LACHLAN JAMES CHRISTIE v. LEE DUN SHING

DCCJ7857/2002

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 7857 OF 2002

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ASSESSMENT OF DAMAGES

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Introduction

1. By an agreement dated 17th February 2000 ("Agreement"), the Plaintiff ("P") sold 5000 shares of Always Good Holdings Limited ("AGHL") to D for US$150,000.00. P claimed against the Defendant ("D") for US$50,000.00 being damages for D's failure to pay the 3rd equal instalment of the price on/before 30th April 2000 ("Payment Date").

2. On 12th May 2003, partial judgment for HK$5,250.00 and interlocutory judgment for breach of contract for damages to be assessed were entered against D ("Judgment").

3. D disputed P's claim on the grounds that (a) AGHL shares had substantial market value at the time of D's breach of contract, and (b) P failed to mitigate his damages by selling the remaining AGHL shares in the market. There was no formal pleading on the issue of mitigation of damages, but the parties agreed that D could proceed on the aforesaid defences based on the contentions set out in his witness statement.

4. The parties agreed that the witness statements (with certain parts excised) do stand as evidence-in-chief of the witnesses as to fact. Mr Vrijmoed, solicitor for D, confirmed that D would not adopt his earlier affirmations referred to in his witness statement as part of his evidence-in-chief.

5. P gave evidence and called Anthony Kam ("Kam"), a certified public accountant, as his expert witness, and his expert capacity was not challenged. D gave evidence and called Douglas Hansen-Luke ("Hansen-Luke") and William James Fyfe ("Fyfe") as his witnesses. The admissibility and authenticity of the documents in the hearing bundle (including documents annexed to P's witness statement) were agreed.

Background facts

(1) Corporate structure

6. The following salient facts are not disputed :

(a)	AGHL's only asset was shares in Asia Strategic Incorporated ("ASI"), a BVI company. ASI with 2 wholly owned Hong Kong subsidiaries ("Subsidiaries") was the company which had value and targeted to enter into Deal (see below).
(b)	AGHL, ASI, Familiar Holdings Limited (another holding company - "FHL") and Subsidiaries were part of a group of companies ("Group") formed in September 1999 to capitalise on the internet boom.
(c)	4 founders of Group (P, D, Hansen-Luke and Dominic James Moynahan ("Moynahan")) invested 40% of ASI's initial capital (20000 out of 50000 shares at US$10.00/share) through AGHL.
(d)	Each share in any Group holding company was equivalent to a share in other Group companies, so when ASI allotted new shares, a holding company, say, AGHL, would allot shares to its shareholders to maintain a 1 to 1 share ratio.

7. ASI's and AGHL's company records as at 3rd December 2001 and 13th May 2003 showed the following subscriptions and transfers :

(a)	Upon establishment, FHL and 2 other entities respectively held 150000, 10000 and 5000 ASI shares, and Hansen-Luke, D, P and Moynahan each held 5000 AGHL shares.
(b)	On 21st February 2000, 3400, 250, 2550, 500, 1700, 3750 and 850 (totalling 13000) ASI shares were allotted to AGHL, P, FHL, Li Lai Kuen ("LLK") and 3 other parties respectively.
(c)	On 16th March 2000, each of AGHL's shareholders further subscribed 850 AGHL shares and Hansen-Luke transferred 500 AGHL shares to Davies.
(d)	On 5th May 2000, 2000 ASI shares were allotted to each of 2 parties (totalling 4000 shares).
(e)	On 11th July 2000, 330, 14, 330 and 165 ASI shares were allotted to FHL, Peter Francis Davis ("Davies") (through AGHL) and 2 other parties (totalling 839 ASI shares). On the same day, Davies subscribed to 14 AGHL shares.
(f)	Pamela Charlotte Estcourt ("PCE") subscribed to 115 ASI shares on 23rd November 2000.
(g)	Davies, Maria Phillips ("MP"), Moynahan and 6 other parties respectively subscribed to 40000, 1348, 13483, 8000, 13864, 1348, 5000, 27727 and 13864 ASI shares on 17th February 2001.
(h)	On 17th February 2001, AGHL transferred 14 and 500 ASI shares to Davies and further transferred 2516, 5350, 9184 and 5850 ASI shares to P, Hansen-Luke, D and Moynahan. On the same day, LLK transferred 50 and 150 ASI shares to PCE and MP respectively, and FHL transferred inter alia 2925, 585, 6015, 6015, 585 and 1755 ASI shares to P, MP and 4 other parties respectively.
(i)	Faith Group Limited subscribed to 240000 ASI shares on 19th February 2001.

8. Under AGHL's memorandum and articles of association, the transfer of AGHL shares was subject to prior or subsequent approval of AGHL evidenced by a directors' or members' resolution and AGHL shall not be required to treat a transferee of an AGHL share as a member until the transferee's name has been entered in the share register.

(2) Dramatis personae

9. P was a director of AGHL, ASI and Subsidiaries and a chartered financial analyst employed by Subsidiaries. D was at the material time was a trader on the futures exchange and AGHL's director/shareholder. D said he only came to P when they established Group.

10. Fyfe has known D since 1991-1992 and has worked with D for a number of years. In/about March 2000, Fyfe became the operations manager of 1 of Subsidiaries but held no executive position at ASI/AGHL. His duties included maintaining the share registers of ASI and its holding companies (eg AGHL). In /about July 2000, Fyfe left Group and participated in a business venture with D. Subsequently, a Singaporean brokerage house made an offer to D, Fyfe and another as a team, which offer was eventually accepted by D and Fyfe. D joined the brokerage house some time in 2003 and Fyfe a few months later.

11. Hansen-Luke was AGHL's shareholder and ASI's former director/chief executive officer. He first met D in early 1999 or earlier.

(3) Agreement

12. It was not disputed that D received 3334 AGHL shares upon payment of 1st 2 instalments under Agreement. The remaining 1666 AGHL shares ("Shares") were to be transferred against the 3rd instalment payment of US$50,000.00 on Payment Date, which payment and transfer of Shares were never completed.

(4) Potential deal

13. Although the parties differed in relation to their understanding of the prospects of the potential deal discussed below, some of the background facts are not disputed.

14. In January 2000, ASI commenced discussions with Sun Hung Kai & Co Ltd ("SHK") for Sun Hung Kai Financial Data Ltd ("SHKD") to acquire inter alia Subsidiaries and to be renamed as Intelligence Quants Limited ("IQL") for eventual listing on the stock exchange's Growth Enterprise Market ("GEM") ("Deal").

15. SHK in its letter dated 13th January 2000 to Hansen-Luke of ASI ("Initial Letter") advised that its wholly owned subsidiary (presumably SHKD) would subscribe for 4000 ASI shares at US$20.00/share. A listing was already contemplated then as Initial Letter referred to SHK's rights through SHKD to subscribe to shares at less than 30% of the initial public offering ("IPO") price prior to listing. P on ASI's behalf accepted the terms of Initial Letter on 26th January 2000.

16. SHK and ASI entered into heads of agreement ("Heads of Agreement") whereby both parties agreed to use reasonable endeavours to formalise on/before 3rd April 2000 ("Deadline") the formation of the new entity (presumably IQL) for eventual GEM listing on terms set out therein. It was anticipated that (a) the new entity would acquire 100% of SHKD's shares and 65% of the shares of ASI's new subsidiary (into which Subsidiaries' assets would be injected) in return for the issue of 82.11% and 17.89% of the new entity's shareholding to SHK and ASI respectively, and (b) a sponsor/lead underwriter would be appointed to prepare for the GEM listing. The parties also agreed that to raise venture capital financing of US$10 million from investors for a 22.7% stake in the new entity's shareholding after dilution. If a formal agreement ("Formal Agreement") were not entered into before Deadline, Heads of Agreement would lapse unless Deadline was extended in writing. Formal Agreement was not entered into in April 2000 and Deadline was extended generally. Hansen-Luke could not remember the final deadline.

17. Hansen-Luke sent a e-mail to 27 persons (including P, D, shareholders, staff, executive directors and others concerned with Group) on 12th May 2000 ("E-mail") in which he referred to a valuation of US$109 million (presumably of IQL) and a final meeting amongst ASI, SHKD and Nomura International Hong Kong Limited ("Nomura") shortly to finalise the mandate for Nomura's underwriting of both a US$10 million private placement and a GEM listing for the end of the year.

