HCA 1599/2009
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
ACTION NO 1599 OF 2009
____________
BETWEEN |
| | SHERRYKNOLL ENTERPRISES LIMITED | 1st Plaintiff |
| | KALAGATE LIMITED | 2nd Plaintiff |
| | CHORONOELL LIMITED | 3rd Plaintiff |
and |
| | GRAND POWER LIMITED | Defendant |
and |
| | 孟慶有 | Third Party |
| ____________ |
| Before: Deputy High Court Judge Au-Yeung in Chambers |
| Date of Hearing: 18 July 2012 |
| Date of Decision: 23 July 2012 |
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D E C I S I O N
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1. The plaintiffs claim that the defendant has converted their shares. They seek an interlocutory mandatory injunction to compel the defendant to deliver up share certificates with a view to selling them.
Background
2. China Reservoir Mining Limited (“CRML”) holds a number of mining rights in the Mainland. Its shareholders are as follows:
| Registered shareholder | Beneficial ownership | Shares | Shareholding |
| Sherryknoll (P1) | Mr Yang | 195,000,000 |  | 51% |
| Kalagate (P2) | Mr Zhang Chao | 200,000,000 |
| Choronell (P3) | Ms Li Xuemei
(Mrs Meng) | 105,000,000 |
| Podromus Group (third party) | Mr Meng | | 49% |
3. In the second half of 2006, Mr Yang, Mr Zhang and Ms Li reached an agreement with Mr Li Qiao Feng, Chairman of one China National Resources Development Holdings Limited (“the Company”). It was agreed that a subsidiary of the Company by the name of Ample Year Limited (“Ample Year”) would acquire 51% of CRML’s shares from the plaintiffs (“the CRML Acquisition”). In consideration thereof, the Company would issue and allot 1,000,000,000 new shares at $0.3 per share to the plaintiffs (“the Consideration Shares”).
4. A framework agreement was signed by Ample Year and the plaintiffs on 12 December 2006. A formal framework agreement was signed on 27 March 2007. Each of the plaintiffs would be allotted 390,000,000 (9.30%), 400,000,000 (9.54%) and 210,000,000 (5.01%) shares respectively. This made the holdings of each of the plaintiffs discloseable under Part XV of the Securities and Futures Ordinance.
5. The Consideration Shares were subject to a lock up period of 12 months during which they were prohibited from sale. As due diligence could not be completed within the half year after signing of the formal agreement as expected, Mr Yang, Mr Zhang and Ms Li agreed with Mr Li Qiao Feng that only half of the Consideration Shares would be subject to the lock up period whereas the other half would be released prior to the expiry of the lock up period.
6. On 2 October 2007, the Company announced that the CRML Acquisition had been completed and that the Company had issued and allotted 1,000,000,000 Consideration Shares to the plaintiffs on 28 September 2007.
7. Although the plaintiffs signed to confirm receipt of the Consideration Shares, they had taken away share certificates for only 500,000,000 shares. According to the plaintiff, it was because the Company secretary suggested that the Company should retain the share certificates for the other half (“the Subject Shares”) until expiry of the lock up period.
8. On 29 February 2008, the plaintiffs received formal notice from the Company that the first half of the Consideration Shares was free to trade. The plaintiffs had sold this half, the bulk of which was at a price below $0.6 per share.
9. From September 2008, despite enquiries with the Company, the plaintiffs were not able to collect the share certificates for the Subject Shares. The plaintiffs therefore reported loss to the share register (Computershare) on 6 November 2008. Each of them filed a statutory declaration containing the following terms:
“3. The Certificates were last in the possession of the Shareholder and due to the inadvertence of the staff of the Shareholder, the Certificates were lost, mislaid or destroyed and could not be found.
…
5. I, on behalf of the Shareholder, declare and warrant that the Shareholder has never pledged the Certificate by way of deposit with any person, company or institute whether the Shareholder or for any other person.”
10. On 5 December 2008, the plaintiffs were informed by Computershare that the share certificates were in the possession of the defendant, who refused to deliver them up.
11. By this action, the plaintiffs seek delivery up of the share certificates for the Subject Shares and damages for conversion.
12. The defendant admits that the plaintiffs are registered holders of the Subject Shares but assert that the defendant is entitled to retain and has beneficial interest in the Subject Shares as a result of agreements or by way of security.
