SUNLINK INTERNATIONAL HOLDINGS LTD (Provisional Liquidators Appointed) AND OTHERS v. WONG SHU WING AND OTHERS

HCA 1527/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1527 OF 2010

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J U D G M E N T

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Introduction

1.  The 1^st plaintiff is an investment holding company incorporated in the Cayman Islands.  Prior to December 2008 it, through its operating subsidiaries, was engaged in the distribution of semiconductors, the development and sale of auto devices and the development and sale of wireless devices and solutions.  The 1^st plaintiff experienced serious financial problems and provisional liquidators were appointed over it on 24 December 2008.  The 1^st plaintiff is listed on the main board of The Stock Exchange of Hong Kong Limited (“Exchange”).  Its shares have been suspended since 2 December 2008.  The 2^nd and 3^rd plaintiffs are subsidiaries of the 1^st plaintiff.  They are in creditors’ voluntary liquidation. 

2.  The 1^st defendant was the chairman of the 1^st plaintiff and was a director of the company until he resigned on 1 March 2010.  He holds directly and through the 2^nd defendant 33.38% of the 1^st plaintiffs issued shares.

3.  On 11 December 2008 the 1^st and 2^nd defendants executed a deed charging their shares in the 1^st plaintiff to Premium Class Investments Limited as security for a loan of $20,000,000 apparently made to the 1^st and 2^nd defendants in January 2008.  The provisional liquidators became aware of the filing of a disclosure of interest notice with the Exchange on 19 March 2009, which recorded the interests of the 3^rd to 5^th defendants of interests in shares, which because of their number seemed to represent those registered in the names of the 1^st and 2^nd defendants.  It is not in dispute that this is the case and that they are the shares in respect of which the charge was executed.  Although the evidence filed by the 4^th defendant says that he has been advised that the deed created a legal mortgage over the shares as the 1^st and 2^nd defendants remained the registered shareholders this would appear not to be the case and they are equitable mortgagees.  However, clause 2 of the deed allows the 5^th defendant to require that the necessary documentation be provided for the shares to be transferred into its name.  Clause 7 of the deed allows the 5^th defendant to direct how the shares are voted.  In addition to the shares covered by the charge the 3^rd and 4^th defendants also bought about the time (so it would appear from the disclosure notice) the deed was executed a further 48,790,417 shares in the 1^st plaintiff.

4.  The purpose of keeping the 1^st plaintiff in provisional liquidation would appear to have been to facilitate restructuring of 1^st plaintiff, which would lead to a resumption of trading in its shares.  The restructuring would involve the issue of a substantial number of new shares in the 1^st plaintiff, which would be allotted to an investor who would as a result obtain control of the 1^st plaintiff in return for the injection of new capital.  This arrangement is commonly described as a sale of a company’s listed status.  This description, although perhaps commercially apposite is not accurate as there is no sale of an asset of the relevant company or anybody else.  The new capital would be used partly to recapitalise the 1^st plaintiff and partly to compromise the 1^st plaintiff’s debt by the introduction of a scheme of arrangement pursuant to section 166 of the Companies Ordinance.  I understand, although no evidence has been filed about this subject for this application, that in the provisional liquidators’ opinion the return to creditors will be higher if there is a restructuring rather than a liquidation.  The defendants have not disputed this.

5.  On 21 January 2009 the Exchange issued a decision stating that the 1^st plaintiff had been put in the first stage of the delisting process.  On 11 May 2009 the provisional liquidators and the 1^st plaintiff entered into an exclusivity agreement with Brilliant Capital International Ltd (“Investor”) and its controlling shareholder Paul Suen for a period of 12 months to allow the Investor to assist in the formulation of a resumption proposal.  Pursuant to this agreement the Investor advanced $8,000,000 to the Sunlink group to continue with its existing operations.  On 18 June 2009 as part of the restructuring the 1^st plaintiff established 2 new subsidiaries: Smart Victory Development Ltd and Global Winner Enterprises Ltd (“Global Winner”).

6.  In July 2009 the 1^st plaintiff was put in the 2^nd stage of the delisting process.  On 26 March 2010 Global Winner, Xiamen Hualian Electronics Company Ltd and Foshan Lianchuang Hualian Electronic Company Ltd (“target company”) entered into a capital increase agreement.  The agreement provides that the capital of the target company will be increased from RMB10,000,000 to RMB21,000,000 and Global Winner will subscribe for additional registered capital of $11,000,000 for RMB12,000,000 financed from additional working capital to be provided by the Investor.  As I understand the purpose of this transaction it is intended to give the 1^st plaintiff an interest in a company with a compatible business in order to demonstrate to the Exchange that it has sufficient operations to comply with Rule 13.24 of the Listing Rules.  The transaction constitutes a very substantial acquisition under chapter 14 of the Listing Rules and requires shareholder approval.  I shall refer to it as the capital injection.

