SANJU ENVIRONMENTAL PROTECTION (HONG KONG) LTD v. WANG LISHAN AND OTHERS

HCMP 570/2021

[2021] HKCFI 1503

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 570 OF 2021

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REASONS FOR DECISION AND DECISION ON COSTS

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Introduction

1.  At the substantive hearing of the originating summons dated 26 April 2021 (“OS”) (as amended on 11 May 2021 (“AOS”)) and the summons dated 27 April 2021 (“Summons”) both issued by Sanju Environmental Protection (Hong Kong) Limited (“P”) against the 1^st to 5^th defendants (“Ds”), I granted an injunction enjoining Ds from passing any resolution at a board of directors meeting of Jutal Offshore Oil Services Limited (“Company”) to approve or authorise “the 2^nd Resolution” (as defined in §3(2) below)) until the 2021 annual general meeting (“AGM”) of the Company or any adjournment thereof.  These are the reasons for my decision.

2.  The AOS is issued under ss 728 to 730 of the Companies Ordinance (Cap 622) (“CO”), s 21L of the High Court Ordinance (Cap 4) and inherent jurisdiction of the Court.

3.  The matter first came before this Court in the afternoon on 26 April 2021 when P made an ex parte application to restrain Ds from approving the following 2 resolutions at the board of directors’ meeting of the Company to be held at 10am on 27 April 2021 (“27 April Meeting”):

(1)  “the purported investment of RMB 220,000,000 by the Company in Pier No 2 owned by Zhuhai Jutal Offshore Oil Services Limited” (“1^st Resolution”)[1]; and

(2)  “the entering into of a subscription agreement or any agreement with Mr Zhang Jinbing (張金兵) (“Purported Subscriber”) under which the Company would allot or issue to the Purported Subscriber 164,401,638 new ordinary shares in the Company or any share” (“2^nd Resolution”)[2].

4.  The ex parte injunction was granted on the bases that it had been demonstrated by P[3] that:

(1)  Ds had not provided any meaningful information pertaining to the 1^st and 2^nd Resolutions to the other directors.  This was despite the magnitude of the transactions, their impact on the Company and the shareholders and the many requests made by the other directors for information relating to the transactions;

(2)  the Group had cash in excess of RMB 1 billion and, as such, there was no need for the Company to raise funds in great haste; and

(3)  there was no urgency or justifications for Ds to push through the transactions at the 27 April Meeting.

5.  At the return date of the Summons on 30 April 2021, counsel for Ds[4] sought an immediate discharge of the ex parte injunction on the grounds that P had been guilty of material non-disclosures and that the Court should not interfere with the management decisions of the Company.  I was not persuaded by the arguments:

(1)  Although P had failed to disclose the fact that Ds’ solicitors had in their letter to Messrs Siao Wen & Leung (“SWL”) dated 26 April 2021 replied to the letter sent to Ds on 24 April 2021[5], that was attributed to the failure on the part of the handling partner in informing the solicitor and counsel attending the application the existence of the letter.  It was not the fault of P.

(2)  In any event, I did not consider Ds’ letter of 26 April 2021 to be material to the application as it only contained Ds’ allegations against P in respect of some disputes which had already been settled by a settlement agreement entered into between the Company and P, whereupon P agreed to pay HK$130 million (“Settlement Sum”) to the Company by 29 June 2021.  It had nothing to do with the transactions under the 1^st and 2^nd Resolutions. 

(3)  The other 2 alleged non-disclosures concerned (i) the Company’s established practice of giving notice of board meetings, and (ii) information available to the directors regarding the Pier Project and the Subscription.  I did not think the allegations were well founded.   

(4)  More importantly, D1 (qua Chairman) had decided to adjourn the 27 April Meeting to 1 May 2021 (“1 May Meeting”) but did not provide any further information to the other directors in respect of the 1^st and 2^nd Resolutions.  This was surprising given (i) Ds’ stance that there was an urgent need to approve the 1^st and 2^nd Resolutions, (ii) the ex parte injunction did not prevent the directors from considering and discussing the 1^st and 2^nd Resolutions, and (iii) P’s complaint about Ds’ lack of transparency in dealing with the transactions.

