INFO ALLIED LTD v. LEUNG TZE CHING AND OTHERS

HCA 774/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 774 OF 2007

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J U D G M E N T

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1.  There are two applications.  The first is to grant an interlocutory injunction pending trial.  It has already been ordered on an interim basis, but on this date comes to an end.  The second, running in tandem, is an application to discharge the interim injunction.

2.  The injunction sought is to prevent the registered holder of a block of shares in a private limited company from dealing with the same in any way pending trial and that includes exercising voting rights of the shares.

3.  Properly to set out the issues, I think it appropriate to record a history of events leading to the dispute and the action and the interlocutory injunction now asked for.

History

4.  Dr Vincent Leung is a practising paediatrician in Hong Kong. In 1987 it came to his attention that a CT scan was on the market. It crossed his mind that this might form the basis of a profitable business venture, the running of an outpatients clinic at affordable prices.  He shared these thoughts with colleagues in the medical profession, many of whom agreed to commit.  Thus they pooled their resources, bought the CT scan and set up a clinic.

5.  The vehicle used for the purpose was a company incorporated in 1987 called Group Benefit Development Limited (GBDL).  The participants were allotted shares in accordance with the level of their invested capital.

6.  Dr Leung (whom I shall call from now on Vincent Leung to distinguish him from another, unrelated, Dr Leung) was appointed Chairman and Managing Director, posts he has held ever since and to date.

7.  One of the other founder shareholders (via a trust) and directors is Dr John Shum.  He and Vincent Leung have known each other since childhood days and had remained firm friends through medical school and thence into practice.  Dr Shum, too, has been on the Board throughout and to date.

8.  Since its inception GBDL has proved by and large to be profitable and successful, and there are now four clinics owned and run by it.

9.  But in 2005 cracks began to appear in what had been a convivial undertaking, engaged in by friends and colleagues in the medical profession.

10.  It was said of Vincent Leung, who was essentially in control of the management, that he could be less than forthcoming when asked about the accounts and other internal matters.  Dr Shum took up the cause, and found on investigation what he thought might be irregularities in the accounting.  I do not need to consider the strength or depth of these concerns; that may be for another forum.  Suffice to say that a body of shareholders, headed by Dr Shum, formed the view that the time had come whereby the affairs of GBDL should be conducted in a more open and transparent manner, and managed in a way that was more accountable to the shareholders.  To this end it would be necessary to reconstitute the Board. 

11.  Vincent Leung strongly rejected the proposition that there had been any misconduct or irregularity in his management of the affairs of GBDL, and resisted the need for a change of the Board or of the way in which GBDL was run.  And he had supporters amongst the shareholders.

12.  Thus from about mid-2006 there came to emerge two camps amongst the shareholders, one led by Vincent Leung and the other by Dr Shum.

13.  Dr Shum’s group realized that the Board could only be changed by a majority vote at a general meeting of GBDL.  A tally of shares held by those in the Shum camp revealed that there was in fact a majority; but only just. 

14.  A decision was made to solidify the group under one head.  To this end they incorporated, in October 2006, a company called Info Allied Limited (IAL).  Dr Shum and those of GBDL who were in his camp were allotted shares in IAL in return for their shares in GBDL.  An important document in the documentation prepared to bring this about was one headed “Info Allied Limited — Memorandum of Understanding,” which was signed by all the participating shareholders.

15.  When the numbers were totalled up IAL had 51.13% of the shareholding of GBDL, thus a narrow but clear majority.

16.  But when the transfers of shares to this new shareholder were submitted to the Board of GBDL for registration, that was adjourned and then, on 31 January 2007, rejected.  But the transactions having been completed, on the face of it the original shareholders would thenceforth have been holding the shares in trust for and subject to the direction of the purchaser IAL.

17.  Included amongst the former shareholders of GBDL who signed the Memorandum of Understanding and who pursued this course, selling his 50,000 shares in GBDL in return for a stake in IAL, was another Dr Leung, whom I shall refer to as H C Leung to distinguish him from Vincent Leung.  H C Leung’s registered interest in GBDL was 1.47% of the total shareholding.

