ZHANG JIANHE v. CITIC 21CN CO LTD

HCA 1968 / 2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1968 OF 2006

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J U D G M E N T

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A.  Introduction

1.  Mr Zhang (the Plaintiff) was formerly employed by Citic 21^[1] (the Defendant) as Vice President of the Data Communication Department of Citi 21’s China Division.  Citic 21 is and was a listed company in Hong Kong.

2.  By way of the present action, Mr Zhang claims against Citi 21 for damages in Citi 21’s wrongful refusal to approve Mr Zhang’s exercise of his option to subscribe for 8 million shares in the company.  The share option were given to Mr Zhang when he was employed by Citic 21. 

3.  It is Mr Zhang’s latest pleaded case that he sought to exercise his right in the option on 31 March 2005, and this was wrongfully refused by Citic 21^[2].   He claims damages in the sum of HK$18,970,782, representing the difference between the option price of the 8 million shares^[3] and the market value of these shares he would have sold after the exercise of the option.

4.  Although Citi 21 accepts that Mr Zhang was given the option and it is common ground that Mr Zhang did ask to exercise his option in March 2005, Citi 21’s defences raise the following main issues for trial:

(1)  Whether it is a term of the option that Mr Zhang’s right to exercise it was conditional upon his satisfactory performance of his duties.

(2)  If so, whether he had failed to perform his duties satisfactorily, and was therefore rightly refused the exercise of the option.

(3)  In any event, whether the March 2005 exercise of the option was invalid and ineffective, as it was not made in accordance with the terms and conditions of the option.

(4)  Whether Mr Zhang has failed to show causation between his alleged loss and Citic 21’s wrongful breach of contract since he did not have the necessary financial means to purchase the 8 million shares under the option price when he sought to exercise the right.

(5)  Even if Citic 21 is liable, what should be the proper quantum of damages.

B.  Background

5.  To provide the proper context for a better understanding of the dispute in the trial, I set out below what I regard as the relevant background facts.  Unless otherwise stated, these facts are undisputed.

6.  Citic 21 is listed company in Hong Kong. Under it, there is a group of companies incorporated in Hong Kong, the Mainland and overseas.

7.  Mr Zhang is an engineer by training in the Mainland, and possesses experience and expertise in the field of information technology. 

8.  By a letter of employment dated 12 September 2000, Mr Zhang was engaged by Citic 21 (then known as 21CN CyberNet Corporation Ltd) as Vice President for the Data Communication Department of the China Division.   He was at that time approached and recruited by Mr Timothy Chen, the then Chief Executive Officer of Citi 21. 

9.  On 20 November 2000, Citi 21 made an offer to Mr Zhang by letter (“the Offer Letter”) to join Citi 21’s Share Option Scheme.  Under the terms and conditions set out in the Offer Letter and the Share Option Scheme document (“the Option Scheme Document”), the option (“the Option”) that was offered to Mr Zhang was that:

(1)  Mr Zhang was entitled to acquire up to a maximum of 8 million shares in Citic 21 in 3 tranches.

(2)  The exercise price for the option was HK$0.792 per share.

(3)  The 1^st tranche of 2.4 million shares was exercisable on or after 21 November 2001.

(4)  The 2^nd tranche of 2.4 million shares was exercisable on or after 21 November 2002; and

(5)  The 3^rd tranche of 3.2 million shares was exercisable on or after 21 November 2003.

10.  The method and procedures by which Mr Zhang could exercise the Option were set out in the Offer Letter and the Option Scheme Document.

11.  It is not disputed in the trial that Mr Zhang had validly accepted the offer for the Option.

12.  In mid 2002, Mr Zhang was assigned to manage 3 of Citi 21’s subsidiaries in the Mainland.  One of these 3 companies was known as Guangdong Tian Tu Technology Company Ltd (“Tian Tu) (廣東天圖科技有限公司).  The other 2 were 廣東啟新科技有限公司 and 廣東凱通軟件開發有限公司.  He was appointed the General Manager of Tian Tu, and was responsible for its management and business.  He was also responsible for the management of the other 2 Mainland companies.

13.  These companies were engaged businesses belonging to the system integration and software development business segment of Citi 21.

14.  On 31 March 2005^[4], Mr Zhang met Ms Chen Xiao Ying (陳曉穎) at the China World Hotel lobby in Beijing.  Ms Chen was the Executive Vice Chairman of Citic 21.

15.  At this occasion, amongst other things, Mr Zhang orally indicated to Ms Chen that he wanted to exercise the Option.  

16.  According to Ms Chen, she effectively rejected it right away.  Ms Chen was apparently unsatisfied with Mr Zhang’s work, while Mr Zhang was of the view that Ms Chen was biased against him.  Mr Zhang however says Ms Chen did not reject his application right away but asked her to deal with it with one Mr Zhang Yunpeng, who was then the person responsible for the finance of Citic 21’s mainland subsidiaries.    I would have to resolve this dispute below.

17.  What is not in dispute is that this March 2005 attempt to exercise the Option by Mr Zhang was in fact rejected eventually.

18.  Then, on 22 July 2005, Mr Zhang put in a written request with an undated cheque of the exercise price to seek to exercise the Option again.  He accepted that at that time, he did not have sufficient funds himself in the bank to honour the cheque, but it is his case that he had by then already arranged with his (unidentified) friends in the Mainland to lend him sufficient funds to honour the cheque, if and when the cheque was presented. 

19.  The 22 July 2005 exercise of the Option was never approved.  However, as mentioned above, this attempt to exercise the Option no longer features in this trial as Mr Zhang’s claim is now premised only on his attempt to exercise the Option on 31 March 2005.

