses the credibility of a witness; they are all part of one judicial process. And in the process contemporary documents and admitted or incontrovertible facts and probabilities must play their proper part.

Every judge is familiar with cases in which the conflict between the accounts of different witnesses is so gross as to be inexplicable save on the basis that one or some of the witnesses are deliberately giving evidence which they know to be untrue. There are, no doubt, witnesses who follow the guidance of the Good Soldier Sveyk that ‘The main thing is always to say in court what isn’t true,’ as a matter of principle, but more often dishonest evidence is likely to be prompted by the hope of gain, the desire to avert blame or criticism, or misplaced loyalty to one or other of the parties. The main tests needed to determine whether a witness is lying or not are, I think, the following, although their relative importance will vary widely from case to case:

(1)   the consistency of the witness’s evidence with what is agreed, or clearly shown by other evidence, to have occurred;

(2)   the internal consistency of the witness’s evidence;

(3)   consistency with what the witness has said or deposed on other occasions;

(4)   the credit of the witness in relation to matters not germane to the litigation;

(5)   the demeanour of the witness.

The first three of these tests may in general be regarded as giving a useful pointer to where the truth lies. If a witness’s evidence conflicts with what is clearly shown to have occurred, or is internally self-contradictory, or conflicts with what the witness has previously said, it may usually be regarded as suspect. It may only be unreliable, and not dishonest, but the nature of the case may effectively rule out that possibility.” (Emphasis added).

24.  I find the above guidelines helpful and will apply the same in assessing the credibility of the Plaintiff and the Defendant’s respective case.

25.  Having heard the oral testimony of the witnesses and having regard to the contemporaneous documents and the parties’ submissions, I am of the view that the parties did not conclude any binding oral agreement in January 2015 Meeting.  I come to this view for a number of reasons.

26.  First, it is not disputed that there is no written agreement which record the terms of the alleged oral agreement.  It is strange that the parties see fit not to have a written contract for a transaction in the size of HK$418 million but yet decided to have a written contract for the due diligence exercise.

27.  There is not even a term sheet and any formal documents to evidence a transaction of such magnitude.  Mr Yin for the Plaintiff submitted that it is inherently improbable that the parties would see fit to sign a written Due Diligence Agreement without at the same time at least recording the essential terms of the oral agreement in a written memorandum if a prior binding oral agreement had indeed been concluded.  I agree.

28.  Secondly, I am of the view that the wording of the Due Diligence Agreement actually shows that there is no concluded binding oral agreement between the parties.  The Due Diligence Agreement provides that:

“鉴于：

一、 甲方系刘超成及其直接或间接持有的公司 (以下统称 “目标公司”)。

二、 乙方系一家香港注册的有限公司，拟收购上述甲方所持有的目标公司股权。

三、 乙方拟收购甲方所持有目标公司股权，并需对目标公司作相应的尽职调查，并据调查结果决定是否继续完成收购。

基于上述情况，现甲、乙双方经友好协商，就上述收购项目以之尽职调查事宜，达成一致协议如下：

一、 上述目标公司尽职调查期限为2015年2月2日至2015年2月6日。

二、 甲方对乙方在尽职调查中所提出的问题应予以协助解决及解答，以帮助乙方在尽职调查期间内完成全面细致的调查工作。

本协议签订后三日内，乙方须将人民币2000万元支付到甲方如下指定银行收款账号 (账号：41010900040033218，户名：深圳市小夜曲贸易有限公司，开户银行：中国农业银行深圳人民北路支行)，该款项作为上述目标公司收购项目的尽职调查保证金及诚意金。尽职调查期限届满7日内，乙方须通知甲方上述目标公司股权收购项目的尽职调查结果是否满意以及是否决定继续完成全部收购项目。若乙方尽职调查结果为满意，则上述人民币2000万元保证金及诚意金自动转为项目收购支付价款的一部分；约乙方尽职调查结果为不满意，则甲方须按乙方指示，在三日内无条件将上述人民币2000万元保证金及诚意金退回至乙方指定账户。” (Emphasis added)

29.  I agree with Mr Yin for the Plaintiff that the word “拟” means “intended” or “proposed”.  That defeats any argument that the parties have reached any binding oral agreement in the January 2015 Meeting.  For if the parties did conclude a binding oral agreement, it is inexplicable as to why the parties would use the word “拟”.  It is true that the Due Diligence Agreement was drafted by the Plaintiff’s side, but there is no dispute that the Defendant, a seasoned businessman, read and signed the Due Diligence Agreement to signify his consent to the content of the Due Diligence Agreement.

