CHEUNG TUNG LAN, TONY v. YANG YONGDONG AND OTHERS

HCMP 447/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 447 OF 2012

____________________

BETWEEN

______________

______________

J U D G M E N T

______________

1.  On 12 March 2012 the plaintiff issued an originating summons under sections 121 and 152FA of the Companies Ordinance seeking inspections of various categories of documents listed in a schedule to the originating summons.

2.  At the time the originating summons was issued the plaintiff was a director of the company but he was removed at a special general meeting on 16 May 2012, namely the day before this application came on for hearing.  The application under section 121 therefore falls away. As a consequence, Mr Lee, who appeared for the plaintiff informed me at the outset of the hearing that he would not be seeking the categories of documents referred to in paragraphs 3 and 4 of the schedule.

3.  The company was incorporated in the Cayman Islands and has been re-domiciled in Bermuda.  It is listed on the main board of the Hong Kong Stock Exchange under Chapter 21 of the Listing Rules as an investment company.  The plaintiff’s shareholding is approximately 8.5 per cent of the company’s issued share capital. 

4.  A director is generally entitled to inspect the documents of a company of which he is an officer.  A shareholder is in a different position.  Other than documents he is entitled to pursuant to the provisions of the Companies Ordinance, for example, the financial statements that have to be put before a company in general meeting pursuant to sections 122 and 122G, a shareholder generally is not entitled to inspect a company’s documents or obtain copies of them.

5.  A member can, however, apply to court for an order to inspect records of a company, pursuant to section 152FA of the Companies Ordinance if he can satisfy the court that (a) the application is made in good faith; and (b) the inspection applied for is for a proper purpose.

6.  Mr Ambrose Ho, SC, who appeared for the 4th defendant, along with Ms Bonnie Cheng, summarised the principles as they emerge from the cases by reference to which the court assesses applications under section 152FA in his submissions, and as they were not in dispute it is convenient to quote them:

“27. The following principles relating to the section can be distilled from the relevant case law:

27.1 While the section expresses a composite notion, it does not mean that, if a proper purpose is proved, a case of good faith shall follow or is to be assumed. The ‘good faith’ and ‘proper purpose’ requirements constitute two separate and independent tests.

27.2 The burden is on the application to demonstrate that he is acting in good faith and that the inspection is for a proper purpose. The burden is not satisfied simply by suggesting that an inference can be drawn that the company resisting inspection must have something to hide.

27.3 Good faith means ‘honestly and with no ulterior motive’, and a proper purpose must be the primary or dominant purpose actuating the inspection.

27.4 The applicant must show that his application is not made out of a mere desire to obtain information, that the purpose of the inspection must be to assist him in his capacity as a member of the company, and that the proper purpose set up must be genuine and not a pretence.

27.5 The requirement of a ‘proper purpose’ is an objective test that calls for the court to look at all the circumstances and to determine whether the purpose for the inspection was indeed proper.

27.6 Even if the applicant is able to show that the application was made in good faith and for a proper purpose, the court may, in its discretion, ultimately consider that there is an insufficient prospect of anything useful resulting from the grant of the inspection order.

27.7 The section requires the court to be satisfied that the applicant actually has a sufficiently reasonable ‘case for investigation’ by examining ‘what the applicant actually wants to achieve’ before exercising its discretion to intervene and grant the inspection order.

27.8       The section should not be regarded as affecting the basic rule of company law that a shareholder should not ordinarily have recourse to the courts to challenge a managerial decision made by or with the approval of directors.”

7.  In May 2011 the 4th defendant appointed China International Capital Limited as its investment manager.  The investment manager is owned by the wife of the 1st defendant.  No point is taken in that regard.  The plaintiff was chairman of the board of the company in May 2011 and approved of the investment manager’s engagement.

8.  The 1st defendant became a director of the 4th defendant on 15 April 2011.  Prior to that he was managing director of the investment manager.  It was intended that prior to being appointed as a director of the 4th defendant, he sever his connection with the investment manager.