20.  By a letter dated 25 August 2005, Citic 21 terminated Mr Zhang’s employment (including his positions with the 3 Mainland companies) immediately with one-month in-lieu of notice payment.    Mr Zhang said he only received the notice on 29 August 2005.  This does not matter for the present trial, as it is common ground that Mr Zhang’s employment was validly terminated whether it was on 25 or 29 August 2005.

21.  In 2006, Mr Zhang brought the present claim against Citic 21 at the Labour Tribunal, which was subsequently transferred to the High Court in August 2006.

C.  The issues

C1.    Was the exercise of the Option conditional upon satisfactory performance of Mr Zhang’s duty

22.  It is Citic 21’s case that the Option granted to Mr Zhang was a conditional one, in that Mr Zhang’s eligibility to exercise his option was subject to his satisfactory performance of duties, including attaining performance targets set down by Citic 21. 

23.  Citic 21 says this condition was a term of the Option set out in the Offer Letter.

24.  In the premises, whether the Option is a conditional one turn on the objective construction of the Offer Letter.   Given that a proper construction should look at the Offer Letter as a whole, I will set it out as follows:

“Dear Sir/ Madam,

Share Option Scheme (the ‘Scheme’)

On behalf of the board of directors of 21CN CyberNet Corporation Limited (the ‘Company’), I have pleasure in offering to you the grant of an option (the ‘Option’) to subscribe for shares of HK$0.01 (or of such other nominal amount as shall result from a sub-division or a consolidation of such shares from time to time) each in the capital of the Company (the ‘Shares’) pursuant to the rules of the Scheme adopted by a written resolution of all shareholders of the Company on 28 May, 1998, as amended from time to time (the ‘Rules’) on the following terms and conditions:-

1.    Maximum number of Shares which you may subscribe for upon the exercise in full of the Option: 8,000,000 Shares (subject to any adjustments in accordance with the terms and conditions of the Rules).

2.    The “Exercise Price” is the price per Share at which you may subscribe for the Shares on exercise of the Option.

Subject to any adjustments in accordance with the terms and conditions of the Rules, the Exercise Price shall be HK$0.792 per Share representing 80 per cent of the average closing price of the Shares for the five trading days immediately preceding the date hereof.

3.    Subject to the early termination provisions contained in the Rules and subject also to paragraph 5 below, you may exercise the Option (in whole or in part) in the following manner:-

(a)  to the extent of 2,400,000 Shares, being 30 per cent. of the total number of Shares covered by such Option at any time on or after 21 November, 2001;

(b)  to the extent of another 2,400,000 Shares, being 30 per cent. of the total number of Shares covered by such Option at any time on or after 21 November, 2002; and

(c)  to the extent of the balance of 3,200,000 Shares, being 40 per cent. of the total number of Shares covered by such Option at any time on or after 21 November, 2003.

4.    The Option shall be exercisable by returning the Option certificate and a subscription form to the Company (marked for the attention of the Company Secretary) together with a remittance in respect of an amount which is equal to the Exercise Price multiplied by the relevant number of Shares subscribed for.

5.    If the Option represented by the Option certificate is only exercised in part, the number of Shares to be subscribed for under the Option must be a whole multiple of 2,000 Shares or in amounts or multiples of one board lot of the Shares trading from time to time on The Stock Exchange of Hong Kong Limited, if different.  A balancing Option certificate (if any) in respect of any Option represented by the original Option Certificate and remaining unexercised will be issued in your name and such certificate will be sent to you at the option of the Company either at your last known address by post or at your place of work but in both cases at your risk.

The offer for the grant of the Option made under this may be accept in full or in respect of less than the maximum number of Shares offered in paragraph 1 above provided that it must be accepted in respect of a whole multiple of 2,000 Shares or in amounts or multiples of one board lot of the Shares trading from time to time on The Stock Exchange of Hong Kong Limited, if different.

If you wish to accept the Option in full or in part, please sign and return the duplicate of this letter enclosed to the Company at its principal place of business referred to above (for the attention of the Company Secretary) together with a remittance in favour of the Company of HK$1.00 by way of consideration for the grant thereof not later than 4 p.m. on 18 December, 2000, failing which this offer will lapse.

The Company Secretary will acknowledge receipt of all applications and the Company will issue to you an Option certificate which will specify the date of grant, the number of Shares in respect of which the Option has been granted and the Exercise Price.

Please also note that any Option granted to you pursuant to your application thereof shall be subject to the terms hereof and all the provisions of the Rules are hereby incorporated  as terms hereof  by this reference.  A copy of the Rules is available at the principal place of business of the Company at 6208, Central Plaza, 18 Harbour Road, Wanchai, Hong Kong.  In the event of any conflict between the Scheme and this letter, the Scheme shall prevail.

The Option as contained in this letter is extended to you by this letter in acknowledgement of your past service with the Company and in anticipation of continuing good efforts being made by you with your work.  This offer and the Option when granted is a private matter between you and the Company and should not be discussed with other members or staff of the Company or its subsidiaries, or any other persons.  The Option when granted is neither assignable nor transferable and can only be exercised by you, or in certain limited circumstances, your legal personal representatives.

Should you require any further clarification regarding the details of the Scheme or the contents of this letter, please do not hesitate to contact the undersigned.

Yours faithfully

Chen Yung-cheng, Timothy

Director

For and on behalf of

21CN CyberNet Corporation Limited

I agree to accept the Option in full/ in respect of      ______Shares pursuant and subject to the terms and conditions set out in this offer letter of which this is a copy and enclose an amount of HK$1.00 by way of consideration for the grant of the Option.

Name:  ZHANG Jianhe 張建和

Date:  20 November, 2000”

25.  Mr Fung, Leading Counsel for Citic 21, contends that on a proper construction of the words “in anticipation of good efforts being made by [Mr Zhang] with [his] work” set out in the penultimate paragraph of the Offer Letter, it means that the Option offered to Mr Zhang was exercisable subject to the subsequent condition of his due and satisfactory performance of his duties.

