EAST ASIA SATELLITE TELEVISION (HOLDINGS) LTD v. NEW COTAI, LLC AND OTHERS

CACV 160/2010 & CACV 161/2010
(Heard Together)

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 160 OF 2010

(ON APPEAL FROM HCA NO. 2189 OF 2009)

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JUDGMENT

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Hon Tang Ag CJHC:

Introduction

1.  The facts are complicated.  The Statement of Claim runs to 163 pages (including Schedules).  For the purpose of these appeals, I take the facts from the Statement of Claim, and will state them as briefly as possible.

2.  The disputes between the parties arose out of a joint venture between the Plaintiff (East) and the 1^st Defendant (New Cotai) to develop a hotel, retail and entertainment complex on the Cotai Site, to be called "Macao Studio City" (MSC), with a total Gross Floor Area (GFA) of not less than 6,000,000 sq ft.

3.  The 4^th Defendant (MacaoCo) is the grantee of the Cotai Site.  Under the grant, the permitted GFA is 119,335 sq m.  Thus, the development of MSC would require a modification of the grant.

4.  MacaoCo is owned by as 96% by the 3^rd Defendant (Cyber Neighbour) and 4% by the 2^nd Defendant (Cyber One).  Cyber Neighbour is a wholly owned subsidiary of Cyber One.

5.  By a Share Purchase Agreement dated 8 April 2006 (SPA), East sold 40% of Cyber One to New Cotai.

6.  Clause 6.2.2 of the SPA provided:

"6.2.2 Upon the signing of this Agreement, the Parties shall cooperate and work together in good faith in connection with:

(i) seeking any Land Grant Modification including with respect to the negotiation of the terms and conditions thereof; and

(ii) the preparation and development of the Master Plan and any changes thereto."

7.  Land grant modification is defined in the SPA and two successive applications for land grant modifications were envisaged.  However, the Plaintiff's case is that SPA was completed on the basis that MacaoCo would seek a single modification to increase the GFA from 119,335 sq m to 560,000 sq m.

8.  No land grant modification has been obtained because, according to East, of a breach of Clause 6.2.2 by New Cotai, which has led to: (1) New Cotai not paying East HK$689,065,200, a sum payable on the grant of modification (para 229 of Statement of Claim); and (2) a diminution of the enterprise value of the MSC Project in the sum of US$2.385 billion or HK$18.603 billion (para 241(1) of Statement of Claim).

9.  As a result, East has commenced HCA 2189/2009 (the Action) and HCMP 2218/2009 under s 168A of the Companies Ordinance (the Petition).

10.  Parts of Claims in the Action and the Petition have been struck out by Reyes J.

11.  This is East's appeal.

12.  Reyes J has summarised East's claims in the Action as follows:

"1. The Plaintiff (EAST) sues the Defendants on a variety of causes of action, some personal, others derivative. The causes of action (as found in the Prayer to EAST’s Statement of Claim) may be summarised as follows:-

(1) By way of personal action against the 1^st Defendant (New Cotai), damages of $689 million for breach of clause 6.2.2 of a Share Purchase Agreement (SPA) and for conspiracy.

(2) By way of personal action against the 5^th to 10^th Defendants (collectively, the New Cotai Directors), damages of $689 million for inducing breaches of the SPA by New Cotai and for conspiracy.

(3) By way of a personal action against the 11^th and 12^th Defendants (respectively, Silver Point and Oaktree), damages of $689 million for inducing breaches of the SPA by New Cotai and for conspiracy.

(4) By way of derivative action on behalf of the 2^nd to 4^th Defendants (collectively, the Joint Venture Companies) against New Cotai, damages or equitable compensation of $18.6 billion (US$2.385 billion) for dishonest assistance and for conspiracy.

(5) By way of derivative action on behalf of the Joint Venture Companies against the New Cotai Directors, damages or equitable compensation of $18.6 billion for breach of fiduciary duty and for conspiracy.

(6) By way of derivative action on behalf of the Joint Venture Companies against Silver Point and Oaktree, damages or equitable compensation of $18.6 billion for dishonest assistance and for conspiracy."

13.  When dealing with the claim of inducing a breach of contract against D5 to D10, it may be necessary to distinguish between those directors who are External Defendants from those who are not.

14.  East's claims in the Action, relevant to this appeal, are:

(1) a claim against the New Cotai Directors for inducing a breach of Clause 6.2.2 by New Cotai;

(2) derivative actions brought by East on behalf of Cyber One, Cyber Neighbour and MacaoCo against New Cotai and the New Cotai Directors in respect of the loss of enterprise value.

15.  The learned judge went on to describe the proceedings before him:

"2. The 1^st, 5^th, 7^th and 9^th Defendants (collectively, the Internal Defendants) were served in Hong Kong. The 6^th, 8^th, 10^th, 11^th and 12^th Defendants (collectively, the External Defendants) were served outside the jurisdiction.

3. There are currently 6 Summonses before me in these proceedings. The Summonses are identified in the conclusion of this Judgment.

