CHINA SHANSHUI CEMENT GROUP LTD AND OTHERS v. ZHANG CAIKUI AND OTHERS

HCA 2880/2015

[2025] HKCFI 1868

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2880 OF 2015

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J U D G M E N T

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Index – This Judgment shall be divided into the following Sections:

Section	Description	Page	Paras
A.	Introduction	5	1-22
B.	The Parties and Persons Involved	11	23-142
B.1	The Plaintiffs’ Group	11	23-35
B.2	CSC (P1)	15	36-40
B.3	CSCHK (P2)	17	41
B.4	Pioneer (P3)	18	42
B.5	Shandong Shanshui (P4)	18	43-44
B.6	Zhang Sr (D1)	18	45-53
B.7	Zhang Jr (D2)	20	54-59
B.8	James Li (D3)	21	60-68
B.9	Chang (D4)	24	69-75
B.10	Doris (D5)	26	76-85
B.11	Champion (D6)	27	86-93
B.12	Zeng (D7)	29	94-103
B.13	Shen (D8)	31	104-111
B.14	CNBM (D9)	33	112-116
B.15	ACC (D10)	34	117-119
B.16	Tianrui	34	120-125
B.17	The Receivers	35	126-142
C.	Disputes over the CSI Shares	40	143-179
D.	Key Events Relevant to Claim	51	180-242
D.1	The 2014 Subscription	51	180-188
D.2	The 2016 Notes, 2017 Notes and 2020 Notes	54	189-203
D.3	Share Options	59	204-206
D.4	The 1st Requisition	60	207-209
D.5	The Potential VGO and Open Offer	60	210-214
D.6	The 2nd Requisition	61	215-223
D.7	The 3rd Requisition	63	224-228
D.8	The Cayman Proceedings	64	229-233
D.9	The Section 329 Application	65	234-238
D.10	Fiduciary Theft	66	239-241
D.11	Importance of Dates and Directorships	67	242
E.	The Impact of the 548 Action	67	243-252
F.	Overview of Claim as Originally Put Forward	71	253-270
G.	Agreed List of Issues	80	271-275
H.	Half-Time Concessions	84	276-302
I.	The Short Answer	91	303-325
J.	The Law	96	326-384
J.1	Introduction	96	326-329
J.2	Pleading of Bad Faith and Dishonesty	97	330-334
J.3	Unlawful Means Conspiracy	99	335-349
J.4	Breach of Fiduciary Duties	105	350-359
J.5	Duty not to exercise power for improper purposes	107	360-367
J.6	Duty to exercise independent judgment	109	368-369
J.7	Creditors’ interest duty when a company may be insolvent	109	370-374
J.8	Knowing Receipt	110	375-379
J.9	Dishonest Assistance	111	380-384
K.	Unlawful Means Conspiracy	113	385-410
L.	Breach of Fiduciary Duty / Overt Acts / Unlawful Means	123	411-412
M.	2014 Subscription	123	413-435
N.	Change of Control Clause in 2020 Notes	132	436-451
O.	Share Options	138	452-469
P.	Open Offer	144	470-495
Q.	Excessive Legal and Related Expenses	152	496-507
R.	13 October 2015 EGM	155	508-530
S.	Board Appointments on 14 October 2015	165	531-545
T.	Introducing Unlawful Amendments	170	546-556
U.	Jinan EGM	175	557-564
V.	Cayman Proceedings	177	565-598
W.	Retaining Multiple Lawyers and accountants for Cayman Proceedings	190	599-602
X.	The Application under Section 329 of the SFO	191	603-617
Y.	Fiduciary Theft	197	618-643
Z.	Qilu Claim	207	644-693
AA.	Conclusion	232	694-695
BB.	Costs	232	696-702
CC.	Postscript	233	703-710

A.  Introduction

1.  When a chef makes a dish using a few possibly good ingredients, but mixes them with many clearly bad ingredients and then seriously overcooks the whole thing, even the taste of the possibly good ingredients will likely be lost.  Something similar can happen in litigation.

2.  It is not too much of a ‘spoiler’ to state that the claim made in this case included many certainly bad ingredients. and it was indeed also seriously overcooked.  During the trial, the head chef who replaced the original head chef understandably and responsibly tried at various points to sift out and jettison the worst ingredients and to turn down the heat, in the hope of saving any better ingredients.  This Judgment will reveal whether that hope was in vain.

3.  The instructions to commence these proceedings were given on 3 December 2015 by a completely new Board of Directors of the 1^st plaintiff (“CSC”)  which had been in control for only 2 days, since the afternoon of 1 December 2015.  The new Board essentially comprised senior executives of Tianrui (International)  Holding Co Ltd (“Tianrui”)  and directors of China Shanshui Investments Co Ltd (“CSI”), including personnel from Ernst & Young who were the receivers (“Receivers”)  of some of the shares in CSI.

4.  The generally indorsed writ was issued on 4 December 2015.  It might be wondered ‘why the rush?’, and ‘how was it possible?’.

5.  As it turns out, it is clear that the persons who became the members of the Board on 1 December 2015 had long intended to make claims against at least some of their predecessors.  It seemed to be the first order of business to launch a claim against the members of the Board which they replaced.  Therefore, despite the fact that it was only on 2 December 2015 that CSC instructed the solicitors (“W&G”)  used to commence the proceedings, W&G were able to provide the draft writ and to obtain instructions for its issue within a day or so, because the thrust of the writ had in all likelihood already been drafted, to an extent cobbling together complaints already made variously elsewhere. 

6.  That would also explain why a full, and the particular form of, the Statement of Claim (“SOC”)  – again in part comprising that compilation of previous claims made elsewhere – was able to be served on 24 December 2015.

7.  In its first iteration, the claim was brought by CSC alone against just the 1^st defendant (“Zhang Sr”), the 2^nd defendant (“Zhang Jr”)  (together “Zhangs”)  and the 3^rd defendant (“James Li”).  The Zhangs and James Li together have been termed the “Original Executive Directors” or “Original EDs”.

8.  But within two weeks, on 17 December 2015 the writ was amended to add the 2^nd plaintiff (“CSCHK”)  and 3^rd plaintiff (“Pioneer”), and to extend the claim as against the 4^th defendant (“Chang”), the 5^th defendant (“Doris”), the 6^th defendant (“Champion”), the 7^th defendant (“Zeng”)  and the 8^th defendant (“Shen”).  The first version SOC reflected those parties.

9.  The 9^th defendant (“CNBM”)  and the 10^th defendant (“ACC”)  were brought into the frame by re-amendments made to the writ on 7 April 2016.  The 4^th plaintiff (“Shandong Shanshui”)  was added when the writ went to purple on 29 May 2017.

10.  Some of the details of the evolution of the claim – shown by the multi-coloured pleading from the SOC through to a Re-Re-Amended Statement of Claim (“RRASOC”)  – will be canvassed below, but it can be said at once that it has given rise to some awkward generalities and internal inconsistencies.  The continued and/or attempted evolution of the claim even during the trial – leading to a further ‘blue-pencilled’ version of the RRASOC (“BPSOC”)  – will also necessarily be canvassed below.  Even the BPSOC was not the last word, as there was deviation, or attempted deviation, from that during cross-examination and in closing submissions (not all in the form of dropping further aspects of the claim).

11.  The plaintiffs’ claim, and the basis of it, has been described by some of the defendants’ Counsel as a ‘moving feast’.  To continue the culinary analogy, in my view it is not unfair to suggest that trying to pin down the Plaintiffs’ claim in this action has been rather like trying to grab a forkful of blancmange.

12.  The whole action is, of course, just one of the myriad pieces of litigation arising out of the fight for control of CSC and its main operating business, Shandong Shanshui.  Elsewhere, that fight has been described as “commercial or corporate warfare”.  The warfare has included the fight for control of one of the main shareholders of CSC, being CSI.  That wider context is important, and it will be necessary to look at it in some detail.

13.  Until the trial itself, the main thrust of the claim was that the various defendants had combined together to achieve the particular stated objects of a conspiratorial agreement to injure CSC by use of unlawful means.  The central unlawful means alleged were various breaches of fiduciary duty.  The thrust of the claim included serious and repeated allegations of dishonesty and bad faith.  In other words, the central argument advanced was that it was the conspiracy which provided the motivation for the directors to act dishonestly or in bad faith in breach of fiduciary duties owed.

14.  As is perhaps well known, it sometimes turns out that those who see deceit in others are merely seeing their own reflections in the looking-glass of life.  It is, therefore, perhaps no surprise that the allegations of conspiracy alleged in this action against the defendants have been elsewhere turned against those making the allegations.  The oddity is in the overlap, in fact the identity, of the plaintiffs on whose behalf the allegations have been made.

15.  This is because, in addition to the claims made by the four plaintiffs in this action, exactly the same four plaintiffs have brought another action, HCA 548/2019 (“the 548 Action”), alleging a conspiracy involving the individuals behind the commencement and pursuit of this action.  Indeed, the very commencement and pursuit of the current proceedings is alleged by the plaintiffs in the 548 Action (the same plaintiffs)  to constitute one of the overt acts of the conspiracy to injure carried on by and amongst the defendants to the 548 Action.  Two of the defendants against whom the plaintiffs have brought the 548 action were the only two factual witnesses for the same plaintiffs in these proceedings.  The potential consequences of this extraordinary situation will require careful consideration.

16.  The above situation arises because the present action was commenced when Tianrui and the Receivers controlled the board of CSC.  However, after an EGM held on 23 May 2018, when the Board was reconstituted, this action has continued and been conducted on the instructions of the INEDs of the CSC Board.  It is the new Board since May 2018 – which does not include either of the Zhangs – which commenced the 548 Action.

17.  It can also usefully be pointed out in this introduction that, though this Judgment is necessarily divided into sections which might seem to ‘compartmentalise’ the case, it is necessary to stand back and look at the case as a whole, so as to consider the potential effects and implications of facts on other parts of the case.  To put it another way, whilst focusing on the detail, it is necessary not to lose sight of the context and bigger picture, but instead to consider the case and its facts taken in the round.  This I have done.

18.  This has meant an iterative process, testing provisional findings against other provisional findings and the wider picture. I have also tested the claimed recollection or casting of events, to which the witnesses have spoken, against the immense mass of contemporaneous documents accumulated for use at the trial, and against what seem to me to be the inherent likelihoods and probabilities.  As is usual, and whilst questions of the credibility of witnesses have arisen and can be addressed, I have focused more on the reliability of witnesses (which is not necessarily based on whether they are credible).

19.  It is, however, neither necessary nor possible to rehearse the totality of oral or documentary evidence within this Judgment. The oral evidence, factual and expert opinion evidence, spread across 29 days.  The trial bundle, including the documentary evidence, comprised more than 110,000 pages (though there were inevitably some significant duplications and some translations).  That there was a full ‘live’ transcript taken, and to which reference can be made, has been helpful.  Further, in navigating and marshalling the various materials, I have also been greatly assisted by the written opening and closing submissions filed for the parties, themselves running to over 1,000 pages.

20.  Ultimately, for most of the claim, there is a relatively short answer to it.  But there is also a longer answer.  I shall deal with both.

21.  As to representation:

(1)  The Plaintiffs’ writ, the SOC, the amended SOC (“ASOC”)  and the Re-Amended SOC (“RASOC”)  were all signed by Mr Barrie Barlow SC.  But the RRASOC, including the purple amendments relating to Qilu, was signed by Ms Rachel Lam SC.  Ms Lam was the lead trial advocate, leading Mr David Chen and Mr Jonathan Lee.  They also produced the BPSOC at the ‘half-time’ point of the trial.

(2)  The Zhangs were represented by Mr Jean-Paul Wou and Mr Simon Ho.

(3)  James Li was represented by Mr Vincent Lung.

(4)  Chang and CNBM were represented by Mr Charles Sussex SC, leading Mr Jason Yu and Mr Avery Chan.

(5)  Doris Wu and Champion Lee were represented by Mr Charles Manzoni SC QC, leading Mr Mike Lui.

(6)  Zeng Xueming was represented by Mr Simon Wong and Mr Geoffrey Yeung.

(7)  Shen Bing was represented by Mr Raymond Leung SC, leading Mr John Leung.

(8)  ACC was represented by Mr Wong Yan Lung SC, leading Mr Val Chow.

22.  This is my Judgment after trial.

B.  The Parties and Persons Involved

B.1  The Plaintiffs’ Group

23.  The Plaintiffs are companies within the “China Shanshui” group of companies (“Group”).  The Group is principally engaged in the production of clinker and cement.  The history of the Group is not a matter of any dispute.

24.  The Group’s business was originally operated by an entity known as “Shandong Cement Plant”, which went into operation in 1977 and was apparently owned and/or operated by a PRC government department known as the Jinan Building Materials Bureau.  Until 1989, and despite having 11 different managers, Shandong Cement Plant never achieved profitability.

25.  In 1990, Zhang Sr was appointed manager, and as a result of his personal attributes – described as including “dogged persistence”, “bold decision-making” and “vigorous action” – Shandong Cement Plant achieved its first profit in 1990.  From 1990 to 2002, the cement output increased 13 times, sales revenue increased 13 times, and workers’ income increased 3 times.

26.  On 21 October 1997, a company later renamed Jinan Shanshui Group Co Ltd (“Jinan Shanshui”)  was established as a state-owned enterprise with the approval of the municipal government of Jinan, Shandong province, to manage a number of state-owned enterprises including Shandong Cement Plant/Factory.

27.  In about October 2000, Jinan Shanshui proposed a ‘PRC Employee Stock Ownership Plan’ (“Share Scheme”), through which its employees could invest in the company’s business by subscribing for shares in a new company to be set up eventually to take over its business.  By February 2001, a total of 2,518 employees of Jinan Shanshui had decided to take part in the Share Scheme, which was implemented on 10 August 2001.  At that time the new company envisaged in the Share Scheme was established under the name of Jinan Chuangxin Investment Management Co Ltd (“Jinan Innovation”).  80.14% of the original registered capital of RMB30.2 million was contributed in cash by those employee participants in the Share Scheme.  The balance was contributed by Jinan Shanshui in cash. However, as PRC Company Law did not permit a company to have more than 50 shareholders, Jinan Innovation registered 10 shareholders, including Jinan Shanshui and nine employees selected as representatives of the total 2,518 employees participating in the Share Scheme.

28.  Later, 353 of the initially participating employees transfer their capital contribution and equity interest to other then existing employees, and two related companies of Jinan Innovation were established, with 1782 employees of those companies joining the Share Scheme and contributing RMB67.1 million cash in capital.  As a result, by September 2005, the number of participating employees in the Share Scheme had increased to 3,947 (“Contributing Employees”).

29.  In 2004, professional advisers were engaged by Jinan Innovation for the possible implementation of a plan to list the business in Hong Kong.  In anticipation of the relevant corporate restructuring for such a public listing, on 15 December 2004 the employee share representatives and Jinan Shanshui transferred their respective equity interests in Jinan Innovation to 9 individuals known as the “management shareholders”, comprising various senior employees involved in the management of Jinan Shanshui.  They were Zhang Sr, a Li Yanmin, and 7 other individuals (those 7 collectively, “Minority Shareholders”).  The interest transferred to the Minority Shareholders were held by themselves beneficially.  Hence, the 9 management shareholders held the equity interest in Jinan Innovation as follows:

Name	Equity interest	Remarks
Zhang Sr	65.55%	52.37% held for other employees 13.18% held beneficially
Li Yanmin	16.19%	9.4% held for other employees 6.79% held beneficially
Yu Yuchuan	4.35%
Dong Chengtian	4.18%
Zhao Liping	3.05%
Zhao Yongkui	2.77%
Mi Jingtian	1.56%
Li Maohuan	1.53%
Wang Yongping	0.82%
Total:	100%

30.  On 6 February 2005, Jinan Innovation became Shandong Shanshui Cement Group Co Ltd, i.e. the 4^th Plaintiff, Shandong Shanshui.

31.  In 2005, CSI, CSCHK and Pioneer were incorporated as part of the overseas restructuring process.  They were established for the subsequent transactions contemplated in the restructuring.

32.  On 11 April 2005, the entire issued share capital of CSI was transferred to the nine original shareholders in the same proportion as the respective holdings in Shandong Shanshui.  Accordingly, Zhang Sr became the holder of 655,519 shares in CSI and Li Yanmin became the holder of 161,902 shares in CSI.

33.  In September 2005, Pioneer entered into an Equity Transfer Agreement with the nine management shareholders to acquire from them the entire equity interest in Shandong Shanshui for RMB162.8 million.  That consideration was funded by subscription monies paid by various institutional investors, who paid US$51 million to CSCHK to subscribe for 49% of its issued share capital.

34.  As a result of the overseas restructuring, Shandong Shanshui became 100% owned by Pioneer, which was in turn held 100% by CSCHK.  The shareholders of CSCHK were CSI (51%)  and the institutional investors (49%).  The shareholders of CSI were Zhang Sr, Li Yanmin and the 7 Minority Shareholders.

35.  CSI has been described as the ‘kingmaker’, as regards CSC.  This is because of its consistent and significant shareholding of just over 25% in CSC (originally 32.27% after the relevant restructuring).

B.2  CSC (P1)

36.  CSC was incorporated in the Cayman Islands in April 2006.  Upon a corporate restructuring in September 2007, whereby (in part)  CSC became the 100% equity holder of CSCHK, CSC became the ultimate holding company of the Group.  It was listed on the Stock Exchange of Hong Kong (“SEHK”)  on 4 July 2008.

37.  As to its shareholders, the following table identifies the changes over the material times (and a short period subsequently).

Date	Shareholders	No of Shares	Percentage
29 July 2008	CSI Institutional investors Public (incl ACC)	871,736,400 1,080,783,600 748,466 000	32.27 40.00 27.73
31 December 2011	CSI Institutional investors Public (incl ACC)	847,908,316 830,142,119 1,137 925,475	30.11 29.48 40.41
30 June 2014	CSI ACC Institutional investors Public	847,908,316 337,932,000 1,078,195,916 551,913,968	30.11 12.00 38.29 19.60
3 November 2014	CSI ACC CNBM Public	847,908,316 453,480,620 563,190,040 1,514,530,654	25.09 13.09 16.67 44.82
1 December 2014	CSI ACC CNBM Public	847,908,316 706, 253, 500 563,190,040	25.09 20.90 16.67 37.34
30 January 2015	CSI ACC CNBM Public	847,908,316 708,263,500 563,190,040 1,259,743,481	25.09 20.96 16.67 37.28
17 February 2015	Tianrui CSI ACC CNBM Public	355,287,000 847,908,316 708,263,500 563,190,040 904,491,384	10.51 25.09 20.96 16.67 26.77
10 April 2015	Tianrui CSI ACC CNBM Public	931,378,000 847,908,316 708,263,500 563,190,040 328,400,384	27.56 25.09 20.96 16.67 9.72
13 April 2015	Tianrui CSI ACC CNBM Public	938,888,000 847,908,316 708,263,500 563,190,040 320,890,384	27.78 25.09 20.96 16.67 9.50
14 April 2015	Tianrui CSI ACC CNBM Public	950,883,000 847,908,316 708,263,500 563,190,040 308,895,384	28.14 25.09 20.96 16.67 9.10
15-16 April 2015	Tianrui CSI ACC CNBM Public (incl Yu Yuan)	951,462,000 847,908,316 708,263,500 563,190,040 310,326,384	28.16 25.09 20.96 16.67 9.12
6 July 2015	Tianrui CSI ACC CNBM Yu Yuan (ACC) Public	951,462,000 847,908,316 708,263,500 563,190,040 142,643,000 167,605,356	28.16 25.09 20.96 16.67 4.22 4.90
31 December 2016	Tianrui CSI ACC CNBM Yu Yuan (ACC) Public	951,462,000 847,908,316 708,263,500 563,190,040 142,643,000 167,605,356	28.16 25.09 20.96 16.67 4.22 4.90
31 December 2017	Tianrui CSI ACC CNBM Yu Yuan (ACC) Public	951,462,000 847,908,316 749,493,305 563,190,040 142,643,000 124,443,579	28.16 25.09 22.18 16.67 4.22 3.68

38.  As to its directors at the material times, I will identify them as necessary when I deal with the individual defendants below.

39.  As already identified above, CSC holds 100% equity interest in CSCHK.

40.  At trial, the only factual witnesses called for CSC (and the other plaintiffs)  were Stephen Liu and David Yen, two of the Receivers (as defined below).

B.3  CSCHK (P2)

41.  CSCHK is a company incorporated in Hong Kong. It holds 100% equity interest in Pioneer.

B.4  Pioneer (P3)

42.  Pioneer is a company incorporated in Hong Kong. It holds 100% interest in Shandong Shanshui.

B.5  Shandong Shanshui (P4)

43.  Shandong Shanshui is a wholly foreign-owned limited company established by Pioneer in the PRC in 2005.  It is one of the 12 national large-scale cement enterprises with national key support.  It has over 100 subsidiaries spread across more than 10 provinces in the PRC.  In other words, Shandong Shanshui was at all material times the onshore Mainland parent holding company of the Group’s operating subsidiaries and factories.

44.  One of the matters raised in this action relates to amendments made to Shandong Shanshui’s articles, which amendments are said to have been unlawful.

B.6  Zhang Sr (D1)

45.  I have already indicated above the background to Zhang Sr and his involvement with CSC and the Group, including his being a shareholder of CSI.  It is essentially common ground that Zhang Sr was the principal driving force in the 1990s behind the growth of the business that is currently operated by the Group.

46.  Zhang Sr was the general manager of CSC until 8 October 2010, the Chairman of CSC until 18 March 2013, and an Executive Director (“ED”)  of CSC at all material times until 13 October 2015. 

47.  I think it fair to say that, at least prior to that date, he had demonstrated a significant reluctance to step down from his role.  Against the history, that may be understandable, and it may not of itself identify that he held nefarious intentions.  His apparent intentions are a matter for exploration through the evidence.

48.  Ultimately, when removed as a director on 13 October 2015, he produced an apparently ante-dated letter dated 1 October 2013 stating that he was resigning (possibly as a face-saving exercise).

49.  Zhang Sr can only have owed fiduciary duties as a de jure director until his removal on 13 October 2015.  There is, however, a pleading in the RRASOC that Zhang Sr continued as a shadow director after the date of his removal – though there are no particulars of any facts supporting that plea.

50.  To establish a case that he was a shadow director, the plaintiffs needed to plead and prove at least that the other directors of the company were directed or instructed by Zhang Sr how to act in relation to the particular sphere of activity of the company relevant to the inquiry, that the directors, or majority of them, acted in accordance with such directions, and that they were accustomed so to act, in a pattern of behaviour in which the board or majority of its members did not exercise any discretion or judgment of its own.  There is no such plea, and no such evidence was elicited or seriously pursued at trial.

51.  The arguments deployed by Ms Lam in her closing submissions as to why Zhang Sr might have remained a shadow director were, with respect, redolent with non-sequitur, and were unconvincing.  I reject them. Ultimately, the point was finally dropped anyway.

52.  Also, by way of example, one of the major events giving rise to complaints in this action was the commencement of Cayman Island proceedings (see below).  This occurred after Zhang Sr had been removed or resigned.  It gave rise to significant correspondence and meetings amongst board members, as well as with lawyers.  There is no trace of Zhang Sr’s presence in any of the discussions.

53.  It can be noted here that Zhang Sr did not give evidence at the trial (though he had provided witness statement).  Then again, it is fair to record that at least the documentary evidence shows that Zhang Sr was not significantly involved in many of the events giving rise to the claimed overt acts of the conspiracy.  I have weighed his absence in the balance.

B.7  Zhang Jr (D2)

54.  Zhang Jr is the son of Zhang Sr.  He joined the Group in March 2006, and was at all material times an ED of CSC and the general manager of the Group (having succeeded his father on 8 October 2010).  He was also CSC’s joint company secretary (together with James Li).

55.  Zhang Jr became the Chairman of CSC on 18 March 2013.

56.  At the trial, Zhang Jr gave evidence on behalf of himself and his father.

57.  I accept that Zhang Jr did not come across as a particularly impressive witness.  Whether or not it is surprising, Zhang Jr appeared to have little memory about the vast majority of key events which had taken place in 2014 and 2015.  He frequently gave answers about not remembering or not quite recalling, and did not appear to have spent any significant time with the documents in the trial bundle seeking to re-familiarise himself with the circumstances giving rise to the case.  Much of his evidence, therefore, did not add much to what could be gleaned from a proper review of the contemporaneous documents themselves.

58.  It may well be right that at the material time the business culture in China might have been somewhat different to that in Hong Kong, with less use of email for business communication, and more communication with department heads advice general managers by telephone or face-to-face.  That provide some explanation as to why there are few emails penned by Zhang Jr in the trial bundle.  Nevertheless, one exchange which particularly struck me was the coyness – tending to simple evasiveness – over his email address, as though concerned that he might inadvertently give something away. 

59.  As Mr Wou fairly accepted in his closing submissions, Zhang Jr was not a details-oriented man.  In considering his evidence, I have tended to look for and test it against corroborative documents, as well as inherent likelihoods.

B.8  James Li (D3)

60.  In around 2005, in the context of the intended IPO for the Group, James Li was identified by headhunters (apparently instructed at the suggestion of Morgan Stanley)  as a candidate able to offer experience has a financial officer, so as to set up proper accounting and internal management practices, and handle listing-related matters and investor relations after listing.  He was interviewed by Morgan Stanley, and certain institutional investors.

61.  James Li became the Chief Financial Officer (“CFO”)  of Shandong Shanshui in January 2006.  But it may be that the title “CFO” is misleading, when his real work remained limited to the tasks already mentioned above.  The accounting and financial matters of the Group were handled by the Finance Department – then headed by Zhao Yongkiu (one of the Minority Shareholders), subsequently Li Hengwen from September 2012 – in Jinan, whereas James Li was (or later became)  resident in Hong Kong.  Both of the names Zhao Yongkiu and Li Hengwen come back into the story.

62.  After CSC had been listed, James Li was appointed as: (1) CSC’s joint company secretary (together with Zhang Jr); (2) qualified accountant; and (3) deputy authorised representative, in relation to the liaison with the SEHK.  This was in part because the SEHK Listing Rules at the time required a listing company to appoint a Hong Kong qualified accountant.  Though that requirement was removed sometime after the Group went public, James Li remained the named qualified accountant and joint company secretary, even though he had not been in charge of the Finance Department nor involved in the financial and accounting management of the Group, which was performed using the accounts and books kept at the Head Office in Jinan (though obviously with some copies in Hong Kong).  He ceased to have the official title of CFO.

63.  Also amongst James Li’s duties were: liaising with professional parties in relation to compliance with disclosure requirements under the Listing Rules; assisting the Group in preparation of results announcements; managing investor relations; liaising with professional advisers; assisting in the Group’s major financing transactions; arranging board meetings and shareholders meetings, including the preparation and publication of announcements and circulars; and arranging directors training and workshops in compliance with the Listing Rules.

64.  After the resignation of various then incumbent directors, Zhang Sr invited James Li to become an ED of CSC.  He was appointed on 23 August 2013.  By then, he was resident in Hong Kong, so that it would have been impossible for him to lead the Finance Department in Jinan, so he turned down the invitation to become head of the Finance Department.  Following his appointment as ED, James Li continued the same duties as previously, though he of course also attended meetings of the Board, and provided input from matters which required Board approval.