26.  With respect, I do not accept Mr Fung’s submissions. 

27.  In my view, on a proper construction of the Offer Letter as whole, the phrase “The Option as contained in this letter is extended to you by this letter in acknowledgment of your past service with the Company and in anticipation of continuing efforts being made by you with your work” did not, and was not intended to, form part of the terms and conditions of the offer of option to Mr Zhang.  This is so because:

(1)  It is not contended (nor in my view it could be so contended) that every sentence or phrase contained in the Offer Letter amounted to (and was intended to become) a legally binding term for the offer of the Option.

(2)  The question is thus whether this particular phrase was objectively intended to and did become one of the legally binding obligations of the offer of the Option.

(3)  In my view, this phrase does not amount to a consideration clause, as it is expressly separately provided in the Offer Letter that in order to accept the offer and to make it binding, Mr Zhang had to pay HK$1.00 by way of consideration for the grant of the Option.

(4)  In the premises, the words “in acknowledgement of your past service” were not intended to be the basis of the consideration for the grant of legally binding offer of option.  As such, the entire phrase (with the words “in anticipation of continuing good efforts being made by you with your work”) when construed as a whole amounted to objectively no more than an expression of thanks and wish on the part of Citic 21 as the grantor of the Option.  It did not amount to an intention to create legal obligations by way of this phrase. 

(5)  Moreover, the ordinary meaning of the words “in anticipation of” and their use, instead of the words such as “conditional upon” or “subject to”^[5], are also in my view consistent with the drafter’s objective intention to use this phrase merely to express a wish on the part of the grantor of the Option instead of incorporating it as a legally binding condition of the offer.  

28.  For these reasons, I conclude that it was not a condition subsequent of the Option that Mr Zhang’s eligibility to exercise the option was subject to his satisfactory performance of duties, including attaining performance targets, if any, set down by Citic 21.

C.2    Whether Mr Zhang had failed to perform his duties satisfactorily and was rightly refused the exercise of the option

29.  Given my above ruling on the construction of the Offer Letter, this issue does not arise.  However, if I am wrong above, and that the right to exercise the Option was conditional upon Mr Zhang’s satisfactorily performance of his duties as submitted by Citic 21, I would have dealt with this issue as follows.

C2.1  Citic 21’s case and evidence

30.  It is Citic 21’s case that Mr Zhang had failed to perform his duties satisfactorily, in that the performance of Tian Tu when under his management as the General Manager was poor.   In particular, Citic 21 says:

(1)  Mr Zhang had failed to meet the performance targets laid down by Ms Chen at a meeting held on 24 March 2003 at Shengzhen. 

(2)  Tian Tu had recorded substantial losses for the financial years of 2003^[6] and 2004^[7], when it was under Mr Zhang’s management as its General Manager.

(3)  An internal audit report of Tian Tu dated 12 August 2005 (“the Internal Audit Report”) compiled by Citic 21’s internal auditors concluded effectively that Tian Tu’s performance and management for the years between 31 December 2002 and 30 June 2005 were poor and irregular. 

31.  In support of its case, Citic 21 relies on the following principal evidence:

(1)  The minutes of the meeting held on 24 March 2003, and a fax memo sent to Mr Zhang dated 30 April 2003.

(2)  Three annual audited reports of Tian Tu respectively for the financial years of 2003, 2004 and 2005.

(3)  The Internal Audit Report.

(4)  Ms Chen’s evidence as to what happened at the meeting on 24 March 2003 (which I will elaborate below) and that in her assessment, Mr Zhang had not been able to carry out any of the business development promises he had undertaken for Tian Tu during the years when he was in charge of it.

(5)  Mr Au’s evidence to explain the discrepancies between Tian Tu’s annual audited reports and the segmental business results reported in the corresponding group audited reports of Citic 21.  Mr Au joined Citic 21 in January 2007 and is now its Vice President for Finance and Accounting.

C2.2  Mr Zhang’s case and evidence

32.  In relation to Citic 21’s allegations of his poor performance, only Mr Zhang gave evidence in rebuttal.  His principal case and evidence in relation to Citic 21’s allegations can be summarized as follows:

(1)  Although he accepts that there was a meeting with Ms Chen (and others) on 24 March 2003, and that at the meeting Tian Tu’s business developments were discussed generally, he does not accept that there were specific business or performance targets set down by Ms Chen at the meeting for him to achieve.  In relation to this:

(a)  he says that before the commencement of the present action, he had never received or seen the minutes now produced by Citic 21.  He does not accept the accuracy of the minutes;

(b) for the fax memo dated 30 April 2003 sent to him, he accepts that he had received this, and although the contents were not entirely complimentary of Tian Tu’s performance, it had nothing to do with any specific business or performance targets as now alleged by Citic 21.

(2)  As far as he could remember, Tian Tu was making profits each year when he was the General Manager.  This is reflected by the corresponding annual reports of Citic 21, which reported that the segmental business for system integration and software development (of which Tian Tu was the major principal contributor of revenue) recorded profits for the same corresponding years of 2003 and 2004.  Mr Zhang also says it was only after the commencement of these proceedings that he was provided with those annual audited reports of Tian Tu which Citic 21 now relies on.  He had not been provided with them when he was still working for Tian Tu, and therefore he doubts the time when they were compiled and produced and their accuracy.  However, as he left Tian Tu in 2005 and is not in possession of the necessary underlying accounting documents of Tian Tu, he is not in a position to point out which parts of the audited reports are inaccurate.

(3)  Insofar as the Internal Audit Report is concerned, this was prepared and complied by the internal auditors of Citic 21, and for the purpose of terminating his appointment.  It is therefore not an independent and impartial report.  Mr Zhang submits that the Court should not rely on it to determine whether his performance was unsatisfactory as alleged.

