CHINA INVESTMENT FUND CO LTD v. GUANG SHENG INVESTMENT DEVELOPMENT GROUP LTD AND OTHERS

HCA 411/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 411 OF 2016

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D E C I S I O N
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1.  I have before me an application by summons taken out by the plaintiff, China Investment Fund Company Limited (“the Company”), for an injunction to restrain the defendants, who are members of the Company, from moving or voting in favour of a number of ordinary resolutions at any general meeting of the Company until the trial of this action or further order, and for an order adjourning the extraordinary general meeting (“EGM”) of the Company as requisitioned by the defendants on 13 January 2016 until further order.

Background

2.  The Company was incorporated under the laws of the Cayman Islands on 18 September 2001 and became listed on the Stock Exchange of Hong Kong on 2 January 2002.  It is an investment company which is principally engaged in investing in listed and unlisted securities.  As such, the Company is known as what is called a “Chapter 21 investment company” to which Chapter 21 of the Rules Governing the Listing of Securities on the Stock Exchange (“Listing Rules”) applies. These rules impose, in particular, additional obligations relating to the qualifications of a company’s directors, investment managers and advisors.

3.  At all material times, the shareholding in the Company appeared to be highly fragmented and scattered, with the majority of the holdings being less than 1% of the issued capital.  As at 11 March 2016, there were 468 shareholders of which 17 held more than 1% of the shares, including two brokers.

4.  As at the time when the defendants’ requisition (“the Requisition”) was deposited with the Company, ie 13 January 2016, the board of directors of the company was composed as follows:

Executive Directors:

Luk Hong Man Hammond
Zhang Xi
Ye Yinggang

Non-executive Directors:

Sui Guangyi
Yao Yuan
Yao Zhixiang
Shi Minqiang

Independent Non-executive Directors:

Wong Chun Kin Quentin
Leung Po Hon
Zhang Qi
Li Jiangtao

5.  There have since been a few resignations and new appointments, so that by now there is an additional non-executive director, namely, Wang Mengtao.  Further, of the original four INEDs, only Li Jiangtao remains and three new ones have been appointed, namely, Guo Miao, Jing Si Yuan and Leung Ka Fai.

6.  The series of events immediately preceding the Requisition concerned the alleged misappropriation of a bill of exchange with a face value of RMB 30 million belonging to the Company (“the RMB 30 million bill”).  The RMB 30 million bill with a maturity date of 9 April 2016 was purchased by a subsidiary of the Company for around RMB 24 million on 9 October 2015, expected to be worth approximately RMB 25.5 million at maturity.

7.  Mr Yao Yuan, one of the directors of the company, was the person who recommended the investment and acted as the intermediary and liaison person between the vendor of the bill and the Company. The Company alleged that in late October 2015 it sought to make an early redemption of the RMB 30 million bill and that, acting on the arrangements made by Mr Yao Yuan, the company secretary exchanged the RMB 30 million bill with three bills of exchange, each with a face value of RMB 10 million, drawn by the same drawer on the same bank in favour of the same beneficiary.

8.  Thereafter, however, according to the Company, Yao Yuan failed to assist it to make an early redemption of the three replacement bills.  In mid-December 2015, Mr Hammond Luk and Mr Zhang Xi, two of the executive directors of the Company, began to have doubt about the authenticity of the three replacement bills and, according to them, confronted Mr Yao Yuan who admitted that he had taken the money obtained from the original RMB 30 million bill.  On 16 December 2015, the audit committee of the board considered the matter and recommended to the board that the incident be reported to the Hong Kong Police and that the duties of Yao Yuan and two other non-executive directors related to him, namely, Shi Minqiang (husband of the sister of Mr Yao Yuan’s wife) and Yao Zhixiang (Mr Yao Yuan’s brother) be suspended, pending investigation.

9.  These recommendations were adopted by the board by resolution on the same day.  The incident was duly reported to the Hong Kong Police.  A public announcement was made by the Company and the trading of its shares was suspended.  On 21 December 2015, the board further resolved to set up a Special Investigation Committee (“SIC”) to investigate the incident, made up of independent non-executive directors. 