65.  James Li was removed as a director of CSC on 13 October 2015, but continued in his role as joint company secretary until his official resignation from the Group on 25 November 2015 (though CSC claims the end date was 1 December 2015).

66.  It is common ground that James Li was never a director of CSCHK, Pioneer or Shandong Shanshui. James Li can only have owed fiduciary duties as a director of CSC between 23 August 2013 and 13 October 2015.  There is no pleading of any duties which James Li might have owed after 13 October 2015.  In particular, there is no separately pleaded duty concerning his role as company secretary, and no plea that he became a de facto or shadow director.

67.  James Li gave evidence at trial.

68.  In evidence, he came across as knowledgeable in the cement industry and in listed company compliance matters.  However, he was certainly not succinct – and that may at times have given the impression that he was trying to avoid the question, rather than answer it.  I am not convinced that Ms Lam’s criticism of James Li, that he had a tendency to embellish documentary evidence so as to justify the absence of particular matters, is entirely fair.  Adding extra information is not necessarily embellishment in the sense suggested by Ms Lam.  In any event, much of James Li’s evidence could be tested against contemporaneous documentation.  I do accept that he was close to the Zhangs in his working relationship.

B.9  Chang (D4)

69.  After graduating in 1994, from what is now Wuhan University of Technology, Chang joined a predecessor of CNBM.  Upon the incorporation of CNBM in 2005, Chang joined as the Secretary to the Board, and subsequently acted as vice president and ED of CNBM and as director of a number of its important subsidiaries.

70.  After CNBM’s investment in CSC, Chang was also in charge of the development of that project, and in making day-to-day decisions for CNBM related to CSC.

71.  Chang was a Non-Executive Director (“NED”)  of CSC from 22 May 2015 to 14 October 2015, and he was an ED of CSC between 14 October 2015 and 1 December 2015.  He was removed as a director at the EGM on that latter date.

72.  Chang can only have owed fiduciary duties as a director of CSC between 22 May 2015 and 1 December 2015.

73.  Chang gave evidence at trial.

74.  Ms Lam accepted that Chang came across as a respectable individual.  But she suggested he nevertheless displayed a tendency to be evasive when penetrating questions were asked, taking a stance which affected aspects of his overall credibility.  However, with respect, I think some of the criticism is misplaced.  For example, the absence of inter-party documents regarding the negotiations of the 2014 Subscription Agreement was explained by the fact that discussions were held inside the office and face-to-face, and there was considerable internal CNBM documentation relating to its consideration.  Further, I think the evidence he gave orally about the Shanghai meeting in October 2015 (see below)  was largely cogent and consistent with his witness statement.

75.  Certainly, Chang came across as highly experienced, and very much alive to the great difficulties which CSC was facing, and proactive in his attempts to improve matters.  I do not accept the allegation to the effect that Chang was entirely an agent for, or the creature of CNBM.

B.10  Doris (D5)

76.  Doris is Taiwanese.  She obtained two MBA degrees, one in each of the United States and Taiwan.  She is a qualified accountant in both the United States and Taiwan.

77.  She joined the Far Eastern Group in Taiwan in 2001.  In 2007, she was promoted within the group as the chief financial officer and vice president of ACC, a listed affiliate of the group.  From September 2014 to June 2017, she was also chief of staff of Asia Cement (China)  Holdings Corp (“Asia Cement (China)”), ACC’s subsidiary listed on the SEHK.  Though after the events giving rise to these proceedings, in April 2016 she became executive vice president of ACC and an ED of Asia Cement (China).

78.  Doris was appointed as Champion’s alternate director with effect from 11 October 2015.

79.  On 13 October 2015, after the 2^nd EGM (as defined below)  and at a meeting held by the Board to discuss new appointments to fill those vacancies arising from the resolutions passed at the 2^nd EGM, Doris was appointed as an ED at the recommendation of the Nomination Committee of the Board with effect from the following day, i.e. 14 October 2014.

80.  The plaintiffs have not averred that the appointment of Doris as alternate to Champion, or as an ED in her own right, was objectionable or unlawful.

81.  Doris was removed from being a director of CSC at the 3^rd EGM on 1 December 2015.

82.  Doris can only have owed a fiduciary duty between 14 October 2015 and 1 December 2015. She is alleged to have become a party to the conspiracy from “mid-October 2015”, presumably a reference to the date when she became a director of CSC.

83.  Doris gave evidence at trial.

84.  Doris was an impressive witness.  Her diligence and independence shone through, and her oral evidence was almost entirely corroborated by the contemporaneous documents created by her, or on which she had comments or input, to which she could make reference.

85.  I do not accept the allegation to the effect that Doris was entirely an agent for, or the creature of ACC.

B.11  Champion (D6)

86.  Champion joined the Far Eastern Group in Taiwan in 1974.  He held a number of posts within the group until his retirement in 2012, with over 25 years’ working experience in finance.  After retirement, he worked part-time as an adviser to the Chairman of the Far Eastern Group and ACC.

87.  Amongst other companies where he held a similar role, Champion took up the role of supervisor of ACC.  However, under Taiwanese law, a supervisor is not a member of the board of the company, has no right to participate in its management, and represents shareholders overseeing, for their benefit, performance of the board.  A supervisor does not report to the company, which does not control or monitor the supervisor. However, a supervisor is empowered to supervise the execution of a company’s business operations, to investigate its business and financial conditions, to examine its accounting books and documents, and also to request the board or managerial officers to make reports on them.

88.  There were apparently five supervisors in ACC in total, and Champion became one of them in 2002.  He says he did not represent or act for ACC during his directorship in CSC.

89.  Champion became a director of CSC on 22 May 2015, following his self-nomination, after he understood from Doris that James Li was looking for a suitable candidate for appointment as a director to fill a casual vacancy in the Board.  He was first appointed as an NED, and the appointment was approved at the CSC AGM held on 22 May 2015.  He was later appointed as a member of the Nomination Committee of the Board with effect from 10 June 2015.  Throughout his period of directorship, he never sought nor did he receive remuneration.

90.  Champion can only have owed fiduciary duties as a director between 22 May 2015 and 1 December 2015.  He is alleged to have become a party to the conspiracy from “late May 2015”, presumably a reference to the date when he became a director of CSC.

91.  Champion gave evidence at trial.

92.  Champion was not challenged in cross-examination in respect of his evidence on the Group’s financial problems, which came to his knowledge after his appointment, and on his advice and complaints about the corporate governance issues concerning CSC.  These matters are relevant to how Champion conducted himself as a director of CSC, and whether the Zhangs dominated the Board, or whether Champion failed to exercise his own independent judgment.  In his evidence, he also came across as diligent and independent.

93.  I do not accept the allegation to the effect that Champion was entirely an agent for, or the creature of ACC.

B.12  Zeng (D7)

94.  Zeng has a background as an engineer, being a senior engineer at professor level accredited by the State Economic and Trade Commission, and a registered consulting engineer (investment)  accredited by the National Development and Reform Commission in the PRC.

95.  Amongst relevant matters of her background, Zeng served as Secretary-General, executive vice president and vice president of the China Cement Association between April 2001 and October 2012.  She was also an independent director of two Shenzhen-listed companies and an INED of a Hong Kong listed company.

96.  Because of her technical specialism, Zeng was invited and recommended by CNBM to be an INED of CSC in early 2015.  But she has never been an employee or director of CNBM, and had no prior involvement in the affairs of CSC, or any prior relationship with any of the other defendants, except that she and Zhang Sr overlapped as (2 out of about 16)  vice presidents of the China Cement Association.

97.  Whilst she was put forward as a candidate at the 2014 AGM held on 22 May 2015, the proposed resolution to appoint Zeng was opposed by around 71% of the valid voting shares for that AGM.  Amongst the parties opposing her appointment was ACC.

98.  However, because the CSC Board was then left with only one INED, one Audit Committee member, one Remuneration Committee member and two Nomination Committee members, which fell below the minimum numbers required under the Listing Rules and the Code of Corporate Governance, the Board resolved by written resolution dated 10 June 2015, and on the basis of provisions within CSC’s articles of association, to appoint Zeng as an INED with effect from 10 June 2015.

99.  She was re-elected as an INED at the 1^st EGM held on 29 July 2015.

100.  Her tenure as an INED lasted less than six months, and she was removed from being a director of CSC on 1 December 2015. Further, as compared to some of the other defendants, Zeng’s apparent input in her role was somewhat limited.  For example, she did not attend the three EGMs of CSC held on 29 July 2015, 13 October 2015 and 1 December 2015.  She was also not involved in any correspondence between the legal advisers and some other defendants regarding various matters concerning CSC.  As Mr S Wong fairly put it in his opening submissions, most of the documents and correspondence in the trial bundle do not even feature Zeng, and claim against her is relatively limited in scope.

101.  Zeng can only have owed fiduciary duties as a director between 10 June 2015 and 1 December 2015. She is alleged to have become a party to the conspiracy from “late May 2015”, presumably a fairly loose reference to the date when consideration was given to appointing her as a director of CSC.

102.  Zeng gave evidence at trial.

103.  It is fair to say that the tenor of Zeng’s evidence identified the degree of reliance placed by her on the views of others.  She was candid in her agreement that she would trust the opinions of the people on the board and listen to their views.  But, there is nothing necessarily wrong about that, unless there is clear evidence of allowing herself to be dominated or manipulated by a dominant director in a way which involved a total abrogation of responsibility.  That was not the impression left by her evidence.

B.13  Shen (D8)

104.  By the time of Shen’s appointment as INED of CSC, he had had an established career in finance for more than 40 years, and more than nine years of experience as a director and in corporate governance.  He had held or was then holding positions including the deputy general manager and executive director of Morgan Stanley, and deputy general manager of China Development Industrial Bank.

105.  Shen was appointed as INED to fill a vacancy on the CSC Board, by the written resolution dated 10 June 2015.  He also acted as chairman of the Remuneration Committee, member of the Nomination Committee, member of the Audit Committee (subsequently acting chairman from October 2015), and member of the special Finance Committee (as defined below).

106.  He was re-elected as INED at the  1^st EGM held on 29 July 2015.

107.  Shen’s tenure as an INED lasted less than six months, and he was removed from being a director of CSC on 1 December 2015.

108.  Shen can only have owed fiduciary duties as a director between 10 June 2015 and 1 December 2015.  He is also alleged to have become a party to the conspiracy from “late May 2015”, presumably a fairly loose reference to the date when consideration was given to appointing him as a director of CSC.

109.  Shen gave evidence at trial.

110.  I agree with Mr Leung that Shen came across as confident, forthright and honest.  His testimony was consistent throughout, and he remained essentially unshaken during cross-examination.  No part of his evidence was subject to challenge from any of the other defendants, and he was only cross-examined by Ms Lam for the plaintiffs.  Ms Lam accepted Shen’s relative distance (including literally)  from the centre of attention – which she said might indicate not fully discharging his supervisory duties as an INED – but also accepted that his evidence should otherwise be taken as generally credible, especially when it pertains to his understanding of the motivations and intentions of his fellow directors.  I agree with the latter point.

111.  He certainly came across as careful and independent, bringing his significant experience to bear.

B.14  CNBM (D9)

112.  CNBM was incorporated in the PRC.  It has been listed on the SEHK since March 2006.  It engages in investment holding and, through its subsidiaries, in cement, lightweight building materials, glass fibre, composite materials and engineering services businesses.

113.  CNBM’s controlling shareholder is China National Building Materials Group Corporation, a centrally owned enterprise directly administered and supervised by the State-owned Assets Supervision and Administration Commission of the PRC Central Government.

114.  In 2013 and 2014, CNBM pursued a strategy of consolidating and investing in cement companies, to form strategic alliances and to enhance cooperation with cement entities.  What was sought was consolidation and restructuring in a market-oriented way, implementing management integration in accordance with the concept of co-existence and mutual win.

115.  Amongst the investments made was the subscription for 16.67% of the shares in CSC in October 2014 (i.e. the 2014 Subscription, as defined below).

116.  CNBM remained a 16.67% shareholder in CSC at all material times.

B.15  ACC (D10)

117.  ACC was incorporated in Taiwan in 1957, and has been listed on the Taiwanese stock exchange since 1962.  Together with its subsidiaries, it manufactures and sells cement, semi-finished cement and clinker cement products.

118.  ACC first invested in the CSC Group in May 2010, and gradually upped its stake under a memorandum of understanding with CSC.  The intention has always been for a long-term investment for ACC.  The increase in ACC’s acquisition was to average down the cost, because the acquisition under the memorandum and was at a much higher price.  ACC also wanted to counter the approximately 20% dilution in its stake in the Group due to the share allotment to CNBM in late 2014.

119.  As a 20.96% shareholder, ACC was one of the four key shareholders in CSC during the material time.  It can also be mentioned that pursuant to an agreement dated 6 July 2015, ACC exercised the voting rights in 4.22 percent of CSC’s shares by Yu Yuan Investment Corp Ltd (“Yu Yuan”), so controlled the voting rights in 25.18% of CSC’s issued shares – see table of CSC shareholdings, above.

B.16  Tianrui

120.  Tianrui is incorporated in the Mainland.

121.  Tianrui first acquired a block of shares in CSC (representing 10.51% of the issued share capital)  on 17 February 2015.

122.  Thereafter, between 10 and 15 April 2015, Tianrui increased its shareholding to 28.16%.  That caused trading in CSC’s shares to be suspended, because of the reduction to the public float.  On 16 April 2015, CSC issued a public announcement that the public float was below 25% (down to 9.18%), and that trading in CSC’s shares had been suspended.

123.  The increase of its shareholding to 28.16% also meant that Tianrui became a larger shareholder than CSI.  This had other knock-on effects, such as triggering redemption under the 2016 Notes (as defined below).

124.  Tianrui issued three requisitions during 2015 (“1^st Requisition”, “2^nd Requisition” and “3^rd Requisition” respectively), each of which led to the holding of an EGM (“1^st EGM”, “2^nd EGM” and “3^rd EGM” respectively)  at which Tianrui sought to change either the entirety, or almost the entirety, of the Board of CSC.

125.  The 3^rd Requisition led to the 3^rd EGM which was eventually held on 1 December 2015, at which all of the then existing directors were removed and replaced as directors by senior executives of Tianrui and directors of CSI, including Stephen Liu (one of the Receivers).

B.17  The Receivers

126.  On 20 May 2015 Stephen Liu, David Yen and Sammy Koo of EY (“Receivers”)  were appointed as receivers over 432,861 CSI shares. 

127.  On 14 July 2015 the Receivers were appointed over an additional 23,464 CSI shares.  This made 456,325 shares in total (“CSI Receivership Shares”).

128.  Both Stephen Liu and David Yen gave evidence at the trial on behalf of the plaintiffs (as the plaintiffs’ only factual witnesses).

129.  It is well known that, since the Civil Justice Reform in 2009, certain documents must be verified by a statement of truth in accordance with RHC Order 41A.  Those documents include a pleading, a witness statement and an expert report.

130.  Order 41A rule 5(2)  provides that the form of the statement of truth verifying a witness statement or expert report is as follows:

I believe that the facts stated in this [name document being verified] are true and (if applicable)  the opinion expressed in it is honestly held.

131.  Though that sub-rule, and the form of the statement, deal with witness statements and expert reports compendiously, there seems to me to be an important distinction between the verification of a witness statement on one hand and an expert report on the other.  That is because it is trite that there is a fundamental difference between evidence as to fact and evidence of opinion.  At common law, opinions are generally inadmissible in proof of material facts. Whilst accepting that in some cases the distinction between evidence of fact and evidence of opinion is not as straightforward as might be supposed, the distinction remains important.

132.  A recognised exception from the general rule is as to the opinions of skilled witnesses, which are admissible wherever the subject is one upon which competency to form an opinion can only be acquired by course of special study or experience.  Even then, if an expert’s opinion is founded on the facts of the particular case, it is essential that the facts be established by direct testimony.

133.  Although in general inadmissible, the opinions or beliefs of witnesses who are not experts are admissible in proof of certain matters, on grounds of necessity, more direct and positive evidence being often unobtainable.  But I do not think any of those categories are applicable in this case.

134.  Hence, because the expression of opinion is ordinarily not applicable to the making of a witness statement, it is usual practice in civil litigation that the maker of a witness statement as to fact adopts the form of verification which is only the first part of the form of the statement provided for in Order 41A rule 5(2), namely:

I believe that the facts stated in this witness statement are true.

135.  That seems to me to be entirely consistent with the form of the statement of truth verifying a document other than a witness statement or expert report, such as a pleading.  This is because Order 18 rule 7 makes plain that every pleading must contain, and contain only, a statement in a summary form of the material facts on which the party pleading relies for his claim or defence.  The form of the statement of truth for a pleading is provided for in Order 41A rule 5(1)  as follows:

[I believe] [the (plaintiff or as may be)  believes] that the facts stated in this [name document being verified] are true.

136.  In this particular case, David Yen verified the SOC and the ASOC (and, I think, the RASOC)  by stating his belief that the facts stated in the documents are true.  He apparently did so as authorised by the CSC Board then still controlled by directors from Tianrui and the Receivers.  However, when it came to their witness statements as to fact, both Stephen Liu and David Yen verified them by saying:

I believe that the facts stated in this witness statement are true and the opinion expressed in it is honestly held.

137.  To my mind, this unhelpfully and improperly blurred the distinction between fact and opinion – not least when they were called only as witnesses of fact.  But there was a more fundamental problem.

138.  During oral evidence at the trial, both Stephen Liu and David Yen made numerous important concessions, which were inconsistent with the case that they caused the plaintiffs so hastily to advance – driven, it seems, by the motive of revenge and on the assumption that because they had not previously or immediately got what they wanted, the previous board must have been in some conspiratorial breach.  That viewpoint was in effect given away by Stephen Liu when, discussing his intention to commence the action in the name of CSC, he said:

Put it this way.  The development of the case demonstrates that why the then Board of Directors did not allow someone from CSI or other major shareholders or independent directors to join the board.  There must be a reason why they resist, try all means, they are hiding something.

139.  There is good reason to ask how Stephen Liu and David Yen – both officers of the Court – could ever have thought it appropriate to sign statements verifying the truth of the pleadings and the content of their witness statements.  There were a number of matters contained in the witness statements where it is difficult to understand how they could possibly have been either believed to be true facts or even expressed as honest opinion.

140.  At various points in their cross-examination, when pressed, or when faced with documents which clearly showed their own witness statements to be either unfair, misleading or flatly untrue, both Stephen Liu and David Yen resorted to the time-honoured but deeply unimpressive attempt to pass the blame to the lawyers.  This may well be another one of those cases where the plaintiffs’ witness statements were not really ‘drafted’ by the witnesses or on the witnesses’ instructions, but rather ‘crafted’ by the lawyers.  But that only emphasises the witnesses’ failures.

141.  Ms Lam sought to escape from the very poor quality of the plaintiffs’ factual evidence at trial – which caused her, understandably and properly, to abandon much of the claim as pleaded (including its central tenets)  – by submitting in closing that the credibility of Stephen Liu and David Yen is of “marginal, if any, relevance to the issues in dispute”. This somewhat startling submission was then sought to be justified on the basis that neither Stephen Liu nor David Yen had any personal knowledge in respect of many of the events which form the subject of the complaints in the action, and their subjective state of mind, motives and beliefs are accordingly of marginal relevance.

142.  But, with respect, it is simply not possible to brush under the carpet the fact that the plaintiffs’ factual witnesses’ evidence, based on a highly subjective and partial (as in not impartial)  view taken on a deliberately incomplete and skewed selection of contemporaneous documentary evidence, was shown up for what it was. 

C.  Disputes over the CSI Shares

143.  It is the dispute over the CSI Shares which is part of the origin story for the events leading to the present action.  Amongst other things, it is now tolerably clear that that dispute provided the entry point for Tianrui to combine with the Receivers (as engineered and facilitated by their lawyers)  to launch a hostile takeover for CSC. 

144.  On 28 November 2005, Zhang Sr and Li Yanmin executed two trust deeds, by which they “confirmed” the trusts on which they held the shares in CSI, called the “Zhang Trust” and the Li Trust” respectively (together, “BVI Trusts”).  In the Zhang Trust deed, Zhang Sr was stated to be the settlor and trustee of 655,519 CSI shares, holding them for 2,549 participating employees (including himself).  In the Li Trust deed, Li Yanmin was stated to be the settlor and trustee of 161,902 CSI shares, holding the same for 1,391 participating employees (including himself).

145.  Amongst the features of the BVI Trusts were the following:

(1)  the trust is an irrevocable one for the period of 100 years;

(2)  it is an absolute discretionary trust, in that the trustee may appoint that he holds the trust property for the benefit of any beneficiaries on such terms as he thinks fit, and the powers of the trustee may be exercised at his absolute discretion;

(3)  the trustee may appoint new or additional trustees;

(4)  the trustee has the power to transfer any trust property to be held on another trust for the benefit of any one or more of the original beneficiaries, to be held on the terms of the new settlement, freed and released from the terms of the BVI Trusts;

(5)  subject to the trustee’s power to amend, the trust is governed by BVI law and the BVI courts have exclusive jurisdiction in any proceedings involving rights or obligations under the settlement;

(6)  the trustee may amend the governing law of the trust and the courts which have exclusive jurisdiction in any proceedings involving rights or obligations under the trust.

146.  Accompanying the deeds of trust were non-binding letters of wishes for the Zhang Trust and the Li Trust respectively.  Intended to guide the trustees on the exercise of their discretion, the letters state the settlor’s firm wish that the beneficiaries listed in the schedule to the letter should receive the proportion of the dividends on the shares corresponding to the amounts listed in the schedule (i.e. in proportion to their entitlements as participating Contributing Employees).

147.  On 24 January 2011, Zhang Sr became the registered shareholder of the 161,902 shares in CSI previously held by Li Yinman.  The transfer is shown on the annual return for CSI made up to 25 January 2011. 

148.  Originally, it was alleged by solicitors acting for Li Yanmin that there had been a blatant misappropriation by Zhang Sr of his CSI shares, as Li Yanmin had never agreed to transfer the shares to Zhang Sr, had never signed any documents to transfer the assets under the Li Trust to Zhang Sr, had not appointed Zhang Sr to be his representative in his capacity as trustee of the Li Trust, and that Zhang Sr had made various false declarations.

149.  However, it appears that subsequently Zhang Sr and Li Yanmin settled their dispute.  On 22 September 2011, they executed a deed of confirmation and ratification, and a deed of settlement.  By the deed of confirmation, both confirmed that they had executed a document dated 26 July 2010, pursuant to which Zhang Sr agreed to replace Li Yanmin as trustee of the Li Trust, and their intention to transfer the assets held under the Li Trust to Zhang Sr.  By the deed of settlement, Li Yanmin agreed to execute the deed of confirmation and ratification, to withdraw or rescind his complaint made to the Securities and Futures Commission (“SFC”)  and SEHK, and Zhang Sr agreed to purchase all the CSI shares under the Li Trust, with all proceeds (at least HK$55 million)  being distributed to Li Yanmin in cash.

150.  Zhang Sr thereby became the registered shareholder of 81.74% of CSI’s issued share capital, as from 24 January 2011.

151.  In November 2013, Zhang Sr lodged a compulsory plan to repurchase the beneficial interests of the Contributing Employees who participated in the Share Scheme (“Repurchase Plan”).  The Repurchase Plan was introduced without any prior consultation with the Contributing Employees.  It contemplated funding the purchase of the Contributing Employees’ beneficial interests with dividends to be distributed by CSI.  In other words, as Ms Lam described it, Zhang Sr would purchase the Contributing Employees’ interests in the CSI shares with funds to which the Contributing Employees were beneficially entitled in the first place.

152.  The Repurchase Plan was met with strong resistance and objection from the Contributing Employees.  In November 2013, over 140 of them signed an open letter to Shandong Shanshui’s employees, Zhang Sr and the local government voicing their objections to the Repurchase Plan, requesting termination of the trust arrangement and the termination of the Repurchase Plan, and seeking the distribution of dividends of RMB120 million by the end of 2013. Later, in March 2014, over 600 Contributing Employees signed and submitted a petition to the Jinan Municipal Party Committee, requesting an investigation into Zhang Sr’s alleged misconduct.

153.  Ms Lam submitted that it was the Contributing Employees’ wish to terminate the trust arrangement and receive their entitlements from their interest in CSI shares which threatened Zhang Sr’s scheme to maintain his position as an 81.74% shareholder of CSI.  If the CSI shares which belonged beneficially to the Contributing Employees were transferred back to them, Zhang Sr would no longer have absolute control over the affairs of CSI, including the composition of its board.  Zhang Sr would be at risk of being removed as a CSI director and, thereafter, being removed as the Chairman and an executive director of CSC.

154.  Starting in August 2014, various litigation was commenced relating to the shares in CSI (together “Trust Actions”), which were later consolidated: 

(1)  On 23 August 2014, HCA 1661/2014 was commenced.

(2)  On 10 September 2014, HCA 1766/2014 was commenced.

(3)  On 30 October 2014, HCA 2191/2014 was commenced. 

(4)  On 25 March 2015, HCA 623/2015 was commenced. 

(5)  On 29 April 2015 HCA 939/2015 was commenced.

(6)  On 14 July 2015, HCA 1564/2015 was commenced.

155.  In the Trust Actions, the plaintiffs were Contributing Employees, who held interest under the staff investment scheme in Shandong Shanshui, subsequently replaced by interests in CSI, by then in turn holding approximately 25.09% of the issued share capital of CSC.  The first Trust Action was brought in the name of 761 participating Contributing Employees, and the total number of plaintiffs grew to 2,631, who together laid claim to 456,325 shares (being 45.6325% of the issued share capital)  of CSI.

156.  Originally, all plaintiffs were represented by KL Gates (“KLG”), principally Samuel Ngo, but during the first few months of 2017 a number of plaintiffs signed documents to terminate the retainer of cardiology and instead to instruct Stephenson Harwood (“SH”)  to represent them in the Trust actions.  Because of an argument as to whether plaintiffs could terminate KLG’s retainer in person, 5 plaintiffs flew to Hong Kong to sign the requisite documents.  Subsequently, represented by SH, they instituted a new action (HCA 1282/2017)  against the same two defendants (Zhang Sr and Li), and they ceased to be plaintiffs in the consolidated actions.

157.  By June 2017, another 1,073 plaintiffs had also signed documents in the Mainland to similar effect, and after KLG’s challenge to the authority of SH to act for those plaintiffs was withdrawn, the 1,073 plaintiffs, as well as 6 additional plaintiffs, became the 6^th to 1,084^th plaintiffs in HCA 1282/2017.  Subsequently another 935 plaintiffs left the consolidated actions and joined HCA 1282/2017 as the 1,085^th to 2,019^th plaintiffs

158.  Also on 30 October 2014, the writ was issued in HCA 2194/2014 against Zhang Sr, Zhang Jr, CNBM and CSC (being a common law derivative action by CSI shareholders and CSI).