30.  Mr Yin for the Plaintiff is right that if the parties had reached a binding oral agreement and the price of HK$418 million had been agreed, there is no reason why the terms of the oral agreement were not recorded in the recital of the Due Diligence Agreement. Instead, the recital specifically and deliberately records a proposed or intended transaction.

31.  It is obvious to the Court that the parties were careful not to state or have any documents to record any binding agreement, oral or otherwise, for the Plaintiff to purchase 51.44% of the Target Company.  The word “拟” was chosen and used deliberately and for a purpose.

32.  Thirdly, in the context of the present case, if a binding oral agreement had been reached in January 2015, it would most likely have triggered a general offer obligation on the part of the Plaintiff.  The price having been agreed in a binding agreement has to be announced.  If such an agreement had been reached or concluded, it is difficult to understand why the same needs not be disclosed through the Hong Kong Stock Exchange.  There is no dispute that no such announcement was ever made.

33.  Further, if such a binding oral agreement had been reached, it would mean that the due diligence exercise would be superfluous or meaningless as a general offer would have to be made on the basis of the agreed price. Also there would not be much point in finding out the assets and liabilities position of the Target Company as the price would have been fixed and announced.

34.  Insofar as the mandatory general offer is concerned, such requirement is provided in Rule 26 of the Codes on Takeovers and Mergers and Share Buy-Backs (“Rule 26”).  The key features of Rule 26 as relevant to the present proceedings are as follows:

(1)  Subject to the granting of a waiver by the Securities and Futures Commission, when any person who acquires, whether by a series of transactions over a period of time or not, 30% or more of the voting rights of a listed company, that person shall extend offers, on the basis set out in this Rule 26, to the holders of each class of equity share capital of the company whether the class carries voting rights or not (Rule 26.1(a)).

(2)  The general offer made under Rule 26 must be in cash or be accompanied by a cash alternative at not less than the highest price paid by the offeror during the offer period and within 6 months prior to its commencement (Rule 26.3(a)).

(3)  The Codes on Takeovers and Mergers and Share Buy-Back (“the Codes”) do not have the force of law, but those who wish to take advantage of the securities markets in Hong Kong should conduct themselves in accordance with the Codes. Otherwise, they may find, by way of sanction, that the facilities of such markets are withheld in order to protect the interests of those who participate in Hong Kong’s securities markets. (§§1.3, 1.4 of the Introduction to the Codes).

35.  Mr Chan for the Defendant submitted that as apparent from Rules 26.1 and 26.3, the obligation to make a mandatory general offer to other shareholders arises subsequent to the offeror’s acquisition of voting rights of over 30%.  It has always been the Plaintiff’s case that from the very beginning, the Plaintiff’s intention was to acquire a controlling stake in a listed company in Hong Kong, by virtue of which, a mandatory general offer is a must and inevitable under the Codes.

36.  However, it is important to note that the above submission is contrary to Mr Jia’s evidence. Mr Jia’s evidence is that the idea of a mandatory offer was raised but the Defendant suggested to him that the Plaintiff could in fact avoid a general offer by receiving the Target Shareholding through a few nominees.  The Plaintiff did not agree to make a mandatory offer during the January 2015 Meeting.  I find Mr Jia’s evidence to be credible as it sits well with the contemporaneous documents.

37.  In a draft agreement for the sale of 26.87% of the shareholding of the Target Company to the Plaintiff by Costrade Group Limited and 3 other unnamed shareholders prepared by Messrs. Troutman Sanders dated 9 March 2015 with comments from TC & Co (acting for the Defendant) dated 2015, it shows that the intended sale was for a shareholding less than 30% so as to avoid the triggering of the general offer obligations.  This does not sit well with the Defendant’s oral testimony that the idea of a mandatory offer was agreed from the very beginning during the January 2015 Meeting.

38.  Further, in a letter dated 27 January 2015 from Messrs. Troutman Sanders to the Plaintiff, it was also recorded that the instruction was to assist in the acquisition of not more than 30% shareholding of the Target Company. Had an agreement been reached on making a mandatory general offer, such step would have been unnecessary.

