AMERASIA GLOBAL PROPERTY LTD v. DONG FEI AND ANOTHER

HCA 1202/2018 and
HCMP 1040/2018 and
HCMP 1089/2018
(Heard Together)

[2019] HKCFI 1475

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1202 OF 2018

____________

____________

MISCELLANEOUS PROCEEDINGS NO 1040 OF 2018

____________

MISCELLANEOUS PROCEEDINGS NO 1089 OF 2018

________________________

DECISION

________________________

1.  This is the dispute between the two shareholders of Treasure (HK) Investment Limited (“TIL”). The majority shareholder, Dong Fei (“Dong”), decided to sell his shareholdings and actually entered into agreement to do so to third party buyers. The minority shareholder, Amerasia Global Property Limited (“AGPL”) tries to prevent such sale on the ground that this is in breach of the agreement which gave the two shareholders the pre-emptive right to buy out each other. The dispute between the shareholders led to deadlock in the management of the company, and gave rise to various legal actions. The court took the view that the allegations and claims in the respective actions should be resolved by way of early trial, and has so directed. Trial of these actions has since been fixed to be held in September this year. Dong now applies to bring forward the substantive determination of one of these actions.

Background

2.  At all material times, AGPL, controlled by Madam Ma Wan Xin (“Ma”), was and still is the holder of 36.36% of the shares in TIL.

3.  Until August 2013, the majority shareholder of TIL was Madam Wang Cui Xia (“Wang CX”) who held 63.64% of the shares.  Wang CX and Ma were the only two directors of the company.

4.  In August 2013, the parties entered into agreement whereby Wang CX sold and transferred her shares to Dong with the consent of AGPL. Dong and Ma became the only two directors of TIL.

5.  TIL owns 55% shareholding in, and thus the majority of, a joint venture which operates a property development project in Xuzhou in the mainland (“the JV”).  Its mainland counterpart, Xuzhou Southeast Metal Materials Company Limited (“Southeast”), holds the other 45%.

6.  The JV had five directors.  Southeast nominated two directors of the JV.  TIL nominated three directors, namely, Ma, Dong and Wang Shi Hua[1]. Ma was also the chairperson[2] and still is the legal representative of the JV.

7.  AGPL’s case is that TIL has been operating as a quasi-partnership based on trust and confidence between its shareholders from the days of Ma and Wang CX to the time since the joining of Dong in place of Wang CX.  This was manifested by the shareholders’ mutual and joint responsibility for and participation in the management of the business and affairs of TIL as well as their agreement that in the event of either shareholder exiting, the remaining shareholder shall have a pre-emptive right to buy out the other’s shares.

8.  In 2017, Dong indicated his intention to sell his shares in TIL.

9.  In February 2018, Dong entered into the agreement to sell his shares in TIL at RMB 200,000,000 to third parties.  AGPL complains that such agreement was entered into without its prior knowledge and was in breach of the alleged pre-emptive right agreement mentioned above.  Further, the third party buyers of Dong’s shares, AGPL says, are controlled by or closely connected with Southeast [3]. The suggestion is that Southeast, as the minority shareholder of the JV, would be able to reverse the balance and to obtain de facto control of the JV by acquiring control of the JV’s majority shareholder, TIL.

10.  There is dispute as to whether it was Ma or Dong who caused or contributed to the management deadlock of TIL subsequent to the alleged breach of Dong.  What is not disputed, however, is that Dong has since March 2018 repeatedly attempted to cause TIL to resolve to appoint an additional director, namely, Cao Gang (“Cao”), to TIL, but to no avail, as a result of AGPL’s resistance.  AGPL was able to do so because both Dong and Ma are required to be present to constitute the quorum for the company’s meeting.

11.  Legal proceedings followed.

12.  In May 2018, AGPL commenced HCA 1202/2018 for specific performance of the alleged pre-emptive right agreement and an order that it should be allowed to buy out the shares of Dong in TIL at the same consideration that Dong contracted to sell to the third parties as mentioned or any fair consideration as the court may assess.

13.  Incidental to the commencement of HCA 1202/2018, AGPL applied ex parte and obtained from the court an interlocutory injunction restraining Dong from taking any step to dispose of his shares in TIL.  The injunction was subsequently continued until the determination of AGPL’s inter partes application to continue the injunction or further order of the court.  Dong has taken out an application to set aside the ex parte injunction or alternatively, fortification of undertaking by AGPL.  Because of the direction for the early trial of all the actions, the shares remain in the hands of Dong and subject to the injunction as of today.