C2.3  Discussion

33.  Looking at the evidence in the round, I have come to the conclusion that Citic 21 has failed to prove that Mr Zhang’s performance of his duties was unsatisfactory in failing to meet performance targets or in mismanaging Tian Tu.  My reasons are as follows.

34.  First, I am not satisfied that it is proved on the balance of probabilities that specific performance targets had been laid down for Mr Zhang by Ms Chen at the meeting on 24 March 2003:

(1)  The performance targets that were said to have been laid down by Ms Chen at the meeting were set out at item 7 of the minutes as follows:

“	1)  天圖公司2003財年的淨利要達到1000萬元；
	2)  針對經營目標，制定獎罰制度；
	3)  要調整目前的薪酬制度，工資要按比例發放； (在一周內做出薪酬方案)
	4)  天圖要把內部管理搞好。”

(2)  I however would not attach any weight to these minutes, as I am not satisfied it has been shown to me that that these minutes represent contemporaneous or correct record of what were discussed at the meeting:

(a)  I accept that a copy of the minutes had not been provided to Mr Zhang after the meeting.  It was only provided to him after the commencement of the litigation.   This is not seriously or effectively denied by Citic 21, as there is never any evidence (including Ms Chen’s evidence) to suggest that a copy of the minutes was in fact provided to Mr Zhang before the commencement of the litigation.  When asked as to whether this was the case under cross-examination, Ms Chen only evasively said that she did not know.  Further, when Mr Zhang asked in correspondence as to why the minutes had not been provided to him before the proceedings, Citic 21’s solicitors answered that this was an internal document.  In other words, they accepted that the minutes were not provided to Mr Zhang after the meeting and before the proceedings but gave a reason to explain why.

(b) In my view if the minutes were prepared soon after the meeting for record purpose, I do not understand why a copy of the same was not provided to Mr Zhang for his keeping and confirmation.

(c)  Further, other than a reference to a general salary reduction proposal (which in my view is not the same as target number 3 quoted above), these so-called 4 performance targets were not mentioned or referred to in the fax dated 30 April 2003 and sent to Mr Zhang.  If there were in fact these 4 performance targets and one of the purposes of the fax was to remind Mr Zhang that they had not been reached (as now suggested by Citic 21), I do not see any good reasons (and none has been shown) why they would not have been referred to in the fax.  The absence of the reference to these specific targets points in my view strongly to the fact that there had not been these 4 specific targets clearly laid down at the meeting.

(d) In the premises, I am doubtful as to the correctness of the contents of the minutes.

(3)  For these reasons, I reject Ms Chen’s evidence that she expressly discussed and laid down these performance targets for Mr Zhang to achieve, as her evidence is not supported or consistent with the documentary evidence.

(4)  Citic 21 has thus failed to prove on the balance of probabilities that these performance targets had been laid down for Mr Zhang to achieve at the meeting held on 24 March 2003.

35.  For the above reasons, there is therefore no question that Mr Zhang had failed in his duties or performance in failing to achieve the performance targets.

36.  Secondly, I am also of the view that it has not been proved on the balance of probabilities that Mr Zhang was guilty of mismanagement of Tian Tu.  My reasons are:

(1)  I do not think the annual audited reports of Tian Tu for 2003 and 2004 amount to sufficient proof that Tian Tu had either suffered substantial losses in these years or, even if it was the case, that it was due to the mismanagement of Mr Zhang:

(a)  It is common ground that the business of Tian Tu belonged to the system integration and software development business segment of Citic 21’s financial reporting.    It is also Mr Au’s evidence that amongst all the subsidiary companies under this business segment, Tian Tu was the single most important major contributor of revenues.

(b) In the 2004 annual report of Citic 21, it reported a profit under this business segment of system integration and software development for the financial year between 1 April 2003 and 31 March 2004.

(c)  In the annual report of Citic 21 dated 4 July 2005, it also reported a profit under  this business segment for the financial year between 1 April 2004 and 31 March 2005.  Further, in its business review of the business segment of system integration and software development and Tian Tu, it stated as follows:

“Business Review (Continued)

System Integration and Software Development

廣東天圖科技有限公司 (Guangdong Tian Tu Technology Co. Ltd.) ("Tian Tu") is one of the subsidiaries of the Company engaged in the system integration and software development business in the PRC.  The revenue derived from the sale of computer products, provision of system integration services and software development business for the current year was HK$59,291,000 (2004: HK$137,228,000) and the attributable profit for the year was HK$939,000 (2004: HK$1,433,000).  The decrease in turnover for the current year was mainly attributable to the severe competition in the system integration business resulting in lower profit margins.  As a result, the management decided to focus more on the software development and technical support services.  The management also plans to utilize the technical expertise of Tian Tu to provide service to other business units of the Group.”

(d) Thus, in these annual reports, it recorded that (i) there were attributable profits for the years 2003 and 2004 under this business segment, and (ii) the decrease in turnover was mainly attributable to the severe competition in this business discipline.

(e)  In light of these public statements made by Citic 21 in its annual reports, I am not satisfied it has been proved that Tian Tu had suffered a loss for these years.

(f)   Similarly, I am also not satisfied that it has been proved that the decreased performance of Tian Tu was caused by or due to Mr Zhang’s unsatisfactory performance as its General Manager.  From Citic 21’s own public statement, the less satisfactory performance was mainly due to the then prevailing market conditions.

(2)  Further, I am also hesitant to attach any significant weight to these annual audited reports of Tian Tu relied on by Citic 21:

(a)  First, I accept that they were not provided to Mr Zhang when he was still the General Manager of Tian Tu.  Again this was not seriously denied by Citic 21.  No good reasons have been provided to explain why these audited reports were not provided to Mr Zhang when he was practically the head of management of the company at that time.  This puts doubts as to the reliability and accuracy of these reports for the present purpose, in particular in light of the inconsistency between the results reflected in these reports and those shown in the annual reports of Citic 21. 

