CHENG CHIEN KUO v. NEW RESOURCES HOLDINGS LTD

HCMP 2985/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2985 OF 2014

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REASONS FOR DECISION

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Introduction

1. The dispute in this case is whether a transfer of shares in the defendant company (“the Company”) to the plaintiff should be ordered to be registered by the board of directors.  At the end of the hearing, I dismissed the originating summons.  These are my reasons for doing so.  I also make a costs order nisi at the end of these reasons.

2. The issues that arise are: (i) whether a transfer had been lodged; (ii) whether the board validly refused to register it; (iii) whether the plaintiff has standing to apply for an order; and (iv) whether the directors’ refusal was made honestly in what they considered to be the best interests of the Company.

Background

3. The Company was incorporated as a private company limited by shares in Hong Kong in 1977 and changed its name to the present name in 1991.  At all material times the shareholders were and are:

Li King Sang (李京生)	380,435
Chen Allen Ching Shiang (陳清祥)	181,521
Li Yuek Wang (李若弘)	163,044
Wu Yin Han (吳銀漢)	70,000
Chou King Thai (周金泰)	70,000
Chang Yue Tien (張雨田)	60,000
Yu Nai Ko (余乃可)	30,000
Hwang Ron Jeng (黃榮正)	45,000

4. There are 4 directors, namely, the first 4 of the shareholders above.  Together they hold 79.5% of the issued share capital.

5. The Company has been involved in the business of property development in the Mainland.

6. The plaintiff used to be resident in Taiwan but has emigrated to Australia for some years.  In 2005, when he was apparently still living in Taiwan, the plaintiff entered into a written agreement with Chang Yue Tien (“Chang”) to acquire his 60,000 shares (representing 6% of the issued share capital) in the Company for US$10 million.  The plaintiff says that this agreement was made on the basis of the acknowledgment by Chang of certain debts owed to him and the result of an amicable arrangement between them.

7. On or about 30 April 2007, Chang and the plaintiff further executed: (i) a document to certify that the 60,000 shares had been sold to the plaintiff on 1 January 2005 and that all rights and obligations relating to the shares from that date onwards belonged to the plaintiff and not to Chang; (ii) an undated instrument of transfer of the 60,000 shares; and (iii) bought and sold notes for the transfer.

8. By a letter dated 30 April 2007 written by a firm of Hong Kong accountants on behalf of Chang to the board of the Company, it was stated:

“Mr CHANG propose to transfer his above shares to Mr CHENG Chien‑Kuo for consideration of US$10,000,000.00.

We are writing on his behalf to seek approval of the above transfer.

Please reply as soon as possible within 30 days time.”[sic]

None of the documents referred to in §7 above were enclosed with the letter.

9. On 30 May 2007, the solicitors firm, P C Woo & Co, replied on behalf of the board that:

“We are instructed to inform you that the Board has refused the transfer of 60,000 ordinary shares at HK$1.00 each in the Company to Mr CHENG Chien Kuo for the consideration of US$10,000,000.00.”

10. There then followed apparently some negotiations which ultimately did not resolve the matter.  Three years after the first exchange of letters, on 12 July 2010, a Hong Kong solicitors firm, Hon & Co, wrote on behalf of both Chang and the plaintiff to the board of the Company, stating:

“張先生現持有吉潤國際集團有限公司的60,000股股份 （‘該吉潤股份’），張先生打算將該吉潤股份以美金10,000,000.00元轉讓給鄭先生。

故此，張先生及鄭先生在此向貴董事會提出，請貴董事會在此信發出的兩個月內以書面通知本律師樓貴董事會是否同意在鄭先生向張先生購入該吉潤股份後，將該吉潤股份登記為鄭先生名下。”

(In English translation: “Mr Chang is currently holding 60,000 shares in the New Resources Holdings Limited (‘the New Resources shares’) and he intends to transfer the New Resources shares to Mr Cheng at a price of USD 10,000,000.00.

Accordingly, Mr Chang and Mr Cheng hereby propose to the Board asking it to give our solicitors’ firm a notice in writing within two months after this letter is issued to confirm whether the Board would agree that the New Resources shares be registered in Mr Cheng’s name after the said shares were purchased by Mr Cheng from Mr Chang.”)

Again, no document was enclosed with this letter.

