WONG MAN YIN v. LAW LAM WAI AND OTHERS

HCA 6260/1997

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 6260 OF 1997

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REASONS FOR DECISION

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1. I have before me three applications in these related proceedings: by the respondents for directions consequent upon my judgment in HCMP 1571 of 2000, and for an order in the same proceedings that the petitioner pay one third of the respondents' costs, and by the plaintiff in HCA 6260 of 1997 that the 1st and 2nd defendants pay the plaintiff's costs of that action. I reserved my decision as to the matters in HCMP 1571 of 2000, but made an order, which was not opposed, in favour of the plaintiff in HCA 6260 of 1997 as to their costs of that action up 26 January 2000, but excluding any costs of this hearing.

2. In HCMP 1571 of 2000, the petitioner sought relief under section 168A of the Companies Ordinance, Cap 32, and, in my judgment handed down on 22 June 2001, I ordered that the 2nd and 3rd respondents purchase his shares. The first matter I must accordingly deal with is the valuation of those shares and the basis upon which it should be conducted.

3. The reasons for my judgment were that the affairs of the company were conducted in a way unfairly prejudicial to the interests of the petitioner, Mr Wong, in respect of the excessive remuneration of directors, failure to pay dividends, and failure to comply with company and statutory regulations. Clearly at least the former two reasons will be relevant to the valuation. As to that valuation, the matters for which directions are now necessary are: by whom it will be conducted; the basis of that valuation, whether on net asset value, or as a going concern; the date at which the shares should be valued; the amount of the excessive directors' remuneration which should be written back in; whether the allotment of shares to the respondents on 24 March 2000 should be taken into account in calculating the petitioner's shareholding; whether there should be a discount for a minority shareholding; and the rate of interest on the sum payable and the date from which it is to run. I will deal with these points in turn.

Conduct of valuation

4. In his submissions to me, Mr Chan for the respondents has proposed that the Court assess the value of the shares according to the valuation set out in his written submission. While this has the benefit of finality and a saving of costs, it may well be too simplistic an approach to what is a complex calculation. It is based purely on a net asset value together with a sum added in to reflect the excess of directors' remuneration. For reasons which appear below I am not satisfied that this is the correct formula to be applied, and am accordingly of the view that this needs to be considered from an expert accounting point of view.

5. The only question is whether there should be one valuer appointed by the Court, or one for each party with further hearings to determine any conflict between them. The obvious disadvantage in the latter course is the length of time these proceedings will continue and the additional costs which will be incurred. It seems to me that the appointment of a single valuer, whose only duty is to report to the Court, will be both time and cost effective, and fair to both sides.

6. I accordingly accede to the request of the petitioner that the valuation should be carried out by an independent chartered accountant as may mutually agreed between the parties within 21 days from the date of handing down this decision, and failing agreement, to be appointed by the President for the time being of the Hong Kong Society of Accountants upon the application of either party.

Basis of valuation

7. The simple choice here is between net asset value at a particular date, plus an amount written back in to reflect the excessive fees paid to the respondent directors, or a valuation of the company on a going concern basis. In short an asset basis or an earnings basis.

8. Where, as here, the company is a going concern, there is some support for the view that it should be valued on an earnings basis. In his work on Minority Shareholders' Rights, Robin Hollington QC states that the earnings basis is usually more appropriate where the company is a going concern, saying, at paragraph 4-119, that the simplest and most common method of calculation is derived from the estimation of two key ingredients:

"(1) the maintainable level of profits of the company after tax; and

(2) the yield that a prospective purchaser would expect in making the investment."

9. This approach was also followed by Rogers JA in Koy Holdings Corp v Spider Knitters Ltd and anor [1998] 1 HKLRD 788, where he says at page 790:

"If a purchase of shares were to be ordered under s.168A(2)(c) the valuation of the shares of the company can be awarded on a going concern basis as between a willing buyer and willing seller, without regard to the fact that the shareholding in question is a minority shareholding.

It has been suggested to me that a likely quantification of that amount is possibly parlous since it is often in the hands of accountants who are not overly generous in estimating the value of a company. Be that as it may, the value of a company (as) a going concern seems to me to have to take into account its potential earning power and it is often on a basis of a multiple of its present earnings."

10. While I am aware that there is a history of irregular profits, and some losses, and that allotments have been made on the basis of net asset value, the company here is certainly a going concern and this basis is clearly the most appropriate, but I also agree with Mr Chow for the petitioner that the valuer should have regard to all matters, including assets, profitability and future prospects, as well as goodwill, for which the petitioner paid a premium when he purchased the shares.

Date of valuation

11. The usual date for valuation of shares in a case such as this is the date of petition, this being, as Le Pichon J said in Re Tai Lap Investment Co. Ltd [1998] 4 HKC 438, with the later approval of the Court of Appeal, a convenient date, and the point in time when the petitioner crystallised his position in claiming to be entitled to cease association with, or participation in the company. This has since been followed in similar cases and I can see no good reason to depart from it now.