13. According to the defendant, Mr Guo was its sole legal and beneficial owner and director, one Mr Meng represented to Mr Guo that he was the sole beneficial owner of each of the plaintiffs. Mr Yang, Mr Zhang, and Ms Li were his nominees.
14. In early July 2007, Mr Meng, on behalf of the plaintiffs, told Mr Guo that the Company had reservation as to the trustworthiness of the plaintiffs and CRML. The CRML Acquisition might fall through unless a credible person or company was willing to provide a guarantee to the Company to the effect that the shares and assets of CRML would not be subject to any legal disputes and liabilities (“the guarantee”).
15. In July 2007, Mr Meng, on behalf of the plaintiffs, orally agreed with Mr Guo of the defendant that the latter would give the guarantee. In return the defendant would be entitled to the portion of the selling price above $0.6 per share in respect of the 1,000,000,000 Consideration Shares. The lock up period would be one year and shares would be sold at such time and at such price to be mutually agreed. Each of the plaintiffs and the defendant would be entitled to possess part of the share certificates and that party would have the exclusive right to sell the shares in its possession (“the oral agreement”).
16. A written guarantee was allegedly provided by the defendant on 20 July 2007 (“the guarantee”).
17. An alleged written agreement between the plaintiffs and the defendant was signed on 6 September 2007 (“the written agreement”) to record and supplemental the oral agreement. To realize the sharing principle and in view of the market value of the shares being $1.40 at that time, the plaintiffs signed and delivered to the defendant the sold notes in advance in respect of 50% of the Consideration Shares. The plaintiffs and the defendant each held 50% of the Consideration Shares.
18. The defendant counterclaims for a declaration that he has beneficial interest in the Subject Shares, a declaration that the plaintiffs are obliged to comply with its directions in the exercise of their voting rights and an account of dividends.
19. All of these allegations are denied by the plaintiffs. They also deny the authenticity of the guarantee and the written agreement. They deny that the defendant had acquired any beneficial ownership even on its own case.
Events leading to this application
20. On 23 January 2011, the Company entered into an acquisition agreement with various parties to acquire 100% equity interest in Daye Non-ferrous Metal Limited, which constituted a very substantial acquisition under the Listing Rules (“VSA”). To satisfy the consideration payable, the Company would need to issue new shares and convertible notes which would drastically dilute holdings of public shareholders prior to the VSA (from 79.15% to 25.54%).
21. Since announcement of the VSA on 1 February 2011 to announcement of its progress on 11 August 2011, the share price of the Company had declined from $0.64 to $0.445.
22. The downward movement of share price and the dilution of public holdings raised concerns in the plaintiffs. They obtained financial advice dated 12 December 2011 to the effect that there would be a negative impact on the profitability and share price performance of the Company after completion of the VSA and that it was highly probable that the share price of the Company would drop materially.
23. The plaintiffs submitted proxy forms intending to vote against the resolutions in respect of the VSA, to be considered in an EGM on 16 January 2012 (the 1st EGM”).
24. The day before the 1st EGM, the defendant took out an ex parte application on notice seeking to restrain the plaintiffs from exercising any votes pursuant to the proxies. Harris J declined to make an order thereon since he did not have the full picture at that time. The 1st EGM was adjourned by the Company.
25. At the 2nd EGM held on 5 March 2012, the resolution concerning the VSA was passed, despite the plaintiffs’ dissent. Completion of the VSA took place on 7 March 2012. The shareholdings of public shareholders have been diluted as expected and may be further diluted upon conversion of the convertible notes. The lock up period will expire in 6 months’ time. The share price of the Company dropped from $0.485 on 8 March 2012 to $0.415 on 16 April. The share price dropped further to $0.35 by 13 July 2012.
26. To protect their interests, the plaintiffs therefore took out this application in February 2012. The trial has been fixed for 8 days to commence on 9 April 2013.
Legal principles for the grant of a mandatory injunction
27. The principles for grant of a mandatory injunction have been set out in the case of Music Advance Ltd v Incorporated Owners of Argyle Centre Phase I [2010] 2 HKLRD 1041, Ma J (as he then was):
The applicable principles for interlocutory injunctions are well-known and do not need repetition. Generally, one needs to look no further than American Cyanamid v. Ethicon Ltd [1975] AC 396 and the relevant text in Hong Kong Civil Procedure 2002 Volume 1 at paragraphs 29/1/8-29/1/50.