18. The IQL Corporate Strategy Document prepared by ASI on Nomura's advice ("Strategy Document") provided inter alia that in return for ASI giving up Subsidiaries, it would own 14% of IQL shares and SHK would own the remaining 86%. It envisaged that IQL would 1st seek a private placement of shares for a pre-IPO capital injection of HK$60 million and thereafter proceed for a GEM listing.

19. D located what appeared to be an unsigned draft letter from Nomura to ASI/SHK's directors purporting to confirm that Nomura would act as international co-ordinator/underwriter to IQL for the proposed private placement and subsequent GEM listing ("Nomura Letter"). Yet Nomura's purported scope of work as stated in Nomura Letter was only to inter alia assist with documentation preparation and work with IQL for the purposes of raising equity. Hansen-Luke said it was expected from the beginning (and P/other directors knew) that the placement would not be handled by Nomura but would be sold to Nomura London Private Equity Group ("Nomura London").

20. Despite the aforesaid, IQL had never been established and eventually Deal fell through in September/October 2000.

P's case

(1) Agreement

21. ASI's 2-year business plan forecasted profit within year 1, but shortly after subscribing to ASI/AGHL shares, it was obvious to P that the revenue projection would not be met and the operating costs significantly exceeded the budget. It appeared that ASI would deplete its initial capital by January 2000. Solvency could only be maintained by the shareholders' willingness to raise new capital through subscribing to new share issues, which would be hard to sustain over time despite the then interest in on-line business.

22. P regarded his investment in ASI/AGHL shares as highly risky. He decided to sell 5000 AGHL shares in January 2000 to reduce his risk exposure in the belief that the then interest in on-line business might produce available potential purchasers with a higher appetite for risk. P had one potential buyer other than D, ie David Ho ("Ho") who was ASI's largest shareholder, but no conclusion on price/other terms was reached. P contracted to sell to D his 5000 AGHL shares as D's offer was the best. Initially, P thought D wished to increase his holdings, but later suspected that D tried to on-sell the shares at a profit and therefore sought payment by instalments.

23. D never explained why he did not pay the 3rd instalment. At that time P guessed D might have mis-budgeted his resources. D's ability to pay was uncertain as his company and his role as a trader became redundant in the 1st quarter of 2000 when the futures exchange went electronic. D's ability to pay might have improved (although P was not sure) when D resumed work by about mid-2001. P later believed D failed to pay the 3rd instalment because D might have thought he made a bad deal by the time of Payment Date.

(2) Payment reminders

24. In the several days prior to/after Payment Date, P gave D several e-mail/verbal reminders as well as a final written reminder (which copy P could not locate) handed to D after Payment Date which extended the payment deadline by about a week. D did not respond to the reminders or pay the 3rd instalment. D did not offer to buy Shares from P after Payment Date.

(3) Mitigating steps

25. Thereafter P tried to sell some of Shares to third parties whom he believed might be interested in buying Shares although Shares had little or no marketability. Although AGHL's share transfer restrictions required board approval, P considered that third parties who were not eligible to subscribe shares might have a possible interest in acquiring Shares in the secondary market.

26. However, such third parties showed no interest predominantly because of the risk related to minority shares in a private company as well as the uncertainty of any return related to Group's financial state (see below) and the industry it operated in. As at Payment Date/early May 2000, AGHL held 23400 out of 63000 ASI issued shares (37.14%) with Shares being 2.6% interest in ASI.

27. P did not approach any existing shareholder to sell Shares. He had approached all major existing shareholders capable of purchasing his shares in February 2000, such efforts finally resulting in Agreement. But Group's finances declined since early February 2000 and worsened by May 2000 when the existing shareholders became aware that D defaulted under Agreement. As the chief executive officer of 1 of Subsidiaries and ASI's director, P believed no existing shareholder would be interested to buy Shares. Their knowledge of Group's financial state (see below) would lead them to prefer subscribing new shares to finance Group's ongoing operations. Indeed, AGHL company records showed no secondary market transactions after Payment Date.

(4) Subscription of shares

28. P denied D's suggestion that subscriptions/allotments of AGHL/ASI shares by the shareholders were indicative of a market for Shares or of the shareholders' interest in acquiring Shares. P said that ASI's new share issues in February, May, July and August 2000 (the latter corresponding to ASI allotments recorded on 23rd November 2000 and 17th February 2001) were for raising capital to finance its subsidiaries' operating losses. In any event, despite having a right to do so as existing shareholders, P and D did not subscribe to further ASI shares after Payment Date. Allotments after Payment Date were under-subscribed, indicating that the secondary market for Shares was dead. For AGHL shares, they were predominantly allotted rather than transferred.

(5) Transfer of shares

29. P again denied D's suggestion that the post-Payment Date transfers of ASI shares, particularly to P, were indicative of a real market for Shares. P pointed out that the transfer of ASI shares to him on 17th February 2001 was not a new acquisition. At that time, apart from Shares (which were equivalent to 1666 ASI shares), P beneficially held 850, 2925 and 250 ASI shares through AGHL, FHL and himself personally. After AGHL was struck off for failing to pay corporate fees, P's ASI shares held through AGHL and FHL were transferred back to him on 17th February 2001. Similar disposal back of ASI shares held by AGHL to Davies, Hansen-Luke, D and Moynahan were also recorded on the same day.

30. Other than the aforesaid, there were only (a) a transfer of 500 AGHL shares from Hansen-Luke to Davies recorded on 16th March 2000, which transaction P understood was entered into in late February 2000 (ie before Payment Date) for US$30.00/share, and (b) 2 small transfers of 150 and 50 ASI shares on 17th February 2001. These were small transfers between existing shareholders. Hansen-Luke suggested in his evidence that as P also transferred Group company shares to Gavin Wybourn ("Wybourn") at US$30.00/share at the material time, Wybourn would also be a potential purchaser of Shares. P denied he had ever transferred shares to Wybourn in any form.

(6) Group finances

31. Group continued to operate at a loss with expenses far exceeding any revenue. Cash balances held by Group at Payment Date would only be able to finance less than 2 further months of operations, so Group had to raise funds by share issues to stay afloat. Group was completely out of funds by October 2000 and had to release all staff leaving only 2 unpaid directors. AGHL and ASI never paid any dividends and were struck off on 1st November 2000 and 2nd May 2003 respectively due to non-payment of corporate fees.

(7) Stock market

32. The value of technology stocks started to decline in about late March 2000. GEM's Growth Enterprise Index ("Index"), consisting mainly of listed technology and internet stock, reached a high on 24th March 2000 but declined by 40% by the end of April 2000 and by 54% by end of May 2000.

(8) Uncertainty of Deal

33. Although the date of 22nd May 2000 was marked on the front page of Strategy Document, P had not seen the original and could not confirm that it was produced on 22nd May 2000. Strategy Document had various drafts and P had seen an updated draft in June 2000.

34. Although Strategy Document anticipated IQL's formation with SHK and ASI each holding IQL's shares, IQL never actually existed and ASI never had any shareholding in IQL/SHKD. No potential investor or no expression of interest to invest in the pre-IPO private placement was ever identified or received. Even if HK$60 million were actually raised by private placement of new IQL shares (which did not occur), ASI's 14% shareholding ratio in IQL would have been significantly diluted by the issuance of shares to investor(s). Thus, the final success of Deal was highly uncertain, and the ultimate value to ASI shareholders was too tenuous to be quantified and considered an asset by any potential purchaser of Shares.

(9) Expert evidence

35. Kam produced a report dated 3rd December 2003 on the valuation of AGHL shares as at Payment Date and their marketability. He had reviewed Nomura Letter or Strategy Document but did not consider they had any impact on the valuation of Shares or AGHL shares because :

(a)	Deal had not been established as a firm offer for ASI shares and the seriousness of Deal was doubtful.
(b)	Deal was an inconclusive proposal that eventually fell through, so it would not have affected the marketability of AGHL shares. It was inappropriate as a matter of accounting practice to take into account inconclusive expectation when valuing shares at a particular date.
(c)	Kam in assessing the value of Shares or AGHL shares adopted valuation methods widely used globally and which did not have regard to on-going negotiations for transfer of shares of the company.

36. In valuing AGHL shares, Kam considered that the net assets value valuation method ("NAV Valuation") was more appropriate than the price/earnings ratio valuation method ("P/E Ratio Valuation") because AGHL was a loss suffering company. P/E Ratio Valuation took into account an element of "goodwill" to reflect the on-going profit making capability of the company. Normally the difference in value between the 2 methods reflected the value of the goodwill.