159.  On 20 May 2015 G Lam J (as he then was)  handed down his Decision appointing Stephen Liu, David Yen and Sammy Koo of EY as the Receivers over the 432,861 CSI Receivership Shares.  On 17 June 2015, G Lam J dismissed Zhang Sr’s application for leave to appeal from that decision, and directed that, without obtaining further directions of the court, the Receivers were not to seek to alter the composition of the Board of CSC.

160.  On 14 July 2015 the Receivers were appointed by Au-Yeung J over an additional 23,464 CSI shares (making the total 456,325 CSI Receivership Shares).

161.  The Receivers concluded that, to carry out their duties, they need to be appointed to the board of CSI.  On 7 July 2015, the Receivers were appointed as directors of CSI.  In addition, on 12 August 2015, two persons nominated by the Receivers, Chong Cha Hwa (“Chong”)  and Hwa GuoWai (“Hwa”)  were also appointed as directors of CSI.  Together they became the majority on the CSI board.  Chong and Hwa later gave an undertaking to the Court (“Chong Hwa Undertaking”)  not to take steps to change the CSC board pending resolution of the litigation mentioned in the next paragraph.

162.  An application by Zhang Sr to the Court in effect to reverse the appointment of the Receivers and Chong and Hwa to the CSI board was rejected by DHCJ Seagroatt on 30 September 2015.  His reasons were handed down on 9 October 2015, in what has been subsequently described as a “trenchant judgment”.  In it, DHCJ Seagroatt rejected Zhang Sr’s contention that the Receivers and their nominated directors were acting in concert with Tian (when, in fact, it seems from the evidence subsequently obtained that is precisely what was happening – see below).

163.  On 20 November 2015, CSI in general meeting voted Zhang Sr and Zhang Jr out of the CSI board.

164.  On 5 August 2015, the Receivers became the registered holders of 432,861 CSI shares (formerly registered in Zhang Sr’s name), and the remaining 20,464 shares were registered in the Receivers name on 5 October 2015.

165.  Tianrui issued the 1^st Requisition leading to the 1^st EGM held on 29 July 2015, to consider resolutions for the removal of all but one of the then directors and the appointment of seven new directors nominated by Tianrui.  On 23 July 2015, on the application of the Receivers for directions on how to vote at the EGM, Au-Yeung J refused to give directions to enable the Receivers to vote in favour of the change in the management of CSC.  She gave detailed reasons for so doing.  She apparently found it necessary to remind the Receivers as to their true role, when they were not the receivers or managers of either CSI or Shandong Shanshui.  In fact, their role had already been canvassed by G Lam J. As officers of the court, the Receivers were supposed to act impartially and in accordance with the directions of the Court in administering the Shares.  It was a way to hold the ring between warring litigants until the disputed issues could be finally determined.

166.  But, as Au-Yeung J noted, the Receivers were in effect seeking to go much beyond the original purpose of their appointment. The Receivers were relying heavily on Tianrui’s proposals.  (Indeed, it is evident to me that the Receivers were acting as Tianrui’s advocate, for reasons which have later become apparent.) 

167.  As an aside, it can be noted that Au-Yeung J also recorded that ACC and CNBM had indicated they would vote against the Tianrui resolutions, for reasons including concerns about the financial consequences triggered upon a change of control.

168.  Tianrui’s proposed resolutions were, as a result, all defeated (and, indeed, Tianrui did not even bother to attend the meeting). 

169.  Tianrui’s 2^nd Requisition led to the 2^nd EGM on 13 October 2015.  The resolutions proposed by Tianrui to remove certain directors were again defeated.  This was in part as a result of the disallowance of CSI’s entitlement to vote its shares, decided by the chairman of the 2^nd EGM.  However, CNBM and ACC voted for the removal of Zhang Sr and two others from the Board of CSC.

170.  However, on 15 October 2015, Tianrui issued the 3^rd Requisition notice for another EGM proposing to replace the directors of CSC.  On 16 October 2015, the Receivers obtained from DHCJ Seagroatt a direction that they be free to vote at any board meeting of CSI in a manner including causing changes to the composition of CSC’s board, and to accept any offer of appointment of the Receivers as directors of CSC.  This has been referred to in these proceedings as the ‘carte blanche’ direction.  It is the carte blanche direction which in effect permitted or facilitated the voting as occurred at the 3^rd EGM on 1 December 2015.

171.  However, as has been pointed out by G Lam J in his Discharge Decision dated 31 January 2018, another dimension to those applications was that it subsequently transpired that shortly after the appointment of the Receivers, there were acquisitions and transfers of various interests in CSI. 

172.  G Lam J pointed out that the evidence shows that by August 2015, and possibly before that, Tianrui was interested in acquiring the interests of the Contributing Employee plaintiffs in CSI, leading eventually to a an arrangement devised whereby: (1) certain representatives would be nominated to acquire the Contributing Employee plaintiffs’ interests in CSI; (2) Tianrui would lend money to those representatives; (3) the acquisition price would be calculated based on the last trading price of CSC shares, i.e. HK$6.29 per share; (4) the representatives would pay 70% of the price to the individual plaintiffs, with the balance of 30% to be paid after those plaintiffs had acquired full title to the CSI shares from Zhang Sr.  As a result, in August 2015, 2,142 of the 2,631 plaintiffs on record signed sale and purchase agreements to sell their interest in CSI shares.  Further the 11 employees who became representatives under the arrangement were procured to sign certain loan arrangements, after which a total of about RMB700 million was paid out in August 2015.

173.  G Lam J held that there was serious doubt whether a Chen Hongqing, who had emerged and claimed to be the lender, was in fact the lender because: (1) the banking documents suggest that the money totalling RMB700 million came from Tianrui; (2) Chen Hongqing was a mid-level manager, and it is doubtful that he had assets of that sum, and even if he did that he would spend on purchasing the plaintiffs’ interest in CSI; and (3) there was evidence that Chen Honqing had been a mid-level manager in the Tianrui group not long before that.

174.  There was also some doubt as to whether the money used to pay the individual plaintiffs was in fact a “loan” to anyone because, in proceedings brought by Chen Hongqing in HCMP 962/2017, his case was that the understanding was that when the employees succeeded in the Trust Action for recovery of the beneficial interest in the shares in CSI, the borrowers would transfer to him (Chen)  the CSI shares purchased with the Loan, instead of repaying the Loan.

175.  G Lam J also pointed out that it had transpired the employee plaintiffs had not up to that point forked out a single cent for the payment of KLG’s legal fees, which (in what must be very substantial sums)  had instead been paid by an undisclosed source.  There was, however, evidence that either Tianrui or its Chairman (or one of his, unnamed, friends)  had been funding KLG in the litigation.  As was pointed out, in my view correctly, this called into question for whose interest KLG were really acting (at least after August 2015)  and the source of their instructions.

176.  Therefore, G Lam J pointed out that when the Receivers applied to the court in September 2015 for directions to permit them to become directors of CSC, the employee plaintiffs (through KLG)  turned up in strong support for the application without disclosing either (1) 2,142 of them had sold their interests, 2,090 of whom had received 70% part payment and signed documents to enable KLG to pursue the action for the benefit of the purchaser; (2) the RMB700 million paid to them apparently originated from Tianrui; and (3) KLG’s fees were not being funded by the plaintiffs but allegedly by an unnamed “friend” of the Chairman of Tianrui.  Therefore, it had become quite apparent that the full picture was not presented by the plaintiffs (or anyone else who had knowledge)  to DHCJ Seagroatt in the applications before him in September to November 2015, and in particular before he granted the Receivers on 16 October 2015 the ‘carte blanche’ direction.

177.  G Lam J concluded that the failure to disclose these facts led to the picture presented to the Court using the names of those plaintiffs “verged on the misleading”.  With respect, G Lam J was perhaps being euphemistic.  In my view, the concerns expressed by him have been entirely made out on the evidence available in these proceedings.  What was presented to the Court was not on the verge, but in the centre of the road of misleading.

178.  Indeed, as G Lam J himself acknowledged in a further decision in HCA 1282/2017 given on 7 May 2018, the information withheld from the Court, and the misleading picture which had been presented, when the Court granted orders for the Receivers to become involved in the management of CSC, resulted in the board of CSC thereafter becoming dominated by Tianrui and the Receivers (following the 3^rd EGM on 1 December 2015).

179.  I have already noted the swiftness with which the new Board commenced these proceedings, just a few days after 1 December 2015.

D.  Key Events Relevant to Claim

D.1  The 2014 Subscription

180.  At the 2014 AGM of CSC held on 16 May 2014, an ordinary resolution was passed to grant a general an unconditional mandate to CSC’s Board to issue shares of CSC.  A general mandate to issue shares had also been passed in identical terms at each of the AGMs held by CSC from 2009 to 2013.

181.  In what CNBM says was part of its implementation of the CNBM Strategy, CNBM subscribed for shares in CSC (“2014 Subscription”)  pursuant to a subscription agreement dated 27 October 2014 (“Subscription Agreement”).

182.  Prior to entering into the Subscription Agreement, CNBM conducted analysis as recorded in an internal memorandum.  The terms of the Subscription Agreement were also the subject of extensive discussions between the legal advisers of CNBM (Slaughter and May)  and CSC (Norton Rose Fulbright), as can be seen in various email correspondence.

183.  CNBM’s internal recommendation proposing the 2014 Subscription to its Board of Directors identified as benefits: (1) promoting strategic cooperation among large companies, including between CSC and CNBM’s subsidiaries operating in Shandong, and advancing the healthy development of the Chinese cement industry; and (2) gaining long-term investment returns by assisting CSC in growing its profits through resource sharing and deepening strategic cooperation.

184.  The board of CSC carried out the 2014 subscription pursuant to the ordinary resolution granting the general mandate to do so.  By the Subscription Agreement, CNBM agreed to subscribe for 563,190,040 shares to be issued by CSC, at a subscription price of HK$2.77 per share, with a three year lock-up period. 

185.  The total subscribed shares represented 16.67% of the enlarged issued share capital of CSC.  The total subscription price of HK$1,560,036,400 (approximately US$5,631,900)  is said to have constituted about 17.8% of CNBM’s investment in its associates as at 31 December 2014.

186.  In the public announcement of the 2014 Subscription made on 27 October 2014, the subscription price of HK$2.77 per share was said to have been arrived at after arms-length negotiations with reference to, amongst other things, the recent trading prices of the Shares.  It was stated that the subscription price represented:

(1)  the closing price of HK$2.77 per Share as quoted on the  SEHK on 27 October 2014, being the date of the Subscription Agreement;

(2)  a discount of approximately 0.07% to the average closing price of approximately HK$2.772 per Share as quoted on the SEHK for the last five consecutive trading days up to and including 24 October 2014, being the trading day immediately preceding the date of the Subscription Agreement; and

(3)  a premium of approximately 0.98% to the average closing price of approximately HK$2.743 per Share as quoted on the SEHK for the last 10 consecutive trading days up to and including 24 October 2014.

187.  As to the reasons for the 2014 Subscription and use of proceeds, the public announcement stated the following:

The Group is one of the largest producers of clinker and cement in China, as measured by volume, and enjoys dominant market positions in its key target markets in Shandong and Liaoning provinces.  The Subscriber is a leading building materials company in the PRC with significant operations in the cement, lightweight building materials, glass fibre and composite materials and engineering services businesses.

The Directors consider that the Subscription provides the Company with an opportunity to enhance its shareholders’ base and raise additional funds for the Group.  The Directors consider the Subscription to be beneficial (i) in terms of using capital operation as a bond between the Group and the Subscriber to lay the foundation for future cooperation on industry technology, business operations, energy saving and emission reduction and project management; (ii) in replenishing the Group’s working capital, reducing gearing level and improving corporate efficiency; and (iii) in implementing the national industrial policies in the areas where the parties are located, which are to strengthen industry self-discipline, reduce disorderly competition and improve market mechanism. The Directors (including the independent non-executive Directors)  consider that the terms and conditions of the Subscription Agreement are, in each case, fair and reasonable, on normal commercial terms and are in the interests of the Company and its shareholders as a whole.

The aggregate gross proceeds of the Subscription will be approximately HK$1,560 million and the aggregate net proceeds of the Subscription, after deduction of the related expenses, are estimated to be approximately HK$1,547 million, representing a net issue price of approximately HK$2.75 per Share.  The Company intends to use the net proceeds from the Subscription for the purpose of partial redemption of the Company’s US dollar bonds and replenish the Group’s general working capital.

188.  The market reaction to the 2014 Subscription was positive, reflected in the share price of CSC rising to HK$2.96 on 30 October 2014.

D.2  The 2016 Notes, 2017 Notes and 2020 Notes

189.  On 25 May 2011, CSC issued senior notes issued in the Singapore Exchange Ltd, for the amount of US$400 million (net proceeds lest issuance costs being US$392 million), at the interest rate of 8.50% pa, with a maturity date of 25 May 2016 (“2016 Notes”). 

190.  On 20 April 2012, CSC issued senior notes issued in the Singapore Exchange Ltd, for the amount of US$400 million (net proceeds less issuance costs being US$394 million), at the interest rate of 10.50% pa, with a maturity date of 27 April 2017 (“2017 Notes”).

191.  The 2017 Notes were fully repurchased on 27 April 2015, following the suspension of trading of CSC’s shares, after the public float fell below 25% as a result of the acquisition of 28.16% of CSC’s shares by Tianrui.

192.  Just prior to that, on 10 March 2015, CSC issued senior notes for the amount of US$500 million, at the interest rate of 7.50% pa, with a maturity date of 10 March 2020 (“2020 Notes”).

193.  The 2020 Notes were approved by written resolution of all directors of CSC on 27 February 2015.  The resolution noted, amongst other things, that it was desirable to appoint a Pricing Committee of CSC’s Board, to approve the terms of the Notes, including the amount of Notes to be issued, the price at which the Note will be sold to the Managers and the interest rate to be borne by the Notes.  It was also noted that CSC would review, consider and approve the unaudited financial statements for the 10 months ended 31 October 2014 (“1031 Financial Statements”), and the latest draft of the announcement to be issued by CSC in relation to those financial results (“1031 Results Announcements”).

194.  The documents (including any schedules, supplements, exhibits, certificates, instruments and form of agreement is attached)  defined in the resolution as the “Transaction Documents” which were circulated to the directors were listed in the resolution as: (a) the latest draft of the Indenture (including the Certificates); (b) the latest draft of the Purchase Agreement; (c) the latest draft of the Preliminary Offering Circular; (d) the latest draft of the Formal Application; (e) the latest draft of the terms and conditions; (f) the Notes; (g) the latest draft of the Formal Notice; (h) the 1031 Financial Statements; and (i) the latest draft 1031 Results Announcements.

195.  The resolution included designating the Pricing Committee consisting of any one director to exercise all the powers of the Board in connection with the issuance and sale of the Notes.  It also recorded that the forms and substance of the Transaction Documents were approved, subject to any amendment made by the appointed director on the Pricing Committee.  The resolution also recorded: (1) the appointment of BOCI Asia Ltd, Credit Suisse Securities (Europe)  Ltd and Morgan Stanley & Co International plc as joint global coordinators, joint underwriters and joint book runners of the Proposed Notes issue; (2) KPMG as auditors and reporting accountants; (3) and various firms as legal advisers separately to CSC and the Joint Global Coordinators on US Federal and New York law, Hong Kong law, Cayman Islands law and British Virgin Islands law, and PRC law.

196.  The annual interest payable (1)  under the 2016 Notes was US$34 million, (2)  under the 2017 Notes was US$42 million, and (3)  under the 2020 Notes was US$37.5 million.

197.  The 2016 Notes and 2017 Notes included a ‘change of control’ clause (“COCC”)  in the following terms (insofar as is material):

“Change of Control” means the occurrence of one or more of the following events:

(1)  …

(2)  the Permitted Holders ceased to be the beneficial owners (as such term is used in Rule 13d-3 of the Exchange Act)  of more than 25.0% of the total voting power of the Voting Stock of the Company;

(3)  any “person” or “group” (as such terms are used in Sections 13(d)  and 14(d)  of the Exchange Act is or becomes the “beneficial owner” (as defined above), directly or indirectly, of total voting power of the Voting Stock of the Company greater than such total voting power held beneficially by the Permitted Holders;

(4)  individuals who are on the Original Issue Date constituted the Board of Directors, together with any new directors whose election or nomination to the Board of Directors was approved by a vote of at least a majority of the directors then still in office who were either directors on the Original Issue Date or whose election or nomination was previously so approved, cease for any reason to constitute a majority of the Board of Directors then in office; or

(5)  …

198.  “Permitted Holders” was defined to mean:

… any or all of the following:

(1)  [Zhang Sr];

(2)  the estate and spouse or immediate family member of the Person specified in clause (1);

(3)  any Affiliate (other than an Affiliate as defined in clause (2)  or (3)  of the definition of Affiliate)  of the Person specified in clause (1)  of this definition; and

(4)  any Person both the Capital Stock and the Voting Stock of which (or in the case of a trust, the beneficial interests in which)  are owned 80% or more by one or more of the Person specified in clauses (1), (2)  and (3)  of this definition.

199.  The 2020 Notes included a COCC in the following terms (insofar as is material):

“Change of Control” means the occurrence of one or more of the following events:

(1)  …

(2)  any “person” or “group” (as such terms are used in Sections 13(d)  and 14(d)  of the Exchange Act)  other than the Permitted Holders is or becomes the “beneficial owner” (as defined above), directly or indirectly, of 30.0% or more of the total voting power of the Voting Stock of the Company;

(3)  [Zhang Jr] or any other Permitted Holder who is a natural person ceases to be the Chairman of the Board of Directors;

(4)  individuals who on the Original Issue Date constituted the Board of Directors, together with any new directors whose election or nomination to the Board of Directors was approved by a vote of at least a majority of the directors still in office who are either directors on the Original Issue Date or whose election or nomination was previously so approved, cease for any reason to constitute a majority of the Board of Directors then in office; or

(5)  …

200.  “Permitted Holders” is defined to mean:

… any or all of the following:

(1)  [Zhang Sr];

(2)  the estate and spouse or immediate family member of the Person specified in clause (1);

(3)  any Affiliate (other than an Affiliate as defined in clause (2)  or (3)  of the definition of Affiliate)  of the Person specified in clause (1)  of this definition; and

(4)  any Person both the Capital Stock and the Voting Stock of which (or in the case of a trust, the beneficial interests in which)  are owned 50% or more by one or more of the Person specified in clauses (1), (2)  and (3)

201.  Hence, the main material differences were that:

  (1)  sub-clause (2)  in the 2016 and 2017 Notes would be triggered upon the Permitted Holders (i.e. Zhang Sr)  ceasing to be beneficial owners of more than 25% of CSC’s total voting power, and sub-clause (3)  was triggered upon a person holding a total voting power greater than that of the Permitted Shareholders, whereas the relevant percentage in the 2020 Notes was 30% and it covered the eventuality of Zhang Jr ceasing to be Chairman; and

  (2)  the definition of “Permitted Holders” changed from a person which owned 80% by Zhang Sr (or affiliates)  to 50%.

202.  It may be important, though it has been ignored by the plaintiffs’ factual witnesses, that sub-clause (4)  – which provided that any reconstitution of the CSC Board that resulted in a change of the majority of the board seats would constitute a change of control event – remained unchanged between the 2016 and 2017 Notes and the 2020 Notes.

203.  It is the change in the terms of the COCC between the 2016 and 2017 Notes and the 2020 Notes which is the focus of one complaint.

D.3  Share Options

204.  On 27 January 2015, CSC announced the grant of share options to various persons to subscribe for 207,300,000 new shares at HK$3.28 per share, subject to the approval of shareholders in general meeting.  Amongst others, Zhang Sr was granted options to purchase 23,600,000 shares and Zhang Jr was granted options to purchase 20,000,000 shares.

205.  In CSC’s circular dated 27 February 2015, the Board of CSC explained:

The Share Options granted to [Zhang Sr and Zhang Jr] are part of the 2014 annual discretionary bonus plan adopted by the Company for the benefit of certain Directors and employees of the Group (“2014 Annual Bonus Plan”)  as recognition of their past contribution to the business performance of the Group and as an incentive for their continuing commitment and contribution to the Group in the future.  The 2014 Annual Bonus Plan has been approved by the remuneration committee of the Company and the Board in accordance with the Articles and the Listing Rules.  Under the 2014 Annual Bonus Plan, the relevant Directors and employees of the group may elect to receive either cash bonus or share options from the Group.

…

The number of share options granted by the Group to the relevant grantees under the 2014 Annual Bonus Plan is not based on an evaluation conducted on the relevant share options, instead, it is determined by the Board as representing four times of the Hong Kong dollar equivalent of such grantee’s relevant cash bonus entitlement upon assessment, subject to adjustments based on such grantee’s position in the Group, responsibilities, year of service, past contribution and the location of employment.  The cash bonus entitlement of [Zhang Jr] and [Zhang Sr] under their service contracts is RMB3 million and RMB5 million, respectively.

206.  As also shown in the circular, as at the last practicable date of 25 February 2015, CSI held 25.09% of CSC’s issued share capital.  On the assumption that the Zhangs fully exercised their options, Zhang Jr would obtain 0.58% and Zhang Sr 0.69% of the new total of shares.  Hence, as the circular also identifies, if the share options were fully exercised by those grantees, CSI’s shareholding in CSC would be diluted to 24.77%.  In her opening submissions, Ms Lam stressed that this would mean CSI would lose its power to block the passing of special resolutions.

D.4  The 1^st Requisition

207.  On 18 June 2015, Tianrui and Bliss Talent Investments Ltd (“Bliss Talent”)  sent CSC the 1^st Requisition notice under Article 12.3 of CSC’s Articles of Association, requesting the Board to convene an EGM to consider their proposed resolutions to remove all but one member of CSC’s board.

208.  On 23 July 2015, on the application of the Receivers for directions on how to vote at the EGM, Au-Yeung J refused to give directions to enable the Receivers to vote in favour of the change in the management of CSC. 

209.  On 29 July 2015, the 1^st EGM took place to consider the resolutions proposed by Tianrui in the 1^st Requisition. Tianrui did not take part in the EGM and all its proposed resolutions were voted down.

D.5  The Potential VGO and Open Offer

210.  On 20 July 2015, CNBM and ACC sent a joint letter to CSC stating that they were considering to jointly make a voluntary general offer (“VGO”)  for all the Shares of CSC not already owned by them collectively, and that given the changes within CSC, they considered it appropriate to notify CSC of their intentions at the earliest possible time.

211.  Whilst Ms Lam originally claimed that the potential VGO constituted a “change of control” event under the 2020 Notes, which was deliberately concealed by CSC, that allegation has not been pursued, but (rightly)  dropped.

212.  On 12 August 2015, CNBM and ACC announced their conditional VGO to buy all the other shares in CSC that they did not own.

213.  In around August 2015, the Original EDs instructed CSC’s solicitors to explore with the SEHK and the SFC feasibility for CSC to conduct an open offer of its shares to its existing shareholders (“Open Offer”), without obtaining the prior approval of the shareholders.

214.  Ultimately, however, the Open Offer was unable to proceed as the SEHK disapproved the exercise on the ground that the Open Offer would not resolve CSC’s public float issue.  As there was no apparent prospect for trading in CSC’s shares to resume, it was thought that any equity fundraising exercise requiring a listing approval from the SEHK would normally be inappropriate.

D.6  The 2^nd Requisition

215.  On 2 September 2015, Tianrui and Bliss Talent sent the 2^nd Requisition notice, requesting the Board of CSC to convene an EGM to consider their proposed resolutions to replace all but two of the directors on CSC’s board.

216.  By notice of EGM dated 22 September 2015, the CSC Board gave notice for the 2^nd EGM to be held in Hong Kong on 13 October 2015, to consider the resolutions proposed in the 2^nd Requisition.

217.  On 10 to 12 October 2015, there was a meeting in Shanghai between the Zhangs, CNBM and ACC, to discuss the upcoming 2^nd EGM.

218.  On 12 October 2015, the CSC Board announced that resolutions 1 to 5 in the 2^nd Requisition (concerning the appointment of five directors to the Board)  would be removed by reason of the failure to comply with Article 16.4 of CSC’s Articles of Association.  That article provides:

No person shall, unless recommended by the Board, be eligible for election to the office of Director at any general meeting unless during the period, which shall be at least seven days, commencing no earlier than the day after the despatch of the notice of the meeting appointed for such election and ending no later than seven days prior to the date of such meeting, there has been given to the Secretary notice in writing by a member of the Company (not being the person to be proposed), entitled to attend and vote at the meeting for which such notice is given, of his intention to propose such person for election and also notice in writing signed by the person to be proposed of his willingness to be elected.

219.  The relevant period or timeframe was therefore 23 September to 6 October 2015 (being respectively the day after notice of the EGM was given, and seven days prior to the EGM).

220.  There is no dispute that the written notices in respect of the five individuals nominated to be CSC directors under the 2^nd Requisition were provided outside, i.e. before, that period.

221.  At the EGM itself on 13 October 2015, Chang (a NED who had been appointed by the CSC Board to be the Chairman of the EGM)  invoked Article 14.7 of CSC’s Articles of Association to disallow CSI VS votes at the EGM.  That article provides:

No objection shall be raised as to the qualification of any person exercising or purporting to exercise any vote or to the admissibility of any vote except at the meeting or adjourned meeting at which the person exercising or purporting to exercise his vote or the vote objected to is given or tendered, and every vote not disallowed at such meeting shall be valid for all purposes.  In the case of any dispute as to the admission or rejection of any vote, the Chairman of the meeting shall determine the same and such determination shall be final and conclusive.

222.  At the 13 October 2015 EGM, the shareholders voted to remove Zhang Sr, James Li and Wu Xiaoyun as directors of CSC.

223.  On 14 October 2015, the CSC Board appointed three directors, namely Doris as ED, Cai Guobin as NED and Ou Chin-der as INED.  The Board also re-designated Chan from a NED to become an ED.

D.7  The 3^rd Requisition

224.  On 14 October 2015, Tianrui and Bliss Talent sent the 3^rd Requisition notice (later supplemented by two further notices).  The 3^rd Requisition proposed resolutions to replace the entire CSC Board by five directors nominated by Tianrui and four directors nominated by CSI.

225.  As canvassed above, on 16 October 2015, DHCJ Seagroatt granted the Receivers’ application for the carte blanche directions giving them liberty to vote at any board meeting of CSI in the manner that they genuinely considered to be in the best interests of CSI, including any changes to the composition of board of directors of CSC, and also permitting any of the Receivers to accept appointment as a director of CSC.

226.  On 4 November 2015, the CSC Board gave notice for the 3^rd EGM to be held in Jinan on 25 November 2015 to consider the resolutions proposed in the 3^rd Requisition.

227.  On 9 November 2015, CSI commenced HCMP 2914/2015, being unfair prejudice proceedings against CSC.  CSI also issued a summons seeking, amongst other things, that CSC should hold the 3^rd EGM in Hong Kong, with Mr John Lees appointed to act as Chairman.

228.  On 13 November 2015, Harris J granted CSI’s application, and directed the 3^rd EGM to be held on 25 November 2015 to be adjourned to 1 December 2015 to be held or continued in Hong Kong.