Calculation of the excessive directors' remuneration

12. The parties are not in dispute that an amount to reflect the excessive remuneration the respondent directors paid to themselves should be added back in to the valuation of the assets of the company. The only dispute is as to how to calculate that sum.

13. The starting point must be the agreement between the parties as to what was to be the remuneration of the directors. This agreement was reached on 2 September 1995 at a meeting of the three, Mr Wong, Mr Law and Mr Tam. There it was decided that the salaries of all three would be $60,000.00 a month and a bonus of 20% of the (intended) Group's net profit before dividend distribution which was to be shared equally between the three directors. It is apparent from this that each director was entitled, in addition to the $60,000.00 a month, to a third share of the 20% of the net profits. Of the calculations produced for this hearing by counsel, I accordingly accept that of Mr Chow for the petitioner as being correct, in that it identifies the proper remuneration to have been paid to Mr Law and Mr Tam as two thirds of the 20% of the profits. Mr Chan has made a further calculation based on payments for a 13th month. I can see no logical reason for this and no evidence that such was actually intended. I therefore find that the sum to be added back for the excess payments to be as Mr Chow calculates, namely $30,320,603.00.

Allotment of shares on 24 March 2000

14. In the course of 1995 and 1996, following extraordinary general meetings, a number of allotments of shares were made, and taken up by Mr Law and Mr Tam. These were the subject of HCA 6260 of 1997 and, by an interlocutory judgment dated 12 January 2000, were declared null and void. Meanwhile, of course, Mr Law and Mr Tam had paid for those shares, and the payments were treated as loans to the company, although they waived part of what they claimed was their full entitlement to interest. In order to restore the position, a further EGM was held on 9 March 2000 at which it was resolved to offer a rights issue of 40,000,000 shares to existing shareholders on the basis of four rights shares for each share then held at a par value of $1.00 plus a premium to make the total equivalent to the net asset worth of each share, the par value being payable no later than 23 March 2000 and the premium within 14 days of issue of a notice demanding payment. Mr Law and Mr Tam took up their entitlement, and paid the par value, and, at a directors' meeting on 24 March 2000, allotted these shares to themselves, as well as those not taken up by the petitioner and the other shareholders. At that date, the premium had not yet been calculated and paid, nor had the issue price of the additional shares declined by the other shareholders and allotted to Mr Law and Mr Tam. The petition was filed that day.

15. It is the petitioner's case that the shares should be valued on the basis of his original shareholding which represented about 30% of the total, and equal to that of the respondents. Mr Chan, however, says that it was the respondents who injected capital into the company in the previous years enabling larger profits to be made when the property market was booming, and the petitioner should not benefit from this, or alternatively the respondents should receive proper interest on that capital as if it had been a loan at market rates.

16. I think the correct approach here is to look at the reality of the situation as at 24 March 2000. This was that about two thirds of the rights issue had been taken up by, and allotted to, Mr Law and Mr Tam, but only partly paid for. As to the balance of the shares allotted to them at the meeting that day, there is no evidence that those were paid for at all until later. I accordingly consider that it would be artificial to allow any of those shares to be taken into account, where they had been allotted but not fully paid for. Doing so would further prejudice the petitioner as the matters of which he complained, and which I found to have been justified complaints, occurred while he was still a 30% shareholder, and it seems less than just to now value his shares as some 6% of the whole.

17. I appreciate that this may not work fully in his favour, as prior to 24 March 2000 the value of the company will be affected by the capital injected by the respondents being treated as a loan, but after that as part of the increased capital. This is, however, a risk that Mr Chow says that the petitioner is prepared to take, and it seems to me to be the logical basis of valuation.

18. I would only add that, as the money put into the company prior to that is to be treated as a loan, the valuer should also take into account in his valuation interest which ought to have been paid at a proper market rate on that loan, rather than the actual rate the respondents charged to the company.

Minority shareholding

19. Mr Chan submits that there should be a discount to reflect the petitioner's minority shareholding. I have to say at the outset that I do not agree with this proposition. The general principle is that, in the case of a private company, a valuation order should not provide for any discount, although, as Mr Hollington at paragraph 4-121 of Minority Shareholders' Rights, in the real world the actual value of a minority shareholding in an unquoted private company is usually less than its pro rata value. On the authorities, the principle is clearly based on such a company being run as a quasi partnership, unless the shareholding had originally been purchased at a discount to reflect the minority shareholding, which is not the case here, and not purely as an investment.

20. It is contended by Mr Chan that this was not a quasi partnership as the petitioner had effectively ended his participation in the company and concentrated his efforts solely on his original company Capital Property Consultants Ltd. But this again is to ignore the reality of the situation. The intention of the scheme devised by the three parties here was that their two companies should be run together, indeed, they anticipated that it would be renamed as a group company, with all three being directors and shareholders of both companies, regardless of which attracted their main efforts. To that extent, it clearly was a quasi partnership and the general principle must apply.