10.  There then followed correspondence from Mr Yao Yuan and the two other suspended directors and two of the independent non-executive directors, namely, Ms Li Jiangtao and Mr Zhang Qi, raising objections as to the validity of the board resolutions passed on 16 December 2015. 

11.  It was in the wake of these events that, on 13 January 2016, the defendants, through their solicitors, deposited their Requisition with the Company.

12.  For various reasons, which are set out in his affirmation filed on behalf of the company, Mr Luk believes that the defendants were all connected or acquainted in some way to each other and to Mr Yao Yuan. The Requisition required the board of directors of the Company to call an EGM for the purposes of considering and, if thought fit, passing a total of 12 ordinary resolutions (a) to remove all three executive directors mentioned above; (b) to remove all four non-executive directors; (c) to remove all directors that had been appointed between the date of the Requisition and the EGM; (d) to appoint Mr Man Kam Tong as executive director; and (e) to appoint Mr Fan Wei Yong, Ms Lin Yan Jenny and Mr Tam Tak Wah as non-executive directors.

13.  On 17 February 2016, the Company, acting by its board of directors, issued a writ of summons against the defendants seeking a declaration that none of the proposed resolutions in the Requisition may validly be moved or passed at any general meeting of the Company on 12 March 2016 or any adjournment thereof and also took out the summons for an interlocutory injunction that I have referred to at the outset.

14.  The defendants initially agreed to an adjournment of the EGM to 24 March 2016.  On 11 March 2016, the court made an interim order that the date of the adjourned EGM be further adjourned to a date to be determined by this court at the substantive hearing of the Company’s summons.  The hearing today is the substantive hearing of that summons.

15.  A number of matters have happened since March, which may have an impact on this application and they are as follows.

(1) The credentials of Mr Man Kam Tong, the candidate put forward by the defendants for appointment as executive director of the Company, had not been accepted by the Stock Exchange of Hong Kong, as a result of which the defendants have withdrawn the proposed resolution to appoint him. 

(2) The defendants have decided that they wish to retain Mr Ye Yinggang as an executive director and have indicated they will not move the proposed resolution to remove him.

(3) The defendants have also decided they will not move the proposed resolution to remove Mr Sui Guangyi, Mr Shi Mingqiang and Mr Yao Zhixiang.

(4) Mr Tam Tak Wah, the person proposed by the defendants to be appointed a non-executive director of the company, appears to have withdrawn or never given his consent to act.  The defendants will therefore not be moving for his appointment at the EGM.

(5) It is expected that the plaintiff’s annual general meeting (“AGM”) will be held in August 2016.  It has, in any event, under the articles to be held no later than 28 September 2016.  At the AGM, by virtue of the provisions of the articles, one-third of the directors have to retire by rotation although any such retiring director is eligible for re-election. Further, any director who was appointed by the board subsequent to the last AGM (held on 29 June 2015) shall only hold office until the following AGM and be subject to re-election.

16.  The upshot of the last point is that, of the current 12 directors of the Company, 8 who had been appointed by the directors since the last AGM shall hold office only until the coming AGM and be subject to re-election.  Of the 4 remaining directors, 3 are executive directors who have to retire by rotation but may put themselves up for re-election at the AGM.  The remaining one is Yao Yuan who is currently suspended from duties. 

17.  In the light of this, the Company has proposed to the defendants by letter dated 20 May 2016 that the defendants withdraw their Requisition in return for the Company undertaking at the next AGM (1) to put up the entire board for retirement and re-election and (2) to accept the proposal of the defendants to put forward for election Ms Jenny Lin and Mr Fan Weiyong as non-executive directors at the AGM. 

18.  Further, an independent accounting firm, Deloittes, appointed to advise the SIC, had issued its report on 3 May 2016 which had been approved by the SIC and subsequently by the board.  Although the report itself had not been disclosed, the public announcement which was made by the Company on 17 May 2016 setting out the findings of Deloittes is in evidence before me.

