JOE ZHIXIONG ZHOU v. SAIF PARTNERS II L.P.AND ANOTHER

HCCL 16/2016
[2018] HKCFI 357

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO 16 OF 2016

(TRANSFERRED FROM HIGH COURT ACTION NO 1551 OF 2010)

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JUDGMENT

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INTRODUCTION

1.  In these proceedings, Mr Joe Zhixiong Zhou (“Mr Zhou”) claims sums alleged to be due as “Carried Interest” under:

 (i) Article 6.1(b)(ii) of an Amended and Restated Limited Partnership Agreement dated 29 June 2005 (“the ALPA”) made between, inter alios, Mr Zhou, the Defendants, Mr Ho Ping Lin (“Initial Limited Partner”) and Mr Zhou’s fellow Limited Partners under the ALPA; and

 (ii) Clause 8 of a Separation Agreement dated 11 December 2006 (“the SA”) made between Mr Zhou of the one part and Mr Andy Yan (“Mr Yan”) of the other part acting on behalf of SAIF Partners.

2.  The 1^st Defendant (“D1”) is a Cayman Islands Exempted Limited Partnership and is the general partner of SAIF II GP L.P. which in turn is the general partner of an investment fund, SB Asia Investment Fund II L.P. (“Fund II”).

3.  The 2^nd Defendant (“D2”) is an exempted Cayman Islands company which at all material times was the general partner of D1.  D2 is controlled by Mr Andrew Yan who is its sole shareholder and director.  Mr Yan therefore controls D1, D2 and the operations of Fund II.  It was Mr Yan who set up Fund II.

4.  The external investors in Fund II are limited partners of Fund II and are the subject of a partnership agreement (“the Fund II LPA”) which is separate from the ALPA.  The external investors (referred to hereafter as “LPs”) took no part in the management of Fund II.  Instead, under the Fund II LPA, the management and control of Fund II was vested in D1 and D1’s general partner, D2.

5.  SAIF Partners is the trading name for a group of entities (including the entities referred to in paragraphs 2 – 4 above) that are controlled by Mr Yan.  Mr Zhou’s professional connection with SAIF Partners began in 2001 with his appointment as an investment officer with the first investment fund established by Mr Yan, Fund I.  In 2004, Mr Yan promoted Mr Zhou to Partner.

6.  Following the execution of the ALPA in June 2005, Mr Zhou was a Principal Limited Partner and had responsibility, together with the other limited partners and Mr Yan, for the investment activity of Fund II.  Mr Zhou was also one of seven Partners in SAIF Partners.  These Partners were drawn from SAIF Partners’ most senior and high ranking professional staff.  As a Partner, Mr Zhou was a member of the Investment Committee that decided which investments proposed by individual limited partners should be taken up as Fund II investments.

7.  Mr Zhou was also a Principal under the Fund II LPA under which, as a Principal, he was obliged to devote substantially all of his business time and efforts to the investment and other activities of the Partnership and to devote such time as was reasonably necessary to conduct investment in a reasonable and prudent manner.

8.  As a Principal Limited Partner of Fund II, until around August 2006 Mr Zhou was involved in, inter alia, identifying potential investment opportunities for Fund II, obtaining the approval of the Investment Committee to go ahead with such opportunities, negotiating the terms of the approved investments and supervising the investments once a transaction had been completed, which often meant serving on the board of the relevant portfolio company in whose share capital Fund II had invested.

9.  Mr Zhou was also a salaried employee of SAIF Advisors (Beijing) Ltd (“SAIF BJ”) and a fee-earning consultant of Sunstep Co Ltd (“Sunstep”), both of which were affiliates of SAIF Management II Limited and D1.

10.  Under the Fund II LPA, Fund II was obliged to pay to SAIF Management II Ltd an annual management fee of 2% of total committed capital in the first 5 years and thereafter 2% of the remaining assets of Fund II.  Fund II was also obliged to pay 20% of its profits realized on its investments to SAIF II GP LP as the general partner of Fund II, which sum then had to be paid over to D1 in accordance with the partnership agreement that governed SAIF II GP LP.  The sum so received then had to be divided up amongst D1’s General Partner and the limited partners of D1 pursuant to their entitlement to “Carried Interest” under Article 6 of the ALPA according to their “Points Allocation” based on a points pool of 10,000 points, each point being equivalent to 0.01% of D1’s profits with the limited partner’s entitlement vesting over a 6 year period.

11.  Mr Zhou’s original points allocation was 1659/10,000 (ie 16.59% of D1’s profits).  By Clause 8 of the SA it was agreed that: (i) Mr Zhou would have an additional nine months of vesting from 1 November 2006 with respect to his carry interest or points in the Fund II General Partner; (ii) his final vested percentage would be 51.78%; and (iii) the non-vested portion of the additional nine months shall continue to be vested as long as Mr Zhou complied with the provisions and obligations of the Separation Agreement.

12.  In about October 2005, Mr Zhou identified a PRC technology company as a potential investment opportunity for Fund II, called Show World Information Technology Co Ltd (“Show World”) that had been established by a Mr Zhou Yang (“Zhou Yang”).  Show World provided proprietary “avatars” (personalized virtual images) and “winks” (a short flash animation program) that it distributed to users through web, instant messaging and wireless networks. Show World had also developed “Color Call” technology enabling an internet user to use an on-line avatar on his or her mobile phone.  Show World also provided on-line advertising in the avatar window.

13.  Mr Zhou and his deal team (Yanchao Zhao [“Mr Zhao”] and Ms Lynda Lau [“Ms Lau”]) produced for distribution to other “Partners and Professionals” a “Concept Paper” on Show World in December 2005.  This described the business of Show World and its progress since its incorporation in 2003 and indicated the potential market for its products.  It stated that Show World was the dominant player in both avatar and Color Call business in China and had a strong technology barrier of entry.

14.  Around 23 and 24 January 2006, there was concern about Mr Zhou’s heavy workload.  In an email concerned with another project dated 23 January 2006, Mr Yan said:

“ Giving Joe’s workload, I also concerned about his time commitment to this project. Perhaps one remedy is to have an associate to stay on top of the company’s matters.”

And the next day, referring to the My Show project in an email to Mr Zhou, a senior limited partner, Donghyun Han, said:

“ I’d like to also challenge the early stage nature of the deal and the partner’s time allocation. Joe, I think you already have more than enough early stage deals in your hands and I am not sure how much time you can spend for this deal.”

15.  In his reply to Mr Han’s email dated 27 January 2006, Mr Zhou stated:

“ … regarding the time allocation, I am fully committed to this deal. ‌… I will allocate appropriate time to this deal as well as other early stage deals that you mentioned … I am very confident that we will be able to manage our portfolio so they will be a huge success for all of us.”

16.  Mr Zhou proceeded to lay before the Investment Committee, established under Clause 2.5 of the ALPA, an Investment Report on Show World.  This document covered much of the ground set out in the Concept Paper and in addition stated that SAIF was considering investing US$8 million for 4,210,526 Series A Preferred Shares (about 29.31% of the ownership of the company post-closing) and US$2 million of warrants for 877,193 Series A shares at 120% of Series A initial pre-money valuation.  There would also be ratchet terms with a target of earnings of US$3 million as shown in the Financial Statements for 2006.  In addition, there was a due diligence report which summarised the views of a number of business partners and customers, including the Founder and President of Digital Chaotex, who believed the Color Call service would have great potential.  A Senior Solution Manager of Datang Mobile Communications Equipment was also reported to have said that transmitting Color Call in TD-SCDMA 3G network was not hard to implement and he was convinced that Color Call was a great idea.  In addition, this individual was very interested in Show World’s test report of Color Call testing on China Mobile WCDMA network.

17.  Responding to the Investment Report, Mr Yan said in an email to Mr Zhou dated 1 February 2006:

“ … I share part of the enthusiasm you have on this deal. However, I also fear that the large amount of our investment capital could provide a strong incentive for the management to do something weird on financial accounts. Ideally, I’d prefer to have a trucked [staged] investment like we did in Taihe. If we can’t re-open the negotiation, we should try to get a de facto trucked [staged] investment by putting a large amount in the overseas account and set up bench mark for inject money into the on-shore account. In this case, I’d like the deal team to elaborate the financial control mechanism in detailed fashion to all Partners.”

18.  Later on the same day, Mr Yan sent another email to Mr Zhou, copied, inter alios, to three members of the Investment Committee and Mr Zhao and Ms Lau, in which he said:

“ … I do have the following concerns and suggestions to the deal team and hope you can address before my formal vote:

1) …

2) …

3) Since we invest a large amount to this pre-revenue company, we need to have strong financial control in place. Ideally in this kind of investment, we should use instalment investments like we re-negotiated with Taihe … we need to have de facto control on the bank accounts as I don’t expect they will be able to use the money quickly.

4) Giving that we have a pretty stringent ratchet term in place, we need to monitor they [sic] accounting methods and account closely.  From other company that we have ratchet term in place, more or less they will try to fake or jack up the numbers.  We need to be mindful.”

19.  Replying to this email, Mr Zhou said:

“ We will negotiate investment in stages as suggested … We will have strong investment control on this deal. We will have co-signature rights plus the execution right on offshore account. Without our approval and [Y]iddi’s execution, no fund can be moved in or out of the offshore account. [M]ajority portion of the fund will sit in offshore account anyway. [F]or onshore fund the control mechanism is 1. all spendings have to be based on approved budget. 2. we need to approve large size spending even if its in the budget. 3. we will check with bank balance monthly if necessary. Let me know if you have additional questions or suggestions.”

20.  Also on 1 February 2006, Mr Zhou said in an email to Mr Brandon Lin (“Mr Lin”), a fellow member of the Investment Committee:

“ I can only promise you that with the support from [Y]anchao and [L]ynda I will spend adequate time on this deal and make all of us worthwhile.”

21.  Then on 3 February 2006, Mr Yan said in another email to Mr Zhou:

“ I feel a lot more comfortable with these trenched investments and remain in favor of this investment. However, we still need to have financial control measures in place. Deal team, pls keep this in mind in your documentation stage.”

22.  A day or so later, the Investment Committee agreed to invest US$8 million in Show World in two tranches.  The structure used involved the incorporation of a Cayman Islands company, My Show Group Limited (“My Show”), which then established a wholly owned foreign enterprise incorporated in the PRC called Beijing Show World Science and Technology Co Ltd (“the WOFE”).  My Show, Fund II, Mr Zhou Yang and Show World then executed a Share Purchase Agreement dated 5 April 2006 (“the My Show SPA”) whereby it was agreed that:

 (i) Fund II would acquire 2,631,579 Series A Preferred Shares in My Show at a price of US$5 million and at a later date would, if certain conditions were met, acquire further Series A Preferred Shares up to a maximum of 1,578,947 at a price of US$3 million;

 (ii) subsequent to the execution of the My Show SPA, Zhou Yang, My Show and Show World would effectuate a Plan of Restructuring involving, inter alia, an Asset Transfer Agreement,under which the WOFE, with Zhou Yang as its General Manager, would assume control of substantially all of Show World’s operations and be entitled to receive substantially all of the income generated by Show World; and

 (iii) by Clause 8.2, My Show and Zhou Yang were to execute a Founder Purchase Agreement (“the FPA”) if one of two conditions was met:

 (a) compliance by Zhou Yang with the registration requirements under Circular 75 issued by the State Administration of Foreign Exchange (SAFE); or

 (b) receipt by My Show of a legal opinion from Show World’s PRC Counsel confirming that Zhou Yang is not subject to such registration. 

23.  Clause 8.2 provided that if neither of conditions (a) and (b) were met, the parties were to use best efforts to agree an alternative means to achieve the intent and meaning of the FPA and, if these efforts failed, the parties were to take all reasonable actions necessary to reverse the transactions completed pursuant to the Plan of Restructuring.

24.  Under the FPA, Zhou Yang was to be issued 8 million Common Shares in My Show in exchange for US$800, whose proportionate relationship to the My Show shares acquired by Fund II would depend on whether, under the operation of the “ratchet” provision in the SPA, My Show’s Financial Statements for 2006 showed Earnings of no less than US$3 million.

25.  In conjunction with the My Show SPA, Zhou Yang entered into a letter agreement with My Show (“the My Show Covenant”) by which he undertook to refrain from acting in other positions, engage in any other job or receive financial benefit or advantage from others and to devote all of his work and effort exclusively towards the fulfillment of his service obligations to My Show and use his best efforts to promote the interest and business of My Show and/or its affiliates during a defined “Commitment Period” running to the end of one year following a Qualified IPO or his earlier resignation. 

26.  Previous investments by Fund II in PRC companies had followed what was called internally “the Sina model” which involved the following steps: (1) the establishment of an offshore entity by the founder of the PRC business; (2) the execution by the Fund and the founder of a Share Purchase Agreement, whereby the Fund would invest in the offshore entity and become a minority shareholder of that entity; and (3) the establishment by the offshore entity of the necessary structure through a WOFE to acquire or control the founder's existing domestic business. 

27.  The difference between the structure adopted for the investment in Show World and the Sina model is that the Fund was to become the majority shareholder in the offshore entity until the execution and implementation of the FPA and in the meantime Zhou Yang would have no direct or indirect shareholding in the WOFE at a time when the assets of his domestic company, Show World, were transferred to the WOFE.

28.  Mr Zhou and a Ms Yiddi Wong Pui Ki were appointed to the board of My Show and Mr Zhou also became a director and the legal representative of the WOFE.  There were various provisions in My Show’s Amended and Restated Memorandum of Association that required the approval of the Series A Director for a range of transactions in excess of US$100,000, the acquisition of any real estate and of any automobile costing more than US$30,000 and the hiring and firing of senior personnel and increasing the compensation of any of the five most highly compensated employees of the company.

29.  By mid-2006, Fund II had become fully invested and Mr Yan began discussing the idea of a new investment fund that subsequently became Fund III.  On about 23 August 2006, Mr Zhou told Mr Yan that he did not wish to be a limited partner in Fund III because he wanted to establish his own investment fund.  Mr Yan was not happy at the prospect of Mr Zhou leaving SAIF Partners; indeed, he was angry at Mr Zhou and felt he might no longer trust him for a number of reasons.  He felt that for Mr Zhou to leave SAIF Partners would be an act of ingratitude and disloyalty.  News of Mr Zhou’s possible departure had started to leak out and unsettle investors in Fund II and Mr Yan thought that some of those investors would be deterred from investing in his new Fund III.  A report in the media of an interview given by Mr Zhou suggested that he had been the main man in bringing about a very large and lucrative transaction involving a company called Shanda Games, whereas it had been Mr Yan who had led on that transaction.  Also, in Mr Yan’s view, Mr Zhou’s required improvements in his role and entitlements if he were to stay with SAIF Partners were unrealistically exorbitant.

30.  Following a period of negotiation, the SA was executed by Mr Zhou and Mr Yan on 11 December 2006.  Put briefly, this provided that from 1 January 2007 to the “Marketing Date” (ie the earlier of 1 April 2007 or the Second Closing of Fund II which occurred on 7 February 2007), Mr Zhou was to remain a “Venture Partner” and would receive 50% of his salary and full benefits as he continued to provide services to D1, Fund II and their affiliates, and to serve on the boards of the companies he had been instrumental in bringing into the Fund II portfolio.  After the “Marketing Date”, Mr Zhou was to be free of the non-compete covenants to which he was subject under the ALPA and other agreements and would become an “Inactive Partner”, but instead of an Applicable Percentage of 36.84% as provided for in the ALPA, under the SA he was given an additional 9 months vesting that raised his Applicable Percentage to 51.78%.  The SA also provided that it superseded any previous agreements between Mr Zhou and SAIF Partners and that following the vesting of the additional 9 months, “there shall be no recourse or reduction.”

31.  Mr Zhou’s salary and his work in respect of Fund II ceased as from 28 February 2007 and during March 2007 he resigned from the various directorships he held on the board of Fund II portfolio companies.

32.  Following his departure from the Fund II General Manager, Mr Zhou joined Kleiner Perkins Caulfield & Byers (“KPCB”) and participated in the launch of that firm’s KPCB China Fund LP that took place on 24 April 2007.