Interest

21. There clearly should be an order for interest to reflect the fact that the petitioner has been kept out of his money since the date of the petition. In Re Tai Lap Investment Co. Ltd, Le Pichon J awarded interest at a flat rate of 10%, although there is no explanation as to how she arrived at that figure, and the same figure was used by me in Lau Yuk Chuen v. Gauss Electronics Co. Ltd and ors [1999] HKEC 735. However, I cannot ignore the fact that, certainly in the last few months, there has been a rapid decline in interest rates, and a flat rate here would not accordingly be appropriate. I think a fair rate is 1% over HSBC prime rate from time to time from date of petition to the date hereof and at judgment rate thereafter.

22. I leave it to the parties to draw up an appropriate order for my approval, with, of course, liberty to apply.

COSTS

23. The final matter is that of costs of these proceedings. Mr Chan has pointed out that the petitioner was only successful on three of the issues he raised at trial, and on two of the prayers of the petition. He claims that those matters on which the petitioner failed took up a large proportion of the hearing, and as a result, he should be deprived of his costs, and pay one third of the respondents' costs. Mr Chow submits that the usual rule should apply, that a successful party should not in the normal course of events be deprived of his costs.

24. In these proceedings the petitioner has succeeded to the extent that he has the result he principally sought, namely a buy out order. While it is true that in a number of issues raised by him I have not found in his favour, he is still a successful party having recovered the remedy he sought. It is trite law that any party who recovers more than nominal damages, or at least a substantial part of what he seeks, should have his costs as against the other party in the absence of very unusual circumstances or evidence that he has deliberately wasted time and costs by raising a large number of issues which had no hope of success. This is not such a case, and I see no reason why the usual order should not apply.

25. I confirm my order nisi as to costs, and dismiss the respondents' summons with costs to the petitioner. I also order that the costs of the summons for further directions be to the petitioner.

Representation:

Mr Anderson Chow, instructed by Messrs Hau, Lau, Li & Yeung, for the Plaintiff/Petitioner

Mr C H Chan, instructed by Messrs Johnson Stokes & Master, for the Defendants/Respondents

HCA 6260/1997

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 6260 OF 1997

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J U D G M E N T

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1. Both these proceedings arise out of a dispute between three of the shareholders of a company called Ricacorp Properties Ltd (Ricacorp), the 3rd defendant in the High Court action and the 1st respondent in the Miscellaneous Proceedings, both proceedings being ordered to be heard together by Yeung J on 21 September 2000. The plaintiff in the former and petitioner in the latter, Mr Wong Man Yin (Mr Wong), is a minority shareholder in Ricacorp who originally claimed damages and declarations as a result of what he maintained were breaches of a shareholders' agreement dated 15 July 1995 (the agreement), and an order pursuant to section 168A of the Companies Ordinance Cap 32 on his complaint that the affairs of the company had been conducted in a manner unfairly prejudicial to his interests. The two other defendants and respondents, Law Lam Wai (Mr Law), and Tam Kwong Chuen (Mr Tam), were shareholders and directors of Ricacorp from 1981 and 1986 respectively.

2. The relationship between the parties and Ricacorp began with the shareholders' agreement in July 1995. At that time Mr Wong was also the major shareholder and director of another estate agency called Capital Property Consultants Ltd (Capital), which was a smaller operation, having some seven branches to Ricacorp's twenty. It was decided between the parties that it would be in the interests of their respective companies, and to expand their market share, to enter into an alliance, and to co-operate with each other. Mr Wong alleges that it was intended that there should be a merger of the companies, but, although this may have been a possible intention in the long term, I do not think that it was envisaged in the shorter term, and, as things turned out, it rapidly became apparent that it would not happen. However, the initial phase of the terms of the agreement was put into effect, with a transfer of shares between the parties resulting in Mr Wong, Mr Law and Mr Tam holding 91% of the shares of Ricacorp equally between them, the other 9% being in the hands of two other minority shareholders, and 75% of the shares of Capital in the proportions of 31% to Mr Wong, and 22% for each of the two others. The price paid by Mr Wong for each of his Ricacorp shares was $1.474, which represented the net asset value of the company according to management accounts as at 31 May 1995, plus a premium of about $900,000.00. The agreement provided for an audited account to be arranged, but it appears that this was never done, and one of Mr Wong complaints is that the price of the shares was excessive and an overvalue. Mr Wong was also made a director of Ricacorp and Mr Law became a director of Capital.

3. A further provision in the agreement was that the existing loans by the directors, Mr Law and Mr Tam, should be shared with Mr Wong in the same proportions as their shareholdings. This too appears not to have been carried out, but all three made a further loan of $1,500,000.00 each shortly thereafter, Mr Wong demanding repayment of his in November 1995, when relations between the parties appear to have started breaking down, and following his demand with legal proceedings, upon which repayment was made.

4. Other provisions of the agreement relevant to these proceedings were that any allotment of shares to increase the capital of the companies should be pro-rata to the existing shareholdings, and that no sale of their shares should be made before offering them to the other shareholders. It was clearly the intention then that the shareholding ratio should be maintained. There was also a provision that future working capital should be met, upon a unanimous resolution of the board of directors, by way of advances and credit from financial institutions and third parties. This appears to conflict with the clause allowing increase in capital by allotment of shares, and the subsequent loans by the directors, but I shall look at it in more detail below when considering the issues now between the parties.