D.8  The Cayman Proceedings

229.  From around 17 October 2015, the CSC Board began to consider the possibility of issuing a winding-up petition and making an application to the Cayman Islands Court, seeking the appointment of joint provisional liquidators (“JPLs”)  over CSC (“Cayman Proceedings”).

230.  The CSC Board received advice from a large number of legal advisers, including Freshfields Bruckhaus Deringer (“FBD”), NRF, Maples and Calder (“Maples”)  as CSC’s Cayman Islands advisers, and Jeremy Goldring QC.

231.  On 10 November 2015, the CSC Board resolved to commence the Cayman Proceedings.

232.  On 11 November 2015, the winding-up petition and the ex parte application for the appointment of JPLs were heard by Justice Mangatal, who adjourned the matter to an inter partes hearing on 18 November 2015.  During the adjournment, various parties joined in the Cayman Proceedings and filed evidence to express their positions, including CSI, ACC, and various other 2020 Notes noteholders.

233.  On 25 November 2015, Justice Mangatal handed down her Judgment dismissing the Cayman Proceedings on the basis that without a shareholders’ resolution, the CSC Board had no authority or standing to present a winding-up petition and had no power or authority to apply for the appointment of JPLs.  That was a technical basis for the dismissal, after the Court had refused to follow previous authority which allowed directors of an insolvent company to present a winding up petition.

D.9  The Section 329 Application

234.  During the Cayman Proceedings, in early November 2015, the CSC Board retained solicitors to advise it on a possible investigation by the company under section 329 of the Securities and Futures Ordinance Cap 571 (“SFO”), and consequential proceedings.

235.  Section 329 of the SFO empowers a listed company to carry out investigations in relation to any interest in its voting shares by requiring, by notification, a person whom the listed corporation knows or has reasonable cause to believe to be interested in those voting shares to give particulars of such interest.

236.  Under section 366 of the SFO, where a notification is given by a listed company under section 329 of the SFO, and that person fails to give the corporation any information required by the notification, the listed corporation may apply for an order directing that the voting shares in question be subject to the restrictions under that Division of the SFO.  One of the consequences of imposing restrictions is that the transfer of any shares subject to the restrictions is void.

237.  On 23 November 2015, the Board caused CSC to make an ex parte application against Tianrui, Bliss Talent, CSI and the Receivers seeking an order that the shares in which they were respectively or jointly interested should be subject to the restrictions of Part XV, Division 12 of the SFO.  Anthony Chan J refused the application on the same day.

238.  On 27 November 2015, solicitors for the CSC Board invited the SFC, on the basis that Tianrui had become concert parties, to make investigation into the matters, and to consider exercising the power under section 213 of the SFO to apply for an adjournment of the coming EGM or, alternatively, to consider notifying the SFC’s concerns and asking Tianrui and the Receivers to vote for an adjournment of the EGM.

D.10  Fiduciary Theft

239.  The plaintiffs originally alleged that the Zhangs, James Li, Chang and Doris unlawfully removed from CSC’s Hong Kong office the essential books and records of CSC, CSCHK, Pioneer and the Group, allegedly to undermine any investigations by the Group and any relevant authorities into their misconduct.  The allegation was of a theft under the Theft Ordinance Cap 210.

240.  This allegation as made against Chang and Doris was abandoned at the close of the plaintiffs’ case at trial.

241.  As it happens, it is clear that at least a significant amount of the material which was said to have been unlawfully removed for improper purposes was subsequently found to have been within the plaintiffs’ possession throughout, albeit in Jinan.

D.11  Importance of Dates and Directorships

242.  In light of these key events, and because of the rather aggregated approach taken to the defendants in the RRASOC, it is necessary to identify the particular allegations which could be conceivably relevant to each individual defendant on an allegation of breach of fiduciary duties owed as a director.  I keep those matters in mind.

E.  The Impact of the 548 Action

243.  On behalf of the Zhangs, and in both opening and closing submissions, Mr Wou set great store by the 548 Action and what he submitted should be the impact of that action upon this one.  The point was also taken up by others.

244.  Mr Wou pointed out that, according to the claim made by the plaintiffs themselves in the 548 Action:

(1)  Between 2014 and 2018, Tianrui and its co-conspirators (collectively “Tianrui Conspirators”)  conspired and perpetrated an elaborate scheme of unlawful means illegitimately (a)  to acquire control of the CSC Group in 2015, and (b)  to derive economic benefits for themselves at the expense of the CSC Group thereafter.

(2)  The Tianrui Conspirators comprised (a)  Tianrui companies, (b)  Li Heping, former CEO of Tianrui, (c)  Li Liufa, Chairman of Tianrui, (d)  Stephen Liu, (e)  David Yen, and (f)  their nominees as directors and officers of the CSC Group between 1 December 2015 and 23 May 2018.

(3)  The Tianrui Conspiracy began sometime prior to 23 August 2014, when the CSI Trust Actions were commenced by the Minority Shareholders, purportedly for behalf of the CSI employee beneficiaries.

(4)  The conspiracy included acquiring control of the CSC Group through the appointment of the Receivers of 45.63% of the shares in CSI, and installing directors and officers aligned to Tianrui on the boards of CSC and its subsidiaries.

(5)  The conspiracy also included embarking on litigation against those whose interests were opposed to Tianrui – including in HCA 2880/2015, i.e. this action.

245.  In this context, I might also note that the evidence given by Chang and Doris on the collusion between Tianrui and the Receivers was not challenged. 

246.  Mr Wou submitted that this action ought never to have been commenced, and should at least have been withdrawn by the Board which took control of CSC in May 2018.  Mr Wou highlighted at least four overlapping features between the 548 Action and this action, being that:

(1)  the plaintiffs are the same;

(2)  in the 548 Action, Stephen Liu and David Yen of the Receivers are sued by the plaintiffs, whilst in this action they act as the plaintiffs’ only factual witnesses;

(3)  both actions are founded on similar causes of action, being unlawful means conspiracy, breach of fiduciary duties and dishonest assistance;

(4)  the 548 Action covers the period from 2014 to 2018, whilst this action covers the period from 2011 to 2015.

247.  By summons dated 14 August 2019, Tianrui sought to set aside the writ in the 548 Action, and to challenge the Court’s jurisdiction.  That summons was dismissed by K Yeung J on 7 December 2020.  K Yeung J took into account the plaintiffs’ pleaded case on unlawful means conspiracy, to assess the respective merits of CSC’s and Tianrui’s cases, and recognised the broad picture of the disputes between two camps of business rivals (Tianrui on one side and ACC and CNBM on the other)  over the control of CSC, with the different sets of proceedings being initiated when different camps were in control of the CSC Board.

248.  Mr Wou submitted that this action is therefore embarrassing, and ought to be struck out for reasons including that:

(1)  as matter of law, the plaintiffs are bound by their pleadings in the 548 Action;

(2)  at the very least, the plaintiffs are estopped by their conduct in the 548 action to disavow their stance that the present action is genuine;

(3)  as this action was commenced for an improper purpose (as the plaintiffs themselves say), the Court should decline to enter any judgment sought by the plaintiffs;

(4)  there was no single reference to the plaintiffs’ stance in the 548 action throughout the plaintiffs’ witness statements and opening submissions at trial, notwithstanding that stance is diametrically opposite to the stance in the present action;

(5)  therefore, the plaintiffs have not come to this Court with clean hands;

(6)  the plaintiffs’ conduct constitutes a clear abuse of the Court’s process, and/or it is vexatious, and the claim should be struck out.

249.  In her submissions, Ms Lam said that the 548 Action is irrelevant to the present action, where there is no dispute that the present action is conducted by an independent Board and it would be fundamentally wrong to equate the plaintiffs with Tianrui.  Ultimately, she said the only concern for the Court is as to whether the central claims for conspiracy, breaches of duties, dishonest assistance and negligence have been made out.

250.  As to the principle based upon the idea that a person may not approbate and reprobate, Ms Lam submitted that the chronology is against Mr Wou’s submissions.  Whilst it might be envisaged that the parties to the subsequent 548 Action might seek to strike out that action on the basis of what had been said earlier in this action, the converse does not apply.  In any event, Ms Lam submitted that there is no diametrically opposed factual case or inconsistent position in itself.  She picked up on the remark which I made at the trial that it may not be inherently unlikely for two conspiracies to exist in parallel, and she submitted that establishing one conspiracy does not necessarily preclude the existence of another.  She also pointed to those parts of the decision of K Yeung J, where he identified a number of the differences between the two actions, not least as regards the relevant chronology is of the matters of complaint.  Perhaps more fundamentally, Ms Lam relied on the difference in the membership of the boards of the plaintiffs at the times of the two actions making different assertions.

251.  Ultimately, I am not persuaded that any estoppel or abuse arises quite in the way advanced by Mr Wou.  The circumstances of the two actions are certainly unusual, but are explicable in the difference of chronological focus, and through the underlying make-up of the members of the Board.  I acknowledge that a company is one company, even if the constitution of its board changes.  But I do not think the present circumstances are best met by striking out this claim in this action, rather than determining it. That is also why I declined to take that step, notwithstanding this point having arisen in the argument during the opening submissions at trial.

252.  Before leaving this topic, I would revert to my comment about the possibility of two co-existent conspiracies.  Now that the evidence has been fully explored in these proceedings, it seems to me to be pretty clear there was likely only one of the two alleged conspiracies, and it was not the one advanced by the plaintiffs in this action.

F.  Overview of Claim as Originally Put Forward

253.  Before turning to the way in which the claim was originally put forward, it can be noted (as Mr Sussex pointed out in his submissions)  that the SOC filed on 24 December 2015 cobbled together and rehashed a litany of allegations made previously by CSI and the Ngo brothers (i.e. Andrew Ngo of Wong & Lawyers acting for the CSI Minority Shareholders, and Samuel Ngo of KLG, representing both the Contributing Employees and Tianrui).  Those allegations included at least:

(1)  the allegation – which is said to underpin the 2014 Subscription – that Zhang Sr ‘reached out’ to Song Zhiping of CNBM and concluded the “Zhang-Song Agreement”;

(2)  the allegation that the 2020 Notes COCC was inserted to entrench the Zhangs’ control and that the Potential VGO triggered it. 

(3)  The allegation that CSI’s vote was unlawfully disallowed in the 2^nd EGM in October 2015.

(4)  The allegation that Doris, Cai Guobin and Ou Chin-der were appointed as directors in breach of rule 26.4 of the Takeovers Code.

(5)  The allegation that the CSC Board chose to convene the 3^rd EGM in Jinan for improper purposes.

(6)  The allegation that the Cayman Proceedings were made in bad faith and for improper purposes.

254.  Those allegations provide or underpin the theme pursued by the plaintiffs in the proceedings. 

255.  In the very first paragraph of Ms Lam’s written opening submissions for trial, she stated that this action essentially arises out of Zhang Sr’s attempt to retain control over CSC, variously assisted by his son (Zhang Jr), as well as other directors of CSC (James Li, Chang, Doris, Champion, Zeng and Shen)  and two major shareholders of CSC (CNBM and ACC).  That obviously was putting the immediate and first focus on the conspiracy claim, linked to the (majority of)  the allegations of breach of fiduciary duty.

256.  The second paragraph of the written opening identified four claims, which Ms Lam summarised as follows (with footnoted references to the paragraphs of the RRASOC, which I shall include in square brackets):

(1)  Conspiracy claim [RRASOC §§20A-20C]: the Defendants unlawfully conspired to assist Zhang SR (as director), CNBM and ACC (as major shareholders)  to control CSC without being required (in the case of Zhang Sr)  to account to CSC for his previous or future misconduct, or (in the case of CNBC and ACC)  to comply with the requirements of Hong Kong company law and/or the Takeovers Code and/or the SEHK Listing Rules.

(2)  Qilu claim [RRASOC §44D]: in July 2015 the Zhangs caused Shandong Shanshui to enter into an equity transfer agreement dated 23 July 2015 (“Qilu ETA”)  with five shareholders of Qilu Property Co Ltd (“Qilu”)  by which Shandong Shanshui agreed to acquire 30% of the equity interest in Qilu from the five shareholders.  The consideration paid by Shandong Shanshui was RMB146.88 million.  Qilu was overvalued and Shandong Shanshui substantially overpaid for its 30% interest in Qilu.  The Zhangs were negligent in causing Shandong Shanshui to enter into the Qilu ETA. Further or alternatively, the Zhangs caused Shandong Shanshui’s funds to be misapplied for the benefit of third parties.

(3)  Breach of fiduciary duties claim: the 1^st to 8^th Defendants acted in breach of their fiduciary duties owed to the Plaintiffs (or any one of them, as the case may be)  during their respective directorships.  Some of the breaches arise out of conduct that also constitute the overt acts under the unlawful conspiracy. Accordingly, the facts comprising the conspiracy claim and the breach of fiduciary duties claim overlap to some degree.

(4)  Knowing receipt or dishonest assistance claim [RRASOC §§21-21A]: this claim against CNBM arises out of the Subscription Agreement, whereby CNBM was allotted 16.67% of CSC’s issued share capital (post-allotment)  at an undervalue, enabling CNBM to become a major shareholder of CSC.

257.  Again, the conspiracy plea was put first.  For the purposes of focusing on the claim as originally put forward, I shall concentrate on that conspiracy, and the related breach of fiduciary duties claims.  This is because there has been a substantial change to those claims as originally put forward.

258.  The relevant parts of the pleaded case in the RRASOC – i.e. the case advanced at the beginning of the trial, on pleadings which governed the relevance and admissibility of evidence at the trial – are as follows.  For ease of reading, all passages from the RRASOC are reproduced in this section below without colour or underlining or deletions arising from the various amendments to the original SOC.  I have also changed the names to those as defined in this judgment.

259.  The conspiracy plea was as follows:

20.  From early 2014, the Original Executive Directors collaborated with (and in the manner pleaded below, unlawfully conspired with)  ACC and CNBM in order to assist those companies to try to obtain control of CSC.  Within the terms of the Takeovers Code, as from about March 2015, the aforementioned collaboration rendered the combination of ACC, CNBM and the Zhangs a “concert party” (the “Concert Party”).  Then (and now)  the Takeovers Code proscribed any concert party from attempting to take over a SEHK – listed company without making a general offer to purchase the shares of the minority shareholders at a value governed by the provisions of the Takeovers Code and/or fixed by the SEHK’s Takeovers Committee.  The purpose of the said collaboration (and of the aforementioned conspiracy)  within the Concert Party was to enable its members unlawfully to acquire control of CSC without providing fair value to CSC (to the prejudice of CSC’s minority shareholders)  and/or without making such a general offer.

20A.  From about March 2014, each of the Original Executive Directors combined in a conspiracy with each other and with CNBM, which combination was later joined by the other Defendants, in the manner pleaded in paragraphs 20B to 39 plus 45 to 64 and 66A to 68 below (the “Conspiracy Plea”), with the unlawful common intention or shared design of unlawfully and in breach of the Original Executive Directors’ fiduciary duties:-

(1)  assisting Zhang Senior, acting in collaboration with CNBM (and later ACC also)  to continue to control CSC without being required to account to CSC for his previous (or future)  misconduct and breaches of his fiduciary duties to CSC; and

(2)  assisting CNBM and ACC to try to obtain control of CSC without complying with the requirements of Hong Kong company law and/or the Takeovers Code and/or the SEHK’s Listing Rules by: (a) not providing full market consideration to CSC for shares to be issued or allotted by CSC to members of the Concert Party; and/or (b) not making a general offer to purchase the shares of CSC’s minority shareholders at their fair market value; and/or (c) the individual or collective actions of CSC fiduciaries (including the Original Executive Directors and future additional CSC directors appointed as a result of the actions of the members of the Concert Party)  to change the composition of CSC’s body of shareholders in a manner considered by them to be advantageous to the Concert Party.

20B.  The participants in the conspiracy combined together in order to achieve the aforementioned unlawful objects by the aforementioned unlawful means in the knowledge and with the intent that it would harm or injure CSC by: (a) jeopardising CSC’s SEHK listing (see paragraph 2 above); (b) exposing CSC to criminal or civil proceedings brought by the SFC or other authorities; and (c) expose CSC to the expense and inconvenience of defending further avoidable civil proceedings.

20C.  The original conspirators, from about March 2014, were the 3 Original Executive Directors and CNBM.  In the manner and at the times pleaded without the Conspiracy Plea below, the other Defendants joined the conspiracy and acted in furtherance of the conspiracy through the overt acts taken by them which are pleaded herein.

260.  The referenced paragraphs §§20B to 39 plus 45 to 64 and 66A to 68 are replete with averments that the various defendants acted “for and on behalf of the Concert Party” and did so “in bad faith”, “dishonestly”, “in dishonest breach of their fiduciary duties”, against what they knew “in truth and in fact”, “purportedly” doing one thing but “actually” doing another.  The RRASOC §38 also pleaded that “all the [CSC] directors owed their allegiances to the Concert Party” (as opposed to being loyal to CSC).

261.  Though it is not necessary to quote those paragraphs in full, §§66A to 68 can conveniently be set out because they give the flavour of the original overall pleading, including the conclusion that the action has been brought by the plaintiffs in order to bring the defendants to account for their dishonest breaches of fiduciary duty and obtain full redress for all other pleaded wrongdoings.:

66A.  Since 1 December 2015, each of the members of the Concert Party has attempted to aggravate the abovementioned wrongdoings and to exploit the advantages that they have provided to the Concert Party by:

(1)  Procuring and encouraging the Mayor and Deputy Mayor of Jinan, purportedly acting on behalf of the People’s Government of Jinan City, but actually acting to assist the Concert Party, to install a so-called working group in the Jinan Plant in order to assist the Zhangs in their unlawful misappropriation of Shandong Shanshui.

(2)  Spreading false rumours that the Group are insolvent and should be wound up (for the same reasons as prompted their actions in the abovementioned Caymans Proceedings).

(3)  Attempting to incite CSC’s bondholders to assert that CSC is in breach of the Bonds and that they are prematurely repayable.

67.  The 1^st to 8^th Defendants’ breaches of their fiduciary duties which are pleaded above were also undertaken in order to prevent or to impede or to hamper the Plaintiffs from obtaining redress against the 1^st to 8^th Defendants for their abovementioned dishonest breaches of their fiduciary duties to the Plaintiffs.

Redress

67A.  By reasons of the Defendants’ abovementioned conspiracy, the Plaintiffs have suffered loss and damage, for which the Defendants are liable to the Plaintiffs in damages (to be assessed).

68.  The Plaintiffs bring this Action inter alia in order to bring the 1^st to 8^th Defendants to account for their dishonest breaches of fiduciary duty.  The Plaintiffs also bring this Action in order to obtain full redress for all of the other above pleaded wrongdoings of the Defendants.

262.  It may be useful to add here that the fiduciary duties alleged to have been owed by the individual defendants as directors were pleaded at §14, as follows:

14.  In their capacities as directors or other officers or employees of CSC, each of the 1^st to 8^th Defendants owed fiduciary duties to CSC, including:-

(1)  the duty to act honestly and in good faith in the best interests of CSC;

(2)  the duty to use his or her powers as a director or officer or employee of CSC solely for the purposes of CSC and not for any collateral purpose;

(3)  the duty to protect CSC’s SEHK listing status by not causing CSC to breach the SEHK Listing Rules or the Takeovers Code or otherwise to act illegally or unlawfully;

(4)  the duty not to misuse his or her said powers in order to prefer particular shareholders of CSC over others or unfairly to change the composition of CSC’s body of shareholders; and

(5)  the duty not to misuse his or her said powers so as to disenfranchise particular shareholders of CSC or so as to deprive particular shareholders of the value of their shares in CSC.

263.  Incidentally it was only in §15A, added in the RRASOC, that the duty to exercise reasonable care, skill and diligence, and the duty to exercise independent judgment, were expressly pleaded – but pleaded only against the Zhangs, and not the other defendants.

264.  The way the claim is pleaded in the RRASOC put the conspiracy first, as the explanation for why the defendants acted in the particular way said to amount to a breach of their fiduciary duties. The pleaded breaches were ones made dishonestly or in bad faith.

265.  Put another way, it is the pleaded conspiracy which is said to explain the motive for the breaches of fiduciary duty: the defendants acted in dishonest or bad faith breach of their fiduciary duties because of their conspiratorial agreement, and in order to further its aims.

266.  This was reflected in the way Ms Lam opened the case for the plaintiffs at trial.  She identified two key points which she described as “decisive of the bulk of the issues in the trial”.  Those points were the two key underlying motivations of the defendants which Ms Lam described as the motivations which “dictated their decisions and actions”:

(1)  The first motivation relates to the Zhangs, and was their intention not to be pursued by the Contributing Employees, directly or indirectly, and others who were considered adverse or hostile to them (including at the relevant times Tianrui and the Receivers).

(2)  The second motivation relates to ACC and CNBM, and the directors appointed to represent them on the board, and was their intention to seek to maintain control over CSC to the exclusion of anyone other than the Zhangs and themselves.

267.  As Ms Lam emphasised in opening, it was those two underlying motivations which in the course of 2014 to 2015 “dictated the actions and steps of the various defendants”.  As she put it slightly differently, it was “because of the underlying motivations, we see the defendants enter into an unlawful means conspiracy”.  In other words, it was submitted in opening that the case really came down to the dishonest and bad faith breaches of fiduciary duties motivated by the two objects of the conspiracy.

268.  This was further emphasised by Ms Lam’s submission that in deciding whether there was a breach of fiduciary duty and the conspiracy, two pertinent questions should be considered in relation to each event in the chronology:

(1)  The first question for each event, act or step is “what were the defendants’ intended end results or outcomes?”.  As Ms Lam put it, regardless of whether the end result was achieved, “all of the steps were taken with the two main end goals in mind and they therefore involved breaches of duties to the plaintiffs by the 1^st to 8^th defendants” (my emphasis).

(2)  The second question, placing each event, act or step within the context and chronology of events, is “what inferences should be drawn in so far as the conspiracy claim is concerned?”.  Whilst individually the various items constitute breaches of fiduciary duty, together and in context they make up the elements and overt acts evidencing the unlawful means conspiracy.

269.  However – and though I will return to this below – this seems to me to be something of a circular or ‘bootstraps’ argument.  It is because of the conspiracy that the defendants acted in bad faith or dishonest breach of fiduciary duty.  At the same time, the breaches of fiduciary duty were said to be bad faith or dishonest breaches because they were breaches made in pursuance of the aims of the conspiracy.

270.  In any event, clearly the allegations of conspiracy and (the bulk of)  breaches of fiduciary duties were not just overlapping, but were self-supporting and mutually dependant.  Each propped up the other.

G.  Agreed List of Issues

271.  At the beginning of the trial, by reference to the RASOC and the Qilu Claim added in the RRASOC, the issues agreed as arising for resolution were as follows:

A.  UNLAWFUL MEANS CONSPIRACY CLAIM AGAINST THE DEFENDANTS

1.  Whether the Defendants are liable to the 1^st Plaintiff for unlawful means conspiracy:

1.1.  Was there any agreement between the Defendants (or any combination of them)  (“Alleged Conspirators”)  from about March 2014 to assist the 1^st, 9^th and 10^th Defendants to obtain control of the 1^st Plaintiff by unlawful means (“Alleged Conspiracy”)  (RASOC §20A)?

If the answer to Question 1.1 above is in the affirmative:

1.2.  What acts were committed by the relevant Alleged Conspirators respectively pursuant to the Alleged Conspiracy, having regard to the overt acts pleaded in the RASOC §§20B-39, 45-64, 66A-68 (RASOC §20A)?

1.3.  Specifically, insofar as the alleged unlawful acts summarised in paragraphs 4.2-4.8 and 4.11-4.13 below were found to have been committed, whether such acts were committed by the relevant Alleged Conspirators for and on behalf of the Concert Party (or any combination of the alleged members)  and/or in furtherance of the Alleged Conspiracy?

1.4.  Did the Alleged Conspirators by those unlawful acts intend to cause harm or injury to the 1^st Plaintiff by (a) jeopardising its SEHK listing, (b) exposing it to criminal or civil proceedings brought by the SFC or others, and (c) exposing the 1^st Plaintiff to the expense and inconvenience of defending further avoidable civil proceedings (RASOC §20B)?

2.  What loss (if any)  is caused to the 1^st Plaintiff as a result of the Alleged Conspiracy and what damages (if any)  should each of the relevant Alleged Conspirators be liable for (RASOC §67A)?

B.  FIDUCIARY DUTIES CLAIMS BY PLAINTIFFS AGAINST THE 1^ST TO 8^TH DEFENDANTS

3.  What was the scope of fiduciary duties owed by the 1^st to 8^th Defendants to the 1^st Plaintiff and by the 1^st and 2^nd Defendants to the 2^nd to 4^th Plaintiffs (RASOC §§14-15)?

4.  To what extent is each of the 1^st to 8^th Defendants liable for the following alleged breaches of fiduciary duty (if founded)?

4.1.  Did the 1^st Defendant (with the assistance of the 2^nd and 3^rd Defendants)  breach his fiduciary duties to the 1^st Plaintiff in respect of:

(1)  The payment in 2011 of “directors remuneration” to the 1^st Defendant of about RMB 149 million (RASOC §17(1))?

(2)  The allegedly unexplained and unaudited mid-2015 net trading losses of over RMB 1 billion (RASOC §17(4))?

4.2.  Did the 1^st to 3^rd Defendants breach their fiduciary duties to the 1^st Plaintiff by causing it to enter into the 2014 Subscription (RASOC §21)?

4.3.  Did the 1^st to 3^rd Defendants breach their fiduciary duties to the 1^st Plaintiff by causing the Group to add a new “Change of Control” clause in the Group’s loan Notes (RASOC §24)?

4.4.  Did the 1^st to 3^rd Defendants breach their fiduciary duties to the 1^st Plaintiff in causing the latter to make false and misleading public announcements between June and September 2015 (RASOC §25)?

4.5.  Did the 1^st to 3^rd Defendants breach their fiduciary duties to the 1^st Plaintiff by instructing solicitors to explore with the SEHK and SFC the possibility of an open offer for the issue and sale of new shares in 1^st Plaintiff (RASOC §29)?

4.6.  Did the 1^st to 2^nd Defendants (with the assistance of the 3^rd Defendant)  breach their fiduciary duties to the 3^rd Plaintiff by drawing down the Pioneer CCB Loan (RASOC §30)  and allowing the 3^rd Plaintiff to default on it (RASOC §55)?

4.7.  Did the 1^st to 3^rd Defendants breach their fiduciary duties to the 1^st Plaintiff by causing the latter to pay or incur legal and related expenses arising in respect of the litigation described in or relating to the matters pleaded in the RASOC §§19, 22, 24, 24A, 25, 40-42, 45 and 46 (RASOC §32A)?

4.7A.   Did the 1^st to 3^rd Defendants breach their fiduciary duties to the 1^st Plaintiff by retaining multiple firms of lawyers and accountants to prepare for the Cayman Proceedings (RASOC §33)?

4.8.  Did the 1^st to 3^rd Defendants breach their fiduciary duties to the 1^st Plaintiff by causing it to appoint various directors to the Board on 13 and 14 October 2015 in alleged breach of Rule 26.4 of the Takeovers Code (RASOC §36)?