37. As AGHL's only asset was 23400 ASI shares and ASI in turn wholly owned Subsidiaries, Kam focused on the value of ASI and Subsidiaries (collectively, "ASI Group").

38. ASI Group had operated for about 8-11 months by Payment Date and suffered consolidated loss of HK$3.8 million in the 1st accounting year up to Payment Date. ASI Group's value on P/E Ratio Valuation should be nil. AGHL as holding company recorded a loss of about HK$1.4 million arising from share of loss of ASI Group. Again, AGHL's value under P/E Ratio Valuation would also be nil.

39. As at Payment Date, AGHL's balance sheet indicated that, after sharing losses of ASI Group, it had a NAV of HK$688,589.00. ASI Group's fixed assets were all depreciable assets. Given that AGHL had 23400 ASI shares of US$1.00 each, the value of each AGHL share should be HK$29.42 and thus the value of Shares should be HK$49,025.00.

40. Kam opined that the value of AGHL shares should be between HK$0 and HK$29.42/share as at Payment Date, but as there was virtually no market for them, Shares would only fetch a small fracture of the aforesaid price range. KAM noted that the following matters would hinder the marketability of AGHL shares :

(a)	AGHL was a privately owned BVI company and its only investment was in shares of ASI Group, which also comprised privately owned companies.
(b)	Shares amounted to 7.1% of AGHL's issued capital, so any purchaser would end up being a minority shareholder.
(c)	AGHL's only asset was 37.14% of shareholdings in ASI which did not give any controlling interest.
(d)	ASI Group suffered from big losses and on a projection of results, it would take a further 5 months to deplete all assets of ASI Group after Payment Date.
(e)	AGHL's constitution contained restrictions impairing the marketability of its shares.

41. Kam said it was extremely difficult to determine the market value of private company shares and in reality, there might not be a market at all. Kam agreed that potential buyers would include (a) those familiar with the company (eg existing shareholders) and (b) independent investment advisers and fund managers who dealt in private company deals. Kam himself did not approach such persons. It was extremely unlikely that anyone would want to purchase Shares although Kam could not rule out such possibility and say that there was absolutely no market for Shares. Kam disagreed that a single willing buyer would constitute a market or that one could extrapolate from the existence of such single buyer a future market. There must be sufficient transactions to create the demand. Where there was inactive trading, Kam would use the aforesaid 2 valuation methods to arrive at the price of each share.

D's case

(1) Background and breach of Agreement

42. P had an argument with one of the other partners and eventually decided to leave Group. D agreed to buy P's AGHL shares and entered into Agreement. Hansen-Luke and Fyfe knew of such sale as a result of processing the transfer of 3334 AGHL shares from P to D. Fyfe knew there was a final date for paying the 3rd instalment but he did not know there was a written Agreement.

43. D said that at around Payment Date (although Fyfe said it was after Payment Date), P told him he was late and only then did he realise he was late in making the final instalment payment. Fyfe said that, having known D for years, D was not an organised person and did not read letters or keep track of dates. D explained he was then busy working on the trading floor with limited time spent in the office, so he did not know that payment was due. Fyfe remembered that P reminded D to make payment of the 3rd instalment although D denied receiving such reminders or any extension of time for compliance.

44. Further, D said that he was led to believe that if any instalment was not paid timeously, the transaction would not be proceeded with and the parties would leave things at that. Fyfe was also unaware of (a) any legal ramifications for D upon failure to pay the 3rd instalment or (b) any contractual provision that permitted P to maintain a claim against D for non-payment. P made no claim at the material time, so Fyfe was surprised by the present claim. Had Fyfe been aware D could be sued for failing to pay the 3rd instalment, he would have advised D to pay or seek legal advice.

45. D denied he failed to pay the 3rd instalment because the market had fallen significantly and he realised that it was not a good investment or that he could not have sold Shares for a profit. D said that from the very start he acquired Shares to increase his holdings and did not want to sell Shares.

(2) Offers (see below)

46. D claimed that P failed to take reasonable steps to sell Shares and to minimise his loss as soon as possible after D's breach.

47. When P informed D he no longer wished to sell Shares to D because D was late with payment, D immediately verbally offered to complete the transfer of Shares at the agreed price of US$50,000.00 ("Initial Offer"), which P declined. Fyfe and Hansen-Luke were aware of this exchange at ASI's office. Hansen-Luke also recalled that D was quite upset for failing to pay the 3rd instalment at the time and later when D realised Nomura's valuation came through to US$109 million. D did not actually tender payment of US$50,000.00 because P already said he did not wish to go through with the sale.

48. According to D (and as recalled by Fyfe), for the next few days/weeks (although D, Hansen-Luke and Fyfe did not recall the exact times or what D said or who was present), D continued to make offers to P to buy Shares at their previously agreed price of US$50,000.00 ("Offers"). D hoped P might change his mind and D really wanted to buy Shares. But P rejected each Offer.

49. D and Fyfe said Offers were made at various places, including at ASI's office and over drinks at the pub. D said Offers were overheard by many people including Hansen-Luke and Davies. However, Fyfe said in his evidence that his recollection as to whether anyone overhead Offers was hazy. In fact most staff would not be interested in or have much idea of the transaction between P and D. Fyfe said he overstepped himself in his witness statement when he said all Offers were heard by all members of the staff in the office and by the majority shareholders of AGHL/ASI (who were Hansen-Luke and Moynahan). But it no secret that D was willing to buy Shares. Fyfe said his recollection was based on his processing of the transactions and the conversations he remembered and was not swayed by his lack of knowledge of the terms of Agreement and/or his close relationship with D.

(3) Alternative potential purchasers of Shares

50. P failed to take steps to try find alternative buyers for Shares. P could easily have offered to sell Shares to AGHL shareholders (Hansen-Luke, Moynahan and Davies) whom D believed would have been interested in buying Shares. But P did not so offer. The restriction in transfer of shares in AGHL's constitution did not prevent P from making efforts to seek alternative buyers of Shares.

51. Hansen-Luke regarded it a trading opportunity to acquire Shares at US$30.00/share and on-sell them at the value implied by Nomura's valuation of US$109 million for IQL in E-mail. He said in his witness statement that had P offered Shares to him at US$30.00/share, which P never did, he would definitely have bought them as he too foresaw a prosperous future for IQL. However, he qualified such statement when he gave evidence to say that had he been presented with a serious opportunity and sufficiently attractive proposition to purchase Shares, he might have been able to secure funding at reasonable price/time to finance the purchase.

52. As was commonly known within ASI, Hansen-Luke did not have US$50,000.00 ready cash at that time, but he had a known ability and proven track record of raising monies for attractive propositions. For example, Hansen-Luke successfully raised most of the paid up capital of about HK$2.5 million of Company One Limited (an internet company he established but was at the time of the hearing inactive pending a potential dividend payment or income stream/capital gain if its acquiring company were successful) within 2 weeks. He persuaded D to invest in and to lend him US$15,000.00 for his own investment in Company One Limited (which loan had been repaid by Payment Date). As at Payment Date, Hansen-Luke still owed a creditor US$50,000.00 in respect of the loan for his initial investment in AGHL, which was eventually repaid. Hansen-Luke said quite possibly he could have raised funds from employees/shareholders of ASI/related companies and from Company One Limited for the purchase of Shares and, being short of cash at the time, he would have bought Shares at US$30.00/share and on-sell them to other people at a higher price immediately to make some money.

53. Hansen-Luke himself had not approached P for Shares. First, at that time an IPO was anticipated under Deal with many subsequent issues of shares, so if people (presumably including him) were looking to invest in the company, there would be many opportunities for them to do so. Secondly, Hansen-Luke knew P to be a determined person so that once he made up his mind, there was usually little point in trying to change his mind. D was unable to confirm this when he gave evidence as he did not work with P. Thirdly, P would have to inform AGHL's directors (including Hansen-Luke) if he wanted to sell Shares to anyone else.

54. When it was suggested that Hansen-Luke favoured D in his evidence because of his personal financial dealings with D, Hansen-Luke said both P and D had claimed against him for monies he owed to each of them. He had no particular friendship with either P or D. D had threatened legal action against him but no legal proceedings were issued because he repaid D. Presently, Hansen-Luke did not owe anyone connected with ASI/Group any money and had only seen P or D in court or in court-related situations.

