CHRISTIAN EMIL TOGGENBURGER v. BEAUFORTE INVESTORS CORPORATION LTD AND OTHERS

HCMP 37/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 37 OF 2007

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J U D G M E N T

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I. INTRODUCTION

1.  The question before me is the validity of a Beauforte board meeting held on 27 December 2006. 

2.  Mr. Toggenburger says that the board meeting was convened with insufficient notice.  He also disputes the validity of a resolution passed at that board meeting whereby 2 directors (Mr. Hess and Mr. Saxer) were replaced by Mr. Wu and Ms. Ho.

3.  If I believe that Mr. Toggenburger has a “compelling case on the merits” (to use the words of Mr. Jonathan Harris SC (appearing for Smartmax)), I should continue an ex parte interim injunction obtained by Mr. Toggenburger from me on 5 January 2007.  That ex parte injunction in essence preserved the position prevailing immediately before the 27 December 2006 meeting pending the trial of this matter.

4.  Otherwise, I should discharge the ex parte injunction.

II. BACKGROUND

A. Beauforte and its board

5.  Beauforte is a Hong Kong listed company.  Mr. Toggenburger holds 27.12% and Smartmax 27.89% of Beauforte.  Smartmax is in turn beneficially owned as to 90% by Mr. Richard Cheung and 10% by Ms. Sun Bo. 

6.  Mr. Cheung, Ms. Sun and Mr. Toggenburger are directors of Beauforte.  Mr. Cheung was in addition Beauforte’s chairman until recently.  As chairman, Mr. Cheung had a casting vote on Beauforte’s board.

7.  On the eve of 27 December 2006 Beauforte’s board consisted of 10 directors.  That board was roughly split between 2 factions.  One faction consisted of Mr. Toggenburger, Mr. Saxer, Mr. Hess, Mr. Courtauld and Ms. Young.  The other faction comprised Mr. Cheung, Ms. Bo, Mr. Cheng, Mr. Tang and Mr. Leung.

8.  Mr. Saxer and Mr. Hess are based in Switzerland.  Mr. Toggenburger is often in Switzerland, but also resides in Hong Kong.

B. Chronology

9.  On 13 December 2006 Mr. Hess appointed Ms. Young as his alternate director.

10.  On 14 December 2006 Beauforte filed a Form D3 with the Companies Registry noting Ms. Young’s appointment as Mr. Hess’ alternate.

11.  But at a board meeting on 20 December 2006, Mr. Cheung refused to accept Ms. Young’s appointment as valid.  Mr. Hess was then telephoned to confirm the appointment.  But Mr. Cheung refused to accept that the person at the other end of the telephone line was Mr. Hess.  By Mr. Cheung’s casting vote, the meeting resolved not to recognise Mr. Hess’ attendance whether by telephone or through his alternate Ms. Young.

12.  On Friday 22 December 2006 Mr. Cheung issued a notice of a board meeting to be held on Thursday 28 December 2006 at 10.00 am.  By the notice Mr. Cheung proposed that the board resolve to remove Mr. Saxer and Mr. Hess as directors pursuant to Art. 101(A)(iii) of Beauforte’s Articles of Association (AA).

13.  Article 101(A)(iii) empowers the board to pass a resolution that a director has vacated his office.  The board may do this if a director absents himself from board meetings during a continuous period of 6 months, without special leave of absence from the board, and if his alternate director shall not have attended in his stead during that 6 month period.

14.  Mr. Toggenburger being in Switzerland at the time of Mr. Cheung’s notice, he e-mailed Mr. Cheung on 23 December 2006 to suggest that the proposed board meeting be held on 4 January 2007 and “ad[d] the 9 points we had prepared for last Wednesday”.  This was because Mr. Toggenburger anticipated that he would be back in Hong Kong by 4 January 2007.  His e-mail stated that, if this was not possible, he would call a board meeting in Switzerland for 27 December 2006 “to deal with the 9 points from last Wednesday”.