4. As far as EAST’s writ action is concerned, I essentially have to determine the following matters:-

(1) Applications by the External Defendants to set aside service on them or, to the extent that service was valid, to strike out EAST’s claims against them; and,

(2) Applications by the Internal Defendants to strike out substantial parts of EAST’s claims against them,

(3) An application by EAST to amend its Re-Amended Writ.

5. In parallel with its claimed actions, EAST has brought a s. 168A Petition in relation to Cyber One (one of the Joint Venture Companies). By the Petition EAST seeks the following cumulative or alternative reliefs:-

(1) An Order that New Cotai’s shares be cancelled and its capital reduced.

(2) An Order that New Cotai transfer its shareholding in EAST for a 'nil consideration, alternatively for a price to be determined by the Court'.

(3) An Order that New Cotai and the relevant New Cotai Directors pay EAST damages and interest for the unfair prejudice caused to EAST and its shareholding in Cyber One.

(4) Such 'injunctive relief ... as may be necessary or appropriate to restrain the continuation of ... wrongful conduct and to protect the interests of [Cyber One’s] members including EAST'.

(5) All necessary accounts and inquiries.

(6) Further or other relief.

6. EAST made New Cotai and 5 of the New Cotai Directors (Mr. Umansky, Mr. Moross, Mr. Friedman, Mr. Baker and Mr. Goldberg) Respondents to the Petition proceedings. The latter Respondents (collectively, the Relevant Respondents) are now applying to strike out parts of the Petition. Cyber One is also a Respondent to the Petition, but it has remained neutral throughout these proceedings.

7. The Defendants (whether External or Internal and whether or not Relevant Respondents) principally rely on 2 contentions in support of their applications to set aside or strike out EAST’s actions and the Petition.

8. First, the Defendants submit that certain of EAST’s claims for relief are impermissible because such are simply claiming reflective loss (namely, a diminution in the value of shareholdings in the Joint Venture Companies).

9. Second, the Defendants argue that certain asserted actions on behalf of the Joint Venture Companies are impermissible because such amount to multiple derivative actions. The Defendants say that multiple derivative actions (or actions analogous to multiple derivative actions) are not possible under the laws of the places (Macao or the BVI) where the Joint Venture Companies were incorporated.

10. In addition to the foregoing main contentions, there are a number of secondary issues to be resolved, including an allegation by the External Defendants of material non-disclosure by EAST in the course of its application to serve outside the jurisdiction. These will be dealt with in the course of my discussion of the principal contentions."

16.  By his judgment dated 16 July 2010, Reyes J:

(1) set aside the service out on ground of material non-disclosure.

(2) struck out –

(i) East's claim on behalf of MacaoCo, because Macao Law does not recognise a "multiple derivative action": Claims A2 and B7 in the Re-Amended Writ;

(ii) East's claim on behalf of Cyber Neighbour because (i) BVI law does not recognise a "multiple derivative action" and (ii) Cyber Neighbour cannot recover reflective loss suffered by MacaoCo: Claims A3 and B8;

(iii) East's claim on behalf of Cyber One, because Cyber One cannot recover reflective loss suffered by MacaoCo: Claims A4 and B9;

(iv) East's claim against the New Cotai Directors for inducing breaches of the SPA: Claim B5.

Inducing breach of SPA

17.  This is Claim B5 in the Re-Amended Writ.  Said v Butt [1920] 3 KB 497, a decision of McCardie J is authority:

"… that a person who without just cause knowingly procures a man to commit a breach of his contract with another, whereby the latter suffers pecuniary damage, is liable to an action for tort. …"

But a director who, acting bona fide within the scope of his authority, procures or causes the breach of a contract between the company and a third party, is not liable for the tort of inducing a breach of contract. This is referred to as the exception to the rule in Said v Butt.

18.  Mr Benjamin Yu, SC, now acting for East but not below, contended that those Defendants who were directors of New Cotai had not acted bona fide and that the exception only avails a director who had acted bona fide and in the course of his employment.  He submitted that this is not such a case.  Mr Yu relied on various paragraphs in the Statement of Claim, including paras 42, 103, 112, 119, 121, 123, 147, 148, 157, 222, 227(16) contending that East's pleaded case against these directors is that they had procured New Cotai's breach of contract by, among other things, making representations which were false without believing in the truth of the same.  This submission was not made before Reyes J.  Mr Yu has not suggested, rightly so, in my view, that on the submissions made by Reyes J, the learned judge had erred in holding that the exception to the rule in Said v Butt did not apply to the Plaintiff's claim.

19.  To raise this new point, East has applied for leave to amend §1 of the Notice of Appeal to add:

"(AA) The learned judge erred in failing to consider or sufficiently consider the pleas of deliberate misrepresentation in the Statement of Claim, which take the present case outside the rules in Said v Butt."