6.  As Ds were not able to refute the good arguable case made by P at that stage, I granted an interim injunction in similar terms as the ex parte injunction save that Ds could, with the unanimous agreement of the other directors, approve the 1^st and 2^nd Resolutions (“Interim Injunction”).

7.  At the same hearing, I dealt with the following procedural matters:

(1)  leave was given to Ds to join the other 4 directors as the 1^st to 4^th interested parties (“IPs”) so that they would be bound by any injunction granted by the Court;

(2)  leave was given to P to amend the OS by deleting the reference to the 28 April Meeting, such that P’s application for injunction cover other board meeting at which the 1^st and 2^nd Resolutions would be considered; and

(3)  the substantive AOS and the Summons were directed to be heard on an expedited basis (on 17 May 2021), on the basis that that the 2021 AGM would be held on 21 May 2021, such that it would be desirable for the AOS and the Summons to be determined before such AGM. 

Factual background

8.  The Company is a company incorporated in the Cayman Islands and is registered as a non-Hong Kong company under Part 16 of the Companies Ordinance (Cap 622) (“CO”).  Its shares have since September 2006 been listed on the main board of the Stock Exchange of Hong Kong Limited with stock code 3303.  The Company is an investment holding company and, through its subsidiaries, engage in manufacturing of oil and gas facilities and processing skid equipment business. 

9.  As at the date of the announcement of the 27 April Meeting, the Company had issued share capital of HK$40 million divided into 4 billion ordinary shares of which 1,644,016,389 were issued.  The issued shares are held or controlled by the following substantial shareholders:

(1)  P holds about 39.02%. According to its latest audited accounts, P had net assets of around RMB 244 million.  P’s shares, in turn, are held by Beijing Sanju Environmental Protection & New Materials Co, Ltd (“BJ Sanju”), a company established in the Mainland whose shares are listed on the Shenzhen Stock Exchange and with market capitalisation of RMB 13.5 billion.

(2)  D1 controls 25.21%, of which 1.07% is held in his name and 24.14% in the name of his corporate vehicle, Cheung Hing Investments Limited. 

(3)  Golden Talent (HK) Technology Co, Limited holds 9.85%.   

10.  The Company has 9 directors whose positions and dates of appointment are as follows:

Name	Position(s)	Date of Appointment as Director
Wang Lishan (“D1”)	Executive Director, Chairman	24/11/2005[6]
Cao Yunsheng (“D2”)	Executive Director	22/1/2021
Liu Yunian (“D3”)	Executive Director	8/6/2018
Su Yang (“D4”)	Independent Non-Executive Director (“INED”)	26/8/2006
Qi Daqing (“D5”)	INED	31/7/2015
Wang Ningsheng (“IP1”)	Executive Director, President	8/1/2020
Liu Lei (“IP2”)	Executive Director, Deputy Chairman	10/6/2017
Gao Zhiqiang (“IP3”)	Executive Director	10/4/2020
Zheng Yimin (“IP4”)	INED	10/6/2017

11.  P became the largest shareholder in May 2017 upon subscription of 99.6% of the then issued share capital of the Company.  At that time, D1, D2, D4 and D5 had already been appointed as Executive Directors of the Company.  D3 was appointed as director in 2018 upon the recommendation of BJ Sanju at D1’s request.

12.  It is P’s case that D2-D5 have been accustomed to act in accordance with D1’s instructions, and Ds being the majority have control over the board of the Company. 

13.  In the evening of 21 April 2021, D1 circulated a notice of board meeting to the directors through WeChat to convene the 27 April Meeting to consider and approve the 1^st and 2^nd Resolutions (“Notice”). 

