KWOK PING SHEUNG WALTER v. SUN HUNG KAI PROPERTIES LTD AND OTHERS

HCA 857/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 857 OF 2008

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D E C I S I O N

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The parties

1.  The plaintiff, the 2^nd defendant and the 3^rd defendant are brothers.  I will refer to them as Walter, Thomas and Raymond.  The company concerned, Sun Hung Kai Properties Limited, is a substantial company listed in Hong Kong and a leading developer.  It is the 1^st defendant.  I will refer to it as “the Company”.

2.  Walter, Thomas, Raymond, the 4^th to 17^th defendants are all the directors of the Company.  Walter is the chairman of the board of directors and chief executive (“CE”); he has been occupying those positions since November 1990.  Thomas and Raymond are vice-chairmen and managing directors.  The 4^th to 8^th defendants are executive directors.  The 9^th to 14^th defendants are non-executive directors.  The 15^th to 17^th defendants are independent non-executive directors.  It is important to bear in mind that other than the three Kwok brothers, there are five other executive directors and nine non-executive directors on the board.

The ex parte injunction

3.  On 15 May 2008, Walter obtained an ex parte injunction from Saw J in these terms:

(1) each of the 2^nd to 17^th defendants is to be restrained from voting at the board meeting of 15 May 2008 to terminate the appointment of Walter as chairman of the board of directors and CE of the Company and/or to re-designate him as a non-executive director; and

(2) the Company, whether by itself, its directors, servants, agents or otherwise howsoever, is to be restrained from implementing any resolution of the board at the meeting of 15 May 2008 to remove Walter from his positions aforesaid and re-designate him as non-executive director.

4.  The effect of the ex parte injunction, which applies only to a board meeting held on 15 May 2008, is clearly spent.

The application today

5.  The application for the hearing today, as amended, seeks an injunction, until final determination of the action or further order, in these terms:

(1) each of the 2^nd to 17^th defendants is to be restrained from voting at any board meeting to terminate the appointment of Walter as chairman and CE and/or to re-designate him as a non-executive director of the Company; and

(2) the Company, whether by itself, its directors, servants, agents or howsoever, is to be restrained from implementing any resolution of the board to terminate Walter as chairman and CE and/or to re-designate him as non-executive director.

6.  I regard this as a fresh application for an interim injunction.

7.  The injunction sought is in very wide terms, even wider than the terms of the permanent relief in the amended statement of claim, as Mr Ho, SC and Mr Huggins, SC, who appeared for separate defendants, rightly pointed out.  The declarations and injunctions sought in the statement of claim are restricted to voting at any board meeting on the grounds alleged in Thomas and Raymond’s notes to the directors of the Company of 5 and 13 May 2008.

8.  The interim injunction sought today has no such restriction.  This is an oddity, to say the least.  Even if the interim injunction sought today were to be restricted to restraining directors from voting on the grounds in Thomas and Raymond’s notes to directors on 5 and 13 May 2008, the scope of the injunction is still very wide.

9.  It seems Mr Ho is not without justification in saying that a literal reading of the injunction sought in the statement of claim may suggest that the board is prohibited from considering Walter’s removal altogether.

10.  In view of the wide terms of the injunction sought in this application, this court should act with circumspection.

What this case is not about

11.  I think it would be helpful if I am to dispel some misconceptions before I consider the merits of the application.

12.  I am not concerned today with whether Walter is suffering from any kind of mental illness, and I express no views on this.  Nor is it for me to say whether Walter is a fit and proper person to remain as chairman and CE of the Company.  This is a matter for the board of the Company to decide.  It is a matter of internal management.  The board of directors has an undoubted discretion to exercise.

13.  What I am asked to do by Walter is to grant an injunction to prevent the board of directors from considering and deciding if he should remain as chairman and CE, on the ground that the directors will exercise their power improperly and for improper motives.  He says to allow the directors to vote to remove him from office would amount to breach of contract and would involve the directors in the tort of procuring a breach of contract by the Company.

The principles for granting an interim injunction

14.  The principles are well established.  I must first be satisfied there is a serious question to be tried.  If that is established, I should go on to consider if the balance of convenience lies in favour of granting or refusing the interim injunction.

Is there a serious question to be tried on breach of contract

15.  In the statement of claim, it is stated that an agreement was made on 18 February 2008 by Walter with the directors of the Company, acting in their own capacity and on behalf of the Company, that he would take leave of absence and at the end of three months he would resume his duties as chairman and CE, if the medical evidence on his mental health was satisfactory.  It is claimed that any action by the board to remove him from his positions on the grounds alleged in Thomas and Raymond’s notes to the directors of 5 and 13 May 2008 would constitute a breach of this agreement.