20.  We heard this and other new points de bene esse.

21.  Mr Yu relied in particular on Reeves v Sprecher [2008] BCC 49 where Lewison J, after referring to McCardie J's formulation of the exception in Said v Butt, said:

"31. This statement of principle has been approved by the Court of Appeal (G Scammell & Nephew Ltd v Hurley [1929] 1 K.B. 419; DC Thomson & Co Ltd v Deakin [1952] Ch. 646); and although viewed with some disfavour in the most recent case in the Court of Appeal (Welsh Development Agency v Export Finance Co Ltd [1992] B.C.C. 270) was nevertheless treated as binding. However, the disfavour with which the rule was viewed in the Welsh Development Agency case seems to me to point to the conclusion that it should not be extended.

32. The rule as formulated is restricted to cases in which the servant is acting in good faith within the scope of his employment. It may be that this means that a servant who personally acts in bad faith is outside the rule, whether he is acting within the scope of his employment or not. Or it may be that the requirement of good faith applies only to the question whether the servant believed that he was acting within the scope of his employment. The precise limits of the rule are not, in my judgment, suitable for determination on an application for summary judgment in advance of the findings of fact that would eventually be made at trial. If the first of these formulations is correct, then if Mr Sprecher and Ms Sanghvi are found at trial to have known that the charges were false and baseless, it could not be said that they were acting in good faith. But, even if the second and more restricted formulation is correct, if it were to be found at trial that Mr Sprecher and Ms Sanghvi knew that they were participating in a disciplinary process based on allegations that they knew to be false and baseless, it seems to be at least open to question whether they could have thought that doing so was within the scope of their employment or authority. I am not therefore prepared to give summary judgment against Mr Reeves on this part of the claim."

22.  In Reeves, the Plaintiff's complaint was that he had been constructively (and wrongfully) dismissed as managing director of a company, PCM, when he was summoned to a disciplinary hearing based on trumped-up charges against him.  One of his claims was against two directors of PCM (who must be regarded as the alter ego of PCM) for inducing a breach of PCM's contract of employment with him.  It was the Plaintiff's case that these directors knew that the charges were false and baseless.

23.  In D.C. Thompson & Co. Ltd v Deakins and Others [1952] 1 Ch 646 Evershed MR after describing the Said v Butt exception said at 681:

"I adopt for this purpose the statement that I find in Winfield's Law of Torts, 5th ed., 603. Dealing with this tort of interfering with contracts, the author says: 'If my servant acting bona fide within the scope of his authority, procures or causes me to break a contract that I have made with you, you cannot sue the servant for interference with the contract; for he is my alter ego, and I cannot be sued for inducing myself to break a contract.' Such is the inference from Said v. Butt, which he then discusses. Later he says: 'If the servant does not act bona fide, presumably he is liable on the ground that he has ceased to be his employer's alter ego,' and so on."

24.  I will not go more deeply into this issue.  I say no more than that the precise limits of the Said v Butt exception require careful consideration and may depend on the true juridical basis for the exception.

25.  By summons dated 1 April 2010, the 5^th, 7^th and 9^th Defendants (the Internal Defendants) applied to have Claim B5 as well as paras 230 to 233 and para B(1) of the prayer in the Statement of Claim struck out on the ground that the claim that these Defendants caused and/or procured and/or induced breaches of the SPA by the 1^st Defendant discloses no reasonable cause of action.

26.  By summonses dated 7 April 2010 and 29 June 2010, the External Defendants made a similar application under O 18 r 15(2) and r 19(1)(a), (b), (c) and (d).

27.  Earlier, by summons dated 1 April 2010, the External Defendants applied for the leave to serve out of jurisdiction to be set aside on grounds including material non-disclosure (A3 804).

28.  Mr Strachan, for the Respondents, has not addressed us on the consequence of a finding that the exception to Butt v Said does not apply.  However, he has informed us that, since Reyes J's decision, New Cotai has filed its own s 168A Petition and brought two writ actions.  Orders have been made that the Action and the Petition be heard together with the New Cotai actions and petitions, and that all proceedings are due to go back to the learned judge on 30 June 2011 for directions.

29.  I believe it is right that we should entertain a new point of law on appeal and avoid unnecessary delay. I would grant leave to East to raise this point.  Of course, the fact that an appeal only succeeds on a new point may have a bearing on costs.  So far as Claim B5 is concerned, I would not strike it out against any of the 5^th to 10^th Defendants.  As for the service out on the External Defendants, Mr Strachan submitted that insofar as the application for leave to serve out of the jurisdiction was not made on the basis of the exception to Butt v Said, leave should be set aside.  Mr Yu on the other hand submitted that Claim B5 in the writ (namely, damages for inducing a breach of contract) is a sufficient pleading for service out purpose.  As a matter of pleading, I agree.  But the reliance on the exception to Butt v Said falls within the duty to make material disclosure.  But since Reyes J had not exercised his discretion (with respect, because the question never arose), I have a discretion which I am disposed to exercise against setting leave aside.  I invite submissions from the parties on the implication of such an approach.