11. On 9 September 2010, P C Woo & Co replied for the board as follows:

“根據董事會給予本所的指示，董事會已就該等股份之轉讓事宜於2010年9月2日召開董事會會議商討，而決議為董事會百分之百不同意該等股份之轉讓予鄭先生。同時，董事會亦指示，公司百分之八十以上的股東不同意該等股分之轉讓予鄭先生。然而，根據董事會給予本所的指示，公司希望與張先生就該等股份之轉讓事宜上以友好的磋商達成協議。”

(In English translation: “In accordance with the instruction given to us by the Board, the Board already held a Board of Directors’ meeting on 2 September 2010 to discuss the matter of transferring the said shares, and came up with a resolution that the Board was 100% opposed to the transfer of the said shares to Mr Cheng.  Also, the Board indicates that over 80% of the Company shareholders disagree to the transfer of the said shares to Mr Cheng.  Nevertheless, the instruction given to us by the Board was that the Company wishes to reach an agreement with Mr Chang by amicable negotiation on the matter of transfer of the said shares.”)

12. Despite this response, no meaningful discussions between the parties ensued. Three and a half years later, on 21 March 2014, Hon & Co wrote to P C Woo & Co as follows:

“現本律師樓獲鄭先生的指示，要求貴所客戶同意把該吉潤股份從張先生轉讓予鄭先生的被提名人及委任人，即楊光友先生的名下。

請貴所於本信函日期之14天內回覆是否同意上述安排。”

(In English translation: “Our solicitors’ firm is hereby instructed by Mr Cheng to ask for your client’s consent that the New Resources shares be transferred from Mr Chang to Mr Cheng’s nominee and appointee, namely Mr. Yang Kuang Yu and the shares be (registered) under Mr Yang’s name.

Please kindly give us a reply within 14 days of this letter to confirm whether (your client) agrees to the above arrangement.”)

Still, no document for any share transfer was attached to this letter.

13. P C Woo & Co wrote a holding reply on 27 March stating that they had not yet been able to contact anyone from the Company.  According to the affirmation of Mr Yang Kuang Yu (“Yang”) filed on behalf of the plaintiff, he managed to approach members of the board and was given to understand that while they objected to a transfer of the shares to the plaintiff, there would be no objection to a transfer to his nominee.  When the plaintiff and Yang proposed that the transfer be made to Yang, however, the board did not agree.

14. On 20 June 2014, Hon & Co wrote to the Company asking for the reasons for their refusal within 28 days.  A statement of reasons was eventually provided, but not until 13 January 2015, after the plaintiff had begun proceedings by the originating summons herein on 14 November 2014.  The reasons given were as follows:

“1. 本公司董事局有理由相信鄭建國先生及／或其提名人楊光友先生涉嫌與台灣幫會「四海幫」及或「四海幫」成員及／或其他非法活動有關聯，身分背景複雜。為免影響公司聲譽和運作，以及影響公司原有股東之合作關係，因此拒絕登記該股份轉讓；及／或

2. 據悉，鄭建國先生其與張雨田先生的所謂股份轉讓，涉及高利貸問題，屬於非正常轉讓；及／或

3. 涉及鄭建國和楊光友先生轉讓股份的實際股東，因建北京鴻禧長新高爾夫球場向本公司借款1250萬元人民幣及欠本公司房租、物業管理費及水電費等共計近2000萬元人民幣，至今未還。當時其借款遠遠超過其入股金額數倍之多。據此，本公司就張雨田先生名下的股份享有第一及首要留置權和押記，因此拒絕登記該股份轉讓；及／或

4.   對於張雨田先生打算向鄭建國先生轉讓60,000股本公司股份一事，本公司已經開過董事會，因涉及上述問題，公司董事會以及約百分之八十股東堅決不同意該股份轉讓事宜。”

(In English translation: “1. Our Board has reasons to believe that Mr Cheng Chien Kuo and/or his nominee Mr Yang Kuang Yu is/are suspected to be connected with the Taiwanese gang  ‘Four Seas Gang’ and/or the member(s) of ‘Four Seas Gang’ and/or other illegal activities and is/are of complicated personal background.  In order not to put the reputation and operation of the Company at risk, and to prevent any adverse effect which might be imposed on the cooperative relationship among the existing shareholders, we hereby refuse to register the transfer of the said shares; and/or

2. It is learnt that the so‑called share transfer between Mr Cheng Chien Kuo and Mr Chang Yue Tien involves problems of usury and is therefore an abnormal transfer; and/or

3. The actual shareholder(s) involved in the share transfer of Mr Cheng Chien Kuo and Mr Yang Kuang Yu had previously borrowed RMB 12.5 million from our Company to finance the construction of the Beijing Hong Shee Everlast golf course and owes our Company rent, property management fees, water and electricity charges etc. adding up to a sum of nearly RMB 20 million which has still not been repaid yet.  The amount of loan it/they took out at that time is by a few times much more than the price it/they paid for the acquired shares.  Accordingly, our Company shall have the first and paramount lien and charge in the shares under Mr Chang Yue Tien’s name.  The register for the transfer of the said shares is therefore refused; and/or

4. As regards the intended transfer of 60,000 shares in our Company by Mr Chang Yue Tien to Mr Cheng Chien Kuo, our Company held a Board of Directors’ meeting.  Due to the abovementioned problems, the Board, together with approximately 80% of our shareholders, resolutely objects to such transfer of the said shares.”)