33.  On 24 August 2007, an investment agreement (“the Xinrui investment agreement”) was made between Keygate Technologies Co Ltd (a Cayman Islands exempted company), KBCB China Fund LP (the Investor),Mr Ding Jun, Ms Zhou Fei, Xinrui (Beijing) Technology Company (“Xinrui”) and an additional Beijing company, under which the Investor invested US$8 million in Xinrui also known as Keygate. Mr Zhou was the deal champion for this investment on behalf of KBCB China Fund LP.

34.  In April 2008, having left KPCB, Mr Zhou set up Keytone Ventures LP, a China-focused venture capital firm.

35.  Sometime around July/August 2008, Mr Zhao Yangchao (“Mr Zhao”), acting on the instructions of Mr Yan, began an investigation into the affairs of the WOFE and My Show.  As part of Mr Zhao’s investigations, Certified Public Accountants were instructed to carry out an investigatory audit of transactions between the WOFE, Xinrui, My Show Ad and Mobile Winks.  The resulting audit report (“the Auditors Report”) was issued on 31 March 2009.

36.  In mid-October 2008, Mr Zhou received a letter dated 15 October 2008 signed by Mr Yan on behalf of D2 (My Show) giving notice that Mr Zhou’s Applicable Percentage had been reduced to 0.05% multiplied by his prior Applicable Percentage because it had been determined that he had committed “Cause” under the ALPA by conducting himself in a manner that adversely affected one or more of D1, Fund II and Fund II’s portfolio’s companies.

37.  The ALPA specifies what the “Applicable Percentage” will be when a Limited Partner becomes an “Inactive Partner” depending on particular circumstances (the “Trigger Event”).  Art 7.1(c)(iv) provides that where a Limited Partner becomes an Inactive Partner due to “Termination with Cause”, that partner’s Applicable Percentage shall be equal to 0.05 multiplied by the Applicable Percentage otherwise provided above in Art 7.1.

38.  As we shall see, the definition of “Cause” includes: (a) failure to comply in a material respect with: (i) securities law; (ii) the “policy” of, inter alios, D2, Fund II, D1 and SAIF Management II Ltd; and (iii) various covenants in respect of such matters as non-solicitation, confidentiality, non-competition, non-disparagement and cooperation following termination of employment.

39.  On 20 November 2008, the WOFE, acting by Mr Zhao sent a report to the Beijing Public Security Bureau, Haidan District Branch alleging that Zhou Yang had committed the offence of embezzlement by lending money to Xinrui and Mobile Winks.  Zhou Yang was arrested and was in custody for four months before being released without charge.

40.  In the second half of 2009, the WOFE ceased operating and a number of its management team, including Li Meng, started a new enterprise called InMyShow with the support of SAIF Partners.  The assets of the WOFE were transferred to InMyShow and a number of entities and Mr Yan became very large investors in the new company.

41.  The alleged conduct of Mr Zhou said to constitute “Cause” under the ALPA spans the time from April 2006 when Mr Zhou was still an active Limited Partner down to and after the SA and his subsequent departure from SAIF Partners on 28 February 2007 to set up his own fund.

42.  The Defendants further contend that the conduct alleged to constitute “Cause” also constitutes a breach or breaches of fiduciary duties alleged to have been owed by Mr Zhou to D1 and/or D2 thereby giving rise to an entitlement to require Mr Zhou to account to the Defendants for any benefit he might have derived from such breaches of duty.

43.  Put briefly at this stage the misconduct alleged is:

 (1) Whilst he was on the boards of the WOFE and My Show, and without informing his partners of what he was doing, Mr Zhou caused a loan of US$2,500,000 to be made on 15 September 2006 by My Show (D2) to Zhou Yang personally, rather than to the WOFE, the security for which loan was extremely tenuous and in circumstances where he acted:

 (a) contrary to the instructions of Mr Yan to ensure that effective financial controls were in place in the WOFE and Show World; and

 (b) failed to monitor Zhou Yang’s use of the money. 

The Defendants’ principal contention is that such conduct constituted “Cause” because it adversely affected Fund II, D1 and the WOFE, contrary to the non-disparagement covenant in Art 3.2(d) and was a failure to comply with the “policy” of the Defendants as required by para (a) of the definition of “Cause” in Art 11 of the ALPA, the policy in question being to keep tight financial control in accordance with the instructions of Mr Yan given in the lead-up to the Investment Committee’s approval of the My Show transaction.

 (2) Mr Zhou wrongfully participated in Zhou Yang’s development and commercialization of “Diandao” (Point Advertising) technology through Xinrui and Keygate Technologies Co Ltd (“Keygate”) and “Color Call” technology through Beijing Wu Xian Wei Ke Science and Technology Co Ltd (“Mobile Winks”),when these technologies belonged to and/or should have been developed and monetised by the WOFE.  Put shortly, Point Advertising is a form of targeted online advertising based on a user’s internet searches.  The technology was developed by Ding Jun starting in mid-2006.  Din Jun was employed by the WOFE from October 2006 to February 2007.  The Defendants’ principal contentions are that Mr Zhou committed the following acts constituting Cause:

 (i) in breach of the non-solicitation covenant in Art 3.2(a)(ii), he solicited Zhou Yang to act in breach of the My Show Covenant by which Zhou Yang undertook to devote all of his work effort exclusively towards the fulfillment of his work obligations to My Show and use his best efforts to promote My Show’s interest and business;

 (ii) in breach of the confidentiality covenant in Art 3.2(b), he made use for his own benefit of information in respect of Fund II and My Show; and

 (iii) in breach of the non-disparagement covenant in Art 3.2(d) he conducted himself in a manner adversely affecting D1 and the WOFE.

 (3) Mr Zhou assisted in the establishment of a company called Beijing My Show Advertising Co Ltd (“My Show Ad”) by Zhou Yang but failed to take steps to ensure that Zhou Yang kept the company as part of the WOFE’s business and could not inject it into a business outside the ownership and control of the WOFE. The Defendants contend that this conduct amounted to Cause in that it adversely affected Fund II, D1 and the WOFE, contrary to the non-disparagement covenant in Art 3.2(d).

44.  In their pleadings and opening submissions, the Defendants also contended that Mr Zhou was guilty of “Cause” in respect of: (i) two loans respectively in the sums of US$300,000 and US$ 250,000 made personally by My Show to Zhou Yang some months before the US$2.5 million loan; (ii) alleged false and exaggerated public statements made by Mr Zhou concerning Fund II without the consent of My Show during an interview with the magazine Institutional Investors and via a press release made by Zero2IPO.  However, wisely, these further allegations of Cause were not relied on in the Defendants’ closing submissions and I make no determination in respect of them.

THE SCHEME OF THE REMAINDER OF THE JUDGMENT

45.  After setting out the relevant provisions in the ALPA and the SA and considering the legal issues in this case, I propose to make a number of observations on the witnesses followed by my detailed findings on the alleged misconduct and then I shall set out my conclusions on the questions whether the Defendants are entitled to reduce Mr Zhou’s Applicable Percentage to 0.05% × the Applicable Percentage to which he was otherwise entitled and/or to require Mr Zhou to account for any profit he has made by reason of any breach of fiduciary duty.

THE RELEVANT PROVISIONS IN THE ALPA

46.  Regrettably, it is necessary to set out at length the relevant clauses in the ALPA:

“	ARTICLE III
	CERTAIN COVENANTS

3.1 Devotion of Time; Other Activities, etc. Each Principal Limited Partner shall devote substantially all of such Partner’s business time and efforts to the investment and other activities of the Partnership, the Fund General Partner, the Fund and the Existing Funds, except as otherwise agreed to by the General Partner. Nothing in this Agreement shall preclude a Limited Partner from engaging in such Limited Partner’s personal investment, family or charitable activities, or from making investments for such Limited Partner’s own account, other than investments that are the same as those traded in or held by the Fund. Each Principal Limited Partner shall refer all investment opportunities that are suitable for the Fund to the Partnership.

3.2 Non-Interference Covenants.

(a) Non-Solicitation. Each Limited Partner (while such Limited Partner is employed by the Partnership, the Fund General Partner, the Fund, the Fund Manager or their respective Affiliates or is a Limited Partner and for twelve months thereafter or such other period as is expressly agreed by the General Partner in writing), shall not (and shall cause such Limited Partner’s Affiliates not to): (i) hire any person (other than on behalf of and for the benefit of the Partnership, the Fund General Partner, the Fund, the Fund Manager or any of their respective Affiliates) or take any action with the objective of soliciting for employment any person who is at the time of such hiring or solicitation or was within twelve months preceding such hiring or solicitation (x) employed by the Partnership, the Fund General Partner, the Fund, the Fund Manager, any Portfolio Company or any of their respective Affiliates or (y) a Limited Partner or any of its Affiliates (other than a Limited Partner’s personal assistant) or (ii) solicit or encourage any other employee of the Partnership, the Fund General Partner, the Fund, the Fund Manager or any of their respective Affiliates to cease providing services to the Partnership, the Fund General Partner, the Fund, the Fund Manager or any of their respective Affiliates or breach any restrictive covenant between the Partnership, the Fund General Partner, the Fund, the Fund Manager or any of their respective Affiliates and such Person.

(b) Confidentiality. Each Limited Partner shall (and shall cause such Limited Partner’s Affiliates to) keep confidential and not, without the prior written consent of the General Partner, disclose or use for his, her or its own benefit any information with respect to this Agreement, the Partnership, the General Partner, the Fund General Partner, the Fund Manager, the Fund, any Portfolio Company (or any predecessor thereto) or any of their respective Affiliates, or any information deemed confidential or proprietary pursuant to any agreement or policy of the Partnership, including, but not limited to, information relating to the Fund’s financial performance results, rates of return (i.e., track record of the Fund or any of the Portfolio Investments), trade secrets or the systems, formulae, analyses, business models and other material ideas developed and reduced to tangible form by or on behalf of the Partnership, the General Partner, the Fund General Partner, the Fund Manager, the Fund, any Portfolio Company (or any predecessor thereto) or any of their respective Affiliates (including by any Partner). Notwithstanding any other provision of this Agreement, the General Partner shall have the right to keep confidential from any Limited Partner for such period of time as the General Partner determines to be reasonable any information that the General Partner believes to be in the nature of trade secrets and any other information (A) the disclosure of which the General Partner believes is not in the best interest of the Partnership, the Fund General Partner, the Fund Manager or the Fund or that could damage the Partnership, the Fund General Partner, the Fund Manager or the Fund or their investments or (B) that the Partnership, the Fund General Partner, the Fund Manager or the Fund is required by law or by agreement with a third Person to keep confidential. Each Limited Partner further agrees that he, she or it will not (and shall cause his, her or its Affiliates or representatives not to) make any statements to the press or other public statements concerning the Fund without the consent of the General Partner.

(c) Non-Competition. Each Principal Limited Partner (while such Principal Limited Partner is employed by the Partnership, the Fund General Partner, the Fund, the Fund Manager or their respective Affiliates and for six months thereafter or such other period as is expressly agreed by the General Partner in writing) shall not (and shall cause such Principal Limited Partner’s Affiliates not to), unless the General Partner has expressly agreed otherwise in writing, become engaged or associated with any entity, whether as a principal, partner, employee, consultant, service provider, shareholder or otherwise (other than as a holder of not in excess of 1% of the outstanding voting shares of any publicly traded company), that is (at the time of such termination) or becomes (within the six months thereafter or such other period as is expressly agreed by the General Partner in writing) engaged in any geographic area in any business (including any private equity fund or similar investment vehicle) that is in competition with the business of the Partnership, the Fund General Partner, the Fund, the Fund Manager, any Portfolio Company or their respective Affiliates.

(d) Non-Disparagement. Each Limited Partner shall not (and shall cause such Limited Partner’s Affiliates not to) disclose to the public or any other Person any false or misleading information concerning, or any information that reflects negatively upon or otherwise disparages, the Partnership, the General Partner, the Fund Manager, the Fund, the Fund General Partner, the Partners, the limited partners of the Fund, or any Portfolio Company, or any of their respective Affiliates or their operations. Each Limited Partner shall not (and shall cause such Limited Partner’s Affiliates not to) conduct himself, herself or itself in a manner adversely affecting the Partnership, the General Partner, the Fund Manager, the Fund, the Fund General Partner, the Partners, the limited partners of the Fund or any Portfolio Company or any of their respective Affiliates, except to the extent necessary in order to comply with any law, order, regulation or ruling applicable to such party (or their respective Affiliates), the Partnership, the General Partner, the Fund Manager, the Fund, the Fund General Partner, the Partners, the limited partners of the Fund or any Portfolio Company or any of their respective Affiliates.

(e) Cooperation. Each Principal Limited Partner following his or her termination of employment for any reason and without payment of any additional compensation (other than reimbursement of such Principal Limited Partner’s reasonable expenses), shall (i) cooperate, in a timely and reasonable manner, with the General Partner, the Fund General Partner and the Fund Manager in respect of all regulatory and litigation matters relating to such Principal Limited Partner’s employment or area of responsibility at the Partnership, the Fund, the Fund General Partner, the Fund Manager or any Portfolio Investment, whether or not such matters commenced at the time of termination, and (ii) provide the Partnership, the General Partner, the Fund, the Fund General Partner or the Fund Manager at their request with any and all documents, materials or information in such Principal Limited Partner’s possession relating to such regulatory or litigation matters other than any such documents, materials or information such Principal Limited Partner is required by law to keep confidential.

(f) Other Remedies; Payment of Expenses. The Partnership shall have the right to pursue all remedies at law or in equity available to it with respect to any of the covenants set forth in this Section 3.2 (including, without limitation, the right to seek an injunction to prevent a breach of any of the aforementioned covenants). The Partners agree to submit to the jurisdiction of any court in which the Partnership pursues the remedies referenced in the preceding sentence. Notwithstanding any other provision of this Agreement, each Limited Partner shall pay on demand (and the Partnership may withhold any amounts otherwise distributable to such Principal Limited Partner to pay) all costs and expenses (including reasonable attorneys’ fees) incurred by or on behalf of the Partnership in connection with the enforcement of these covenants against such Limited Partner and any such payment shall not constitute a Capital Contribution to the Partnership.

(g) Reasonableness of Provisions.  The Partners agree that the provisions of this Section 3.2 are reasonable, have been agreed to in good faith and are not more restrictive than is necessary to protect the legitimate interests of the Partners.”

“	ARTICLE IV
	LIABILITY, EXCULPATION AND INDEMNIFICATION

…

4.2 Exculpation.

(a) Generally. No Covered Person shall be liable to the Partnership or any Partner for any act or omission taken or suffered by such Covered Person in good faith and in the reasonable belief that such act or omission is in or is not contrary to the best interests of the Partnership and is within the scope of authority granted to such Covered Person by this Agreement, provided that such act or omission does not constitute Disabling Conduct of the Covered Person. No Partner shall be liable to the Partnership or any Partner for any action taken by any other Partner.

…

4.3 Indemnification.

(a) General.  The Partnership shall and hereby does, to the fullest extent permitted by applicable law, indemnify, hold harmless and release (and each Partner does hereby release) each Covered Person from and against any and all claims, demands, liabilities, costs, expenses, damages, losses, suits, proceedings and actions, whether judicial, administrative, investigative or otherwise,of whatever nature, known or unknown, liquidated or unliquidated (‘Claims’), that may accrue to or be incurred by any Covered Person, or in which any Covered Person may become involved, as a party or otherwise, or with which any Covered Person may be threatened, relating to or arising out of the investment or other activities of the Partnership, or activities undertaken in connection with the Partnership, or otherwise relating to or arising out of this Agreement, including amounts paid in satisfaction of judgments, in compromise or as fines or penalties, and counsel fees and expenses incurred in connection with the preparation for or defense or disposition of any investigation, action, suit, arbitration or other proceeding (a ‘Proceeding’), whether civil or criminal (all of such Claims and amounts covered by this Section 4.3, and all expenses referred to in Section 4.3(c), are referred to collectively as ‘Damages’), only to the extent that (i) such Covered Person has not committed any act constituting Cause and has acted in a manner reasonably believed to be in or not opposed to the best interest of the Partnership, the General Partner, the Fund General Partner or the Fund and (ii) such Damages did not arise primarily from Disabling Conduct of such Covered Person.”