14.  On 8 July 2018, Dong caused the board of the JV to resolve to remove Ma from the office as director and chairperson.  He also commenced HCMP 1040/2018 on the following day for, amongst others, an order that an extraordinary general meeting (“EGM”) of TIL should be convened, quorate with one member only, for the passing of the following resolutions:

 (1) removal of Ma as director of TIL;

 (2) appointment of Cao as director of TIL; and

 (3) authorization of Dong to instruct legal representative to act for TIL in HCA 1202/2018 and other proceedings at his discretion.

15.  A week later, in line with its claim in HCA 1202/2018 and in the light of what Dong has so far done as mentioned above, AGPL presented its petition in HCMP 1089/2018 on the ground that the affairs of TIL have been conducted by Dong in a manner unfairly prejudicial to the interest of AGPL, and that the mutual trust and confidence that underlies the formation and operation of TIL has ceased to exist.  AGPL seeks an order to endorse its buy-out of Dong’s shares, and until the completion of sale and transfer of shares, an injunction restraining Dong from taking any step or attempting (i) to change the constitution of the board of TIL including the removal of her or appointment of additional director; (ii) to dispose of his shares in TIL; and (iii) to remove Ma as a director of the JV.

16.  Incidental to the commencement of HCMP 1089/2018, AGPL also took out an application for interlocutory injunction essentially in the same terms mentioned above, pending the substantive determination of the proceedings therein.  Insofar as this may be necessary, AGPL asks for stay of proceedings in HCMP 1040/2018.

17.  Up to this hearing, AGPL has been reiterating that it is ready willing and able to buy out Dong’s shares at the same consideration he agreed in February 2018 to sell to the third party buyers (ie, RMB 200,000,000) or any consideration as the court may see fair and reasonable.  Dong persists in refusing to sell his shares to AGPL, notwithstanding that the agreement between him and the third party buyers is said to have lapsed in late November 2018.  In court, and admittedly not supported by properly filed evidence, counsel tendered information that the parties to such agreement have agreed to stand by the agreement pending the resolution of the dispute in these actions.

18.  The parties appeared before Hon Anthony Chan J on 20 July 2018.  As mentioned, his Lordship gave directions for the early trial of the actions, one after the other with HCMP 1089/2018 being the lead action.

19.  In late October 2018, the trial of the actions was fixed to be held on 23 September 2019 with six days reserved.  A pre-trial review hearing was fixed to be held on 25 June 2019.

20.  On 6 December 2018, Dong took out an application in HCMP 1040/2018.  Essentially, Dong sought to amend the originating summons with the effect of reducing the scope of his claim from what were summarized under §14 above to merely that for an order to convene an EGM of TIL for the purpose of appointing Cao as an additional director.  Dong also sought urgent directions for the substantive disposal of his amended claim in that action.

21.  Dong’s application in HCMP 1040/2018 mentioned in the preceding paragraph came before DHCJ Lam SC on 18 February 2019.  The DHCJ gave leave to amend.  AGPL argues that Dong’s application should not be entertained.  In the event that the court decides to entertain Dong’s application, the same should be refused, or insofar as this is necessary, AGPL would counter by its application for interlocutory injunction in HCMP 1089/2018, i.e., to restrain Dong from taking any step to alter the constitution of the board of TIL pending the trial with the other two actions.

22.  DHCJ Lam SC directed the amended claim in HCMP 1040/2018 to be heard together with AGPL’s summons for interlocutory injunction in HCMP 1089/2018 on an early date.  Apparently with reservation about Dong’s application to bring forward the substantive determination of HCMP 1040/2018, the DHCJ made clear that whether Dong is entitled to do so, notwithstanding the order of Anthony Chan J for the early trial of all three actions, remains a live issue.

23.  Hence the hearing before this court.

Basis for Dong’s application

24.  A court of co-ordinate jurisdiction has jurisdiction to vary a previous order, including bringing forward the scheduled substantive determination of certain proceedings, to suit a change of circumstances or for the purpose of managing the case and furthering the underlying objectives of the rules of the court: see Asia-Pac Infrastructure Development Ltd v Ing Yim Leung Alexander [2011] 1 HKLRD 587 (§33); Acropolis Ltd v Hongkong & Shanghai Banking Corp Ltd [2019] 1 HKLRD472 (§§9,17 – 18).

25.  Mr Wong SC, with Miss Ellen Pang and Miss Rosa Lee, appearing for AGPL, submits that the court should not readily entertain an application like this, in order not to send a wrong message that may open the floodgate for attempts to bring forward the substantive determination of an action, or part of it, that has already been fixed for trial.  This, he submits, must be avoided from a case management perspective.  The short time lag between now and the scheduled trial also militates against such move.