5. One of the clear intentions of the co-operation between the two companies was to allow their expansion to enable them to compete with larger companies on a more equal footing, and to this end two EGM's were convened, in August 1995 and November 1995 ( the 1st and 2nd EGM's), to increase the share capital of Ricacorp by a total of 10,000,000 $1.00 shares. Mr Wong attended both these meetings and cast his vote in favour.

6. There followed a board meeting in December 1995, of which Mr Wong says he was not given notice, at which an allotment of the new unissued shares was approved as to 2,958,333 shares for each of the parties herein, with one extra for Mr Tam to even up the numbers, and the balance to the two smaller shareholders. An invitation was sent to Mr Wong to subscribe for the new shares, but he either failed or declined to do so, and Mr Law and Mr Tam accordingly allotted those offered to themselves, as well as those offered to the other minority shareholders who did not take them up. By this time the parties were seriously at odds, and Mr Wong took little further part in the affairs of Ricacorp. The reason for the dispute is not clear, but a major factor is claimed to have been disagreement over the name of the holding company which was planned under the agreement, Mr Law and Mr Tam being unwilling to include the word "Capital", although at a meeting on 2 September 1995 attended by the three parties hereto, they were described as the board of directors of Ricacorp Capital Property Group Ltd, which had not yet been formed, and in the event never was. Mr Wong also now maintains that Mr Law and Mr Tam had refused to contribute loans to Capital in the proportion of their shareholdings as envisaged by the agreement. Whatever the reason, the parties certainly did cease to see eye to eye, and each side concentrated on pursuing the interests of their own company.

7. There followed three further EGM's of Ricacorp: in March 1996, September 1996 and October 1996, increasing the number of shares by 10,000,000, 20,000,000 and 20,000,000 respectively to a total of 70,000,000. Mr Wong did not attend the first of these meetings, but did attend the second and third, voting against the resolutions. He was again offered a chance to subscribe to the new shares, this time in proportion to his shareholding which became increasingly smaller by comparison to the other two as they took up the shares he refused. By the end of 1996 Mr Wong's shareholding in Ricacorp was a little over 6%, and by a resolution passed at the AGM held on 19 December 1996, he was removed as a director.

8. By the High Court proceedings commenced on 12 June 1997, Mr Wong sought declarations that the EGM's held in March, September and October were invalid in that they were called on less than 14 days notice, that the allotments of shares were null and void, as he claimed he had not been given notice of the relevant board meetings, and rectification of the share register. The defendants in that action conceded the short notice of the EGM's and amended their defence to admit that and the lack of notice of the board meetings, and judgment was given on admissions in respect of the EGM's, the resolutions made, and the allotments on, 12 January 2000, restoring the shares to 20,000,000. The only matter outstanding in that action is the defendants' counterclaim that Mr Wong is in breach of the agreement by accepting a directorship in another estate agency, contrary to clause 12 of the agreement.

9. Following that judgment, Mr Law and Mr Tam convened a further EGM (the 6th EGM) on 9 March 2000 at which a resolution was passed to increase the share capital to 60,000,000 by a rights issue of four shares for each held at a price based on the net asset value per share of the company. Mr Wong attended the EGM and voted against the resolution. An offer was made for him to subscribe to the rights issue, but he failed to do so, and Mr Law and Mr Tam took up 20,000,000 each at a directors' meeting on 24 March 2000. The same day the petition herein was filed.

10. The petitioner, Mr Wong, now has five main areas of complaint that he contends amount to unfair prejudice to him as a shareholder. These may be summarised as: the allotments of shares conceded by the respondents now to be null and void which resulted in a dilution of his shareholding and which he claims were in breach of the agreement; the 6th EGM which restored the nullified share capital; excessive directors' remuneration together with a failure to declare any dividend; failure to observe company and statutory regulations; and the overstatement of the net asset value of Ricacorp upon purchase of his shares in 1995.

The share allotments

11. The objection to the allotments of shares following the increase in share capital by resolutions at the first five EGM's, in addition to the lack of notice complained of, is that it in breach of two clauses in the agreement. These are clauses 1.3 and 3.2. The first reads as follows:

"Any allotment of shares of the Companies pursuant to further increase of capital shall only be made pro-rata to the existing share-holding of the parties. Unless all the Parties agreed, the share price of any allotment shall not be less than the net asset worth of the Companies at the time of the allotment."

12. Clause 3.2 reads:

"The future working capital requirements of the Companies will be met as the Boards of Directors may unanimously resolve from time to time, by means of advances and credit from financial institutions or from other third parties at best available rates."