The application

19.  On this application Ms Chyvette Ip, who has appeared for the Company, argued that there are serious issues to be tried.  I do not think that would be enough, this being the sort of case where an order continuing the interlocutory injunction until trial is likely to be dispositive of the whole action.  If the injunction is continued now there will not be a trial before the AGM, which will take place in August or at the latest by 28 September 2016.  In that event, it is not in dispute that the present requisitioned EGM would become academic, and there would not be a trial of the action at all.  On this basis I think the Company as applicant should be held to a higher standard so far as its prospects of success are concerned: Cayne v Global Natural Resources plc [1984] 1 All ER 225, 236b-f; Kwok Shun On v Wong Sai Wing [2001] 3 HKLRD 811 at §43.

20.  I am not satisfied that the Company has sufficiently good prospects in its action.  The claim as stated in the writ is most unusual, being for a declaration that certain resolutions – which have been validly proposed by members holding the requisite amount of shares, in a requisition validly deposited with the Company pursuant to the articles – may not be moved or passed at the EGM on 12 March 2016 or any adjournment thereof.  For some reason no statement of claim has yet been served.  According to Ms Ip the cause of action relied on by the Company is in line with that in Estmanco (Kilner House) Ltd v Greater London Council [1982] 1 WLR 2 and Theseus Exploration NL v Mining and Associated Industries Ltd [1973] Qd R 81.  I shall come to these cases in a moment.

21.  It is well established that members are not, as such, fiduciaries of a company.  In exercising their voting rights they do not owe any fiduciary obligation to the company.  The court seldom interferes with the way in which resolutions are to be proposed by members or are to be voted upon by them at properly convened general meetings.  No doubt if a proposed course of conduct is shown to be unfairly prejudicial to the interests of certain members, they may, if so advised, seek relief, possibly including interim relief, under proceedings brought or to be brought under ss 724-725 of the Companies Ordinance (Cap 622).  Likewise if certain proposed resolutions will result in a breach of a shareholders’ agreement, there may be scope for relief as a matter of contract between parties to the agreement.  But no member has complained of unfair prejudice or breach of agreement here or instituted any proceedings. 

22.  The broad principle is not in doubt.  As stated by Lord Sumption in Eclairs Group Ltd v JKX Oil & Gas plc [2015] UKSC 71 at §40:

“... Directors owe a duty of loyalty to the company, but shareholders owe no loyalty either to the company or its board. Within broad limits, derived for the most part from Part 30 of the Companies Act 2006 (Protection of Members against Unfair Prejudice) and the City Code on Takeovers and Mergers, they are entitled to exercise their rights in their own interest as they see it and to challenge the existing management for good reasons or bad.”

23.  When these proceedings were first launched, the Company’s case was that the Requisition was unlikely to have been motivated by genuine concern for the Company’s interests but instead likely to have been motivated by the defendants’ desire to hinder the investigation of the SIC.  As Ms Ip fairly accepted, however, the investigation by the SIC has now come to an end.  Indeed the existing board of directors had, against the wishes of two of the INEDs who were members of the SIC (and who have since resigned from the board), resolved to dissolve the SIC on 6 May 2016.

24.  That being the case, I see little basis for the directors to continue to seek to prevent the Company’s internal democratic processes from taking their course.  The articles of association are a contract among the Company and its members.  The articles provide for the mechanism of requisition for an EGM.  Article 58 states that members holding not less than one-tenth of the paid up capital have the right by written requisition to require an EGM to be held.  The EGM has to be held within two months of the requisition.  That mechanism has been initiated; the EGM has been convened but adjourned pending this application.  To say that the EGM shall not be resumed, until after the AGM, when by then it will have become academic, is a strong thing.  By what right does the Company acting through the management claim to be entitled to prevent not only the requisitionists, but also the remaining shareholders, from giving voice to their wishes at an EGM?  In the ultimate analysis there is in my view nothing that can justify the court’s intervention at this stage.