“	ARTICLE VI
	DISTRIBUTIONS; WITHHOLDING

6.1 Distributions.

(a) Timing and Form of Distributions. On or after each date on which the Fund General Partner makes a distribution to the Partnership, subject to the other provisions of this Agreement, the Partnership shall, after establishing reserves for anticipated obligations or commitments of the Partnership, make a distribution pursuant to Section 6.1(b) of the amount distributed to the Partnership from the Fund General Partner.

(b) Making of Distributions. Subject to the other provisions of this Agreement, distributions shall be made as follows:

(i) Distributions Attributable to Capital in the Fund and Other Non-Carry Distributions. Capital Distributions and Other Non-Carry Distributions shall be distributed among the Partners in proportion to each Partner’s aggregate Capital Contributions.

(ii) Distributions Attributable to Carried Interest.

(A) Carried Interest Distributions shall be distributed among the Limited Partners in proportion to a fraction, the numerator of which is each Limited Partner’s Points Allocation and the denominator of which is the Maximum Points Allocation.

(B) Any Carried Interest Distributions not distributed among the Limited Partners as described pursuant to Section 6.1(b)(ii)(A) shall be distributed to one or more Limited Partners as determined by the General Partner in its sole discretion.

…”

“	ARTICLE VII
	INACTIVE PARTNERS; REALLOCATION

7.1 Designation and Rights of an Inactive Partner.

(a) Designation of Inactive Partner. Unless the General Partner determines otherwise, a Limited Partner shall become an ‘Inactive Partner’ under any of the following circumstances (each, a ‘Trigger Event’): from and after the earliest date on which such Limited Partner (i) ceases to be an employee of the Fund Manager or its Affiliates or to perform services for the Partnership, Fund, the Fund Manager or their Affiliates (on behalf of the Fund) for any reason (whether because of such Limited Partner’s death or Disability); (ii) gives notice of such Limited Partner’s voluntary termination as an employee of the Fund Manager or its Affiliates; (iii) is given notice of such Limited Partner’s involuntary termination as an employee of the Fund Manager or its Affiliates; or (iv) commits any act (or failure to act) constituting Cause.

(b) Rights of Inactive Partner. Except as may otherwise be provided by the Act, whenever the act, vote, consent or decision of one or more of the Limited Partners is required or permitted pursuant to this Agreement (including any vote of the Investment Committee), an Inactive Partner shall not be entitled to perform such act, to participate in such vote (unless the Partnership is in dissolution and such vote is made pursuant to section 15 of the Act) or consent or to make such decision; and except as provided herein such act, vote, consent or decision shall be performed, tabulated or made as if such Inactive Partner were not a Partner.

(c) Amendments to Points on the Partnership Register. Unless otherwise agreed to by the General Partner, upon the occurrence of a Trigger Event such Inactive Partner’s Points Allocation shall, in each case, be adjusted by the General Partner to equal the applicable percentage (as set forth below, the ‘Applicable Percentage’) of such Points Allocation. The General Partner shall,without the consent of the Limited Partners, amend the Partnership Register to adjust the Points Allocation of the relevant Inactive Partner set forth on the Partnership Register accordingly, and the amount by which such Inactive Partner’s Points Allocation is reduced pursuant to this Section 7.1 shall be forfeited and reallocated pursuant to Section 7.2.

Applicable Percentages for a Limited Partner who becomes an Inactive Partner:

If the Trigger Event occurs:	Applicable Percentage
Before the first anniversary of the latter of (x) the Final Closing and (y) the Initial Date of such Limited Partner:	0%
Thereafter but before the fourth anniversary of the Initial Date of such Limited Partner:	20.24% plus 1.66% for each month after the first anniversary of the Initial Date of such Limited Partner
On or after the fourth anniversary of the Initial Date of such Limited Partner:	80.08% plus 0.83% for each month after the fourth anniversary of the Initial Date of such Limited Partner
On or after the sixth anniversary of the Initial Date of such Limited Partner:	100%

provided that:

(i) if a Limited Partner becomes an Inactive Partner due to voluntary resignation within three years from the Initial Date, the Applicable Percentage for such Inactive Partner shall be equal to 0.7 multiplied by the Applicable Percentage otherwise provided above,

(ii) if a Limited Partner becomes an Inactive Partner due to death or Disability, the Applicable Percentage for such Inactive Partner shall be increased by 20%,

(iii) if a Limited Partner becomes an Inactive Partner due to Termination without Cause, the Applicable Percentage for such Inactive Partner shall be increased by (A) the Pro Rata Daily Amount (if any) and (B) an additional 5%,

(iv) if a Limited Partner becomes an Inactive Partner due to Termination with Cause, the Applicable Percentage for such Inactive Partner shall be equal to 0.05 multiplied by the Applicable Percentage otherwise provided above,

(v) to the extent proceeds from a Portfolio Investment are actually received by the Fund prior to such Limited Partner being deemed to have become an Inactive Partner (but not to the extent proceeds are actually received thereafter), the Applicable Percentage with respect to Carried Interest Distributions relating to such Portfolio Investment shall be 100%, and

(vi) in the case of each of items (ii) and (iii) above, in no event shall the Applicable Percentage for a Limited Partner that has become an Inactive Partner exceed 100%;

and provided, further, that if a Limited Partner is terminated for Cause and it is ultimately determined by a court of competent jurisdiction in a decision that is not subject to appeal that the event due to which the determination of Cause was made either did not occur or was not of a nature as to constitute Cause, then for purposes of this Agreement it shall be deemed that such Limited Partner was terminated without Cause as of the date on which such Limited Partner was terminated for Cause, and such Limited Partner will receive within 30 days (or as soon as practicable thereafter) all amounts such Limited Partner would have received had such Limited Partner been terminated without Cause on such date; and provided, finally, that the General Partner, in its sole discretion, may deem the Initial Date of any Limited Partner for the purposes of this Agreement to fall on a date earlier than such Limited Partner’s actual Initial Date (but in no event earlier than January 1, 2005).  Nothing in this Section 7.1(c) shall affect any distribution already made or required to have been made to a Limited Partner prior to such Limited Partner becoming an Inactive Partner.”

“	ARTICLE XI
	DEFINITIONS

11.1 Definitions. As used herein the following terms have the meanings set forth below:

‘Affiliate’ shall mean, with respect to any specified Person, a Person that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, the Person specified.

‘Cause’ shall mean, with respect to a Limited Partner:

(a) a failure by such Limited Partner to comply in a material respect with or a material breach by such Limited Partner of any (i) securities law of any jurisdiction or any rule or regulation of a regulatory or self-regulatory agency with jurisdiction over the activities of the Fund, the General Partner, the Partnership, the Fund General Partner, the Fund Manager or any of their Affiliates or (ii) policy of the General Partner, the Partnership, the Fund General Partner, the Fund Manager or any of their Affiliates, provided that, in the case of this item (ii), such failure or breach has caused, or would reasonably be expected to cause, a material adverse effect on the Fund, the Manager, any Portfolio Company or any of their respective Affiliates, and provided, further that a Limited Partner shall not be held to have breached a law, rule, regulation or policy (for the purposes of this definition of Cause) to the extent such Limited Partner relied in good faith on the advice of the General Partner’s internal or external counsel or accountants;

(b) …

(c) a failure by such Limited Partner to comply with or breach by such Limited Partner of any provision of Section 3.2 or 6.4.

‘Covered Person’ shall mean any Partner, any Person that directly or indirectly, through one of more intermediaries, controls, is controlled by, or is under common control with the Partnership; any officers, directors, shareholders, controlling Persons, partners,members, employees, representatives or agents of a Partner; or any officer, employee or agent of the Partnership; or any Person who was, at the time of the act or omission in question, such a Person.

‘Disabling Conduct’ shall mean, with respect to any Person, a material violation of this Agreement by such Person that, if curable, is not cured within 30 days after a written notice describing such violation has been given to such Person by the General Partner (or, if such Person is the General Partner, by any Limited Partner); such Person’s conviction of a felony; a willful violation of law by such Person having a material adverse effect on the Partnership (or its assets); fraud, willful malfeasance or gross negligence by or of such Person; or reckless disregard of duties by such Person in the conduct of such Person’s office. Notwithstanding the provisions of Section 12.10, for purposes of this Agreement, ‘gross negligence’ shall have the meaning given such term under the laws of the State of Delaware.

…

‘Fund Manager’ shall mean SAIF Management II Ltd, and any successor thereto.

‘Inactive Partner’ shall have the meaning set forth in Section 7.1(a).

‘Termination for Cause’ shall mean the involuntary termination of a Limited Partner’s employment with the Fund Manager or its Affiliates for Cause.

‘Termination without Cause’ shall mean the involuntary termination of a Limited Partner’s employment with the Fund Manager or its Affiliates without Cause.”

“	ARTICLE XII
	MISCELLANEOUS

12.1 Amendments. This Agreement and any Schedule hereto may be modified or amended, and any provision hereof may be waived, by a writing signed by the General Partner in its sole discretion, provided that, except as otherwise expressly provided herein, no such modification, amendment or waiver that would adversely affect the rights of the Limited Partners under this Agreement, shall be effective without the written consent of Limited Partners, other than Inactive Partners, that at the time in question have Capital Commitments aggregating in excess of 2/3 of all Capital Commitments of all Limited Partners, other than Inactive Partners, and provided, further, that, except as otherwise expressly provided herein, no such modification, amendment or waiver that would (i) increase the Capital Commitment of a Limited Partner, (ii) extend or increase any financial obligation or liability of a Limited Partner or (iii) otherwise materially and adversely affect the rights of a Limited Partner in a manner that discriminates against such Limited Partner vis-à-vis the other Limited Partners under this Agreement, shall be effective without the written consent of such Limited Partner. In addition to the foregoing, the General Partner has full authority without the consent of the Limited Partners to interpret any ambiguous provisions of this Agreement and to correct or supplement any provision herein that may be inconsistent with any other provision of this Agreement.

12.12   Entire Agreement.  This Agreement constitutes the entire agreement among the Partners with respect to the subject matter hereof and supersedes any prior agreement or understanding among them with respect to such subject matter.” 

THE LEGAL ISSUES

The meaning and effect of the SA

47.  The SA was not drafted by lawyers.  Mr Zhou produced drafts which were then negotiated between himself and Mr Yan. It was common ground that the SA should be construed in accordance with Hong Kong law which is no different than the applicable English law.

48.  Authoritative guidance on how a court should undertake the interpretation of contracts was provided relatively recently by Lord Neuberger(with whom Lords Sumption and Hughes agreed) in Arnold v Britton & ors [2015] UKSC 36.  In paragraph 15 of his judgment, Lord Neuberger said:

“ 15. When interpreting a written contract, the court is concerned to identify the intention of the parties by reference to ‘what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean’, to quote Lord Hoffmann in Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] 1 AC 1101, para 14. And it does so by focussing on the meaning of the relevant words, in this case clause 3(2) of each of the 25 leases, in their documentary, factual and commercial context. That meaning has to be assessed in the light of (i) the natural and ordinary meaning of the clause, (ii) any other relevant provisions of the lease, (iii) the overall purpose of the clause and the lease, (iv) the facts and circumstances known or assumed by the parties at the time that the document was executed,and (v) commercial common sense, but (vi) disregarding subjective evidence of any party’s intentions. In this connection, see Prenn at pp 1384–1386 and Reardon Smith Line Ltd v Yngvar Hansen-Tangen (trading as HE Hansen-Tangen) [1976] 1 WLR 989, 995–997 per Lord Wilberforce, Bank of Credit and Commerce International SA (in liquidation) v Ali [2002] 1 AC 251, para 8, per Lord Bingham, and the survey of more recent authorities in Rainy Sky, per Lord Clarke at paras 21–30.”

49.  Lord Neuberger then went on to emphasis seven factors, the first five of which are relevant to this case:

“ 17. First, the reliance placed in some cases on commercial common sense and surrounding circumstances (eg in Chartbrook, paras 16–26) should not be invoked to undervalue the importance of the language of the provision which is to be construed. The exercise of interpreting a provision involves identifying what the parties meant through the eyes of a reasonable reader, and, save perhaps in a very unusual case, that meaning is most obviously to be gleaned from the language of the provision. Unlike commercial common sense and the surrounding circumstances, the parties have control over the language they use in a contract. And, again save perhaps in a very unusual case, the parties must have been specifically focussing on the issue covered by the provision when agreeing the wording of that provision.

18. Secondly, when it comes to considering the centrally relevant words to be interpreted, I accept that the less clear they are, or, to put it another way, the worse their drafting, the more ready the court can properly be to depart from their natural meaning. That is simply the obverse of the sensible proposition that the clearer the natural meaning the more difficult it is to justify departing from it. However, that does not justify the court embarking on an exercise of searching for, let alone constructing, drafting infelicities in order to facilitate a departure from the natural meaning. If there is a specific error in the drafting, it may often have no relevance to the issue of interpretation which the court has to resolve.

19. The third point I should mention is that commercial common sense is not to be invoked retrospectively. The mere fact that a contractual arrangement, if interpreted according to its natural language, has worked out badly, or even disastrously, for one of the parties is not a reason for departing from the natural language. Commercial common sense is only relevant to the extent of how matters would or could have been perceived by the parties, or by reasonable people in the position of the parties, as at the date that the contract was made. Judicial observations such as those of Lord Reid in Wickman Machine Tools Sales Ltd v L Schuler AG [1974] AC 235, 251 and Lord Diplock in Antaios Cia Naviera SA v Salen Rederierna AB (The Antaios) [1985] AC 191, 201, quoted by Lord Carnwath at para 110, have to be read and applied bearing that important point in mind.

20. Fourthly, while commercial common sense is a very important factor to take into account when interpreting a contract, a court should be very slow to reject the natural meaning of a provision as correct simply because it appears to be a very imprudent term for one of the parties to have agreed, even ignoring the benefit of wisdom of hindsight. The purpose of interpretation is to identify what the parties have agreed, not what the court thinks that they should have agreed. Experience shows that it is by no means unknown for people to enter into arrangements which are ill-advised, even ignoring the benefit of wisdom of hindsight, and it is not the function of a court when interpreting an agreement to relieve a party from the consequences of his imprudence or poor advice. Accordingly, when interpreting a contract a judge should avoid re-writing it in an attempt to assist an unwise party or to penalise an astute party.

21. The fifth point concerns the facts known to the parties.  When interpreting a contractual provision, one can only take into account facts or circumstances which existed at the time that the contract was made, and which were known or reasonably available to both parties.  Given that a contract is a bilateral, or synallagmatic, arrangement involving both parties, it cannot be right, when interpreting a contractual provision, to take into account a fact or circumstance known only to one of the parties.”

50.  Clause 1 of the SA is in effect a recital recording that Mr Zhou would not be joining Fund III but was to depart from SAIF to form a new fund (“Newco”) that would focus on investing in earlier stage companies with smaller capital needs than Fund III.

51.  Clause 2 provides that Mr Zhou would not solicit external investors (“LPs”) for investment in Newco before the earlier of the second closing date of Fund III or 1 April 2007 (“the Marketing Date”), after which date Mr Zhou was to be free to solicit LPs, including SAIF II and SAIF III LPs. (It is common ground that by reason of the events that happened, the Marketing Date is 7 February 2007).

52.  Clause 3 provides:

“ Transition: SAIF will, whenever it determines, make an announcement that Joe has become a Venture Partner and will remain a Venture Partner until the Marketing Date. As a Venture Partner, Joe will provide services to SAIF and will serve on behalf of SAIF as a director of existing boards or resign from existing boards responsibilities (and help transition those responsibilities) at the reasonable direction of SAIF until the Marketing Date. Upon the Marketing Date, Joe shall no longer be a Venture Partner and shall resign from all board responsibilities in his capacity as a SAIF representative.”

53.  Clauses 4, 6, 9, 10 are of no relevance.

54.  Clause 5 provides that Mr Zhou would receive 100% of his current salary and benefits and normal performance bonus at SAIF BJ and Sunstep for work performed to the end of 2006.  Thereafter he was to receive 50% of his salary and benefits.

