SONG LIANZHONG v. CHINA NTG INVESTMENT LTD AND OTHERS

HCMP 1823/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1823 OF 2011

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BETWEEN

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J U D G M E N T

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1.  This is an application by the applicant for an order under section 114B of the Companies Ordinance, Cap 32, that the first annual general meeting be held for China NTG Investment Limited (“the Company”) which is the 1st respondent. The applicant also wants to pass a resolution at the AGM to remove three of the five directors from the board of the Company.

2.  The 2nd to 5th respondents oppose the application.  The 2nd respondent has settled with the applicant yesterday.  The 3rd to 5th respondents are still contesting. 

3.  The parties all agree that the time for holding the first AGM of the company has expired.  The 3rd to 5th respondents initially also agreed to hold the AGM, but later withdrew from that position.  Mr Lau, counsel for the 3rd to 5th respondents, in his skeleton submissions also agreed that the AGM should be held, but opposed any resolution for replacement of directors.  In any case, there is still no agreement to hold the meeting.

The issue

4.  The real issue is for boardroom control.  The applicant holds 51% of the shares of the company; the 2nd and 3rd respondents each holds 3%; the 4th respondent holds 20% and the 5th respondent holds 23%. Each of the shareholders has one director on the board.  The applicant now wants to remove the directors representing the 3rd to 5th respondents. 

The case of the 3rd to 5th respondents

5.  The Company was incorporated on 12 November 2009.  The 18 months for it to hold the first AGM expired on 12 May 2011. Since the 2nd to 5th respondents were opposing the removal of the directors of the 3rd to 5th respondents, they refused to take part in convening the AGM. Article 22(a) of the Articles of Association of the Company requires two members personally present, or by proxy, to form a quorum.  The AGM could not be convened without the co-operation of the 2nd to 5th respondents. 

6.  The 2nd respondent’s representative, Mr Leung Sin Wai, made an affidavit on behalf of the 2nd to 4th respondents to oppose the application.  Though the 2nd respondent has settled with the applicant, this evidence is still available to the 3rd to 5th respondents.  Mr Leung said the applicant was a member of a group of companies with a BVI company called China NTG Investments Limited (“BVI NTG”) at the apex.  The English names of BVI NTG and the Company are very similar and the only difference is the use of the word “Investment” for the Company and the word “Investments” for BVI NTG. The Chinese names of the two companies are the same.  The composition of the shareholders and their shareholdings and the members of the board of the two companies are also the same.  BVI NTG was incorporated in September 2009 whilst the Company was in November 2009. 

7.  The 2nd respondent had agreed to invest RMB 130 million in BVI NTG for 3% of its shares.  RMB 70 million was payable as deposit.  When the 2nd respondent tried to effect payment of RMB 30 million as the first part of the deposit in December 2009, Mr Leung became aware that BVI NTG did not have a bank account in Hong Kong or elsewhere.  He then came to the understanding that the Company was incorporated as the executive arm to provide management services like employing staff and managing bank accounts for BVI NTG, whilst BVI NTG was primarily to hold projects, assets and properties. He also said that the shareholders considered themselves as partners in operating the group of companies. 

8.  In mid-January 2010, he had a meeting with the applicant, the 5th respondent and the representatives of the 3rd and 4th respondents in Beijing and the parties discussed the shareholding structure, composition and management.  All parties agreed that each shareholder had the right to appoint a director in the companies in the group, including BVI NTG and the Company, and each party had the right to participate in the management of the companies.  The purpose of such arrangement was to ensure team responsibility and that no individual shareholder could prevail in the management.

9.  After the 2nd respondent had paid a further deposit of its investment at RMB 40 million in March 2010, the parties then proceeded to formalise their relationship by executing a subscription agreement and a shareholders’ agreement, both dated 30 March 2010.  The subscription agreement was to provide for the subscription by the applicant and the 2nd to 5th respondents for the shares of BVI NTG.  The shareholders’ agreement was to regulate the rights and obligations of the applicant and the 2nd to 5th respondents as shareholders of BVI NTG. 

10.  I note that the two agreements only refer to BVI NTG and do not contain any reference to the Company.  The executions of the two agreements by the applicant and the 3rd to 5th respondents and BVI NTG were all witnessed by one Annie Chan.  The execution of the agreements by the 2nd respondent was witnessed by another person. 