25.  The Company submitted that it would be disruptive to its operations to have the directors all replaced prior to the AGM, particularly at this stage when it is heavily engaged in finalising matters for the annual report and the AGM.  This in my opinion is not at all a reason for the injunction sought. 

(1) First, as a matter of principle, operational inconvenience is not a ground for denying the requisitionists’ right to an EGM. 

(2) Secondly, the defendants are not seeking the removal of all the existing directors.  One out of the three existing executive directors and three out of the four existing non-executive directors would remain on the basis of the defendants’ most recent stance.  Nor have the defendants in the Requisition specifically asked for the removal of the independent non-executive directors as such.

(3) Thirdly, these are only proposed resolutions.  The very point of an EGM is to see whether they have the support of the majority of the members.  It is the members who own shares in the Company, and they are generally the most appropriate persons to decide what is best for themselves.  Who should be removed from or appointed to the board of directors is a matter for the members, ie the Company in general meeting.  The purpose of a meeting is for the members to come together so that competing views may be ventilated and debated and members left to vote in accordance with their persuasion.  There would be nothing to prevent those opposing the defendants’ proposed resolutions from trying to persuade the meeting to reject them, either because they would be disruptive to the Company’s operations or for other reasons.  Indeed, while the current management apparently took a dim view of the suitability of Ms Jenny Lin and Mr Fan Weiyong to be directors of the Company, they were prepared to put them forward for election at the AGM, because, as put in Mr Luk’s 4^th affirmation, “as long as [the fact that they were not recommended by the board and were put forward without prejudice to the Company’s position that they were not suitable candidates] and full information of their background and experience is disclosed ..., the Company’s and shareholders’ risk will be minimized”.  It is difficult to see why the same could not be done at an earlier EGM.

(4) Fourthly, the defendants own only a small percentage of shares in the Company, by now about 5.9%.  With that level of shareholding they are by no means likely to be able to dictate the outcome of the EGM.  In fact there are shareholders with greater shareholdings than the defendants’.  Mr Sui Guangyi, one of the non-executive directors, alone held 16.27% as at 11 March 2016.  There is no evidence at all that Mr Yao Yuan had control over a sufficient majority of the shares of the Company to secure an affirmative result for the proposed resolutions or could otherwise control the outcome of any general meeting. 

26.  Ms Ip submitted that the proposed resolutions, if carried, would not be in the Company’s best interests.  She argued that it would leave only one executive director and it is not clear whether or not he was willing to continue to serve on that basis.  Further, it would mean that the Company would not have the requisite number of independent non-executive directors prescribed by the Listing Rules.  The short answer, in my opinion, is that these are matters that can be put to the shareholders.  The board can also appoint additional directors for the purpose of complying with the requirements of the Listing Rules for a sufficient number of independent non-executive directors.

27.  In Mr Luk’s affirmation it is said that deferring the question of election of directors to the AGM would be better because it would give shareholders an “objective” opportunity to determine whom they wish to appoint “without suggestion of no confidence in the current board”. While this may be attractive from the existing management’s point of view, I am unable to see how it can be said to be necessarily in the interests of the Company to suppress members’ expression of lack of confidence in existing directors.

28.  It was submitted on behalf of the Company that this court should infer that the two new directors proposed by the defendants would act in breach of fiduciary duty and thwart any action that is or ought to be taken by the Company against Mr Yao Yuan.  Other than the relationship between them and Mr Yao, there is really very little evidential basis for this most serious inference.  But the fear also rings hollow because the Company is prepared to put them forward for election at the AGM. There is nothing to prevent anyone from drawing members’ attention to all the points that may be said against them, either at an AGM or an EGM.