4.9.  Did the 1^st to 2^nd Defendants breach their fiduciary duties to each of the Plaintiffs in introducing the Unlawfully Altered Articles of the 4^th Plaintiff (RASOC §§40-42)?

4.10.  Did the 1^st to 2^nd Defendants breach their fiduciary duties to the Plaintiffs for the misappropriation of the 4^th Plaintiff and its subsidiaries, except Qilu Property Company Ltd, and/or their assets (RASOC §§44B-44E)?

4.11.  Did the 1^st to 8^th Defendants breach their fiduciary duties to the 1^st Plaintiffs by convening the CSC shareholders’ EGM scheduled for 25 November 2015 in Jinan instead of Hong Kong (RASOC §45)?

4.12.  Did the 1^st to 8^th Defendants breach their fiduciary duties to the 1^st Plaintiff by passing the 10 November 2015 Resolution for the presentation of a winding up petition in the Grand Court of the Cayman Islands and an application for appointment of joint provisional liquidators (RASOC §§47-62)?

4.13.  Did the 1^st to 5^th Defendants breach their fiduciary duties to the Plaintiffs by the fiduciary theft of the Plaintiffs’ Records (RASOC §§63-64)?

5.  What losses (if any)  did the Plaintiffs suffer as a result of respective breaches of fiduciary duties on the part of the 1^st to 8^th Defendants (if so found)  and what damages or equitable compensation (if any)  should each of the relevant Defendants be liable for?  Specifically, were the losses set out in the Appendix (if so found)  hereto caused by the alleged misconduct of the relevant Defendants and, if so, to what extent were such losses attributable to each of the relevant Defendants?

C.  KNOWING RECEIPT / DISHONEST ASSISTANCE CLAIMS AGAINST THE 9^TH DEFENDANT

6.  Whether the 9^th Defendant is liable to account to the 1^st Plaintiff for its alleged:

6.1.  Knowing receipt of 563,190,040 shares in the 1^st Plaintiff under the 2014 Subscription; and/or

6.2.  Dishonest assistance of the 1^st to 3^rd Defendants’ breaches of fiduciary duties by entering into the 2014 Subscription (RASOC §21A)?

7.  What (if any)  amount is the 9^th Defendant liable to account to the 1^st Plaintiff in respect of the alleged undervalue in the price paid for the 2014 Subscription (RASOC §21A)?

D.  QILU CLAIM

8.  What was the scope of duties owed by the 1^st and 2^nd Defendants to the 4^th Plaintiff?

9.  What was the value of Qilu as at 30 April 2015 and/or 23 July 2015?

10.  In causing the 4^th Plaintiff to acquire 30% of the equity interest in Qilu on 23 July 2015, did the 1^st and/or 2^nd Defendants (1) act negligently, and/or (2) misapply the 4^th Plaintiff’s assets?

11.  What loss did the 4^th Plaintiff suffer as a result of the acquisition of 30% of the equity interest in Qilu? To what extent are the 1^st and/or 2^nd Defendants liable to compensate the 4^th Plaintiff for such loss?

272.  That list did not survive the plaintiffs’ evidence.

273.  In the light of the state of evidence after the closure of the plaintiffs’ case, Ms Lam was forced (and indeed acted appropriately and reasonably)  to make significant changes to the way in which she attempted to put forward the plaintiffs’ case.  There is real force in Mr Sussex’s submission that it is not surprising that the plaintiffs have struggled to make good their claims against the defendants, given the cavalier attitude with which this action was commenced.

274.  This is what led to the BPSOC.

275.  Having said that, I think it is also fair to say that Ms Lam continued to seek to finesse the way in which she presented the plaintiffs’ case, making various changes which were not all further concessions (see further below).  Hence my comment about the blancmange.

H.  Half-Time Concessions

276.  At the end of the plaintiffs’ case, Ms Lam recognised that the plaintiffs’ case was in real trouble.  Immediately after the conclusion of the evidence of David Yen, the plaintiffs’ second factual witness, on Day 11, Ms Lam sought to bring two points to the attention of the Court. 

277.  First, she said she had instructions to confirm that she did not pursue the allegations of fiduciary theft against Chang and Doris.

278.  Secondly, she stated that she hoped that she had made clear that the case was primarily a case of breach of fiduciary duties, but that given the way that the evidence had developed and the tenor of the cross-examination, she wished to make clear that she was not pursuing the case based on dishonesty.  At first blush, Ms Lam seemed to be saying that she would not pursue a case based on dishonesty against any of the defendants, except in relation to the dishonest assistance claim against CNBM and any breach of fiduciary duty in that respect.

279.  However, at the beginning of Day 12, Ms Lam offered a more nuanced version of how she intended to proceed, whilst expressly recognising that following the plaintiffs’ evidence there were certain aspects of the case which presented some difficulty for the plaintiffs to proceed with.

280.  Ms Lam stated that the plaintiffs would maintain the claims in relation to breach of fiduciary duties, except that identified in Agreed Issue 4.1.  As to Issues 4.2 to 4.13, Ms Lam stated that there is a distinction between the 1^st to 3^rd defendants (the Zhangs and James Li, i.e. the Original EDs)  and the 4^th to 8^th defendants (Chang, Doris, Champion, Zeng and Shen).  As regards the Original EDs, the Plaintiff would pursue a case of breach of fiduciary duties, including the plea of bad faith.  Dishonesty would be relied upon in the context of Issue 4.2 (the 2014 Subscription), Issue 4.9 (amendment of the articles of Shandong Shanshui), and Issue 4.13 (fiduciary theft).

281.  As to the other defendants, the plaintiffs would not pursue bad faith, but would pursue, as Ms Lam put it, “the full suite of breach of fiduciary duties”. 

282.  As to the claims in respect of knowing receipt and dishonest assistance, the knowing receipt aspect was in effect dropped.  Ms Lam said her submissions would be on dishonest assistance, obviously involving dishonesty.

283.  As to the conspiracy claim, Ms Lam said the plaintiffs “recognise fully the difficulties that [they] have in this respect”.  She said that notwithstanding that there may be difficulties with the particular elements of the conspiracy case as pleaded, those pleas would be maintained in so far as they form the background and context of the other issues.  As I think was fairly described by Mr YL Wong, the conspiracy plea was not being maintained wholeheartedly because the plaintiffs thought they had any real prospect of success; rather, the conspiracy plea was being maintained to seek to provide some of the factual matrix or background or context to permit exploration of the issues relating to alleged breaches of fiduciary duties.

284.  In light of the Court’s concerns, and those concerns mentioned by Counsel for the various defendants, I invited Ms Lam to produce a ‘blue-pencilled’ document, based on the RRASOC to identify which parts of the pleadings were not going to be pursued.  Time was granted for that purpose.

285.  On Day 13, Ms Lam spoke to the BPSOC which had been produced, and briefly stated her position in relation to the claims that were continued to be maintained.

286.  In her closing submissions, Ms Lam described the BPSOC as aiming at filtering out excessive peppering of allegations of dishonesty, and abandoning claims and allegations which had become untenable in light of the evidence.  (I can add here that by the end of the trial, Ms Lam also dropped the matters giving rise to Agreed Issues 4.1, 4.4, 4.6 and 4.10. Further, she abandoned certain aspects of the conspiracy claim, and dropped the allegation of conspiracy altogether as against Zeng and Shen.  I can come back to those matters later.)

287.  As will be seen below, the most obvious blue-pencilling is in the crossing out of most of the allegations of dishonesty and bad faith.  The BPSOC nevertheless still had some apparent internal inconsistencies and problems.

288.  For example, §21(3)  of the BPSOC – which is part of an assertion of facts pleaded by the claimants in HCA 2194/2014, and adopted as averments of fact by the plaintiffs in this action – reads (with the blue-pencilling shown by the strikethrough):

(3)  The Original Executive Directors dishonestly purported to justify the 2014 Subscription by causing CSC to issue a public announcement inter alia through the SEHK website (“Public Announcement”), falsely stating that CSC required the funds to be raised from the 2014 Subscription for the purpose of repaying CSC’s USD Bonds (which in truth and in fact were not repayable until May 2016 and February 2017)  in disregard of the fact that CSC then held cash or cash equivalents of about RMB 2.154 billion.

289.  Whilst the words “dishonestly” and “falsely” have been taken out, there remains the idea that what was stated was not “in truth and in fact”, and was “in disregard of” the true facts, which must incorporate an allegation of falsity, and probably also dishonesty.

290.  Similarly, §50 was blue-pencilled so as to read:

50.  In purporting to pass the 10 November 2015 Resolution, the Zhangs and the 3^rd to 8^th Defendants, all acting for and on behalf of the Concert Party, acted dishonestly and in bad faith and in breach of their fiduciary duties to CSC for the collateral and unlawful purposes of pre-empting the forthcoming CSC shareholders’ EGM and attempting, through the Application, unlawfully to engineer changes to the composition of CSC’s body of shareholders for the advantage of the Concert Party.

291.  First, one of the references to “unlawfully” is left in.  Secondly, the only pleaded reason to pre-empt the EGM is to do so in motivation of the two underlying key points as opened on by Ms Lam.  But once it is no longer said that the directors acted dishonestly or in bad faith, but instead it is accepted that they acted honestly and made a good faith decision on what they felt was in the best interests of the company, there was no “collateral purpose” left.

292.  There are various other paragraphs where (1)  references to dishonesty have been deleted by blue-pencilling, but there remains an allegation of misconduct, undertaken for and on behalf of the Concert Party and to act in a manner which was unlawful, or (2)  juxtaposed words like “purportedly” and “actually” are used.  An example of the latter is §56, which reads:

56.  On 17 November 2015, the 5^th Defendant acting in bad faith swore an affidavit, purportedly both in her capacity as a CSC executive director and in her capacity as the Chief Financial Officer and Vice President of ACC “a member and creditor of [CSC]”, but actually for and on behalf of the Concert Party, in support of the Winding Up Petition and in support of the Application in which inter alia she deposed: [….]

293.  If a person “purportedly” does something but is “actually” doing something else, that must be a description of at least bad faith, and maybe dishonesty.

294.  Further, §45 provides another example, which reads:

45.  Following the service of a further notice of requisition by Tianrui, on 4 Novermber 2015, Zhang Junior and the 3^rd Defendant procured the 4^th to 8^th Defendants all acting for and on behalf of the Concert Party to cause the Board to issue a Public Announcement that, on 25 November 2015, CSC would convene a CSC shareholders’ EGM to be held at the Jinan Plant in Shandong Province, PRC.  In breach of their fiduciary duties, the 1^st to 8^th Defendants took this (unprecedented)  step of convening the shareholders EGM of a SEHK listed company to be held in Jinan, Shandong Province, PRC in order: to disadvantage CSC’s non-Concert Party shareholders; to again conduct the EGM unlawfully; and to try to avoid the jurisdiction of this Court.

295.  Though §45 was not blue-pencilled, it nevertheless it must amount to an allegation of bad faith, when it is maintained that the breach of duties was “in order to” do the various things set out at the end of the paragraph.  Those things cannot have been done in good faith.

296.  Even §67 (see above)  is left in, with only the deletion of the word “dishonest”, but leaving what must amount to an allegation of bad faith, as follows:

67.  The 1^st to 8^th Defendants’ breaches of their fiduciary duties which are pleaded above were also undertaken in order to prevent or to impede or to hamper the Plaintiffs from obtaining redress against the 1^st to 8^th Defendants for their abovementioned dishonest breaches of their fiduciary duties to the Plaintiffs.

297.  In other words, it remains part of the overall summary pleading that the defendants acted in breach of their fiduciary duties in ways which included seeking to prevent or impede or hamper the plaintiffs from obtaining redress for those breaches.  That must be an allegation of acting in bad faith.

298.  With respect, this is thoroughly unsatisfactory.  It is not helped by Ms Lam in effect entirely recasting the plaintiffs’ case in closing submissions, focusing essentially only on breaches of the proper purpose duty and the bona fide duty (as she termed them).

299.  But the real point arising is as follows: all the above examples and other aspects of the BPSOC tend to emphasise the probable practical impossibility of filtering out allegations of dishonesty or bad faith from the original claim, whilst (1)  somehow leaving a cohesive or cogent plea of conspiracy, and the overt acts of the breaches said to show that conspiracy, and (2)  somehow leaving some different case on breaches of duty, said to be somehow incorporated within but a “lesser” part of what was previously there.

300.  This is the problem which happens when a party puts his case impossibly high.  Not only will that party fail to clear the hurdle he has set himself, the higher he puts his case the louder will be the crash when, as is inevitable, it fails and falls.

301.  Lastly, it is important to keep firmly in mind what the BPSOC was designed to achieve.  There was no application for amendment of the RRASOC.  Rather, ‘blue-pencilling’ of that document was invited by me, because it seemed to me to be fair to the defendants and necessary for the Court to understand as clearly as possible what was the effect of the various concessions made by Ms Lam, and hence what parts of the pleaded claim were not being pursued.

302.  As I have pointed out, the intended clarity was not obtained.  But in any event, albeit that the BPSOC was intended to identify those parts of the pleaded case which were no longer pursued, the plaintiffs remained bound by, and could not take their claim beyond or outside, what was pleaded.

I.  The Short Answer

303.  I accept the various submissions made on behalf of the defendants that the unlawful means conspiracy claims suffered from several significant problems in pleading, as well as in law (even ignoring the evidence).  The same can be said of the breach of fiduciary duty claims, where the pleading has tended to aggregate all defendants into a single unit, and therefore seek to run all allegations against all defendants without any proper or appropriate discrimination between them.

304.  In any event, it is clear from the RRASOC that the two claims in conspiracy and breach of fiduciary duty are inextricably linked (see above).  The defendants are alleged to be part of an unlawful means conspiracy with an intention to injure the plaintiffs, but the allegations concerning the conspiracy were essentially based upon the allegations of the bad faith or dishonest breaches of fiduciary duty, where the bad faith or dishonest breaches of fiduciary duty are said to have arisen as a result of, and to constitute the overt acts of, the conspiracy.

305.  Indeed, as Ms Lam put it in opening, it was Zhang Sr’s efforts to retain his status in and control over CSC, together with ACC’s and CNBM’s desire to obtain shareholding control of CSC, which explain the parties’ motivations underlying the conspiracy.

306.  The alleged improper motives were tied inextricably with the serious allegations that each of the alleged conspirators combined with the intent that it would harm or injure CSC by jeopardising its SEHK listing, exposing it to criminal or civil proceedings brought by the SFC or other authorities, and exposing it to the expense and inconvenience of defending further avoidable civil proceedings.

307.  That made logical sense as a pleading (ignoring for now the evidence), where it is difficult to envisage a situation where a director can be said to have acted in good faith in the best interests of the company, but at the same time intentionally causing harm by knowingly jeopardising the company’s listed status and exposing it to civil and criminal liability.

308.  I have referred to the circular or ‘bootstraps’ argument.  It is because of the conspiracy that the defendants were said to have acted in bad faith or dishonest breach of fiduciary duty.  At the same time, the breaches of fiduciary duty were said to be bad faith or dishonest breaches because they were breaches made in pursuance of the aims of the conspiracy.

309.  In other words, if you knock out the conspiracy the stated bad faith motive for the breaches falls away.  Similarly, if you knock out the bad faith element of the breaches, the conspiracy falls away.

310.  As pleaded, the breaches are alleged to be dishonest and/or in bad faith.  In the wrap-up plea, all of the breaches are alleged to have been dishonest breaches.  In any event, in the context of alleged breaches of fiduciary duty, it is difficult to see what the difference is between a dishonest breach and a breach made in bad faith.  Essentially both come back to proper purpose.  If the purpose was not proper, because of an alleged ulterior purpose, whether it is described as dishonest or in bad faith does not seem to me much to matter. 

311.  But, if you remove the allegation of dishonesty and bad faith, leaving only an honest or good faith breach of fiduciary duty, that seems unlikely to be capable of amounting to unlawful means (and in any event simply fails to prove the alleged conspiracy).  It in effect removes any suggestion of improper purpose.

312.  It may also be instructive to recall how Ms Lam described the general tenor of the defences raised by the defendants, which she said were “largely similar” amongst them all.  She described them as denying the existence of any conspiratorial agreement and asserting that all the overt acts relied upon by the plaintiffs in the conspiracy claim were undertaken bona fide for the best interests of the plaintiffs or otherwise justified.  Otherwise, she said, the defendants simply plead ignorance.  In other words, Ms Lam expressly recognised that a main part of the defence raised – and the case the plaintiffs would have to meet in order to succeed in their claim – was that the various allegedly overt acts which supposedly supported the conspiracy claim were in fact “undertaken bona fide for the best interests of” the plaintiff. 

313.  Ms Lam has since accepted that fact, and so that defence.  Ms Lam confirmed to me in terms that the plaintiffs no longer say that the 4^th to 8^th defendants (i.e. Chang, Doris, Champion, Zeng and Shen)  breached the duty to act honestly and in good faith in the best interests of CSC.

314.  The abandonment of the plaintiffs’ allegations of defendants’ dishonesty and bad faith – and the acceptance of the defendants’ defence based upon the averment that they acted bona fide and for the best interests of the company – therefore must involve the abandonment of the alleged improper motives and intentions.  The result is that the claims for conspiracy and breach of proper purpose duties must, and do, fail.

315.  As I put it during discussion at trial, where each part of the claim in conspiracy and in breach of fiduciary duty props up the other, and where reason why the breaches of duty are said to amount to a conspiracy is because they were in bad faith, and the reason why they were taken in bad faith is because they were motivated by the aim intention of the conspiracy, then if you remove bad faith the conspiracy collapses in on itself.

316.  Indeed, it makes no sense to argue that any act done by any defendant can fit into a description of “acts pursuant to or in furtherance of such unlawful objects” – i.e. those set out in RRASOC §20A – when it is accepted that the act was done not just without dishonesty or bad faith, but also was done with the honest belief that it was in the best interest of CSC.

317.  Similarly, an honest belief that an act was performed in the best interest of CSC negates the argument that the person performing the act had the intention to injure CSC.  This is because an honest belief in acting in the best interests is the very antithesis of an intention to injure.

318.  The concessions made by Ms Lam also seem to me to sound the death knell for the claims of breaches of fiduciary duty, at least as against the 4^th to 8^th defendants.

319.  Of course, the conspiracy claim is the only ‘link’ by which the plaintiffs seek to connect CNBM and ACC with any of the director-defendants who are being sued for breach of fiduciary duties.  If that link is absent, there is simply no case left against CNBM or ACC.

320.  That is the short answer to most of the claim.

321.  I can deal with the longer answer and with the remaining aspects of the claim below.

322.  However, lastly, it is convenient here to deal with Ms Lam’s invitation to apply what she said is the “greater includes the lesser” principle.  She submitted that, as a matter of legal principle, a party may elect not to pursue the full panoply of claims but to rely on the lesser pleas within their pleaded case.  She submitted that it is open to the Court to make findings based on the same.  She relied on:

(1)  It is a general rule that a pleader, who has pleaded more than he strictly need have done, can always disregard the unnecessary or surplus averments and rely simply on the more limited ones.

(2)  The founding dictum for that proposal was cited with approval in Hong Kong, where the rule was re-christened as one of “the greater includes the lesser”.

(3)  Consistently, it is open to the Court to find liability on the basis of a lesser state of mind, even if dishonesty or bad faith was pleaded but not established at trial.  This is particularly when breaches of fiduciary duties can be proved without it necessarily being dishonest or in bad faith.

(4)  In the context of the proper purpose duty, it does not matter whether the Director honestly believed that in exercising the power as he did he was acting in the interests of the company.  In other words, the fact that dishonesty is no longer pursued presents no barrier to the Court finding liability on the basis of a lesser averment.

323.  But, in this case, it is plain that Ms Lam has not simply disregarded unnecessary or surplus averments beyond what she strictly needed to have pleaded, so that she can simply rely on more limited ones.  The allegations of dishonesty and bad faith were central planks of the overall case pleaded against the defendants, on the self-supporting proposition that it was the conspiratorial agreement which provided the motivation for the dishonest or bad faith breaches of duty, and the dishonest or bad faith breaches of duty evidenced, and were the overt acts or unlawful means of, the conspiracy.

324.  It is impossible to try to argue that dishonesty or bad faith were not themselves essential elements in the cause of action of conspiracy pleaded.  The unlawful objects of the conspiracy pleaded and presented inherently involved dishonesty or at least bad faith.  There was no honest conspiracy open on the facts of the case.  If the dishonest and bad faith elements are removed, it simply does not follow that what is left could be sufficient to establish the conspiracy claim.  If the conspiracy element fails, the pleaded motivation for acting in breach of duty is removed.

325.  Quite simply, there is no potential application of any “greater includes the lesser” principle in the circumstances of this case.

J.  The Law

J.1  Introduction

326.  The applicable legal principles to be addressed have either been widened or narrowed as a result of the change of case adopted after the close of the plaintiffs’ evidence, and with the production of the BPSOC.

327.  Nevertheless, I think it apt to deal with the principles arising from what was the originally formulated claim in the RRASOC, if for no other reason to provide the context for consideration of any additional or different principles as may be applicable upon the significant shift in case.

328.  Most of the legal principles are well settled, and I do not think it necessary to traverse or enter into detailed analysis of a series of previous authorities.  However, I have had regard to the authorities cited by the various parties in their arguments, both in their opening and closing submissions.

329.  Even if I have not expressly said so at every turn, I have applied the following principles in my approach to the issues in the case.

J.2  Pleading of Bad Faith and Dishonesty

330.  In its original form, before ‘blue-pencilling’, the RRASOC was liberally peppered with assertions that the defendants acted “in bad faith”, “dishonestly” – and even engaged in “theft” – and were knowingly involved in a conspiracy carried out through the “bad faith” or “dishonest” misconduct of the alleged co-conspirators.  Even the BPSOC continues to maintain similar allegations against certain defendants on some aspects of the claim.

331.  It is trite that such serious allegations of fraud or dishonesty must be pleaded distinctly and with the utmost particularity.  Where dishonesty is usually a matter of inference from primary fact, the defendant is entitled to know the primary facts which will be relied upon at trial to seek to justify the inference.  It is not open to the Court to infer dishonesty from facts which have not been pleaded, or from facts which have been pleaded but are consistent with honesty.

332.  In cases where direct proof is not available, it is enough if the circumstances appearing in evidence give rise to a reasonable and definite inference, but that means they must do more than give rise to conflicting inferences of equal degrees of probability such that the choice between them is merely a matter of conjecture.  In other words, the Court must not choose between guesses, and if the choice is between conflicting inferences as might be drawn from primary facts, and the Court cannot without conjecture drawn inference one way or the other, the burden on the claimant will not have been satisfied.

333.  The Court must adopt a disciplined approach to the drawing of inferences, especially where there are allegations of bad faith or dishonesty.

334.  Findings of bad faith or dishonesty require compelling evidence to satisfy the Court on the balance of probabilities.  This is because the more serious the allegation, the less likely it is that that event occurred, and hence the stronger and more cogent should be the evidence before the Court concludes that the allegation is established on the balance of probabilities.

J.3  Unlawful Means Conspiracy

335.  One of the two types of conspiracy is ‘lawful means conspiracy’, sometimes known as ‘conspiracy to injure’ because a lawful means conspiracy requires there to have been a predominant intention to injure the plaintiff.  This is in contradistinction from an ‘unlawful means conspiracy’, where the intention to injure need not be the predominant purpose of the means employed.

336.  The type of conspiracy with which this case is concerned is ‘unlawful means conspiracy’. 

337.  A useful starting position is to remember that economic torts need to be kept within carefully defined bounds so as not to trespass upon legitimate business activities.  As it was put in JSC BTA Bank v Ablyazov (No 14) [2020] AC 727 at §6:

The successful pursuit of commercial self-interest necessarily entails the risk of damaging the commercial interests of others.  Identifying the point at which it transgresses legitimate bounds is therefore a task of exceptional delicacy. The elements of the four established economic torts are carefully defined so as to avoid trespassing on legitimate business activities or imposing any wider liability than can be justified in principle.

338.  The elements of an unlawful means conspiracy are well-settled, and can be stated as follows.  The plaintiff must plead and prove:

(1)  An express/tacit agreement or understanding between the defendant and another or others (“Element 1”).

(2)  An intention to injure the plaintiff by unlawful means, whether or not the intention to injure is the predominant purpose (“Element 2”).

(3)  Unlawful acts carried out pursuant to the agreement or understanding and such intention (“Element 3”).

(4)  Resulting loss or damage to the plaintiff (“Element 4”).

339.  As to Element 1 – an express or tacit agreement or understanding:

(1)  It is not necessary that every overt act is done by every conspirator, but the act must be done pursuant to the conspiracy or combination.

(2)  Consent, that is agreement or adherence to the agreement, can be inferred if it is proved that the alleged conspirator knew what was going on.

(3)  Thus, it is not necessary for the conspirators to join the conspiracy at the same time.

(4)  But the parties to it must be sufficiently aware of the surrounding circumstances and share the same object for it properly to be said that they were acting in concert at the time of the acts complained of.

(5)  Indeed, it is meaningless to speak of an agreement or combination in the absence of a common understanding of the material facts being shared by all the alleged conspirators.

(6)  A plea of conspiracy must include at least one overt act which is the act of all the alleged conspirators or, failing that, a number of overt acts which include at least one act on the part of each conspirator.

(7)  In most cases, it will be necessary to scrutinise the acts relied upon in order to see what inferences can be drawn as to the existence or otherwise of the alleged conspiracy or combination.  It will be the rare case in which there will be evidence of the agreement itself.

(8)  Each alleged co-conspirator must have joined in the implementation of the plan, and the unlawful act performed must have some causative potency in the context of its implementation (rather than merely being incidental to it)

(9)  In an alleged multi-party conspiracy, there must be analysis of the extent to which any particular defendant shared a common objective with the primary conspirators, and the extent to which the achievement of that objective was to the particular defendant’s knowledge to be achieved by unlawful means intended to injure the plaintiff.

340.  As to Element 2 – intention to injure:

(1)  Knowledge and intention are connected, because the element of intention to injure (and indeed acting in concert)  cannot be inferred in the absence of the requisite knowledge.

(2)  This is why there must be sufficient identity of object amongst the parties to a conspiracy or combination, even though the advantage to be derived from that same object may not be the same.

(3)  Possession of a separate aim may be evidence that the person concerned has not participated in the conspiracy combination at all, at any rate if he acted throughout in ignorance of the true facts.

(4)  The suggestion that the Court can adopt a test of “constructive intent”, derived from the fact that the defendant should have known the injury to the plaintiff would ensue, is contrary to the requirement for the unlawful means to be directed towards the plaintiff.

(5)  Hence, it is not sufficient in seeking to meet the element of intention to show merely that there was knowledge to found an awareness of the likelihood of particular consequences.

(6)  Rather, lesser states of mind, such as an appreciation that the course of conduct would inevitably harm the plaintiff, would not amount to an intention to injure.

(7)  The unlawful acts in question must be the instrument by which the loss is inflicted.

(8)  Unlawful acts will not be the instrument in this sense, if the unlawful acts are only incidental to, or collateral to, the loss.