(1)  Under the 1^st Resolution, it was proposed that the Company should invest RMB 220 million in Pier No 2 (“Pier Project”) owned by an indirect subsidiary, Zhuhai Jutal Offshore Oil Services Limited.

(2)  Under the 2^nd Resolution, it was proposed that the board should allot 10% of its issued shares to Mr Zhang Jinbing (“Zhang”) using the general mandate given by the shareholders at the AGM held on 12 June 2020, which authorised the directors to allot and issue up to 20% of the Company’s shares in issue (“2020 Mandate”).  As with all general mandates given by the shareholders at an AGM, the 2020 Mandate is only valid until the conclusion of the next AGM of the Company.    

14.  In the Notice, it was stated that the Subscriber was an investor in real estate (產業投資人) and the shares would be issued at no less than 80% of the last trading price or the average trading prices of the Company’s shares in the last 5 trading days.  Appended to the Notice were:

(1)  a draft Subscription Agreement between the Company and Zhang (“SA”);

(2)  draft minutes of the 27 April Meeting recording the directors having passed the 1^st and 2^nd Resolutions unanimously;

(3)  draft announcement on the SA; and

(4)  draft application for listing and permission to deal in the Subscription Shares to be issued.

15.  Under the SA:

(1)  the Subscriber will be subject to a “lock-up” period of 180 days during which the “Subscription Shares” cannot be disposed of or encumbered unless with the prior written consent of the Company (clause 4(D));

(2)  the “Long Stop Date” for fulfilling the condition[7] is 31 May 2021 or such other date as the parties may agree (clause 2(A)); 

(3)  new shares representing 10% of the issued share capital of the Company as at the date of the SA (or 9.09% of the total enlarged capital following completion of the issue) (“Subscription Shares”) will be allotted and issued to the Subscriber (“Subscription”); and

(4)  completion of the Subscription shall take place within 2 working days of the fulfilment of the condition or such other time as may be agreed between the parties (clause 5(A)).

16.  In the draft announcement, the “Reasons for the Subscription and Use of Proceeds” was described in this way:

“The Group is principally engaged in fabrication of facilities and provision of integrated services for oil and gas industries, other energy and refining and chemical industries and provision of technical support services for shipbuilding industry.

[The Board holds the view that the Subscription provide [sic] opportunities for the Group to broaden shareholder base and the capital base of the Company and improve the liquidity of the Shares. The Directors believes [sic] that the Subscription can strengthen the financial position of the Group and provide working capital to the Group to meet any future development and obligations.]

[The Directors considers [sic] that the terms of the [SA] (including the Subscription Price) are fair and reasonable and the Subscription is in the interest of the Company and the Shareholders as a whole.]

Assuming all Subscription Shares are successfully subscribed, the net proceeds of approximately HK$[*] from the issue of the Subscription Shares will be applied for construction of site facilities and the general working capital of the Group and future investment of the Group as and when opportunities arise but no specific investment targets have been identified yet as at the date of this announcement.” (underlined added)

17.  P complains about Ds’ act in trying to “steamroll” the 1^st and 2^nd Resolutions at the 27 April Meeting in circumstances where:

(1)  the Pier Project had since 2018 been discussed by the directors, and the board recently approved a budget of RMB 1.8 million at the board meeting held on 30 March 2021 for payment of preliminary works in respect of the Pier Project (珠海碼頭建設的前期啟動預算) (“Preliminary Budget”).  There was no explanation as to why the Company had to approve an investment of RMB 220 million in the Pier Project;

(2)  IPs had never been told by Ds as to why there was a sudden need for the Company to raise funds or why the proposed Subscription was the only alternative available to the Company; and

(3)  Ds had already negotiated with Zhang on the terms of the Subscription and came up with a 2^nd draft of the SA for the board’s approval as well as the draft announcement on the same.  However, the identity of Zhang was only disclosed to IPs on 22 April 2021, and there was no information as to why it was in the best interest of the Company to issue shares to Zhang at a 20% discount. 