29.  Heavy reliance was placed by Ms Ip on Theseus Exploration NL v Mining and Associated Industries Ltd [1973] Qd R 81. Indeed the form of the declaration sought in the writ here appears to have been taken from that case.  But that was an extreme case.  Mr Foyster was in a position to control a majority of the votes of the members of the plaintiff. He requisitioned a general meeting of the plaintiff for the purpose, in effect, of removing the existing board and replacing it with a board of his choosing including himself.  After a hearing over three days, Hoare J was satisfied that the proposed new directors, if elected, would probably use the assets of the company for the benefit of Mr Foyster and not for the benefit of the company (see p 92B).  Accordingly, an interlocutory injunction was granted to restrain the meeting and the vote.  On the basis of the judge’s conclusion on the evidence, the decision seems to me to be explicable as the grant of a quia timet injunction to prevent the procurement and commission of breaches of fiduciary duty (by the proposed directors, if elected) against the company.  It is not authority for the proposition that the court can or should grant an interlocutory injunction to prevent a general meeting from being held or certain resolutions from being moved or passed thereat, merely because there are serious issues as to whether the resolutions are in the best interests of the company, or whether the requisitionists have been actuated by ulterior considerations not in the interests of the company.  Still less is it authority that the court will vet candidates for a company to see if their appointment as directors would be in the company’s interests.

30.  The present case is quite different, by now at any rate.  The defendants here are not proposing to replace the entire board (they had never proposed to replace the INEDs).  They are not seeking to appoint any executive director.  There is no specific allegation as to what the proposed directors would do if elected that would be inimical to the Company. There is no evidence that the defendants or Yao Yuan are in a position to control a majority of the votes at a general meeting.

31.  Ms Ip also prayed in aid the decision of Megarry VC in Estmanco (Kilner House) Ltd v Greater London Council [1982] 1 WLR 2.  That is a case where the council as majority shareholder of the company was found to have passed a resolution to prevent the company from seeking to enforce a contract with the council.  The actual decision in the case was that the applicant, as a purchaser of one of the flats in the building scheme, was entitled to be substituted as plaintiff in a derivative action brought against the council in right of the company.  As Deputy Judge A To (as he then was) explained in Hiew Fook Siong v Fung Tak Keung [2006] 3 HKLRD 762 at §18, Estmanco is in essence an example of an exception to the general rule applicable where the majority was practising a fraud on the minority.

32.  Ms Ip also placed reliance on Sunlink International Holdings Ltd v Wong Shu Wing [2010] 5 HKLRD 653. That was a case in which the shareholders in question were proposing to veto a restructuring of the company which was insolvent which would seek to derive value from the listing status of the company for the benefit of both the shareholders and creditors.  In §33 of his judgment Harris J said:

“The law in this area is imprecise and not easy to apply, but in my view, and this regard I respectfully disagree with Deputy Judge To, the authorities do demonstrate that the court will intervene to prevent a shareholder voting in a way which will result in the destruction of the economic value of other shareholders’ shares for no rational reason.”

One can readily understand that decision in the light of the facts of that case.  As explained by Deputy Judge Pow SC in Kim Lung Transportation Co (a firm) v Ip Man Fai (HCA 271/2012; 6 June 2012) at §27, the decision in Sunlink could readily be explained on the basis that the taking of a wholly irrational decision which has the effect of destroying the economic value of the holding of the minority shareholders can be classified as an instance of the traditional exception of “fraud or oppression on the minorities”.  A fraud on the minorities, as is established by authorities such as Cook v Deeks [1916] AC 554, is a matter in which the courts have traditionally been ready to intervene. Suffice it to say that the facts of the present case are a far cry from the situation in Sunlink or Cook v Deeks.

33.  Ms Ip also submitted that having an EGM when the AGM is imminent would be wasteful, that there is no urgency for the board to be reconstituted, and that the defendants would suffer no prejudice by having to wait until the AGM.  I agree with Mr Martin Wong, who has appeared for the defendants, that it would be to put the cart before the horse to say that there is no harm for the EGM to be put back until after the AGM.

34.  For all these reasons I think the application fails and there will be an order that the summons be dismissed.