I would, however, only highlight one aspect. Where, as in the present case, the plaintiffs seek an interlocutory mandatory injunction (that is, an order requiring the defendant to do something, in contrast to a prohibitory injunction which restrains the defendant from doing something), the following matters should be borne in mind as being the court's approach :-
(1) In the case of interlocutory mandatory injunctions, it is often said or assumed that a court will not grant one unless it feels a high degree of assurance that at the trial of the action, it will be shown that the injunction was rightly granted : see Shepherd Homes Ltd v. Sandham [1971] Ch 340 at 351. This has been explained and sometimes understood as meaning that in the case of an interlocutory mandatory injunction, the applicant's case on the merits has to be made out to a higher standard of proof than in the case of prohibitory injunction : see the Court of Appeal's observations in TKI Limited v. New Happy Limited [1995] 1 HKC 551 at 554 B-D.
(2) Broad statements such as the above must, however, be properly put in context.
(3) The basic approach to interlocutory injunctions, whether mandatory or prohibitory, is the same. Section 21L of the High Court Ordinance, Chapter 4 makes no distinction between these two types of injunctions and simply states that interlocutory injunctions may be granted if it appears to be just or convenient to do so.
(4) At the interlocutory injunction stage, the principal concern of the court is that it might make a wrong decision in the sense that after trial, the party to whom an interlocutory injunction has been granted may lose or the party who has been refused one, may win. The court will therefore take whichever course appears to carry the lower risk of injustice if it should turn out that it is wrong. This "fundamental" principle is the source of the guidelines that have evolved for the determination of interlocutory injunctions (included are, of course, the American Cyanamid guidelines) and therefore, in the application of any guidelines, sight must not be lost of this principle. See here : Films Rover International Ltd v. Cannon Films Sales Ltd [1987] 1 WLR 670 at 680 D-G, in a passage from the judgment of Hoffman J which was approved by the House of Lords in R v. Secretary of State for Transport ex parte Factortame Limited (No.2) [1991] 1 AC 603 and recently reiterated in the English Court of Appeal decision of Zockoll Group Ltd v. Mercury Communications Ltd [1998] FSR 354 (which Mr Au was kind enough to place before me).
(5) Two common guidelines are of course the consideration of the merits of the plaintiffs' claim and the balance of convenience. Here, it is of course easy to see at once how they are linked to the fundamental principle : there must be a risk of injustice if the plaintiff cannot even establish a serious question to be tried or that one or the other party will be put to substantial inconvenience or prejudice if an interlocutory injunction were or were not granted.
(6) In the case of interlocutory mandatory injunctions, the risk of injustice (being wrong in the sense referred to above) can be quite acute. In Films Rover International Limited, it was put thus by Hoffman J at 681 B-E :
“In Shepherd Homes Ltd. v. Sandham, Megarry J. spelled out some of the reasons why mandatory injunctions generally carry a higher risk of injustice if granted at the interlocutory stage : they usually go further than the preservation of the status quo by requiring a party to take some new positive step or undo what he has done in the past; an order requiring a party to take positive steps usually causes more waste of time and money if it turns out to have been wrongly granted than an order which merely causes delay by restraining him from doing something which it appears at the trial he was entitled to do; a mandatory order usually gives a party the whole of the relief which he claims in the writ and makes it unlikely that there will be a trial. One could add other reasons, such as that mandatory injunctions (whether interlocutory or final) are often difficult to formulate with sufficient precision to be enforceable. In addition to all these practical considerations, there is also what might be loosely called a 'due process' question. An order requiring someone to do something is usually perceived as a more intrusive exercise of the coercive power of the state than an order requiring him temporarily to refrain from action. The court is therefore more reluctant to make such an order against a party who has not had the protection of a full hearing at trial.”
(7) This passage in my view explains just why it is that generally a court will have to feel a high degree of assurance that at the trial of an action it will be shown that the interlocutory injunction was rightly granted before an interlocutory mandatory injunction will be given; all this being an exercise in assessing the strength of the plaintiffs' case : see sub-paragraph (1) above. However, I emphasize that this is only generally the court's approach. Where it is shown, as an exception to this general approach, that the case is one in which the withholding of on interlocutory mandatory injunction would in fact carry a greater risk of injustice than granting it even though the court does not feel the "high degree of assurance" as aforesaid, it would be right to grant an interlocutory mandatory injunction : see Films Rover International Limited at 681 A-B.