(9)  This is because the unlawful means must be the means by which the defendant intended the harm to the plaintiff, and the means by which the harm is intentionally inflicted.

341.  Also on Element 2, it seems clear to me that RRASOC §20B contains a plea of intent arising from actual and direct knowledge, inconsistent with any suggestion of constructive knowledge or intent.

342.  As to the Element 3 – unlawful acts carried out pursuant to the agreement or understanding and such intention:

(1)  Breaches of fiduciary duty, dishonest assistance and knowing receipt have all been recognised as being capable of amounting to “unlawful means” for the purposes of the tort of conspiracy.

(2)  However, other cases have held that breaches of fiduciary or statutory duty are not unlawful means capable of founding and actionable unlawful means conspiracy.

343.  As to the Element 4 – resultant loss or damage:

(1)  Damage is an essential element of the tort of conspiracy. 

(2)  As a starting point, the innocent party should be restored, in money terms, to the same position as he would have been if the wrong had not been committed.

(3)  But, the plaintiff must prove actual pecuniary loss, and a claim to general damages to be assessed is insufficient.

(4)  Further the plaintiff must plead and prove that the alleged loss or damage was caused by the acts constituting the tort of conspiracy.

(5)  The function of the tort of unlawful conspiracy is to provide a remedy where the plaintiff is harmed through the instrumentality of the unlawful means, requiring proof that the unlawful means were not incidental but the means by which the defendant intended to harm the plaintiff.

344.  It is a defence to an action for conspiracy to injure by unlawful means if the defendant not only acted to protect his own interests, but did so in the belief that he had a lawful right to act as he did.  This is reflective of an underlying policy of the common law in this area that the tort of causing injury by unlawful means is designed only to enforce basic standards of civilised behaviour.  Indeed, the essence of conspiracy is the cooperation of the minds of the conspirators in pursuance of the unlawful design.  A person should not be held liable if he had no knowledge that the design was unlawful.

345.  Reference can be made to Total Lubricants v Christophe de Chaterac [2012] 5 HKC 523, at §§51-52, where – in a decision binding on me, but with which I in any event agree – the Court of Appeal held that a defendant may raise a defence and avoid liability on the basis that he did not have the requisite intent to injure the plaintiff, on the basis that he believed he was entitled to act as he did, even if he knew it would cause loss.

346.  A different point arises as to whether the overt acts of an unlawful means conspiracy may be lawful.  Ms Lam referred to the conceptual possibility that in a conspiracy claim liability can be grounded merely on the fact that the defendant is a party to a combination or agreement between two persons, aimed at another, to use unlawful means, pursuant to which unlawful action is taken, resulting in damage to the victim.  But, there is no requirement that the defendant has to be the one who takes the unlawful action, provided that he is a party to the agreement.  Therefore, Ms Lam submitted, that so long as a party has carried out an act (whether lawful or unlawful)  pursuant to the conspiracy, that party has carried out an “overt act”.  Hence, she said, the unlawful means requirement can be satisfied by another conspirator carrying it out.

347.  I can see the conceptual possibility.  But that is not the pleaded case, even in the BPSOC.

348.  As to whether a person can be liable for conspiracy if at the relevant time he does not owe fiduciary duties, Ms Lam submits that he can, because the effect of his prior overt acts “may have lingered on and played a role in the loss and damage suffered by the plaintiff, whether or not he owed fiduciary duties”.

349.  Again, I see the conceptual possibility of that.  But, the way in which the case has been framed against the defendants is not that they acted in breach of fiduciary duties, the effect of which lingered on after they ceased to owe fiduciary duties.  The pleaded case is that the defendants committed the breach of duties as amounted to overt acts of the conspiracy.

J.4  Breach of Fiduciary Duties

350.  It is helpful to begin by recognising the trite principle that the existence of a fiduciary relationship does not mean that every duty owed by a fiduciary to the beneficiary is a fiduciary duty.  In particular, a trustee’s duty to exercise reasonable care, though equitable, is not specifically a fiduciary duty.  In short, there is a distinction between a fiduciary duty and a duty of care, a breach of which might amount to negligence.

351.  As pleaded in the RRASOC, the claim in this case is not a claim in negligence (except as regards the Qilu Claim).

352.  CSC is a company incorporated in the Cayman Islands.  Hence, its directors’ duties are governed by the laws of the Cayman Islands, but in the absence of expert evidence identifying any difference, they will be assumed to be the same as in Hong Kong law.

353.  It is trite that fiduciary duties are not concerned with competence but with concepts of honesty and loyalty.  However, ‘crass incompetence’ may provide evidence that the director did not honestly believe he was acting in the best interest of the company.

354.  The test of honesty is generally subjective. For the objective test to apply, the question is whether on the available evidence the director failed to give any actual consideration if the impugned transactions were in the interests of the company at the time they were entered into.

355.  An allegation that the transaction was not bona fide and was entered into as a result of deliberate and dishonest breach of duty is a very serious allegation, engaging the principles requiring compelling evidence by way of proof.

356.  If a director’s decision was one which a reasonable board would consider to be in the interests of the company, then the Court will presume that the director acted bona fide and had good grounds for the decision.  This is related to the settled principle that the Court should be slow to interfere with the business judgments and decisions of directors in whom are vested the right and duty of deciding where the company’s interests lie and how they are to be served, which are matters potentially involving a wide range of practical considerations.  The Court does not substitute its own opinion for that of the management or question the correctness of a decision, if bona fide arrived at.  Courts do not act as a kind of supervisory body over decisions within the powers of management acting honestly.

357.  Whilst a director cannot simply accept professional advice without applying any of his own independent judgment, the more specialist the nature of the advice, the more reasonable it is likely to be for the director to accept it.  Similarly, a director should generally be able to trust any co-director, unless there is reason to mistrust the other person.

358.  A director is not an agent of his co-directors, and is not answerable for the acts or defaults of co-directors without taking part in them or without some culpable inactivity on his part.

359.  Unlike directors, shareholders owe no fiduciary duties to the company, and are generally entitled to vote their shares in their own interest as they see fit.

J.5  Duty not to exercise power for improper purposes

360.  It is trite that directors must exercise their powers for a proper purpose.  In the assessment as to whether that has occurred, a four-stage test can be applied: (1)  identify the power whose exercise is in question; (2)  identify the proper purpose for which that power was delegated to the director; (3)  identify the substantial purpose for which the power was in fact exercised; and (4)  decide whether that purpose was proper.

361.  In this regard, it is important not to conflate two issues: (1)  what was the true purpose of the director’s exercise of power, which is a factual question on the director’s subjective intention; and (2)  whether the true purpose was not a proper purpose for which the power was conferred, which is an objective question.

362.  Where more than one purpose for the exercise of a power can be identified, a decision can only be challenged if the primary or predominant purpose was improper.  Again, the principled basis for this is to limit, as is appropriate, the intervention of the Court in the conduct of a company’s affairs.

363.  However, whilst it is the director’s subjective intention and perception that are determinative, objective considerations are relevant in that they may be taken into account when assessing the credibility of the director’s evidence of his professed purposes.  In that regard, some cases may require considerable weight to be given to contemporaneous actions. 

364.  Therefore, where a director has filed evidence of his purpose in exercising the power, that evidence if accepted will destroy the inference of improper purpose which the plaintiff invites the Court to draw.  This point is of particular importance in light of the way in which the plaintiffs argued their case in closing submissions.

365.  These principles are also allied to that dealt with above, namely that the Court will ordinarily not substitute its opinion for that of the management, as the Court will give credit and respect to the judgment of management in reaching an opinion bona fide.

366.  It is, of course, impossible to define in advance the exact limits beyond which directors must not pass.  The variety of situations facing directors of different types of company in different situations is such that defining the limits by enumeration is simply unrealistic.

367.  Where a plaintiff seeks to impugn the decision of a board of directors to enter into a transaction, it is necessary for the plaintiff to prove that at least a majority of the directors was led to vote in favour of the exercise of powers in furtherance of an improper purpose.

J.6  Duty to exercise independent judgment

368.  As already mentioned above, fiduciary duties are concerned with concepts of honesty and loyalty, not with competence. Therefore, it would be confusing to think that the duty to exercise independent skill is somehow “related to” the duty to exercise reasonable care and skill. Instead, the duty to exercise independent judgment is typically described as a duty not to fetter the exercise of discretion, arising from surrendering or delegating the exercise of discretion to someone else, such as a shareholder, a fellow director or a third party.

369.  The duty is looking at whether a director was improperly influenced by anyone else in managing the company’s affairs (or perhaps whether he simply abdicated his judgment or abrogated his responsibilities in favour of someone else).  If the director is so influenced, then he failed in his loyalty to the company as opposed to other parties.  The breach of the duty to exercise independent judgment does not occur simply because for example, a director failed to exercise sufficient care or diligence in reading and understanding the materials before making a decision.

J.7  Creditors’ interest duty when a company may be insolvent

370.  At the point in time when a company is insolvent or nears insolvency or is in doubtful solvency, or if a contemplated payment or course of action would jeopardise its solvency, the interests of the creditors ‘intrude’ on the directors’ duties, and will require the directors to take into account those interests.

371.  Insolvency may be tested by either the cash flow or balance sheet test.  The cash flow test, i.e. whether a debtor could meet his liabilities when they were due, is normally used.

372.  On the authorities, once the directors of a company know or ought to know that the company is or is likely to become insolvent, the creditors’ interests duty is triggered.

373.  The directors will owe a duty to the company to take care to protect the interests of creditors, instead of owing duties directly to the creditors.

374.  The duty, once it arises, cannot be ignored. But it might be addressed in a way without breaching the duty.  Those ways might include looking at the bigger commercial picture and the commercial realities.

J.8  Knowing Receipt

375.  It is trite that, to establish liability for knowing receipt, it is necessary to prove (1)  a disposal of the plaintiff’s assets in breach of trust, (2)  beneficial receipt of those assets by the defendant, and (3)  knowledge on the part of the defendant that the assets he received are traceable to a breach of fiduciary duty.  The recipient’s state of knowledge must be such as to make it unconscionable for him to retain the benefit of the receipt.

376.  In the context of a commercial transaction, constructive knowledge would only suffice if on the facts actually known to the defendant, a reasonable person would either have appreciated that the transfer was probably (as distinct from possibly)  in breach of trust or would have made enquiries or sought advice which would have revealed the probability of breach of trust.

377.  Where liability for knowing receipt is established, the defendant would be liable as a constructive trustee, with the imposed obligation to restore the assets, and potentially to be accountable for any profit that would have been made or any loss that would been avoided if the assets had remained in the hands of the true trustees and had been dealt with according to the trust.

378.  However, in this case the relevant assets the subject of the claim in knowing receipt are the Shares allotted under the Subscription Agreement.  Those Shares were not assets of the company.  Rather, shares represent bundles of rights against the company.  Indeed, before the Shares were issued, they did not exist as an item of property, whether belonging to the company or anyone else.  It was the act of issuing the Shares and agreeing to allot them which created the relevant item of property, but that property was never owned by the company CSC.

379.  Ms Lam seemed to acknowledge the “difficulties” that these principles presented to the claim in knowing receipt, and she did not address that claim in closing submissions, effectively abandoning it.  I need not address it further.

J.9  Dishonest Assistance

380.  The general requirements for dishonest assistance liability are as follows: (1)  there is a trust; (2)  there is a breach of trust by the trustee of that trust; (3)  the defendant induces or assists that breach of trust; and (4)  the defendant does so dishonestly.

381.  Whether someone has acted dishonestly is to be evaluated objectively, based on the person’s subjective knowledge.  It may consist in knowledge that the transaction is one in which he cannot honestly participate, or it may consist in suspicion combined with a conscious decision not to make any enquiries which might result in knowledge.  Although a dishonest state of mind is a subjective mental state, the standard by which the law determines whether it is dishonest is objective.  If by ordinary standards a defendant’s mental state would be characterised as dishonest, it is irrelevant that the defendant judges by different standards.  The Court will take into account the circumstances known to the person providing the assistance, his personal attributes such as his experience and intelligence, and the reason why he acted as dead.

382.  In this context, ‘blind-eye’ knowledge is equated with actual knowledge.  But the imputation of ‘blind-eye’ knowledge requires two considerations to be satisfied: (1)  the existence of a suspicion that certain facts may exist, which is to be judged subjectively by reference to the beliefs of the relevant person; and (2)  a conscious decision to refrain from taking any step to confirm their existence, where the decision to avoid obtaining confirmation must be deliberate.

383.  Where these requirements are satisfied against the defendant, the defendant is liable personally to account in equity in respect of the breach of trust or fiduciary duty as though he were a trustee. The remedy is a personal equitable remedy, meaning the dishonest assistant comes under a liability to account on the basis applicable to a trustee.

384.  The measure of loss, where suffered, is the loss caused by those of the breaches which he has assisted, but it is not necessary to show that the assistance itself is causative of loss.

K.  Unlawful Means Conspiracy

385.  This relates to Issue 1.1 (though I am not sure that that issue as agreed has correctly identified the full nature and import of the pleaded conspiracy).

386.  The conspiracy as alleged in RRASOC §§20A and 20B is that the conspirators used unlawful means in the furtherance of two objectives.  In terminology which I think it is helpful to understanding in analyzing the pleaded case, Mr YL Wong identified that the unlawful objects of the alleged 2014 conspiracy, which are two-fold, might be regarded as “Limb 1” and “Limb 2”:

(1)  Limb 1: to assist Zhang Sr (NB. the pleading does not include Zhang Jr), acting in collaboration with CNBM and later ACC, to continue to control CSC without being required to account to CSC for his past or future misconduct and breaches of fiduciary duties;

(2)  Limb 2: to assist CNBM and ACC to try to obtain control of CSC without complying with the law/Takeovers Code/Listing rules in the three ways identified, being (a)  not providing full market consideration for the shares to be allotted, (b)  not making a general offer to purchase the shares of CSC’s minority shareholders that their fair market value, and/or (c)  the individual or collective actions of CSC fiduciaries to change the composition of CSC’s body of shareholders in a manner considered by them to be advantageous to the Concert Party.

387.  I accept the submission that Limb 1 and Limb 2 should be regarded as the quid pro quo of each other.  It is not alleged in the pleading that Zhang Sr was collaborating with CNBM and ACC purely to promote the interests of the latter two.  Put another way, the pleaded unlawful objects are that (1)  Zhang would help CNBM obtain control of CSC without complying with certain laws and regulations, whilst (2)  in return they would help him to continue to control CSC without recourse for any misconduct, past or future.  Another way of putting it would be, “you scratch my back, and I will scratch yours”.  As such, Limb 1 – the first identified of the key underlying motivations – is an integral part of the pleaded conspiracy.

388.  This is not to overlook the fact that the pleading of Limb 1 and Limb 2 appears to give rise to an immediate internal inconsistency, because an agreement to maintain Zhang Sr’s control is the opposite of an agreement to enable CNBM and ACC to obtain control.

389.  However, as Mr YL correctly submits, in cross-examination Ms Lam put a somewhat different case to Zhang Jr, Chang, Champion and Doris.  Ms Lam put the proposition that an informal understanding was reached amongst the Zhangs, CNBM and ACC from around May 2015 for Zhang Sr (a)  to assist ACC and CNBM to gain control over CSC, (b)  defend of the takeover attempt by Tianrui and the Receivers, and (c)  to keep the Zhangs on the Board, because they had ‘guanxi’ with PRC and loyalty of the remaining employees.  Overall, Ms Lam put it that the steps taken since May 2015 “were with the aim of promoting ACC’s and CNBM’s interests in CSC”, and that it was “in furtherance of this objective” that Chang, Champion, Zeng and Shen were appointed to the Board of CSC, being in breach of rule 26.4 of the Takeovers Code.

390.  Leaving aside for the moment that the pleaded formation of original conspirators was in March 2014, not May 2015, the way that case was put by Ms Lam seemed to ignore Limb 1, namely the objective of assisting Zhang Sr to retain control without having to account for his misconduct, past or future.  Keeping “the Zhangs” (i.e. both of them)  on the board because they had ‘guanxi’ or loyalty is not the same thing.

391.  In other words, there did not seem to be any serious attempt to prove Limb 1 at trial.  Indeed, in her closing submissions, Ms Lam expressly abandoned various parts of the alleged conspiracy, including (as was pleaded in RRASOC §20A)  the object of assisting Zhang Sr to control CSC without being required to account for previous or future misconduct, i.e. Limb 1.

392.  The abandonment of an integral element of the essence of the conspiracy alleged is fatal to the claim.  The plaintiffs are not permitted to seek to save a conspiracy claim by running in closing submissions a case fundamentally different that that pleaded, and on which there was a trial.  They are not allowed to suggest new objects, in particular, which are different from the pleading, or simply not pleaded at all.

393.  In her closing submissions, Ms Lam also expressly abandoned part of Limb 2, namely the object of the alleged conspiracy including assisting CNBM and ACC to obtain control without making a general offer to the minority shareholders.  She also abandoned the pleading of the intended injury by exposing CSC to criminal or civil proceedings brought by the SFC or other authorities.

394.  The reason for the significant shift in the way in which the plaintiffs sought to advance a case on conspiracy may be obvious. The conspiracy as actually pleaded is deeply counter-intuitive and repugnant to common sense.  It is beyond far-fetched.  It is also disproved on the evidence.

395.  First, it is contrary to common sense to think that either of CNBM or ACC would think it in their interest to conspire with Zhang Sr to allow him to retain control of CSC without being required to account for his previous or future misconduct.  There is no suggestion that either CNBM or ACC knew of any particular misconduct on the part of Zhang Sr which had already occurred, which they were prepared to overlook irrespective of the damage that it might have caused (or, at least, none is pleaded).  It makes even less sense to suggest that they would in effect provide an immunity to Zhang Sr as regards any future misconduct by him, of which they could not know in advance, which might cause extensive damage, and of which they might themselves perhaps be victims. 

396.  It can also be noted that assisting a person to retain control of the company is not, of itself, unlawful.  Further there is no plea as to what knowledge the defendants had as to Zhang Sr’s alleged previous breaches of fiduciary duty, or how the acts to which they were a party at the time when they were alleged to be a party to the conspiracy might have assisted him not to account to the plaintiffs.  Nor is it pleaded how the defendants sought to “cover up” any future breaches by Zhang Sr (a proposition which on its face makes no sense anyway). 

397.  It also makes no rational sense that substantial, well-established and reputable listed companies like CNBM and ACC would conspire together with Zhang Sr to injure CSC, a company in which they had made or were about to make substantial investments to become substantial shareholders – still less, if the suggested injury was to jeopardise CSC’s listing status, or expose it to criminal or civil proceedings or the expense and inconvenience of defending civil proceedings.

398.  The pleaded conspiracy, which was allegedly originally formed between Zhang Sr (or both Zhangs), James Li and CNBM in March 2014, only subsequently joined by ACC and other parties at various dates more than a year later in and after May 2015 also makes little sense.  It seems to me to be inherently unlikely that ACC would agree to become a party to an already existing conspiracy of the nature alleged.  There is also the apparent chronological mismatch between (1)  a conspiracy formed in March 2014, which (as pleaded)  already included as one of its objects assisting both CNBM and ACC to try to obtain control of CSC, and (2)  ACC only joining that conspiracy in May 2015.  It is also inherently unlikely that ACC would join a conspiratorial agreement, part of which was that CNBM would be allotted shares at a significant undervalue.  I don’t buy the argument that ACC changed its mind. 

399.  I also agree with Mr Lung that the plaintiffs did not identify a single reason or motive for James Li to take part in the alleged conspiracy, and none was put to him during cross-examination.  In any event, there was no apparent financial, commercial or other incentive or motive for James Li to take part in the alleged conspiracy.

400.  Further, the evidence points to steps taken which were clearly contrary to the alleged conspiracy (see further below, dealing with each of the alleged breaches).  Those steps included at least:

(1)  After Chang was appointed a director, he voted (as part of the majority of the CSC Board)  in favour of engaging an independent law firm and an independent firm of accountants to investigate the complaint letter issued by the Minority Shareholders of CSI in June 2015 alleging misdeeds against Zhang Sr.  The firms engaged were both reputable, and provided certificates of independence.  There is no suggestion in the evidence that Chang or CNBM, or anyone else, sought or condoned a faulty investigation.  That is obviously contradictory to the suggestion that Chang or CNBM would assist Zhang Sr in not being required to account for any misconduct.

(2)  Chang gave undisputed evidence that CNBM and ACC persuaded Zhang Sr, at a meeting in Shanghai in mid-October 2015, to step down from the CSC Board.  Zhang Sr was clearly reluctant and unwilling to go, and only agreed to do so after heavy persuasion from the chairmen of both CNBM and ACC.  That is contrary to the suggestion that they were intending to assist Zhang Sr to remain in control, including so as not to be required to account for any misconduct.

(3)  Stephen Liu confirmed in evidence that, in his meetings in June 2015, CNBM and ACC were not against the removal of the Zhangs, but were concerned about the consequence of the removal of Zhang Jr in triggering the COCC.  David Yen agreed that objectively he cannot criticise the decision of CNBM and ACC to keep Zhang Jr at that stage.

(4)  There were differences in the voting between the Zhangs and Chang at CSC Board meetings:

(a)  on 11 August 2015, the CSC Board (including Chang)  voted in favour of setting up a Special Committee to explore financing options, when the Zhangs did not vote in favour (because of their conflict of interest in relation to CSI); and

(b)  on 13 October 2015, Zhang Jr voted against the CSC Board giving a recommendation to Chang to exclude CSI’s votes at the 2^nd EGM.

(5)  After Champion was appointed as director, he was quick to express alarm that various announcements had not been sent to him for review, a practice he considered completely unacceptable.  That prompted immediate steps to review and improve CSC’s announcement release procedure, in an overhaul of its process.

(6)  Champion and Doris opposed James Li’s proposal to pay RMB5 million to Zhang Sr by way of remuneration despite his removal on 13 October 2015.  Doris went so far as to obtain (from ACC’s staff and advisers)  information about the level of remuneration of listed company directors, based on which she briefed the CSC directors, and maintained her objection to the proposal.

(7)  The present action is continuing, notwithstanding that part of it seeks to obtain redress against alleged misconduct on the part of the Zhangs.

(8)  The interests of CNBM and ACC conflicted at many points in the chronology, including:

(a)  after ACC learned of the issue of shares to CNBM under the 2014 Subscription, it was quick to register its protest to CSC’s senior management, via emails from Doris (and Ms Lam accepted in submission that ACC was “shocked” by the 2014 Subscription);

(b)  on 11 May 2015, ACC voted against the appointment of Zeng, voted against the general mandate, and voted against the share option scheme, whilst CNBM voted the same way at the same AGM.

(9)  Indeed, ACC’s voting stance at the 22 May 2015 AGM is completely contrary to the allegation of pre-existing conspiratorial agreement reached in that month, or earlier in March/April 2015 (as pleaded). By its voting, ACC defeated the Zhang’s attempt to appoint loyal supporters as might enable Zhang Sr to retain control (Limb 1), and defeated any attempt to give a Zhang-controlled board mandates to allot shares (similar to Limb 2(c)).

(10)  The Potential VGO, if carried out, could have ousted Zhang Sr as an indirect shareholder (and therefore his control)  over CSC.

(11)  It is the plaintiffs’ own case that the Zhangs engaged in a range of misconduct on their own accord, not on behalf of the alleged concert party, and apparently not to the knowledge of the alleged co-conspirators.

(12)  The effect of the amendment of Shandong Shanshui’s articles in late October 2015 tends to suggest that the Zhangs were seeking to maintain their own control of CSC’s subsidiaries, against the interests of CNBM and ACC.

401.  Far from there being any conspiracy involving the combination of Zhang Sr, CNBM and ACC, the evidence as a whole tends to paint the picture of Zhang Sr seeking (at least to some extent)  to adopt a ‘divide and rule’ approach to and between CNBM and ACC.  That is not to say that there was any partial conspiracy.  But, in any event, if either CNBM or ACC are not found to be a party to the pleaded conspiracy, there is no proper plea to an alternative conspiracy involving only one or other of them in combination with Zhang (for the obvious reason that that would conflict with Limb 2).

402.  Also, central to the allegation of conspiracy is the Zhang-Song Agreement.  But there is virtually no evidence – and none of any real weight – to support the existence of such an agreement.  See below.

403.  As already mentioned, there was also the plea that the overall intention was to damage CSC in three respects:

(1)  jeopardising its listing status;

(2)  exposing it to criminal or civil liability;

(3)  exposing it to the expense of other, avoidable, proceedings.

404.  As Mr Sussex put it, these bare assertions of injurious intent did not age well.  It is common ground that the reason for the suspension of trading of CSC’s shares was Tianrui’s rapid acquisition of CSC’s shares, causing the breach of the public float requirement.  Ultimately, it was the CNBM-ACC Board which successfully fulfilled all the resumption conditions, and obtained the grant of resumption of trading on 31 October 2018.  There is no evidence of CSC being the subject of any regulatory proceedings brought by the SFC or any other authority.

405.  Further, no questions were put to any defence witnesses, including Zhang Jr, asking or suggesting how CSC’s listing status was jeopardised by the defendants’ conduct, what criminal or civil proceedings had been brought, or what further avoidable civil proceedings CSC had unnecessarily to defend.

406.  No damage, no tort.

407.  I also note that it was Stephen Liu’s evidence that Champion was not part of a scheme to protect the Zhangs as at 18 August 2015, and David Yen was of a similar view up to 2 September 2015.  That evidence is inconsistent with the pleaded case of his having joined the conspiracy in May 2015, and there is no alternative date pleaded.

408.  It is also telling that, in her closing submissions, Ms Lam abandoned the allegation of conspiracy against Zeng and Shen.  This must significantly undermine the conspiracy allegation against both CNBM and ACC (when Zeng and Shen were originally pleaded as having been added to the board because they were “of” CNBM and ACC, in effect their creatures).  If the supposed representatives of CNBM and ACC are not accused of being conspirators, that must make it at least rather less likely that CNBM and ACC were conspirators.  This abandoned claim also reflected the continued unravelling of the plaintiffs’ case as formulated, and it was a belated recognition that the allegation should never have been made against Zeng and Shen, but that they were in effect ‘scooped up’ as alleged conspirators because of the new Board’s apparent determination to seek some retribution against all of those directors which it had replaced.

409.  Of course, if there is no allegation of conspiracy made against Zeng and Shen, that also entirely removes the pleaded motivation for them to have acted in breach of any fiduciary duty owed.

410.  Lastly, I note that CNBM and ACC are being sued in conspiracy only.  Therefore, they are not the subject of any claims for breach of fiduciary duties (to which claims I can now return).

L.  Breach of Fiduciary Duty / Overt Acts / Unlawful Means

411.  Whilst there is some substantial overlap between the alleged breaches of fiduciary duty and the alleged overt acts and/or unlawful means as part of the alleged conspiracy, there are certain allegations which are not overlapping.  In her closing submissions, Ms Lam identified them as:

(1)  Offering the 2015 Share Options (the Original EDs).

(2)  Removing the proposed resolutions in the 2^nd Requisition pursuant to Article 16.4 of CSC’s articles (the Original EDs).