7.  In April of 2010 the 1^st plaintiff was put in the 3^rd stage of the delisting process.  The 1^st plaintiff is required to submit a viable resumption proposal to the Exchange at least 10 days before the expiry of the six month period for delisting, which is 11 November 2010 failing which the listing will be cancelled.  A notice of an extraordinary general meeting of the 1^st plaintiff was given on 30 June 2010 to shareholders of a meeting to be held on 4 August 2010 for the purpose of considering and passing a resolution to approve the capital injection.  A notice of an annual general meeting of the 1^st plaintiff for the year ending 31 December 2008 was also given on 30 June 2010 for a meeting also to be held on 4 August 2010 for the purpose of considering and passing resolutions to approve audited financial statements and to re-appoint auditors.  Similarly a notice was given in respect of the annual general meeting for the year ending 31 December 2009.  On 26 July 2010 the share register of the 1^st plaintiff received 3 proxy forms from the 1^st and 2^nd defendants stating that they voted against all the resolutions at the extraordinary and annual general meetings.  At the time the 1^st defendant was a creditor of the 1^st plaintiff for $446,880 and because of the proposed scheme of arrangement arguably interested in the capital injection and prohibited from voting.  On 26 July 2010 he entered into a deed of waiver of the debt, which allowed him to vote.  The provisional liquidators anticipated that given the size of the 1^st and 2^nd defendants shareholding the resolutions would not be passed.  They adjourned all 3 meetings until further notice.

8.  The provisional liquidators on behalf of the 1^st plaintiff issued a public announcement dated 4 August 2010 reporting the adjournment and the reasons for it.  The notice states “In order to understand the intent of and seek to reach consensus with the Controlling Shareholder and his associate so that the Company can continue its operation and proceed with the proposed restructuring, the Company needs more time to communicate with the Controlling Shareholder.  As such, the adjournment of the 2008 AGM until further notice was proposed at the 2008 AGM”.  The reference to Controlling Shareholder and his associate is a reference to the 1^st and 2^nd defendants.  A similar comment is made in the announcement in relation to the 2009 annual general meeting.  There is no reference in that announcement to it in relation to the extraordinary general meeting, but it has not been suggested before me that the comment did not apply to the capital injection.  I note that there is reference in the announcement to the 1^st plaintiff addressing queries from the Exchange on the 1^st defendant’s eligibility to vote at the extraordinary general meeting.  I assume, it not being suggested to the contrary, that subsequently the Exchange confirmed that the 1^st plaintiff could vote on the resolution concerning the capital injection, but I do not know when this was clarified.  As matters transpired the provisional liquidators did not, as the announcement indicated, contact the 1^st plaintiff and consider with him the reasons why he was not prepared to support the various resolutions.  I have not been given any reason for this.  The 1^st defendant points this out in paragraph 41 of his affirmation and notes that in the affirmation of David Yen in support of the ex parte application (which I explain later) this is not addressed.  In paragraph 31 of Mr. Yen’s reply affirmation he suggests that the explanation is that on 15 July 2010 the 1^st plaintiff turned down an offer to meet.  As this was prior to both the meeting and the announcement it does not seem to me that this is a satisfactory explanation.

The Application

9.  At least so far as the dealings between the plaintiffs and the defendants are concerned the next event was an ex parte application on notice made on 12 October 2010 for an injunction restraining the defendants from voting the 1^st and 2^nd defendants’ shares against any of the resolutions.  I was told that the matter was very urgent because unless the annual general meetings and extraordinary general meetings took place by 11 November 2010 the provisional liquidators expected the shares to be delisted and the prospect of restructuring the 1^st plaintiff would evaporate.  It was necessary, I was told, to have the matter decided urgently in order that the provisional liquidators could proceed to fix a new date for the general meetings.  It was accepted by Mr. William Wong who appeared for the plaintiffs at all hearings before me that in practice the meetings could be convened immediately and the application decided before the meetings took place.  I took the view that the application should be dealt with at an inter partes hearing after the defendants had had the opportunity to file evidence particularly as it was likely to involve a final determination of the rights of the defendants to vote the 1^st and 2^nd defendants’ shares on the resolutions as they say fit.  That hearing took place on the afternoon of 26 October 2010.  I would note that this application is important both to the parties directly affected by it, but also, as Mr. Wong emphasised, to persons interested generally in the restructuring of insolvent public companies.  It is unfortunate that the application was made late and that the matter could not be more fully argued before me.

10.  The grant or refusal of the injunction sought by the plaintiffs at this interlocutory stage would dispose finally of the claim for an injunction in the writ against the defendants.  It is common ground that in these circumstances the court should approach the matter on the broad principle that it should endeavour to do what will avoid injustice, but that the plaintiffs have to show at least that they are likely to succeed at trial and that this requires a stronger evidential case than is required in ordinary matters to which the American Cynamid principles apply: Hong Kong Civil Procedure 2010, vol. 1, para. 29/1/18.