13. There are number of issues arising out of these clauses, the first of which is whether Ricacorp was entitled to raise working capital by means of allotments of shares, rather than by loans as provided by clause 3.2, or clause 3.3 which provides for loans by shareholders. Mr Chow for the petitioner has sought to distinguish between the capital referred to in clause 1.3, which may be raised by allotment of new shares, and working capital under clause 3.2, which he says may only be raised by loans. In my view the difference here is illusory. It is clear from the evidence that the intention was to expand the operations of the company very quickly, which was in fact done, the number of branches increasing from 20 in 1995, to more than 70 in 1996 and to over 135 in 1997, and the turnover from $69 million in 1995 to about $625 million in 1998. In order to do so a large injection of funds was necessary, not just to cover current expenses for day to day operations, but for investment in fixed assets. Clearly the money intended to be raised by the allotments was for both, and the agreement envisaged increasing capital by the issue and allotment of new shares. Doing the best I can with a badly drafted agreement, I am of the view that this was an alternative to raising loans, and for the latter a unanimous resolution of the board was required, perhaps understandably as they would commit the company to liabilities to third parties. In any event, I accept the evidence of Mr Law that attempts had been made to find financial institutions willing to offer loans of the size required, but in a volatile field and without much in the way of fixed assets as security, none had been found. The alternative was either massive shareholders' loans or increasing the share capital. Mr Law and Mr Tam had already made large loans to the company, which, under the agreement should have been shared by Mr Wong. This did not happen, and the only loan to the company from Mr Wong, of $1,500,000.00 shortly after the agreement, he demanded to be repaid about three and a half months later.

14. It is not in dispute that Mr Wong agreed to the creation of the new shares in the 1st and 2nd EGM's. He claims now that this was on the basis that there would be no allotment of those shares without unanimous agreement of the board. I find this difficult to believe. I was clear that the intention was to expand the business of the company and there seems to have been no discussion about any other way of raising the funds necessary to do so. It cannot therefore have come as any surprise to him to find that an allotment of those shares was to be made, even if, as now appears from the pleadings to be admitted, although not according to the evidence of Mr Law, he had no notice of the board meeting at which the allotment was agreed.

15. It is conceded by Mr Wong in his pleadings, however, that he did receive the offer to subscribe to the shares. Again here the oral evidence contradicted the pleadings in that he claimed that his maid had placed the letter with the offer in a drawer and only remembered it later when asked to look for it. He said the same thing happened to the letters with the second and third offers in April and September 1996. However, he admitted in cross-examination that he had not only received the third personally, but signed on it to acknowledge receipt, although he claimed he was too busy to read it. I do not find this explanation credible, and find as pleaded that he received the offers to subscribe, knew of the allotments, and decided not to accept the offers.

16. While there were therefore irregularities in the later EGM's, in that a miscalculation by Mr Law or Mr Tam had meant short notice of a day or two being given, and a lack of notice of the board meetings at which the allotments were decided, and while these are clearly breaches of company and statutory regulations, I cannot agree that, in so far as the share allotments are concerned, any prejudice or unfairness resulted towards the petitioner, Mr Wong. He did not deny receiving notice of the 3rd EGM, which he did not attend, but he did attend the 4th and 5th EGM's and voted, and, although he did not attend the subsequent board meetings, possibly through lack of notice, he was made aware of the allotments by the letters inviting him to subscribe. There was no attempt here by the other shareholders to conceal what they were doing, and he had ample opportunity to subscribe for the shares, and thus retain his proportional holding, or to seek to have the decisions annulled, which did not happen until the High Court proceedings were commenced in 1997. Even then, no prejudice was alleged, only annulment of the allotments on the basis of lack of notice of the meetings and breach of clauses 1.3 and 3.2 of the agreement.

17. The complaint under clause 1.3 is that the number of shares offered to him was less than he was entitled to. The first offer was for 2,958,333 shares of the total of 10,000,000 issued pursuant to the resolutions at the 1st and 2nd EGM's, for which he had voted in favour. Mr Wong claims that he was entitled to 30.33% of the shares according to the share ratio established in the agreement. However, I accept the evidence of Mr Law as to this, that a small number of shares were held back for allotment to the minor shareholders who had not been allotted any on a previous occasion. The balance were divided according to the ratio in the agreement, and there can be no criticism of this. This offer was ignored by Mr Wong, who had in any event told Mr Law that he was not interested in putting more money into Ricacorp, and, the minority shareholders also declining the offer, all the shares were taken up by Mr Law and Mr Tam. This of course had the effect of diluting Mr Wong's shareholding to less than that intended by the agreement, and he was accordingly offered less than the others of the shares issued pursuant to the 3rd and 4th EGM's, namely 1,516,667 of the first 10,000,000, and 2,022,222 of the second 20,000,000.

18. It cannot be the case that the reference to the allotment of shares pro-rata to the existing share-holding in clause 1.3 can mean anything other than the shares held at the time of the new allotment. It does not make sense that a shareholder refusing to take up allotments, or even by selling his shares, and thereby reducing his proportion of the total shares, should still be able to demand an allotment proportionate to his original shareholding. In any event, the phrase used cannot refer to shares held at the time the agreement was entered into, as Mr Wong did not have any of those in Ricacorp then, only acquiring them after the initial terms of the agreement were put into effect.

19. To conclude this part, I am satisfied that Mr Wong was well aware of the intention to increase the capital by the issue and allotment of new shares, and had initially agreed to it. He was kept informed, although perhaps not as timeously as could have been done, but with no prejudice to him, and he decided that he was not going to subscribe to the new shares, in the certain knowledge that the effect would be to reduce his proportion of the total shares.