15.  On 25 December 2006 Mr. Toggenburger himself issued a notice of a board meeting to be held in Luzern at 1 pm on 27 December 2006.  The meeting was discuss the removal of Mr. Cheung as chairman (among other topics).  My attention was not specifically drawn to this notice by Mr. Toggenburger’s lawyers at the hearing of the ex parte injunction.

16.  On 27 December 2006 (at 9.16 am) Mr. Cheung issued an e-mail stating that Mr. Toggenburger had suggested “to advance the meeting to 27th December 2006 at 1:00 pm and asked the Directors to meet in Luzern, Switzerland”. 

17.  Mr. Cheung’s e-mail rejected this suggestion, since it was “impossible for Directors to travel to the meeting venue in Switzerland (certain directors may need to apply visa!) in less than 12 hours from the receipt of the notice”. 

18.  Instead, Mr. Cheung stated that “in order to meet with Mr. Toggenburger’s suggestion” the board meeting would be advanced to that very day at 1.00 pm.  Mr. Cheung’s e-mail further proposed that Mr. Wu and Ms. Ho be appointed as directors in place of Mr. Hess and Mr. Saxer.

19.  At the 27 December 2006 meeting, Mr. Hess and Mr. Saxer were purportedly removed as directors, to be replaced by Mr. Wu and Ms. Ho.

20.  Possibly as a result of the 26 December 2006 Taiwan earthquake which disrupted e-mail communications in Asia and elsewhere, Mr. Toggenburger did not actually receive Mr. Cheung’s 27 December 2006 e-mail.  He did not learn about the 27 December 2006 meeting until after it had taken place.

21.  Having learnt of what happened, Mr. Toggenburger instructed his lawyers (Messrs. Haldanes) to protest to Beauforte about the short notice. 

22.  Thus, by letter dated 27 December 2006 to Beauforte, Haldanes queried the validity of the 27 December 2006 meeting. 

23.  By a letter dated 2 January 2007 Haldanes questioned whether Mr. Hess and Mr. Saxer (or their alternate directors) had indeed been absent from board meetings for 6 months.  Haldanes also referred to the 20 December 2006 incident where Mr. Cheung refused to acknowledge Ms. Young’s presence or Mr. Hess’ attendance by telephone. 

24.  Subsequently, by letter dated 3 January 2007, Haldanes pointed out that there was a recording of Mr. Saxer having by telephone attended a board meeting on 25 August 2006

25.  Beauforte responded to Mr. Toggenburger by pointing to Art. 126 of its Articles of Association (AA).  Art. 126 provides that no notice need be given of board meetings to directors outside Hong Kong.  Beauforte claimed (but Mr. Toggenburger disputes) that Mr. Tang (who acts as alternate director for both Mr. Toggenburger and Mr. Courtauld) had not made any complaint about the notice.  Beauforte said that 6 directors were in Hong Kong and 4 (Mr. Cheung, Ms. Sun, Mr. Cheng and Mr. Leung) attended the 27 December 2006 meeting.

26.  Mr. Hess did not receive Mr. Cheung’s 27 December 2006 notice until 28 December 2006.  Mr. Hess complained to Mr. Cheung about the lack of notice in an e-mail dated 28 December 2006.

27.  Mr. Saxer apparently did not receive notice of the 27 December 2006 board meeting.  He protested to Beauforte by e-mail dated 3 January 2007.

28.  Ms. Young says on affidavit that she only had 4 hours’ notice of the board meeting.  She complained about the short notice to her by telephone to Beauforte’s Secretary and by e-mail dated 27 December 2006 at 6.36 pm.

29.  Mr. Tang says on affidavit that he received notice of the 27 December 2006 board meeting at 10.46 am.  He could not attend the meeting because of other commitments at the time.  He immediately informed Beauforte’s Secretary about this.  He indicates in his affidavit that he is disappointed that the meeting proceeded nonetheless.

30.  On 5 January 2007, following the grant of the ex parte injunction, Mr. Toggenburger issued a notice convening a board meeting for Monday 8 January 2007.  The proposed agenda was the removal of Mr. Cheung as chairman and his replacement by Mr. Courtauld pursuant to AA Art. 114(A).  The latter provides that Beauforte’s directors may elect a chairman and “determine the period for which [he] is to hold office”.