11.  Clause 4 of the shareholders’ agreement provides as follows:

“4. Directors

4.1 Subject to fulfilment of the condition precedent as set out in clause 1A.1 of this Agreement, the Board shall consist of not less than five Directors. Each of the existing Shareholders shall, so long as he/it remains a Shareholder, be entitled to nominate the following number of persons set opposite its name below as Director(s).

Name of shareholder	Number of person(s)
Song	1
Chan	1
Sze	1
GRC	1
WEC	1

Each Existing Shareholder shall also be entitled to nominate and procure that such Director(s) nominated by him/it be removed from office from time to time.

4.2 If any vacancy occurs in the Board with respect to any Director nominated by any Shareholder, such Shareholder shall have the rights and power to nominate another person(s) to fill such vacancy. Each Shareholder shall have the right to procure that a Director nominated by him/it be removed or replaced at any time. Any replacement Director nominated by any Shareholder shall be a person appropriately qualified for the office of Director.

4.3 The quorum necessary for the transaction of business at a meeting of the Board shall, unless otherwise agreed in writing by all Shareholders be no less than half of the number of the Directors from time to time.”

12.  Mr Leung further said that the parties did not think it necessary to sign other subscription and shareholders’ agreements for each of the associated companies.  Instead, the two agreements signed for BVI NTG would serve as the basis for the oral agreement and understanding of their partnership in relation to the other associated companies, including the Company.

13.  However, disputes amongst the shareholders arose in April 2011.  The applicant wanted to oust the directors appointed by the 3rd to 5th respondents in the AGM to be held. 

The case of the applicant

14.  The applicant made an affidavit in reply.  Notwithstanding the evidence of Leung on the reason for each shareholder to have one director on the boards of the Company and BVI NTG which was despite the difference in shareholding and despite the applicant being the controlling shareholder in both, the applicant did not say a word on how and why the boards are so composed.  He, however, denied that there was any shareholders’ agreement for equal participation in management by all shareholders. 

15.  He further said that he did not know how exactly BVI NTG had come into being.  He made this assertion despite his being a 51% shareholder of this company and his execution of the subscription agreement was witnessed by Annie Chan.  He also asserted that he did not know how exactly the BVI NTG shareholders’ agreement came to be signed though it appeared to bear his signature. 

16.  He suspected that BVI NTG was a vehicle used together with the BVI NTG shareholders’ agreement by the 2nd to 5th respondents, or some of them, to divert the assets of the Company.  Since the shareholding structure of both the Company and BVI NTG are the same, I do not understand how the applicant would be prejudiced even if assets are transferred from the Company to BVI NTG or vice versa.

17.  The applicant further said that he did not understand English and believed that he had been misled by the other shareholders and/or their representatives into signing the BVI  NTG shareholders’ agreement.

Analyses

18.  In the light of the conflicting evidence on the issue of whether there is an oral shareholders’ agreement for the company in terms of clause 4 of the shareholders’ agreement of BVI NTG, I do not think it is appropriate for me to decide the matter without hearing evidence and the witnesses being cross-examined. 

19.  The parties agree that if there should be a written shareholders’ agreement for the Company which is in the same terms of the shareholders’ agreement for BVI NTG and there is no challenge to its execution, then the applicant would not be entitled to remove the directors of the other shareholders and fill up the vacancies with his own candidates (see Re Rich Treasure Enterprises Limited [2001] 3 HKLRD 769).  If there should be an undisputed oral agreement in the same terms, the parties also agree that the position will be the same.  However, the parties differ when the existence of such an oral agreement is in dispute. 

20.  Mr Chain, counsel for the applicant, referred me to Re Mandarin Capital Advisory Limited [2011] 2 HKLRD 1003, where Harris J said:

“20. It seems to me that in order for a minority shareholder to contest successfully an application for an order under section 114B, which will enable the applicant to convene a general meeting to remove him as a director, on the grounds that a company is in the nature of a quasi-partnership, it would be necessary for the respondent to demonstrate that, assuming that the meeting called could be convened and conducted without the intervention of the court, he would be entitled to an injunction to prevent the applicant tabling a resolution to remove him as a director. In considering whether or not such an injunction should be granted regard would need to be had to the clear implication of section 157B, namely, that a majority shareholder has a right to remove directors, which is not easily restricted. Strong evidence would be required of an unqualified right on the part of a respondent to participate in the management of a company all the time that he remained a shareholder. In my view this requires something more than allegations that, if made out at trial, might establish that it is unfairly prejudicial for the respondent to be excluded from management of a company. What I anticipate would normally be required is a written agreement between shareholders, to which a company is not a party, which contains an express prohibition against removal of a director all the time he remains a shareholder, which can be enforced by injunction.