55. D and Hansen-Luke believed the main reason why P did not make any effort to sell Shares in/about May 2000 was because P realised that after entering into Agreement, the prospects of AGHL were improving and there was a strong likelihood that the value of Shares would only increase in the foreseeable future because of Deal. D said P told Hansen-Luke that he was lucky not to have sold Shares to D.

(4) Transfers/subscriptions of shares

56. D argued that the transfers and subscriptions of AGHL/ASI shares showed that the existing directors and employees were interested in such shares and that they constituted a market for Shares. Further, in failing to offer Shares to these existing shareholders and employees, P failed to mitigate its damages. Fyfe and Hansen-Luke had knowledge of these matters because they processed the transfers of shares of Group companies, including the transfer of P's 3334 AGHL shares to D.

(5) Employees' option scheme

57. It was suggested that recipients of E-mail including employees would be interested in purchasing Shares. Fyfe had no interest in Group company shares or in buying into internet-related companies. He was personally skeptical of the internet boom. Fyfe was aware that some employees purchased shares under an employees' option scheme, but he was not involved in any price discussion. Hansen-Luke recalled that non-executive directors of a Subsidiary were given bonus shares or an option to purchase shares (possibly ASI or FHL shares) which they could exercise at US$10.00/share.

(6) Transfer of shares

58. D suggested that both Davies and Wybourn would be interested in acquiring Shares. Soon after Hansen-Luke's transfer of AGHL shares to Davies at US$30.00/share recorded in about March/April 2000 (the transaction might be earlier), P transferred AGHL shares to D under Agreement also at the same price. Hansen-Luke said that at about the same time as his transfer of AGHL shares to Davies, P might have transferred some Group company shares to Wybourn at US$30.00/share. Hansen-Luke recalled extensive discussions with P, Davies and Wybourn on the sale of shares and the price.

59. Hansen-Luke did not mention P/Wybourn's transaction in his witness statement as he was unclear what form the transaction took. He believed that Wybourn did not wish to have his name on the record directly. Wybourn's name was not found on AGHL/ASI share registers, but Hansen-Luke said he was not in a position to verify the accuracy of the share registers that P produced for the present case. Further, Hansen-Luke was unaware of Judgment when he made his witness statement and therefore did not realise that P's ability sell Shares was an issue, so he only focused on describing what he remembered of P/D's transaction.

(7) Subscription of shares

60. Subscriptions of new rights issue (as distinct from transfers of shares) had an element of existing shareholders raising capital to keep the company afloat. Hansen-Luke said there were probably 2-3 (but definitely 2) rights issues at different valuations after Payment Date. The 1st rights issue (probably in July 2000) was a positive one as they believed that IPO under Deal would definitely happen and it was a question of keeping the company going until it happened. The majority of shareholders as well as some junior employees subscribed. The 2nd or 3rd rights issues (or the final rights issue) were very much about keeping the company afloat in a negative environment.

61. It was argued that, despite their capital raising purpose, such subscriptions showed that existing shareholders (eg D, Davies, Hansen-Luke and ASI's staff) would also be interested to acquire Shares by transfer from P. AGHL shares had been subscribed at US$100.00/share, which consideration reflected their realised value attained after Payment Date.

62. D could not recall whether he subscribed to any share issue after Payment Date. At that time, with the trading floor migrating to the electronic system, he was busy getting his electronic trading system ready.

63. Davies originally held 500 AGHL shares and subscribed to 14 AGHL shares (being his pro rata allocation) at US$100.00/share after Payment Date. This suggested Davies would be interested to acquire a larger stake within AGHL, particularly at a lower price of, say, US$30.00/share, and would not have minded an acquisition by subscription instead of by transfer. The consideration of US$1,400.00 would not substantially improved capital contribution in keeping the company afloat. Fyfe heard that Davies subsequently invested US$40,000.00 in 40000 ASI shares, which he thought suggested that Davies was interested in acquiring a larger stake in ASI/AGHL. As Fyfe had left Group by that time, he would not comment on Davies' reasons for the investment. However, Fyfe agreed that by that time ASI's financial state had deteriorated and Deal had fallen through, and there was a definite possibility that Davies wished to put money into ASI to keep it afloat.

64. Hansen-Luke believed (although he was unsure) he subscribed to the shares of ASI or Group companies at different valuations after Payment Date (ie from May to October 2000). When P's and Hansen-Luke's pay was reduced by half, the difference was paid to them as non-cash equity subscription at US$70.00 or US$100.00/share. Hansen-Luke also remembered subscribing to a nominal amount of shares at US$1.00/share in (he believed) October 2002 when he and P diluted AGHL's shares against the wishes of other shareholders. By October 2000 Hansen-Luke had very little money of his own and few people would invest in ASI.

65. Fyfe had some hazy recollection that MP (possibly through FHL) and PCE subscribed to small amounts of ASI shares (as they did not have a lot of money) at US$30.00/share at about the same time Davies purchased AGHL shares from Hansen-Luke.

(8) Stock market

66. Whilst D accepted that Index fell significantly by 40% by end of April 2000 and by 54% by end of May 2000, D was sure that the grey market (before Index was instituted) prior to March 2000 was a lot lower. He recalled the Hang Seng Index fell dramatically in early October 2000. D said a declining market made no difference to a GEM listing if the company was worthwhile and had a genuine product for the public. It did not make the listing any harder or easier; it only reduced the valuation.

(9) Viability of Deal

67. As at Payment Date and May 2000, D was busy working on the trading floor and did not have the day-to-day running of Group's business or Deal, which was left to Hansen-Luke, P and Moynahan. D obtained information on Deal by e-mail, attending ASI's office to see how things were getting on or meeting up with colleagues/founders over drinks. D was not aware of Deadline in Heads of Agreement or its general extension and, as far as he was concerned, Deal had good prospects and was definitely going ahead. This would have generated interest amongst existing shareholders to acquire Shares.

68. The 27 recipients of E-mail were aware of Nomura's valuation of IQL of US$109 million. D said P should have made offers (if not to all 27 recipients) at least to those recipients to whom P had made known he had been selling his AGHL shares. D and Hansen-Luke were sure that most such recipients would have jumped at the chance to buy Shares at US$30.00/share when they were valued at US$316.40/share (see below). Had P offered Shares to the existing shareholders and other people concerned with Group immediately after D's breach, he would have been able to sell Shares at a profit in which case he would have suffered no real loss.

69. D referred to IQL's business, products/services and clientele as described in Strategy Document to say that in/about May 2000, IQL (not been established as yet) was well on its way to being a successful company. What D meant was that as at May 2000, existing clientele was already using Subsidiaries' and SHKD's services, and discussion on IQL's formation and ASI/SHK's business plan were going ahead. IQL (of which ASI would have an interest) was headed for a private placement to be carried out from May to July 2000 and a GEM listing in November 2000.

70. Hansen-Luke said that subsequent to Deadline, SHK employed a former finance director of the Swire Group to work full-time on Deal. Both parties continued with the work jointly (including jointly instructing solicitors, accountants and consultants) until August/September 2000. In fact SHK was willing to transact with ASI to the end; for SHK, it was always a question of price.

71. But Hansen-Luke accepted that as at 22nd May 2000, Nomura was not prepared to commit in writing (see draft Nomura Letter) until Nomura London agreed to investment under Deal. Even so, Hansen-Luke suggested that Nomura Letter reflected that as at 22nd May 2000 (ie beyond Deadline) Nomura considered ASI/related companies to be of substantial value and worthy of interest for its time and effort which would have been in excess of US$50,000.00.

72. The 1st concrete disappointment was in the summer of 2000 (Hansen-Luke thought it was about July 2000) when Moynahan admitted to them that Nomura London had not even been informed of Deal or had not given consent to invest in IQL. In fact, Nomura London only had a vague presentation of Deal and did not regard this as a serious opportunity. At that point, Hansen-Luke personally gave up hope of making a lot of money from Deal. But for a few months afterwards, ASI was still trying to ascertain whether it could create and run a long term sustainable business.

73. For D, he said nothing happened after E-mail and thought ASI was still in negotiations. There was no decision to kill Deal until around September/October 2000 when D became aware that the private placement never went ahead and Deal had collapsed.