16.  The first obvious point about an agreement with each of the directors is that as shown in the minutes, the 9^th, 13^th, 15^thand 17^th defendants were not even present at the time this agreement was alleged to be made.  They cannot possibly be parties to this agreement.

17.  More importantly, as a matter of plain construction of the letter of Walter dated 18 February 2008, which was accepted by the board and formed the basis of the alleged agreement, it simply cannot be construed that the board or any of the directors have undertaken to consider the question if Walter should remain in office only on the basis of his mental health.  The letter and the alleged agreement did not touch at all on the wider issue whether it might or might not be in the interests of the Company for Walter’s office as chairman and CE to be terminated on grounds other than his mental health.

18.  Mr Tong, SC, submitted on behalf of Walter that it is not his case that the Company cannot remove him, come what may.  If that is not the effect of the agreement contended by him, I see no basis of granting an interim injunction which is to prohibit the board from considering his removal at all. Mr Tong further submitted if the terms of the interim injunction are too wide, the court may narrow this down. This is just no answer.  It is for the applicant to formulate the proper basis of his claim and the scope of the interim relief he wishes to seek from the court.

19.  I agree with Mr Huggins it cannot possibly be said there was any implied term if Walter were shown to be medically fit, the directors would allow him to resume duties as chairman and CE, whether or not the board felt it was in the best interests of the Company that he should be removed on grounds other than medical unfitness. The directors have a continuing duty to exercise their discretion and decide what is in the best interest of the Company from time to time.  It is impossible to attribute to the board of directors an intention to enter into a binding agreement with Walter that would have the effect of fettering their discretion. As Mr Huggins has submitted, that would be irrational and unjustified.

20.  Mr Huggins and Mr Ho have referred me to the Articles of Association.  The relevant articles on the powers of the board to appoint a director to be chairman, managing director, or other executive director, to determine the period for which he is to hold office, and to remove him from office are found in Articles 125, 117 and 118.

21.  If by accepting the terms in Walter’s letter of 18 February 2008, this had the effect of restricting the powers of the board in such a manner as to remove its powers and rights under the above articles to terminate Walter’s office as chairman or executive director, this would be in effect to alter the Articles of Association.

22.  The Articles of Association are binding on the Company, and can only be altered by special resolution, not by a board resolution (section 13 of the Companies Ordinance, Cap. 32).  An agreement by a company to fetter its statutory powers is unenforceable (Russell v Northern Bank DevelopmentCorporation Limited [1992] 1 WLR 588).  Thus, a company cannot agree with a director and shareholder not to exercise the statutory power under section 157B of Cap. 32 to remove him as a director by ordinary resolution before the expiration of his office (Muir v Lampl [2004] 4 HKC 626).  I reject Mr Tong’s submission that the alleged agreement should be treated as an agreement of a private nature between a director and the board.

23.  To recap, there is no basis for finding that the board had intended to disable itself from acting on its undoubted powers and duties to remove Walter from office, if it were thought to be in the interests of the Company to do so. The alleged agreement does not provide that the Company shall not use its constitutional powers to remove Walter as chairman or executive director. If the agreement were to this effect, it would be unenforceable against the Company as this is seeking to circumvent the statutory requirement for any alteration of the Articles of Association to be by special resolution.

24.  I am not satisfied there is a serious issue to be tried on the case of breach of contract.

Is there a serious question to be tried on inducing or procuring breach of contract

25.  This may be disposed of shortly. The claim in tort is dependent on the assumption the alleged agreement exists. It follows that I cannot be satisfied there is a serious question to be tried on the cause of action in tort.

Is there any other basis for preventing the board from exercising its constitutional powers

26.  It is further alleged in the statement of claim that voting for Walter’s removal on the grounds in Thomas and Raymond’s notes to directors would be an exercise of the directors’ fiduciary power for improper cause or motive and a breach of fiduciary duties on their part.

27.  I am not satisfied there is any serious issue to be tried on this claim either.

28.  There is no evidential basis for the assertion that the directors would exercise their powers improperly or for improper motives if they are to vote on the resolution to remove him from office.

29.  Whatever might be the disputes and ill feelings between Walter and his brothers, what happened at the adjourned meeting on 8 May 2008 called by Walter is insufficient for this court to infer that the other 14 directors would not vote in accordance with their honest beliefs as to what is in the best interest of the Company.  All the directors who have taken part in this application have stated firmly and clearly they are fully aware of their duties and powers as directors of the Company and will exercise their powers at board meetings in the best interest of the Company.  I see no reason why I should question their good faith and assume they would not carry out their duties conscientiously.