(8) This of course brings into focus the balance of convenience. Thus, if a plaintiff in seeking an interlocutory mandatory injunction cannot demonstrate more than a serious question to be tried, it will have to show that the balance of convenience tilts so much in its favour that justice requires such an injunction to be granted, even taking into account those aspects of an interlocutory mandatory injunction expressed by Hoffman J in Films Rover International Limited.
(9) At no stage, however, in the consideration of the matter does the court lose sight of the practical realities of the situation to which the injunction will apply : see NWL Limited v. Woods [1979] 1 WLR 1294 at 1306C per Lord Diplock.”
28. As the contest about the grant or refusal of an interlocutory injunction is effectively the only contest between the parties and will have the practical effect of putting an end to the action, it would mean giving the plaintiff judgment in the case against the defendant without permitting the defendant the right of trial. The court should be wary of the high risk of injustice. Fast-Link Express Ltd v Falcon Express Ltd, HCA 2040/2005, 30 December 2005, Deputy Judge Carlson.
29. The Court is concerned with the practical consequence of the injunction which is sought, questions such as whether irremediable prejudice will be caused to the defendant, how expensive it will be to implement the injunction and whether it prejudges the outcome of the trial. See Wako Giken (HK) Co Ltd [2010] 4 HKLRD 121, Harris J.
Merits of the plaintiffs’ claims
30. There is no doubt about the existence of serious questions to be tried. The court will have to determine why the Consideration Shares had come into possession of the defendant, which in turn depends on the existence of the oral/written agreements as to profit-sharing, and whether the defendant had given the guarantee as requested for by the plaintiffs.
31. Mr Neoh SC submits that the plaintiffs’ case against the defendant is overwhelming. With respect, I cannot agree. The plaintiffs effectively suggest that the Company, for no reason, released the Subject Shares to the defendant without the plaintiff’s consent. This is make-believe.
32. Their pleaded case was also inconsistent with the prior statutory declaration. Paragraph 3 of the statutory declaration was a fabrication. Paragraph 5 was misleading since Mr Yang stated in his supporting affirmation that the certificates were kept with the Company. Such inconsistency cast doubt on the veracity of the plaintiffs’ case.
33. On the other hand, the defendant’s version of how they came by the shares pursuant to the oral and written agreements is capable of belief. There were blank sold notes in respect of the Consideration Shares executed in escrow by Mr Yang, Mr Zhang and Ms Li on behalf of the plaintiffs. They were then left to Mr Li Qiao Feng by way of a custody agreement. Mr Li Qiao Feng denied ever receiving the alleged contract notes or being aware of the escrow arrangement. The plaintiffs effectively dispute their authenticity, hence in substance alleging forgery or fraud against the defendant. They could not, however, explain how the defendant got possession of the Subject Shares in the first place. The failure of Mr Meng or Mr Guo in asking the plaintiffs about the sale or for an account of the sale of the first half of the Consideration Shares was irrelevant to the question of whether the agreements existed.
34. Mr Neoh further challenges the defendant’s case on 3 other broad grounds:
(1) The guarantee was simply not necessary in the first place and was not disclosed in accordance with the Listing Rules;
(2) The oral/written agreement(s) were incomplete in that they did not provide for the date for sale of the Subject Shares.
(3) The defendant does not have proprietary interest.
35. With regard to ground (1), Mr Neoh SC pointed out that the framework agreement between the Company and Ample Year had already provided for the latter to carry out due diligence as to the legal and financial status of the plaintiff and CRML, and to be reasonably satisfied with the results of the exercise. The formal agreement was drafted by a reputable firm of solicitors in the area of corporate finance law. The guarantee came only 4 months after the formal agreement was signed. The guarantee, therefore, served no useful purpose, as the defendant was itself only a BVI company whose financial strength was unknown. Mr Guo’s own credibility was irrelevant since it was not him who provided the guarantee.
36. Moreover, the Company has never disclosed the guarantee through its public announcements in respect of the CRML Acquisition in breach of the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Ltd (“the Listing Rules”) made under section 23 of the Securities and Futures Ordinance, Cap. 571:
(a) Rule 14.58(9): the announcement for a very substantial acquisition must contain, where appropriate, details of any guarantee and/or other security given or required as part of or in connection with the transaction.
(b) Rule 14.63(2)(a): the circular for a very substantial acquisition must, if a shareholders’ approval is required, contain all information necessary to allow the holders of the securities to make a properly informed decision.