26.  Dong is seeking to vary the order of Anthony Chan J on the basis of change of circumstances since that order was made on 20 July 2018.  The change is said to come about as a result of the amendment of his claim in HCMP 1040/2018.  Upon the amendment, the relief that Dong is seeking is now reduced to merely an order pursuant to section 570 of the Companies Ordinance, Cap 622 (“CO”) for the convening of an EGM, with a one-member quorum, to enable the passing of a resolution to appoint Cao as an additional director of TIL.  Dong is no longer seeking to remove Ma as a director of TIL.  He also offers undertakings, including that to procure the reinstatement of Ma as a director of the JV.  As mentioned, Ma was removed from the board of the JV in July 2018.

Change of circumstances

27.  The transcript of the hearing before Anthony Chan J shows that his Lordship took the view that Dong’s claim in HCMP 1040/2018 could not be resolved without AGPL’s claim in HCA 1202/2018 and its petition in HCMP 1089/2018, as the matters raised in the actions commenced by AGPL could stand as its defence to Dong’s claim in HCMP 1040/2018.  Mr Man does not appear to dispute such observation, as the matter then stood [4].  However, he submits that such circumstances have changed.  Mr Wong submits that the change are more apparent than real, and more form than substance.  I can see why he says that.

28.  Dong moves for the court-ordered meeting on the ground that Ma has allegedly been obstructing the management and operation of the JV by holding to her the seal of the JV, which is required for signing the JV’s company documents in its operation in the mainland.  The purpose of appointing an additional director is to enable Dong, together with Cao, to effectively out-vote Ma on the board of the company in resolving to remove Ma as the legal representative of the JV.

29.  As far as the above allegations against AGPL (and Ma), and thus the relief sought in HCMP 1040/2018, are concerned, they are not at all new circumstances.  The allegations against Ma in this respect have been made in the affirmations filed prior to the hearing on 20 July 2018.  Dong has been attempting to move for the appointment of Cao as the additional director ever since March 2018.  These matters were therefore before Anthony Chan J, when he nevertheless decided to case manage all three actions by way of directing them to proceed to early trial.

30.  By his affidavit, Dong explained why it has become important for Cao to be appointed as an additional director now.  However, Mr Man made clear during the hearing that he is not relying on any urgency of the situation of either TIL or the JV that is said to have arisen or developed since Anthony Chan J made his order on 20 July 2018.  In other words, there is no change of circumstances in terms of urgency arising since Anthony Chan J’s order.

31.  It can actually be said that Dong tailor-made the so called change of circumstances to enable his present application.  Mr Man SC, with Mr Ng, appearing for Dong does not shy away from that.  Nevertheless, he argues that if such change renders the current scope of his client’s section 570 claim in HCMP 1040/2018 unanswerable by AGPL, there would be no more reason why the determination of such claim in that action should be deferred to trial with the other two actions, albeit to be tried in September. Mr Man describes what he is seeking is no different from summary judgment in HCMP 1040/2018.

32.  The application in HCMP 1040/2018 is made pursuant to section 570 of the CO, which says:

“ (1) This section applies if for any reason it is impracticable—

(a) to call a general meeting of a company in any manner in which general meetings of that company may be called;

(b) to conduct the meeting in the manner prescribed by the company’s articles or this Ordinance.

(2) The Court may, either of its own motion or on application—

(a) by a director of the company; or

(b) by a member of the company who would be entitled to vote at the meeting,

order a general meeting of the company to be called, held and conducted in any manner the Court thinks fit.

(3) If the order is made, the Court may give any ancillary or consequential directions that it thinks expedient.

(4) Directions given under subsection (3) may include a direction that one member of the company present at the meeting in person or by proxy is to be regarded as constituting a quorum.

(5) A general meeting called, held and conducted in accordance with an order under subsection (2) is to be regarded for all purposes as a general meeting of the company duly called, held and conducted.

…”

33.  Mr Man submits that it is his client’s right as the majority shareholder to procure the company to meet and to appoint additional director and to resolve out of the deadlock.  On the contrary, Mr Wong submits that a section 570 application should not be used in a manner which is inconsistent with an agreement between the shareholders concerning control and management of a company, which is the subject dispute in HCMP 1089/2018.

34.  As to the alleged shareholders’ agreement, Mr Man first takes a pleading point.  He argues that the pleaded case of AGPL, with particular reference to its petition in HCMP 1089/2018, does not go so far as alleging equal decision-making status of the shareholders and directors but only equal participation in, or non-exclusion from, the management of TIL.  Nor is there pleading that there could and would only be two directors.

35.  At least for the present purpose, I do not agree that such reading of the pleaded case of AGPL is the only reasonable one.