55.  Clause 7 provides:

“ Other Provisions. SAIF and Joe will agree to a mutual non-disparagement and cooperation provision. As requested, Joe will not solicit any SAIF professional staff prior to October 31 2007. Except as explicitly amended by the provisions above, Joe remains subject to the obligations in previous agreements entered into between Joe and SAIF that are related to confidentiality, return of materials, etc. For the avoidance of doubt it is hereby acknowledged and agreed that as of the Marketing Date Joe shall not be subject to any non-compete or similar restriction (including any provision that would reduce Joe’s vested interests) by reason of forming Newco or joining another fund. The provisions in this memo supersede any previous agreements entered into between Joe and SAIF.”

56.  Clause 8 provides:

“ Vesting: Joe will have an additional nine months of vesting from November 1, 2006 with respect to carry interest or points in SAIF Partners II LP. With this additional vesting Joe’s final vested percentage will be 51.78%. The non-vested portion of the additional nine months vesting shall continue to be vested as long as Joe has compliant [sic] with the provisions and obligations under the [sic] this separation agreements [sic]. For the avoidance of doubt, there shall be no recourse or reduction once the carry interest is vested.”

57.  Clause 11 provides that save for the items specified, Mr Zhou would not be entitled to any other compensation from SAIF and under Clause 12 Mr Zhou agreed that his unfunded remaining capital commitments as a Partner to Fund II (total US$320,000) would be reallocated to other individuals designated by SAIF, whilst his personal capital commitment in Fund II (US$500,000) would remain in force.

58.  It was submitted on behalf of Mr Zhou that: (A) by reason of Clause 8, including in particular the last sentence thereof, the Defendants were contractually debarred from reducing Mr Zhou’s final vested percentage of 51.78%; (B) further or in the alternative, by reason of the last sentence of Clause 7, the whole of the ALPA, save for the obligations relating to “non-disparagement, cooperation and confidentiality, return of materials, etc” was superseded by the SA; and (C) on the true interpretation of the SA, Mr Zhou was free from any covenants contained in the ALPA as from the Marketing Date (7 February 2007) or at the latest 28 February 2007.

59.  The Defendants contended that:

 (I) the SA cannot have been intended to supersede ALPA completely because:

 (i) Mr Zhou’s entitlement to a vested percentage of 51.78% predicates an on-going entitlement to Carried Interest Distributions under Art 6.1(b)(ii) of the ALPA; and

 (ii) by its terms (eg Clauses 4 and 7) the SA contemplates the continuing operation of the covenants contained in Arts 3.2(d) and 3.2(e);

 (II) it is only in relation to the power to police breaches of the SA contemplated by the condition in Clause 8 that Mr Zhou be compliant with the SA, that the words, “there shall be no recourse reduction once the carry interest is vested” is intended to apply;

 (III) such parts of the SA that might constitute a release by the Defendants of any claim they may have had against Mr Zhou founded on Cause was not binding on the Defendants on the ground that Mr Zhou was guilty of sharp practice in not declaring that the Defendants had such a claim; and

 (IV) alternatively to (III), the SA stood to be rescinded and/or the defendants were entitled to damages on the ground that Mr Zhou had falsely represented that he had not misconducted himself in a manner constituting Cause, Mr Zhou being under a duty to inform Mr Yan that he (Mr Zhou) had been guilty of Cause in the respects now alleged against him.

60.  In their written submissions, the Defendants pleaded that the SA was void by reason of the Defendants’ unilateral mistake that there were no grounds to terminate Mr Zhou for Cause.  In his closing submissions, however, Mr Pow SC told the Court he would rather rely on the contention that the SA was rendered voidable by a misrepresentation by Mr Zhou that he had not been guilty of “Cause”.

61.  In my judgment, the words, “[t]he provisions in this memo supersede any previous agreements entered into between Joe and SAIF” at the end of Clause 7, do not have the effect of extinguishing the entirety of the ALPA.  This, in my view, is clear from the words of Clause 7 itself that provide that Mr Zhou will remain subject to the obligations in previous agreements entered into between Mr Zhou and SAIF that are related to confidentiality, return of materials, etc.  Further, I think that the meaning and effect of the words in the last sentence of Clause 7 is that the amendments made by the SA to the ALPA as it applies to Mr Zhou supersede those original ALPA provisions from the date of the SA.

62.  Turning to Clause 8, in my judgment the natural and ordinary meaning of this provision is that, once the additional prospective nine months of vesting has vested (giving a final vested percentage of 51.78%), that final percentage is forever after fixed and cannot be reduced.  Mr Yan is an experienced and astute business man.  It was open to him to have insisted on a warranty from Mr Zhou that he had not committed any act (or failed to do an act) constituting Cause, the breach of which would reduce his Applicable Percentage to a given figure, but Mr Yan did not do so.

63.  In my view, by virtue of Clause 7, paragraphs (a), (b) and (c) of the definition of Cause and the covenants contained in Art 3.2(a) – (e) continued to apply to Mr Zhou until he left his employment with SAIF Partners, which was originally envisaged to occur on the Marketing Date but which in fact occurred on 28 February 2007.

64.  I reach the conclusion that under the SA these provisions were to cease to apply after the termination of Mr Zhou’s employment with SAIF Partners having regard in particular to the wording of Clause 3, as well as the fourth sentence of Clause 7.  However, the effect of the SA was not to prevent conduct by Mr Zhou after he left SAIF’s employment from amounting to a breach of fiduciary owed to D1.

65.  In support of submission (III) Mr Pow cited Bank of Credit and Commerence International SA v Ali et al [2001] UKHL 8.  There, the question was whether an agreement with the appellant bank signed by the bank’s ex-employees by which they agreed the terms therein set out “in full and final settlement of all or any claims … of whatsoever nature that exist or may exist” precluded a claim for damages for being put at a disadvantage in the labour market by reason of being associated with the dishonest manner in which the appellant had carried on business.  The House of Lords held that there were no special rules of interpretation applicable to a general release, which was to be construed in the same way as any other contract.  So construed, the agreements did not release the appellant from a claim for disadvantage in the labour market since neither party could have realistically supposed that such a claim was a possibility.In the course of their respective judgements, Lords Nicholls and Hoffmann made the following observations:

“ [32] Thus far I have been considering the case where both parties were unaware of a claim which subsequently came to light.Materially different is the case where the party to whom the release was given knew that the other party had or might have a claim and knew also that the other party was ignorant of this. In some circumstances seeking and taking a general release in such a case, without disclosing the existence of the claim or possible claim, could be unacceptable sharp practice. When this is so, the law would be defective if it did not provide a remedy.” (Lord Nicholls)

“ [69] My Lords, I think that this argument presses the principle in Bell v Lever Brothers Ltd too far. It was not a case which concerned a general release. A transaction in which one party agrees in general terms to release another from any claims upon him has special features. It is not difficult to imply an obligation upon the beneficiary of such a release to disclose the existence of claims of which he actually knows and which he also realises may not be known to the other party. There are different ways in which it can be put. One may say, for example, that inviting a person to enter into a release in general terms implies a representation that one is not aware of any specific claims which the other party may not know about. That would preserve the purity of the principle that there is no positive duty of disclosure. Or one could say, as the old Chancery judges did, that reliance upon such a release is against conscience when the beneficiary has been guilty of a suppressio veri or suggestio falsi. On a principle of law like this, I think it is legitimate to go back to authority, to Lord Keeper Henley in Salkeld v Vernon, 1 Eden 64, 69, where he said: ‘no rule is better established than that every deed obtained on suggestio falsi, or suppressio veri, is an imposition in a court of conscience.’ (Lord Hoffmann)

66.  In support of submission (IV), the Defendants cited the following passage in Jonathan Parker LJ’s judgment in Conlon & ors v Simms [2008] 1 WLR 484:

“ [127] In my judgment there can be no doubt that the principle of caveat emptor does not apply to the making of a partnership agreement, and that in negotiating such an agreement a party owes a duty to the other negotiating parties to disclose all material facts of which he has knowledge and of which the other negotiating parties may not be aware. This was made clear as long ago as 1932 in the passage from the judgment of Lord Atkin in Bell v Lever Bros Ltd [1932] AC 161, 227… In that passage, Lord Atkin said [1932] AC 161, 227:

‘ Ordinarily the failure to disclose a material fact which might influence the mind of a prudent contractor does not give the right to avoid the contract.  The principle of caveat emptor applies outside contracts of sale.  There are certain contracts expressed by law to be contracts of the utmost good faith, where material facts must be disclosed; if not, the contract is voidable.  Apart from special fiduciary relationships, contracts for partnership and contracts for insurance are the leading instances.  In such cases the duty does not arise out of contract; the duty of a person proposing an insurance arises before a contract is made, so of an intending purchaser.’  (Emphasis supplied)”

67.  In my judgment, these judicial observations have no application in the instant case.  The SA was not a general release.  It was an agreement governing a range of matters arising out of the departure of Mr Zhou from SAIF Partners of which his applicable percentage was but one.  Moreover, it did not release Mr Zhou from all claims arising out of the misconduct relied on by the Defendants, as is evidenced by the Counterclaim for damages the Defendants brought for the losses alleged to have been suffered by the Defendants by reason of such misconduct.  I am also far from satisfied that Mr Zhou knew that either of the Defendants had a claim against him to reduce his Applicable Percentage under Article 7 of the ALPA.  No suggestion was made to him in cross-examination that he had such knowledge and I am not prepared to infer that he did so.  As at the date of the SA (11 December 2006) he had been involved in the granting of the US$2.5 million loan by My Show personally to Zhou Yang and he had taken no steps to obtain a declaration of trust in respect of the establishment by Zhou Yang of My Show Ad.  He had also amended the My Show slides prepared by Mr Zhao for an Advisory Board Meeting due to be held later that month when Mr Zhou was to report to LPs on the progress of the My Show project.  In my judgment, Mr Zhou very likely thought he was entitled in the circumstances then obtaining to proceed in the manner he did in respect of the US$2.5 million loan and My Show Ad on the basis that he could trust Zhou Yang to act in the best interests of the WOFE.  And so far as the amendments to the slides are concerned, the Defendants have not proved to the requisite standard that Mr Zhou made those changes pursuant to a settled intention to join in Zhou Yang’s plans for Xinrui and Mobile Winks.  I am therefore of the view that Mr Zhou was not under a duty to make any disclosure about having changed the slides or that he was entertaining the possibility of investing in a company which Zhou Yang intended should take forward Diandao (Point Advertising) in competition with the WOFE and My Show.

The meaning and effect of the ALPA

68.  The ALPA is expressed to be governed by the law of the Cayman Islands.  It was common ground that the law of the Cayman Islands on the construction of contracts is the same as English law on that topic.

69.  The expression “Termination with Cause” in Section 7.1(c)(iv) (“proviso (iv)”) is not defined in Article 12, but “Termination for Cause” is defined as meaning, “the involuntary termination of a Limited Partner’s employment with the Fund Manager or its Affiliates for Cause”.

70.  “Fund Manager” is defined as meaning “SAIF Management II Ltd, and any successor thereto” and, pursuant to the definition of “Affiliate”, SAIF Management II Ltd is an affiliate of SAIF BJ, D1 and D2.

71.  Assuming that Mr Zhou was employed not only by SAIF BJ, but also by any of the affiliates identified in paragraph 70 above, those employments were terminated as a result of the SA and his ceasing to work in respect of Fund II as from 28 February 2017.  This termination was therefore clearly not a dismissal but by consensual arrangement without any reference to any misconduct or “Cause” on the part of Mr Zhou.

72.  It was submitted on behalf of the Defendants that if, following a consensual termination that is not expressed to be related to, or by reason of any Cause, it is discovered that the Limited Partner had been guilty of conduct amounting to Cause, his employment will have been terminated “with” Cause within proviso (iv).  It was submitted that the word “with” does not connote a causal connection between the termination and “Cause” so that a termination preceded by unknown acts of Cause is within proviso (iv).  Thus, if the Limited Partner’s conduct fell within the definition of “Cause”, it would matter not that the Cause was only discovered after the termination and was not causally linked to the termination or that the termination had been consensual and not a dismissal.

73.  I reject this submission.  In my judgment it is clear from the use of the word “for” in the first line of the paragraph following Art 7.1(c)(vi) (“if a Limited Partner is terminated for Cause …”) and in the Definition of “Termination for Cause”, that the word “with” is used interchangeably with “for” in Article 7 of the ALPA.  And the word “for” plainly signifies a causal connection between the termination and the Cause so that the termination must at the time it occurs be by reason of conduct amounting to “Cause”.

74.  I am also of the view that the definition of “Termination for Cause” must be taken to be the applicable definition for “Termination with Cause” in proviso (iv) and that the termination of Mr Zhou’s employment(s) is not covered by that definition because that termination was not “involuntary” (viz in the nature of a dismissal) but voluntary in the nature of an agreed termination as provided for in the SA.

75.  It was also submitted that the trigger event in paragraph (iv) of Art 7.1(a) (“commits any act (or failure to act) constituting “Cause”) should lead to the conclusion that a consensual termination without reference to “Cause”, followed by the discovery of “Cause”, amounts to “Termination with Cause” within proviso (iv).  This contention I also reject.  Section 7.1(c) provides: “Unless otherwise agreed to by the General Partner, upon the occurrence of a Trigger Event such Inactive Partner’s Points Allocation shall, in each case, be adjusted by the General Partner to equal the applicable percentage (as set forth below, …) of such Points Allocation”.  The purpose of Section 7 is therefore to specify both when a Limited Partner will become an Inactive Partner and what the Inactive Partner’s applicable percentage will be on the occurrence of applicable trigger event.

76.  The applicable percentage where the Limited Partner becomes an Inactive Partner due to “Termination with Cause” is “set forth below” in proviso (iv).  There is no other provision “set forth below” that provides for an applicable percentage where a Limited Partner commits an act (or fails to act) constituting fraud.  Everything therefore depends on the meaning of proviso (iv) and in my opinion paragraph (iv) of Section 7.1(a) is plainly intended to be construed consistently with proviso (iv).

77.  I should emphasise that I do not consider proviso (iv) to be ambiguous, that is to say, reasonably capable of two differing meanings.

78.  However, even if there were an ambiguity, I would still hold that the interpretation I have given above to proviso (iv) is the interpretation that is to be preferred.  It is a well-known canon of construction that when interpreting a clause in a contract it should be read in its context.  Here, the general context is a highly detailed agreement drafted by skilled, expert lawyers which is proffered to prospective limited partners like Mr Zhou on a “take it or leave it” basis.  The specific context is a set of provisions (Article 7 and the definition of “Cause”) that provide for the forfeiture of an accrued right to Carried Interest that is as far from being a genuine pre-estimate of any loss arising from the “Cause” as it is possible to imagine.  I would therefore construe Art 7.1(a)(iv) and proviso (iv) strictly in favour of the profferee, Mr Zhou, rather in favour of the SAIF parties to the ALPA.

79.  In paragraph 57B of the Re-Amended Defence and Counterclaim, the Defendants plead that a term is to be implied into the ALPA to the effect that if a Limited Partner commits any act (or failure to act) constituting Cause, the Applicable Percentage for such Limited Partner shall be multiplied by the Applicable Percentage otherwise provided in Article 7.1, regardless of whether the Limited Partner is an Inactive Partner.  The Defendants plead that such a term is necessary in order to give business efficacy to the ALPA and/or it represents an obvious, unexpressed intention of the parties to the ALPA.

80.  Mr Pow did not argue for this implied term in his closing submissions.  This was a sensible approach.  If he had done so, I would have had no difficulty in rejecting the submission on the basis that the postulated implied term was not necessary to give business efficacy to the ALPA and nor does it represent an obvious unexpressed intention of the parties.  Suffice it to say that the ALPA does not exclude an action for damages against a former Limited Partner who has caused loss by reducing the 20% profit payable by Fund II to D1 for distribution under Art 6 of the ALPA.

81.  It would have been relatively easy for the draftsman of the ALPA to have inserted a provision in Art 7.1 along the following lines: “If it be discovered after a Limited Partner becomes an Inactive Partner that his conduct whilst a Limited Partner amounted to ‘Cause’, the Applicable Percentage of such Inactive Partner from the time of such conduct shall be equal to 0.05 multiplied by the Applicable Percentage otherwise provided above.”  However, the omission of such a provision is no reason for construing Art 7 as if it contained such wording, see Lord Neuberger’s fourth factor in paragraph 20 in Arnold v Britton.