11.  As I understand Mr. Wong’s submissions this application has been advanced on 2 different grounds.  First, that by voting against the resolutions the 1^st defendant would diminish the value of his assets; assets to which the plaintiffs are entitled to look to satisfy their claims in the writ for damages for breach of fiduciary duty.  Thus says Mr. Wong, the plaintiffs are entitled to a Mareva injunction to restrain to the 1^st defendant and the 2^nd defendant from voting against the resolutions and against the 3^rd to 5^th defendants from procuring them so to vote.  Secondly, Mr. Wong says that to vote against the resolutions is irrational and is a fraud on a power and the court in its equitable jurisdiction should intervene to prevent this.  Before addressing these grounds in detail there are 2 further introductory matters, that I will consider.

The 3^rd to 5^th defendants

12.  A company is not concerned with whether or not a person whose name is registered in its share register has created an equitable mortgage over his shares and will recognise the person registered as entitled to vote, which in the present case is the 1^st and 2^nd defendants.  However, as an equitable mortgagee the 5^th defendant is entitled to direct how the shares are voted unless at the time the equitable mortgage was created the parties agreed otherwise: Wise v Landell [1921] 1 Ch 430 at 430, per Astbury J; Puddephatt v Leith [1916] 1 Ch 200 at 202, per Sargant J.  As I have already observed consistent with this principle clause 7 of the deed gives the 5^th defendant an express power to direct how the 1^st and 2^nd defendants vote.

13.  It is not in dispute that the 5^th defendant is entitled to direct how the shares are voted.  I was told by Mr. Anthony Cheung, who appeared for it before me, that it wishes the shares to be voted against the resolutions.  The 3^rd and 4^th defendants also wish to vote against the resolutions.

Claims against the 1^st defendant

14.  The writ seeks damages for breach of fiduciary duties against the 1^st defendant and an inquiry and the necessary account of all sums lost as a result of such breaches and an account of all profits and benefits received by the 1^st defendant.  The writ also includes claims for the delivery up of books of the plaintiffs and final orders enjoining the 1^st defendant from voting against the resolutions, which I have described earlier in this judgment.

15.  The alleged breaches of fiduciary duty are serious and summarised in Mr. Yen first affirmation.  As the 1^st defendant has filed no evidence in answer to Mr. Yen’s allegations I need only summarise the claims, which are that he:

(1)    Misplaced and/or lost the books and records of the plaintiffs and other subsidiaries of the Sunlink group;

(2)    Created fictitious transactions through false accounting and forging documents to deceptively produce a high turnover and high levels of account receivables and inventories in the plaintiffs and other subsidiaries of the Sunlink group;

(3)    Wrongfully commenced an investment project in mainland China on behalf of the 1^st plaintiff without the approval of its board;

(4)    Wrongfully advanced credit to a supplier who applied for credit with forged documents;

(5)    Evaded mSolutions’ tax liabilities through false accounting and forging documents.

16.  These matters, other than the tax evasion, have been reported to the Independent Commission Against Corruption.  The 1^st defendant says that he has never been approached by either the Independent Commission Against Corruption or the Inland Revenue.  As I have already noted he has not addressed the substantive allegations at all, because, so I was told by Mr. Clifford Smith S.C. who appeared for him, of the short time available to him.  He says that this is not unreasonable particularly given the real issue between the parties, which is whether or not he is entitled to vote his shares as he sees fit.  The fact, however, is that the provisional liquidators have produced cogent evidence of substantial claims against the 1^st defendant, which remain unanswered and in my view, the plaintiffs have demonstrated at this stage that they are very likely to prove some material breach of fiduciary duty at trial, although I cannot say what the damages might be.

Mareva Injunction

17.  Mr. Wong has founded this element of the application on the judgment of Vinelott J. in Standard Chartered Bank v Walker & Another [1992] 1 WLR 561.  The relevant applications were made by 2 banks: Standard Chartered Bank (“SCB”) and T.S.B. Bank plc (“TSB”) in 2 separate actions commenced by each bank against George Walker and a company owned by him, Birdcage Walk Ltd (“Birdcage”).  Walker and Birdcage were owners of substantial blocks of shares in Brent Walker Plc (“Brent”).  Walker and Birdcage had heavy liabilities to the banks which were secured by charges over some of their shares in Brent, which allowed the banks to direct how the shares should be voted.  Walker’s liability to SCB was in excess of £24,000,000 and his liability to TSB in excess of £9,000,000.  Birdcage had liabilities in excess of £900,000 and £9,000,000 respectively.  The banks sought injunctions restraining Walker and Birdcage from voting their shares, which had not been provided to the banks as security, other than in favour of resolutions to restructure Brent at an imminent extraordinary general meeting.  The banks believed that if the restructuring was not approved the collapse of Brent was inevitable.