74. As far as D and Hansen-Luke were aware, P was fully knowledgeable and aware of Deal in early to mid 2000. Documents produced by P showed that AGHL's company secretary communicated with P. P was also ASI's founder/director and took an active role in the discussions leading to IQL's formation. In fact, P was nominated by ASI's board of directors to be ASI's representative within IQL's senior management and, according to Strategy Document, would have become IQL's chief operating officer.

(10) Valuation

75. Hansen-Luke confirmed that Nomura informed him shortly before 12th May 2000 that its valuation of IQL was US$109 million, so E-mail stated that Nomura's valuation had increased from US$40-70 million to US$109 million. He had no reason to doubt Nomura's valuation, so ASI's valuation at end of April 2000 (ie the week before E-mail) was in the US$40-70 million level.

76. Strategy Document was written for securing pre-IPO financing. In Strategy Document, IQL's net present value of net cashflow in year 1 was stated to be HK$880 million or US$113 million on an assumed initial equity injection of HK$60 million at the start of the 1st year of its operations. D believed in such valuation, which was based on Strategy Document and the business plan that Deloitte Consulting, P and Hansen-Luke helped to write. According to the valuation in Strategy Document, ASI's 14% shareholding in IQL gave a valuation of US$15.82 million. AGHL held 40% of ASI's shares, which gave AGHL a valuation of US$6.328 million, so that the value of each AGHL share was US$316.40, ie more than 10 times the value at which P agreed to sell Shares to D. Given that in/about May 2000 IQL was headed for a GEM listing with a valuation of US$113 million, it was not surprising that P held onto Shares.

77. D agreed that the revenue projections in CSD for years 1-6 were future projections (and not existence performance) with sub-projections for various companies. He also agreed that Subsidiaries' projected revenue for years 1 and 6 were about HK$20 million and HK$350 million respectively. However, he denied that the disparity in the revenue projections for years 1 and 6 suggested such projections were mere marketing presentation.

78. Although ASI's consolidated profit and loss account for the year ended 30th April 2000 showed consolidated total income of HK$609,051.00, D denied that the valuation in Strategy Document was aggressive or over-valued. D maintained that the value of Shares as at Payment Date was higher than US$30.00/share and that he and other members of staff and directors were willing to purchase Shares at a higher price. In any event, they constituted the market and the value of Shares was what a willing buyer was prepared to pay to a willing seller.

79. D had not seen Kam's expert report before he gave evidence in court but denied that Shares as at Payment Date were worthless. He also disagreed with Kam's valuation of AGHL. Kam did not understand the demand for and what constituted a market for Shares or how valuation worked.

The issues

80. The issues in this assessment of damages are as follows :

(a) whether D made Initial Offer and Offers to P after Payment Date;

(b) if so, whether P rejected Initial Offer and Offers;

(c) whether D had taken any reasonable steps to mitigate damages;

(d) P's measure of loss and damages (if any) in light of (a) to (c).

Assessment of the evidence

81. I have carefully considered the evidence of the witnesses and the parties' submissions. The lay witnesses were all sophisticated and experienced professionals from the financial/commercial field. I am impressed by P's evidence, which was given in a straightforward and cogent manner and I am satisfied that he is generally honest and reliable. I do not have a similar favourable impression of D, Fyfe and Hansen-Luke because of their demeanour in the witness box and the inherent implausibility of their version(s) of events (see below). Unless specified otherwise below, I prefer P's evidence instead of the evidence of D's witnesses whenever they conflict.

Mitigation of damages : legal principles

82. Mr Vrijmoed submitted that P had a "duty" to take all reasonable steps to mitigate loss consequent upon D's breach and could not claim as damages any sum due to P's own neglect. However, proper analysis shows that it is not a duty as such (see McGregor on Damages (supra) para.7-017 at p.222). The principle is that P would be unable to recover damages for any loss which he could have avoided but has failed, through unreasonable action or inaction, to avoid. Put shortly, P could not claim for avoidable loss (see McGregor on Damages (supra) para.7-004 at p.217).

83. Mr Vrijmoed relied on Jamal v Moolla Dawood [1916] 1 AC 175 (also referred to in Ripple Corporation Limited v Ashok M Hemani HCA7636&7641/1982 (unreported, 29th December 1986)). It was held that a seller of readily marketable shares "in what must have been a public company" who retained them after breach could not recover from the buyer any loss below the market price at the date of the breach if the market fell and was not liable to the buyer for any profit if the market rose.

84. What steps are reasonable is a question of fact (Rich Pacific Holdings Limited v Top Profit Properties Limited HCA6806/1998 (unreported, 26th June 2000) and Payzu Limited v Saunders [1919] 2 KB 581).

85. The onus of proof is on the party asserting that mitigating steps should have been taken. But the law does not impose a very high standard on the injured party, who is only obliged to act in the ordinary course of business, and the wrongdoer must bear the consequence that injured party may not be able to resell at the best price.

86. I accept the aforesaid principles and I do not find any serious dispute between the parties on them.

Mitigation of damages : Initial Offer and Offers

87. Mr Vrijmoed submitted that to reasonably mitigate damages, P should have accepted Initial Offer and/or Offers. P submitted that Initial Offer/Offers were incredible and, even if I do find D made Initial Offer/Offers, it was not reasonable to expect P to accept them in the absence of tender of payment when D had defaulted in payment under Agreement.

88. I find on balance upon assessment of the evidence and against the economic background and circumstances of Group at the relevant time (which suggested that D's continued interest in Shares was improbable - see below) that D did not make Initial Offer/Offers to P. It is therefore unnecessary to consider whether P should have considered Initial Offer/Offers from D. My reasons are as follows :

(a)	I do not accept that D merely forgot to pay the 3rd instalment on Payment Date. D explained that he was too busy and disorganised. But this does not sit well with P's contention and Fyfe's acceptance under cross-examination that P had reminded D to make payment. I find on balance that P did send reminders to D and even extended the payment deadline by about a week. I further find that it was D's conscious decision not to pay the 3rd instalment.
(b)	D said he was led to believe that payment of the instalments was optional so the transaction would simply not proceed if payment was not made timeously but I reject such contention. Such contention does not sit well with D's other belief that after Payment Date, P was still bound to sell Shares to him if he offered payment. I also find Fyfe's contention (similar to D's) that there were no legal consequences arising from the failure to pay the final instalment unreliable as he confessed to unawareness of Agreement and details of P/D's contract.
(c)	D gave no sensible reason for making repeated offers in face of a solid rejection by P. Even if D was unaware (as he said) that P is a stubborn person, it would have been obvious to D (P and D being co-founders of Group) that persons involved in Group, including P, were all sophisticated professionals conversant in financial/commercial matters and likely to know their own minds.
(d)	The defence evidence relating to Offers was most vague and unsatisfactory, which cannot be excused on the basis of lapse of time and failure to anticipate potential litigation. D claimed great frustration with P's recalcitrant attitude and repeated rejections of Initial Offer/Offers. In my view, some details of Initial Offer/Offers, if genuine, would have impressed D (or even Fyfe and Hansen-Luke) more solidly than disclosed in the evidence.
(e)	Although Fyfe sought to underlie the existence of Initial Offer/Offers by saying that all Offers were heard by all members of staff and the majority shareholders in the office and D also was quite adamant that many persons (including Hansen-Luke, Fyfe and Davies) overheard Initial Offers/Offers, such assertion does not sit well with Fyfe's evidence that (i) although staff were in the office, they would not be interested in what P/D were up to and would not have much of an idea of P/D's transaction, and (ii) in truth he had no idea whether other people at the office actually overheard.
(f)	D did not tender payment upon making Initial Offer/Offers or adduce any evidence to show that he was ready and able to pay the 3rd instalment as at Payment Date or at the times when the alleged Initial Offer/Offers were made.
(g)	P said and the company records he produced (the authenticity of which is admitted) show that in fact D did not, despite several subsequent share issues and having a preemptive right to subscription as an existing shareholder, subscribe to ASI/AGHL shares after Payment Date. D did not deny this and only said he had no recollection. On balance, I accept P's contention. D's disinterest (particularly for the ASI share issue in July 2000) again does not sit well with D's claimed eagerness to acquire Shares even after Payment Date.

Mitigation of damages : alternative potential buyers

89. Mr Vrijmoed submitted that P should have taken steps to find alternative buyers by at least approaching the 3 other AGHL shareholders. Had P done so, he would have been able to sell Shares to (a) Hansen-Luke at US$30.00/share given his willingness to purchase Shares at that price or (b) Davies who also bought AGHL shares at around that time. D also suggested in his evidence that P should have offered Shares to most of the recipients of E-mail.