82.  By a letter dated 23 July 2012 addressed to all Limited Partners (including all Inactive Partners) signed by Mr Yan “For and on behalf of SAIF II GP Capital Ltd General Partner of SAIF Partners II LP”, the following notice was given:

 (a) insofar as Article 7.1(c)(iv) is ambiguous, the General Partner invokes its power of interpretation pursuant to Article 12.1 and declares that the meaning of Article 7.1(c)(iv) is that if a Limited Partner becomes an Inactive Partner due to Cause, the Applicable Percentage for such Inactive Partner shall be equal to 0.05 multiplied by the Applicable Percentage otherwise provided above; and

 (b) insofar as Article 7.1(c)(iv) is inconsistent with any other provision of the Amended LPA, the General Partner invokes its power of correction pursuant to Article 12.1 to correct Article 7.1(c)(iv) so that it reads as follows:

“ (iv) if a Limited Partner becomes an Inactive Partner due to Termination with Cause, the Applicable Percentage for such Inactive Partner shall be equal to 0.05 multiplied by the Applicable Percentage otherwise provided above.

Further, the above question with respect to interpretation of the Amended LPA has been made and determined pursuant to Article 12.8 of the Amended LPA.”

83.  The Defendants pleaded that proviso (iv) had been amended as set out in the letter of 23 July 2012 and they relied on that letter in their opening submissions and closing submissions, but it did not baulk at all large in their submissions overall.

84.  In my judgment, given the wide potentiality for the power conferred by Art 12.1 to be exercised to the prejudice of individual counterparties to the ALPA, particularly those who have become Inactive Partners, Art 12.1 must be strictly construed in favour of such individuals.  So construed, I find that the notice contained in the letter of 23 July 2012 is ineffectual both as a declaration as to the interpretation of proviso (iv) and as a corrective amendment thereto.  My reasons are as follows.  First, the notice does not specify the respect(s) in which proviso (iv) is ambiguous and nor is proviso (iv) in fact ambiguous; rather, it has only one reasonable meaning, and secondly, the power to interpret or correct under Art 12.1 can only be exercised so as to give rise to consequences adverse to a party under the ALPA where those consequences relate to the conduct that occurred before the issuance of the Art 12.1 notice. Thirdly, the said notice is ineffectual to correct proviso (iv) because the notice fails to identify with which provision or provisions of the ALPA proviso (iv) is inconsistent and because proviso (iv) is not inconsistent with any provision of the ALPA.

The meaning of the word “policy” in the definition of “Cause” in Article 11 of the ALPA

85.  The Defendants concede that SAIF Partners and its affiliated entities had no written “policy” governing the management of their investments.

86.  In my opinion, the word “policy” in paragraph (a)(ii) of the definition contemplates a statement calling itself a “policy” issued by the General Partner, the Partnership, the Fund General Partner, the Fund Manager or any of their Affiliates.  Examples of such a statement are the Policy Against Trading on the Basis of Inside Information, the Policy Against Trading Stock of Restricted Companies, and the Policy of Confidentiality which Mr Zhou covenanted in his contract with SAIF BJ to sign and comply with.

87.  Given that the definition of Cause is part of a set of provisions under which a Limited Partner’s points allocation can be forfeited, and given that the ALPA was proffered to Limited Partners on a “take it or leave it” basis, I think that the definition of Cause should be construed in favour of the Limited Partner where its meaning is ambiguous.

88.  In paragraph 27 of their Re-Amended Defence, the Defendants rely on a “policy” said to be derived from an understanding shared by the Limited Partners that they were expected to do all that was necessary to promote, advance and protect the interests of the 1^st and 2^nd Defendants, Fund II and the companies in which Fund II had invested, as well as SAIF Partners generally, including the taking of active and appropriate steps to diligently supervise and manage the business and financial affairs of the investee portfolio companies so as to protect the interests of SAIF Partners and its affiliated entities, including the 1^st and 2^nd Defendants, Fund II, and the companies in which Fund II had invested.

89.  In paragraph 144 of the Defendants’ closing written submissions,it is contended that Mr Zhou’s behavior in respect of the US$2.5 million loan, “can be characterized as a breach of the ‘policy' of the Partnership to keep tight financial control, such policy having been imposed through the Partner’s demand and [Mr Zhou’s] express agreement of the imposition of special requirements of financial control.”

90.  In my judgment, to the extent that the meanings of “policy” inherent in the Defendants’ pleadings and closing submissions constitute reasonable alternative meanings to the meaning of “policy” postulated above in paragraph 86, preference should be given to the paragraph 86 meaning because a partner would then have little difficulty in identifying what “policy” was caught by the definition, whereas if this were not the meaning of the word “policy” he could well be uncertain as to what was within or without the reach of paragraph (a)(ii) of the definition.

91.  I conclude therefore that the word “policy” in the definition of Cause connotes a statement calling itself a “policy” issued by the General Partner, the Partnership, the Fund General Partner, the Fund Manager or any of their Affiliates. 

The meaning and effect of the provisions falling within Art 3.2

92.  The Defendants contend that Mr Zhou’s dealings with Zhou Yang that were concerned with the development and commercialisation of Diandao (Point Advertising) by Xinrui in competition with the WOFE and My Show constituted solicitation or the encouragement of Zhou Yang to breach the My Show Covenant, contrary to Art 3.2(a)(ii) of the ALPA.  This raises the question whether at all material times My Show was an Affiliate of any of the Fund General Partner, Fund II, the Fund Manager (SAIF Management II Ltd), and the answer is that it was.

93.  I next turn to deal with the meaning and effect of the following words in the last sentence in Art 3.2(d) (Non-Disparagement):

“ Each Limited Partner shall not (and shall cause such Limited Partner’s Affiliates not to) conduct himself, herself or itself in a manner adversely affecting the Partnership, the General Partner, the Fund Manager, the Fund, the Fund General Partner, the Partners, the limited partners of the Fund or any Portfolio Company or any of their respective Affiliates, except to the extent necessary in order to comply with any law, order, regulation or ruling applicable to such party (or their respective Affiliates), the Partnership, the General Partner, the Fund Manager, the Fund, the Fund General Partner, the Partners, the limited partners of the Fund or any Portfolio Company or any of their respective Affiliates.”

94.  In my opinion, read in the context of Art 3.2(d) as a whole, the conduct prohibited by these words is conduct that is injurious to the reputation of the adumbrated entities and not conduct that causes them direct financial loss or direct operational difficulties.  In other words, the last sentence of Art 3.2(d) is equivalent to an obligation not to bring the listed entities into disrepute by, for example, publicly “bad mouthing” them, or by expressing offensive and/or highly controversial views, or by disreputable personal behavior that comes into the public domain and thereby reflects badly on the listed entities.  This wording therefore does not, in my judgment, apply to Mr Zhou’s involvement in the US$2.5 million loan, or his alleged dealings with Zhou Yang concerning: (a) the development and commercialisation of Diandao (Point Advertising) by Xinrui; (b) the development and commercialisation of Color Call technology by Mobile Winks; or (c) Mr Zhou’s alleged failure to ensure that My Show Ad was kept within the structure of the WOFE and My Show.

Mr Zhou’s defence founded on Arts 4.2 and 4.3

95.  Finally, I deal with Mr Zhou’s defence that he is a “Covered Person” for the purposes of Arts 4.2 and 4.3 of the ALPA and is therefore entitled to be indemnified in respect of the claims made against him.

96.  In my judgment, Mr Zhou is a Covered Person for the purposes of Arts 4.2 and 4.3, but the Defendants’ case that Mr Zhou’s Applicable Percentage has been reduced under the provisions of Arts 7.1 and 7.2 would not, if successful, involve rendering Mr Zhou “liable” to the Partnership or any Partner within Art 4.2(a).  Instead, the outcome of a successful reliance on Arts 7.1 and 7.2 by the defendants would be that a prior entitlement of Mr Zhou has been reduced.  Further, to the extent that Mr Zhou might be liable for breach of fiduciary duty to D1 in respect of his dealings with Zhou Yang concerned with Xinrui and Mobile Winks, he would be unable to bring himself within the words, “any act or omission taken or suffered by such Covered Person in good faith and in the reasonable belief that such act or omission is in or is not contrary to the best interests of the Partnership …” in Art 4.2(a).

97.  So far as the entitlement to an indemnity under Art 4.3(a) goes, this does not apply where the Covered Person has committed any act constituting Cause and has acted in a manner not reasonably believed to be in or not opposed to the best interests of the Partnership, the General Partner, the Fund General Partner or the Fund or where the damages claimed arise primarily from Disabling Conduct including fraud, wilful misfeasance or gross negligence or reckless disregard of duties.  Thus, if the Defendants were to establish misconduct constituting Cause and/or breach of fiduciary duty, Mr Zhou would not be entitled to an indemnity under Art 4.3(a).

CONCLUSION ON THE LEGAL ISSUES RAISED BY THE SA AND THE ALPA

98.  The conclusions that follow from my findings on the meaning and effect of the SA and the ALPA are as follows:

 (1) By reason of the final sentence of Clause 8 of the SA, the Defendants are contractually debarred from advancing their claim that Mr Zhou’s applicable percentage is that set out in proviso (iv).

 (2) Even if there is no contractual bar on the Defendants’ case based on “Cause”, that case fails in limine because it is dependent on proviso (iv), and on the true interpretation of that provision and on the unchallenged facts, Mr Zhou did not become “an Inactive Partner due to Termination with Cause” but became an Inactive Partner by virtue of a consensual termination resulting from the SA, this being a termination that was not causally linked to his having committed any act or acts constituting Cause.

 (3) Even if the Defendants’ interpretation of Art 7.1 be correct, so that “Termination with Cause” in proviso (iv) means termination preceded by unknown conduct amounting to Cause:

 (a) the Defendants cannot rely on acts said to constitute Cause committed by Mr Zhou after he had left the employment of SAIF Partners on 28 February 2007; and

 (b) the Defendants’ contentions that Mr Zhou committed acts constituting Cause by failing to comply in a material respect with a “policy” of strict financial control and/or by conducting himself in a manner adversely affecting, inter alios, Fund II, the Fund II General Manager (D1) and the WOFE Defendants, are misconceived in that such conduct does not fall within the definition of Cause.

 (4) There is nothing in the SA or the ALPA that would have prevented the Defendants from bringing a claim for losses suffered as a result of any breach by Mr Zhou of the covenants contained in Art 3.1 and Art 3.2 committed before 28 February 2007.

DID MR ZHOU OWE ANY OF THE DUTIES OF A FIDUCIARY TO D1 AS ASSERTED IN THE DEFENDANTS’ COUNTERCLAIM?

99.  The fiduciary duties the Defendants plead Mr Zhou owed to, inter alios, D1 and D2 include duties not to place his personal interest in conflict with those entities, not to derive a secret profit from his position as a Limited Partner and not to use confidential information for his own benefit.

100.  As recorded above, D1 is a Cayman Islands Exempted Limited Partnership.  It was established under the Cayman Islands’ Exempted Partnership Law (Law 11 of 1991) as amended by Law 7 of 2000, Law 26 of 2001, Law 23 of 2002 and Law 14 of 2006.  It is common ground that the question whether Mr Zhou owed any of the duties of a fiduciary to D1 is to be determined in accordance with Cayman Islands law.

101.  The Court had been put before it three expert reports on Cayman Islands law from Mr Nigel Meeson QC, the late Mr Richard de Lacy QC and Mr John Ross McDonough QC.  All three experts agreed that a limited partner may owe a fiduciary duty to an exempted limited partnership or to an affiliate of the exempted limited partnership by reason of an agreement or relationship between them which gives rise to such duty, in the same way as a fiduciary duty may arise out of any agreement or relationship between two or more parties.

102.  It is not in dispute that the law of the Cayman Islands governing the question whether the ALPA gives rise to any fiduciary duties owed by Mr Zhou to D1 is the same as the applicable English law, which in turn is the same as the applicable law of Hong Kong.

103.  I adopt the following statement of law from para 7-005 of Snell’s Equity (33^rd ed):

“ The categories of fiduciary relationship are not closed. Fiduciary duties may be owed despite the fact that the relationship does not fall within the one of the settled categories of fiduciary relationships, provided the circumstances justify the imposition of such duties…There is … growing judicial support for the view that:

‘ a fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence’. [Bristol & West Building Society v Mothew [1998] Ch 1 at 18]”

104.  As Henry J put it when delivering the judgment of the Privy Council in Arklow Investments Ltd v Maclean [1999] UKPC 51:

“ The concept encaptures a situation where one person is in a relationship with another which gives rise to a legitimate expectation, which equity will recognize, that the fiduciary will not utilize his or her position in such a way which is adverse to the interests of the principal.” [7]

105.  I have also found the following paragraphs in the judgment of Ribeiro PJ in Libertarian Investments Ltd v Hall (2013) 16 HKCFAR 681 to be of valuable assistance:

“ 56. Although the parties’ relationship may be generally non-fiduciary, particular obligations may import fiduciary duties and equitable remedies.

57. Thus, in Hospital Products Ltd v United States Surgical Corp, Mason J noted that in cases where a comprehensive fiduciary relationship does not exist:

‘ … it does not exclude the existence of a more limited fiduciary relationship for it is well settled that a person may be a fiduciary in some activities but not in others.’

58. Similarly, Blanchard, J., in the New Zealand Supreme Court stated:

‘ It is well settled that, even in a commercial relationship ofa generally non-fiduciary kind, there may be aspects which engage fiduciary obligations of loyalty. That is because in the nature of that particular aspect of the relationship one party is entitled to rely upon the other, not just for adherence to contractual arrangements between them, but also for loyal performance of some function which the latter has either agreed to perform for the other or for both or has, perhaps less formally, even by conduct, assumed.’

…

60. The authorities show that a person attracts fiduciary duties where he undertakes an obligation to act in the interests of another. As Mason J expressed it in Hospital Products Ltd v United States Surgical Corp:

‘ [A]n entitlement to act in one’s own interests is not an answer to the existence of a fiduciary relationship, if there is an obligation to act in the interests of another. It is that obligation which is the foundation of the fiduciary relationship, even if it be subject to qualifications including the qualification that in some respects the fiduciary is entitled to act by reference to his own interests.’

61. Similarly, in Breen v Williams, Gummow J stated:

‘ Fiduciary obligations arise (albeit perhaps not exclusively)in various situations, where it may be seen that one person is under an obligation to act in the interests of another.’

62. And in the Canadian Supreme Court, McLachlin, J. put it thus:

‘ The essence of a fiduciary relationship … is that one party exercises power on behalf of another and pledges himself or herself to act in the best interests of the other.’

106.  Mr Barlow SC argued that it was to be inferred from the agreements linking the entities concerned with the operation of Fund II, each of which agreement contained an “entire agreement” clause, that it was not intended that the parties to the ALPA would owe fiduciary duties to D1.  I reject this submission.  It is trite law that entire agreement clauses do not preclude the implication of terms into a contract and nor do they, in my view,preclude the existence of fiduciary duties if a party to a contract is under an obligation to act in the interests of another.  Further, although the structure of the group of entities may have been designed to preclude exposure of individuals to claims from external parties, it did not preclude claims between the parties to the agreements, as exemplified by Art 3.2(f) of the ALPA.

107.  Moreover, whilst it is true that D1 does not directly manage or own Fund II’s assets, D1 nevertheless exerts control over the management of Fund II through SAIF II GP LP, which is defined as “Fund General Partner” in the ALPA.

108.  In my judgment, as a result of the ALPA and the manner in which the limited partners expected each other to carry out their roles under that agreement, Mr Zhou was under a fiduciary duty not to act contrary to, or put his own interest before, the interests of D1 and those of his Fund II co-partners.  By Art 3.1, each Principal Limited Partner undertook to devote substantially all of his or her business time or efforts to the investment and other activities of, inter alios, D1, Fund II and SAIF II GP LP, and to refer all investment opportunities suitable for Fund II to D1.  Also, by Art 3.2(b), each Limited Partner covenanted to keep confidential and not, without the prior written consent of D2, to disclose or use for his, her or its own benefit any information with respect to the ALPA, D1, D2, SAIF Management II Ltd or any Portfolio Company or any of their Affiliates [Emphasis supplied].