39.  Hence, I accept Mr Jia’s evidence that he was uncertain about the idea of holding part of the Target Shareholding through some nominees and he asked Mr Simon Chiu to study the same and report back to him. Indeed, the idea of a mandatory general offer came much later when the Plaintiff under the advice of Mr Simon Chiu decided not to violate any rules of the Codes.

40.  I therefore reject the Defendant’s oral testimony that the parties had agreed to go down the route of a mandatory general offer during the January 2015 Meeting.  If that had been the agreement, it would have been detailed in the Defendant’s witness statement.  Also, it is inconsistent with the draft agreement for the Plaintiff to acquire the 26.87% of the shareholding of the Target Company and the specific instructions given to Messrs. Troutman and Sanders to acquire not more than 30% of the shareholding of the Target Company.  This also impacts on the Court’s assessment of the overall credibility of the Defendant.

41.  I also agree with Mr Yin for the Plaintiff that the fact that those representing the Defendant had subsequently sought, albeit unsuccessfully, to procure the Plaintiff to enter into written agreements for the sale and purchase of separate blocks of shares from different individuals (who together held 51.44% of the Target Company) is inconsistent with the assertion that there was already in existence a binding oral agreement for the purchase of 51.44% from the Defendant.

42.  Mr Yin for the Plaintiff also submitted that it cannot make any difference that the Plaintiff was allegedly aware that the shares were not held in the Defendant’s own personal name because if the alleged oral agreement was already in place the obligation would be owed by the Defendant to the Plaintiff to procure the individual shareholders to transfer their shares which the Defendant had agreed to sell to the Plaintiff upon completion and it is not only unnecessary but it would not have made any sense for the Plaintiff to enter into direct contractual relationship individually with each those actually holding the shares to acquire several blocks of minority shareholdings with the attendant problem of having to find a mechanism to ensure that the Plaintiff would not be stuck with a minority shareholding. Whatever may have been said or not said at the meeting between Mr Jia and the Defendant in early January 2015, the fact that the parties were negotiating for the Plaintiff to enter into written agreements for the sale and purchase of separate blocks of shares from the individuals in whose name were registered is strongly indicative that the parties had always intended that any binding contractual obligations would arise only upon the signing of the written agreements with the registered shareholders. It follows that even if the figures of HK$418 million had been thrown about at the meeting as a price at which the parties might be prepared to strike a deal, it could not have been intended to give rise to a binding oral agreement for the sale of 51.44% shareholding in the Target Company.  I agree.

43.  Further, I also note that the aforesaid draft agreement contains a clause which stipulates that the Earnest Money were to be treated as a part payment of the purchase price of the 26.87% of the shareholding of the Target Company.

44.  Fourthly, I observe that for the sale of 26.87% of the shareholding of the Target Company, the price was not even stated in the draft document.  I agree with Mr Yin for the Plaintiff that if the price of HK$418 million had indeed been agreed, there is no reason why an agreed price would not have been stated in the draft legal document.  The irresistible inference is that the parties have not yet finalized the price in March 2015. 

45.  Fifthly, it is the Defendant’s own case, during his oral testimony, that the price of HK$418 million comprises of two elements, namely, the value of the listing status (commonly known as the “shell price”) at HK$288 million and the net asset value at HK$130 million.  However, the net asset value could be adjusted upon the conclusion of the due diligence exercise.  Given that the net asset value was yet to be ascertained, it cannot be right that the parties had already agreed on a purchase price at HK$418 million during the January 2015 Meeting.

46.  Sixthly, the Defendant informed this Court that in fact he was not the beneficial owner of 51.44% of the shareholding of the Target Company but that he had authority to sell the 51.44% shareholding of the Target Company on behalf of two gentlemen, namely, Mr Chan Hing Ping and Mr Richard John Siemens.  This does not sit well with the terms of the Due Diligence Agreement.

47.  The Defendant said that “Mr Jia agreed on behalf of the Plaintiff to purchase and I agreed to sell 51.44% of the shareholding in the Target Company (“Target Shareholding”) at the price of HK$418,000,000. Mr Jia was fully aware of the fact that I was not holding any shares of the Target Company at the time but would procure the Target Shareholding from the several shareholders owning the same”. (Paragraph 3(a) of the Defendant’s Witness Statement) (Emphasis added)

48.  What the Defendant did not say in his witness statement was that the Target Shareholding was in fact owned by two individuals and he had full authority to enter into the oral agreement on their behalf including concluding a price at the January 2015 Meeting.