18.  Vinelott J. granted the injunction.  He accepted that only in an extreme case would a court interfere with the exercise of a shareholder’s voting rights in his own shares.  As I read the judgment the court accepted that the court’s jurisdiction to grant Mareva relief extends to preventing a debtor destroying the value of his assets to the detriment of his creditors either because he has an ulterior purpose or simply for no rational reason and that such jurisdiction can in an extreme case justify preventing a shareholder exercising his voting rights in shares.  I agree.  At the time of the application Brent’s shares traded at 10p a share and, presumably, it was assumed, although it is not stated in the judgment, that if the restructuring took place they were likely to increase in value.  Vinelott J. rejected a submission that the shares were worthless, and, I assume, a further submission that as a result an application based on the Mareva jurisdiction was artificial and should be rejected.  He took the view that the shares had what he described as a “hope value” and obstructing the reconstruction proposals would be so pointlessly harmful that it amounted to wilful dissipation of assets which the court has jurisdiction to prevent consistent with Mareva principles.

19.  Mr. Wong argues that this application presents a very similar case.  It seems to me that there are differences.  The 1^st and 2^nd defendants have executed a deed mortgaging the shares registered in their name.  Mr. Cheung in answer to a question from me stated that the 5^th defendant’s position is that it is entitled to enforce the security as the 1^st and 2^nd defendants are in default of the loan repayments, a suggestion to which Mr. Smith S.C. did not object.  In any event it would appear that the 5^th defendant could perfect its security pursuant to clause 2 of the deed.  Although it was not argued by Mr. Cheung it seems to me that on the evidence before me it is highly arguable that the economic value in the shares has been, or could shortly be, transferred to the 5^th defendant and, therefore, if the 1^st and 2^nd defendants were to vote against the resolution to approve the capital injection and diminish the value of shares registered in their names it would not amount to a diminution of the assets of the 1^st defendant, which would otherwise be available to the 1^st plaintiff when it comes to enforce any judgment it might obtain against him.  For this reason it seems to me that I should not intervene to prevent the 1^st and 2^nd defendant voting their shares against the resolution relying on the court’s Mareva jurisdiction.  If I am to do so it must be on the basis that the court can properly exercise its equitable jurisdiction in certain cases to prevent a shareholder lawfully exercising his voting rights; which is in reality the real issue to which this application gives rise.

Fettering a shareholder’s right to vote as he pleases

20.  It is not in dispute that unlike a director a shareholder does not owe fiduciary duties to a company and that the right to vote shares is a proprietary right.  It is also not in dispute that in most circumstances a shareholder is entitled to vote as he wishes and without regard to the interests of other shareholders.

21.  The final proposition has been clearly and consistently stated by courts since the 19^th century.  In North-West Transportation Co Ltd v Beatty (1887) LR 12 App Cas 589 [PC]at 593 Sir Richard Baggally said this:

“….every shareholder has a perfect right to vote upon any such question, although he may have a personal interest in the subject-matter opposed to, or different from, the general or particular interest of the company.”

22.  Similar statements appear in subsequent authorities.

(1)    Pender v, Lushington (1877) 6 Ch D 70 at 75-76 per Jessel MR:

“… where men exercise their rights of property, they exercise their rights from some motive adequate or inadequate, and I have always considered the law to be that those who have the rights of property are entitled to exercise them, whatever their motives may be for such exercise - that is as regards a Court of Law as distinguished from a court of morality or conscience, if such a court exists ... if these shareholders have a right of property, then I think all the arguments which have been addressed to me as to the motives which induced them to exercise it are entirely beside the question ... a man may be actuated in giving his vote by interests entirely adverse to the interests of the company as a whole. He may think it more for his particular interest that a certain course may be taken which may be in the opinion of others very adverse to the interests of the company as a whole, but he cannot be restrained from giving his vote in what way he pleases because he is influenced by that motive. There is, if I may say so, no obligation on a shareholder of a company to give his vote merely with a view to what other persons may consider the interests of the company at large. He has a right. if he thinks fit, to give his vote from motives or promptings of what he considers his own individual interests. This being so, the arguments which have been addressed to me as to whether or not the object for which the votes were given would bring about the ruin of the company, or whether or not the motive was an improper one which induced these gentlemen to give their votes, or whether or not their conduct shews a want of appreciation of the principles on which this company was founded, appear to me to be wholly irrelevant.”

(2)    Re Unisoft Group Ltd (No 3)[1994] 1 BCLC 609 at 622i per Harman J:

“It is important to remember that shareholders’ rights to deal with or vote their shares are separate from the rights of the company as a corporate entity and shareholders’ relationships with it. Shareholders are entitled to sell their shares, to vote their shares, to take any course they like in general meeting without regard to any other person’s rights or position. In my judgment the law is that a shareholder may act with malice in voting his shares against a particular resolution and there can be no objection to that, just as in Bradford Corp v Pickles [1895] AC 587, a landowner acted on his own land with malicious intent to harm his neighbour, but was not in breach of any legal obligation. Of course, if a trustee holds shares on trust, he may have obligations to his beneficiaries which cause him to exercise the rights attached to those shares in the interest of the beneficiaries, but there is nothing whatever to do with an individual’s position as a shareholder and his relationship with his co-shareholders.”