(b) I am not persuaded that the differences in accounting practices and accounting period as mentioned by Mr Au in evidence could satisfactorily explain the inconsistency.  For example, there is nothing before me to suggest and support why the Court should rely on the financial year period say for 2004 adopted in Tian Tu’s audited report to decide whether Tian Tu suffered a loss instead of the financial year period adopted for Citic 21’s annual report for the same year.   It must be noted that Citic 21 is the parent company of Tian Tu, and it is in its annual report that it represented to the outsiders that Tian Tu (being the principal contributor) had been making profit under this business segment.

(c)  Secondly, according to Mr Au’s evidence (which I accept), in relation to these audited reports, Tian Tu’s management should have made a written declaration to confirm that all the information and materials provided to the auditors for the auditing purpose were correct and accurate and that the management was responsible for the same.  No such written declarations have been provided at the trial to support the accuracy of these reports.  In light of Mr Zhang’s consistent stance (since he has been provided with copies of these reports upon discovery) to doubt the accuracy of these reports, and the fact that he (as the General Manager) of Tian Tu had no involvement in the commissioning and preparation of these reports, the absence of these written declarations further renders these reports unreliable for the present purpose. 

(3)  Finally, I also refuse to attach any weight to the Internal Audit Report for the following reasons:

(a)  The maker of the report was not called to give evidence and be cross-examined upon.  This makes it entirely unfair to Mr Zhang when the report was relied on to make serious allegations against him.

(b) Further, without the maker coming to give evidence, it is unclear on what bases, and whether those bases were justified, did he rely to come to the conclusions made in report.  In other words, there is nothing before the Court to test against the soundness and correctness of the bases of the conclusions set out in the report.  Under such circumstances, it is unsafe for the Court and unfair (to Mr Zhang) to attach any weight to it to determine whether the allegations made against Mr Zhang were made out.

C2.4  Conclusion

37.  For the above reasons, I conclude that:

(1)  Citic 21 has not proved that Mr Zhang’s performance was unsatisfactory in that he had failed to meet any performance targets and/or that he had mismanaged Tian Tu’s business.

(2)  In the premise, even if Mr Zhang’s right to exercise the Option was conditional upon satisfactory performance of his duties, Citic 21 has not proved that it was entitled to disapprove Mr Zhang’s exercise of the Option based on any unsatisfactory performance.

C3.    Whether the March 2005 exercise of the Option was invalid and ineffective

C3.1  What were required to be submitted when Mr Zhang sought to exercise the Option

38.  Citic 21’s case is that this attempt to exercise the Option by Mr Zhang was invalid, as it was not made in accordance with the rule and procedures laid down in the Offer Letter and the Option Scheme Document by submitting a written subscription form or notice in writing together with a remittance equivalent to the applicable exercise price (which should be in the sum of HK$6,336,000).  In the premises, there is no question of a proper exercise of the Option and wrongful refusal.

39.  The first question I need to deal with under this issue is what were, if any, the contractual procedures, if any, required of Mr Zhang to properly exercise his Option.

40.  For this, one looks to the contractual documents, ie., the Offer Letter and the Option Scheme Document. 

41.  Clause 4 of the Offer Letter (which was stated expressly to be one of the terms and conditions of the offer of Option) provides that the Option shall be exercisable by returning a subscription form to Citic 21 marked for the attention of the Company Secretary together with a remittance in the amount of the exercise price multiplied by the relevant number of shares subscribed for.

42.  Clause 6(A) of the Option Scheme Document similarly provides the procedures to exercise the Option as follows:

“6.  EXERCISE OF OPTIONS

(A) Subject to sub-paragraph (C) below [which is irrelevant for the present purpose], an Option shall be exercised in whole or in part and, other than where it is exercised to the full extent outstanding, shall be exercised in amounts or integrals multiples of such number of Shares as shall represent the board lots for dealing in Shares traded on the Stock Exchange for the time being, by the Grantee (or by his or her legal personal representative) by giving notice in writing to the Company stating that the Option is thereby exercised and the number of Shares in respect of which it is exercised.  Each such notice must be accompanied by a remittance for the full amount of the Exercise Price in respect of which the notice is given.  Within 40 days after receipt of the notice and the remittance and, where appropriate, receipt of the Auditors’ certificate pursuant to paragraph 9, the Company shall allot and issue the relevant Shares to the Grantee (or to his or her legal personal representatives) credited as fully paid with effect from (but excluding) the relevant exercise date and issue to the Grantee (or to his or her legal personal representatives) certificates in respect of the Shares so allotted.” (emphasis added)

43.  Looking at the Offer Letter and the Option Scheme Document as quoted above, I accept that on a proper construction, it is a term of the Option that a valid exercise of it must be made by Mr Zhang by (a) submitting either a subscription form or notice in writing to Citic 21 setting out the number of shares under the Option he wanted to subscribe, and (b) tendering together with the exercise notice a remittance for the full amount of the exercise price for the shares he wanted to subscribe.

44.  Thus, in order to show that the March 2005 exercise was a valid one, the burden is on Mr Zhang to prove that at the time when he applied to exercise the Option:

(1)  He submitted a subscription form or notice in writing to Citic 21; and

(2)  He tendered remittance in the sum of HK$6,336,000 (0.792 x 8,000,000) for the subscription of the 8 million shares in Citic 21.

C3.2  Whether Mr Zhang had submitted a subscription form or notice in writing

45.  In relation to this question, it is common ground and evidence that Mr Zhang orally indicated to Ms Chen that he wanted to exercise the Option on 31 March 2005 at the hotel lobby of China World Hotel. 