36.  AGPL alleges[5]a common understanding that existed between it (through Ma) and Wang CX from the outset.  The two shareholders were jointly responsible for and entitled to participate in the management of the business and affairs of TIL and the JV.  They owed mutual duties to co-operate with and to consult each other on major business decisions of TIL and the JV.  The pre-emptive right agreement in respect of their shares was reached for the purpose of maintaining TIL’s status as the majority in the JV.  It was pursuant to the common understanding that Ma and Wang CX became the only directors of TIL.  TIL has since been operated in accordance with such common understanding and as a quasi-partnership based on mutual trust and confidence between Ma (AGPL) and Wang CX.

37.  AGPL continues to plead [6]that it was in exercise of its pre-emptive right that it consented to the transfer of Wang CX’s shares to Dong.  It further agreed to provide security for Dong’s payment for the shares only in consideration of his agreement to be bound by the same common understanding mentioned above.  The common understanding and the quasi- partnership relationship between AGPL (through Ma) and Dong continued to be manifested in the composition of the board and the business decision- making arrangement the same way as that between AGPL and Wang CX previously.

38.  In my view, the pleaded case of AGPL should be read as a whole.  So read, such pleaded case, in my view, cannot be said to be wanting in respect of basis that permits AGPL to establish that the business and affairs of TIL, and TIL’s role in the JV, were expected to be operated and managed by the joint decision of the two shareholders at all material times.  It is not unarguable that the intended use by Dong of his majority shareholder’s status to outweigh the joint decision-making right of AGPL would be contrary to such common understanding and the quasi-partnership relationship.

39.  Mr Man also argues that the alleged common understanding and quasi-partnership agreement were in any event contradicted by the terms of their own contractual documents.  He refers to the written agreements [7] whereby Dong acquired the shares of Wang CX, and submits that they were completely silent about the alleged common understanding or the Pre‑emptive Right Agreement.  Not only that, there was express entire agreement clause whereby the written agreement superseded any prior negotiation and agreement between the parties[8].

40.  I do not agree, again for the present purpose.

41.  The contractual documents must be read in their context as agreements for the sale and purchase of Wang CX’s shares in TIL.  So must their terms, including the provisions in respect of warranties and representations as well as the entire agreement clause.  That these documents, in such context, were silent about the common understanding and quasi-partnership relationship between the shareholders in respect of the management and business decision-making of TIL (and its part in the JV) do not necessarily negative the alleged existence of such understanding and relationship as a matter of fact. To begin with, it is not really the case of AGPL or Ma that such understanding and relationship was agreed upon or evidenced in writing.  Rather, they are said to have been discussed and manifested by their actual arrangement and conduct accordingly at all material times.  Further, the parties also found it necessary to incorporate the written consent of AGPL to the sale of Wang CX’s shares to Dong[9].

42.  Mr Man then submits that the minority’s complaint about unfair prejudice, contemplating the consequence of a court-ordered meeting, is not a ground for denying his right to seek the order. It is in this context that the following authorities have to be studied.

43.  First, the authorities cited by Mr Wong.

44.  In Manfield Coatings Co Ltd v Springfield Coatings Co Ltd & Anor [1995] 1 HKC 74, the plaintiff majority shareholder attempted without success to procure a general meeting for resolving to appoint an additional director, because of the resistance of the minority shareholder.  It was impracticable to hold the meeting for the absence of the necessary quorum, which was two members present or by proxy.  The majority shareholder applied under then section 114B, which was the predecessor of the section 570 of the current CO.

45.  Referring to authorities including Re Opera Photographic Ltd [1989] 1 WLR 634, Hon Cheung J (as Cheung JA then was) accepted that the general right to have a quorum could not be regarded as a class right attached to the shares of the minority shareholders.  However, the minority shareholder there alleged an oral shareholders’ agreement between the founding shareholders whereby the company was formed on the basis of a partnership and the shareholders had joint control and management, and without the prior consent of the other party, there would be no change in the directorship and the ownership of the shares of the company.  It was based on the agreement for the continuation of the same understanding that the plaintiff became the shareholder.  Whilst the shareholders’ agreement was disputed and had to be adjudicated in the winding up petition, it was a matter that the court should take into account in the exercise of his discretion.  His Lordship refused the plaintiff’s application, considering that to do otherwise would override the alleged agreement between the shareholders on the management and control of the company.  Further, there was no allegation that the company could not otherwise function properly without the intended appointment.

46.  Re Rich Treasure Enterprises Ltd [2001] 3 HKLRD 769 was another instance where the plaintiff majority shareholder applied under section 114B to enable the appointment of additional directors.  There pursuant to a written shareholders’ agreement, the board of directors together would discuss and formulate the company’s general and specific policies.  The views of the directors were to be exchanged at regular weekly board meetings, and the board would resolve any dispute by vote.  The mutual trust broke down, and the plaintiff complained that the defendant refused to co-operate in the management.  Thus the application.  The plaintiff obtained the order in the first instance.  On appeal, the Court of Appeal set aside the order, considering that the appointment of new directors was inherently wrong.  The reason was that the shareholders’ agreement made clear that the shareholders intended a balance in respect of the directors’ powers, and the appointment of new directors disturbed such balance by allowing the plaintiff to take over the company by outvoting the defendants at any stage.  The parties had suffered irrevocable breakdown, and the correct course would be for the winding-up and unfair prejudice petitions, which had been presented by then, to proceed as quickly as possible.