18.  Meanwhile, Vincent Leung had been garnering his own support.  He caused to be incorporated a BVI company called Newide Pacific Limited (Newide), which purchased or otherwise acquired the shares hitherto owned by those in the Leung camp.  The mechanics of these transactions are not clear, though it would seem on a reading of the relevant minutes of the Board meeting of 31 January 2007 that these may have been similar to those employed by Dr Shum, save that Vincent Leung is the sole shareholder and sole director of Newide.

19.  By this means Newide came to hold 47.99% of the shareholding of GBDL; thus close to the number held by IAL but not a majority.

20.  Whilst at the meeting of 31 January the Board had declined to register the transfers to IAL, at the same meeting they approved of and registered the transfers to Newide.

21.  To complete the picture to date, a company called Charm Advance Limited (Charm) owns 30,000 shares in GBDL.  This amounts to .88% of the shareholding.  Charm is a subsidiary of Hong Kong Health Check and Laboratory Holdings Company Limited (Health Check) which is a publicly listed company that features in the saga as I shall come to.

22.  Then there was a startling development, one which gave rise to this action.

23.  In March 2007, prior to the 10^th, H C Leung, who as I have said was one of those shareholders who had assigned his shares to IAL in return for shares in IAL, purported to sell the 50,000 shares still registered in his name to Newide in the sum of $615,000.  Then at a Board meeting of 10 March 2007 registration of that transfer was approved.

24.  H C Leung having completed the sale must have done so freely but then there was a change of heart, for in a letter handwritten dated 11 March, which I have seen, sent to Vincent Leung, he attempted to undo the sale, declaring it null and void.  The letter reads in part:

“I have already sold my shares to IAL … The shares belong to IAL not to me.  I have no right to those shares and no right to sell the shares to Newide …”

25.  On the same day he wrote again, which letter stated in part:

“I will not complete the bought and sold agreement and the voting right will stay in my hand.  I will not accept any sum of money related to the said agreement and I have not accepted any money from you.”

26.  But by then there had been registration.  The shares thenceforth were in Newide’s name.  And that is the present position.

27.  The significance of this goes to how closely matched are the shareholdings of the two camps in GBDL.  Without H C Leung’s shares, IAL would be left with 49.66% and Newide 47.99%.  H C Leung’s small holding is enough to alter the balance of power.

28.  Dr Shum wrote to the Board demanding a cessation of the process whereby Newide had acquired H C Leung’s shares, without authority of the beneficial owner thereof, IAL.  When that was declined, IAL brought these proceedings.

The Action

29.  H C Leung is sued as D5 in conversion for selling shares belonging to IAL.  Vincent Leung and three others as D1 to D4 are joined as directors who approved and registered the wrongful sale.  Newide is joined as D6 because against it are sought first a declaration that it holds the shares it acquired from H C Leung as constructive trustee of IAL and secondly an injunction that it shall not deal with the shares in any way including exercising its voting rights other than in accordance with IAL’s instructions.

30.  In essence, for determination at trial will be whether the sale between H C Leung and IAL was a genuine and valid sale that was completed, and if so, whether Newide can establish that it acquired H C Leung’s shares as a bona fide purchaser without notice, so as to defeat IAL’s equitable interest therein.

These Applications

31.  Shortly after issuing this writ, IAL applied on 30 April 2007 for an interlocutory injunction against Newide to restrain it from dealing in any way with the H C Leung shares, including exercising its voting rights, except in accordance with instructions from IAL pending judgment in the action proper.  This is the first matter before me.

32.  On 4 May 2007 an interim injunction in terms was ordered.  That order remains extant until the date of this judgment.

33.  Meanwhile there is also an application made by Newide to discharge the interim injunction.

Recent Developments

34.  On 7 June 2007 the GBDL Board approved and registered a transfer of Newide’s shareholding in GBDL (but save and except the H C Leung shares) to a company called Speedco Pacific Limited (Speedco) which is another BVI company controlled by Vincent Leung.  

35.  On 8 June there was an announcement by Health Check that Charm, its subsidiary, had entered into an agreement conditional upon due diligence to purchase all of Speedco’s interest in GBDL; that is 47.99% of the total shareholding, thus increasing Charm’s holding to 48.87% of the total.

Matters to Come

36.  Finally there is one further pertinent development but that is for the future; namely, 14 July 2007.

37.  On that date there is scheduled to take place an EGM sought by Dr Shum and others in his camp to give effect to the proposals to alter the make-up of the Board.