18.  In the meantime, on 21 April 2021, the board issued a notice to convene the 2021 AGM to be held in Shenzhen for the purpose of considering, inter alia, resolutions to (1) re-elect directors of the Company, given that D1, D2, D3 and IP4 will retire as directors and have offered themselves for re-election, and (2) grant a general mandate to the board to allot, issue and deal with not more than 20% of the share capital in issue until the next AGM. 

19.  Between 23 and 26 April 2021, some of IPs repeatedly requested for an adjournment of the 27 April Meeting on the basis that more time and information should be provided to all the directors before the 1^st and 2^nd Resolutions were considered or approved by the board.  However, D1 refused to adjourn the 27 April Meeting or to provide the information requested by IPs.

20.  Against the above background, P applied for and obtained the ex parte injunction in the afternoon on 26 April 2021 so as to preserve the status quo in respect of the Pier Project and the SA. 

21.  At the 1 May Meeting which was attended by all directors, the Pier Project and the proposed Subscription were discussed.  There is a dispute about this Meeting in that:

(1)  Mr Laurence Li SC (leading Mr Brian Fan), counsel for Ds, contends that there was “consensus” amongst the directors on the necessity and desirability of both the Pier Project and the need for fundraising. 

(2)  On the other hand, P says that IPs considered the Pier Project should be subject to further assessments including financial and technical assessments, and there was no need to approve the Pier Project in the amount of RMB 220 million.  The directors required further analyses on the use of funds and, thereafter, decided whether there was a need to raise funds and, if so, through what means.   

22.  On 7 May 2021, D1 circulated further materials about the Pier Project and the proposed Subscription to all the directors, namely:

(1)  Analysis of Background of Zhang;

(2)  Investment Return Analysis on Pier Project;

(3)  Proposed Subscription Analysis; and

(4)  Updated Investment Report (2021.02.24).

23.  On 9 May 2021, Ds procured a resolution to be passed to postpone the 2021 AGM to 28 June 2021 on, inter alia, the ground that the board considered that the AGM should be held in Hong Kong (instead of in Shenzhen).

Discussion

24.  At the hearing, Ds seek to file a further affirmation to respond to certain new allegations said to have been raised by IP2 in his affirmation filed on behalf of P on 12 May 2021.  Given the lateness of the affirmation and the fact that the 2021 AGM has been postponed to 28 June 2021, this Court indicates to Ds that if they intend to rely on the further affirmation, leave will be given to P to reply to the affirmation and the hearing will have to be postponed to another date.  Mr Li confirms that Ds do not pursue the application. 

Applicable principles

25.  The application is made under ss 728-729 of the CO.  These sections relevantly provide:

     Section 728

“(1) Section 729 applies if, in relation to a company—

(a) a person has engaged, is engaging or is proposing to engage in conduct that constituted, constitutes or would constitute—

(i) a contravention of this Ordinance;

(ii) a default relating to a contravention of this Ordinance; or

(iii) a breach specified in subsection (4); or

(b) a person has refused or failed, is refusing or failing, or is proposing to refuse or fail, to do an act or thing that the person is required by this Ordinance to do.

…

(4) The breach specified for the purposes of subsection (1)(a)(iii) or (2)(a)(iii) is—

(a) a breach of the person’s fiduciary duties owed to the company in any capacity other than as a director of the company;

(b) a breach of the person’s fiduciary or other duties as a director of the company owed to the company; or

(c) a breach of the company’s articles.

…”

Section 729

“(1) The Court may, on application by a member or creditor of the company whose interests have been, are or would be affected by the conduct or by the refusal or failure, do any or all of the following—

(a) grant an injunction, on the terms that the Court thinks fit—

(i) in the case of section 728(1)(a) or (2), restraining the person from engaging in the conduct or requiring the person to do any act or thing; or

(ii) in the case of section 728(1)(b) or (3), requiring the person to do any act or thing;

(b) order the person to pay damages to any other person;

(c) declare any contract to be void or voidable to the extent specified in the order.