Multiple Derivative Actions

30.  As noted, there are derivative actions on behalf of MacaoCo against the three New Cotai Directors for breaches of fiduciary duty owed to MacaoCo, as well as derivative claims on behalf of Cyber Neighbour against three New Cotai Directors for breaches of fiduciary duties owed to Cyber Neighbour.  There is also a single derivative action on behalf of Cyber One against the New Cotai Directors for breaches of fiduciary duties against New Cotai.  MacaoCo is a company incorporated in Macao, Cyber Neighbour is incorporated in the BVI.

31.  There is no dispute that a single derivative action on behalf of New Cotai was possible.  However, it was struck out by Reyes J as a claim for reflective loss.

lex incorporationis

32.  A common issue in the multiple derivative actions is whether it is the law of the place of incorporation (lex incorporationis) or lex fori which governs whether a derivative action is available. East argued that it is the lex fori.  This is also the subject of an application for leave to amend the Notice of Appeal (para 1A) because counsel for East had not so contended before Reyes J.  I would also grant leave to East to raise this new point.

33.  Reyes J said:

"87. … the Hong Kong Court will only entertain such derivative action if and only if an analogous action can be brought by the shareholder under the law of the place of the foreign company’s incorporation. See Konamaneni v. Rolls Royce (India) Ltd. [2002] 1 WLR 1269 (Lawrence Collins J at para. 50)."

34.  Mr Yu submitted that Lawrence Collins J's observations were unnecessary for the decision.  That maybe so, but the observations were made after Lawrence Collins J (as he then was) had heard arguments on the question. The learned judge said at page 1284 and para 50 of his judgment:

"… If it had arisen for decision I would have held that the law of the place of incorporation governs. That is because the basic rule is that the shareholders had no direct rights, as Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204 makes clear. Although for purely English domestic purposes, the exceptions to the rule have been regarded as a procedural device, I do not consider that in the international context their real nature is procedural. They confer a right on shareholders to protect the value of their shares by giving them a right to sue and recover on behalf of the company. It would be very odd if that right could be conferred on the shareholders of a company incorporated in a jurisdiction which had no such rule, and under which they had acquired their shares."

35.  In Base Metal Trading Ltd v Shamurin [2005] 1 WLR 1157 at 1176, Arden LJ said at para 68:

"Another example of a matter governed by the law of the place of incorporation is the determination of the circumstances as a matter of substantive law in which the shareholders can bring actions on behalf of the company (often called 'derivative' actions): See Konamaneni. …"

36.  Mr Yu pointed out that a shareholder who sues in the name of the company does not have a cause of action; rather, he is constituted a representative of the company to bring proceedings: Waddington Ltd v Chan Chun Hoo [2008] 11 HKCFAR 370 at 49-51. He submitted the form of the proceeding is a "mere matter of procedure" to give a remedy for a wrong which would otherwise escape redress: Burland v Earle [1902] AC 83 at 93, cited by Lord Millett in Waddington in para 51.  It is a matter of standing.  In the case of a "multiple derivative action", the question is whether the action may be brought by a member of the parent or ultimate holding company of a company in which the cause of action is vested.  Again, it is simply a question of standing.  He submitted the ability of a shareholder to bring a derivative action or multiple derivative action is not a right.  He merely has the standing to do so. 

37.  With respect, as Lawrence Collins J said, a derivative action is a procedural device, which confers a right on shareholders to protect the value of their shares by giving them a right to sue or recover on behalf of the company.  It is true that the cause of action asserted is the company's.  But a stranger to the company would not have the right to bring an action in the name of the company.  Nor a beneficial owner (as opposed to a legal owner) of shares.  The right to bring a derivative action is an incident of the legal ownership.

38.  In Waddington Lord Millett said (with the concurrence of the other members of the court):

"55. … If the question whether a derivative action is available is a question of substantive law, as the Bills Committee thought (following statements to this effect in Konamaneni v. Rolls Royce (India) Ltd [2002] 1 WLR 1269 at p. 1284 and Base Metal Trading Ltd v Shamurin [2005] 1 WLR 1157 at p. 1176 CA), then it is governed by the law of the place of incorporation. The same law also governs the company's indoor management. Neither question is governed by the common law of Hong Kong; both are governed by the law, whether statutory or common law, of the overseas jurisdiction. The question whether the leave of the court is required is a procedural question governed by the lex fori. In my opinion, once the legislation is extended to cover multiple derivative actions, the continued existence of two parallel regimes will serve no discernable purpose."

39.  Ribeiro PJ said:

"31. In providing for two parallel regimes, the Bills Committee noted that there exist a large number of companies incorporated outside Hong Kong but controlled by Hong Kong residents. On the basis that the right of a shareholder to bring a derivative action is governed by the law of the place of incorporation, it was concerned that the abolition of the common law right to bring derivative actions in respect of non-Hong Kong companies might deprive their shareholders of rights otherwise available to them. But as Lord Millett points out in his judgment, it is not necessary to preserve the common law in Hong Kong on derivative actions to cater for the application of the law of the place of incorporation on derivative actions for non-Hong Kong companies."