30.  Besides, the removal of a director, chairman or CE is a question of internal management, and any complaint about internal management should be brought by the company, not by a shareholder (MacDougall v Gardiner [1875] 1 Ch D 13 at 23).  Where the complaint concerns a matter of internal management which are valid if done with the approval of the majority of the shareholders or are capable of being confirmed by the majority, the court will not interfere (MacDougall v Gardiner, supra. at 25; Burland v Earle [1902] AC 83 at 93 to 94).  This rule does not extend to a case where the directors have acted in abuse of their powers or where the act is unfair and oppressive as against the minority shareholders.  In other words, the situation comes within one of the well-known exceptions to the rule in Foss v Harbottle (1843) 2 Hare 461.

31.  The case of Re Southern Resources Ltd (1989) 15 ACLR 770 relied on by Mr Tong does not assist him.  As pointed out by Mr Ho, it is important to note that the issue of the shareholders’ standing to sue in that case was resolved in their favour because the relief sought was with respect to an allotment of shares alleged to have been made for improper purpose by the directors and resulted in diminution of the shareholders’ voting power. It was held that diminution of voting power stands on a fundamentally different footing from other detriments resulting from abuse of power by directors (at 782-3).

32.  So the court must leave the board to decide on an issue of internal management. If Walter is dissatisfied with the board’s decision, his remedy is to take the issue to the shareholders at a general meeting to have the matter decided and voted on by the shareholders.

33.  At present, I am not faced with a minority shareholder complaining about the acts of the majority. And there is no evidence as to how the majority of shareholders would vote if a resolution to remove Walter from office should be placed before them.

34.  Insofar as Walter has commenced this action on behalf of himself and on behalf of all shareholders of the Company other than the 2^nd to 6^th, 8^th, 10^th to 11^th, 13^th and 16^th defendants, that is misconceived. The statement of claim does not contain any allegation that wrongdoers are in control in the sense that they are in a position to prevent shareholders in general meeting from taking action if the shareholders should feel aggrieved about the removal of Walter from his office and there is no evidence to suggest that an attempt has been made to put the matter to shareholders but is frustrated by the 2^nd to 17^th defendants.

Balance of convenience

35.  It is strictly unnecessary to consider the balance of convenience, as I am not satisfied there is a serious issue to be tried on any of the claims advanced in the statement of claim. I will deal with this succinctly.

36.  The loss suffered by Walter in his individual capacity can be adequately compensated in damages, and the Company is plainly good for any amount of damages that might be awarded.  Damages will be the only remedy, as there can be no question of any entitlement of Walter to be restored to his office, bearing in mind that contracts for personal services cannot be specifically performed. He is not entitled to an injunction which would have the effect of compelling the Company to continue to employ his personal services as chairman and CE.

37.  In contrast with any loss likely to be suffered by Walter, any injury suffered by the Company as a result of the interim injunction will be substantial and may be difficult to quantify.  The dispute over Walter’s removal has attracted considerable media interest. Investors will have serious concern how the business operations and staff morale might be affected, given the instability and uncertainty in management structure.  I understand since the ex parte order was made on 15 May 2008, the share price of the Company underperformed considerably on each of the two consecutive trading days immediately following.  That the share prices of other property developers had also dropped during this time is neither here nor there. There is no need to dwell on this. The injury to the Company is not something that can adequately be compensated by an award of damages.

38.  The balance of convenience clearly lies in favour of refusing the interim injunction.

39.  The board as a whole should be free to decide what they genuinely consider to be in the best interest of the Company.

40.  For those reasons, I dismiss the application.

41.  I decline to order costs on an indemnity basis for any of the defendants, but I will order costs to be paid forthwith by the plaintiff.  I do so for two reasons.

42.  Firstly, this is a self-contained application.  I do not see why the defendants should have to wait to get their costs at the conclusion of the action.

43.  Secondly, I have dismissed the application on the basis that I am not satisfied there is a serious question to be tried on any of the plaintiff’s claims.  So this is appropriate to depart from the usual case and order costs to be paid forthwith.

44.  The 14^th defendant has not taken any part in these proceedings, there is no need to make any costs order regarding him.  I make the following order on costs:

(1) the plaintiff is to pay the costs of the 1^st to 8^th Defendants at the ex parte hearing on a party-and-party basis to be paid forthwith; and

(2) the plaintiff is to pay the costs of the 1^st to 13^th and 15^th to 17^th defendants in this application on a party-and-party basis to be paid forthwith.