47.  In the English case of Alvona Developments Ltd v The Manhattan Loft Corporation (AC) Ltd [2005] EWHC 1567, the relationship between the two shareholders, 70% and 30% respectively, was not regulated by a written agreement.  However, it was alleged that each side would appoint one director.  After the subsequent resignation of one director, the remaining sole director would only act upon the joint instruction of the shareholders.  However, the director could not act, and the company was in a deadlock.  The majority shareholder moved to appoint additional directors.  The minority shareholder alleged an oral agreement that the parties would jointly appoint a single director, and managed to stall the general meeting, making use of the two-member quorum requirement.  The majority shareholder commenced proceedings under section 371 of the Companies Act 1985, which was similar in terms to section 570 of the CO.  Not unlike the present case, the majority shareholder applied for summary judgment in respect of the claim under the section, on the basis that it was in any event entitled to judgment even if the allegations of the minority shareholder were assumed to be true.

48.  Peter Smith J considered a number of authorities which stated the relevant legal propositions.  The quorum provisions of the articles of association are not of themselves sufficient to prevent the court from making the order under section 371, and they could be overridden by an order under that section.  The right of the member to choose not to attend a meeting does not amount to a right to veto or a right to frustrate the wishes of a majority.  A desire to break the deadlock, whilst commendable, is not of itself a justification for making an order.  The power under section 371 confers on the court a discretion and it must be exercised properly having regard to the relevant circumstances.  The power could not be used to overturn class rights or substantive rights.  As to what is or is not a substantive right for the purpose of the section, that must be decided on a case by case basis.

49.  In that case, it was not alleged that the minority shareholder’s right was class right.  However, Peter Smith J found that the purpose of the shareholders’ agreement mentioned above, whilst disputed, was to ensure that there would be a joint director.  Deadlock would arise in case of dispute between them.  That could amount to substantive right of the nature that had been recognized by the authorities.  What the plaintiff majority intended to achieve by the order sought was to secure a majority appointment, and the result would be for the minority to either agree or be overridden.  This would be to change the effect of the alleged shareholders’ agreement, which contemplated possible deadlock if the shareholders disagreed.  In the circumstances, Peter Smith J concluded that it would not be right at that stage to make an order under the section.  In other words, the dispute as to the agreement alleged by the minority shareholder would have to be resolved at the trial first, as the finding would have bearing on whether or not an order under the section should be made.

50.  Then, the authorities cited by Mr Man.

51.  In Re Success Plan Ltd [2002] 3 HKLRD 560, the shareholders’ agreement provided that the board should consist of seven directors.  Among the three shareholders, the majority shareholder was entitled to appoint three directors while the other two shareholders were entitled each to appoint two directors. One of the latter two directors subsequently withdrew, and his shares were transferred to the majority shareholder.  However, the shareholders’ agreement was not altered as a result.  The majority shareholder now claimed the right to appoint five directors to the board whereas the remaining minority shareholder maintained that that should remain to be three.  The quorum of the board meeting was three directors, consisting of two of those appointed by the majority shareholder and one of those appointed by the minority.  The minority-appointed director refused to meet, and thus stalling the majority shareholder’s attempt to move for the appointment of the directors intended.  The majority shareholder applied under section 114B of the CO.  Yuen JA found that it was impracticable to call a meeting.  The question was whether discretion should be exercised to order the meeting with one-member quorum.

52.  Yuen JA reiterated that a quorum requirement did not confer a veto power on a minority shareholder by their ability to prevent a meeting being held, unless the minority shareholder had a special right attached to his shares that rendered his presence at meetings indispensable.  For instance, it would be unlikely for a meeting of one shareholder to be held to break a shareholder deadlock (ie, equal shareholdings), but a numerical deadlock of shareholders could be broken by a court-ordered meeting of one shareholder.

53.  As to whether the discretion to order the meeting should be exercised, all the circumstances had to be considered.  The possibility that unfair prejudice might result from a court-ordered meeting is a matter that the court would take into account, because the court would not lend its aid to the commission of any acts that would be unfairly prejudicial to any shareholders. However, that is not to say the fact that a petition has been presented would, in all the circumstances, defeat an application for a court-ordered meeting.  If all the resolutions that the majority shareholder was seeking to pass at the meeting were clearly oppressive, then the court would not lend its aid to it by ordering a meeting.  However, that was not the case before her Ladyship.  There was no dispute that the majority shareholder was entitled to appoint three directors.  Under the articles, the majority shareholder also had the right to move for the passing of a resolution to remove its appointee and to procure the appointment of another person in his place.  At the end, Yuen JA gave the order for convening the meeting for such specific purpose.