20. Was the conduct of the respondents unfairly prejudicial in the context of these allotments? It certainly caused prejudice in that the petitioner's proportional shareholding was reduced, but this was, as I have already found, from his own choice. Was it unfair? I am not satisfied that it was. Breach of their obligations under the company's articles, or under statute, may well be evidence of unfair dealing, but it is by no means conclusive. As Hoffmann LJ observed in Re Saul D Harrison & Sons plc [1995] 1 BCLC 14, conduct may be technically unlawful without being unfair, and vice versa. While the respondents did breach regulations, all they were doing was continuing on the path of expansion of the company which had been the original intention of all the parties, and with which the petitioner concurred. The fact that he later, either for personal reasons, or reasons connected with the interests of his own company, decided not to support that expansion financially, does not make the respondents' pursuing it, while offering him a share in it, unfair for the purposes of section 168A.

The 6th EGM

21. Although denying any breach of the shareholders' agreement, Mr Law and Mr Tam decided in late 1999 or early 2000 to regularise the situation regarding the share capital of the company and to dispose of the major part of the High Court proceedings. They accordingly conceded the matter of notice of the EGM's and board meetings, and, at their own instigation, brought the application before the court to further amend their defence and to have judgment on admissions entered against them. The effect of this was, of course, to nullify the shares issued under the resolutions of those EGM's, and to reduce the share capital. It also left the company in effect owing Mr Law and Mr Tam some $40,000,000.00 which they had paid for the shares and which now became a loan. Being not unreasonably concerned about the commercial image of their company, they immediately proceeded to remedy the situation by calling another EGM, on 9 March 2000 (the 6th EGM) at which a resolution was passed authorising the issue of 40,000,000 new shares to be offered as a rights issue on the basis of four shares for every existing share at a par value of $1.00 plus a premium equal to the net asset value of each share. Mr Wong attended the meeting and voted against the resolution. As the shareholding in the company was now restored to that immediately after the agreement in 1995, Mr Wong was invited to take up the 12,133,332 shares he was entitled to. He failed to do so, and, at a board meeting on 24 March 2000, all the new shares were allotted to Mr Law and Mr Tam.

22. Mr Wong's complaint about the rights issue was that he had not been supplied with any financial information to enable him to make a decision on whether he should take up the offer. Indeed, this complaint was made by his solicitors in a letter of 6 March 2000, prior to the EGM, although no specific request was made for such information, and the tenor of the letter itself is a more general complaint that the directors were conducting the affairs of the company to his prejudice, including what they claimed were excessive directors' remuneration and lack of dividends. While the respondents did not accept that any prejudice had been caused to Mr Wong, in August 2000, when the audited accounts up to 31 March 2000 and management accounts to 24 March 2000, the date of allotment, were available, they were supplied to him with a further invitation to take up the rights issue out of time, which would have been done by the respondents giving up some of those allotted to them. This again was declined.

23. I do not consider the conduct of the respondents was unfairly prejudicial in their handling of this matter. It was not in my view unreasonable to restore the issued share capital, the lack of financial information was no different for Mr Wong than for any other shareholder, including the respondents, the accounts not being available until after the allotment had taken place, and in any event it was not requested, nor was an opportunity to inspect the books which were available to the respondents. Even if the petitioner was thereby at an unfair disadvantage, this was remedied by the later offer to take up the rights issue out of time, when the information was available.

Directors' remuneration and dividends

24. It is not in dispute that, during the years from 1995 to 2000 no dividends were declared and paid by the company. The only time a dividend was proposed was in 1999, but at a time when, as a result of the earlier allotments which he disputed, Mr Wong's shareholding had been reduced to 6%, and he opposed the payment until the validity of those allotments, the subject of the High Court proceedings, could be resolved. During the same period Mr Law and Mr Tam, as executive directors, paid themselves substantial sums by way of directors' fees. These may be summarised as follows:

Year end	Turnover ($)	Profit ($)	Directors' emoluments ($)
31.8.95	69,304,639.00	- 18,548,168.00	2,586,093.00
31.8.96	177,438,825.00	11,881,053.00	4,855,444.00
31.3.98	989,687,830.00	46,569,757.00	29,738,564.00
31.3.99	300,607,750.00	9,230,197.00	10,994,504.00
31.3.00	242,730,754.00	- 19,470,257.00	5,746,694.00

25. By agreement at a meeting held on 2 September 1995, the parties had agreed their remuneration as directors at $60,000.00 a month plus one third of 20% of the net profits. Mr Wong himself appears to have restricted his own remuneration to less than this, but that of Mr Law and Mr Tam is clearly well in excess of it, and, claims Mr Wong, in excess of any reasonable amount. Indeed, in the years that the company made a profit at all, the directors paid themselves sums equivalent to between 40% and over 100% of the profits, or, if one takes the figure for profit before the emoluments were paid, between 29% and 54%. The total received by the directors in those five years was $53,921,299, while the net profit over the same period was $29,662,582.00.