40.  Mr Yu, in his skeleton submissions (but not in his oral submissions), has referred to Ebbage v Manthey [2001] QSC 4, a decision of the Queensland Supreme Court, and a number of other Australian authorities. In Ebbage, the plaintiff asserted that he was entitled to bring a derivative action on the basis of an equitable interest in the shares. However, Helman J pointed out:

"… But in Australia it is now well settled that an equitable interest in shares does not confer standing to bring a legal proceeding based on an exception to the rule in Foss v Harbottle…"

41.  In such context, Helman J went on to say:

"The rule in Foss v Harbottle and its exceptions have generally been considered part of the powers and procedures of modern courts of equity … It follows that the rule as to the lack of standing of a beneficial owner of shares to institute a derivate proceeding is procedural. Matters of procedure are governed by the lex fori, so that the rule as to the lack of standing of one whose name does not appear on a company's register of members to bring a derivative proceeding, as it is understood in this jurisdiction, governs this case. … But in any event the evidence as to the law of Vanuatu is irrelevant since the lex fori is the governing law on this subject."

42.  Virgtel Ltd v Zabusky [2006] QSC 66 is another decision of the Queensland Supreme Court. It was concerned with a Nigerian company.  Under Nigerian law, leave of the court was required before a derivative action could be made.  de Jersey CJ said:

"44. The issue which arises here is whether the manner of commencement of this proceeding was regulated by Nigerian law of Queensland."

43.  He went on to say:

"55. In my view, the present question is procedural. It concerns the mechanics of litigation, what formalities must be met before a proceeding may go forward (John Pfeiffer pp 542-4): it does not concern the 'existence, extent or enforceability' of the right (to bring a derivative proceeding), just the manner of its exercise (para 99)."

44.  However, the learned judge mentioned that counsel for the respondent (Mr Savage) had relied on the dictum of Lawrence Collins J in Konamaneni at 1284, and said:

"58. … That obiter could not prevail over the other authority to which I have referred, at least for present purposes"

45.  It is not clear from the judgment what Mr Savage's submission was, but Konamaneni has not decided that a requirement for leave by the law of incorporation is not procedural.  Nor is such a view inconsistent with Konamaneni, thus Arden LJ in Base Metal after expressing agreement with Konamaneni said at para 68:

"… The question whether a shareholder has a right to bring a derivative action may have to be distinguished in future from the question whether the shareholder has satisfied any procedural rules from bringing a derivative claim, for example by serving prior notice on the company. My provisional view is that these are matters of procedural law for the lex fori rather than the law of the place of incorporation."

46.  See also Lord Millett quoted in para 38 above.

47.  With respect, there is nothing in any of the Australian authorities which makes me doubt the correctness of Lawrence Collins J's observations in Konamaneni.

48.  Mr Yu also made the point that Lord Millett's reference to Konamaneni in para 55 of his judgment was conditional.

49.  But, Ribeiro PJ's reference to Konamaneni could not be described as conditional.  Indeed, I do not agree that Lord Millett's observations suggest that he had reservations about the correctness of Konamaneni. 

50.  In my view, it is not arguable that the right to bring a multiple derivative action is not governed by the law of the place of incorporation.

s 168BC(4) Companies Ordinance

51.  Mr Yu also relies on s 168BC(4) of the Companies Ordinance which provides:

"Subject to other provisions in this Part, this Part shall not affect any common law right of a member of a specified corporation, or any common law right of a member of a related company of a specified corporation, to bring proceedings on behalf of the specified corporation, or intervene in any proceedings to which the specified corporation is a party."

52.  But as the dictum of Lord Millett quoted in para 38 above shows, if the right of a foreign corporation to bring a derivative action is governed by the law of the place of incorporation, the saving of "any common law right" is nothing to the point.

BVI law

53.  I turn to the derivative claim on behalf of Cyber Neighbour (a BVI company), which is governed by the BVI law.

54.  Section 184C of the BVI Business Companies Act provides:

"(1) Subject to subsection (3), the Court may, on the application of a member of a company, grant leave to that member to

(a) bring proceedings in the name and on behalf of that company; or

(b) intervene in proceedings to which the company is a party for the purpose of continuing, defending or discontinuing the proceedings on behalf of the company.

(2) Without limiting subsection (1), in determining whether to grant leave under that subsection, the Court must take the following matters into account

(a) whether the member is acting in good faith;

(b) whether the derivative action is in the interests of the company taking account of the views of the company’s directors on commercial matters;

(c) whether the proceedings are likely to succeed;

(d) the costs of the proceedings in relation to the relief likely to be obtained; and

(e) whether an alternative remedy to the derivative claim is available.

(3) Leave to bring or intervene in proceedings may be granted under subsection (1) only if the Court is satisfied that

(a) the company does not intend to bring, diligently continue or defend, or discontinue the proceedings, as the case may be; or

(b) it is in the interests of the company that the conduct of the proceedings should not be left to the directors or to the determination of the shareholders or members as a whole.

(4) Unless the Court otherwise orders, not less than twenty eight days notice of an application for leave under subsection (1) must be served on the company and the company is entitled to appear and be heard at the hearing of the application.