21. In the present case, the 1st respondent’s evidence is limited to para. 6 of his first affirmation in which he says this:

‘The plaintiff and I have equal status in the Company, both of us were directors and from the beginning it was agreed we would run the business together as partners. This structure was envisaged so that there would be a balance of power and checks and balance between the Plaintiff and I. This would safeguard my investment (as a 44% shareholder of the Company) as well as reassure third parties the Company was dealing with that there would be checks and balance at the Company.’

22. In my view, this does not demonstrate any more than an initial understanding about how the business was to be managed. It does not demonstrate an agreement that if the parties fell out, the plaintiff could not exercise his statutory right to remove the first defendant as a director, which is not the same as saying that the first defendant’s removal might not be capable, either independently or in conjunction with other relevant factors, of constituting unfair prejudice for the purposes of section 168A of the Companies Ordinance. I do not think this conclusion is affected by the point emphasised by Mr Maurellet, namely, that all the plaintiff says in response to the first defendant’s evidence is this, which is contained in para. 7 of his second affirmation: ‘However, I cannot currently recall whether there was any discussion or an agreement of a partnership. It is unhelpful that the first defendant makes assertion of partnership without giving any particulars.’

23.  In conclusion, I find that the allegation of a quasi-partnership is not a ground for refusing the plaintiff’s application.”

21.  Mr Chain said that there is no written shareholders’ agreement for the company; I should therefore accede to the application and leave the 3rd to 5th respondents to issue proceedings under section 168A and/or 177(1) of the Companies Ordinance. 

22.  However, if I should do that, I will be adjudging against the claim of the 3rd to 5th respondents of the existence of the oral shareholders’ agreement of the Company.  In that event, unless the 3rd to 5th respondents should have my decision overturned on appeal, the doctrine of res judicata will prevent them from relying on this oral agreement in the further proceedings.

23.  Mr Chain submitted that my decision that I am not satisfied that there is an oral agreement as contended by the 3rd to 5th respondents is only a summary one and would be made for the purpose of this application only, and such finding would not prevent the 3rd to 5th respondents from relying on the alleged oral agreement in the further proceedings.

24.  I, however, take a different view.  If I should only make a provisional and non-binding assessment on this factual dispute, then I should not give final relief to the proceedings.  However, if I should accede to the application, I would be giving the applicant a final rather than interlocutory relief which will allow him to repack the board of the Company and to have full control of its board.  I also note that, in Mandarin Capital, Harris J has indeed made findings in paragraph 22 that the evidence of the 1st defendant therein: 

“...does not demonstrate an agreement that if the parties fell out, the plaintiff could not exercise his statutory right to remove the first defendant as a director, which is not the same as saying that the first defendant’s removal might not be capable, either independently or in conjunction with other relevant factors, of constituting unfair prejudice for the purposes of section 168A of the Companies Ordinance.”

25.  Elements which give rise to the superimposition of equitable considerations that prevent unfair prejudice may include one or more of: 

“(i) an association formed or continued on the basis of a personal relationship involving mutual confidence - this element will often be found where a pre-existing partnership has been converted into a limited company;

(ii) an agreement, or understanding, that all, or some (for there may be sleeping members), of the shareholders shall participate in the conduct of the business;

(iii) restriction upon the transfer of the members’ interest in the company - so that if confidence is lost, or one member is removed from management, he cannot take out his stake and go elsewhere.” (See Ebrahimi v Westbourne Galleries Limited & Others [1973] AC 360 at 379F to H).

26.  The cases where the equitable considerations apply are often called quasi-partnerships.  If the respondents are merely alleging that there is a quasi-partnership but not an agreement as referred to by Harris J in paragraph 22 of his judgment, or an agreement as contended by the 3rd to 5th respondents, then it may be right to allow the majority shareholder to exercise his statutory right under section 157B of the Companies Ordinance to have control of the board and for the minority shareholder to pursue other legal remedies.  However, the 3rd to 5th respondents are not merely alleging a quasi-partnership.  They are saying that there is an oral agreement providing in definite terms that each shareholder is to have one director regardless of the size of shareholding. 