…

(5)  To avoid doubt, a person is not entitled to recover, by way of damages under subsection (1)(b) or (2)(b), any loss that solely reflects the loss suffered by the company that only the company is entitled to recover under the common law.”

26.  Mr William Wong SC (leading Mr Arthur Yip and Ms Euchine Ng) submits that P’s application is in the nature of a final quia timet injunction, and the Court should be guided by the following principles:

(1)  Where the Court is satisfied that the defendant is about to commit a misfeasance, or that a wrongful act is imminent, the Court has jurisdiction and power to grant a quia timet injunction to restrain the wrongful act or misfeasance which is imminent but has not yet commenced, if it is necessary and just so to do.

(2)  The plaintiff has the burden of proving that it is reasonably certain that what the defendant is threatening and intending to do will cause imminent and substantial damage to him.

(3)  The criterion by which the degree of probability of future injury must be established depends on all the relevant circumstances and are not fixed.  The greater the prejudice or inconvenience that may be caused by the apprehended injury (if it occurs), the more readily will the Court intervene despite uncertainties and deficiencies of proof.

(4)  In ascertaining that probability, one of the most important indications of the defendant’s intentions is ordinarily found in his own statements and actions.

(5)  Even in the absence of an express threat, the actions of the defendant may give a sufficiently clear indication of an intention to act unlawfully, and if the defendant has undertaken not to commit a breach, that is an evidentiary matter that weighs against the need for an injunction.

(6)  Likewise, even if there is no express threat, it may be of importance that the defendant has stated that it is within his rights to do the particular acts complained against (Re Tysan Holdings Ltd [2013] 4 HKC 425, §35, per Mimmie Chan J; Re Pearl Oriental Oil Limited [2018] HKCFI 2559, §37, per Recorder Stewart Wong SC). 

27.  As regards duties owed by a director, Mr Wong relies on the following well established principles:  

(1)  Directors owe fiduciary duties of utmost good faith and cannot exercise their power for improper purposes or otherwise than for the benefit and in the best interests of the company (Re Tysan, §38).

(2)  Directors owe fiduciary duties to the Company to make decisions only for proper purposes and having considered the relevant matters (Passport Special Opportunities Master Fund LP & Anor v eSun Holdings Ltd & Ors [2011] 4 HKC 62 at §§57-60, 88, 90, 143, 147, 150-156, per Barma J (as he then was)).

(3)  Directors owe a duty to exercise reasonable care, skill and diligence that would be exercised by a person with the general knowledge, skill and experience that it may reasonably be expected that a person carrying out the functions carried out by the director has (s 465 of CO; SFC v Yin Yingneng, HCMP 2502/2012, 16 January 2015, §§45-47).

(4)  In respect of listed companies, directors are also under a duty to comply with the Listing Rules.

28.  On the other hand, Mr Li submits that:

(1)  Whether to undertake the Pier Project and the choice of method of fund-raising are commercial decisions for the management of the Company.  It would be wrong for the Court to substitute its opinion for that of management, or indeed to question the correctness of the management’s decision if bona fide arrived at (Kwok ShunOn v Wong Sai Wing [2001] 3 HKLRD 811, §73, per Yuen J (as she then was)).  The weight to be given to various factors is a matter for the directors and not the Court (Passport Special Opportunities Master Fund, §152).

(2)  Whether there is sufficient information for a commercial decision is itself a commercial matter for the board.   

(3)  P has twice confirmed that it does not allege improper purpose.  It is not now open to P to insinuate or assert improper purpose. 

(4)  P’s complaint is about provision of information. It is “logically incorrect” for Mr Wong to argue that the application is for a quia timet injunction.  In any event, there is no breach and no “reasonable certainty” of the breach (Pearl Oriental Oil, §37).  In any event, P cannot succeed in showing any “reasonable certainty” that Ds’ acting on the present information would be in breach of their duties.   