90. I do not accept that in failing to offer Shares to the above parties P unreasonably failed to mitigate damages or (see analysis on Deal below) P failed to so offer Shares because he realised AGHL's prospects were improving due to Deal.

91. I am not satisfied on the balance of probabilities that Hansen-Luke had any genuine interest or capability in purchasing Shares. It would be unreasonably onerous for P, in light of common knowledge of Hansen-Luke's strapped financial circumstances and Hansen-Luke's obvious understanding of Group's financial status/circumstances, to seek out Hansen-Luke with an offer (and not just consider a proposal from Hansen-Luke) for the sale of Shares. In my view, this goes beyond what is reasonably required in the ordinary course of business to mitigate damages :

(a)	I accept that whilst P had approached existing shareholders (Hansen-Luke being a co-founder and existing shareholder at that time) in January 2000 when he intended to sell his 5000 AGHL shares, it only attracted (apart from D's offer) an inconclusive expression of interest from Ho.
(b)	On balance, I do not accept Hansen-Luke was interested in purchasing Shares in the post-Payment Date period. Hansen Luke (like P) was a core member of Group. His knowledge of Group's finances and Deal (see below) rendered it unlikely that he would be interested in acquiring Shares.
(c)	It is very telling that Hansen-Luke explained there would be many subscription issues of shares with the anticipated IPO under Deal and therefore many opportunities for people interested in investing in Group/IQL (including himself) to reap the benefits of IPO/Deal by subscription without any need to acquire Shares from D. This is contrary to the suggestion that Hansen-Luke would be a likely buyer of Shares and in fact, this echoed P's stance that interested parties would prefer to invest by subscribing to rather than acquiring shares by transfer.
(d)	Hansen-Luke claimed interest in acquiring Shares at US$30.00/share because (i) Nomura valued IQL at US$109 million in May 2000, which he regarded as a prosperous future for IQL, and (ii) it presented an opportunity for him to make a quick profit by on-selling Shares at a heightened value. I refer to my analysis on Deal and Group's circumstances below to say that such valuation is misleading and a quick profit improbable. Further, Hansen-Luke, being personally involved in the negotiations in respect of Deal, knew this. He has not identified or even suggested any potential party likely to acquire Shares from him if he were to purchase Shares.
(e)	Although not stated in Hansen-Luke's witness statement, it is known virtually to everyone at the office (which presumably included P) that Hansen-Luke did not have the funds to purchase Shares. In my view, it would be unreasonable to expect P under such circumstances to seek out Hansen-Luke to propose a sale of Shares to him.
(f)	Hansen-Luke said that he might have been able raise finance within reasonable price/time. But there is no certainty or even probability that he could do so. His so-called proven track record and his intended sources of finance for Shares were from his own internet company, Company One Limited, and employees/shareholders of Group. Such intended sources are doubtful given his then outstanding indebtedness in relation to investments in these companies and the common knowledge that he did not have income/capital. In my view, it is to expect too much of P to require him seek out Hansen-Luke and then wait and see if he could come up with the money to purchase Shares.
(g)	Indeed, ASI's board meeting of 23rd May 2000 ("Meeting"), whose attendees included P, Ho, Moynahan, Hansen-Luke and D, already included discussion on further share issues to existing shareholders, approval of executive director/non-executive director options and employee options. There is no or no pressing reason for Hansen-Luke to consider acquiring Shares himself and it is unlikely that he could have on-sold Shares to others (who may also benefit from employee/director options and share allotments) for a quick profit.
(h)	Hansen-Luke sold 500 AGHL shares to Davies for US$30.00/share in about March 2000 and he did not explain why he so disposed of such shares when he claimed interest to acquire Shares at the same price.
(i)	As evidenced by the company records, I also find on balance that Hansen-Luke has not made any cash subscriptions of ASI shares after Payment Date despite various subsequent share issues (including the share issue in July 2000).

92. On balance, I am not impressed with D's contention that P should have mitigated damages by making an offer of Shares to Davies :

(a)	Hansen-Luke transferred 500 AGHL shares to Davies on 16th March 2000 and AGHL allotted 14 shares to Davies (with corresponding 14 ASI shares allotted to AGHL) in July 2000. I find such small acquisitions insufficient to suggest that Davies would have been interested to acquire 1666 Shares for US$50,000.00.
(b)	D and his witnesses inferred from Davies' willingness to subscribe to 14 ASI shares through AGHL in July 2000 at US$100.00/share that he would be interested to acquire Shares for US$30.00/share. The 14 ASI shares were merely Davies' pro rata share of the July 2000 rights issue. According to Hansen-Luke, such rights issue was for raising finance to keep ASI going pending negotiations for Deal. Therefore, even on D's own case, the value of US$100.00/share is not a realised value obtained on sale/transfer of shares but merely reflective of the fund-raising effort of ASI's shareholders to keep ASI afloat pending negotiations for Deal.
(c)	Fyfe inferred from Davies' subscription of 40000 ASI shares for US$40,000.00 (ie US$1.00/share) that Davies would be interested in acquiring a larger stake in ASI. But Fyfe actually had no personal knowledge of Davies' subscription and reasons for investment. Fyfe also accepted that by that time (ie February 2001), ASI's financial situation had deteriorated and there was a definite possibility that Davies wanted to make the investment to keep ASI afloat. Hansen-Luke also confirmed that the 2nd and/or 3rd rights issues after Payment Date (which would include the subject rights issue) were negative rights issues to raise finance to keep ASI afloat after Deal fell through. Indeed, Hansen-Luke said few people would invest in ASI by October 2000. So even on D's case, Davies' subscription of 40000 ASI shares is not reflective of his interest to acquire a larger stake in AGHL.
(d)	I note that Davies' alleged interest in acquiring a larger stake in AGHL came from inferences drawn from subscriptions by and transfers of shares to him. There is no evidence that D, Fyfe or Hansen-Luke had actually communicated with Davies to ascertain his interest or otherwise in acquiring Shares. Given the above analysis, I find that Davies had no real interest to acquire Shares at the material time.

93. No evidence was adduced as to Moynahan's interest or disinterest in acquiring Shares save a general suggestion that he should be interested because of the on-going Deal. Moynahan was a founder/shareholder and already had a healthy stake in AGHL. Even on D's case, it is flawed logic to suggest that because there may be a prosperous future because of Deal, an existing shareholder must necessarily be interested to acquire more shares by transfer.

94. D did not make clear who "most" recipients of E-mail meant other than Hansen-Luke, Davies and Moynahan. Fyfe had no interest in Shares. There is no evidence of any financial ability to buy or appetite for Shares on the part of the other recipients at the material time. It is again flawed logic to say that information in E-mail, no matter how promising, would cause recipients (including general staff) to be necessarily interested in purchasing Shares.

95. I find Hansen-Luke's evidence in relation to the transfer of shares by P to Wybourn at US$30.00/share in March/April 2000 as indicative of Wybourn's interest in acquiring Shares at that price unreliable :

(a)	Such transaction is nothing but Hansen-Luke's bare assertion. The company records, which D accepted as authentic despite Hansen-Luke's doubt over their accuracy, showed no record of any transfer of ASI/AGHL shares from P to Wybourn. Hansen-Luke did not mention such transaction in his witness statement. Fyfe who was responsible for processing share transfers made no mention of such transaction. I find Hansen-Luke's explanation that the transaction was probably done without physical share transfer or formal record a mere attempt (but an unlikely one) to explain away the absence of any written record.
(b)	Given Hansen-Luke's claim that he had extensive discussions on the sale of AGHL shares with P, Davies and Wybourn, his vague and uncertain recollection of the transaction (including which company's shares were transferred by P to Wybourn and the mode of the transaction) is odd.
(c)	Hansen-Luke's explanation that he did not mention the transaction in his witness statement because he thought liability issue was still at large is difficult to understand. If both liability and quantum issues were at large, then all pertinent facts on both issues should be canvassed in his witness statement. Indeed, Hansen-Luke dealt with his own interest in acquiring Shares after Payment Date in his witness statement.
(d)	P explained and I accept that when ASI was struck off, the holding companies transferred ASI shares back to the beneficial owners as recorded on 17th February 2001 in the share registers. No such transfer was recorded for Wybourn who was said to be a beneficial owner of shares.
(e)	I therefore find on balance that Wybourn had not acquired any shares in any Group company from P at US$30.00/share.