46.  However, it is Mr Zhang’s further evidence^[8] that:

(1)  Ms Chen did not expressly reject his application at the meeting, but only put him off by asking him to see Mr Zhang Yunpeng, who was the person then responsible for finance matters for Citic 21’s business in the Mainland.

(2)  He had on the next day after this meeting and in accordance with Ms Chen’s instruction went to see Mr Zhang Yunpeng and handed over a notice to exercise the option to Mr Zhang Yunpeng.

(3)  Ms Chen later refused to sign the approval of his application for the exercise of the Option.

47.  On the other hand, Ms Chen’s evidence is that she rejected Mr Zhang’s oral application at the meeting at the hotel lobby right away and did not ask him to go to see Mr Zhang Yunpeng.  It was so because she had all along been dissatisfied with Mr Zhang’s performance and in her mind, there was no question that he could be approved with the exercise of the Option. Ms Chen in fact says Mr Zhang Yunpeng was with her at the hotel lobby during the meeting, and there was no need to ask Mr Zhang to go to see Mr Zhang Yunpeng.

48.  On this question, I prefer and accept Ms Chen’s evidence and reject Mr Zhang’s evidence that he had later submitted a written notice to Mr Zhang Yunpeng.  My reasons are as follows

49.  First, I do not find Mr Zhang a credible witness on this question because:

(1)  He was evasive in answering very simple questions put to him.  For example, it is his evidence that he knew that Ms Chen did not approve his application for the exercise of the Option after he had given the form to Mr Zhang Yunpeng.  When asked by the Court whether he had asked Ms Chen for the reasons of the refusal, Mr Zhang gave a long and convoluted answer. He said although he wanted to know the reasons, but somehow he did not want to know them at that time, as he knew that if he had confronted her, he would have been sacked by her, which was not something he wanted to happen as he felt at that time a responsibility to carry out and through a project worthy of some $39m which he managed to conclude.  He said he did not want to sacrifice the interest of the company because of his own desire to exercise the Option.

(2)  I find this answer beyond common sense and incredible.  It appears to be natural for a person in Mr Zhang’s position to have asked for the reasons for the refusal of his exercise of the Option, something which he regarded as of right, and something which was of a significant financial value.  It is beyond me to think that Mr Zhang would have just let to go merely because he wanted to complete a deal he had brought to the company. 

50.  Secondly, Mr Zhang’s own evidence that Ms Chen would have sacked him if he had asked her the reasons for the disapproval shows that it was clear to him at that time Ms Chen was very unsatisfied (rightly or wrongly) with his performance.  This in my view is more consistent with Ms Chen’s evidence that she right away flatly and expressly rejected Mr Zhang’s oral application for the exercise of the Option.   As such, it is inherently incredible that Ms Chen would still have asked Mr Zhang to approach Mr Zhang Yunpeng to deal with the application.

51.  Thirdly, under the procedures laid down in the Offer Letter and the Scheme, the notice in writing should be submitted to the Company Secretary of Citic 21.  Mr Zhang knew about this, as it is his own evidence that the documents relating to the Option had been translated to him by his son (who was then studying in the United States) sometime in 2003.  In the circumstances, it is also inherently unlikely that Ms Chen would have directed him, and that he would have submitted the form, to Mr Zhang Yunpeng directly but not to the then company secretary.

52.  Fourthly, judging from the way Mr Zhang has given evidence and in which he has conducted the trial, he is clearly an intelligent, meticulous and careful person.  It therefore strikes me as also incredible that he had in fact submitted a written notice to Mr Zhang Yunpeng for the exercise of the Option, but for no good reasons he has not kept a copy of the notice himself.    He has also never sought any discovery from Citic 21 for a copy of this notice.

53.  For the above reasons, I reject Mr Zhang’s evidence concerning the submission of the notice, and find that:

(1)  Mr Zhang made an oral application to Ms Chen for the exercise of the Option at the hotel lobby of China World Hotel on 31 March 2005.

(2)  Ms Chen rejected Mr Zhang’s said application right away and did not ask him to go to Mr Zhang Yunpeng to deal with it.

(3)  Mr Zhang never submitted any written notice to Mr Zhang Yunpen for this attempt to exercise the Option after meeting Ms Chen.

(4)  Insofar as necessary, Mr Zhang Yunpeng was present at the meeting between Ms Chen and Mr Zhang at the China World Hotel lobby.

C3.2  Whether Mr Zhang had tendered the remittance at the time of the March 2005 application

54.  This can be dealt with very shortly.

55.  It is not Mr Zhang’s case or evidence that he had tendered any remittance for the exercise of the Option when he made the March 2005 application to exercise the Options.

56.  Thus, it is common ground that he did not do so, and I so find.

C3.3  conclusion

57.  Given the above findings, I conclude that:

(1)  For the March 2005 application for the exercise of the Option, Mr Zhang has failed to prove on the balance of probabilities that (a) he had submitted a subscription form or notice in writing for that purpose, and/or (b) he had tendered the necessary remittance equivalent to the exercise price.

(2)  In the premises:

(a)  the March 2005 exercise made by Mr Zhang was not made in accordance with the terms and conditions governing the exercise, and was therefore invalid and without effect; and  

(b) Citic 21 was not in breach of contract in not approving Mr Zhang’s application to exercise the Option on 31 March 2005.

(3)  Mr Zhang’s present claim against Citic 21 must therefore fail, as he had not made a valid and effective exercise of the Option.  The claim should be dismissed on this ground.

C4.    Whether Mr Zhang has shown that he had the necessary the financial means to purchase the 8 million shares when he sought to exercise the Option in March 2005

58.  The burden is on Mr Zhang to prove that he had in place the necessary financial means (i.e., funds in the sum of HK$6,336,000) to purchase the 8 million shares in Citic 21 had his application to exercise the Option were approved.