9.  The matters which have led the plaintiff to make this application relate to the investment manager’s conduct.  The manner in which the 4th defendant has dealt with the investment manager and what the plaintiff suggests is the 1st defendant’s continuing relationship with the investment manager, which is inconsistent with the agreement that the 1st defendant sever his connections with the investment manager when he joined the board of the 4th defendant.  There is also a general complaint that a number of other senior members of staff of the 4th defendant have an excessively close relationship with the investment manager. 

10.  There are four particular investments about which the plaintiff has concerns.  The first concerned an investment in Datronix Investment.  The plaintiff complains that the investment manager did not disclose the fact that two funds managed by it had also invested in Datronix Investment.  The plaintiff suggests that the fact that two of the investment manager’s funds already hold shares in Datronix Investment gave rise to a conflict of interest.

11.  There is no complaint that the investment itself was a poor one.  Mr Lee was not able to tell me whether or not the investment had appreciated in value.  I would have thought it entirely unsurprising that the investment manager would be recommending and making investments on behalf of the 4th defendant that it was also recommending and making on behalf of other clients.

12.  Mr Lee suggested that a conflict might arise because the trading of shares in the same company for different clients could give rise to concerns that the trading affected the share price.  It seems to me that this is a rather artificial concern.  It cannot sensibly be suggested that the 4th defendant expected the investment manager to build completely different portfolios of investments for different clients.  It seems unlikely that it would have made much difference to the 4th defendant’s decisions to buy any investment if the board had been told that the investment manager had already purchased shares in a listed company on behalf of other funds that it managed and no evidence has been filed by the plaintiff suggesting that it would.

13.  The second complaint concerns an investment in a company called Win King which was proposed by the investment manager but was never, in fact, concluded.  There is a difference between the plaintiff and the 4th defendant about why it was not concluded.  Nothing of significance turns on the difference.  The plaintiff’s complaint concerns the proposed structure of the investment in Win King and in particular that it was to be held through a company owned by the investment manager’s staff.  The investment was in a project in Beijing.

14.  The 4th defendant was to have no involvement in the project’s management.  It was not to invest directly in the company that operated the project.  Its interest in the project was to be 30 per cent and indirectly owned.  Self evidently the 4th defendant would be acquiring through, it was intended, a wholly owned subsidiary, a minority interest in another company.  The directors of the 4th defendant, including the plaintiff, did not apparently ask for information about who would control that other company.

15.  Although the investment was never concluded, the 4th defendant engaged lawyers to advise on the structure and documenting of the investment.  The board itself failed to ask some fairly obvious questions about the structure.  I find it difficult to read very much into this matter.

16.  The 3rd investment was in a company called Guotai Junan Investment.  There is a complaint similar to that made in respect of Datronix Investment, that the investment manager had not disclosed that funds managed by the investment manager had also purchased shares in this publicly listed company.  In addition, the plaintiff complains that after acceptance of the recommendation to buy shares in Guotai the investment manager continued to recommend the share after its price dropped below the investment manager’s alert closing price.  The 4th defendant did not accept this recommendation.

17.  The 4th defendant did, however, lose money on the shares that it had brought, although this is not the plaintiff’s complaint.  His complaint seems to be the continued advice to buy that was not, in fact, acted on.  As it transpired the price did fall further.

18.  The final complaint relates to Shengli Oil.  This investment was concluded.  It is not suggested that it is a bad investment.  The complaint concerns the structure of the investment, in particular the fact that the 4th defendant was required to put up earnest money amounting to 100 per cent of the money invested. 

19.  The plaintiff says, about which there is a dispute, that the board had expressed concerns about this at a board meeting on 11 January 2012 and it had been resolved that although the investment be confirmed, further evaluation and negotiation should take place for the board’s consideration.  The plaintiff complains that the executive directors went ahead and made the investment without doing so.  The 4th defendant disputes the plaintiff’s version of what was agreed at the board meeting. 