109.  Further, although different partners were responsible for different investments, all were entitled under Art 6 of ALPA to distributions paid out of 20% of the profits made by Fund II, those profits being the result of the partners’ collective efforts to select and nurture investments for the benefit of the external investors.  As Mr Zhou accepted in cross-examination, the partners depended on each other for co-operation and expected each other to do their best in making a success of the business of the Fund.

THE WITNESSES

110.  Mr Zhou was the sole witness called in support of his claim.  The witnesses for the Defendants were Mr Yan; Li Meng; Mr Brandon Lin; Ms Lynda Lau; and Mr Zhao.

Mr Zhou

111.  It was Mr Zhou’s case that he only became involved in discussions concerning Diandao (Point Advertising) technology that led to the investment by KPCB in Xinrui in August 2007, quite a bit of time after his relationship with Fund II terminated on 28 February 2007.  Thus he testified that he took no notice when on 6 February 2007, he received an email from Zhou Yang attaching a pro forma SAIF Term Sheet with My Show’s name at the top but with the names of the other parties redacted and when Zhou Yang called him in early March 2007 to talk about a Point Advertising project (the Keygate project) he told Zhou Yang he was not interested because he was too busy with other matters; he also took no notice of a confidential analysis sent to him on 7 March 2007 by Zhou Yang of Keyword (Point) advertising placed by LG and Kaola.cn.  Additionally, when in April 2007, Ding Jun (who had conceived of the Diandao technology in mid 2006 after leaving Microsoft where he had worked for several years) gave a presentation of the technology, he said he was not interested.  Instead, it was only in May or June 2007 when Ding Jun made another presentation that he decided the technology now had a commercial future.

112.  Mr Zhou was cross-examined on the Xinrui investment agreement dated 24 August 2007 and his attention was drawn to the “entire agreement” clause that included the words, “this Agreement shall be deemed to terminate and supersede … the Series A Preferred Stock Financing Term Sheet, dated as of March 30, 2007”.  When asked about this term sheet, Mr Zhou’s first reaction was to say that there had been no such term sheet and he was not aware of such of a document; in any event such a term sheet would not be legal because the KPCB fund had not been established at that date.  Then Mr Zhou accepted that at some point there had been a term sheet and this actual term sheet would have been produced in April 2007.  The term sheet had not been disclosed by him because it was in the hands of KPCB and he had not asked that it be disclosed, even though he remained an Inactive Limited Partner of one of the General Partners of the KPCB fund.  When asked whether he was willing now to request KPCB to produce a copy of the executed Xinrui investment agreement with the sensitive information redacted, he answered “no” even though an unsigned copy of the agreement was in one of the court bundles.

113.  It was obvious to me that Mr Zhou had been caught out by Mr Pow’s reference to the 30 March 2007 term sheet and that his answers when questioned about this document were untruthful.  In my view, at this point in his cross-examination, he was making his evidence up as he went along, which casts doubt over the credibility of the whole of those parts of his evidence that are disputed by the Defendants. As to those parts of his evidence I have approached them with a wary, skeptical eye, requiring to be especially convinced that they are to be believed and are reliable.

114.  In particular, I do not accept Mr Zhou’s evidence that he did not become involved in exploring the possibility of investing in the Keygate venture until May or June 2007 after Ding Jun’s second presentation of the keygate Diandao technology.  In my judgment, for reasons I give below when dealing with the Xinrui allegations made against him, Mr Zhou was discussing with Zhou Yang the possibility of investing in a company that would utilize the keygate (Diandao) technology in competition with the WOFE a week or so before 6 February 2007.

Mr Yan

115.  Mr Yan’s two witness statements contained a great deal of argumentation in support of the Defendants’ case, statements of opinion, submissions of law and hearsay.  A more blatant failure to comply with the requirements of Order 38, rule 2A(2) of the Rules of the High Court in Hong Kong is hard to imagine.  By that rule, a witness statement must consist of the oral evidence that a party intends to adduce on issues of fact at the trial.  This means, as para 38/2A/6 of Hong Kong Civil Procedure makes clear, that a witness statement must contain only such material facts as the witness is able to prove of his own knowledge and must not contain any inadmissible evidence, including hearsay and evidence of opinion.

116.  Parts of Mr Yan’s witness statements were admissible, including the history of SAIF Partners, Mr Zhou’s employment history, Mr Zhou’s championing of the My Show investment, the conclusion of the Separation Agreement and Mr Yan’s dealings with Mr Zhou concerning Mr Zhou’s departure from SAIF Partners.

117.  Mr Yan’s evidence that a representative of Nomura told him that the WOFE’s accounts had been found to be “weird” when Nomura was considering an invitation to invest in the WOFE was not challenged.

118.  Mr Yan was cross-examined about his role as a witness in legal proceedings in the Grand Court of the Cayman Islands for the winding up of Acorn International, Inc (“Acorn II”) on just and equitable grounds.  The case concerned the actions taken by the “Group of Four” consisting of Mr Yan and three other individuals (all of who represented the minority shareholders of Acorn II) to remove Mr Robert Roche as Executive Chairman of Acorn II.  Acorn II is a holding company of a business established in the PRC.  The trial judge, Justice Andrew Jones QC, found that Mr Yan’s evidence was carefully tailored to meet the ends of the minority shareholders’ case and was not always truthful.  Justice Jones QC also held that the allegations levelled against Mr Roche had been contrived as an ex post facto justification for the actions taken by the Group of Four to remove Mr Roche from the office of Executive Chairman.

119.  Following the judgment of Justice Jones QC, Mr Yan and two other members of the Group of Four were sued by Acorn II for very large damages for breach of fiduciary duty, including the giving of false testimony in the just and equitable winding up proceedings.  This action was settled upon Fund II selling to Acorn II all of the shares it owned in Acorn II for US$4.17 million, which represented a discount of about 60% to the closing price of Acorn II’s ADSs.  Mr Yan did not contribute personally to the cost of this settlement on the basis that he was a “Covered Person” entitled to be indemnified under Clause 4.3 of the ALPA.

120.  It was submitted by Mr Barlow that the finding by Justice Jones QC that Mr Yan’s evidence had not always been truthful, and had been contrived as an ex post facto justification for the actions of the Group of Four, is relevant to my assessment of Mr Yan’s credibility in these proceedings.  I agree with this submission and have taken these matters into account when assessing the reliability of Mr Yan’s evidence.  My conclusion, however, is that overall the admissible evidence given by Mr Yan is reliable.

121.  Mr Barlow also sought to put to Mr Yan examples where Mr Barlow suggested that, if Mr Yan had been subject to the sort of fiduciary duty that it was alleged Mr Zhou was under, Mr Yan would have been seriously in breach of such a duty.  When asked what the relevance of this questioning was to the issues in the case, Mr Barlow replied that Mr Zhou had pleaded that Mr Yan had taken from Fund II’s external investors the assets of the WOFE worth US$20 million when he knew they were worth more than US$200 million.  Mr Barlow also argued that this questioning went to Mr Yan’s credibility.  In my judgment, these questions were not sufficiently pertinent to the issues I had to decide in the case, including Mr Yan’s credibility, and I ruled that this line of questioning must cease.

Li Meng

122.  Li Meng joined the staff of the WOFE in October 2006 as Vice President and Head of Operations, Sales and Marketing.  A good many of the matters set out in his witness statement were inadmissible hearsay or expression of opinion.

123.  He was cross-examined first by Mr Barlow who put to him various parts of his evidence given in arbitration proceedings brought by My Show against Zhou Yang seeking to enforce the US$2.5 million loan made personally to Zhou Yang.  Li Meng confirmed that this evidence was truthful and denied Mr Barlow’s suggestion, put only generally at the end of this exercise, that the evidence he was now giving to the Court was inconsistent with his evidence in the arbitration.

124.  The following parts of Li Meng’s evidence in chief were not challenged in cross-examination: (a) during due diligence work by Nomura on the WOFE and Mobile Winks, a representative from Nomura approached him and expressed concerns about the WOFE’s accounts; (b) Ding Jun was recruited by the WOFE to develop “Point Advertising” technology.

125.  Li Meng was then cross-examined by junior counsel for Mr Zhou, Mr Chan Pat Lun, on technological matters in the pre-smart phone era and the business of Mobile Winks including: (a) the collection of data on avatar users and whether that data could be “mined”; (b) the proposition that the more instant messaging platforms there were, the more potential avatar users there were; (c) if a new messaging platform were started, users would have to be asked to download the software; (d) a new messaging platform would have to compete with existing platforms such as MSN, QQ and Yahoo Messenger; (e) the large marketing cost (including advertising) in launching a new messaging platform; (f) the possible tracking of avatar users through their IP addresses; (g) what “Point Advertising” is; (f) the technology that is the basis of the business operated by Mobile Winks.

126.  In my judgment, Li Meng’s evidence was truthful and reliable.

Mr Brandon Lin

127.  In his witness statement, Mr Lin set out to build a case in support of the Defendants’ contention that Mr Zhou owed fiduciary duties to the Defendants.  To the extent that his statement consisted of legal reasoning and expressions of an opinion on issues of law, his evidence was inadmissible.  However, his personal understanding of the structure of the entities constituting Fund II and the governance of the relevant limited partnerships, the role of limited partners working for Fund II and the performance norms of the private equity industry were admissible evidence which I accept.

Ms Lynda Lau

128.  In November/December 2005, Ms Lau was assigned to work as an Associate on the Show World deal team headed by Mr Zhou. The other Associate was Mr Zhao. In her witness statement, Ms Lau describes her involvement in handling the 3 loans made personally to Zhou Yang by My Show that is dealt with below.  Throughout, she reported to Mr Zhou.  I have ignored on grounds of inadmissibility that part of Ms Lau’s witness statement where she purports to say that the US$2.5 million loan was not intended to be part of the original My Show transaction.

129.  I found Ms Lau to be a truthful and reliable witness.

Mr Zhao

130.  As stated above, Mr Zhao worked on the Show World deal team under the leadership of Mr Zhou.After Mr Zhou left SAIF Partners, Mr Zhao was appointed a director of My Show and took over Mr Zhou’s role of monitoring and supervising My Show and the WOFE.  For the most part, his witness statement dealt with the investigation he was instructed by Mr Yan to undertake into the affairs of the WOFE, Show World and My Show in about the middle of 2008.  Those parts of his witness statement where he expresses the opinion that: (i) it was to avoid drawing the attention of the advisory board to targeted online advertising that Mr Zhou amended the second slide that Mr Zhao prepared in November 2006; and (ii) it was due to Zhou Yang’s control over the WOFE that Zhou Yang was able to mislead the employees of the WOFE into thinking Mobile Winks, Xinrui and My Show Ad were part of the My Show group of companies, were inadmissible and I have ignored them.

131.  I found Mr Zhao to be a careful and truthful witness.  I accept his evidence.

THE COURT’S ASSESSMENT OF THE DEFENDANTS’ CASEALLEGING CAUSE AND BREACH OF FIDUCIARY DUTY AGAINST MR ZHOU

Introduction

132.  Although I have decided that the Defendants are contractually debarred from seeking to have Mr Zhou’s Applicable Percentage reduced to 0.05 × the Applicable Percentage otherwise provided for, I nonetheless think it right that I should assess the Defendants’ misconduct allegations in respect of Cause in case I am wrong in the manner in which I have construed the SA and the ALPA.  It is also necessary, in any event, to determine the claim that Mr Zhou has acted in breach of fiduciary duty to D1.

133.  In assessing the case against Mr Zhou, I have kept carefully in mind that the standard of proof in civil cases—the balance of probabilities‌—‌is flexible in its application, so that where a serious allegation is made (as here) more cogent evidence may be required to overcome the unlikelihood of what is alleged in order to prove the allegation.  As Lord Nicholls explained in In Re H (Minors) [1996] AC 563:

“ 73. The balance of probability standard means that a court is satisfied an event occurred if the court considers that, on the evidence, the occurrence of the event was more likely than not. When assessing the probabilities the court will have in mind as a factor, to whatever extent is appropriate in the particular case, that the more serious the allegation the less likely it is that the event occurred and, hence, the stronger should be the evidence before the court concludes that the allegation is established on the balance of probability. Fraud is usually less likely than negligence. Deliberate physical injury is usually less likely than accidental physical injury. A step-father is usually less likely to have repeatedly raped and had non-consensual oral sex with his under age stepdaughter than on some occasion to have lost his temper and slapped her. Built into the preponderance of probability standard is a generous degree of flexibility in respect of the seriousness of the allegation.

74. Although the result is much the same, this does not mean that where a serious allegation is in issue the standard of proof required is higher.  It means only that the inherent probability or improbability of an event is itself a matter to be taken into account when weighing the probabilities and deciding whether, on balance, the event occurred.  The more improbable the event, the stronger must be the evidence that it did occur before, on the balance of probability, its occurrence will be established.”

The US$2.5 million loan

134.  This loan was advanced under cover of a detailed agreement some 7 pages long containing 5 Recitals and 8 Articles.  It was drafted by lawyers, in particular Mr Robert Zhang and Mr Stanley Cha of King & Wood, acting for My Show under instruction from Mr Zhou and/or his subordinates, in particular Ms Lau.  The Recitals recite the My Show SPA and the FPA and record the expectation that under the latter agreement Mr Zhou (the Borrower) is expected to be the owner of 8 million common shares in My Show provided the FPA has been performed.  The final recital records that the Borrower and the Lender (My Show) desire to enter into the loan agreement for the sole purpose of assisting the Borrower to provide working capital to Show World and its related PRC companies.

135.  Under the agreement, the loan was interest free and was to be repaid by the Borrower in one year’s time.  The Borrower also covenanted to use the proceeds exclusively for the purposes specified in the Recitals and to comply in all material respects with all applicable laws.  By Art 7.01, the Borrower granted a charge as a first security interest over the 8 million common shares he stood to receive under the FPA.  At best, this security was of speculative value.

136.  By Art 8.10, it was agreed that any dispute arising out of the agreement should be referred to arbitration under the auspices of the Hong Kong International Arbitration Centre if the dispute had not first been resolved through consultation.

137.  The burden being on them, the Defendants have not proved that the US$2.5 million was not used for the purposes of the WOFE.

138.  As already noted above, the US$2.5 million loan was not the first loan made personally to Zhou Yang by My World.  In March 2006, before the closing of the My Show SPA, Zhou Yang asked Ms Lau for a loan of US$300,000 from My Show to pay a security deposit for the purchase of equipment to be used by Show World.  By two emails dated 27 March 2006, Zhou Yang sent Ms Lau overseas fund transfer information for his personal account and information about the equipment in question.  Ms Lau sought Mr Zhou’s approval for the loan which Mr Zhou gave.  US$300,000 was advanced to Zhou Yang interest free, repayable within one year.  The loan was given in exchange for an unsecured promissory note signed by Zhou Yang and drafted by his lawyers. Clause 1 of the note stated that the loan was intended to be used by the Payor (Zhou Yang) primarily for the payment of a security deposit of up to US$300,000 to secure the purchase of equipment.

139.  On 21 April 2006, after the closing of the My Show SPA, My Show, acting by Mr Zhou, made a further interest free US$250,000 loan repayable within one year personally to Zhou Yang.  Zhou Yang explained to Ms Lau that the money was needed for the purchase of further equipment.  Ms Lau, who was involved in handling this transaction, obtained Mr Zhou’s approval for the loan.  In exchange for the loan, Zhou Yang signed a promissory note which, save for the sum promised to be paid, was in identical terms to the note given in respect of the prior loan of US$300,000.

140.  In late June 2006, My Show lent US$1 million to the WOFE.  The money was paid into the WOFE’s bank account with the Beijing Branch of China Merchants Bank.  In the lead up to this loan, on 23 June 2006 Zhou Yang notified Ms Lau of an upcoming funds transfer from the US account to the WOFE account of US$3 million.  Ms Lau queried the purpose and timing of the funding and, in his reply email dated 29 June 2006, Zhou Yang stated that, based on a conversation he had had with Mr Zhou, the fund would be transferred in instalments and requested the transfer of US$1 million to the WOFE account. Later, Zhou Yang told Ms Lau that the US$1 million was for working capital and that he might need about US$2 million to make some acquisitions but he had not yet decided whether to do this onshore or offshore and so he did not now need the US$2 million.  Mr Zhou approved the transfer of US$1 million and this sum was transferred from My Show’s account to the WOFE’s account as recorded above.