(3)  Disallowing CSI’s votes at the 13 October EGM in breach of Article 14.7 of CSC’s articles (the Original EDs, Chang, Champion, Zeng, Shen, CNBM and ACC).

(4)  Making the section 329 SFO application (the Original EDs).

412.  I can deal with each of these in turn, interwoven with dealing with the overlapping alleged breaches of fiduciary duty, which are are said to be capable of standing apart from the alleged conspiracy.

M.  2014 Subscription

413.  This is Issue 4.2.

414.  Central to the allegation of conspiracy – and what and so what is said to have led to the 2014 Subscription – is the Zhang-Song Agreement.  That agreement was supposedly made between Zhang Sr and Song (Chairman of CNBM), but there is no direct evidence supporting the existence of such an agreement, and there is significant evidence pointing against the existence of such an agreement.  All witnesses in a position of knowledge denied the existence of such an agreement.

415.  Stephen Liu obviously had no contemporaneous knowledge, but relied on an affirmation filed by Zhao Yongkiu (one of the Minority Shareholders)  in HCMP 360/2015, but who has since passed away.  In any event, the evidence in that affirmation was multiple hearsay, as Zhao claimed to have learned of the Zhang-Song Agreement from conversations with individuals who themselves claimed to have heard about the agreement being “sealed up” by Zhang Sr from one or more unidentified members of the senior management of the Group.  This is at least third-hand hearsay evidence, and is of little to no weight in support of the serious allegations of misconduct. 

416.  Even as described, it is devoid of the kind of detail that would allow it to make any sense.  It ignores the fact that both CSC and CNBM were listed companies in Hong Kong, and so that Zhang and Song would know that any agreed allotment would be subject (1)  to CSC’s shareholders’ approval of mandate, (2)  to CSC’s Board’s approval, and (3)  to the SEHK’s approval.  The allegation is also against the vast preponderance of the evidence, including that set out above (which I need not rehearse here).

417.  Further, I accept Mr Sussex’ submission that, even at the end of the trial, it remained impossible to make any sense of what the plaintiffs were apparently trying to allege as being the Zhang-Song Agreement.  First, nothing in the pleadings suggests exactly how it is said that CNBM could assist the Zhangs in relation to the PRC complaints or on the CSI level.  Secondly, the case put to the defence witnesses shifted, and remained nebulous (and formed no proper basis for the serious allegations of improper motive and conspiracy).  Thirdly, though the plaintiffs put the three elements of the Zhang-Song Agreement (as suggested at §4.24 of the Zhao affirmation)  to some witnesses, those elements are different from the pleaded case.  Fourthly, the way in which the plaintiff sought to suggest that other defendants might have known of the Zhang-Song Agreement was extremely weak.

418.  I also take into account that Zhao Yongkiu was one of the Minority Shareholders and, as recorded by G Lam J in a decision given in the Trust Actions on 1 April 2021, was a central figure in the arrangements between Tianrui and the Receivers, and had provided initial funding to the Receivers.  These facts did nothing to increase the credibility of what was stated in the Zhao Yongkiu affirmation.

419.  In this context, it is necessary to deal with Ms Lam’s invitation to draw an adverse inference from the fact that none of the defendants, but in particular CNBM, called Song as a witness at the trial.  I decline that invitation:

(1)  It is settled that the principles on the drawing of adverse inferences from the absence of a witness do not constitute a presumption.

(2)  The mere failure of a party to call a witness does not automatically confer an evidential benefit on the opposing party.

(3)  Whether any inference is drawn will depend upon the quality of the primary facts on which the inference is based.

(4)  This is a fact sensitive matter, and it will vary from case to case.

(5)  An inference will be drawn only if the circumstances of the case persuade the judge that it is appropriate to draw that inference.

(6)  But there is no inference which can be drawn until there is some fact raised by evidence which could be regarded as positively proving or suggesting that fact.

(7)  In this case, there is no sufficient evidence of primary facts on which an inference could be drawn, where there is in effect little more than bare assertion on multiple-hand hearsay material, provided indirectly by someone whose credibility is in any event in doubt.

(8)  I accept Mr Sussex’s submission that there was thus simply no reason for CNBM to trouble Song, its former chairman, to step into the witness box to answer speculation and unsubstantiated rumour.

(9)  I also accept that the plaintiffs were able to put their case in cross-examination of Chang, who confirmed that it was he (not Mr Song)  who was involved in the detailed negotiation of the 2014 Subscription.

(10)  Hence, it is neither appropriate for any adverse inference to be drawn, nor is it in any way unfair that no such adverse inference is drawn.

420.  I also note that there were apparently other witnesses whom the plaintiffs might have themselves called, who were somewhere in the chain of hearsay dealt with in the Zhao Yongkiu affirmation.  They were not called.

421.  There is also something of a chronological mismatch on the plaintiffs’ own case, which suggests that Zhong Sr contacted Song in March 2014 as Zhang Sr was facing the Contributing Employees’ call to terminate the Employee Trusts.  But it is common ground that the earliest of the Trust Actions were commenced only in August, September and October 2014 (though I accept there was earlier complaints, and the petition submitted to the Jinan Municipal Party Committee, requesting an investigation into Zhang Sr’s alleged misconduct sometime in March 2014).

422.  Once the Zhang-Song Agreement is rejected, the essential basis of the allegation of dishonest knowledge pleaded against CNBM falls away.  But, I also find that there was nothing suggesting, from CNBM’s perspective, that there was anything untoward about the 2014 Subscription.  I accept that it was the result of arm’s length negotiation between CNBM and CSC, and was the subject of a proper internal and board level discussion at CNBM. 

423.  There was detailed analysis in various broad papers, as well as professional advice, considered by the CNBM board prior to its approval of the 2014 Subscription.  Those papers included, amongst other things, feasibility analysis of the proposed placement, consideration of CSC’s production capacity and financial position, the appropriate issue price and lock-up period, and the strategic benefits and risks of the transaction.  As Mr Sussex has pointed out, it was not suggested at trial that the documents identifying CNBM’s apparent careful deliberation and decision-making process was somehow a facade or charade.

424.  There were also sound commercial reasons for CSC to enter into the 2014 Subscription.  The public announcement on 27 October 2014 – which had been adopted in draft by the CSC Board, recorded in its admittedly brief minutes of the Board meeting on that date – recorded the reasons as being (1)  to establish a bond between CSC and CNBM so as to lay the foundation for future cooperation on industry technology, business operations and the like, (2)  to replenish the Group’s working capital and reduce its gearing level, and (3)  implementing national industrial policies, including to reduce disorderly competition.  Similar reasons were provided to the SEHK to justify the 2014 Subscription and in the Offering Memorandum for the 2020 Notes.

425.  I accept James Li’s evidence that he was not otherwise involved in the negotiation of the subscription price and that he supported the transaction after taking into account these three reasons stated in the announcement, regarded as proper.

426.  The plaintiff’s expert, Mr White, accepted he had no reason to doubt these statements.  The plaintiffs’ factual witnesses also did not doubt the synergistic benefits of the Subscription Agreement. Both Stephen Liu and David Yen acknowledged that there were real and substantial benefits in the strategic partnership.

427.  The external evidence – in the form of research analysis from JP Morgan – also supports the need for CSC to have improved its financial metrics.  Further, the net gearing ratio was reduced, from 61.2% before, to 56.9% after the 2014 Subscription.  Though I do not need to set it out in detail, I note that there was also commentary from investment banks after the 2014 Subscription pointing out that it would potentially help CSC obtain better financing and ease its high gearing pressure, that the subscription price was appropriate, that there was strategic value in the transaction, and that industry discipline in Shandong would be strengthened as a result of the strategic partnership.

428.  As to the price of HK$2.77 per Share under the Subscription Agreement, and the allegation that this was at a significant undervalue, I accept the submission that – against all the other points – knowledge of undervalue would be insufficient to fix CNBM with liability.  If CNBM was not put on inquiry as to any dishonesty, it was entitled to acquire shares at what might be a bargain price.  It is correct that some of the internal documents of CNBM suggest that it knew the trading price of CSC’s shares was low by reference to the net asset value (“NAV”).  But Ms Lam did not suggest to Chang in cross-examination that the suggested undervalue, considered with other terms, was so gross that CNBM knew that CSC’s directors were acting for improper purposes. 

429.  Against the evidence which I accept and in the absence of any proper basis of the claim upon the Zhang-Song Agreement, the allegation of allotment at undervalue does not really lead anywhere.  In any event, I do not think it has been established that the price of HK$2.77 per Share was at an undervalue.

430.  The matter of the price and whether it was at an undervalue was addressed by expert evidence at the trial.  The plaintiff relied upon the evidence of Mr David White, and CNBM on the evidence of Ms Fang Fang Li.  Each of them provided an individual expert report, and together gave a Joint Statement. 

431.  They agreed that, based on the information available, the market approach, particularly based on forward-looking trading multiples, would be the most appropriate approach to address the issues on which the expert opinion had been sought.  Both agreed that they could express their conclusions with more confidence in a range of prices that is commercially acceptable, rather than pinpointing a single dollar figure.  Further, whilst both experts agreed the NAV per share of CSC as of 30 June 2014 was HK$4.06, neither expert relied on the NAV per share of CSC as the basis for calculating the value of those shares, as it was not based on forward-looking variables. That was consistent with Chang’s evidence that when assessing the value of CSC’s shares, NAV was just one of the indicators.

432.  I do not think there is any need to go through all of the evidence, and how it developed from the time of the reports to the end of cross-examination.  It suffices to say in broad terms that I prefer the evidence of Ms Li. 

(1)  I accept that the broker reports relied upon by her, which post-dated the profit warning given by CSC, identified an average ‘target price’ of HK$2.65 (which Mr White in effect accepted as the better indication of fair value at the time). 

(2)  As to Mr White’s argument that there might have been a control premium, that was based on the idea that CSC should not have allotted shares to CNBM but should have tried to extract a higher price with the premium from ACC.  Of course, that would have been a different transaction.  But in any event, ACC would only pay the control premium if it was going to get control, but as there was no evidence that it was going to get control, then it would not pay a premium.  Further, if ACC was not going to pay a premium, there is no reason why anyone else would pay a premium if not going to get control. 

(3)  In any event, the suggestion that control would be relinquished to ACC (or CNBM)  is essentially contrary to the main thesis of the plaintiffs’ case that the Zhangs were not going to give up control.

(4)  I accept Ms Li’s evidence that the value per share which would be the commercially acceptable price in an arm’s length transaction would be HK$2.71, a 2.10% discount to the closing price on the last trading day before the announcement was made.

(5)  I also accept her view as to the relevant considerations which would be taken into account by CSC and CNBM as part of the negotiations from that starting price.  For example, the price range based on discount rates to comparable precedent transactions in the same industry was HK$2.35 to HK$2.77, the price range derived from discount/premium rates to precedent placements of Hong Kong-listed companies three months prior to the date of the Subscription Agreement was HK$2.23 to HK$2.79; and there was a three-year lock-up undertaking to which CNBM would be subject.

433.  I accept, and myself reach, the conclusion that the price payable under the Subscription Agreement clearly fell within the commercially acceptable price range to the boards of both CSC and CNBM in an arm’s length transaction.

434.  It can also be noted that the plaintiffs have not sought to impugn the purposes, motives or bona fides of CSC’s other directors, including NED Xiao Yu and INEDs Wang Jian, Hou Hualiang and Wu Xiaoyun, who also approved the 2014 Subscription.  The plaintiffs have not sued the non-executive directors, or pleaded that they shared the improper purposes that allegedly motivated the Original EDs.  Nor is it pleaded that those non-executive directors were aware of the alleged Zhang-Song Agreement.  The vague assertion that the directors other than the Original EDs exercised no meaningful control over Zhang Sr is far from clearly or properly pleading that the non-executive directors failed to exercise independent judgment in vetting and approving the 2014 Subscription.  There is also no basis for rejecting, and indeed I accept, James Li’s evidence that, prior to May 2015, the non-executive directors did occasionally disagree with the proposal put forward by the Original EDs.

435.  The claim of breach of fiduciary duty in this regard is dismissed.  The claim of dishonest assistance made against CNBM in this regard is also dismissed.

N.  Change of Control Clause in 2020 Notes

436.  This is Issue 4.3.

437.  The pleaded case for the plaintiffs is that the Original EDs, acting in bad faith and on behalf of the Concert Party, caused the Group to restructure its terms of borrowing by adding the 2020 Notes COCC, and that CSC did not need to issue the 2020 Notes because the 2017 Notes were not yet due.   It is pleaded that this was done in an illicit attempt to entrench Zhang Jr as CSC’s chairman, and to thwart any attempt by Tianrui (or anyone else)  to prevent the Concert Party from obtaining full control of CSC, and therefore the Group.

438.  Other than the suggestion that the Original EDs were acting on behalf of the Concert Party (i.e. the Zhangs themselves, together with CNBM and ACC), there is no pleaded case against any of the other director-defendants or CNBM or ACC.  Of course, none of the other defendants were yet directors when the 2020 Notes issuance was approved by the CSC Board by its written resolution of all directors on 27 February 2015.  They are not said to have already been parties to the alleged conspiracy.  It is not even suggested that, at that date, ACC was a party to the alleged conspiracy.

439.  In passing, it can be noted that none of the four other directors who signed the written resolution have been made the subject of this claim.  Nor does the RRASOC plead any complaint about the way in which those directors acted in this regard; there is no plea that they were either acting in bad faith or otherwise in breach of their fiduciary duties to CSC. Instead, the pleading completely ignores the fact that the Original EDs simply could not have passed the resolution on their own, because they were only three out of seven directors.

440.  It is noteworthy that, despite not having any personal knowledge of the relevant matters, neither of the plaintiffs’ factual witnesses spoke to Credit Suisse or any of the other directors, who were recorded to have considered the issue of the 2020 Notes in their terms to be in the commercial interests of CSC.  This seems typical of those witnesses decisions not to seek potentially relevant information available from other sources, perhaps because of a fear that the answers thereby obtained might not fit their desired case theory.

441.  But the claim is, in any event, a bad one.

442.  To use the phrase adopted by Mr Wou, CSC was not a “mom-and-pop grocery shop”.  It was a listed company, and its activities were regulated by the SEHK.  Likewise, CSC’s counterparties to the 2020 Notes were sophisticated investment banks and international investors.  It is, therefore, wholly unsurprising that the terms of the 2020 Notes were the product of negotiations between CSC and those sophisticated counterparties, in close consultation with their respective legal advisers.  CSC’s legal advisers were NRF.

443.  Those facts on their own demonstrate the inherent unlikelihood that the Zhangs and James Li – as only three out of the seven directors of CSC – could somehow dictate the terms of the 2020 Notes, including the COCC, in an “illicit attempt to entrench” their own control.

444.  I accept Zhang Jr’s evidence that the COCC was included in the 2020 Notes at the request of Credit Suisse, in the context of and against the backdrop of the Trust Actions, which litigation created a risk factor and threatened the loss of Zhang Sr’s voting power and the triggering of sub-clauses (2)  and (3)  of the existing COCC in the 2016 and 2017 Notes.  Though James Li was not directly involved in the negotiation for the restructuring and issuance of the 2020 Notes he recalls from a report given by the then head of the Finance Department Li Hengwan, that the issuing banks requested the inclusion of the varied terms of the COCC.  I also note that Li Hengwan gave consistent evidence in the Trust Action, specifically identifying by name the senior manager at Credit Suisse who made the request for the terms of the COCC.  That evidence was adopted by Zhang Jr, without specific challenge.

445.  Indeed, in the Offering Memorandum of the 2020 Notes this risk factor was expressly recognised, as follows (bold in original):

We rely on our key management personnel.

Our performance and implementation of our business plan rely, to a significant extent, on the service of our Directors, particularly [Zhang Jr], our chairman, executive director and general manager, [Zhang Sr], our Executive Director and other senior management.  We do not maintain key employee insurance.  In the event we lose the services of any key management personnel, we may be unable to identify and recruit suitable replacements in a timely manner or at all.  In addition, if any member of our senior management were to join or form a competitor, we may lose some of our no-how and customers.  These could materially and adversely affect our business and results of operations.  We may also need to employ and retain more management personnel to support our expansion into new target markets.  If we are unable to hire and retain qualified management personnel, our business and growth may be adversely affected.

We, our management and/or our shareholders may become involved in legal and other proceedings from time to time, any of which may materially and adversely affect our business, liquidity, financial position, results of operations or cash flow.

…

[Reference to the Trust Actions] … If [Zhang Sr] ceases to be the trustee of the Trusts or if the Trusts are terminated and/or dissolved as a result of such ongoing disputes and legal proceedings, the voting power of [Zhang Sr] in our company will fall below 25.0%, causing a change of control under the 2016 Notes and the 2017 Notes, which will require us to offer to purchase the 2016 Notes and the 2017 Notes at 101% of their principal amount plus accrued interest. See “- We may not be able to repurchase the Notes upon a change of control” and “Description of other Material Indebtedness – 8.5% Senior Notes due 2016 and 10.50% Senior Notes due 2017”.

446.  The reference to “key” management personnel is unsurprising, where the purpose of the COCC is to protect the issuing banks and noteholders.  David Yen accepted in evidence that: (1)  the COCC in the 2020 Notes was there to protect the lenders, and the noteholders, from a form of change which might imperil the value of the Notes; (2)  the COCC in the 2020 Notes had to be reworded from the previous 2016 and 2017 Notes to avoid the risk of immediate triggering, and (3)  it is normal to tie a COCC to the identity of the chairman.

447.  I also take into account that CSC had the benefit of the funds advanced under the 2020 Notes at a time when it was being urged to refinance its loans, and its credit rating was at risk.

448.  Ms Lam suggested that the issuance of the 2020 Notes at a premium caused a net loss to CSC and was uncommercial, on the basis that the premium paid for early redemption of the 2017 Notes, in addition to the costs of issuing the 2020 Notes, exceeded the savings in interest payable. But I accept Mr Sussex’s submission that that suggestion proceeds on a flawed premise.  As he submitted, the overwhelming likelihood was that the 2017 Notes had to be refinanced by a further US dollar bond issuance, just as in the past proceeds of bond issuance were used to reduce or refinance existing borrowings.  Looking at the profitability and nature of the business, the ability to repay US$400 million of principal in 2017 through the mere accumulation of profit seems at least highly unlikely.  Hence the refinancing costs would have had to be paid in any event.  Further, CSC was able to take advantage of a new bond issuance in 2015, avoiding the risk that such ability would be gone or lessened in 2017.  In effect, the 2017 Notes were replaced, or extended by three years, on a substantially reduced interest rate.

449.  I also accept the submission made by various Counsel that, as it turned out, the Board’s decision was timely.  Unbeknownst to the Board at the time, Tianrui was “lurking in the shadows” (an evocative, and I think accurate, phrase used by Mr Wou).  When Tianrui became the largest shareholder of CSC with 28.16% in mid-April 2015, that not only led to the abrupt suspension of trading of CSC’s shares on 16 April 2015, but it triggered the COCC clause in the 2016 Notes (and would have triggered the same clause in the 2017 Notes, had they not already been repaid).  There can also be no serious dispute that Tianrui’s proposed resolutions to reconstitute the CSC board by its 1^st and 2^nd Requisitions would, if passed, have had the same triggering effect.  Indeed, the resolution passed under the 3^rd Requisition did trigger the obligations to repurchase both the 2016 Notes and the 2020 Notes.

450.  Any criticism that the board resolution was a written one, so that the Board did not hold a physical meeting to discuss the matter, is misplaced.  It is quite clear that there was prior full circulation of the relevant documents, including drafts of the Notes themselves as well as the relevant Offering Memorandum and additional explanatory materials.

451.  Lastly, I would note that there is no pleaded alternative case that, if the Original EDs were not acting for and on behalf of the Concert Party, they were nevertheless acting in bad faith for their own individual benefit.

O.  Share Options

452.  This is another part of the claim which was originally made elsewhere on the suggestion of the CSI Minority Shareholders, and subsequently adopted in this action.

453.  In this action, the references to the Share Options are pleaded specifically by reference to those previous proceedings, at §§23 and 26, as follows:

23.  On 13 March 2015, in HCMP 360/2015, the Honourable Mr Justice Harris granted leave to the Petitioners to bring and continue unfair prejudice proceedings issued pursuant to sections 732 and 733 of the Companies Ordinance (Cap. 622)  on behalf of CSI (then controlled by the Zhangs)  against the Zhangs, CNBM and CSC (then controlled by the Zhangs), in which the Petitioners sought similar remedies to those which they sought in the 2014 Action plus orders restraining the Zhangs and CSC from approving the grant of new share options in CSC (the “Share Options”)  at HK$3.68 per share, in order further to change the composition of CSC’s body of shareholders, for the benefit of the Zhangs and CNBM.  As a condition of the grant of leave, the Petitioners discontinued their 2014 Action.

26.  On 6 July 2015, in HCMP 593/2015, Mr Justice Harris dismissed CSI’s application for an interlocutory injunction to restrain CSC from acting on the abovementioned Shared Options (pleaded in paragraph 23 above)  and from holding a CSC shareholders’ EGM to consider whether to approve the Zhangs’ Share Options.  The main reason given by Mr Justice Harris for dismissing CSI’s application was that he was persuaded by leading Counsel then instructed for CSC that there was no necessity for the proposed interlocutory injunction because, if CSI succeeded at trial, CSC could be required to compensate CSI by paying to it damages sufficient to enable CSI “to buy in the open market sufficient shares to regain an interest of 25%” of CSC and (based upon the figures pleaded in paragraph 28 below)  CSC had sufficient resources with which to pay any award of damages that the Court may make against it.

454.  Though under the heading of “The earlier Misconduct” (which appears above §21 of the RRASOC, and which section continues until the next heading of “The Recent Misconduct”, appearing above §33), it is difficult to see what those paragraphs are intended to lead to in this action, unless merely to provide some context of various misconduct alleged against the defendants (as colour for the actual breaches alleged in this action). 

455.  On its face, the pleading merely recites what has been said in other proceedings, and seems to suggest that the complaints about the Share Options will fall for resolution in those proceedings.  There does not seem to be any specific plea of any breach of any particular duty or that the Options Scheme was otherwise wrongful, and there is no part of the prayer in the RRASOC which seems to flow from the reference to the Share Options. 

456.  It is also telling that none of the Agreed Issues references the Share Options (though I accept that there are some apparently alleged overt acts which are separate from the alleged breaches of fiduciary duty also constituting overt acts).  I do not think that the question of the Share Options can be taken to be wrapped up as “overt acts” mentioned by reference to paragraphs of the RRASOC in Issue 1.2, not least where the relevant paragraphs §§23 and 26 were not included as paragraphs of the RRASOC giving rise to issues about breach of fiduciary duty under Issues 4.1 to 4.13.

457.  Ms Lam submitted that, despite the pleading points taken by the defendants in respect of the Share Options at various points during the course of the, it must always have been clear to the Original EDs that the Share Options are relied upon as both overt acts and unlawful means of the alleged conspiracy.  The fact that the Share Options offering has not been pleaded as capable of founding an independent cause of action for breach of duties does not, she said, detract from the fact that the Share Options had been pleaded as an unlawful means for the purposes of the conspiracy at §20A of the BPSOC.

458.  I am afraid I disagree.  It does not seem to me that the Share Options has actually been pleaded as an unlawful means for the purposes of the conspiracy at §20A.  I do not think it is sufficient simply to say that some general comment about a complaint made in other proceedings must have been understood, or should be taken to be understood, to be a pleading of unlawful means for the purposes of the alleged conspiracy in these proceedings. In short, it is not sufficient as a plea in this action of an overt act merely to recite allegations made by other people in another action (even if involving a complaint against some of the defendants to the present action).  Further, as I have said above, the way in which the reference to the Share Options has been pleaded rather suggests that the complaint will be dealt with and resolved in the other proceedings, not these.

459.  Nevertheless, I can go on to make relevant findings.

460.  Ms Lam submitted that the Share Options were offered in breach of the Original EDs’ fiduciary duties, specifically the proper purpose duties and bona fide duties, amounting to an unlawful means by which the conspiracy was carried out.  She said the proper purpose for which the power to grant share options was delegated to the directors was primarily to incentivise and/or reward the grantees.  However, the immediate substantial or primary purpose of the Share Options was not that, but rather to dilute CSI’s shareholding and thereby entrench the Zhangs control over CSC. 

461.  Ms Lam also submitted that the absence of any meaningful documentary support, and the obvious effect of diluting CSI’s shares to below 25% if exercised, at the time of the Zhangs facing an increasingly pressing prospect of losing control over CSI, as well as the unprecedented scale and nature of the Share Options, showed this primary purpose. 

462.  Further, Ms Lam submitted, in the absence of any explanation why the Share Options were offered in such unprecedented scale at that particular moment, and where the Original EDs self-interest was involved, pointed to a breach of the duty to act bona fide.

463.  Mr Wou’s submissions were short on this point.  He said that the plaintiffs’ case is very detached from reality because:

(1)  At the time late 2014/early 2015, the Trust Actions were at an early stage, and KLG had not yet applied for receivership over the shares.

(2)  CSC was not a small operation, but a listed company, with activities regulated by the SEHK and its Board advised by external legal advisers, so that it is absurd to suggest that Zhang Sr caused CSC to grant share options.

(3)  The complaint is that the dilution in CSI’s shares below 25% would take away its power to block the passing of special resolutions, but there is simply no suggestion that any major decision requiring special resolution was on the cards at the time.

(4)  The Share Options scheme was designed by external professional advisers (Deloitte Consulting).

(5)  Pursuant to the scheme, the 458 grantees had up to 10 years to exercise their options, and common sense dictates that they would likely exercise options over time rather than collectively in one go, and certainly not immediately upon issue.

(6)  Even if they did (which did not in fact happen), the dilution effect (0.32%)  would have little impact on the balance of power between shareholders – as Harris J had observed in HCMP 593/2015, when he noted that though CSI’s shareholding would drop below 25%, it is highly unlikely that if CSI voted against the special resolution it would be passed.

464.  Mr Wou also pointed out that Harris J had observed that the claim in respect of the Share Options lay on fairly soft foundations, and that there was nothing unusual for a public company to grant share options as incentives for its employees.  I agree, and I also agree that is important to note that the shares offered on 27 January 2015 were offered pursuant to an option scheme adopted by CSC on 14 June 2008, and the company had offered shares to employees in 2011.

465.  Ms Lam sought to place reliance on the significant difference of scale between the options granted in 2011 (200,000 in total), as against those in 2015 (over 203 million altogether, and over 43 million for the Zhangs alone).  But the explanation for that can be found in the recommendations summarised in a proposal for the Remuneration Committee to the Board.  CSC had experienced a 50% drop in its net profit for the first half of 2014 when compared to the same period in 2013.  The cash and equivalents held were about half of the short-term borrowing.  Significantly, S&P had raised concerns about the Group’s liquidity, and lowered the company’s credit rating.  The company faced difficulties in distributing year-end bonuses under the 2014 bonus plan in cash in January 2015.  As a consequence, alternatives to making cash payments were considered, and the suggestion of the grant of share options was thought to be in the interest of CSC.