Power to order registration of transfer

15. A share in a company is a form of personal property and is ordinarily transferable, but it also confers membership in the company and is only transferable in accordance with the company’s articles: s 134(2) of the Companies Ordinance (Cap 622).  The articles may, and in the case of a private company, must (because of s 11(1)(a)(i) of the Ordinance) contain restrictions on a member’s right to transfer shares.  A common form of restriction is a right for the directors to refuse to register a transfer of shares. 

16. In the present case, Article 26 of the Company provides:

“The Directors may at any time in their absolute and uncontrolled discretion and without assigning any reason therefor, decline to register any transfer of any share whether or not it is a fully paid share (and for the purpose of this Article the word transfer shall include the renunciation of a letter of allotment of any share.)”

It can be seen that the first clause in Article 26 is similar to the article in In re Smith and Fawcett Ltd referred to below.

17. The part of Article 26 that provides no reason need be given for a refusal must now be read subject to s 151(3) of the Ordinance[1] which provides that the transferee or transferor may request a statement of reasons, which has to be provided within 28 days under s 151(4).  Further, s 152 enables the court to override the company’s refusal by ordering registration of the transfer if it is satisfied that the application is “well‑founded”. 

18. S 152 came from s 69(1B) of the previous Companies Ordinance (Cap 32), which was added in 1984. There is a suggestion in C Bates, The Companies (Amendment) Ordinance 1984 in Perspective (1985) 15 HKLJ 167 at 191 that this was enacted following the recommendation of the Company Law Revision Committee in its Second Report published in 1973 (at §3.52), which in turn was based on a recommendation of the UK’s Company Law Committee (better known as the Jenkins Committee) in their report published in 1962.[2]  But it seems to me that both committees’ recommendation was primarily concerned with delayed registration of share transfers rather than refusal of registration.  The recommendation was that an order might be made for the transfer to be registered forthwith “on the showing of good cause”.  It is unlikely that the Jenkins Committee intended this recommendation should extend to a case where the directors have refused registration, given that it also recommended against requiring directors to give reasons for refusal to register generally because to do so “would limit a discretion which may be essential to preserve the character of a private company”.[3]

19. There is a suggestion that s 69(1B) was modelled on a New South Wales provision — s 186 of the NSW Companies Code 1981.  The language used there, however, refers to the refusal to register being “without just cause”, whereas the condition adopted by the Hong Kong legislation is if the court is “satisfied that the application is well‑founded”.  Since the decision in Simon Fireman v Golden Rice Bowl Ltd [1987] HKLR 981 the courts in Hong Kong have approached this power on the basis of English common law principles set out in cases such as In re Smith and Fawcett Ltd [1942] 1 Ch 304, in accordance with which the court will not interfere unless the discretion to refuse to register a transfer was not exercised by the directors bona fide and honestly in what they considered to be the best interests of the company, or was exercised for collateral purposes: see Choy Bing Wing v Max Share Ltd (unrep, HCMP 1096/1993, 31 August 1993); Re Hansby Co Ltd (unrep, HCMP 4610/2003, 12 May 2004); Liu Jinjing v Wai Hing Enterprises Ltd (unrep, HCMP 2915/2014, 2 December 2015).  No argument has been advanced in this case that any different test should be applied, whether because of the new requirement of reasons under s 151(3) & (4) or otherwise.

Whether transfer was lodged

20. With reference to the three letters mentioned in §§8, 11 and 14 above, there is an issue whether there was actually a transfer lodged with the Company.

21. The scheme of the statute is as follows.  S 150(1) provides:

“A company must not register a transfer of shares in the company unless a proper instrument of transfer has been delivered to the company.”

22. Its predecessor is s 66 of the Companies Ordinance (Cap 32), which provided:

“Notwithstanding anything in the articles of a company, it shall not be lawful for the company to register a transfer of shares in … the company unless a proper instrument of transfer has been delivered to the company …”

23. The equivalent section in England was s 63 of the Companies Act 1929 which was enacted to scotch the practice of providing for the oral transfer of shares and thus to ensure that a transfer is made only by a document on which stamp duty may be charged: Re Greene [1949] Ch 333. The phrase “proper instrument of transfer” means not necessarily a document complying with the formalities prescribed by the articles but an instrument such as will attract stamp duty: In re Paradise Motor Co Ltd [1968] 1 WLR 1125, 1141B.