31.  At the time of obtaining the ex parte order, Mr. Toggenburger’s lawyers did not mention to me that their client intended to call such a meeting.  Instead, at the ex parte hearing it was said that the injunction was simply intended to preserve the status quo before 27 December 2006 and to allow Beauforte “to conduct any urgent/necessary business through its pre-existing board of 10 directors”.

32.  On 8 January 2007 Mr. Cheung’s lawyers applied before me ex parte for an order that Beauforte be restrained from removing Mr. Cheung as director at the meeting at 1.00 pm on that day. 

33.  I refused the order.  I did not think that it was necessary.  This was because the ex parte injunction already granted only allowed the board to preserve the status quo and proceed with its urgent or necessary management business.  The ex parte injunction granted on 5 January 2007 was not intended to enable one faction of directors to improve its position relative to the other.

III. DISCUSSION

34.  For the purposes of deciding whether or not the ex parte injunction should be continued, there are 2 principal issues:-

(1)	whether there was sufficient notice for the board meeting at which Mr. Hess and Mr. Saxer were purportedly removed as directors; and,
(2)	whether Mr. Hess and Mr. Saxer were validly removed pursuant to AA Article 101(A)(iii)

35.  There is also a subsidiary issue.  That is whether or not there was material non-disclosure at the time the ex parte injunction was obtained.  If there was, then what sanction (if any) should the Court impose on Mr. Toggenburger for such non-disclosure?

A. Whether notice of meeting sufficient

36.  Mr. Harris suggests that notice was adequate. 

37.  First, he points out that under AA Art. 126 notice of a board meeting “need not be given” to any Director or alternate Director for the time being absent from Hong Kong.  Mr. Harris argues that since Mr. Toggenburger, Mr. Hess and Mr. Saxer were in Switzerland on 27 December 2006, they were not entitled to receive notice in any event. 

38.  Notice was in fact given to their alternate directors (Ms. Young and Mr. Tang) both of whom were in Hong Kong.  Mr. Toggenburger cannot complain (Mr. Harris contends) if purely “as a matter of courtesy” notice was sent to him, Mr. Hess and Mr. Saxer.

39.  Second, Mr. Harris suggests that the removal of Mr. Hess and Mr. Saxer as directors was an important issue which had been previously raised.

40.  Third, what is a reasonable time depends on the circumstances of a given case.  Here (Mr. Harris points out) AA Art. 125 allows for board meetings to be conducted by way of telephone conference.  Presumably, even if one cannot be physically present in Hong Kong, one can still attend by telephone.  Thus, the time frame for any notice (the argument runs) can be relatively short.

41.  Fourth, Mr Harris notes that Mr. Toggenburger himself by his 25 December 2006 notice attempted to call a meeting in Luzern within a very short time frame.  What is sauce for the goose (Mr. Harris submits) is sauce for the gander.  Mr. Toggenburger cannot credibly complain about short notice when he purported to do the very thing which he accuses Mr. Cheung of doing.

42.  I am not persuaded by Mr. Harris’ submissions. In my view, there is a compelling case that notice of the 27 December 2006 meeting was far too short.

43.  First, given the possibility of a telephone conference, a director may wish to attend by telephone rather than by an alternate director. 

44.  All Art. 126 states is that notice “need not be given” to a director who is absent from Hong Kong.  That is a far cry from saying that, if notice is given (whether through courtesy or otherwise), the notice need not allow sufficient time to enable a director at least to decide whether to attend by telephone or in person through his alternate, and to make appropriate arrangements accordingly.

45.  Second, consider the context of Mr. Cheung’s notice.  It was given on 27 December 2006 at 9.16 am.  It purported to call a meeting for 1.00 pm.  What was the rush?  Why did Mr. Hess and Mr. Saxer have to be removed so immediately?  On the material presently before me, there is no evidence of real urgency.