141.  In cross-examination, Mr Zhou testified that the background to the US$2.5 million loan included the need to establish a PRC company or appoint a PRC citizen who would acquire an advertising licence for the advertising business of the WOFE and/or Show World.  Such a company or individual required RMB 10 million (about US$1.5 million) registered capital and working capital on top of that.  The WOFE, being foreign-owned, could not hold such a licence and advertising revenue was now critical; the sale of avatars and winks was not going well.  Another part of the background was the US$30 million profit ratchet provision in the My Show SPA.  The WOFE had only received funds from My Show in June 2006 which was half way into 2006 and there were now only three months to go before the end of My Show’s 2006 financial year.  I accept this evidence of Mr Zhou.

142.  In answer to the question why the money was paid personally to Zhou Yang rather than into the WOFE’s bank account, Mr Zhou said that if US dollars were paid into the WOFE’s bank account, there would be time and value limitations affecting the conversion of the US dollars into RMB.  In addition, the exchange rate was moving in a way that favoured conversion into RMB sooner rather than later.  In Mr Zhou’s view (I paraphrase), Zhou Yang could be relied on to use the money for the benefit of the WOFE because to do so was strongly in his own interest, given that his future right to 8 million common shares in My World (a right that would give him a 70% holding) depended on the success of the WOFE and this future entitlement was his only route to an ownership interest in the WOFE, albeit an indirect one.  Further, Fund II was the only shareholder in My Show and this represented an effective control over how the money would be utilised.  The situation was like a chicken that had not started to lay eggs and needed to be fed, rather than killed, so that it would lay eggs.  In his view, it was within his discretion to proceed as he did without first drawing the situation to the attention of the partners.

143.  Mr Zhou was persuaded to accept in cross-examination that the structure of the My World deal differed from the conventional Sina model in that Zhou Yang would be left in control of the WOFE whilst the My Show SPA was being implemented and this meant it was particularly important for control over the WOFE’s accounts to be maintained.  Whilst I accept that there was a need for financial control, I cannot see that this was the more pressing because of the way it is said that the My Show deal differed from the usual Sina model.  I say this because, as I understand it, under the conventional model the local founder would also be centrally involved in running the WOFE whilst owning a minority interest in the offshore vehicle, whereas in the case of My Show, as Mr Zhou testified, Zhou Yang appeared to have a strong interest in using the money advanced to him for the business of the WOFE in order to meet the requirements of the ratchet.

144.  The cross-examination of Mr Zhou by Mr Pow included the following questions and answers:

“ Q. … Do you also know that on the same date, 16 October -- 16 October was the date he [Zhou Yang] started establishing Xinrui, paid in RMB 2 million as capital ‌-- on the same date, he established My Show Ad, a company, another company; again, put in RMB 2 million as the share capital of My Show Ad? Do you know?

A. My Show Ad is justified. That was the purpose.

Q. My Show Ad --

COURT: You were asked whether you knew or not.

MR POW: Yes.

COURT: Whether that amount of RMB went into My Show Ad from Zhou, Zhou Yang.

A. I don’t know that for a fact at that time.

COURT: Do you now accept that’s what happened with the money?

A. I would accept, yes.

MR POW: Thank you.

145.  I understood Mr Pow to submit that in the course of this passage of the evidence, Mr Zhou admitted that he knew that the US$2.5 million loan funded the capitalization of Xinrui.  If this submission was made, I do not accept it.  In my judgment, whilst Mr Zhou replied that he accepted now that that the RMB 2 million capitalisation of My Show Ad was funded by the US$2.5 million loan, he did not deal with what he knew, whether at the time in 2006, or now, about the RMB 2 million capital contribution to Xinrui.

146.  In the lead-up to the execution of the US$2.5 million loan agreement, Robert Zhang of King & Wood sent an email dated 23 August 2006 to Mr Zhou stating: “Zhou Yang told us you propose to have the Cayman Company provide a bridge loan to Zhou Yang to serve as the working capital of the domestic company, on the condition that Zhou Yang should pledge his equity interests in the Cayman company for the aforesaid bridge loan.” [Italics supplied].  Mr Pow submitted that it could be inferred from this email that the whole idea of a personal loan to Zhou Yang rather than a loan to the WOFE, came from Mr Zhou.  I reject this submission.  In my judgment, Mr Zhang’s email came only after there had been discussions between Mr Zhou and Zhou Yang and the likelihood is that it was Zhou Yang, who would be the one dealing with the proceeds of the loan on the spot in Beijing, who first requested that the money should be paid as a loan to himself rather than to the WOFE.

147.  I also dismiss the submission made by Mr Pow in closing that I should infer that Mr Zhou procured the making of the loan knowing that it was to be used by Zhou Yang to capitalise Xinrui with a view to that company developing and commercializing Diandao (Point Advertising) quite independently of the WOFE. 

148.  Mr Zhou accepted that he did not check with Zhou Yang about the loan down to the time he left SAIF on 28 February 2007.  He was very busy at the time, with responsibility for eleven portfolio companies and around August 2006 he was negotiating and closing three new investments.

149.  Mr Zhao and Yiddi Wong were directors of My Show.  The US$2.5 million loan must have been approved by a resolution of My Show’s Board and it would have been a material item in My Show’s accounts.  However, neither of these directors, nor Mr Yan, took any steps themselves to ensure that the loaned funds had been spent on providing the WOFE with working capital.

150.  In my judgment, Mr Zhou honestly believed that the US$2.5 million would be used to meet the WOFE’s working capital requirements and that Zhou Yang could be trusted to use the money for those purposes, given in particular his (Zhou Yang’s) incipient right to acquire a 70% majority interest in My Show if that company’s earnings for 2006 were stated to be at least US$3 million in its accounts for that year.  That said, I am bound to conclude that Mr Zhou took insufficient account of Mr Yan’s insistence that effective financial controls be imposed on the WOFE and he thereby exposed My Show and Fund II to an unnecessary risk that the proceeds of the loan would not be properly spent in furtherance of the WOFE’s business.  He also failed to honour his assurance that he would devote sufficient time to the supervision of the My Show investment.  Accordingly, if: (i) the Defendants’ interpretation of the SA and the definition of Cause and the covenants in Art 3.2 and Art 7 of the ALPA is correct; (ii) and if the pleaded policy and/or the policy contended for in the Defendants’ closing submissions, satisfies para (a)(ii) of the definition of Cause, Mr Zhou would be guilty of Cause in each respect pleaded by the Defendants.

151.  For the avoidance of doubt, I should make it clear that in no respects was Mr Zhou’s involvement in the making of the US$2.5 million loan a breach of fiduciary duty.

XINRUI

152.  The Diandao or Point Advertising technology used by Xinrui prompts an advertisement to pop up when an individual clicks his cursor on certain keywords appearing on a webpage.  This technology was first developed by Ding Jun in mid-2006 after leaving the employment of Microsoft where he had worked for a number of years.  He produced a computer program that used AJAX technology, keyword tips and links based on updating information online from time to time.

153.  Mr Zhao testified that about one month, or even earlier, after the My Show investment deal was closed, there was a meeting in a café close to SAIF Partners’ then office in the China Resources Office in Beijing, attended by himself, Ding Jun, Zhou Yang and Mr Zhou.  At this meeting, Ding Jun gave a demonstration of the Point Advertising technology he was in the course of developing.  Mr Zhao, Mr Zhou and Zhou Yang discussed the development of Ding Jun’s Point Advertising technology and Zhou Yang recommended that Ding Jun join the WOFE to create a new Point Advertising business line.  It was Mr Zhao’s understanding that the proposed development of Point Advertising would be for the benefit of the WOFE.  Mr Zhou testified that the first time he met Ding Jun when there was any conversation about Point Advertising was in April 2007.  I do not accept this part of Mr Zhou’s evidence and I find on the basis of Mr Zhao’s testimony that the meeting as related by him did take place and that nothing was said on this occasion about Point Advertising being developed by some company other than the WOFE.

154.  Zhou Yang incorporated Xinrui on 18 October 2006 and on that date contributed RMB 2 million to the company’s capital.  Xinrui’s legal representative was stated in its business licence to be Zhou Fei who was Zhou Yang’s girlfriend.  Also in October 2006, Ding Jun joined the staff of the WOFE to develop Point Advertising.  Ding Jun was registered as holding 10% of the shares in Xinrui and the registered holder of the remaining 90% was Zhou Fei.

155.  I have no doubt that Mr Zhou knew that Zhou Fei was Zhou Yang’s girlfriend.

156.  On 13 November 2006, Zhou Yang registered two internet domain names—“Keygate.com.cn” and “Keygate.net” for use by Xinrui.

157.  On 11 November 2006, Mr Zhao sent two slides that he had prepared to Mr Zhou for an Advisory Board Meeting due to be held later that month when Mr Zhou was to report to LPs on the progress of the My Show project.  The first slide prepared by Mr Zhao had a section headed COMPANY OVERVIEW which read:

“ • My Show is a leading provider of digital personalized virtual image expression (Avatar) in China. My Show develops proprietary avatar products, and distributes to users through web, instant messaging and wireless network. Based on a new proprietary flash technology, the Company developed a new generation avatar product, which provides higher quality visual effect and transmits faster in the network with anti-piracy protection. My Show offers avatar and winks, and sells online advertising through its avatar platform. The Company is working with wireless carriers to launch a new business line -- Color Call. We anticipate that Color Call will be the killer application in 3G wireless network.” [Italics supplied]

158.  The second slide had a section headed RECENT BUSINESS DEVELOPMENTS that read:

“ • Launched the new avatar and winks service platform in MSN

• Testing the Color Call service with China Mobile and China Unicom, and resolved almost all technical hurdles

• Planning the new generation of targeted online advertising”

159.  Mr Zhou changed the italicised three sentences in the first slide, in particular by removing any reference to Color Call.  The amended version read:

“ • My Show offers avatars and winks to more than 35 million MSN users and more than 15,000 medium size communities. Winks on MSN become very popular. The Company sells online advertising through direct sale and through agencies.”

160.  Mr Zhou also changed Mr Zhao’s bullet points under the heading RECENT BUSINESS DEVELOPMENTS by removing any reference to Color Call or targeted online advertising.  The amended version read:

“ • Launched the avatar and winks service platform on MSN in China in July

•     Signed exclusive publishing rights of more than 5,000 minutes of original flash/animation contents for IM and community in China. The Company owns the largest flash/animation contents library for IM and community in China.”

161.  Mr Zhou was asked in cross-examination what he understood Mr Zhao’s words, “the new generation of targeted online advertising” in his second slide to be referring to.  He answered that what he understood “targeted online advertising” to be referring to was advertising based on a user’s profile that could be generated from the link to a My Show avatar used on the MSN network. This was different from Diandao or “point advertising” which was purely reactive and did not depend on a user profile.  He said that he removed the words, “planning for the new generation of targeted online advertising,” in the second slide because the planning phase had passed and, further, it was simply repetitive of an earlier slide.  Also, the WOFE had started selling online advertising.

162.  Mr Zhou further testified he was introduced to a project to do with Diandao by Zhou Yang in early March 2007 but he did not ask what this meant because at the time he was not interested: he was wrapping up things with SAIF, he had started to travel and was trying to raise a fund or join another fund.  Mr Zhou told Zhou Yang he was not interested, and did not want to be bothered at this time.

163.  On 6 February 2007, Mr Zhou received an email of that date addressed only to himself from Zhou Yang attaching a SAIF Term Sheet. Translated, the email said:

“ My revered elder brother,

This is the term sheet of SAIF.  I have redacted the words in it.  Please promptly find someone to sign it.  The foreign exchange administration is looking forward to seeing it.”

164.  The attachment was headed “SB ASIA INVESTMSENT FUND II LP AND MY SHOW and was a standard form (boiler plate) SAIF term sheet which had been used, or intended to be used, for an investment transaction involving My Show but with the details of the entities and individuals involved redacted.  Mr Zhou’s evidence was that, when he received this email, he had no idea to what it related and he ignored it.

165.  On 7 March 2007, Mr Zhou (who was the only addressee) received an email, sent to his SAIF email address in Chinese, from Zhou Yang attaching a confidential analysis report, also in Chinese.  In the email, Zhou Yang wrote: “My revered elder brother, please see the results.”  The attached report was headed, “Key Word Advertisements Placed With KeyGate, and set out the results of advertisements placed by LG (the well-known South Korean electronics company) and a company called Kaola.  Mr Zhou testified that he did not reply to this email.  He might have scanned through it but he was not interested.  He was busy with other matters.  He accepted that Zhou Yang was trying to impress him with the success of Keygate.

166.  Mr Zhou said in his witness statement that he sat down to hear a presentation about Keygate from Ding Jun in April 2007.  He stated that this meeting came about because a friend of his (Mr Zhou’s) at Microsoft called in late April 2007 to say that he had a friend who had developed some technology and would he (Mr Zhou) take a look at it, which he agreed to do because he was now with KPCB and was ready to look at new investments.  At the presentation meeting with Ding Jun, mention was made of Diandao (“Point Advertising”) but Mr Zhou told Ding Jun this was not something in which he would invest and he did not report the opportunity at this time to KPCB.  He thought the concept involved too much for the potential purchaser to do—the cursor had to be moved over the keyword and when the advertisement popped up, it had to be clicked on.

167.  Mr Zhou said in cross-examination that in May or June 2007, Ding Jun came back with a new concept for technology called “semantic analysis” that could read a webpage and tell what it was.  It could go through the whole page and come back with a different text.  Mr Zhou then wrote a “core report” for KPCB similar to a SAIF concept paper, followed by an investment committee report.

168.  On 24 August 2007, the Xinrui investment agreement was signed by or on behalf of Keygate, a Cayman Islands company, KPCB China Fund LP, acting by Mr Zhou, Ding Jun, Zhou Fei and Xinrui.  Mr Zhou testified that the two PRC companies were included in the deal to satisfy registration requirements with the relevant regulatory agency.  He understood Ding Jun and Zhou Fei to be the founders of one of the PRC companies.  When the agreement was signed he did not know of Xinrui or the people behind it.  As far as he was concerned, the main person involved in Keygate was Ding Jun and the vehicle in which the KPCB fund was investing was Keygate.  He relied on the lawyers to ensure everything was in order and signed the contractual documentation assuming that the lawyers had done their job.

169.  Mr Zhou claimed in evidence that the business carried on by Keygate would not have competed with the targeted advertising carried on by the WOFE.  The latter form of advertising was tied to the IDs of users of avatars operating in an instant messaging network from which profiles could be constructed and advertisements could then target groups with similar profiles. Keygate’s Diandao business was not dependent on knowing who the users are. Instead it was reactive, being geared to a cursor being clicked on a keyword as it was moved over a webpage.

170.  For the reasons given in my assessment of Mr Zhou as a witness, I do not accept his evidence: (a) that when Zhou Yang called him in early March 2007 to talk about a Point Advertising project he told Zhou Yang he was not interested because he was too busy with other matters; (b) his evidence that he took no notice of the confidential analysis sent to him on 7 March 2007 by Zhou Yang of Keyword (Point) advertising placed by LG and Kaola; (c) that following another presentation by Ding Jun in April 2007, he told Ding Jun that he was not interested.  Instead, I find that from a date that preceded 6 February 2007 by at least a few days, Mr Zhou was in serious discussions with Zhou Yang about investing in a venture independent from the WOFE in which Zhou Yang would have interest, the business of that venture being to utilise the Diandao technology developed by Ding Jun.

171.  Turning to Mr Zhou’s amendment of the slides around 19 November 2006 prepared by Mr Zhao, I am not satisfied that by that date Mr Zhou was resolved on seeking to invest on his account in an entity separate from the WOFE that would develop Ding Jun’s technology.  Accordingly, after a deal of anxious consideration, I find that Mr Zhou did not amend the slides to conceal a scheme in which he would invest in an entity competing with the WOFE.