27.  In Re Opera Photographic Limited [1989] 1 WLR 634 has also been referred to in aid of the applicant.  However, that is also a case where the minority shareholder relied on the equitable considerations in Ebrahimi v Westbourne Galleries and the Articles of Association which required two members to form a quorum. Morritt J, however, considered that the 51% shareholder had the statutory right under the Companies Act 1985 to remove the 49% shareholder from the board. 

Decision

28.  Since the AGM of the company should be held as soon as possible and the 3rd to 5th respondents have not consented to hold it, I think it is impracticable for the AGM to be called.  I would therefore make an order for it to be called, but I will not authorise the applicant to propose a resolution for consideration at the meeting to change the composition of the board.

29.  Regarding the dispute on the existence of the oral shareholders’ agreement of the Company, I will give directions for it to be resolved.  The parties appear to have many other disputes relating to the running of the Company and BVI NTG.  However, I will not allow these disputes to be ventilated in these proceedings.  I will confine the issues to the existence of the oral agreement.  On this point, I would also refer to Mandarin Capital where Harris J said:

“24. … It is also undesirable that what should be a simple application is turned into something more complex by allowing it to be contested on the basis that the applicant is unfit to run the company in question.

…

26.  I would in closing repeat that, in my view applications under section 114B should be determined by reference only to those considerations that are relevant to the exercise of the right of an applicant to convene a meeting and put the particular resolution in question before a company in general meeting for consideration and voting.  In my view it is undesirable that applications of this sort should be allowed to develop into an assessment of the conduct of a company’s affairs by its directors with delay to the determination of the application, increase in costs and probably no resolution to the real issues between the parties.  If as a result of an order under section 114B action is taken by an applicant which a respondent believes is unfairly prejudicial to him he may seek the appropriate relief in a procedure designed for the determination of such complaints.”

Order

30.  I now make the order.

1.   An annual general meeting of the 1st respondent, China NTG Investment Limited be held on 16 March 2012 at 10 am, at Room 2801, Sun Hung Kai Centre, 30 Harbour Road, Wanchai, Hong Kong.

2.   The meeting shall be treated as the annual general meeting of the company for the years of 2010 and 2011.

3.   One member of the Company present in person or by proxy shall be deemed to constitute a sufficient quorum of the meeting.

4.   The period of laying the accounts for the years ended 31 December 2010 and 31 December 2011 before the annual general meetings be extended to 16 March 2012.

5.   At the meeting, the following matters shall be considered and voted upon:

(1)  To receive and consider the audited accounts for the period from 12 November 2009 (ie, the date of incorporation of the Company) to 31 December 2010 and 1 January 2011 to 31 December 2011, together with the directors’ and auditors’ reports thereon.

(2) To appoint the auditors and fix their remuneration.

(3) The transaction of any other business as the Company sees fit.

6.  The originating summons be adjourned for trial before a judge with three days reserved to be fixed in consultation with counsel’s diaries and with the following directions:

(i)    The parties do provide discovery by exchange of list of documents within 14 days hereof.

(ii)   Inspection of lists of documents within seven days thereafter.

(iii)  The parties do exchange witness statements within 28 days thereafter.

7.   The issue to be determined at the trial be limited to “whether there is an oral agreement between the shareholders of the Company which provides inter alia that each shareholder is entitled to appoint one director to the board with reference to the specific questions set out at annex 1 to this order”.

8.     Costs be in the cause of the trial.

9.   Liberty to apply.

Annex 1

(1)  What are the circumstances of the formation of the NTG group of companies, China NTG Investments Limited (“the BVI company”) and China NTG Investment Limited (“the Hong Kong company”), including full particulars of: (i) the precise relationship between the BVI company and the Hong Kong company; and (ii) the (intended) structure and business of the NTG group of companies?

(2)  What are the circumstances as to the shareholders of the BVI company entering into the alleged written shareholders’ agreement for the BVI company (the BVI shareholders’ agreement) with full particulars of: (i) when, where, how and why the BVI shareholders’ agreement was entered into; and (ii) the background and context behind and leading up to the BVI shareholders’ agreement being entered into?

(3) What are the circumstances as to the shareholders of the Hong Kong company entering into an alleged oral shareholders’ agreement for the Hong Kong company (the Hong Kong shareholders’ company) with full particulars of: (i) when, where, how, why and by whom the Hong Kong shareholders’ agreement was entered into; and (ii) the background and context behind and leading up to the Hong Kong agreement being entered into?