54.  Then Re Mandarin Capital Advisory Ltd [2011] 2 HKLRD 1003, which Mr Man relies on heavily.  The 56% majority shareholder moved for the removal of the 44% minority shareholder’s directorship, but the latter managed to stall that by rendering the general meeting inquorate.  The majority shareholder applied for an order under section 114B of the CO.  The minority shareholder resisted on the basis that the company was established as a quasi-partnership to be jointly managed, and the order sought would override the partnership. The alleged agreement was not in writing.

55.  Harris J found that it was impracticable to convene the meeting.  The question most debated was whether or not discretion should be exercised to order the meeting to be convened.  The evidence before the court showed that it was plausible that at the time the company was established, the parties proceeded on the basis that the company would be jointly managed.  On behalf of the minority shareholder, cases including Manfield Coatings Co Ltd, Re Rich Treasure Enterprises Ltd and Alvona Developments Ltd mentioned above were cited in support of the argument that section 114B should not be used in a manner that is inconsistent with the shareholders’ agreement concerning the control of the company.  Whilst accepting that these authorities appear to support such general proposition, his Lordship suggested caution in considering what that means in practical terms for the way in which such an application needs to be argued and determined.

56.  Upon analyzing the reasoning in the authorities relied on by Peter Smith J in Alvona Developments Ltd, Harris J questioned whether those authorities necessarily led to the conclusion that Peter Smith J drew in that case and that Cheung J drew in Manfield Coatings Co Ltd mentioned above.  The authorities that Harris J specifically referred to were Re Opera Photographic Ltd (mentioned above) and Re Woven Rugs Ltd [2002] 1 BCLC 324.

57.  In Re Opera Photographic Ltd, Morritt J considered that the deadlock between the two shareholders had to be resolved one way or another. It could be resolved either by ordering the meeting or by an unfair prejudice or winding up petition.  Be it that the meeting was ordered, in which case the minority shareholder would likely be removed, or that the meeting was not ordered and the deadlock continued, the result could well be an unfair prejudice petition.  The majority shareholder had the statutory right to remove a director, and the quorum provisions could not be regarded as conferring on the minority shareholder some form of entitlement to veto that.  As Harris J observed, Morritt J concluded that the allegation of an agreement or understanding between the shareholders inconsistent with the order sought was not a ground for refusing to order a meeting that allowed a majority shareholder to exercise his statutory right to remove a director.

58.  In Re Woven Rugs Ltd, Anthony Mann QC further explained the approach to considering and determining an application by the majority shareholder for an order for convening the meeting.  Again, it was pointed out that if the shareholders’ disagreement was not resolved shortly, an unfair prejudice petition would be likely.  Likewise, ordering the meeting which would lead to the removal of the minority shareholder’s representative from the board would trigger the petition.  One way or the other, the petition proceedings would seem to be the proper forum for adjudicating on the question of whether, in the circumstances, and in the absence of a shareholders’ agreement as to directorship, it was unfair to remove the minority shareholder’s representative from the board and/or to appoint additional directors, and if so what the appropriate relief is.  It would be inappropriate to embark on the sort of inquiry on the basis of something less than the full picture that would doubtless be presented to the court hearing the unfair prejudice petition, and without the flexibility of the sort of remedies available in such proceedings.

59.  Harris J found the analysis in Re Opera Photographic Ltd and Re Woven Rugs Ltd above more persuasive than that in Manfield Coatings Co Ltd and Alvona Developments Ltd.  In line with that, his Lordship said that:

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

60.  Approaching the application in the case before him, Harris J had the following to say:

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

61.  I propose to take no less care than what Harris J suggested in Re Mandarin Capital Advisory Ltd in applying the relevant principles. I say that not so much because Harris J appears to be suggesting an approach different from that in Manfield Coatings Co Ltd and Alvona Developments Ltd.  I say that because whilst Harris J’s approach led to his conclusion in the very circumstances of the case before him, it does not follow that the same conclusion would or should be drawn in the circumstances of the present case.