49.  I find this difficult to understand because if the Defendant indeed had had authority to enter into the oral agreement, there would be no need for him “to procure the Target Shareholding from the several shareholders owning the same”.  No procurement would be required as the Defendant would have full authority to enter into a binding oral agreement to sell the Target Shareholding.

50.  Further, if Mr Richard John Siemens had given full authority to the Defendant to sell his shareholding to the Plaintiff and a deal was concluded at the January 2015 Meeting, there is no reason why the same information was not communicated to Mr Richard John Siemens around the same time. If that information had been communicated, it is inexplicable why Mr Richard John Siemens would then have sold his shareholding to six other individual shareholders before the completion of the due diligence exercise.  I am of the view that it could only mean that no binding oral agreement was reached in the January 2015 Meeting.  Hence, Mr Richard John Siemens saw fit to sell his shareholding to other individuals without letting the Plaintiff know or obtaining the Plaintiff’s consent.

51.  The Defendant said that he could have procured the six individuals to transfer their shareholding to the Plaintiff. That may or may not be the case but the fact is that the liberty to sell on the part of Mr Richard John Siemens to the six individuals tends to show that no binding agreement was concluded by the Defendant on behalf of Mr Chan Hing Ping and Mr Richard John Siemens.

52.  Mr Yin for the Plaintiff submitted that the Defendant’s testimony that the 51.44% shareholding of the Target Company was beneficially owned by Mr Richard John Siemens and Mr Chan Hing Ping and that although in entering into the alleged binding oral agreement, the Defendant was incurring a personal liability towards the Plaintiff to deliver the Target Shareholding upon completion, the Defendant was in fact selling as the duly authorized agent of the two gentlemen as his undisclosed principals is not only directly contradicted by what was expressly stated in the recital to the Due Diligence Agreement where the vendor was described as the Defendant and his directly or indirectly held companies, but completely at odds with the conduct of Mr Richard John Siemens who is recorded as having transferred the shares registered in his name to not less than six different individuals.  I agree.

53.  Mr Yin for the Plaintiff further submitted that under cross-examination, the Defendant was categorical in testifying that those six individuals were genuine purchasers at arms-length (as opposed to nominees for the two gentlemen) but he was unable to provide any or any convincing explanation as to why Mr Richard John Siemens would have sold the same shares again to someone else after the Defendant acting with his authority had already come to a prior binding oral agreement with the Plaintiff for the sale of those shares some 8 to 10 days previously or how the Defendant’s authority to sell the shares was supposed to enable the Defendant to procure delivery of the shares upon conclusion of the oral agreement if they had already been sold by Mr Richard John Siemens to the six individuals prior to the completion date.  I also agree.

54.  Mr Yin for the Plaintiff is also right in submitting that the sale by Mr Richard John Siemens before the completion date would have rendered nugatory the Defendant’s authority to sell and put it out of the Defendant’s power to deliver those shares to the Plaintiff upon the completion of the oral agreement.  There is no escape from the conclusion that if the Defendant’s testimony that the six individuals were genuine purchasers at arms-length were true, then in the absence of anything to suggest that Mr Richard John Siemens was deliberately seeking to renege on the deal with the Plaintiff, the proper inference to be drawn from the sale to the six individuals by Mr Richard John Siemens is that he had never authorized the Defendant to sell the shares for him. Hence, there can be no binding oral agreement in January 2015.

55.  Seventhly, it is the Defendant’s oral testimony that no oral agreement would be concluded unless and until Mr Jia of the Plaintiff and Mr Chan Hing Ping shook hands and they did in a dinner immediately following the January 2015 Meeting.  However, there is no evidence or suggestion that Mr Jia of the Plaintiff ever shook hands with Mr Richard John Siemens.  The Defendant’s answer, during the cross-examination, is that Mr Chan Hing Ping represented Mr Richard John Siemens as well.  I find this hard to believe because there is no evidence or suggestion that Mr Richard John Siemens gave any authority to Mr Chan Hing Ping to conclude any deals on his behalf. Further, the evidence suggests that Mr Richard John Siemens knew nothing about the January 2015 Meeting. 