(3)    Re Astec (BSR) plc[1998] 2 BCLC 556 at 584c per Jonathan Parker J:

“The starting point is the proposition that in general the right of a shareholder to vote his shares is a right of property which the shareholder is free to exercise in what he regards as his own best interests. He is not obliged to cast his vote in what others may regard as the best interests of the general body of shareholders, or in the best interests of the company as an entity in its own right.”

(4)    Hiew Fook Siong & Ors v. Fung Tak Keung & Ors[2006] 3 HKLRD 762 at 769I per Deputy High Court Judge To (as he then was):

“… a shareholder, unlike a director, is free to exercise his voting right in any manner he pleases. Unlike a director who owes a fiduciary duty to the company, a shareholder does not and he may vote even according to his own selfish interest or to the dis-interest of the company. There is no general requirement that a shareholder may only exercise his voting right bona fide in the interest of the company. The learned authors were right when they said that the statements in the reports that members must exercise their votes “bona fide for the benefit of the company as a whole” is misleading. That statement has been taken out of context. The context in which that statement was made was usually in connection with the two well-recognized exceptions to the general rule, ie alteration of articles of the company and the majority practicing a fraud on the minority.”

23.  Mr. Wong argues that whilst this is the general position the right to vote is not absolute and there are qualifications to it.  First he points to authority, which demonstrates that the court will intervene to prevent majority shareholders acting in a manner which harms the interest of minority shareholders.  In Estmanco (Kilner House) Ltd v Greater London Council [1982] 1 ALL ER 437 at 444, Sir Robert Megarry V.C. said:

“Plainly there must be some limit to the power of the majority to pass resolutions which they believe to be in the interests of the company and yet remain immune from interference by the courts. It may be in the best interests of the company to deprive the minority of some of their rights or some of their property, yet I do not think that this gives the majority an unrestricted right to do this, however unjust it may be, and however much harm shareholders whose rights as a class differ from those of the majority. If a case falls within one of the exceptions from Foss v Harbottle, I cannot see why the right of the minority to sue under that exception should be taken away from them merely because the majority of the company reasonably believe it to be in the best interest of the company that this should be done. This is particularly so if the exception from the rule falls under the rubic of ‘fraud on a minority”

24.  He submits that Cooke v Deeks [1916] AC 554 is an example of this principle.  In that well known case directors acquired an interest in a contract in breach of their fiduciary duties.  It was held that the directors could not use their majority voting power as shareholders to ratify the transaction.  Lord Buckmaster said at page 565 “This would be to allow a majority to oppress the minority.  To such circumstances the case of North-West Transportation Co v Beatty, Burland v Earle have no application.  In the same way, if directors have acquired for themselves property or rights which they must be regarded as holding on behalf of the company, a resolution that the rights of the company should be disregarded in the matter would amount to forfeiting the interest and property of the minority of share-holders in favour of the majority, and that by the votes of those who are interested in securing the property for themselves. Such voting power has never been sanctioned by the Courts, and, indeed, was expressly disapproved in the case of Menier v Hooper’s Telegraph Works.”.

25.  A further example cited by Mr. Wong is Clemens v Clemens [1976] 2 ALL ER 268.  In that case the plaintiff held 45% of a family company’s shares, while her aunt, the defendant, held 55%.  The defendant was a director, the plaintiff was not.  The defendant and four others were the directors.  The directors proposed to increase the company’s share capital, and all directors other than the defendant would be allotted shares.  The court held that the irresistible inference was that the resolution had been framed to put complete control of the company into the hands of the defendant and her fellow directors and to deprive the plaintiff of her existing rights as a shareholder.  Foster J. considered such considerations to be sufficient in equity to prevent the defendant using her voting power as she had and to set aside the resolutions.  Having reviewed the authorities he concluded that what emerged from them is that the defendant was “not entitled to exercise her majority vote in whatever way she pleased.  The difficulty is in finding a principle, and obviously expressions such as “bona fide for the benefit of the company as a whole”, “fraud on a minority” and “oppressive” do not assist in formulating a principle.  I have come to the conclusion that it would be unwise to try to produce a principle, since the circumstances of each are infinitely varied. It would not, I think, assist to say more than that in my judgment Miss Clemens is not entitled as of right to exercise her votes as an ordinary shareholder in any way she pleases”: page 282c-d.

26.  Mr. Wong says that there is no rational basis for rejecting the capital injection and that to do so simply has the effect of destroying other shareholders’ investment in the 1^st plaintiff.  The authorities I have cited are authority, submits Mr. Wong, that this is not permissible and the court can properly prevent it.

27.  Secondly, he says that to the extent that the defendants are attempting to use their voting power to pressure the Investor to agree that shareholders should receive greater value in the restructuring this can properly be characterised as a fraud on a power.  Mr. Wong argues that the voting right that attaches to shares is a power and that like all powers it must be “be exercised subject to those general principles of law and equity which are applicable to all powers conferred on majorities and enabling them to bind minorities….”: Allen v Gold Reefs of West Africa Ltd. [1900] 1 Ch 656 at 671 per Lord Lindley M.R. in the context of the power of the majority to alter articles of association.

