Relevant employees whose shares in China Shanshui Investment Company Limited held by ZHANG CAIKUI on trust (Please refer to Schedule 1 attached to the Writ of Summons for names of the relevant employees) AND ANOTHER v. ZHANG CAIKUI AND ANOTHER

HCA 1661, 1766, 2191/2014 &
HCA 623, 939, 1564/2015 (Consolidated)

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NOS 1661, 1766, 2191 OF 2014 AND 623, 939, 1564 OF 2015

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(Consolidated pursuant to the Order of The Honourable Mr Justice G Lam dated 20 August 2015)

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REASONS FOR DECISION

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1. Five of the plaintiffs in these consolidated actions, represented by Messrs Stephenson Harwood, sought a direction from the court to the court‑appointed receivers in relation to two proposed resolutions at the annual general meeting of China Shanshui Cement Group Limited (“CSCG”) to be held on 2 June 2017, being items 10 and 11 on the notice of AGM dated 11 May 2017.

2. Broadly speaking, those two proposed resolutions are for a general mandate to be given to the directors of the company to allot and issue new shares up to 20% of the total issued share capital during the year up to the next AGM of the company, and to extend that general mandate by the number of any shares bought back by the company pursuant to the buy‑back mandate proposed in item 9 of the notice of AGM. 

3. The shareholding structure of CSCG appears at the moment to be as follows:

Tianrui	28.16%
ACC/Yu Yuan	26.40%
CSI	25.09%
CNBM	16.67%
Public	3.68%

4. It is said that there is a “power struggle” among the substantial shareholders in the form of a contest between Tianrui and ACC for the control of CSCG.  It is said that the proportion of shares that China Shanshui Investment Company Limited (“CSI”) at present has in CSCG, namely 25.09%, is a critical block of shares because if it is combined with either Tianrui’s shareholding or ACC’s shareholding, there will be an absolute majority of over 50%; and that this “king‑maker” capacity adds a “control premium” to the value of CSI’s shareholding in CSCG as a block. 

5. The applicants were concerned that if the general mandate was given to the board and exercised to the maximum of 20% of the issued capital, it would dilute CSI’s shareholding to approximately 20.91%, leading to the loss of the control premium which was worth hundreds of millions of dollars.  The applicants therefore asked the court to direct the receivers to exercise the rights attached to the shares in receivership in CSI and/or exercise their powers as directors of CSI with a view to causing CSI to vote against the two resolutions, or at least causing CSI to seek an adjournment of the vote at CSCG’s AGM until after the disposal of an application filed earlier by Stephenson Harwood on behalf of 1,077 plaintiffs (including the 5 applicants here) for the removal of the present receivers which is due for hearing on 11 and 12 July 2017. 

6. Both the applicants and the receivers have referred me to the following passage in the judgment of Street J in Duffy v Super Centre Development Corp Limited [1967] 1 NSWR 382 at 383 for guidance:

“The receiver and manager is appointed as an officer of the Court to undertake in that capacity the management of the business of the company as well, of course, as undertaking the care of the company’s assets. To the extent to which he makes decisions from time to time, they are in effect made under the authority of the Court itself, and they are subject to review and control by the Court should a proper case be made out requiring such intervention. Whilst this Court does, therefore, have an ultimate control over the day to day actions of a receiver and manager, it is a control which is not in my view to be too freely exercised. If, of course, there can be shown to be some defect in the manner in which the receiver and manager is conducting his duties — a defect arising either out of some want of good faith or out of some erroneous approach in law or in principle — then that is clearly a ground on which the Court would entertain an application by one of the interested parties for appropriate directions or some other form of remedial order. Where, however, the challenge made is that there has been an absence of prudence and wisdom in the receiver’s decisions, a far heavier onus rests upon the party who seeks to challenge the decision in question. The Court will not concern itself with minor and ordinary decisions that he may have made: it must be shown that there is a decision of real significance in the affairs of the company and as to which there are real and substantial grounds for questioning its correctness before the Court will embark upon an investigation of what, if any, directions ought to be given.”

7. Having heard the parties on an urgent basis on 1 June 2017, I dismissed the applicants’ application as I considered that there was no sufficient justification for the court’s intervention in light of the circumstances including the following.

8. While there have been debates in the commercial community as to the desirability of general mandate (at least in the form in which it is usually proposed by the management of listed companies in Hong Kong), it is not in dispute that the practice of granting general mandate to the board is fairly common among Hong Kong listed companies and, in the case of CSCG, has been continuously adopted since its listing. 

9. The grant of the general mandate itself does not of course lead to any dilution of the shareholding of any existing shareholders; only the exercise of the power under the mandate would do so.  Although the general mandate has been in place since the listing of the company and, therefore, throughout the period of the appointment of receivers in respect of certain shares in CSI up to the present, there has not been any placement of shares carried out pursuant to the general mandate in a manner like the placement to CNBM, which the plaintiffs complained of and which was a matter taken into account in the decision to appoint receivers in the first place; see my decision in these proceedings dated 20 May 2015 at para 18.  In fact even as the debate proceeded on 1 June 2017, the general mandate granted in last year’s AGM was still valid and effective. 

10. On behalf of the applicants, Mr Maurellet SC did not, for the purposes of this application, challenge the good faith of the receivers.  He did allege that they had placed themselves in a position of conflict of duties in that insofar as the receivers sit on the board of CSCG (and Mr Stephen Liu is a member of the board with Mr David Yen being his alternate), they have to focus only on the interests of CSCG, whereas in their capacity as receivers of shares in CSI they have to focus on the interests from the point of view of those shares and therefore from the point of view of CSI.  He submitted that CSCG’s interests and CSI’s interests did not align in relation to the question of the issue of new shares of CSCG, in particular having regard to the control premium enjoyed by CSI.

11. This issue of conflict is indeed relied on as a major foundation for the removal application and may need to be dealt with when that application is determined.  But the receivers had already in recent correspondence undertaken that they “will not cast any votes within or on behalf of CSI which would lead to any dilution of CSI’s shareholding in CSCG”.  Further, as Mr Barlow SC pointed out, while there had been proposals for the offer or placement of shares since the beginning of the receivership, none had been proposed on the basis that no shareholders’ approval would be necessary.  He further submitted that if indeed a proposal is made to exercise the general mandate, notice would have to be given to the receivers as members of the CSCG board and the receivers would be in a position to ensure that the matter does go to the shareholders such as by convening an EGM to decide the matter and if necessary to decide if any of the directors should be removed.  There is no dispute that the members in general meeting can revoke by ordinary resolution any general mandate previously granted. 

12. I am not prepared to proceed in this application, as I think the applicants implicitly invited me to, on the assumption that the receivers were acting or likely to act in a conspiracy with either Tianrui or some outside interests with a view to diluting CSI’s shareholding in CSCG.  I also noted that only 5 out of the 2,631 plaintiffs in these actions had seen fit to make this application.  Their position is to be contrasted with that of the 1,554 plaintiffs (2,631 – 1,077) indisputably represented by K & L Gates and of the 1^st defendant who at least represented the interests of the non‑plaintiff employees who were beneficiaries under the BVI trusts as well as the 1^st defendant himself as a beneficial owner of about 13% interests in CSI.  Both Mr Law Man Chung and Mr Jean‑Paul Wou, who appeared for them respectively, submitted that the application was unnecessary and premature at best.  In these circumstances, I did not think it would be right for the court to intervene by giving directions to the receivers as sought by the applicants.

13. The application was therefore dismissed with costs with a certificate for two counsel for the receivers.