59.  This, Mr Zhang has failed to prove:

(1)  There is evidence^[9] that Mr Zhang only had total assets^[10] in the region of HK$900,000 to HK$1.2 million between February and April 2005.  This shows that he did not have sufficient cash to pay for the 8 million shares.

(2)  It is Mr Zhang’s evidence that he had arranged various unidentified friends to lend me the necessary funds to acquire the 8 million shares in relation to the July 2005 application to exercise the Option.

(3)  I do not accept that this amounts to sufficient evidence to prove that he had the necessary financial means to purchase the 8 millions shares at the option price in March 2005.  My reasons are as follows:

(a)  Despite the interrogatories served by Citic 21 on Mr Zhang, he refused to disclose the identity of these friends who had allegedly agreed to provide funds to him to finance his purported exercise of the Option in July 2005.  Mr Zhang has also failed to provide any evidence to show that these identified friends were in fact in a position or able to provide him the necessary funds. 

(b) In my view, Mr Zhang’s evidence on this alleged financial arrangements with his unidentified friends is nothing but a bare allegation.  I do not accept it as sufficient evidence to prove that Mr Zhan had the financial means to enable him to exercise the Option whether in March or July 2005.

(c)  In any event, taking this evidence to the highest, it only shows that as at July 2005, Mr Zhang had been able to arrange the necessary funds to finance his exercise of the Option.  That is very different from saying that he also had the necessary arrangement made in place in March 2005.  Quite to the contrary, it is not Mr Zhang’s evidence that he had also arranged similar financial arrangement with his unidentified friends to provide the funds in March 2005 to enable him to exercise the Option.

60.  For these reasons, I find that:

(1)  Mr Zhang did not have the necessary funds or financial means to enable him to purchase the 8 million shares even if his March 2005 exercise of the Option were a valid and effective one.  In other words, Mr Zhang would not have been able to realise the exercise of the Option and purchased the shares.

(2)  In the premises, even if Citic 21 was in breach of its contractually obligation in wrongfully refusing to approve his March 2005 exercise of the Option, Mr Zhang has failed to show causation between his claimed loss and Citic 21’s breach of contract.

(3)  Mr Zhang’s claim against Citic 21 should therefore also fail on this ground and be dismissed.

C5.    Quantum

61.  As I have come to the conclusion that Mr Zhang’s claim should be dismissed, strictly speaking, I do not need to deal with the issue on quantum of loss.

62.  However, if I am wrong above in my conclusion, and had Mr Zhang been successful in his claim, I would have determined his quantum of loss as follows.

63.  If Mr Zhang had been wrongfully refused his exercise of the Option, the quantum of his loss is the difference between (a) the market price of the 8 million shares in Citic 21 of which Mr Zhang could have reasonably sold on the market and (b) HK$6,336,000 (being the cost of the shares) and the transactional costs of the sale of the shares on the market.

64.  Under this equation, for the purpose of assessment, a crucial question that arises is what is the date or are dates that should be taken that Mr Zhang would have been reasonably able to sell those shares on the market. Under this question, 3 sub-issues call for determination:

(1)  If Mr Zhang’s application on 31 March 2003 were approved, when should he be taken to have been issued with the necessary shares certificates by Citic 21, so that he could start to arrange them for sale.

(2)  After he had received the shares from Citic 21, how long it would have reasonably taken him to arrange the shares to be sold at the market through the stockbrokers.

(3)  Whether he would or should have offloaded the 8 million shares at one go (i.e., on one day) or it would have been more reasonable for him to have sold them in tranches over a period of time, and if so, what should have been the pattern of sale.

C5.1  When would Mr Zhang have been issued with the shares by Citic 21

65.  Clause 6(A) of the Option Scheme Document provides that Citic 21 had up to 40 days to process an application for the exercise of a share option under the scheme.

66.  Mr Fung SC for Citic 21 submits that as a matter of law, for the question of assessment of damages, the Court is to approach the matter on the basis of what Mr Zhang would have gained if Citic 21 had fulfilled his legal obligation and had done no more:  Lavarack v Woods of Colchester Ltd [1967] 1 QB 278 at 294B-D; Kaye Steam Navigation Co Ltd v W&R Barnett Ltd (1932) 48 TLR 440; The “World Navigator” [1991] 2 Lloyds Rep 23 (CA) at 31-33. 

67.  Further, Mr Fung says the governing legal principle is that “the defendant, in performing his contractual obligation, is assumed to have chosen to perform them in the way least beneficial to the plaintiff where the contract gave him that choice”:  The “World Navigator”, supra, 33 per Staughton LJ.

68.  In the premises, Mr Fung further submits that the Court should adopt its contractually entitled 40 days as the time Citic 21 would have taken to process Mr Zhang’s application for the exercise of the Option and issue the relevant share certificates.

69.  I accept Mr Fung’s submissions.

70.  In fact, Mr Zhang does not seek to contend otherwise in terms of the applicable principles, although he suggests that the Court in considering this issue should adopt an approach most unfavourable to Citic 21 given that it was the wrongful party. 

71.  I do not accept Mr Zhang’s contention.  In assessing damages for breach contract, the court is to put the innocent party in the position he would have had been in, had the contract been performed.  IN doing so, the court can take into account of only strict, legal obligations: it cannot take account of “the expectations, however reasonable, of one contractor that the other will do something that he has assumed no legal obligation to do.”  Thus, as mentioned above, if the contract-breaker had a choice of alternative methods of performance, damages will be assessed on the basis of his minimum legal obligation, that is, on the alternative which would have been least onerous, or most beneficial to the contract-breaker.  See:  Chitty on Contracts (30^th ed), para 26-001.

72.  For these reasons, under this sub-issue, I conclude that for the purpose of assessment of damages, Mr Zhang would be assumed to have received his share certificate of the 8 million shares 40 days after 31 March 2005, that is 10 March 2005.