62.  To start with, it does not appear that Harris J, in endorsing the analysis in Re Opera Photographic Ltd and Re Woven Rugs Ltd, should be taken to deny that all the circumstances prevailing at the time when the court is asked to exercise the discretion under section 570 should be taken into account.  As Yuen JA explained in Re Success Plan Ltd, the possibility that unfair prejudice that might result from a court-ordered meeting is among all the circumstances that had to be considered in the exercise of the discretion.  Specifically, the court would not lend its aid to the commission of any acts that would be unfairly prejudicial to any shareholders.  If all that the majority shareholder sought to resolve at the meeting was clearly oppressive, then the court would not lend its aid to it by ordering a meeting.  That was just not the case there, and hence her Ladyship’s decision.  Though cited in Re Mandarin Capital Advisory Ltd in relation to another argument on behalf of the majority shareholder, what was said in Re Success Plan Ltd was not questioned in Harris J’s judgment.

63.  What circumstances are prevailing at the time when the court has to consider the exercise of the discretion under section 570, and whether the circumstances give rise to a genuine concern about a predominantly oppressive objective behind the application, must vary from case to case.

64.  The evidence of the minority shareholder in the case before Harris J was notably limited to a single paragraph in the affirmation [10] , where it was alleged that the parties had equal status in the company and both were directors as well as agreed from the beginning that they would run business together as partners.  The structure was so envisaged that there would be balance of power and check and balance between them.  His Lordship found that such evidence demonstrated an initial understanding about how the business was to be managed, but not an agreement that if the parties fell out, the majority shareholder could not exercise his statutory right to remove the minority as director.  Whilst this was not the same as saying that the minority’s removal might not be capable, either independently or in conjunction with other relevant factors, of constituting unfair prejudice for the purposes of the then section 168A of the CO, his Lordship concluded that he should order the meeting to be convened.

65.  Before Harris J was plainly an application by the majority shareholder for a court-ordered meeting to resolve a deadlock.  Whilst the meeting, if held, would lead to the removal of the minority shareholder from the board, this was the statutory right of the majority shareholder.  The minority resisted the application on the basis of an alleged initial common understanding that would not stand as a ground for resisting the application.  Though his Lordship suggested that it might have been different, had the understanding or agreement between the shareholders been such that the minority shareholder would not be removed from the board so long as he remained a shareholder, the balance to be struck by his Lordship would have remained the same, namely, the majority’s statutory right to remove a director on the one hand and alleged unfair prejudice in the form of breach of the alleged shareholders’ understanding on the other.

66.  It is true that there is in the present case also the minority shareholder’s allegation in respect of a common understanding and agreement concerning joint participation and control of the management of the company, which allegedly formed the basis on which Dong became a shareholder of the company, and was manifested by the composition of the board of directors at all material times.  However, the circumstances relevant to the court’s consideration are actually more than that.

67.  First, unlike the above authorities, where the majority shareholder sought the order from the court with a view to maintaining control over the management of the company, Dong on the contrary intends to exit TIL and has sought to dispose of his shares.  It is the minority shareholder which has offered to buy out the majority shareholder and to obtain control of the company.  To consider the section 570 application on the basis of Dong’s right as the majority shareholder to alter the composition of the board, in my view, would be an oversimplified, if not potentially inapplicable, approach in the circumstances of this case.

68.  Second, Dong considers that it is his prerogative to decide to whom he would sell his shares.  Whether this is right would depend on the outcome of the trial of the claim in HCA 1202/2018 and the petition in HCMP 1089/2018. More relevant is AGPL’s allegation that the third party buyers from Dong are in fact controlled by or closely connected with Southeast, the minority of the JV. Dong is perceived to be enabling or facilitating Southeast to obtain de facto control of the JV.  This has not happened so far because of the interlocutory injunction in place in HCA 1202/2018.  Now Dong made clear that he is seeking the section 570 order to enable him to procure TIL to appoint Cao as additional director, and thus making it possible for him, with Cao, to secure a board resolution of TIL to remove Ma as the legal representative of the JV.  This is also perceived to be advantageous to Southeast in terms of de facto control of the JV.  If not driven by any urgency arising after the order of Anthony Chan J in July 2018, as Mr Man accepts, one would ask why Dong, as an outgoing shareholder, should be allowed to bring about the above situation, when it may turn out that he is not even in a position to sell his shares to Southeast’s associates.

69.  Third, the above authorities suggest that the fact that a petition has been presented would not in all circumstances defeat a court-ordered meeting[11].  As Harris J observed in Re Mandarin Capital Advisory Ltd, it is perhaps undesirable to allow a section 570 application to develop into an assessment of the conduct of a company’s affairs by its directors, which should be left to be ventilated and fought out in an unfair prejudice or winding up petition that the section 570 application may probably trigger.  Otherwise, there would be unjustified delay to the determination, increase in costs and probably no resolution to the real issue between the parties.  However, the significant fact of the present case is that not only has AGPL already presented the unfair prejudice petition, but the trial of such petition would be held in less than 4 months pursuant to the considered decision and direction of the court.  In Re Rich Treasure Enterprises Ltd, the Court of Appeal considered that the correct course would be for the winding-up and unfair prejudice petition, which were commenced after the section 114B order was made in the first instance, to proceed as quickly as possible.  The prevailing circumstances of this case support that this is all the more appropriate approach.  I do not see that such approach necessarily contradicts the observation of Harris J, when these circumstances did not exist in the case before his Lordship.