37. Mr Ho SC submits that whether or not the guarantee was disclosed was a matter for the Company. It might have regarded the guarantee as part of satisfying itself that the conditions set out in para 4.1 of the formal agreement (including due diligence on the CRML assets to be purchased) had been met and that there was no need to separately mention the guarantee in such context.
38. Mr Ho SC points out that the circular for the acquisition was published on 29 June 2007 before execution of the guarantee on 20 July. It was thus not surprising that the circular did not mention the guarantee.
39. Mr Neoh SC may well be right in his query on the guarantee but it goes to the overall credibility of the defendant’s case at the trial. Mr Ho’s submission cannot be lightly ignored in the exercise of weighing credibility.
40. With regard to ground (2), Mr Neoh SC submits that the oral/written agreements may be void for uncertainty because they left out a critical term, namely, the time for sale of the Subject Shares: May & Butcher v R. [1934] 2 KB 17. The defendant could not be conferred a right to hold on to the share certificates forever.
41. Mr Ho SC submits that it is not surprising that the agreements did not stipulate any time frame for sale after the lock up period. Each party obviously wanted to maximize the profits. The plaintiffs would want to sell at not less than $0.6 whereas the defendant at as much above $0.6 as possible. This could only be achieved by leaving the timing of the disposal flexible. Given the manner of sharing in the profits, the timing was naturally left to the decision of the defendant. Mr Ho SC suggested that the parties were then optimistic about future performance of the share price. At the relevant time, there was nothing to suggest that the parties would or could not cooperate to bring about a win-win result contemplated under the profit sharing agreements. It would be strange for the parties to agree to a fixed timeframe for disposal of the shares after the lock up period.
42. There is force and commercial sense in Mr Ho’s argument.
43. An agreement is not incomplete in a fatal sense simply because it leaves something still to be determined: New World Development Co Ltd & ors v Sun Hung Kai Securities Ltd & anor (2006) 9 HKCFAR 403.
29. …It is often possible for the court to discern in the parties’ agreement the intended principles, criteria or machinery, express or implied, for determining specific contractual rights and liabilities without requiring the parties to arrive at further agreement. Where this is possible, the agreement is not “incomplete”. This was the approach of Maugham LJ in Foley v Classique Coaches Ltd [1934] 2 KB 1 at 13, although his Lordship stated the proposition in negative terms:
“It is indisputable that unless all the material terms of the contract are agreed there is no binding obligation. An agreement to agree in the future is not a contract; nor is there a contract if a material term is neither settled nor implied by law and the document contains no machinery for ascertaining it.”
…
32. The courts will endeavour to find practical meaning in commercial agreements and are reluctant to strike down as too vague and uncertain agreements which businessmen have made and acted upon. Thus, to cite Lord Wright once more, this time in Hillas & Co Ltd v Arcos Ltd (1932) 43 Ll L Rep 359 at 367:
“Business men often record the most important agreements in crude and summary fashion; modes of expression sufficient and clear to them in the course of their business may appear to those unfamiliar with the business far from complete or precise. It is accordingly the duty of the Court to construe such documents fairly and broadly, without being too astute or subtle in finding defects, but, on the contrary, the Court should seek to apply the old maxim of English law verba ita sunt intelligenda ut res magis valeat quam pereat. That maxim, however, does not mean that the Court is to make a contract for the parties, or to go outside the words they have used, except in so far as there are appropriate implications of law, as, for instance, the implication of what is just and reasonable to be ascertained by the Court as a matter of machinery where the contractual intention is clear but the contract is silent on some detail.”
44. The court may be able to resolve the uncertainty by applying a reasonable standard:
“Even the parties’ later failure to agree on the matters left outstanding will vitiate the contract only if it makes it ‘unworkable or void for uncertainty.’ Often, the failure will not have this effect, for it may be possible to resolve the uncertainty in one of the ways already discussed, e.g. by applying the standard of reasonableness; or the matter to be negotiated may be of such subsidiary importance as not to negative the intention of the parties to be bound by the more significant terms to which they have agreed. … All this is not to say that the courts will hold parties bound when they have not yet reached substantial agreement, but once they have reached such agreement it is not fatal that some points (even important ones) remain to be settled by further negotiation.” Chitty on Contracts,Vol 1, 30th ed, para 2-129.
45. The parties’ clear intention was to each hold 50% of the Consideration Shares. The defendant has rightly been in possession pursuant to agreement. The plaintiffs have exercised their right to sell without obtaining the consent of the defendant, consistent with the parties’ agreements. It would not be surprising that the defendant be given a similar right. Finding a time by which or price at which to sell might be feasible having regard to parties’ intention and what is just and reasonable. That is a matter for the trial judge to decide.