24. S 151(1) provides either the transferee or transferor of shares in a company may “lodge the transfer with the company”.  S 151(2)–(4) stipulate that the company must, within 2 months, either register it or give notice of refusal to register.  This period is highly significant because the power to refuse has to be positively exercised by the board of directors (see Moodie v W & J Shepherd (Bookbinders) Ltd [1949] 2 All ER 1044) and if the company does nothing within the period, first, an offence is committed (see s 151(4)) and, secondly, the company may find that it has lost the right to refuse to register the transfer: Re Swaledale Cleaners Ltd [1968] 1 WLR 1710. 

25. If the company refuses to register, the transferee or transferor may request a statement of reasons. If such a request is made, the company must, within 28 days, give the reasons or register the transfer.  In the case of a refusal to register, s 152 provides that the court may order registration.  S 155 provides that a company must, within 2 months after the transfer is lodged with the company, have share certificates ready for shares that are transferred.

26. Apart from the provisions of the statute there are also requirements prescribed by the articles of the Company. Articles 27 and 28 stipulate that every transfer must be (i) in writing; (ii) in the usual common form or in any other form which the directors may approve; (iii) left at the registered office of the Company; (iv) accompanied by the certificate of the shares to be transferred; and (v) signed by both the transferor and transferee.

27. Mr Chain, who appeared for the Company, submitted that, by virtue of s 150(1), an instrument of transfer is a mandatory requirement when lodging a transfer of shares within the meaning of s 151.  Mr Phang, who appeared for the plaintiff, submitted that an instrument of transfer is only required before the Company actually registers the transfer.

28. Irrespective of this it seems to me clear that s 151 envisages the lodging of a transfer and is not triggered by simply sending a letter of request.  None of the three letters sent on the plaintiff’s behalf in 2007, 2010 and 2014 mentioned above can in my view be regarded as a transfer lodged with the Company.  In fact the first letter said Chang proposed to transfer his shares and the second said he intended or planned to transfer his shares.  The third letter referred to the second and demanded that the Company “consent” to the “arrangement” for a transfer of the shares to Yang, without saying whether the transfer had taken place (subject to registration) and if so when.  None of them attached any agreement, notes or instrument for the transfer or containing the particulars of the transfer.

29. Nor is it in dispute that none of the three letters was in the usual common form of a transfer of shares, or accompanied by any share certificate, or signed by the transferor and transferee as required by the articles. 

30. Mr Phang argued that these requirements had been waived by the Company; alternatively, it was estopped from insisting on their compliance.  I fail to see how P C Woo’s response of 30 May 2007 can be said to be a waiver of the requirements.  It was simply a letter saying the transfer was refused, without giving any reasons.  It is impossible to distil from it any unequivocal representation that the Company would not require compliance with the articles and would treat the first letter of request as a “transfer” under s 69(1B) of the then Companies Ordinance, or a representation that any transfer lodged in future would not need to comply with the formalities prescribed by the articles.  The same may be said of the second response of P C Woo & Co in September 2010.

31. As to the third request made by Hon & Co in 2014, arguably the contractual formal requirements were waived by P C Woo & Co on behalf of the Company in their statement of reasons for refusal and the cover letter dated 13 January 2015 which stated it was supplied pursuant to s 152 of the Companies Ordinance (Cap 622). Mr Chain pointed to the fact that by then, a copy of the signed instrument of transfer had been produced on behalf of the plaintiff as an exhibit in these proceedings.  Be that as it may, such waiver, if any, only took effect on 13 January 2015.  Until the formal requirements were waived, the plaintiff could not say that there was a valid transfer lodged with the Company. 

Whether there was a timely refusal to register

32. It follows in my view that it was not open to the plaintiff to argue that because the refusal to register came more than 2 months after the request dated 21 March 2014, the Company had lost the right to refuse to register.

The plaintiff’s standing

33. Further, the request in 2014 was a request for consent to a transfer of the shares to Yang as a nominee of the plaintiff, not to the plaintiff himself.  Even if this was treated as a “transfer” lodged with the Company, the transferee was Yang, not the plaintiff.  While it might have been intended that the beneficial interest in the shares would lie with the plaintiff, it is the legal holder of shares who would become a member of the Company upon registration.

34. S 152 enables the court to make an order on the application of the transferor or the transferee, not the new beneficial owner of the shares who is not to be registered as member.  Insofar as the third request is concerned, therefore, the plaintiff has no standing to bring this application.