29.  I accept Mr Wong’s submission that P’s application is for a quia timet injunction and the Court should approach the application on the basis of the principles summarised in §26 above. 

30.  In the present case, there is no dispute that unless restrained by the Court to do so, Ds will vote for the 1^st and 2^nd Resolutions at a board meeting.  The only issues are:

(1)  whether their act in so voting was “wrongful” in the sense that it constituted a breach of duties within the ambit of s 728(4)(b) of the CO; and

(2)  if the answer to (1) is in the affirmative and the act still continues, whether such act will cause substantial damage to P. 

31.  I consider these issues in turn.

Whether breach of duties?

32.  The relevant time for considering whether Ds acted in breach of duties was the commencement of these proceedings.  If P fails to show such breach, there would be no wrongful act which requires the Court to enjoin and the application must fail. 

33.  Of course, since the commencement of the proceedings, there has been further development in the matter including the 1 May Meeting at which the directors had the opportunity to discuss the 1^st and 2^nd Resolutions, and further information was provided by Ds to IPs.  If and to the extent that such development has the effect of remedying the breach complained of by P, it militates against the need for the Court to continue the Interim Injunction as it cannot be said that the wrongful act (which ceases to exist) will cause substantial damage to P. 

34.  Although Mr Wong disavows any allegation of improper purpose, this does not sit well with his skeleton where repeated references are made to the duty of directors to act for proper purpose.  I agree with Mr Li that it is not open to P to insinuate or assert improper purpose and I have not taken into account Mr Wong’s submissions to that effect. 

35.  Mr Wong submits that with the limited and doubtful information available to the board, it is simply not possible for any reasonable director to form an informed view as to the merits of the 1^st and 2^nd Resolutions.  Ds acted in breach of their fiduciary duties and duty of care and skill in seeking to “steamroll” the 1^st and 2^nd Resolutions through the board without any regard to whether it is in the interests of the Company to issue the Subscription Shares at a substantial discount, and the dilution effect of such issue on the shareholders.   

36.  I agree with Mr Li that the principle of judicial non-interference with bona fide management decisions is applicable to the application, and the weight to be given to various factors is a matter for the directors and not the Court.  However, I do not agree that the question whether sufficient information has been provided to the directors is a commercial matter if and insofar as it is suggested that it is not a matter which the Court should interfere with.  It is well established that a director of a company has a right to require the company to provide information which he considers necessary or essential to properly perform or discharge his duties as director.  This is particularly so when the director is asked to consider and make decision for the company.  This may be seen as a corollary of a director’s duty to act with care and skill in relation to all matters relating to the company’s affairs, which has been explained by Rogers VP in Re Boldwin Construction Company Ltd [2001] 3 HKLRD 430, §12 in this way:

“Hence, in relation to many matters directors will no doubt rely upon what is done by company officials and their fellow directors in relation to the affairs of a company. But that is not to say that the ultimate responsibility does not lie upon the director. If a director has cause to be suspicious, or reasonably believes there is such cause, then the director may incur liability if he does not satisfy himself in relation to all matters relating to the company’s affairs. More importantly, even if a director does rely upon other directors or company officials in the conduct of the company’s affairs, he must, at all times, be at liberty to satisfy himself as to any matter in relation to the company’s business.” (underlined added)

37.  It follows that if there is evidence to suggest that the majority of the directors are about to approve a substantial transaction without proper or complete information to justify the transaction and in complete disregard of the other directors’ requests for information, the Court has the power to grant a quia timet injunction to restrain such wrongful act.  This is because once approved, the majority of the directors will proceed with signing the agreement and binds the company to the transaction which may often be difficult, if not impossible, to unwind. 