(5) The Court may grant such interim relief as it considers appropriate pending the determination of an application under subsection (1).

(6) Except as provided in this section, a member is not entitled to bring or intervene in any proceedings in the name of or on behalf of a company."

55.  Reyes J said:

"123. … Where (as all experts here agree) that domestic law does not recognise the bringing of a multiple derivative action, that is the end of the matter."

56.  With respect, I agree.  The parties’ experts on BVI law (Mr. Paul Webster QC for the Defendants, Mr. Richard Millett QC and Mr. Joe Smouha QC for EAST) all accept that multiple derivative actions are not possible in the BVI.

57.  On that basis, it seems to me that Cyber Neighbour could not bring a multiple derivative action in Hong Kong. 

58.  Mr Yu submitted that in considering foreign law expert evidence, the Court does not simply accept any stated conclusions as being correct.  It must look at the basis of the legal reasoning: Full Wisdom Holdings Ltd v Traffic Stream Infrastructure Co Ltd & Others [2004] 2 HKLRD 1016 at para 23, per Le Pichon JA.  That is so and has particular relevance when I come to consider the Plaintiff's expert (Professor Godinho) on Macao law.  But I can see no reason to disagree with the views of the experts on BVI law. 

59.  Indeed, one may look at s 260 of the English Companies Act 2006 which provides as follows:

"260 Derivative claims

(1) This Chapter applies to proceedings in England and Wales or Northern Ireland by a member of a company—

(a) in respect of a cause of action vested in the company, and

(b) seeking relief on behalf of the company.

This is referred to in this Chapter as a 'derivative claim'.

(2) A derivative claim may only be brought—

(a) under this Chapter, or

(b) in pursuance of an order of the court in proceedings under section 994 (proceedings for protection of members against unfair prejudice).

(3) A derivative claim under this Chapter may be brought only in respect of a cause of action arising from an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director of the company.

The cause of action may be against the director or another person (or both).

(4) It is immaterial whether the cause of action arose before or after the person seeking to bring or continue the derivative claim became a member of the company.

(5) For the purposes of this Chapter—

(a) 'director' includes a former director;

(b) a shadow director is treated as a director; and

(c) references to a member of a company include a person who is not a member but to whom shares in the company have been transferred or transmitted by operation of law."

60.  That was taken by Lord Millett, writing extra judicially in Gore-Browne Bulletin May 2010, as precluding multiple derivative actions in England.  He said:

"In England, the Companies Act 2006 provides that a derivative claim 'may only be brought' pursuant to the statute, which thus entirely supersedes the common law action. This is in accordance with the Law Commission's recommendations and is certainly more logical than the position that obtains in Hong Kong; but it is most unfortunate, for the statutory provisions are drafted in terms that plainly exclude the multiple derivative action. Thus, such an action is not possible under the statute and cannot be developed at common law. In spite of the precedents in other common law countries, the prevalence of groups trading through wholly owned subsidiaries (when the assets at risk of misappropriation are more likely to be situate in the trading subsidiaries than in the holding company), and the recommendations of the Company Law Review Steering Group, the Law Commission recommended that the multiple derivative action should not be allowed, and the Steering Group's recommendation that it should was not adopted.

……

This is all very well if the wrongdoers have allegedly misappropriated assets belonging to the company itself. If they belong to a subsidiary, however, and there is no liquidation or administrative receivership, the only remedy is a multiple derivative action. This is possible in Australia, New Zealand, Canada, Singapore and Hong Kong, but not in England. Had the facts alleged in Waddington come before an English Court, the case must have been dismissed in limine, and for the first time in more than 150 years an alleged injustice would be without redress. The moral for would be fraudsters is simple; choose an English company, and be careful to defraud its subsidiary and not the company itself."

61.  I mention this to show Lord Millett's view on the effect of a similar provision in the United Kingdom.  In the course of the proceedings counsel told us that they were unaware of any contrary view having been expressed on the effect of s 260 of the English Companies Act. 

62.  Lastly, I do not accept the suggestion that s 184C only applied to proceedings within the BVI such that it should not be treated as precluding the Hong Kong court in Hong Kong from allowing a common law multiple derivative action on behalf of the BVI company.

Macao Law

63.  I turn to consider whether a multiple derivative action is permitted under the law of Macao.

64.  The relevant provision is the Macao Commercial Code article 248 which provides in translation:-

"The liability action in favour of the company can be brought by an unlimited liability shareholder or by shareholders holding a capital participation of no less than 10%, if the company has not yet initiated the respective action."

65.  Mr Strachan submitted that it is plain that the Macao law recognises only a single derivative action, a contention supported by New Cotai's expert, Mr Riquito, a Macanese lawyer, who has stated in his evidence that under article 248, the remedy is available only to a direct shareholder of MacaoCo and not to an indirect shareholder.