28.  Fraud in the context of the exercise of a power means fraud in its equitable not common law sense.  The meaning in the former sense was described by Lord Parker in Vatcher v Pault [1915] AC 372 at 378:

“The term ‘fraud’ in connection with fraud on a power does not necessarily denote any conduct on the part of the appointor amounting to fraud in the common law meaning of the term or any conduct which could be termed dishonest or immoral. It merely means the power has been exercised for a purpose, or with an intention, beyond the scope of or not justified by the instrument creating the power.”

29.  Mr. Wong submits that the power to vote was not conferred in order to enable a majority of shareholders to force a company into liquidation for no rational reason and at the expense of other shareholders’ financial interests.  To exercise the power irrationally and at the expense of other shareholders’ interests in a company is an improper use of that power and may be restrained just as any other fraud on a power may be restrained. 

30.  Mr. Smith S.C. response is that this is a mischaracterisation of the significance of the authorities on which Mr. Wong relies.  What has been demonstrated, says Mr. Smith S.C., is that there are recognised circumstances in which the courts will interfere with a shareholder’s exercise of his voting rights.  They are oppression of a minority by alteration of the articles (Estmanco) and expropriation of company property (Cook v Deeks).  In addition he says there are cases of voting in a particular way constituting a fraud on a minority, a complaint which is now generally remedied by applications under section 168A of the Companies Ordinance.  The cases he argues do not establish a general qualification of the right, described in the authorities to which I have referred in paragraphs 21 and 22, of a shareholder to vote his shares in any way his wishes and for whatever reason.  Mr. Smith S.C. referred me to the decision of Deputy Judge To (as he then was) in Hiew Fook Siong & Other v Fung Tak Keung & Others ibid in which the judge concludes in paragraphs 15 and 16 having reviewed a number of authorities:

“15. With respect, I do not think these cases establish any general principle that the majority shareholder may not exercise his voting right in any way he pleases. Instead, these cases fall within one of the two recognised exceptions to the general rule that unlike directors, shareholders do not owe each other fiduciary duties to exercise their voting right in any particular way other than according to their own will and even in their self interest. These exceptions are alteration of articles and majority practising a fraud on the minority. Voting rights are proprietary rights, to the same extent as any other incidents of the shares, which the holder may exercise in his own selfish interests even if these are opposed to those of the company. The learned authors of Gower and Davies' Principles of Modern Company Law (7th ed., 2003) have stated the law correctly when they wrote at p.486 as follows:

Scattered throughout the reports are statements that members must exercise their votes “bona fide for the benefit of the company as a whole”, a statement which suggests that they are subject to precisely the same basic principle as directors. But, it seems, this is highly misleading, and the decisions do not support any such rule as a universal principle. On the contrary, it has been repeatedly laid down that votes are proprietary rights, to the same extent as any other incidents of the shares, which the holder may exercise in his own selfish interests even if these are opposed to those of the company.

After examining a host of authorities, the learned authors concluded at p.494 as follows:

What conclusions (if any) can be drawn from the foregoing discussion of the case law? Only, it is submitted, that the twin concepts of “fraud on the minority” and “bona fide in the interests of the company” are obsolete and meaningless in relation to activities by members.  They were invented by the judges to curb the worst excesses of majority rule and at the time of their invention they were needed in the light of the then statute law. Now, however, because of recent statutory reforms they are needed no longer. In most cases anything that they achieve can be achieved better by a petition under s.459. [the equivalent of s.168A of the Companies Ordinance in Hong Kong.]

16.      Mr Peter Ng SC submitted that the views of the learned authors were merely academic and unsupported by any authorities.  I respectfully disagree.”

31.  Mr. Smith SC submitted that this is the correct view.  I note that whilst the quote from Gower in paragraph 15 remains in the 8^th edition of the book the text has otherwise been substantially changed.  At page 654 of the 8^th edition the author observes (and the same paragraph appears in the 7^th edition) that “However, to deny the fiduciary character of the shareholder’s voting rights and to assert their proprietary nature is not to say the exercise of shareholder’s voting powers is, or should be, unconstrained by law.  The controlling shareholders may not be required to exercise their powers in the best interests of the non-controlling shareholders, but this does not mean they may trample over the interests of the latter with impunity.  There are many situations in the modern law, and not just within company law, where the exercise of property rights is subject to some sort of review by the courts.  The issue which arises, therefore, is not the one of principle, but whether it has proved possible for the courts or the legislature to develop a set of criteria for the effective review of majority shareholders’ decisions.  As we shall see below, this task was addressed by the courts at an early stage in the development of British company law, but the results of that exercise have not been spectacularly successful.  The courts have hovered uncomfortably between an unwillingness to determine how businesses should be run and an equally deeply felt unease that simple majoritarianism would leave the minority exposed to opportunistic treatment by the majority.” 