46. With regard to ground (3), Mr Neoh SC submits that putting the defendant’s case at its highest, the possession was for the purpose of sale and a contractual right to share in the profits. On a proper construction of the oral/written agreement(s), the plaintiffs would have a right to call for the sale of the Subject Shares upon expiry of the lock up period and account to the defendant for any excess over $0.6 per share. No proprietary interest or security interest could have been created in favour of the defendant.
47. With respect to Mr Neoh SC, the alleged right to call for the sale of the Subject Shares upon expiry of the lock up period was not pleaded. The defendant appears to have a right to retain the shares until sale. Given that the price had been left open, what price of sale would the plaintiffs invite the court to fix? When would be the reasonable time to sell? These are all matters to be examined at the trial if there is a proper plea.
48. On the evidence as it stands, there are difficulties in each party’s case. At best, the plaintiff has only shown serious issues to be tried. If the plaintiffs had sought summary judgment, the defendant would have been given unconditional leave to defend. Like Deputy Judge Carlson in Fast-Link Express Ltd v Falcon Express Ltd, I decline to decide the entire contest between the parties summarily in the plaintiffs’ favour on the untested material before me, especially when the plaintiffs do not have an overwhelming case on the merits.
Balance of convenience
49. Notwithstanding that the “high assurance” test may not be satisfied, there is a question of whether or not there are circumstances that would justify the court imposing the mandatory injunction. In balancing the convenience, it is relevant to consider:
(i) each party’s view towards the performance of the Subject Shares;
(ii) whether damages form an adequate remedy; and
(iii) the terms of any undertaking provided by the plaintiff.
The Court warns itself against speculating on the trend of share price or taking away a party’s right to decide on the best time to liquidate its shares. Its duty is to balance the justice to each party before deciding on the right course to take.
(i) Each party’s view towards the performance of the Subject Shares
50. The VSA, the associated drop in share price and dilution of public shareholding and the further dilution should rights over the convertible notes be exercised, all demonstrate the risks to which the plaintiffs are exposed. The plaintiffs’ concern has proven to be true. The financial adviser’s view that with the likelihood of heavy capital expenditure and commitment, continuance of the dilution effect and heavy interest and financial burden might cause the share price to drop below $0.45. A drop in $0.1 in the share price will translate into a loss of $50,000,000 to the plaintiffs.
51. The current price is not much above the issue price of $0.30. The lock up period for the shares under the VSA is 6 months, which will expire in September 2012.
52. If the injunction is not granted, Mr Neoh SC submits that the plaintiffs will not be able to sell the Consideration Shares until the trial is over in April 2013. The plaintiffs will suffer the uncertainty over a further drop in share price, or other corporate actions the Company may take that may affect the share price.
53. The defendant is more optimistic. In reliance on the IFA report, the defendant’s view is that the issue of the shares and convertible notes would strengthen the capital base of the Company and hence would be beneficial to the future development and expansion of the group. The acquisition would have a positive effect earnings. Total cash and total borrowings would increase with an overall positive financial effect. It was in the interests of the Company and the Shareholders as a whole. The IFA has given due consideration to the potential dilution effect on the existing shareholders and various risk factors associated with the proposed acquisition.
54. Mr Ho submits that the plaintiffs’ reliance on the recent drop in share price of the Company was not proof that the VSA did not have a positive effect on the share price. Share prices could be affected by numerous factors. They could have dropped more had it not been for the benefits of the VSA.
(ii) Whether damages form an adequate remedy
55. On the plaintiffs’ side, clearly they want to sell the Subject Shares. Any loss to them is compensable by damages.
56. The defendant claims that if an injunction is granted, damages are not an adequate remedy because he will lose: (i) the chance to decide when to sell the Subject Shares; and (ii) the voting rights.
57. With regard to (i), the defendant’s loss can be compensated for by an award of damages. It is a matter for it to prove at the trial when the opportune time to sell is and the applicable price.
58. With regard to (ii), I agree with Mr Ho SC that registered owners of shares must comply with the instructions or directions of the beneficial owners to vote: Kirby v Wilkins [1929] Ch 444 at 454; Butt v Kelson [1952] Ch 197 at 204-5; Hotung & anor v Ho Yuen Ki [2002] 4 HKC 233 at para 27.