96. Mr Vrijmoed submitted that it is no excuse for P not to approach the aforesaid persons to sell Shares by relying on a belief that such persons would have preferred to subscribe to instead of purchase AGHL shares and P should have vindicated his belief by approaching these persons, failing which P failed to mitigate his damages.

97. The reasonableness of any mitigating step is a question of fact to be considered in all the circumstances of the case. It is incorrect to say that one must inflexibly approach other existing shareholders/directors or concerned persons upon breach of a sale/purchase of private company shares. If the particular factual matrix admits of other relevant considerations which detract from such proposition, the court must weigh such considerations to see whether objectively and reasonably the claimant's action or omission is justified.

98. In light of the circumstances analysed above and bearing in mind P's intimate knowledge of Group and its business arising from his executive role and ownership interests, and the state of the stock market, Group's finances and Deal at the material time (as discussed below), I find that D has not on balance discharged the burden to show that the aforesaid persons had any genuine or probable interest in Shares and/or financial capability to acquire Shares that would render it reasonably incumbent on P to seek them out to sell Shares.

99. I accept that share issues after Payment Date were all undersubscribed and find that D, Hansen-Luke and P did not subscribe to any AGHL/ASI shares after Payment Date. The available evidence showed there was no real interest in the secondary market. The company records show not a single secondary market transaction from Payment Date to September/October 2000 when there was no further interest to invest in Group. Further, even if P should have at least posed an offer to sell Shares to the aforesaid persons, I find that D had not shown on balance there was any avoidable loss arising from such failure.

100. In respect of outsiders, Mr Vrigmoed submitted that P should only have approached them as a last resort because outsiders would not be in a position to decide whether to buy or not, they not knowing the intricate details of ASI/AGHL. But in light of the aforesaid findings and what I have to say below in respect of the stock market, Group finances and Deal at the material time (which information I find were known to all involved in Group), it was not unreasonable for P to have approached outsiders instead.

101. After all, P had approached all major existing shareholders in February 2000 (which I accept) and excited no serious interest other than D's offer (which resulted in Agreement) and there is no sufficient evidence of improved circumstances as known to the shareholders after Payment Date (see analysis below). Indeed, P relied on the very lack of knowledge of intricate details of ASI/AGHL to pose a possible aura of attraction of Shares to outsiders, which eventually was still of no avail. Shares represented only a minority interest, and Group's finances as well as the prospects of the internet industry were uncertain. P was not shy in admitting to the share transfer restrictions in AGHL's constitution. But that is not necessarily an insurmountable hurdle if there is a serious offer from an outsider. After all, since the formation of ASI/AGHL, a good number of shareholders have joined Group companies. Rather, the problem with the share transfer restrictions was how it affected the attractiveness of Shares to potential third party buyers.

102. Mr Vrijmoed also attacked the credibility of P's evidence in approaching unidentified outsiders. I find P to be a credible witness and I accept his evidence in this respect. Even if I am wrong, I do not see how P's failure to approach outsiders would assist D in discharging its burden to establish P's failure to mitigate. It was never D's contention that approaching outsiders was a reasonable step or that such approach could have avoided loss.

103. In the circumstances, I find on balance that D has not shown that P failed to properly mitigate damages. I also do not find favour with Mr Vrijmoed's argument that P failed to mitigate by keeping Shares for reaping the benefit of the GEM listing (see below).

Measure of damages : legal principles

104. Where an injured party sustains a loss by reason of a breach of contract, he is, insofar as money can do it, to be placed in the same situation with respect to damages as if the contract had been performed. But to recover more than nominal damages he must prove loss (see Halsbury's Laws of England 4th ed Reissue, Vol.9, para.1012 at pp.753-754).

105. The normal measure of damages is the estimate loss directly and naturally resulting in the ordinary course of events from the wrongful party's breach of contract. Where there is an available market, the measure of damages is prima facie the difference between the contract price and the market/current price at the time when the contract should have been performed or (if no such time is fixed) at the time of breach. But the reference to a market price presupposes the existence of a real market.

106. Where there is no market/current price, the loss must be quantified in some other, and sometimes more speculative, way. P referred to Treitel, The Law of Contract 11th ed, pp.953-954 where the learned author suggested that "the value of the goods left on his hands would have to be assessed ......; and his damages would prima facie be the amount (if any) by which the contract price exceeded that value".

107. Chan Miu Cheung, personal representative of John Gilbert, deceased v Prague Enterprises Limited & ors CACV172/1992 (unreported, 28th January 1994), a case relied on by both parties, dealt with the measure of damages arising from a sale/purchase of private company shares. The articles of association gave directors an unfettered discretion to refuse any transfer without giving reason and the company's shares were not readily marketable. The court concluded that the company was not a valuable company. The 1st instance judge considered the set up, equipment, staff and client base of the company and his valuation of shares was supported by the total assets per share from the company's audited accounts over several years. Further, the fallout between key persons in the company caused an adverse impact on the company's fortunes. Litton JA said at p.14 that :

"Valuation of shares in a private company is not an exact science. There is always room for reasonable minds to differ on the result. The fact is that, in this case, expert witnesses were called, one on each side, and they both reached the opinion that the proper value to place upon the shares in May 1984 was in the region of $4 ...... The plaintiff's appeal on damages must therefore be dismissed."

108. Mr Vrijmoed emphasised that Chan Miu Cheung's case (supra) showed that the court would resort to a valuation of shares only if there is no market. But assuming that there is no market for Shares, Mr Vrijmoed did not challenge Kam's valuation of Shares although D vaguely objected to Kam's valuation methods. D has not adduced any expert evidence on this issue.

Market for Shares

109. Mr Vrijmoed submitted P had not discharged the burden to establish there was no market and hence no market price for Shares. P, on the other hand, submitted that his damages were quantified by the agreed contract price and it was for D to show, if he were able, there was a market for Shares. In my view, it is for P to establish and prove on balance the measure of loss and damages claimed by him.

110. Mr Vrijmoed submitted that despite Kam's view that Shares were extremely non-marketable, there is still a possible market constituted at least by AGHL's other shareholders. Since P/Kam failed to approach these other shareholders, P failed to establish there is no market and would only be entitled to nominal damages. Mr Vrijmoed argued that P would only be able to conclusively show there was no market only if he approached all other shareholders and they all indicated no interest in buying Shares.

111. I am not with Mr Vrigmoed on this submission. P's onus is to show on the balance of probabilities and on credible evidence acceptable to the court that there is no real or genuine market for Shares in the circumstances P found himself as a result of D's breach. The court is not concerned with theoretical or academic possibilities. For reasons below, I am of the view there was no market for Shares, which were not readily marketable at the material time from D's breach of Agreement up to October 2000. Even on D's case, Deal fell through by September/October 2000 and Hansen-Luke admitted that no one would be interested to invest in Group any more then.

112. The circumstances of Group and the internet industry at the material time suggest there is unlikely to be a real market for Shares :

(a)	Despite D's suggestion otherwise, I find the shareholders were well aware of Group's financial circumstances. They had e-mail communications (see E-mail), meetings at the office and discussions over drinks after work. Apart from Deal (see below), they knew ASI's operations at the material time, as evident from its audited financial statements, were modest and Shares only represented a small (2.6%) interest in ASI. Further, ASI/Group were operating at a loss, so Group's solvency was dependent on share issues to raise finance. It is evident from the fact that the shareholders were called upon to subscribe to ASI share issues (see February and July 2000 rights issues) in order to raise capital. The known state of Group's finances would have been a factor that discouraged interest in acquiring Shares.
(b)	Group companies were established to ride on the internet boom. Their fortunes and Deal were strongly tied to the market demand for internet/ technology stock. But Index showed a 40% fall from end of March to end of April 2000 which decline increased significantly to 54% by end of May 2000. D was constrained to accept that a GEM listing in a declining market would suffer from reduced valuation and, in my view, a consequent adverse impact on the attraction of Shares or Deal. A substantial cooling of market interest in internet/technology stock would render any chance of a quick profit by buying in and selling Shares remote. Hansen-Luke also accepted that Deal fell through for SHK over the question of price.
(c)	Based on my analysis above, there is on balance no sufficient or satisfactory evidence to show any real interest or capability amongst the shareholders to acquire Shares during the material period. Even if there were potential interest for shares of Group companies, according to Hansen-Luke, the shareholders would have anticipated many opportunities to acquire shares through subsequent share issues. Thus, even on D's case, there was no real secondary market for Shares.
(d)	Apart from Deal (see below), the fact that Shares were BVI private company shares amounting to 7.1% and 2.6% interest in AGHL and ASI respectively with share transfer restrictions would pose a major deterrent to any existing shareholder who intended to acquire Shares and on-sell them to third parties for return/profit.