32.  The passage quoted from 494 has been deleted and in my view did not in any event suggest that there are no qualifications to a shareholder’s right to vote as he wishes.  After a thorough and useful review of the authorities, which largely deal with the compulsory acquisition of shares, the following conclusions now appears at paragraph 19-9 of the 8th edition:

“Overall, it is suggested:

(a) that if it is desired to keep an objective element in the test as it applies to compulsory transfers at a fair price, then that objective test should recognise both benefits conferred on as well as the avoidance of harms to the company, and that benefits conferred on or harms avoided by the company will necessarily be benefits conferred on or harms avoided by the shareholders, as far as the increase in corporate wealth is reflected in the value of their shares.

(b) That outside the area of compulsory transfers but where the majority’s purpose is to benefit the company (either posi­tively or negatively) it should be enough that the majority has acted in good faith, as is the dominant trend in the English decisions.

(c) That in cases of conflicts between or among groups of shareholders, where no corporate interest is engaged, the best approach is to apply a test of fairness, on the lines of the test used in the statutory unfair prejudice jurisdiction, con­sidered in the next chapter and which, therefore, would be likely to be the forum of choice for this third class of case.”

33.  The law in this area is imprecise and not easy to apply, but in my view, and this regard I respectfully disagree with Deputy Judge To, the authorities do demonstrate that the court will intervene to prevent a shareholder voting in a way which will result in the destruction of the economic value of other shareholders’ shares for no rational reason. Before turning to consider whether or not this is such a case there is one other matter, which I should address.

34.  Mr. Wong put much emphasis in his submissions on the fact that the 1^st plaintiff is insolvent and that in such circumstances it is well established that the interests of creditors are paramount.  He suggested that for this reason it was wrong for shareholders to exercise their voting rights to secure a benefit for themselves.  He pointed in particular to the decisions at both first instance and in the Court of Appeal in Re Yaohan Hongkong Corp. Ltd [2000] 3 HKC 554 and [2000] 4 HKC 488 respectively.  Yaohan concerned the rights of shareholders, who were called upon to vote in respect of a scheme of arrangement introduced to affect a restructuring of an insolvent listed company.  The restructuring involved existing shareholders receiving shares in a new company, to which, as I understand the transaction, the listed status of the insolvent company was to be transferred.  The court was concerned whether the shareholders were receiving too greater proportion of the value of the restructuring.  In other words benefiting excessively at the expense of the creditors.  The court considered to what extent it had the jurisdiction to ignore the result of a shareholders’ meeting in a case in which the shareholders were unreasonably exploiting their position, on the grounds that shareholders had no substantive interest in the matter and that their approval was more a matter of form than substance.  The court at first instance held that it could approve a scheme notwithstanding the dissent of shareholders who had no interest in the matter. In my view the decision of Le Pichon J is irrelevant to the present case.  Here I am concerned with an extraordinary general meeting which is required by the Listing Rules not a court convened meeting pursuant to section 166 to consider and approve a scheme of arrangement.  To the extent that it is suggested that shareholders of an insolvent listed company should take into account the interests of creditors when deciding how to vote at an extraordinary general meeting required by the Listing Rules, I disagree.  There is in my view nothing to be found in the authorities to justify this view.

35.  Mr. Wong relied on the Court of Appeal’s decision for another reason.  He points out that Rogers VP held at 498F-G that the company’s listed status was an asset of the company.  The relevance of this submission I understood to be that the listed status was not an asset of the shareholders to be disposed of as they see fit.  I accept that the rights conferred on a company by the listing agreement have an economic value, which a company may realise by the type of scheme that is envisaged in the present case.  To that extent the listed status may be described as an asset of the company. However, I think there is more to the matter than that.  As Yuen J stated in Re Albatronics (Far East) Company Limited HCMP 1934/2001 (unreported 19 June 2001) at paragraphs 31 to 32:

“31. The “listing status” as an asset has not been defined conceptually. It is accepted by both counsel at this hearing that the “listing status” is not a chose in action that the Company can assign. Nor is it attached like goodwill to any part of the Company’s business, such that if that business is transferred, the listing status would be transferred with it.

32.    Therefore where, as in the present case, the ability to facilitate listing is implemented by the exchange of the shares in the Company with the third party, it is difficult to see how shareholders’ approval is not essential when it is their property which is to be disposed of.”

36.  These observations were made in the context of restructuring that involved a share swop and a back door listing, which is not the structure intended in the present case and I understand is not a structure that the Exchange currently accepts.  But the important matter is that when a shareholder acquires shares in a listed company part of the economic value that attaches to the shares is reflective of its listed status.  To that extent a shareholder in my view has at least an economic interest in the listed status of the company, which might be viewed, and without deciding it I would be inclined to so view it, as an inchoate asset.  The relevance of this is in my view that it is perfectly proper for a shareholder in the 1^st defendant to consider how best he can maximise his interest in the listed status of the 1st defendant.  Whether or not the court is entitled to sanction a scheme of arrangement against which shareholders have voted at a court convened meeting is another matter, which it is not necessary for me to consider.