26. Mr Law seeks to justify these payments by claiming that they were in line with emoluments paid to directors in other property companies, and were based on 1.5% of turnover, which was an industry norm. While I can see that senior management in such companies responsible for particular branches or areas might be paid a commission at such a rate, on the turnover of their branch or area, to encourage them to promote the business, I am not satisfied that the evidence shows the practice elsewhere to extend a similar arrangement to directors. The only figures available are those for a company called Centaline where the average over the same period was 1.216% of turnover, with widely ranging figures for each year, and, even in those where it exceeded 1.5%, the payments to the directors were less than a total of 25% of profits, and averaged a total of 10.803%. I should add that Mr Wong, who was also a shareholder of Centaline, had made a formal objection to that company also of excessive remuneration of directors. On any analysis of the figures the payments to the directors here were very large and took a considerable sum from the company which might otherwise have been distributed to the shareholders as dividends. It is contended on behalf of the petitioner that this was unfairly prejudicial to the shareholders.

27. There is no doubt that a failure to distribute profits by way of dividends can be unfairly prejudicial conduct, particularly where the directors are consistently paying excessive remuneration to themselves. As Harman J said in Re a company (No 00370 of 1987),ex parte Glossop [1988] BCLC 570，at page 576:

".....That restores the position which I am sure all the Victorian judges and legislators, who first created companies from 1862 onwards, would have thought obvious, that is that one of the prime purposes of a company is as a vehicle to earn profits which should be distributed by way of dividend to the members of it.

On that basis (leaving aside the question of taxation, which cannot, in my view, change the basic position, although it may make the purpose difficult if not impossible to effect), it is, in my judgment, right to say that directors have a duty to consider how much they can properly distribute to members. They have a duty, as I see it, to remember that the members are the owners of the company, that the profits belong to the members and that, subject to the proper needs of the company to ensure that it is not trading in a risky manner and that there are adequate reserves for commercial purposes, by and large the trading profits ought to be distributed by way of dividends. No doubt in practical terms shareholders will have a difficult case to make if directors, not considering their own personal pocket, not benefiting themselves in some capacity (e.g. by paying out to themselves remuneration in excess of that which should legitimately be paid so that their remuneration is limited to that which would be paid to ordinary people in the market performing those functions), simply pile up profits in the company and do not distribute them by way of dividend. None the less members can, in my view, if those facts were adequately proved, make the company the subject of a petition for a just and equitable winding up, because the proper and legitimate expectations of members have not been applied, but have been defeated."

28. That case, of course, was concerned with what the petitioner claimed was an inadequate payment of dividends which had not increased at a commensurate rate with the company's profits, nor with the directors' remuneration. Here, no dividends have been paid at all, despite large profits having been made, which by 31 March 1999 had resulted in retained earnings in the company of nearly $45,000,000.00, and this after directors' emoluments of over $40,000.000.00 had been paid in the previous two years.

29. On any objective view of the matter, and it is clear that the test is objective, this is as clear a case of directors enriching themselves from the profits of their company as one could imagine, while at the same time failing to pay to other shareholders any of the earnings to which they were entitled. I do not find the evidence of Mr Law, that they received no more than that which was usual in this business, convincing, and even if I did accept that, there is no good reason on the evidence before me why, apart from the year 1999, when the petitioner had good reason to object to an immediate distribution, they made no effort to allow the other shareholders to share in the company's success. This is a clear case of conduct unfairly prejudicial to the interests of the shareholders, and were this the only ground, I would be prepared to grant the petitioner the relief he seeks. However, I will go on to consider the remaining matters of complaint.

Failure to observe regulations

30. The matters relied on by Mr Wong in respect of this part are, in addition to the lack of any or any proper notice of EGM's and board meetings referred to above, the failure to prepare accounts or convene an annual general meeting to lay the accounts before the company in general meeting less than 9 months after the date the accounts were made up to in any of the years under consideration, failure to hold an AGM at all in 1998, failure to send the 1998 accounts to Mr Wong in proper time before the meeting, or possibly at all, and making loans to themselves contrary to section 157H of the Companies Ordinance, Cap 32.

31. While trivial irregularities in the conduct of a company's affairs, and the occasional late accounts or meetings might be considered as minor matters which were unlikely to prejudice the interests of shareholders, the situation here does not in my view fall into that category. I take into account particularly that, after relations between the parties soured in late 1995, and apparently went rapidly further downhill in 1996, Mr Wong had less to do with the affairs of the company while he concentrated on his own, Capital, and the company's affairs were almost entirely in the hands of Mr Law and Mr Tam. In those circumstances, it was more important than ever that a substantial shareholder who was not involved in the day to day running of the company should be kept informed, be provided with accounting information at least at the times statutory and company regulations required, and be given proper notice of meetings. Not to do so begins to look as if there was a deliberate attempt to exclude him from information about the company and accordingly prevent him from making informed decisions as to how to vote when meetings were held. Such conduct must inevitably be unfairly prejudicial to the interests of the other shareholders.