66.  The plaintiff relied on the evidence of Professor Godinho, who had found no precedent of any multiple derivative action in Macao or in Portugal (Para 10 of Bundle at 295).  The learned judge understood Professor Godinho's evidence to be that:

"94. … Macao law (in common with the law of Hong Kong and that of many other states) has a principle whereby the corporate veil may be ignored. The application of that principle in conjunction with Art. 248(1) (Prof. Godinho suggests) can have the result in certain situations of mimicking what happens under a common law multiple derivative action. Thus, where the corporate veil can be pierced under Macao law, a parent X may be treated as the same legal person as its subsidiary Y. In that instance, a shareholder of X would be able to sue wrongdoers of Y directly under Art. 248(1) since X and Y are together deemed to be 'the company' within the terms of that provision."

67.  Mr Yu submitted that on such basis, the learned judge ought to have concluded that multiple derivative action was permissible in Macao. He submitted that provided a multiple derivative action is permissible under the lex incorporationis, the juridical basis upon which it could be done should not matter. 

68.  Mr Yu relied on what Lord Millett said in Waddington:

"65. The multiple derivative action has been recognised in many states of the United States, but the legal basis on which the action is maintainable has varied from state to state and from time to time. Many of the grounds upon which the action has been rationalised would not be accepted in either England or Hong Kong. In some cases the subsidiary has been treated as a mere instrument, agent or alter ego of the parent company; in others the corporate structure has been described as a fiction or 'specious and illusory device' allowing the court to pierce the corporate veil. …"

69.  But it is important to note that Reyes J went on to say.

"95. But, in reality, the shareholder does not sue wrongdoers of Y because Macao law recognises a direct right of suit in the shareholder under a doctrine analogous to a common law multiple derivative action. The shareholder is only able to sue directly in the example given because Macao law recognises the different doctrine of piercing the corporate veil.

96. Further, implicit in Prof. Godinho’s argument is an acceptance that, but for recourse to some other doctrine (such as piercing the corporate veil) whereby a parent and a subsidiary are treated as the same entity, Art. 248(1) does not authorise a direct action by a shareholder of X against the wrongdoers of Y. There would be no need for Prof. Godinho’s elaborate reasoning in relation to piercing the corporate veil, if on its own Art. 248(1) is capable of being construed as enabling multiple derivative actions. Inherent in Prof. Godinho’s approach is a tacit acknowledgment of Mr. Riquito’s position, namely, that on its face, Art. 248(1) plainly only permits shareholder suits analogous to single (not multiple) derivative actions."

70.  In para 39 of Professor Godinho's affirmation, he said after discussing the concept of lifting the corporate veil under Macao law:

"39. Importantly, it is not necessary to show fault in order to disregard the corporate personality. A simple or objective breach of the purposes of the legal regulation is sufficient. (As I understand it, this means the principle is very different from the principle of 'lifting the corporate veil' in common law jurisdictions.)"

71.  Professor Godinho then concluded:

"45. Accordingly, it is my view that the Macau courts would apply the disregard of corporate personality principle to allow the initiation of liability proceedings by East Asia on behalf of [MacaoCo]. The disregard would operate to correct what would otherwise be an unjustified curtailment of the rights of shareholders having 10% of the capital or more of what is effectively, a single, interlocking corporate structure."

72.  With respect, I also have difficulties with Professor Godinho's analysis.  If, by lifting the corporate veil, MacaoCo would not be treated as a separate entity from its holding company, one would have thought the action should be in the name of the holding company and not MacaoCo.

73.  The matter may be tested in this way.  Under English law the veil of incorporation might be lifted under certain circumstances.  But if as a result of s 260 of the 2006 Companies Act a multiple derivative action is not available in England, could one bring a multiple derivative action by lifting the veil of incorporation?  I do not think so.  Despite Professor Godinho's conclusion in para 45 of his affirmation quoted above, I cannot accept that the lifting of the veil of incorporation of MacaoCo could result in East being able to issue proceedings in MacaoCo's name.

Reflective loss

74.  This is relevant to the derivative claim brought by East in the name of Cyber One (a single derivative action) as well as on behalf of Cyber Neighbour (a multiple derivative action).  Though, in the case of Cyber Neighbour, in any event, a multiple derivative action is not permissible. 

75.  Reyes J said:

"125. The loss claimed on behalf of Cyber Neighbour is plainly a claim for reflective loss.

126. EAST’s allegation is that a result of the New Cotai Directors’ breaches of duty, Cyber One, Cyber Neighbour, and Macao Co have suffered loss. Spelled out in pedantic detail, EAST’s case runs thus: Had the New Cotai Directors not acted in breach of their duties, a land grant modification would long ago have been made in Macao Co’s favour and the MSC project would have enjoyed an enterprise value of at least $18.6 billion. Because there has been no land grant modification, Macao Co does not today enjoy such enterprise value and its net asset value has been (and continues to be) diminished. Since Macao Co is worth less than it should be, Cyber Neighbour’s shareholding in Macao Co and (in consequence) Cyber Neighbour are worth less than they should be. Since Cyber Neighbour is worth less than it should be, Cyber One’s shareholding in Macao Co and (in consequence) Cyber One are worth less than they should be.