38.  If this goes through, those in the camp of Dr Shum will have effective control of the Board.  That said, the proposal does not seek to exclude Vincent Leung.

The Legal Principles

39.  The law relating to the granting or refusal of applications for interlocutory injunctions emerges from the speech of Lord Diplock in American Cyanamid Co. v Ethicon Ltd (1975) AC 396.

40.  First is that there must be a serious question to be tried.  If not, the application fails at this point.

41.  Second is to consider whether, if the plaintiff succeeds after trial, it could be adequately compensated in damages.  If so and the defendant has the means to pay, there should be no interlocutory injunction.  If not then third is to consider if the interlocutory injunction is granted, whether after trial a successful defendant could be adequately compensated by the plaintiff’s undertaking in damages, and that it has the means to pay.  If so, then this would not be a reason to refuse the injunction.

42.  Where there is doubt about the adequacy of damages in respect of both parties the court is obliged to weigh the needs of the parties the one against the other to establish where the balance of convenience lies.

43.  This is now well settled law and recognised in Hong Kong; see the White Book at 29/1/9.

A Serious Issued to be Tried?

44.  It is apparent from the pleadings and affidavit evidence filed against the application that the genuineness and validity of the contract between H C Leung and IAL is challenged; further, it is said that Newide had neither actual nor constructive notice of that sale, real or otherwise.

45.  It is not for me to attempt to resolve material disputes of fact and I do not.  Suffice for me to find that IAL has a strong chance of success in demonstrating on the papers that the transaction was genuine and complete, and in resisting the proposition that Newide had no notice, either actual or constructive. 

46.  One only has to consider the roles played by Vincent Leung; on the one hand the controlling mind of Newide; on the other a director of GBDL instrumental in the refusal to register the transfers to IAL which included the H C Leung block of shares.  I say no more about that.

47.  There is, most assuredly, a serious issue to be tried.

Damages an Adequate Remedy?

48.  For IAL, I think not.

49.  I have already mentioned the balance of power enjoyed by the ultimate holder of the H C Leung block of shares.  If Newide is unrestricted it can transfer them to Speedco.  Then if the transfer to Charm becomes unconditional Charm will have a majority shareholding in GBDL.  IAL will be a minority partner in an arrangement not of its making, and prospectively very different from that of the original make up of GBDL, which was a body of doctors getting together to run a profitable undertaking.

50.  If on the other hand a sale by IAL to Charm goes on to the table, the shareholding being a minority interest, the offering price may be significantly lower than might otherwise have been the case.

51.  As has been submitted, all sorts of factors can influence what shares are worth and how much a buyer might be prepared to pay for them.  But what is not refutable is that a majority interest will be worth more than a minority one.

52.  This is a prejudice which may not be able to be reversed, particularly as final resolution may be months or even more than a year away.  IAL’s loss of majority control in GBDL is not, as I find, something that can be quantified and recognised in damages.

53.  As for Newide, it currently has but 1.47% in GBDL.  It has already rid itself of the 47.99% formerly held.  If for the meantime it is denied the opportunity to exercise its voting rights or otherwise dispose of the shares it seems to me that the deprivation following a successful defence could and probably will be adequately addressed in damages.

54.  In these circumstances there is no good reason to withhold the granting of the injunction.

Balance of Convenience

55.  Although there is no need for me to consider this any more, I do so to demonstrate that were it to have been a matter for determination I would have found in favour of IAL.

56.  The loss of majority control by IAL would be irreversibly prejudicial for reasons I have given.

57.  The loss of majority to Newide and, going behind the corporate veil, the Vincent Leung camp, will probably amount to a change of composition of the Board of Directors of GBDL and possible change in governance.  That will not necessarily be prejudicial; indeed it would be expected to be otherwise, given that the emphasis is said to be on improving management, and on transparency and accountability to shareholders, and that means all shareholders.  And Vincent Leung will still be on the Board unless he chooses otherwise.

58.  In any event, a minority shareholder with a genuine grievance has his remedies available to him.

The Result

59.  IAL shall have its injunction in terms applied for.  The interim order having run its course, there is no need for me to deal with the application to discharge it.

60.  Costs are nisi.  These, including those reserved, shall be to the plaintiff in any event.