32. The other matter under this head is the question of the loans to the directors in 1999, amounting to about $5,000,000.00 each, both of which appear to have been repaid within a matter of months. While I agree that this is a breach of section 157H, the respondents having made no attempt to show that the loans came within the exceptions to that section, I am not satisfied that it amounts to conduct affecting the petitioner to such an extent to be unfairly prejudicial. Apart from the prompt repayment of the loans, they were properly recorded in the accounts, and, I believe, interest was paid. There was therefore nothing underhand or dishonest about them, and the company did not suffer financially in any way. It is also pertinent to note that, over the years, the respondents had made many large loans themselves to the company, and, at the time of these loans, had paid some $40,000,000.00 for shares which were subsequently ruled invalid, and their payments converted to loans. It follows that, although they did not know it at the time, the company was in effect indebted to them for considerably more than the loans to them. I accordingly propose to disregard these loans for the purposes of this part.

Overstatement of the net asset value

33. The contention of Mr Wong here is that there were errors in the management accounts made up to 31 May 1995 upon which the value of the shares was based when he first purchased them under the agreement. It was clearly the intention that audited accounts would be provided later and adjustments made if necessary. This was never done, and, indeed, Mr Wong never asked for them. It is equally clear that, had audited accounts been done, some adjustment would have been made. In particular, no depreciation of fixed assets had been allowed for, although the company's accounting policy was for straight line depreciation, which would have meant the depreciation up to that date should have been taken into consideration rather than accounting for it only at the end of the year, and there was an error in the amount of profits brought forward by an overstatement of some $460,000.00. There was also a question of the writing off the value of the company's investment in subsidiaries, but I accept the explanation for this that it was reasonable to consider these as losses early in the investment which need not at that stage have been written off. As to the other errors, I am satisfied that that is all they were, which would have been corrected if audited accounts had been asked for and produced. These were not deliberate attempts to overcharge the petitioner and did not amount to unfairly prejudicial conduct. I would also add that, as at the time the petitioner was not yet a shareholder, any overvalue prior to his purchase could not amount to conduct affecting a shareholder. The failure to supply audited accounts later might have been, but this is not the conduct complained of. At most Mr Wong may have an action against Mr Law and Mr Tam personally to recover any overpayment.

HCMP 1517 of 2000 - conclusion

34. For the reasons given above, I am of the view that, in respect of the remuneration of directors and failure to pay dividends, and failure to comply with company and statutory regulations, the affairs of the company were conducted in a way unfairly prejudicial to the interests of Mr Wong, and I am satisfied that the proper relief under section 168A that should be granted to him is that the two other major shareholders purchase his shares. I will hear counsel on any consequential matters including the basis and date of valuation of the shares.

HCA 6260 of 1997 - counterclaim

35. Clause 12 of the agreement reads as follows:

"The parties agree that so long as each of them remain a Shareholder in the Companies and for six months thereafter, it (sic) shall not do anything which is likely to compete with or is in competition with the Companies including without limitation acquiring shares in other companies which are likely to compete or are in competition with the Companies or being a director or consultant or in business or be associated with any of such companies; or in partnership with any person or entity which will compete or is in competition with the Companies unless prior written consent is obtained from the other Shareholders."

36. In December 1999 Capital acquired 60% of the shareholding of another company called Easy Property Co. Ltd and Mr Wong was appointed a director of it. The acquisition was approved by the board of directors of Capital at a meeting on 6 December 1999, of which Mr Law, as a director, was given notice, although he did not attend. The defendants claim that, by becoming a director of Easy Property, Mr Wong is in breach of the agreement, in that Easy Property, being in a similar business, is in competition with Ricacorp and Capital, and, by a letter dated 27 March 2000, demanded that he make good the breach. On 10 May 2000, by a further letter, the defendants gave notice of termination of the agreement under clause 12.

37. I have to say that I have some difficulty with the proposition that a subsidiary can be in competition with the company which holds a majority of its shares. Any business it does is largely for the benefit of its major shareholder, Capital, of which Mr Law and Mr Tam are shareholders under the agreement, and of which Mr Law is a director. It is clear to me that what clause 12 envisaged was a situation where one or more of the parties to the agreement acquired personally a minority interest in another company in competition with Ricacorp and Capital, or became a director of such a company. I cannot accept that, where one company acquires a majority interest in another, and a party to the agreement becomes a director, this is against either the intention or the spirit of clause 12. Indeed, I would go further and say that the wording of the clause does not, in my view, allow of such an interpretation. It is little different from one of the companies expanding its business by opening an additional branch, which may technically be in competition with the other branches, but when looked at as a whole, is for the overall benefit of the company.

38. I am accordingly not satisfied that Mr Wong was in breach of clause 12 or that the defendants were entitled to terminate the agreement, nor to the declaration that they claim. The counterclaim will therefore be dismissed.

Costs

39. There will be an order nisi that Mr Wong has his costs of the section 168A proceedings and the counterclaim in the High Court action to be taxed.

Representation:

Mr Anderson Chow, instructed by Messrs Hau, Lau, Li & Yeung, for the Plaintiff/Petitioner

Mr C H Chan, instructed by Messrs Johnson Stokes & Master, for the Defendants/Respondents