20.  The final matter of which the plaintiff complains concerns the close connection between the investment manager and two directors (the 1st defendant and Chan Yuk-sang) and two senior staff members.

21.  In answer to questions from the court Mr Lee told me: (1) the plaintiff is not complaining about any actual loss to the company resulting from any of the matters about which he complains; (2) the plaintiff does not suggest there has been a breach of the listing rules; (3) the plaintiff does not allege any breach of securities regulations; (4) the plaintiff has not alleged any breach of fiduciary duty by a director of the company; (5) the plaintiff has no present intention to take any particular action against the 4th defendant or its directors.

22.  Mr Lee summarised the plaintiff’s complaint as follows.  The 4th defendant has too close a relationship with the investment manager, blindly follows its recommendations and is prepared to exculpate the investment manager’s dubious conduct.  The latter is a reference to the investment manager’s failure to disclose that funds it manages has invested in shares it has also recommended to the 4th defendant.

23.  The purpose of this application is apparently to find out what other investments have been made since October 2011 and how the existing ones have been dealt with.

24.  Section 152FA does not alter the basic rule of company law that a shareholder does not ordinarily have access to the courts to challenge managerial decisions of directors.  It follows that the section does not enable a shareholder to inspect documents to monitor what directors are doing with a view to challenging those decisions.

25.  It seems, however, that this is what the plaintiff wishes to do.  He has not suggested that there is any particular purpose to seeking documents other than confirming his view that the 4th defendant is continuing to use an investment manager who has performed poorly and has not been as transparent in making recommendations as it should have been. Presumably, although this is not expressly stated, he thinks the investment manager should be replaced.

26.  As I have stated in paragraph 41 of my judgment in Wong Gar Gee Mimi v Hung King Sang Raymond, section 152FA:

“requires that the court be satisfied that the applicant actually has a sufficiently reasonable ‘case for investigation’ by examining ‘what the applicant actually wants to achieve’, before exercising its discretion to intervene and grant the inspection order:”

27.  In the present case, what the plaintiff apparently wants to achieve is not a “proper purpose” for making an order.  In paragraph 25 of my judgment in Wong Kar Gee Mimi v Hung Kin Sang Raymond I said this:

“By enacting section 152FA, the legislature provided an important new procedure for the protection of shareholder rights and interests and the community’s more general interest in the maintenance of good corporate governance. Section 152FA should therefore be interpreted and applied in a manner consistent with these legislative objectives. This can be achieved through taking a generous approach to the interpretation of what constitutes an interest ‘reasonably related’ or ‘germane’ to the applicant’s status as a shareholder. Given that a member’s status is based entirely on his shareholding in the company, I am inclined to think that where the purpose for seeking an inspection order is founded upon the protection against a change in the value of a member’s shares, that purpose is ‘germane’ to his status as a shareholder and ‘proper’ under section 152FA. Put another way, where a member seeks to protect his economic interest in the company, this should prima facie satisfy the ‘proper purpose’ requirement.”

28.  Such a liberal approach to the interpretation of “proper purpose” should not, as appears to have happened in the case of the present application, be understood as providing a member access to records of management decisions about which he is unhappy.  If a member of a public company is unhappy about the commercial acumen of its directors, his remedy is to sell his shares.  If his concern is that a breach of duty has occurred, which he wishes to remedy in order to protect his economic interest in the company, he should be able to identify the breach in his application and explain to the court what he proposes to do as a result of obtaining the information he seeks. 

29.  I am not satisfied that the plaintiff has demonstrated that the application has been made for a proper purpose and would for that reason dismiss it.  There are two other difficulties with the application which I would mention.

30.  At the commencement of the application, as I have already mentioned, Mr Lee told me that as a result of the plaintiff being removed as a director he would not pursue all the documents listed in the schedule to the originating summons. 