38.  I am satisfied that in failing to provide to IPs all relevant information pertaining to the 1^st Resolution by 26 April 2021, Ds acted in breach of their duty of care and skill and the duty to act in good faith owed to the Company in that:

(1)  the only budget which had been considered and approved by the board was the Preliminary Budget.  The board never considered a budget in the amount of RMB 220 million in respect of the Pier Project, and no information had been provided by Ds to explain why the board was asked to approve such budget in great haste;

(2)  Ds had not provided any analysis or justification to explain why the Preliminary Budget was insufficient when the preliminary work was not completed or why the budget suddenly had to be increased by 120 times; 

(3)  there was nothing to indicate that the opportunity to invest in the Pier Project would be gone if the Company did not approve the increased budget or commit to invest RMB 220 million into the Project; and

(4)  no due diligence report, feasibility study or analysis on return of the investment in respect of the Pier Project had been prepared or provided to the directors.  This was despite the magnitude of the Project, which accounted for about 14% of the market capital of the Company.  Specifically, the Updated Investment Report dated 24 February 2021 was not provided to IPs until 7 May 2021.

39.  It may be said that at the time of the hearing, the breach of duty has not been fully addressed or rectified, given that the Investment Return Analysis on Pier Project is only a 2-page discounted cashflow analysis on the Project (“DCF Analysis”) based on various assumptions which has never been considered by the board or supported by any objective materials or analysis.  On the other hand, one may say that in light of the additional materials provided by Ds, it is possible for the directors to come to an informed decision as to whether or not it is in the best interest of the Company to vote for the 1^st Resolution.  It is unnecessary for me to form any view on this matter.  For the reasons discussed in §48 below, I do not think that P has discharged the burden of showing that the Company or P will suffer substantial damage if Ds voted for the 1^st Resolution.

40.  I turn to the 2^nd Resolution. 

41.  Where, as here, the propriety of a proposed fundraising is impugned, the Court has to look at the matter objectively in the way Lord Wilberforce described in Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821, 832F-H, 835F-H.

42.  In my judgment, Ds acted in breach of their duty to act in good faith and with reasonable care and skill in deciding to vote for the 2^nd Resolution at the 27 April Meeting, having regard to the following facts and matters:

(1)  The Group had cash in excess of RMB 1 billion.  There was no analysis or materials on the financial position of the Company to explain why the Company had a need to raise any fund, whether by way of borrowing or equity financing. 

(2)  Even if (contrary to my view) there was a proper basis for Ds to believe that the Company had a need to raise fund, there was nothing to suggest that it would be in the interest of the Company to raise such fund by way of the Subscription, rather than any other form of equity financing such as rights issue or placement of shares to a few independent placees, rather than to a single investor such as Zhang.

(3)  There was no information whatsoever about Zhang or why it would be in the interest of the Company for Zhang to become a substantial shareholder.

(4)  There was no information or analysis to explain or justify why the Subscription Shares should be issued at a substantial discount. 

(5)  There was no consideration as to whether the Subscription would be in the interest of the shareholders as a whole, contrary to the statement in the draft announcement.

(6)  It would be a flagrant breach of duty for the directors to approve the 2^nd Resolution and the corresponding draft announcement, when none of the considerations stated to have been considered by the board had in fact been considered at the 27 April Meeting.

43.  Mr Li seeks to justify the Subscription on the bases that equity financing would be in the interest of the Company in view of the substantial increase in the share prices of the Company in the past year or so, and the issue of the Subscription Shares would not have any impact on the leverage ratio of the Company.  He submits that rights issue and placement have their inherent disadvantages and cannot be said to be better options as compared to the Subscription.  However, the arguments are no more than ex post facto justifications put forward on behalf of Ds in opposition to the application.  The fact remains that by 26 April 2021, there was nothing to show that the justifications submitted by Mr Li had in fact been provided to all the directors, let alone considered by Ds when they decided to vote for the 2^nd Resolution. 

44.  There is another matter which reinforces my view that voting for the 2^nd Resolution would involve Ds acting in breach of their duties owed to the Company.  In seeking to justify the urgency of the 2^nd Resolution, Ds claim that the Subscription is “the only currently available source of capital to carry out the Pier Project”.  This cannot be true or correct.   