37.  I now turn to consider the defendants’ explanation for their decision to vote against the resolution to approve the capital injection.  First he says that the target company is very small and that the 1^st defendant will pay too much for the acquisition of 52.38% of it.  He says that this is why he decided to vote against the capital injection.  He believes that there are better proposals available, but he had not identified any, neither has he explained why if he is sincere he has not contacted the provisional liquidators.  I do not accept that this explanation is genuine.  He goes onto suggest in paragraphs 49 and 50 of his affirmation that he knows of “a few independent third parties who are interested in helping out even if the company is delisted.”  These third parties are not identified nor are any financial details provided of what a restructuring of a delisted company would involve.  He does not explain what the attraction would be to other shareholders of the company being privatised.  It may be that the 1^st defendant takes the view that his personal position will be better if the 1^st defendant is liquidated as his principal concern may be the claims he faces rather than maximising value in the shares registered in the names of the 1^st and 2^nd defendants and he thinks, rightly or wrongly, that a company in liquidation will be less likely to pursue him.  That this is the 1^st defendant’s view is made all the more likely now that the 5^th defendant’s role and position has become clearer because it now appears that the 1^st defendant has a limited, if any interest, in the value of the shares.

38.  So far as the resolutions to approve the financial statements and appointment of auditors are concerned he sets out in paragraph 34 of his affirmation reservations about the accounts, which seems to focus on writing off certain items.  Apparently he wants new accountants and new independent non-executive directors “because I wanted new accountants and INEDs to be appointed to look at the account treatments again.  With regard to the INEDs, I also wanted new ones be appointed to monitor the work of the Provisional Liquidators particularly when I considered that there were other better proposals that the Provisional Liquidators should be able to arrange for the Company.”  Given the 1^st defendant’s inability to explain with any degree of precision what his reservations are about the accounting treatment of various accounting items of this massively insolvent company and his already noted failure to identify any “better proposals” I dismiss this explanation as disingenuous.

39.  The 1^st and 2^nd defendants have not in my view demonstrated that they are exercising their voting rights (such as they are) in good faith.

40.  The 4^th defendant’s evidence is, so far as it goes, rather more convincing.  He says that he thinks that the creditors of the 1^st plaintiff will get more under the proposed restructuring than creditors in similar situations have obtained.  This would suggest that the provisional liquidators have done their job well not poorly. The 4^th defendant says quite candidly that he thinks that shareholders should get a bigger slice of the pie.  He explains that although he did not know of the proxies filed by the 1^st and 2^nd defendants he wanted them to vote against the resolution concerning the capital injection.  He does not say what his position is in respect of the other resolutions.  He goes onto say that he had expected the provisional liquidators to return with an improved offer to shareholders.  What the 4^th defendant does not explain is why he would now direct the 1^st and 2^nd defendants to vote against the resolution and he does not dispute Mr. Yen’s evidence that if the resolution is not passed now the shares will be delisted and the prospect of any restructuring will have been lost.

41.  As it is the 5^thdefendant (as directed by the 3^rd and 5^th defendants) who are entitled to direct how the 1^st and 2^nd defendants share are voted in my view it is the 5^th defendant’s position that needs to be focused on.  It seems to me that there is nothing improper in a shareholder having indicated that he would vote against the capital injection resolution at the extraordinary general meeting on 4 August 2010.  He may quite reasonably and properly have taken the view that there was time for the investor and the provisional liquidators to agree a revision to the proposal that would provide a better return to shareholders as a whole.  This has not happened and the situation has changed.  On the evidence before me I have to assume that the 5^th defendant (and to the extent relevant the 1^st and 2^nd defendants) will vote unless restrained against the resolution at the extraordinary general meeting, which is shortly to take place and that this will result in the delisting of the 1^st plaintiff’s shares.  It does not seem to me that this is for the benefit of the 1^st plaintiff whether considered by reference to shareholders as whole, whom on the evidence before me it must be assumed will lose the economic value represented by their shares, or creditors.  It seems to me to be irrational.  This is sufficient in my view to justify the court intervening to prevent the defendants voting against the resolutions to be put before shareholders at the extraordinary general meeting and annual general meetings.  I also consider that the 3^rd to 5^th defendants continued insistence on voting against the capital injection resolution is on the evidence before me so irrational that I am entitled to infer, as I do, that in voting against the resolution they would not be acting in good faith.

42.  I will therefore grant an order in the terms of the ex parte summons save that I will make a costs order nisi that the costs of the application and the hearings before me be paid by the defendants to the plaintiffs forthwith such costs to be taxed if not agreed.  I will, however, grant the parties liberty to apply if they wish to address me on the precise wording of the order as this was not addressed at the hearing before me or on costs before the order is sealed.