46.  Third, look at the context of the requisition for the 27 December 2006 meeting more broadly.

47.  The meeting was convened during the Christmas - New Year vacation period.  Monday and Tuesday (25 and 26 December 2006) were holidays.  Monday 1 January 2007 was a holiday.  The only full business days in that week were Wednesday, Thursday and Friday (27-29 December 2006). 

48.  In the circumstances, it would be reasonable (in the absence of genuine urgency) for a company to make allowance for the fact that directors (and possibly alternates) are going to be away from Hong Kong for the holidays.  Even if directors or alternate directors remained in Hong Kong they were likely to have made plans for the Christmas - New Year period.  Indeed, if they were working at that time, they might well have been under pressure from their businesses to meet year-end deadlines. 

49.  Any notice for non-urgent business in or around the end of December 2006 should therefore have given the directors enough opportunity to alter their plans or re-arrange their schedules to be able to attend a meeting in person, by telephone or through an alternate.

50.  Even the directors or alternate directors present in Hong Kong found the notice of less than 4 hours short.  The result was that such directors had little or no time in which to re-arrange their affairs so that they could be present either in person or even by telephone.

51.  Mr. Harris suggests that Ms. Young and Mr. Tang waived any right to object to the short notice.  I disagree.  Their affidavits indicate that they both complained about the short notice not allowing them to attend.  Whether they specifically told Beauforte’s Secretary that the meeting should not proceed seems to me neither here nor there.

52.  Given that 2 key alternate directors could not be present, that directors were abroad, and that the proposed business of removing Mr. Hess and Mr. Saxer does not seem to have been pressing, a responsible board ought to have considered whether or not to postpone the relevant meeting.  There is no evidence that Beauforte’s board did so.  Had it, I think the appropriate course of action (namely, postponement) would have been self-evident.

53.  Fourth, the fact that Mr. Toggenburger in a fit of pique himself purported to convene a meeting in Luzern at very short notice (given that 25 and 26 December 2006 were holidays) is ultimately irrelevant.  Two wrongs simply do not make a right.

B. Whether removal valid

54.  Assume now that Mr. Cheung’s notice gave sufficient time. The question is whether the 27 December 2006 board resolution removing Mr. Hess and Mr. Saxer was valid.

55.  Mr. Saxer and Mr. Hess were appointed as directors pm 12 June 2006.

56.  Mr. Harris argues that Mr. Hess and Mr. Saxer were validly removed.

57.  Mr. Harris says that in AA Art. 101(A)(iii) the stipulation of a board resolution that a director has by reason of his absence vacated his office, merely “serves an administrative purpose”.  Thus, the resolution “adds nothing”. 

58.  I understand Mr. Harris to mean by this that, if a director absents himself for a continuous period of 6 months, he is automatically to be treated as having vacated his office.  The board resolution merely confirms that the office of director has been vacated.

59.  Mr. Harris contends that as at 20 December 2006 both Mr. Hess and Mr. Saxer had not attended any board meetings.  Thus, they were rightly treated by the 27 December 2006 board meeting as having vacated their offices.

60.  Again I am not persuaded by Mr. Harris’ argument. Again I believe that there is a compelling case against Smartmax’ position.

61.  First, on a fair reading of Art. 101(A)(iii), I do not believe that a board resolution is a mere “administrative” formality.  I think that the article plainly requires the passing of a resolution before a director can be considered to have vacated his position.

62.  Second, in the case of Mr. Saxer, there is evidence that he attended a meeting on 6 August 2006 by telephone.

63.  Third, in the case of Mr. Hess, he attempted to attend a meeting on 20 December 2006 by his alternate Ms. Young and, when that was rejected, by telephone.

64.  Mr. Hess’ attempts to attend the meeting were both barred by Mr. Cheung. 

65.  Ms. Young was said by Mr. Cheung to have been invalidly appointed as an alternate director because Mr. Hess simply faxed a letter of appointment.  That letter therefore did not contain his actual signature (as opposed to a fax copy thereof).  I do not think that this was a valid ground of rejection, especially given that (as evidenced by the Form D3 filed by Beauforte before the 20 December 2006 meeting) Beauforte had already recognised Ms. Young’s appointment as alternate.