C5.2  How long it would take for Mr Zhang to arrange the shares to be sold on the market through the stockbrokers

73.  Citic 21 has called Mr Lam as an expert to give evidence on how long it would reasonably take for someone in Mr Zhang’s position to complete the clearing process of his share certificates so that he could sell the shares on the market.

74.  Mr Lam is, amongst others, an experienced stockbroker and he confirms that he is familiar with the procedures involved in stockbroking, including the sale of shares on the Stock Exchange.  There is no challenge to Mr Lam’s role as an expert, and I accept him as one.

75.  Mr Lam’s evidence is that it would normally take about 10 working days for the clearance to complete.  This time included the time required by Mr Zhang to transfer his shares to a brokerage firm and to have the transfer and registration cleared through the central registration system.

76.  After cross-examining Mr Lam, Mr Zhang in fact accepted Mr Lam’s evidence in this aspect.   Mr Zhang further confirms his acceptance of Mr Lam’s evidence in his closing submissions.

77.  I therefore accept Mr Lam’s evidence, and conclude that, for the purpose of assessing damages, it would have taken Mr Zhang another 10 working days after his receipt of the share certificates before he could start selling the shares on the market.  It means that the earliest date Mr Zhang could have started selling the shares is 26 May 2005. 

C5.3  What should have been the pattern of sale of the 8 million shares

78.  Based on the assumption that Mr Zhang was only reasonably able to start selling his shares on 26 May 2005, and after looking at the historic share prices and trading volumes of Citic 21’s shares at the relevant period of time, it is Mr Lam’s evidence that in order not to depress significantly the share price by offloading the entire 8 million shares on the market at one go, it would be reasonable for Mr Zhang to sell these 8 million shares on two consecutive days as follows:

(1)  On 26 May 2005 for 6,940,000 shares.

(2)  On 27 May 2005 for 1,060,000 shares.

79.  If Mr Zhang had sold the 8 millions in the above manner, according to Mr Lam’s calculation by reference to the relevant share prices, Mr Zhang would have received sale proceeds in the total sum of HK$16,479,500 (HK$14,227,000 + HK$2,252,500).

80.  Mr Zhang does not dispute Mr Lam’s above evidence and calculations. 

81.  I also find Mr Lam’s evidence credible, and accept the same.

82.  In the premises, for the purpose of assessing damages, I hold that Mr Zhang would have sold the 8 million shares on the market respectively on 26 and 27 May 2005 at the price of HK$14,227,000 (for 6.94 million shares) and HK$2,252,500 (for 1.06 million shares).

C.5.4 The amount of damages

83.  In light of the above findings, had Mr Zhang been successful in his claim, I would be have awarded him damages in the sum of HK$10,083,022 (calculated as:  HK$16,479,500 – HK$6,336,000 [the cost price for the 8 million shares] – HK$16,479 [as stamp duty, which was about 0.1% of the sale price] – HK$2,801 [as transaction fee which was about 0.017% of the sale price] – HK$41,198 [as commission which was about 0.25$ of the sale price]).

D.  Conclusion

84.  For the reasons set out above, Mr Zhang fails to prove liability against Citic 21, and I dismiss his claim

85.  There is no reason why costs should not follow the event.  I therefore make an Order nisi that costs of the action be to Citic 21 to be taxed if not agreed.  I further direct that in relation to counsel’s fees for the trial, it is Mr Fung SC and his junior Mr Wong’s fees which are allowed and taxable.  I do not think this matter justifies the costs of three counsel (two Senior counsel with one junior counsel).  Unless any of the parties applies by Summons to vary the same, the costs order nisi shall be made absolute 14 days from today.

[1] The Defendant was formerly known as 21 CN CyberNet Corporation Ltd between 11 April 2000 and 2 March 2004 and Easy Concepts International Holdings Ltd prior to 11 April 2000.

[2] In his original pleading, Mr Zhang’s claim was based on his attempted exercise of the option on 22 July 2005.  However, as the case developed and in the middle of the trial, Mr Zhang formally asked for leave (which was granted by this Court) to amend his pleading, and to pursue his claim solely on the basis that the subject matter exercise of the option was treated as at 31 March 2005.  He confirmed with the court that he would not pursue any alternative claim based on the 22 July 2005 exercise of the option. 

[3] Although at certain point of the trial, Mr Zhang sought to mount his claim based on 9.25 odd millions shares, which included certain extra rights issues announced by Citic 21 of which Mr Zhang said he was also entitled to by reference to his 8 million share option.  However, in his application for leave to amend the Statement of Claim as mentioned above, and in his closing submissions, Mr Zhang confirmed that he would only pursue his claim based on the 8 million shares option.

[4] It is in fact Mr Zhang’s case that he met Ms Chen sometime in late December 2004, while it is Ms Chen’s case that it should be sometime in late March or early April 2005.  However, for the purpose of the trial, Mr Zhang is prepared to accept 31 March 2005 (which is not objected to by Citic 21) as the date of the meeting.  The Court therefore treats this as the agreed date of the meeting and Mr Zhang’s attempt to exercise his Option. 

[5] Which words have been used a few times within the other terms of the Offer Letter when these were clearly intended to form part of the terms and conditions of the offer of the Option. See for examples: Clause 1 and the phrase “Please also note that any Option granted to you pursuant to your application therefor shall be subject to the terms hereof and all the provisions of the Rules are hereby incorporated as terms hereof by this reference” in the Offer Letter.

[6] In the sum of RMB730,60769.

[7] In the sum of RMB3,987,056.34.

[8] Mr Zhang’s witness statement dated 31 March 2008, paras 13, 14 and 15.

[9] Mr Zhang’s bank statements adduced at trial.

[10] In terms of cash and securities.