59. However I find this head of loss to be academic. The Subject Shares are registered in the name of the plaintiff. Even on the defendant’s own case, the agreement(s) do not provide for change of registration in its favour. The voting rights remain with the plaintiffs.
60. The defendant apparently do not think it has power over any voting rights even with possession of the Subject Shares. That was because after its application was declined by Harris J, the defendant has never applied for a similar order, ex parte or inter parte. At this hearing, Mr Ho SC confirmed that it was due to practical considerations that the order was not sought pending trial. In my view, the potential prejudice in terms of loss of voting rights was non-existent. Any loss suffered as a result of the plaintiffs “wrongful” exercise of voting rights against the interest of the defendant might be compensated for by damages that should enable it to buy back shares and possess once again voting rights. In any case, the 500,000,000 Consideration Shares now form only 3% of Company’s shares. There are thus very little voting rights.
61. I am of the view that damages will be an adequate remedy for either party.
(iii) The terms of any undertaking provided by the plaintiff
62. The plaintiffs initially proposed that if an injunction was granted, they would pay in net proceeds of sale representing the excess. On a proper analysis, given the downward trend of the share price and the current share price well below $0.60, that would mean that all proceeds of sale would be pocketed by the plaintiffs and the defendant would get nothing. If so, the mandatory injunction would effectively determine the action against the defendant without a trial. I categorically rejected this proposal as being entirely unfair to the defendant.
63. The plaintiffs have indicated through Mr Neoh SC’s skeleton submission that the plaintiffs would give serious consideration to any proposal for a further reasonable sum to be paid into court. Having discussed the terms of a mandatory injunction to be granted and the undertakings that the plaintiffs can give, the plaintiffs have put forth some undertakings and the defendants have commented on the same. In considering the viability of those undertakings, I consider the following to be important safeguards:
(i) The share certificates and proceeds of sale should not pass into the hands of the plaintiffs but should go through a stakeholder, the plaintiffs’ solicitors as proposed by the parties.
(ii) The sale price should not be less than $0.4 per share. The net proceeds of sale to be deposited into court will cover an award of damages in favour of the defendant where the share price shall increase to $1.00 by the time of trial.
(iii) The plaintiffs should fortify their undertaking as to damages by providing a “top-up amount” which, together with the net sale proceeds, shall in the aggregate be equivalent to no less than HK$0.4 per share. No sale shall be effected until the top up money has been paid into the escrow account.
(iv) Sale of the shares may be done in tranches, as 500,000,000 shares sold together may have a negative impact on the share price.
(v) The defendant should be informed, as soon as possible, of the sale of the Subject Shares to enable them to verify the share prices.
(vi) The defendant is at liberty to seek further fortification of the plaintiff’s undertakings in damages.
64. The defendant has asked for any undertaking to be given, not only by the plaintiffs but also its directors personally. The plaintiffs agree.
65. I consider that with the undertakings given by the plaintiffs and their directors, as modified by the defendant, are more acceptable than the initial proposal of the plaintiffs.
Balancing the parties’ interests
66. Where then does the balance lie? The plaintiffs and the defendant are BVI companies with no known assets. Each party runs the risk of an empty judgment and possession of the Subject Shares is an important safeguard.
67. I have considered the share prices over the years. There have been fluctuations:
(i) Immediately after the 1st half of the Consideration Shares were free to trade in February 2008 and up to April 2008, the price was $0.6 and over;
(ii) Thereafter prices dropped to as low as 0.12+ in October 2008 and gradually picked up;
(iii) From May 2009, prices were constantly above $0.6 until it reached $1.19 (highest) on 3 August 2009;
(iv) In the whole month of August 2009, it stayed at about $1.00;
(v) Thereafter, it remained at or about $0.6 until April 2010;
(vi) From April 2010, price has been in a downtrend;
(vii) The price in February 2011 (when VSA was announced) was close to $0.6. At completion of the VSA it was $0.485.
(viii) The constant downtrend thereafter leads to the current price at $0.35.
68. Despite the various periods when the share price reached over $0.6, the defendant had not seen fit to sell them. There was no evidence that the plaintiffs challenged that decision in the past. The plaintiffs have not compelled it to sell either.
69. The defendant urges upon me that sale of the Subject Shares is a commercial decision. There is nothing so serious or urgent that the court has to run the risk of granting a mandatory injunction by mistake. The trial is only 9 months away. Change in price can be due to various reasons. I agree.