56.  Eighthly, in a document entitled “介紹及協調服務協議”, clause 4.1 provides that:

“4.1 若選定賣方達成對購入控制性股權有法律約束力的買賣協議或成功購入控制性股權，甲方支付介紹費予乙方，介紹費為600萬港幣。” (Emphasis added)

57.  There is no evidence that Ms Zhang ever demanded the Plaintiff for the sum of HK$6,000,000 or that the Plaintiff had paid Ms Zhang the sum of HK$6,000,000.  If indeed a legally binding sale and purchase agreement had been reached, it would be strange if Ms Zhang did not demand or chase the Plaintiff for the payment of HK$6,000,000.

58.  Ninthly, in terms of the WeChat or text messages which the Defendant heavily relied upon to evidence the existence of a binding oral agreement, I agree with Mr Yin for the Plaintiff that given that the Court is dealing with informal text messages and having regards to the innate ambiguities and nuances of some of the expressions, the Court should be slow to accept the out-of-context meanings attributed by the Defendant to the words used.  For example, when Mr Simon Chiu sent a text message to Ms Zhang stating “確認一下作價問題”, the phrase could not be understood as simply seeking re-confirmation of the price already agreed as the words “問題” can also suggest that the price was still not settled. Also the words “錢的問題” could have properly been understood to refer to the funds required for a general offer and not the agreed price for the purchase of 51.44%.

59.  The words “是否决定继续完成全部收购项目” in the Due Diligence Agreement equally cannot bear only one meaning, viz, a binding oral agreement had already been concluded prior to the signing of the Due Diligence Agreement.  I agree that those words are also apt to describe a situation where there is not yet in existence any binding oral agreement and the Plaintiff would decide whether to proceed with the transaction in light of the outcome of the due diligence exercise.

60.  Similarly, the phrases used by Mr Simon Chiu in his communication with Ms Zhang and the Defendant which might carry the meaning that the price of the acquisition had been agreed have to be read in context. Mr Simon Chiu has given his explanations in his witness statement to which I accept.

61.  In general, I find Mr Jia and Mr Simon Chiu’s evidence credible.  Mr Jia is very consistent that during the January 2015 Meeting, only some directional issues were agreed but the concrete price and methods of acquisition have to be agreed after the completion of the due diligence exercise.  He agreed that the issue of the Listing Value was raised and discussed.  Mr Chan for the Defendant submitted that Mr Jia has conceded in his evidence that he may have agreed to the price proposed by the Defendant after the Defendant had reduced the Listing Value to HK$288 million.  However, I agree with Mr Yin for the Plaintiff that when Mr Jia uttered the words “有可能有講過” he was referring to the Defendant’s offer to lower the Listing Value to HK$288 million, and when Mr Chan subsequently put to Mr Jia that he had agreed to buy the shares at the price of HK$288 million subject to satisfactory due diligence results, Mr Jia’s answer was “我沒有必要提早去同意這個”.  I find his evidence credible.

62.  Also when Mr Jia testified that a difference of HK$30 million in the asset value of the Target Company was not material to him, it cannot be taken to mean that he actually agreed to the Defendant’s case that the asset value is HK$130 million.  I am of the view that what he meant was that if there was a different of HK$30 million after the due diligence exercise, that by itself would not be a deal breaker.

63.  Mr Simon Chiu’s evidence is also consistent.  His evidence is basically that he did not participate in the January 2015 Meeting and therefore did not know what happened during the meeting. He was there to assist Mr Jia of the Plaintiff to carry out the due diligence exercise and to make sure that the transaction could go through legally and effectively.  I find his evidence that he first found the idea of avoiding the general offer obligation doggy but went along with it initially credible. He subsequently advised the Plaintiff to go for a mandatory general offer.  This is consistent with the timetables prepared by Hoitong.

64.  Mr Yin for the Plaintiff submitted that the text message sent by Mr Simon Chiu on 17 March 2015 to promise that the transaction would be completed as soon as possible is equivocal both as to whether a binding oral agreement for the sale and purchase of the shares had already been concluded and as to whether there were any outstanding issues raised in the due diligence exercise which remained unresolved.  Mr Yin further submitted that properly understood in its context, it was no more than a statement of reassurance that the Plaintiff remained in earnest.  It cannot be understood as an admission by the Plaintiff that there was in existence a binding oral agreement or that the due diligence problems have been resolved.  I agree.

65.  On the contrary, I find the Defendant’s evidence less credible. For example, his oral evidence that the parties had agreed to go for mandatory offer in the January 2015 Meeting was not mentioned in his witness statements.  It is also contradicted by the contemporaneous documentary evidence.