(1)  In the draft announcement, the “reasons” stated for the Subscription did not refer to the Pier Project.  To the contrary, it was stated that the fund to be raised from the Subscription would not be applied for any specific investment target (see §16 above).

(2)  According to the DCF Analysis subsequently produced by Ds, the Company would only be required to pay RMB 100 million in 2022 but not before. 

45.  I am satisfied that such breach of duties continues as at the date of the hearing as the further materials provided by Ds between 30 April and 7 May 2021 have not addressed the problems or deficiencies discussed in §§42 and 44 above.

46.  I should add that Mr Wong on behalf of P has offered an undertaking to the Court to repay the Settlement Sum by 29 June 2021 and will not seek any extension of time to repay the same (“Undertaking”). The Undertaking is offered to address Ds’ contention that the Company has a need to raise fund to finance its business and investment.  Given that it is P’s contractual obligation to repay the Settlement Sum, I do not see any reason for the Court not to accept the Undertaking. 

Whether P will suffer substantial damage?

47.  For the purpose of this issue, both Mr Wong and Mr Li proceed on the basis that it would be sufficient for P to demonstrate that the Company and/or P will suffer substantial damage if Ds are not enjoined from carrying out the wrongful act complained of by P.  This accords with the commercial reality that P holds a substantial stake in the Company such that any loss or damage suffered by the Company will affect, albeit indirectly, the value of P’s shareholding in the Company. 

48.  In respect of the 1^st Resolution, I do not think it has been demonstrated that the Company will suffer any substantial damage without the injunction sought. 

(1)  Even if the 1^st Resolution is passed by Ds qua majority of the directors (against the objection of IPs), such resolution is only an internal decision, and can be reviewed and changed at a later stage. 

(2)  Indeed, the history of the matter shows that even after the board in March 2021 passed a resolution to approve the Preliminary Budget, it was open to the board to review or re-consider the Pier Project at a subsequent meeting and decide whether it is necessary or appropriate to approve a different budget for the same Project.

(3)  There is nothing to suggest that the Company is required to sign any contract or otherwise enter into any binding commitment with any third party in respect of the Pier Project upon the 1^st Resolution having been passed. 

49.  The position is very different in respect of the 2^nd Resolution.  Once passed by Ds qua majority, the 2^nd Resolution will have the effect of authorising Ds (or any of them) to procure the Company to enter into the SA with Zhang.  Once entered into, the SA will impose an obligation on the Company to issue the Subscription Shares at a discount of up to 20% (assuming Stock Exchange will approve the listing of the Subscription Shares).  Substantial damage will be suffered by the Company and P in that:

(1)  In the absence of any cogent evidence such as valuation report or opinion from independent financial adviser to show that the 20% discount is fair or otherwise not at an undervalue, P is entitled to say that in issuing the Subscription Shares at a discount, the Company will suffer substantial damage, being the difference between the Subscription price and the fair price at which the Subscription Shares ought to have been issued. 

(2)  P will suffer damage in its own right as its shares will be diluted by 10% which, in turn, will have the inevitable effect of depressing the trading prices of the shares in the Company including the shares held by P. 

50.  The injunction will only last until the 2021 AGM or any adjournment thereof.  At the 2021 AGM, the shareholders can consider whether they want to re-elect the retiring directors and whether the composition of the board should be changed.  They can also decide whether to grant a new general mandate to the directors to issue new shares and, if so, on what terms.  Once the shareholders have made these decisions, it will be a matter for the new board to review and decide whether it is in the interest of the Company and the shareholders as a whole to enter into the SA if and to the extent that Zhang remains interested in the Subscription. 

Conclusion and Costs

51.  In conclusion, P succeeds in seeking an injunction to enjoin Ds from voting for the 2^nd Resolution but fails in its application in respect of the 1^st Resolution.  Instead of ordering the unsuccessful party to pay the costs of the successful party in respect of that part of the application on which it fails, a fair costs order would be no order as to costs in respect of the entire proceedings, including all costs reserved.