66.  As far as Mr. Hess’ attempt to attend by telephone was concerned, Mr. Cheung said that he could not be sure that the voice at the other end was Mr. Hess.  Again I do not think that this was a valid ground of rejection.  If there were doubts about Mr. Hess’ identity, that could readily be tested by asking questions to which only the real Mr. Hess was likely to know the answer.

67.  Assume (although this is not clear from the evidence) that there was a board meeting on (say) 13 June 2006 which Mr. Hess did not attend.  Assume that he did not attend any other meeting until his attempt to join that on 20 December 2006.

68.  It is true that 20 December 2006 is more than 6 months after 13 June 2006.  But, if Art. 101(A)(iii) requires a resolution before a director is deemed to have vacated his office, it is strongly arguable that Mr. Hess’ attendance (or attempted attendance) on 20 December 2006 “broke” any 6 month period of absence from board meetings. 

69.  In other words, no relevant resolution having been passed before 20 December 2006, Beauforte could no longer in light of the “break” on 20 December 2006 pass a resolution removing Mr. Hess as director.  Any 6 month period of absenteeism before 20 December 2006 would have been “spent”.

C. Whether material non-disclosure

70.  There are 3 potential candidates for material non-disclosure.

71.  First, Mr. Harris complains that at the ex parte stage it was stated that Mr. Tang would have voted against the removal of Mr. Hess and Mr. Saxer.  Nothing to that effect is explicitly mentioned in Mr. Tang’s affidavit sworn in support of the ex parte application.

72.  I do not accept that this was a material non-disclosure.  The tenor (albeit not express) of Mr Tang’s affidavit is that he would not have supported the relevant resolution.

73.  In any event, if sufficient notice had been given and more directors had attended, the advocacy of one or other of the latter may have swayed their colleagues to vote against the resolution.  I therefore doubt that the alleged non-disclosure is material.

74.  Mr. Harris raises no other material non-disclosure.

75.  The other 2 candidates for non-disclosure are raised by me as the judge granting the ex parte order.

76.  First, it seems to me that I should have been expressly told about the 25 December notice by Mr. Toggenburger.  That gives rise to an argument of unclean hands.  Mr. Toggenburger was acting in a manner similar to that which he condemns.  In the end, I have rejected Mr. Harris’ argument to that effect.

77.  Had I been told of the 25 December notice, I would still have granted the injunction.  I would have made it clear that, to my mind, the injunction did not enable the interim board set up under the injunction to remove Mr. Cheung as chairman.

78.  Thus, although there has been a non-disclosure, I do not think that it is material.

79.  Second, at the ex parte hearing, I should have been told of any intention on Mr. Toggenburger’s part to call a director’s meeting for 8 January 2007 to remove Mr. Cheung as chairman.

80.  Had I been told of any such intention on the part of Mr. Toggenburger, I would have queried whether the ex parte injunction allowed it.  To my mind, pending resolution of this dispute, the injunction does not permit any drastic change in the composition of the board as it stood before 27 December 2006.

81.  In the event, Mr. Carolan (acting for Mr. Toggenburger) informs me that Mr. Toggenburger only formed the relevant intention after the ex parte injunction was granted. 

82.  Further, the board meeting of 8 January 2007 was adjourned for clarification from the summons judge on 12 January 2007.  The meeting was reconvened on 15 and 16 January 2007, at which time Mr. Cheung was removed as chairman and Mr. Courtauld was appointed in his place.

83.  Since the validity of Mr. Cheung’s removal as chairman is not squarely before this Court at this time, I do not propose to comment on it any further.  Mr. Harris does not raise this matter at this stage as a material non-disclosure.

IV. CONCLUSION

84.  Subject to any refinements proposed by counsel, the ex parte injunction is to be continued pending the trial of this dispute or further order.  I shall hear counsel on consequential matters.