70.  For completeness, I should mention that I have considered the allegations and evidence in respect of Ma as the legal representative of the JV, which is very much her last chip in hands that would allow her to have some check on the affairs of the JV business.  Mr Wong submits that the stance of AGPL has always been that Ma would co-operate in exercising her power as the legal representative to facilitate the operation of the business of the JV so long as she is provided with sufficient relevant materials and information.  There is indeed evidential support of that [12]. AGPL is the one which is seeking to gain full ownership of TIL and is keeping its offer open.  Mr Wong submits that there is simply no reason for AGPL, through Ma, to conduct the affairs of either TIL or the JV in any manner harmful to what is perceived to be its interest.  This, I think, is logical enough.

71.  In the circumstances, I do not see that the application by Dong under section 570 of the CO in HCMP 1040/2018 is clearly unanswerable by AGPL without regard to the determination of the dispute in HCA 1202/2018 and HCMP 1089/2018.  Insofar as the approaches to section 570 application in the above authorities call for reconciling, that the position may be far from clear also adds to the undesirability of giving what Mr Man describes as a summary judgment at this stage before the scheduled trial of the other two actions.  It follows that I see no real change of circumstances, as depicted by Mr Man, that would justify the bringing forward of the determination of such proceedings, let alone determination in his client’s favour at this stage.

AGPL’s application in HCMP 1089/2018

72.  For completeness, I will address AGPL’s application for interlocutory injunction in HCMP 1089/2018 briefly.  As mentioned, this was originally taken out to prevent Dong from altering the constitution of the board of TIL pending the substantive determination in HCMP 1089/2018.  Determination of the application is not necessary, in view of the order of Anthony Chan J in July 2018 for the early trial of all three actions.  Now AGPL will pursue this application only if this court entertains Dong’s application to bring forward the section 570 application in HCMP 1040/2018.

73.  The principles governing the grant of interlocutory injunction are trite.  The applicant has to establish that there is a serious issue to be tried in respect of the contention in the action: American Cyanamid Co v Ethicon Ltd [1975] AC 396.  However, what Harris J said in Re Mandarin Capital Advisory Ltd (above) drove counsel into argument as to whether his Lordship is advocating a more stringent test.  As mentioned, in explaining what is required to successfully resist a section 570 application to enable a majority shareholder to exercise his statutory right to remove a director, Harris J referred to a situation where the minority shareholder applies for an injunction to restrain the majority shareholder from doing exactly that.  Strong evidence of such right of the minority would be required, and his Lordship suggested nothing less than a written shareholders’ agreement to such effect.

74.  Again, the context in which Harris J carried out his analysis is where the only basis on which the minority shareholder resists the section 570 application is firstly, the alleged understanding or agreement of quasi-partnership and equal control of the company, and secondly, the unfair prejudice in the form of alteration of such balance of control by a court-ordered meeting.  It follows that in such context, the merits of the case are such that it requires nothing less than strong evidence of a shareholders’ agreement to take away the statutory right of the majority shareholder before the minority shareholder manages to establish a serious issue to be tried for the purpose of obtaining the interlocutory injunction.  In my view, this is not to suggest that any new test for interlocutory injunction has arisen.

75.  Back to the circumstances of the present case, I agree with Mr Wong that there is at least a serious issue to be tried in respect of the unfair prejudice allegations in the petition in HCMP 1089/2018.  I also agree with him that the next question is which of the grant or refusal of the injunction would carry a lower risk of injustice: see Music Advance Ltd v Incorporated Owners of Argyle Centre Phase I [2010] 2 HKLRD 1041 at §12.  The prevailing circumstances of the present case mentioned above refer.  As far as Dong, who intends to exit TIL, is concerned, his interest was and still is in the price that he expects to receive from the sale of his shares, be it sale to the third parties or, pursuant to the offer to buy out, AGPL.  In terms of any inconvenience resulting from an injunction to restrain the alteration of the composition of the board of TIL, the balance tilts towards maintaining the status quo until the trial of the actions in less than four months.

Disposition

76.  Dong’s present application by summons filed on 2 December 2018 for bringing forward the substantive determination in HCMP 1040/2018 is dismissed with costs. Costs shall be taxed, if not agreed.  As it is not necessary, no order is made in respect of AGPL’s summons for interlocutory injunction in HCMP 1089/2018.

77.  In the absence of application within 14 days to vary, the above costs order shall become absolute without further order of the court.