127. Two features of EAST’s derivative claims may be noted.

128. First, EAST seeks to claim by way of derivative actions Macao Co’s loss as reflected through the shareholding chain from Cyber Neighbour up to Cyber One. The derivative claim which EAST wishes to bring on behalf of Cyber Neighbour claims Cyber Neighbour’s loss as reflected from Macao Co’s loss. The derivative claim which EAST wishes to bring on behalf of Cyber One claims Cyber One’s loss as reflected from Cyber Neighbour’s loss which in turn is loss reflected from Macao Co’s loss.

129. Second, as far as its claim for lost enterprise value of $18.6 billion is concerned, EAST does not assert any parallel personal cause of action against the New Cotai Directors having as its measure of damages the lost enterprise value of $18.6 billion. All of the personal claims which EAST asserts (whether in its Writ, Amended Writ, Re-Amended Writ and proposed Re-Re-Amended Writ) are for $689 million (the quantum of the 2^nd tranche payment said to be due from New Cotai). EAST does not plead a personal cause of action against the New Cotai directors which claims the reflective loss quantum of $18.6 billion as EAST’s own damages entitlement."

76.  Mr Yu sought to overcome this by relying on the fact that where a company has suffered loss but has no cause of action to sue to recover that loss, the shareholder can sue, even though the loss is a diminution in the value of the shareholding: Johnson v Gore Wood [2002] 2 AC 1, 35G (Lord Bingham).  He submitted that because the structure of the joint venture was that all the decisions were made at the level of the shareholders of Cyber One, thus "there may be scope for the New Cotai parties to argue that, because certain of the conduct which East alleges gives rise to the derivative claims took place at the Cyber One level and not at the MacauCo level, MacauCo does not have a valid cause of action in respect of such conduct".

77.  But as the Learned Judge has pointed out, nowhere in its pleadings or affidavit evidence had East even hinted that MacaoCo was somehow unable to sue the New Cotai Directors for wrongs inflicted upon MacaoCo.  On the contrary, East's pleaded case is that Macao Co has a cause of action against the wrongdoing of the New Cotai Directors.: Judgment §139.  Also the suggestion that MacaoCo might not have a cause of action because all decisions were made on the Cyber One level, was rightly described by the learned judge as speculative and contrary to the main thrust of East's case: Judgment §144.

78.  Mr Yu submitted that the burden is on New Cotai to show that MacaoCo has a cause of action, and hence the rule against reflective loss is applicable.  Mr Yu relied on the following:

"83. … As the Prudential is an exclusionary rule denying a claimant what otherwise would be his right to sue, the onus must be on the defendants to establish its applicability. Further, it would not be right to bar the claimant's action unless the defendants can establish not merely that the company has a claim to recover a loss reflected by the profit, but that such claim is available on the facts. …" – Shaker v Al-Bedrawi and Others [2003] 1 BCLC 157 (Peter Gibson LJ)."

79.  He also submitted that before the New Cotai parties file a Defence to MacaoCo's claims, obviously one will not know whether they will allege that no decision has been made on the MacaoCo level, and hence MacaoCo has no cause of action.  But it is certainly not inconceivable that such an argument would be raised.  See Hong Kong Civil Procedure 2011 §18/19/4 p. 406. 

80.  I do not believe this matter turns on the burden of proof.  If and when such a defence is raised, it may be that the matter can be revisited.  But, as matter now stands, I agree with Reyes J that this is speculative.  Also I do not understand how the fact that no decision had been made on the MacaoCo level could relieve its directors of their fiduciary duties.

Material non-disclosure

81.  The Judge set aside service of the proceedings on the External Defendants, namely, D6, D8 and D10 (Mr Moross, Mr Baker and Mr Vora) out of the jurisdiction because East was guilty of material non-disclosure in that it failed to provide the court with any evidence that multiple derivative actions were recognised under Macao law and BVI law (Judgment §§175 and 176). The Judge also said that East should have pointed out that it was seeking to make claims for reflective loss and explained why such claims were arguably permissible (Judgment §180).

82.  As Mr Strachan submitted the duty of disclosure extends to matters of law.  In Memory Corporation Plc and Another v Sidhu (No 2) [2000] 1 WLR 1443 at 1460 Mummery LJ said the duty to disclose encompassed "significant factual, legal and procedural aspects of the case".  Inadvertent (innocent) non-disclosure may well give rise to the ex parte order being discharged:  See, for example, Re A [2007] HKEC 2266 (§41).  I have no doubt that the decision to set aside leave fell within the wide discretion of the learned judge and there is no basis upon which we can interfere with his exercise of discretion.

Draft Orders

83.  I invite the parties to submit a draft order giving effect to the views expressed above as well as submissions on costs within 14 days of the handing down of this judgment.

Hon Fok JA:

84.  I have had the benefit of reading the judgment of Tang Ag CJHC in draft.  I respectfully agree with it and have nothing to add.

Hon Chu JA:

85.  I agree.