70. The defendant complains of the plaintiffs’ delay in taking out this application. The proposed VSA was announced on 1 February 2011. The circular was issued on 19 December 2011. The plaintiffs obviously knew about the VSA before commissioning a financial report on 12 December 2011. The present summons was issued only on 15 February 2012.
71. I do not blame the plaintiffs for taking out this summons at the time they did. It takes time to observe the movement of share price. The price was not that bad in February 2011. The trial dates were fixed recently and discovered to be over a year from the date of the summons. There may be commercial considerations that justifies the plaintiffs’ course.
72. On balance, given the lack of overwhelming merits and lack of an alternative plea to demand for sale of the shares, there seems to be greater risk of injustice to grant than to withhold the injunction.
Other matters
73. Had I granted a mandatory injunction, I would have adopted the wording of the defendant with some modifications as follows:
“UPON the plaintiffs and each of them jointly and severally giving an undertaking as to damages
AND UPON the plaintiffs fortifying their undertakings as to damages as provided for below
AND UPON each of the directors [name] of each of the plaintiffs [name] jointly and severally undertaking to the court and to the defendant to procure the plaintiffs to comply with their undertakings and the terms of this order
IT IS ORDERED THAT:
(1) The Defendant shall deliver the share certificates of the 500,000,000 shares in the Company to Messrs. Michael Li & Co. directly, who shall act as stakeholder for these certificates for the purpose of carrying out these undertakings.
(2) Messrs. Michael Li & Co may deposit the share certificates or such part of the share certificates as may be required from time to time for sale into a brokerage company (“Broker”) for the purpose of selling the same in the market whether through The Stock Exchange of Hong Kong Limited and/or by way of private placements.
(3) Forthwith upon the deposit of the share certificates or any part thereof with the Broker, the Plaintiffs shall join Messrs. Michael Li & Co. to give an irrevocable written instruction to the Broker to pay the net sales proceeds (defined in paragraph 4 below) to the escrow account (defined in paragraph 4 below) directly.
(4) The net sale proceeds of any of the 500,000,000 shares (namely the sales proceeds less brokerage) (“the net sales proceeds”) shall be deposited by Messrs. Michael Li & Co into a special escrow account of Messrs. Michael Li & Co (“the escrow account”) to be opened for the purpose of holding the net sales proceeds.
(5) The Plaintiffs further undertake that, subject to clause 6 below, the said 500,000,000 shares will not be sold at a price below HK$0.4 per share.
(6) If the Plaintiffs were to sell any of the said 500,000,000 shares at a price below HK$0.4 per share, the Plaintiffs undertake to, before any instruction or order for such sale shall be placed, top up and pay into the escrow account (“the top up money”) a sum which together with the net sale proceeds shall in the aggregate be equivalent to no less than HK$0.4 per share. No sale shall be effected until the top up money has been paid into the escrow account.
(7) All the net sale proceeds and if applicable, all the top up money, will be paid into court within 7 days from payment into the escrow account until trial or further order of the court.
(8) The Plaintiffs may instruct the Broker or the Central Clearing and Settlement System of the Hong Kong Stock Exchange to seek the breaking up of each of the certificates constituting the 500,000,000 shares in order to facilitate sale.
(9) The Plaintiffs shall cause written notice to be given to the Defendant within [24] hours of any sale of shares effected pursuant to paragraphs 5 or 6 above with details of the transactions thereof.
(10) The Plaintiffs shall cause the statements of account with details of the transactions of each and every sale of the shares to be provided to the Defendant within [24] hours from the receipt of such statements from the Broker.
(11) There shall be liberty to apply.”
Conclusion
74. I dismiss this application. Costs should follow the event and be to the defendant, and I make an order nisi accordingly. There be summary assessment of costs on 14 August 2012 at 4:30 pm on the papers without an attendance. The defendant shall file and serve its statement of costs by 6 August 2012. The plaintiffs shall file and serve their grounds in opposition by 13 August 2012.
75. I thank counsel for their very able assistance.
| | (Queeny Au-Yeung) |
| | Deputy High Court Judge |
Mr Anthony Neoh, SC and Mr William Wong, instructed by Michael Li & Co, for the plaintiffs
Mr Ambrose Ho, SC and Mr Norman Nip, instructed by Keith Lam Lau & Chan, for the defendant
Please refer to HCMP1895/2012 for the relevant appeal(s) to the Court of Appeal.