113. The viability or prospects of Deal are relevant. I find on balance that the rosy picture painted by D/his witnesses in their witness statements is unrealistic and not supported on the evidence adduced. I am not with D on his contention that the shareholders unreservedly believed in the substantial value of IQL and the prosperous prospects of Deal.

114. Discussions on Deal commenced in January 2000 but despite months of negotiations thereafter, Deal remained tenuous with no commitment by any party. The reality is that SHKD's acquisition of inter alia Subsidiaries/ASI for stock in SHKD never materialised, IQL was never been established and ASI never owned any shares in IQL. The pre-IPO fund raising by private placement of IQL shares and GEM listing also did not occur. Hence, when D/his witnesses referred to Deal and IQL's substantial valuation, they were only referring to future projections. The questions are (i) whether there is any realistic belief in Deal's prospects at the material time and (ii) if so, whether it is possible to infer that the prosperous prospects of Deal would generate an interest in or market for Shares.

115. Deadline in Heads of Agreement was not met and was extended generally. Hansen-Luke could not remember the final deadline but what is clear is that Formal Agreement was not entered into. Deal was on an uncertain footing from the beginning. Several matters are of note :

(a)	Without Formal Agreement to bind SHK on the SHKD/ASI merger and formation of IQL, Deal remained very much in the air. The shareholders must have known that Formal Agreement had not been signed by Deadline and no new milestone date was set. I reject D's alleged ignorance of these matters. Whilst, as he said, he might not have been directly involved in the negotiations, he would have kept abreast of developments. Indeed, Meeting in May 2000 dealt with progress of Deal.
(b)	The shareholders would have realised that the absence of a new milestone date for the extended Deadline did not auger well for a contemplated GEM listing in half a year.
(c)	Heads of Agreement contemplated that ASI would hold 17.89% of IQL's shareholdings but Strategy Document of 22nd May 2000 showed a reduction of ASI's proposed holding of IQL's (ie the new entity's) shares to 14%. Pre-IPO capital injection was also reduced from US$10 million contemplated in Heads of Agreement to HK$60 million in Strategy Document. No explanation was given for scaling down Deal in the period after Payment Date although it is not inconsistent with the declining market at the time. Further, there is no evidence of commitment by any investor(s).
(d)	Heads of Agreement expressly provided that private placement financing would be in return for a 22.7% stake in the new entity (ie IQL) after dilution. Even if such private placement were successful, which did not happen, ASI's interest in IQL would have been significantly diluted from the proposed 17.89% or 14% to an even smaller percentage. Thus, the ultimate value to ASI shareholders and to any owner of Shares is tenuous and much less significant than suggested by D.

116. Nomura's mandate for the private placement and GEM listing was never finalised. Although E-mail of 12th May 2000 robustly anticipated such finalisation, Hansen-Luke was careful to qualify in E-mail that "things can be delayed or side-swiped by market forces". It would have been apparent by the following week that the mandate was not signed. Even if the mandate were signed, it would have been after the targeted day in Strategy Document's timetable. The above should have alerted shareholders that all was not well and Deal was uncertain.

117. Strategy Document was intended to present the prosperous prospects of Deal to potential investors for the private placement. Although the date of 22nd May 2000 was marked on the front page, I find it is only 1 of a series of drafts. Indeed, the blank date and distribution number on its "Disclaimer" page, and its assumption of IQL's existence and Nomura's involvement showed that Strategy Document is but a draft.

118. Against this background and on a proper reading of Strategy Document in the context of Group's circumstances, I am unable to place substantial weight, as D/Hansen-Luke did, on its selected contents. As at 22nd May 2000, SHK was not yet prepared to commit to Formal Agreement and neither Nomura nor Nomura London was prepared to commit to sponsoring or underwriting the private placement or GEM listing. Indeed, Nomura London had never been formally presented with Deal as late as July 2000. At most Nomura prepared the draft unsigned Nomura Letter which did not evidence any commitment. It was obvious that the timetable proposed in Strategy Document for both the private placement and GEM listing was seriously derailed and the whole Deal was uncertain. All involved parties within Group were experienced and sophisticated financial professionals. They would not have failed to recognise the tenuous and doubtful nature of Deal during the period from May to July 2000. By July 2000, it became apparent that Nomura London had not been formally informed and even Hansen-Luke lost heart in Deal.

119. On the totality of the evidence, it appeared that Deal was tenuous from the start without even some preliminary concrete commitment by any party and I find the shareholders knew this.

120. D/Hansen-Luke relied on IQL's valuations in E-mail and Strategy Report to say that Shares were at the material time of substantial value and hence they inferred there must have been general interest for acquisition of Shares. I do not agree. I note that ASI's audited financial statements show a much more modest figure. More importantly, as at 12th and 22nd May 2000 or at the time of D's breach, IQL did not exist and such projected valuations are, as explained above, dependent on assumptions which were known to be speculative and which did not eventually materialise.

121. D suggested that IQL's projected valuation for year 1 of US$113 million in Strategy Document meant that each AGHL share was worth US$316.00 on the basis that ASI held 14% of IQL's shares and AGHL held 40% of ASI's shares. However, such assessment is unrealistic and the shareholders, being financial professionals and having knowledge of Deal, would have been aware of this :

(a)	Such valuation is based on very robust revenue projections for years 1-6 in Strategy Document, sharply increasing from HK$20 to HK$350 million.
(b)	Such valuation assumed that a capital injection of HK$60 million was already available at the start of IQL's 1st year of operations. As explained above, such capital injection was and was known to be uncertain.
(c)	Even assuming that such capital injection were available, D's valuation of each AGHL share completely ignored the dilution of ASI's shareholding in IQL as a result of investors' acquisition of IQL shares under the private placement. The dilution would have been significant given the amount of the capital injection and there might have been further dilution on the intended GEM listing.

122. Therefore, in the given circumstances of ASI/AGHL at the material time, I find on balance that there was a lack of real interest by the shareholders in secondary market acquisitions, and there was no real market for Shares consisting of willing buyers with a real or probable demand.

123. Whilst Kam alluded to a theoretical possibility of a market for Shares, it is necessary to determine whether such market existed in the circumstances of this case. I agree with Kam that for private company shares, one cannot extrapolate from the mere possibility of a potentially willing buyer that there would be a future market.

124. P suffered a loss by reason of D's breach of Agreement. Although AGHL/ASI's finances were precarious, the market was falling and Deal was speculative and tenuous, AGHL shares clearly still had some value. At the time of D's breach, ASI/Subsidiaries were still on-going concerns with products/services on the market and AGHL had a 40% interest in that business. In the absence of contrary evidence, I note Kam's valuation methods resulted in a range of HK$0 and HK$29.42 per Share.

125. Kam suggested in his report that the share value should be discounted as there was virtually no market, but he did not say how a value within the range should be determined. More importantly, Kam clarified in his evidence that as a matter of accounting practice the valuation methods he adopted should not take into account business expectations or transfers of shares (ie the market situation). He also added that NAV Valuation (HK$29.42/Share) was more appropriate than P/E Ratio Valuation (HK$0/Share) for a loss suffering company. I am therefore prepared to accept that each AGHL share had a value of HK$29.42/share or US$3.77/share at US$1.00 : HK$7.80 at the time of D's breach. Therefore P's loss is US$50,000.00 - (1666 Shares x US$3.77/share) = US$43,719.18.

Conclusion

126. I therefore assess P's damages and grant judgment in favour of P against D in the sum of US$43,719.18 and interest thereon at the rate of 8% pa from the date of the Writ of Summons to the date of judgment and thereafter at judgment rate until payment. I am not persuaded that I should exercise my discretion to award pre-action interest in all the circumstances.

127. There is no reason why costs should not follow event. I therefore grant a costs order nisi that D is to pay P the costs of the assessment of damages including all costs reserved to be taxed if not agreed.