Bona fides of the directors

35. Although the plaintiff, on record, challenged the bona fides of the directors in relation to all three refusals, Mr Phang submitted that he could only realistically attack the bona fides of the directors in 2007.  He referred to the statement of reasons given in 2015 quoted above (which, according to the directors, had been their reasons since 2007), and submitted that all the newspapers and other materials adduced by the Company in these proceedings on the background of the plaintiff post‑dated May 2007 and could not have been available as a reason for the refusal then.  The short answer to this is that the directors relied on what they perceived to be the notoriety and their general knowledge of the background of the plaintiff, rather than specific news reports of anything novel.

36. I have no doubt that, if the articles so permit, it is open to a board of directors to refuse to register a transfer of shares if they bona fide believe that the proposed transferee is an undesirable or objectionable person to admit to membership of the company.  In Re Bede Steam Shipping Co Ltd [1917] 1 Ch 123, 128, where the articles enabled the directors to refuse to register the transfer of any share if “in their opinion it is contrary to the interests of the company that the proposed transferee should be a member thereof”, Eve J (whose decision was affirmed by the Court of Appeal) said:

“It is the duty of the directors to look at all the relevant circumstances in which the transferee is placed. He may be, as has been suggested, the owner of a private business competing with the company, or a person whose presence in the particular company would be resented by the shareholders generally and be calculated to give rise to unpleasantness, or he may even be a person so notoriously litigious as to be unacceptable in any peace‑abiding corporation. All these are matters which the directors may properly take into account in exercising their discretion.”

37. In my view, the articles of the Company in the present case equally permit the directors to refuse to register a transfer of any share to a person if they bona fide believe it would be against the interests of the Company to do so.  The affirmation evidence is that the directors did consider, based on their own belief which they regarded as general knowledge in Taiwan, that the plaintiff was a member of or connected with a criminal syndicate called the Four Seas Gang, and that on this basis they considered it would not be in the interests of the Company to admit him as a member.  In fact, in the latter part of 2007, Taiwanese newspapers reported certain alleged criminal activities of the Four Seas Gang and that the plaintiff, among others, had been charged with offences in connection with those activities.  There is also evidence that the plaintiff was a wanted person in Taiwan.  In these proceedings I need make no finding of these matters as facts.  It is sufficient to say that, on the evidence, the plaintiff has failed to show that the reason given by the directors was perverse.

38. Further, the plaintiff alleged, but in my judgment failed to prove, that the directors’ decision was in fact based on some other reason and that the reasons they gave were not genuine.  This is a serious allegation of bad faith which the plaintiff has come nowhere near to substantiating.  No application has been made for the deponents of the affirmations to be cross‑examined.  In this context the following words of Lord Greene MR in In re Smith and Fawcett Ltd, supra, at p 308 bear repetition:

“Speaking for myself, I strongly dislike being asked on affidavit evidence alone to draw inferences as to the bona fides or mala fides of the actors. If it is desired to charge a deponent with having given an account of his motives and his reasons which is not the true account, then the person on whom the burden of proof lies should take the ordinary and obvious course of requiring the deponent to submit himself to cross‑examination. That does not mean that it is illegitimate in a proper case to draw inferences as to bona fides or mala fides in cases where there is on the face of the affidavit sufficient justification for doing so, but where the oath of the deponent is before the court, as it is here, and the only grounds on which the court is asked to disbelieve it are matters of inference, many of them of a doubtful character, I decline to give to those suggestions the weight which is desired.”

39. Mr Phang relied on Re Yuen Kiu Kwan [2009] 3 HKLRD 371 but that seems to me to be a wholly different case, where the reason for refusal to register as disclosed by the directors was a legal ground which the court held to be invalid.  There was no suggestion that the reason given by the directors was not actually their real reason for the refusal.

40. The directors’ position with regard to the refusal to register in 2010 and 2015 is, as Mr Phang accepted, even stronger because by then there had been formal publicity of the matters adverse to the plaintiff’s reputation.

41. It is unnecessary to deal with the other reasons for the refusal to register or the issue of the stamping of the instrument of transfer which Mr Chain raised as a discretionary factor why the court should not make an order under s 152.

42. For the above reasons the originating summons was dismissed.

Costs

43. I make the following costs order nisi: (i) the costs of the defendant’s summons filed on 9 May 2017 (for leave to adduce two late affirmations) be to the plaintiff; (ii) the plaintiff do pay the defendant the costs of these proceedings (excluding the costs of Tsao’s affirmation); (iii) upon the expiry of 14 days, if there is no application to vary the costs order nisi, the defendant be at liberty to apply for summary assessment.