172.  In my judgment, Mr Zhou’s dealings with Zhou Yang about an investment in an entity that would develop Ding Jun’s Diandao technology started around late January 2007 in the lead-up to Zhou Yang’s email to Mr Zhou dated 6 February 2007 and amounted to soliciting Zhou Yang to act in breach of the My Show Covenant contrary to Art 3.2(a)(ii) of the ALPA.  The idea was that both Mr Zhou and Zhou Yang would have an interest in an entity separate from the WOFE that would utilise technology that was available and appropriate to be developed by the WOFE even if there were differences between the WOFE’s point advertising and Diandao point advertising.  These dealings were also in breach of the confidentiality covenant contained in Art 3.2(b).

173.  I also find that in acting as he did in conjunction with Zhou Yang from around late January 2007 down to the conclusion of the Xinrui investment agreement, Mr Zhou acted in breach of his fiduciary owed to D1 in that he put his own interest ahead of the interest of D1 and his co-partners and thereby profited from his position held under the ALPA.

MOBILE WINKS

174.  The extent to which Show World, the WOFE and My Show utilized and/or had the potential to utilise Color Call technology is well shown by the following excerpts from contents of the Concept Paper produced on 12 December 2005 by Mr Zhou and his deal team in respect of the proposed Show World investment:

“ Color Call could be the killer application for 3G and 2.5G WVAS.”

“ Color Call is a unique service invented by the Company to bring the avatar to mobile. The Company has developed Colour Call technology so that a user could use the same avatar in its internet community to mobile and it has very strong appealing to the young generations … Color Call service requires a higher network performance and is an ideal application for 3G platform … Mobile operators are very excited about Color Call service, and are convinced it will be the next big thing for 3G mobile application and will be a huge success … we expect the Color Call market will catch up or even surpass CRBT in two years after 3G network operation starting.”

“ The dominate player in China avatar and Color Call market and the very first player to apply avatar to wireless market in the world.”

“ As the Color Call function has to be built in the headsets, the ideal platform would be 3G as the 3G headsets are new and still developing. The Company would have the opportunity to work with handset manufacturers to add Color Call functions. … The Company has started working with 3G system and handset manufacturers including Datang to embed the function into the system and menu. For 2.5G, the Company is working with China Mobile Shanghai and Dopod (a smart phone, PDA or high end headset manufacturer) on a trial basis, and plans to roll out trial in three months.”

“ Evaluation

Color Call is a unique service that enables user to use the same avatar in its internet community to mobile and it has a very strong appealing to the young generations …. Today, CRBT alone is a US$586 million business in 2005. We believe Color Call could be bigger business in two years after 3G service starts as Color Call has advantages over CRBT.

The Company has developed Color Call and is driving the implementation with China Mobile on 2.5G and 3G network.

In addition, the Company is working with wireless carriers, planning to launch a new business line, Colour Call, a new generation WVAS that will enable the mobile caller to ring the receiver with the caller’s avatar character showing on the receiver’s handset screen together with ringtone.  The service is expected to be the next big thing for 3G service offering.  The Company is to start a trial with China Mobile Shanghai and Dopod, a smart phone, PDA manufacturer at 2.5G network within the next few months.”

175.  In addition, the Valuation Analysis in the Investment Report on Show World sent to the Investment Committee stated:

“ [The Company’s] first mover advantage and high technology entry barrier to local competitors in avatar and Color Call business leads the followers at least twelve to eighteen months.”

176.  As recorded above, the Investment Report also included a due diligence report which summarized the views of a number of business partners and customers, including the Founder and President of Digital Chaotex who believed the Color Call service would have great potential and a Senior Solution Manager of Datang Mobile Communications Equipment who said that transmitting Color Call in TD-SCDMA 3G network was not hard to implement and that he was convinced that Color Call was a great idea.  In addition, he was very interested in Show World’s test report of Color Call testing on China Mobile WCDMA network.

177.  Mr Zhou admitted in evidence that, based on his own due diligence on Mobile Winks, the information presented on Mobile Winks’ website appeared to be correct and this implies that research and development on the core of its innovative value-adding mobile business applicable to 2.5G and 3G had been going on since 2006. 

178.  By July 2006, Li Qiang had been recruited by the WOFE to head the team developing “Colour Call”.

179.  On 2 February 2007, Zhou Yang (as applicant) and a number of employees of the WOFE, Li Qiang, He Wenhui and Gao Jinsheng, applied for the registration of three patents in the PRC relating to “Color Call” technology. On 4 December 2007 the same individuals applied for two similar patents in Hong Kong.

180.  On 24 April 2007, Zhou Yang incorporated Mobile Winks and contributed capital in the sum of RMB 2 million.  The business licence named Zhou Yang as the legal representative.

181.  On 18 August 2007, Zhou Yang sent an email to “all” stating that on 15 August 2007, Mobile Winks officially entered into a US$30 million financing agreement with Keytone Venture LP and KPCB.

182.  Mr Zhou’s evidence was that Zhou Yang first approached him about a potential project involving a company called Mobile Winks at the beginning of the second half of 2007.  Show World had an initial concept called Color Call which contemplated avatars being used on a mobile phone network as well as on an instant messenger network.  The price an avatar user pays for using the avatar on the Microsoft MSN network is split between Show World and Microsoft. At a time before the introduction of smart phones, if avatars were to be used on a mobile network, the network would have to be used to recruit users and pay to have people install their client software on the mobile phone.  Thus every feature phone would have to carry its own operating system.  Carriers would have to agree to their user base being tapped.  Mobile Winks’ business involved the establishment of a new mobile messaging network.  To establish such a network would have been an enormous task that Show World would not have been able to handle.  At some future point, consideration would have had to be given to Show World having a pro rata shareholding but that stage had not been reached early in the second half of 2007.  At this point, there was nothing wrong in KPCB considering the Mobile Winks proposal.  If KPCB were to invest in the project, this would have been hugely beneficial to Show World and Fund II because they would not have had to spend money establishing the new network.

183.  Mr Zhou testified in evidence that Zhou Yang’s email of 18 August 2007 was not sent to him.  The contents of the email were not true.  No financing agreement was ever concluded between Mobile Winks, Keytone Venture LP and KPCB.

184.  The Defendants submitted that I should infer that Mr Zhou and Zhou Yang were discussing the establishment of Mobile Winks’ Color Call business separately from the business of the WOFE from as early as August 2006.  In support of this submission, Mr Pow suggested that, if I were satisfied that Mr Zhou was discussing the keygate project with Zhou Yang from August 2006, it was likely he was also discussing Mobile Winks from the same point of time.  Mr Pow also relied on the removal of the reference to Color Call from the slides prepared by Mr Zhao.  I decline to draw the inference contended for by the Defendants.  In my opinion, there is simply insufficient evidence for the inference properly to be made.  As with the removal of those parts of the slides that referred to targeted advertising, I find there is insufficient evidence for me to conclude that the removal of the reference to Color Call in the slides was pursuant to an intention to conceal a firmly laid plan for Color Call technology to be commercially utilised by an entity other than the WOFE.

185.  I also find that the Defendants have failed to prove that Mr Zhou or Keytone Ventures LP or KPCB ever invested in Mobile Winks.  The Defendants complain that Mr Zhou has failed to produce discovery of the investment agreement referred to in Zhou Yang’s email of 18 August 2007.  But this begs the question.  If there never was a concluded agreement, there will be no document to disclose.

186.  In the absence of the necessary evidence to prove that Mr Zhou and/or Keygate Ventures LP and/ KPCB invested in Mobile Winks, the Defendants’ claim for an account of any profit made in breach of fiduciary by Mr Zhou must fail.

187.  If I am wrong to hold that Mr Zhou was not subject to the Art 3.2 covenants after he left his employment with SAIF Partners on 28 February 2007, the conversations he admits he had with Zhou Yang from mid-2007 onwards over a possible investment in Mobile Winks and his consideration whether to make such an investment would constitute: (i) a solicitation of Zhou Yang to breach the My Show Covenant contrary toArt 3.2(a); and (ii) misuse of confidential information contrary to Art 3.2(b).However, these breaches of Art 3.2 could only lead to Mr Zhou’s Applicable Percentage being reduced by virtue of proviso (iv) if I am wrong as to the meaning and effect of the SA and Art 7.1 and the Defendants’ case on these issues is correct.

MY SHOW AD

188.  Beijing My Show Advertising Co Ltd was incorporated on 18 October 2006.  Its initial capital of RMB 2 million was provided by Zhou Yang.  Li Meng and Cui Ke were appointed by Zhou Yang to hold 99% of the shares in My Show Ad on trust for Zhou Yang. 

189.  Mr Zhou knew that My Show Ad had been incorporated and that this was because the WOFE, as a foreign owned entity, could not itself hold the advertising licence that was needed for the WOFE to earn much needed advertising revenue, the sale of avatars and winks having proved to be disappointing.

190.  My Show Ad operated out of the premises occupied by the WOFE. There is evidence that the WOFE lent RMB 2.6 million to My Show Ad from 2006 to 2008 and, as at 31 August 2008, RMB 1,500,000 of that sum was outstanding.  It also appears that My Show Ad had net profits of RMB 362,251.61 in 2007.

191.  The Defendants’ submitted that it was to be inferred from the matters recorded in paragraphs 187 and 188 that Zhou Yang incorporated and ran My Show Ad as a secret competitor to the WOFE and My Show.  I disagee with this submission.  In my judgment, the above-related matters are just as consistent with, if not more in favour of, the proposition that My Show Ad was being run for the benefit of the WOFE and My Show, particularly given that the entity holding the necessary licence to run an advertising business could not have been the WOFE, but had to be locally owned.  In my view, what eventually happened is that Mr Yan fell out with Zhou Yang and went to war against him and it was at that point that Zhou Yang took My Show Ad for himself in an exercise of self-help.

192.  The principal complaint against Mr Zhou at trial was that he did not insist that Zhou Yang execute a declaration of trust over the share capital in My Show Ad in favour of My Show.  In my opinion, from a risk point of view, the improper appropriation of the share capital of My Show Ad was of a considerably lower order than the risk that the ready money put into Zhou Yang’s hands by the US$2.5 million loan would not be spent to provide working capital for the WOFE.  Shareholdings have to be registered and can be relatively easily traced, even if put into the name of nominees if those nominees have to be PRC citizens.  Tracing the proceeds of the loan would have been considerably more difficult.

193.  Further, I am far from convinced that a declaration of trust in favour of My Show would not have run into the difficulty that the holder of the advertising licence could not be foreign owned.

194.  In my judgment, Mr Zhou was entitled to trust Zhou Yang to ensure that My Show Ad was run as part of the overall business of the WOFE.  The bust-up between Mr Yan and Zhou Yang was not reasonably foreseeable.  In the circumstances as perceived by Mr Zhou, Mr Yan’s insistence that financial controls be imposed on the WOFE did not, in my view, deprive him from exercising his discretion in the manner that he did.  I am therefore of the view that, even if the effect of the SA and of the definition of Cause, Art 3.2(b) to (e) and Art 7 of the ALPA is as submitted by the Defendants, Mr Zhou’s failure to obtain a declaration of trust in favour of My Show would not constitute Cause.

195.  I am also of the clear opinion that Mr Zhou’s alleged failings in respect of My Show Ad did not constitute a breach of fiduciary duty. 

THE REMEDY FOR MR ZHOU’S BREACH OF FIDUCIARY DUTY IN RESPECT OF XINRUI

196.  In substance, the ultimate beneficiaries to whom Mr Zhou owed the duty not to make a secret profit from his position as a Limited Partner were the external investors who contributed to Fund II.  However, neither those investors nor Fund II are parties before the Court.

197.  It is also the case that D1’s proprietary interest in the profit made by Mr Zhou personally on the Xinrui investment agreement is limited to the 20% of that profit that would have been transferred to D1 by SAIF II GP as explained in paragraph 10 above.

198.  In order to avoid over-recovery by D1 and to protect the interests of Fund II, D1 must, in my opinion, hold the profit made on the Xinrui investment agreement to be disgorged by Mr Zhou on trust for Fund II, as Mr Pow accepted in his closing submissions. Subject to this condition, the Defendants are entitled to: (i) an order that (a) Mr Zhou disgorge the profit he made personally as a result of the investment made by KPCB China Fund LP under the Xinrui investment agreement of 24 August 2007; and (b) all necessary enquiries and accounts be taken to establish the sum due under (i)(a); and (ii) interest either pursuant to sections 48 and 49 of the High Court Ordinance (Cap 4) or, at the Defendants’ election, interest under the equitable jurisdiction of the Court.

THE REMEDIES TO WHICH MR ZHOU IS ENTITLED

199.  Mr Zhou is entitled to payment of the Carried Interest he ought to have been paid pursuant to Clause 8 of the SA.  The sum due is that specified in the Annexure to Mr Zhou’s second witness statement, save for the double counting identified in paragraphs 5 – 12 of Mr Yan’s 3^rd witness statement and referred to in Appendix 1 of the Defendants’ closing written submissions.

200.  Mr Zhou also seeks a declaration that he is entitled to: (1) 8.59% (representing his vested percentage of 51.78% of his final points allocation of 1,659/10,000) of all Carried Interest further distributions made to the limited partners of D1; and (2) 11% of any and all distributions made to the limited partners of Fund II based on capital contributions. 

201.  Mr Pow objected to the grant of the declarations sought by Mr Zhou on the grounds that this relief was not pleaded, had not been for in opening and had not been the subject of relevant evidence.  I reject Mr Pow’s objection.  It is true that no declarations were sought in the Statement of Claim but they were sought in Mr Zhou’s written opening and the entitlement to continued receipt of Carried Interest and distributions based on capital distributions has been established on the evidence adduced at trial.  I therefore propose to grant the declarations sought by Mr Zhou.

202.  Finally, Mr Zhou seeks compound interest on the sums awarded in respect of unpaid Carried Interest.  However, in his Statement of Claim, he merely claims “damages” and interest pursuant to sections 48 and 49 of the High Court Ordinance.  Indeed, not only is compound interest not sought in the Statement of Claim (dated 8 November 2011), but no particulars of how the loss said to be compensable by compound interest were pleaded, nor was evidence adduced to prove any such interest loss.

203.  In China Everbright-IHD Pacific Ltd v Ch’ng Poh (2002) 5 HKCFAR 630, Lord Millett NPJ suggested, obiter, that the courts of Hong Kong should consider abandoning the stance of the common law against awarding compound interest but there has been no subsequent decision by the Court of Final Appeal adopting Lord Millett’s proposal.  There has, however, been the decision of the House of Lords in Sempra Metals Ltd (formerly Metallgesellchaft Ltd) v Inland Revenue Commissioners and another [2007] UKHL 34.  Here, their Lordships held that it was open to a claimant in a common law claim to plead and prove his actual interest losses caused by late payment of a debt, which might include compound interest.  This decision, which was given some 4 years before Mr Zhou’s Statement of Claim was served, I propose to follow.

204.  In Sempra Metals, both Lord Scott and Lord Nicholls emphasised that such a compound interest loss must be proved.  Lord Nicholls said:

“ the House should now hold that, in principle, it is always open to a claimant to plead and prove his actual interest losses caused by late payment of a debt.” [94]

“ But an unparticularised and unproved claim simply for ‘damages’ will not suffice. General damages are not recoverable. The common law does not assume that delay in payment of a debt will of itself cause damage. Loss must be proved.” [96]

205.  In my judgment, the failure to plead a claim for compound interest and the failure to plead and prove particulars of how such a loss occurred, are fatal to Mr Zhou’s claim for compound interest, which I reject. He is, however, entitled to interest pursuant to sections 48 and 49 of the High Court Ordinance, such interest having been claimed in the Statement of Claim’s prayer as noted above.

CONCLUSION

206.  For the reasons given above:

 (1) Mr Zhou’s claim for unpaid Carried Interest succeeds.

 (2) The Defendants’ Counterclaim that Mr Zhou be ordered to disgorge the profit he personally made from KPCB China Fund LP’s investment in Xinrui under the Xinrui investment agreement succeeds, but all of the Defendants’ other claims that Mr Zhou was guilty of Cause under the ALPA or in breach of fiduciary are dismissed.