66.  His evidence that he had full authority from Mr Richard John Siemens to sell his 24.57% of the shareholding of the Target Company is flatly contradicted by Mr Richard John Siemens’ sale of his shareholding to six purchasers.  The Target Company’s announcement dated 31 March 2015 makes this point clear.  On the contrary, the Target Company had not made any announcement that Mr Chan Hing Ping had entered into any binding agreement to sell his 26.87% of the shareholding in the Target Company to the Plaintiff.  

67.  Further, when being cross-examined on the need to enter into separate written agreement with different registered owners of the Target Shareholding, the Defendant for the first time, in oral testimony, said that it was the idea of Ms Zhang who at her own initiative tried to preserve for the Plaintiff the possibility of avoiding the obligation to make a general offer by disguising the acquisition of a 51.44% shareholding by splitting it up into several transactions.  I find that explanation to be incredible.  First, it is against the Defendant’s own evidence that there was an agreement that the acquisition would be by way of a mandatory offer during the January 2015 Meeting.  Secondly, given the agreement to go for a mandatory offer, it is incredible that Ms Zhang would have come up with a plan to avoid the general offer obligation on her own initiative.

68.  Still further, the Defendant’s assertion, made for the first time in his oral testimony, that the obligation to pay over a forfeitable deposit had been discussed at the first meeting when the asserted binding oral agreement was concluded, is, in my view, hard to believe.  Mr Yin for the Plaintiff submitted that the assertion is not consistent with the Defendant’s pleaded case (§5 of the Re-Amended Defence) and it is inconceivable that the Defendant’s case would have been pleaded in that way if what is being asserted is true.

69.  Additionally, I also accept Mr Yin’s submission that the Defendant’s testimony during cross-examination that the figure of HK$418 million had resulted from a counter-offer from Mr Jia is incredible.  It is inconsistent with paragraph 4(a) of the Defendant’s witness statement which stated that the Defendant had taken the initiative to lower the listing value to HK$418 million in order to incentivise Mr Jia to accept the deal.  Further, the Defendant had retracted the allegation of a counter-offer from Mr Jia in re-examination.

70.  Overall, I am of the view that the Court should take into account all the factual circumstances into consideration and make its own assessment according to established principles.  It will be dangerous for the Court to rely on one or more informal text messages to come to a view as to whether a binding oral agreement was reached in the January 2015 Meeting.

71.  I have also taken into consideration the Defendant’s grant of time extensions to the Plaintiff to arrange for funds and the fact that the sum of HK$450 million was deposited into Haitong on 30 March 2015, but I am of the view that they are not determinative on whether a binding oral agreement was reached in the January 2015 Meeting.  They are also consistent with the Plaintiff’s intention or efforts to complete an intended transaction.

72.  Finally, I should also mention that I come to the above decision irrespective of which party bears the burden of proof in establishing the existence or non-existence of the asserted binding oral agreement as I do not find it attractive to decide this case purely on burden of proof.  It is also not necessary to do so as the evidence is quite clear to this Court.

73.  I also do not find it to necessary to draw any inference, adverse or otherwise, from the fact that Ms Zhang was not called as a witness in the trial.

D. DISPOSITION

74.  For all the reasons stated above, I make an order that the Defendant do return the sum of HK$20 million to the Plaintiff forthwith with interest at Hongkong and Shanghai Banking Corporation’s prime rate plus 1%.

75.  As this Court has come to the factual finding that no binding oral agreement was reached between the parties, there is no need for this Court to deal with other factual disputes of the parties.  In Goff & Jones: The Law of Unjust Enrichment, 9^th Ed., the learned editors at §14-06 state:

“A pre-contract deposit, paid before any binding contract has been entered, is essentially an expression of seriousness of intention on the part of the prospective purchaser. It is not subject to the same principles as deposits paid at the time of making a contract. Part of the basis of payment of a pre-contract deposit is that the contract will subsequently come into existence. If, therefore, no contract materializes, the basis of the payment has failed, and the deposit must be returned.” (Emphasis added)

76.  As far as costs is concerned, I make a cost order nisi that the Defendant is to pay the costs of and occasioned by the present action including this trial to the Plaintiff, to be taxed on a party to party basis, if not agreed.  The above costs order nisi will be made absolute unless the parties apply to vary the same within 14 days from the day hereof.

77.  Finally, it remains for this Court to thank Mr Yin for the Plaintiff and Mr Chan for the Defendant for their helpful assistance.