31.  The plaintiff was seeking inspection of the following three categories of documents: (1) all monthly financial reports of the 4th defendant since 2011; (2) all expenses records with supporting documents/vouchers of the 4th defendant since October 2011; (3) all monthly statements of all bank accounts (whether such bank accounts are used for trading or holding securities or not) and/or securities accounts of the 4th defendant kept with any bank and/or security brokers since October 2011.

32.  It is obvious that the large majority of the documents referred to in these three paragraphs are unrelated to the investments referred to in the plaintiff’s evidence or any other investments that the 4th defendant might have made since October 2011.  This of itself calls into question the bona fides of the application and the purpose for which it is made.

33.  I would emphasise that in bringing applications of this sort, an applicant’s advisors should be careful to limit the request for inspection to documents which are relevant to “proper purpose” relied on.  Seeking broad categories of documents that necessarily include documents irrelevant to that purpose may lead to an application that might otherwise have been successful being dismissed.

34.  Shortly before the hearing the 1st to 3rd defendants filed evidence demonstrating that the plaintiff, although a shareholder in the 4th defendant, is not a member because his shares are held in CCASS and his name is not entered in the 4th defendant’s share register.  Section 152FA only applies to members of a company.  Nothing turns on this in the present case because I am not satisfied that the plaintiff has established a proper purpose and it may be that if I had taken a different view the technical issue could have been overcome by a late amendment to the originating summons.

35.  I would, however, make the following comments.  Given the fact that many shareholders in Hong Kong listed companies hold shares through CCASS and many Hong Kong investors hold shares in both public and private companies through nominees, it is important that practitioners check that the applicant is a registered shareholder of the subject company before issuing any application under section 152FA.

36.  I will now hear the parties on costs.    

(Discussion re costs)

37.  There is no dispute that the plaintiff should pay the various defendants’ costs of his unsuccessful application.  The only matter of contention is whether, as Mr Maurellet who appeared for the 1st to 3rd defendants submits, that in the case of his clients the costs should be taxed on a common fund basis rather than a party and party basis.

38.  His reason for this submission in brief is this.  It should have been apparent to the plaintiff that the decision to refuse to entertain his application for inspection was a collective decision of the board of the company and that it was inappropriate to proceed against the 1st to 3rd defendants personally.  It was not necessary for them to be joined as parties in order for the plaintiff to obtain the substantive relief that he sought.

39.  Mr Maurellet also points to the way in which I dealt with costs in my decision in Wong Kar Gee Mimi v Hung Kin Sang Raymond where a similar issue arose.  In that case the plaintiff was successful in obtaining an order and argued that one particular director should pay her costs because he was the puppet master who controlled the company and orchestrated its response to her application.

40.  I rejected that submission on the basis that it simply was not realistic on the evidence before the court to expect me to determine whether this allegation was correct or otherwise.  Mr Maurellet submits that the position is similar in the present case and that it should have been apparent to the plaintiff’s legal advisers, who are obviously familiar with my decision, that it was inappropriate to proceed against his clients simply to try and obtain a costs order against them.

41.  Mr Lee in response has said the justification for joining the 1st to 3rd defendants was that at the time the originating summons was issued there was no evidence that there had, in fact, been a board meeting.  The Plaintiff being a director would have expected to have been aware if one had been convened and a resolution passed by the board collectively to reject his application for inspection and to contest the originating summons.

42.  In my view the position is this.  It would only be in a rare case in which there is strong evidence of particular directors of a company, dictating the decisions of the board that there would he justification for making individual directors parties to an application such as this simply with a view to obtaining a costs order against them.

43.  In my view, the decision to join the 1st to 3rd defendants was not justified and was unnecessarily aggressive.  In the circumstances I think it is appropriate to order that the 1st to 3rd defendants costs are paid on a common fund basis.