466.  In December 2014, Deloitte was chosen to advise and assist in the implementation of a long-term incentive plan, and the feasibility study was conducted by it.  Deloitte prepared a proposal which was subject to certain revisions following discussions between the staff responsible and representatives from Deloitte.  Deloitte also conducted a survey of potentially affected employees about the proposal, which was finalised on 13 January 2015 and circulated to the Remuneration Committee, which responded with comments.  Deloitte also produced an announcement, notices and acceptance letters, which were necessary for the implementation of the proposed share options, which documents were provided to directors of CSC for their consideration.

467.  Later draft written resolutions of the Remuneration Committee were prepared by NRF and provided to members.  In distinction from the 2011 share options, which were granted in addition to the relevant remuneration received by employees, the 2015 share options were granted as part of their remuneration to replace the year-end bonus payable under the 2014 bonus plan.  Nevertheless, employees retained the voluntary choice either to receive a cash bonus or share options.

468.  Those points seem to me to provide a strong answer to Ms Lam’s suggestion that the Share Options represented an unexplained yet significant departure from past practice, or that there was little documentation on which the Board made the decision.  I also take into account that Stephen Liu had to admit that the approval of the Share Options scheme as an alternative to giving out cash bonus was done in CSC’s best interests.

469.  Lastly, in so far as the Share Options are supposed to be brought into the allegation of conspiracy, that also rests on the foundation of the Zhang-Song Agreement.  But, as I have held above, there was no such agreement.

P.  Open Offer

470.  In closing submissions, Ms Lam summarised the plaintiffs’ case on the Open Offer as based upon the following salient facts:

(1)  On 20 July 2015, CSC announced that ACC and CNBM had approached them for a possible VGO whereby they intended to purchase the entire share capital of CSC.

(2)  On 11 August 2015, the CSC Board considered the Open Offer to be a desirable route and resolved that it be handled by a Finance Committee.

(3)  This was followed by ACC’s and CNBM’s own announcements of the possible VGO on 12 August 2015.

(4)  By 9 September 2015, submissions were made to the SFC and SEHK for approval.  On 14 September 2015, SEHK rejected the application on the basis that it would be inappropriate for CSC to proceed with the proposed Open Offer.

471.  Hence, Ms Lam submitted, the Original EDs had instructed solicitors to explore the Open Offer with SEHK and SFC primarily to shore up ACC’s and CNBM’s (i.e. the Zhangs’ new allies’)  shareholding in CSC, by diluting CSI and Tianrui.  This was done at a time when they were losing control of CSI, and was in breach of their proper purpose duties and bona fide duties.

472.  With respect, that summary submission seems to me to contain a number of leaps of logic.  In any event, in so far as it is based upon the existence of the conspiracy, I have already rejected that. 

473.  As to more detail, it is convenient to start with the potential VGO.  Though the potential VGO was referred to in the RRASOC, there is no remaining pleaded challenge to the lawfulness of or the intention behind the announcement of the potential VGO.  Therefore, it is not open to the plaintiffs to run any unpleaded assertion, as was put to some of the witnesses as the reason for or the use of the potential VGO.  That assertion was summarised by Ms Lam in her submissions that there is an irresistible inference that the potential VGO was put forward for a tactical purpose, namely to influence Au-Yeung J’s decision in respect of how the Receivers ought to vote at the 1^st EGM on 29 July 2015.

474.  As Mr Sussex pointed out, that unpleaded assertion is pregnant with the suggestion that the ostensible reasons for the potential VGO were false, a suggestion which is not open to the plaintiffs to make, not least in light of the abandonment of allegations of dishonesty and bad faith against most of the directors, ACC and CNBM.

475.  In any event, there is no reason to doubt the potential VGO as anything other than a genuine endeavour put forward in the then prevailing circumstances.  First, ACC and CNBM went to the trouble and expense of engaging Goldman Sachs to provide advice on the potential VGO well after the hearing before Au-Yeung J.  Goldman Sachs was going to charge an advisory fee of a minimum US$2 million, even if the potential VGO did not go ahead.  In total, at least six professional advisers were retained for their services. The potential VGO even remained on the table until May 2016.

476.  Further, I accept Doris’ evidence that she came up with the idea of the potential VGO on around 18 July 2015, because it might give an exit to CSI and Tianrui, with the purpose to “stabilise the boat”.  In this regard, I reject the submission made by Ms Lam that there might be something wrong in this situation because the logical consequence would be that ACC and CNBM would end up with control over CSC.  They would only do so by buying out Tianrui and CSI (i.e. giving them an exit), and surely stability is a good thing.  Of course, it is now known that that was not the kind of stability which Tianrui and the Receivers wanted, because they wanted total control.

477.  I also accept that the decision to bring the possible VGO to the attention of Au-Yeung J was because it was thought to be a development of which the Court should be informed, and that there was nothing untoward about that.  In any event, Au-Yeung J expressly disregarded the evidence of the potential VGO when holding that it would be wrong for the Receivers to vote the CSI shares in support of the 1^st Requisition.

478.  In passing, I also note that Au-Yeung J expressly recognised that CNBM and ACC had legitimate concerns that the resolutions proposed by Tianrui at the time were strategic moves to strengthen and embed its control over CSC, to the exclusion of the other substantial shareholders.  She was also not convinced ads to the value of Tianrui’s claimed financial backing.

479.  As to the Open Offer itself, the RRASOC or BPSOC contains only one paragraph regarding the proposed Open Offer.  That is §29, which reads as follows:

29.  In about August or early September 2015, the Original Executive Directors, acting in breach of their fiduciary duties to CSC and for and on behalf of the Concert Party, instructed Hong Kong solicitors purportedly on behalf of CSC, to explore with the SEHK (while SEHK trading in CSC’s shares was still suspended)  and the SFC (who had a known policy of not waiving the Takeovers Code’s requirement of shareholders’ approval)  the possibility of CSC making an open offer for the issue and sale of new shares in CSC priced at between HK$3.48 and HK$3.61, without obtaining the prior approval of CSC’s shareholders.  Both the SEHK and the SFC rejected the Concert Party’s proposal in mid-September 2015.

480.  The breach of fiduciary duty allegation is raised only against the Original EDs.

481.  As pleaded, there is a recognition that the proposed Open Offer remained at an exploratory stage before the SEHK ruled against it.  But the pleading does not explain how merely exploring with the SEHK the possibility of an Open Offer amounted to a breach of fiduciary duty. 

482.  It was Ms Lam, in her closing submissions, who sought to explain how.  She submitted that it was necessary to look at the chronology of events, as follows:

(1)  The first time the Open Offer was officially proposed was at the 11 August 2015 board meeting.  The Board decided that the Open Offer should be handled by a Finance Committee, specifically tasked with exploring this option.

(2)  No one then mentioned the letter of support from CNBM in February 2015, or even considered reaching out to CNBM.

(3)  The Finance Committee consisted of James Li (as chairman), Champion, Shen and Wu Xiaoyun. 

(4)  The directors had been advised by both Morgan Stanley and lawyers that the Open Offer was unlikely to succeed because it would not resolve the public float issue.

(5)  However, irrespective of the difficulties, James Li pressed ahead with the necessary arrangements.

483.  Ms Lam suggested that “one might query” whether the meetings of the special Finance Committee were genuinely required since the meetings were held to confirm what had in effect already been done.  This seems to be a suggestion that the whole process of setting up and conducting exploration via the Finance Committee was a sham.  Ms Lam also said what may be inferred from the chronology is that it was not a run-of-the-mill case of a board seeking advice as to how best to proceed, but rather that the decision had already been made in favour of the Open Offer.

484.  As she put it, the “real reason” behind the enthusiasm shown towards the Open offer was likely because it was a route by which CSI and Tianrui’s interest would be diluted and simultaneously an opportunity would be conferred on ACC and CNBM to further increase their shareholding in CSC.  This, she said, comes from looking at the three scenarios put forward in the Morgan Stanley proposal, where both scenarios 2 and 3 “would have allowed CNBM and ACC to increase their shareholding by subscribing 1.1013 billion new shares either in full or in part (and where scenario 1 was unlikely to occur)”.

485.  Those three scenarios were as follows:

(1)  Scenario 1: All shareholders subscribe the open offering shares according to the pre-offering shareholding percentage.  This would mean that the shareholding percentage of each shareholder remains unchanged.

(2)  Scenario 2: A minority of shareholders give up subscribing the open offering shares and ACC and CNBM accept such shares in 100%.  This would mean that the shareholding percentage of ACC and CNBM after the offer will increase.

(3)  Scenario 3: A minority of shareholders give up subscribing the open offering shares, but no other shareholder is willing to accept such shares in 100%.  This would mean that since ACC and CNBM subscribe partly the open offering shares abandoned by some other shareholders, the shareholding percentage of ACC and CNBM after the offering will increase.  In the meantime, the underwriter will become a shareholder.

486.  In essence, Ms Lam was relying on the assertion – which was supported by the various defendants in their evidence – that either scenario 2 or 3 was more likely to materialise than scenario 1.  This was in part because of the broad consensus that Tianrui’s financial capabilities should be doubted, and because ACC and CNBM were in a better financial position.

487.  The starting point of the analysis should be that by August 2015, CSC and the Group faced a serious liquidity problem. There were insufficient disposable funds to meet the short-term liabilities falling due at the end of August, and further significant liabilities falling due before the end of the year.  At the Board meeting held on 11 August 2015, the Board discussed various options to address the liquidity problem. Eventually, it was resolved that the special Finance Committee be appointed to explore financing options.

488.  The contemporaneous documents show that Morgan Stanley was engaged to provide advice, and after weighing different options, Morgan Stanley advised the Board to pursue the option of an open offer – on the basis that it was the “most feasible” option.  That was then explored with the SEHK, with the assistance of solicitors.  I see no proper basis for any criticism of those steps.  I also note that Morgan Stanley’s proposal expressly excluded the option of a private placement of shares for two reasons, one being that the shareholders had not granted a general mandate, and the other being that the funds raised would not be sufficient to meet CSC’s funding needs.

489.  In any event, the theory that the Open Offer would, and was intended to, enable ACC and CNBM to obtain control of CSC by increasing their collective shareholding over that of Tianrui and CSI is fraught with difficulties.

490.  First, the possibility of triggering a mandatory general offer (“MGO”)  had been considered by Morgan Stanley in its Open Offer proposal.  By reference to Rule 26.1(d)  of the Takeovers Code, and the collective voting rights between ACC and CNBM, if their collective holdings were to increase by more than 2%, that would trigger the MGO requirement.  In the original draft confirmation sought by the CSC Board, it was envisaged that ACC and CNBM would subscribe not only to their assured entitlement, but also would apply for excess shares not taken up by other shareholders.  However, Doris refused to sign the draft confirmation or give any binding commitment to subscribe for shares in excess of ACC’s pro rata entitlement in the Open Offer, as this would immediately trigger a MGO – and such an undertaking by ACC and CNBM should not be necessary given the underwriting arrangement in place.  The revised statement deleted the reference to application for excess shares, and changed the confirmation to contain only a statement of intention to subscribe rather than an obligation.

491.  The result was that if the Open Offer were implemented as per the Morgan Stanley proposal, ACC and CNBM could only collectively acquire less than an additional 2% of shares, without triggering a MGO.

492.  Further, which of the three scenarios might in fact occur was obviously a matter of conjecture, the result depending on decisions to be made by numerous persons over whom the defendants obviously had no influence or control, including Tianrui.  For example, Tianrui might have had, or might have been able to raise, sufficient funds to have taken part fully on the pro rata basis.

493.  The proposed Open Offer involved a 100:33 offer, with the total number of about 4.5 billion shares post-offer.  If CNBM, ACC and their associates fully subscribed, they would retain a 41.85% stake, whereas if Tianrui and CSI failed to participate completely, they would be diluted from 53.25% to 40.03%.  But to retain their position as the largest block of shareholders, they would only need to subscribe to 81,378,083 shares (i.e. 1.81%), which at most would be valued at under HK$294 million, even at the upper end of the proposed range of subscription prices.  As Mr Sussex correctly submitted, that is a far cry from the US$400 million (approximately HK$3.1 billion)  plus premium and accrued interest that Tianrui would have had to shoulder pursuant to its undertakings, in the event of the reconstitution of the CSC Board.

494.  There is also great force in Mr YL Wong’s submission that, if ACC were already a party to the conspiracy by May 2015 (as alleged), it would have been far more straightforward for ACC simply to have voted in favour of the general mandate at the May AGM, and so give power to the Board to allot 20% of new shares by way of private placement, without having to explore the Open Offer.  Yet, ACC voted against that mandate.

495.  I reject the allegations relating to the Open Offer.

Q.  Excessive Legal and Related Expenses

496.  At §32A of the BPSOC, it is alleged that the Original EDs have paid or incurred legal and related expenses arising out of the litigation matters referred to elsewhere in the pleading, totalling a little under HK$33.8 million.  It is the plaintiffs’ case that by causing CSC to pay or incur legal and related expenses arising out of the litigation, the original EDs bridge their proper purpose duties and bona fide duties. 

497.  Ms Lam submitted that the proper purpose for hiring and retaining lawyers and accountants was conferred primarily to vindicate or protect the interests of CSC.  However the immediate substantial or primary purpose for which the power was in fact exercised by the Original EDs was to entrench the Zhang’s control over the Group, since the legal and related expenses were incurred in order to participate in the Trust Actions, cause the inclusion of the new COCC in the 2020 Notes, make the Unlawful Amendments and convene the 3^rd EGM in Jinan.

498.  Ms Lam submitted there was no evidence of real or actual consideration of the amount or necessity of incurring the expenses, to the extent it had been incurred or indeed at all.  Applying the objective test, no intelligent or honest person would have believed the expenses were made for the benefit of CSC.

499.  I see some force in the suggestion, for example, that if CSC incurred costs in the Trust Actions or litigation to which it was not a party, the question arises as to how or why those costs were incurred for a proper purpose on a good faith basis.  However, there is a more fundamental problem.

500.  I have already rejected above the complaints about the COCC in the 2020 Notes, and I will reject below the complaint about the 3^rd EGM in Jinan.  Some of the cost claim seem to overlap with or duplicate other aspects, such as the costs incurred in relation to the Cayman Proceedings, and I will also reject below the complaint in that regard.

501.  But, in any event, it cannot be that the expenses incurred in relation to those two matters were wholly unnecessary.  This point has perhaps been implicitly (or unwittingly)  recognised in Ms Lam’s submissions that the case relates to “excessive” legal and related expenses. 

502.  Yet, for example, no attempt has been made to explain what are the “excessive” expenses relating only to the COCC in the 2020 Notes (as opposed to the legal costs of advice and so forth for the 2020 Notes in general), or only to the location of the 3^rd EGM (as opposed to costs necessarily incidental to considering and holding any requisition leading to an EGM).  Indeed there is no explanation or evidence as to how the inclusion of the COCC, or how the alleged breach of holding the EGM in Jinan per se (as opposed to in Hong Kong), increased or led to unnecessary or additional costs or expenses, and if so in what amounts.

503.  As regards the Cayman Proceedings, in light of the acceptance by the plaintiffs’ factual witness that in the then prevailing circumstances it was not inappropriate at least to consider the option of an application for JPLs, again there was no attempt to seek to say where the line might be drawn between those expenses properly incurred in that consideration, and those expenses improperly incurred from a point when the consideration should have led to their cessation.

504.  Indeed, the unsatisfactory approach adopted by the plaintiffs gives rise to further difficulties that some expenses that are now claimed as damages were in fact incurred entirely properly, and without any connection to any alleged breach or conspiracy.  I accept Mr Lung’s submission that a clear example is the expenses paid to Beijing Jumhe Law Offices – item (h)  in §32A – which expenses were in fact incurred to retain the firm to conduct an independent investigation into the Minority Shareholders’ complaint, which is not alleged to be wrongful conduct at all (and, if anything, which investigation should have been welcomed).

505.  The particular amount of just over HK$464,000 under that item (h)  may not be thought significant.  But this lack of precision tends to identify the scattergun and attempted catch-all approach adopted by the plaintiffs.  Indeed, that the plaintiffs have, by the end of the trial, in effect limited their claim to the sum of only approximately HK$33.8 million X the question whether real value of bringing the claim was not seen in the dollar recovery, but in the inflicting of the perceived necessary revenge or retribution on the members of the prior Board.

506.  There was no order for a split trial, and the plaintiffs bore the burden of proof at the trial.  If the plaintiffs cannot prove the specific sums claimed, there is no alternative properly open to them to seek an order to damages to be assessed.

507.  I conclude that the Plaintiffs have failed to overcome the burden of proving loss caused by the

R.  13 October 2015 EGM

508.  There are no matters relating to the conduct of the 2^nd EGM on 13 October 2015, or the immediate run-up to it, identified by reference to any breach of fiduciary duty in the Agreed List of Issues.  Hence those events are relevant only to the conspiracy claim.

509.  The case pleaded as regards the 2^nd EGM in the RRASOC, now BPSOC, is at §35, as follows:

35.  At the CSC shareholders’ EGM held on 13 October 2015, the Original Executive Directors with the assistance of CNBM (in particular through the 4^th Defendant)  and ACC (in particular through the 5^th Defendant), all acting in bad faith and in accordance with a pre-arranged script which the Original Executive Directors had caused to be prepared and sent to the 4^th and 5^th Defendants before the noon Board meeting that proceeded the 13 October 2015 EGM, for and on behalf of the Concert Party:-

(1)  procured the 4^th Defendant, to act as the Chairman of the meeting;

(2)  in disregard of Court Orders made against the Zhangs in relation to the CSI Receivership Shares, procured the 4^th Defendant (pursuant to a stage-managed statement of objection on behalf of ACC)  unlawfully to disallow CSI from voting its CSC shares in defiance of the C.A. Ruling;

(3)  in anticipation of the Caymans Proceedings, through the coordinated pre-arranged voting of CNBM and ACC (supporting the votes of the requisitionist, Tianrui)  caused Zhang Senior, the 3^rd Defendant and Ms Wu Xiao-yun to be removed as CSC directors; and

(4)  in the manner pleaded in sub-paragraphs (2)  and (3)  above, caused the Tianrui requisition’s proposals (which, but for the matters pleaded in sub-paragraph (2)  hereinabove, CSI would have supported)  for the removal of all the other Board members – to be defeated.

510.  In her closing submissions, Ms Lam also abandoned the reference in §35(3)  to “in anticipation of the Caymans Proceedings”.  Ms Lam also made it clear that the bad faith allegation is maintained only against the Original EDs, and not Chang or Doris.

511.  The three main topics upon which there was cross-examination for the plaintiffs about the 2^nd EGM were (1)  what happened at a meeting in Shanghai in the days beforehand, (2)  the disallowance of CSI’s votes under Article 14.7 of CSC’s articles of association, and (3)  the removal of Tianrui’s resolutions under the 2^nd Requisition from consideration at the 2^nd EGM, as a consequence of non-compliance with Article 16.4 of CSC’s articles of association.

512.  Ms Lam focused on the meeting in Shanghai between 10 and 12 October 2015 – therefore immediately before the 2^nd EGM on 13 October 2015 – involving the Zhangs, ACC and CNBM.  Her allegation was that the three parties decided in Shanghai on the outcome of the events to occur on 13 October 2015.  Little was said in cross-examination about a Board meeting held at 12 noon that day (“Pre-EGM Board Meeting”), and what actually occurred at the 2^nd EGM at 2:30 p.m. was itself only cursorily examined.

513.  First, I accept that the Shanghai meeting was mentioned in these proceedings as early as January 2018 in the witness statements filed by Doris (for herself, and for ACC).  Despite the passage of time between that and the trial, no amendment was sought to make an allegation in the terms of what Ms Lam put to the witnesses at trial.  As Mr YL Wong correctly submitted, this is yet another objectionable part of the moving feast.

514.  Anyway, I accept the evidence of Chang and Doris as to what occurred prior to the 2^nd EGM.  In summary:

(1)  The main purpose of the Shanghai meeting was for a discussion with the Zhangs about the upcoming EGM. 

(2)  ACC and CNBM did discuss changes to the Board, and in particular the possible removal of Zhang Sr, James Li, and Wu Xiaoyun.

(3)  The point of the meeting was for the two Chairman of CNBM and ACC to give Zhang Sr some ‘face’, and to persuade him to step down amicably from CSC. 

(4)  This was on the basis that Zhang Sr was the focal point of disputes, and his departure might help settle things down within the company.

(5)  With Zhang Sr’s agreement (albeit reluctant)  to step down, and his tacit acceptance that he would not stir up other employees to cause trouble, ACC and CNBM later voted in support of the resolutions to remove him, James Li and Wu Xiaoyun at the 2^nd EGM.

(6)  The discussions in Shanghai were consistent with what ACC had told the Receivers at a meeting with them on 30 June 2015, namely that ACC in fact supported the removal of Zhang Sr, but that drastic action should be avoided to minimise further disturbances (incidentally another piece of evidence which completely negates the alleged conspiracy).  Amongst the discussed drastic action to be avoided was the removal of Zhang Jr as Chairman, because of the concern that it would trigger the COCC of the 2020 Notes.

(7)  The basic stance on the part of ACC and CNBM to oppose the 2^nd Resolution had been decided on long before the Shanghai meeting, and there was no need to have discussed it at that meeting.

(8)  Indeed, shortly after the 2^nd Requisition was raised on 2 September 2015, in the Board’s public announcement of 4 September 2015 it had been stated that removal of the existing EDs and INEDs would trigger the COCC and early redemption.

(9)  There was further discussion at a Board meeting on 19 September 2015, where the minutes recorded that Tianrui’s proposal was against CSC’s interest, and the Board’s voting recommendation should be against the motion, as was stated in the subsequent Circular on 22 September 2015.

(10)  The Circular also re-stated the point about triggering the COCC, that the Board’s voting recommendation would be against the motion, and that the Board had been informed that CNBM and ACC would follow the Board’s recommendation when voting at the 2^nd EGM.

(11)  As indicated, all those steps and the clear stance of CNBM and ACC was known well in advance of the Shanghai meeting.

515.  Moving to the other two points dealt with in cross-examination, as can be seen from the above extract of the pleading, the Article 14.7 issue is pleaded (but it is not included as an issue under the breaches of fiduciary duty), but the Article 16.4 issue is not pleaded (and therefore it is necessarily also not included as an issue under the breaches of fiduciary duty).

516.  In the absence of any allegation of bad faith or any claim of breach of duty, the complaint directed against Chang as to his conduct as chairman of the 2^nd EGM cannot be relied on as the unlawful means of any conspiracy as against him (or, by intended extension, CNBM).  In any event, it is settled that a chairman’s decision at a general meeting, which is provided in the articles to be final and conclusive, can only be challenged if it were made in bad faith.  It is also settled that, in acting as chairman of a general meeting, the chairman does not act as a representative of the directors of a company, but as a representative of the members.

517.  Similarly, the plaintiffs have confirmed that no allegation of bad faith is raised against Doris.  Therefore, nothing she did (or, by intended extension, ACC)  can be relied on as the unlawful means of any conspiracy. 

518.  But, there is in any event no basis to impugn the decision of Chang taken as chairman at the 2^nd EGM.  I can deal first with the run-up to the Pre-EGM Board Meeting.  In this regard, I accept the slightly varying but in thrust mainly consistent evidence of Chang and James Li, which demonstrates as follows:

(1)  A meeting took place on the evening of 12 October 2015 between Zhang Jr and Chang.  (I accept that Doris was not present, and James Li’s recollection that he and she were is, on balance, incorrect.)

(2)  Zhang Jr suggested that Chang should chair the 2^nd EGM the next day, and Zhang Jr relayed the lawyers’ advice that the EGM chairman would have the right to disallow CSI voting shares.  Zhang Jr also requested Chang to exercise that right.

(3)  Chang accepted the decision that he should be chairman, albeit that he did so with some reluctance.  But as regards the CSI voting issue, he strongly asked for a board meeting to be convened before the EGM.

(4)  I accept the board meeting was convened at short notice, as a result of that discussion, and it was not a matter pre-arranged in the Shanghai meeting.

(5)  Early on the day of the 2^nd EGM, Chang received an email from Yao Tianjun, head of securities services division of CSC, calling the Pre-EGM Board Meeting at 12 noon, to discuss whether Chang should be the Chairman of the 2^nd EGM and whether the CSI’s votes could be validly exercised.

(6)  A little later, Yao Tianjun sent another email, asking Chang if he had any comments or suggestions on an attached draft Word document entitled (in translation)  ‘EGM Hosting Speech’.

(7)  The draft speech referred to the Board meeting to be held at 12 noon.

(8)  Later that morning, Chang also received (a)  a letter from Deacons, containing the advice that the Chong Hwa Undertaking continued to apply, despite a judgment of the Court of Appeal in the case involving Zhang Sr’s challenge to their appointment, (b)  an opinion from Solomon Harris which advised Zhang Jr that it would not be unreasonable for a chairman of the 2^nd EGM to reject CSI’s votes if the chairman received independent Hong Kong law advice that CSI’s representative was invalidly appointed as precluded by the Chong Hwa Undertaking, and (c)  a letter from Zhong Lun law firm (“ZL”), referring to a letter from Zhang Sr disputing the admissibility of votes to be cast on behalf of CSI, and urging the CSC Board take legal advice.

(9)  Incidentally, it can be noted that Chong and Hwa themselves considered it necessary to apply for release from the Chong Wah Undertaking on 15 October 2015 (i.e. even after the 2^nd EGM).

519.  At 12 noon on 13 October 2015, the Pre-EGM Board Meeting was held, attended by Zhang Jr, James Li, Chang, Doris, Champion, Wu Xiaoyun, Zeng and Shen.  Lawyers of FBD and NRF also attended, as legal advisers of CSC.  Though Doris was in attendance, she did not take part in the discussion or vote, as Champion managed to dial in so that she did not need to act as his alternate.  I accept what happened at the meeting is as follows.

520.  During the meeting, the directors proposed that Chang accept their appointment as chairman, as he was the only director physically present who was not sought to be removed under the 2^nd Requisition.  The Board also discussed whether CSI’s shares should be discounted.  The legal advisers in attendance advised that it would be lawful for the chairman of the 2^nd EGM to determine that CSI was unqualified to vote.  Alternative approaches were explored.  Chang himself expressed that it might be more reasonable to adjourn the 2^nd EGM, but his view did not ultimately prevail.

521.  Eventually, the CSC Board resolved at the Pre-EGM Board Meeting that: (1)  Chang would act as chairman of the 2^nd EGM (by unanimous decision); (2)  upon considering the Hong Kong and Cayman Islands legal advice received, there were doubts as to the validity and legitimacy of the voting qualification of CSI, so that clear guidance should be given to Chang to declare at the 2^nd EGM that CSI’s votes will not be valid (by majority decision, Zhang Jr opposing).

522.  I would note at this point that David Yen agreed in his evidence that it was proper and appropriate for the Board to consider Zhang Sr’s letter and give Chang advice as to what to do as chairman of the coming EGM.

523.  There is a transcript of the 2^nd EGM, which was held as scheduled in the afternoon of 13 October 2015.  Chang presided as chairman of the meeting, and declared at the outset that, because of the disputes over the shares and voting rights, CSI did not have the right to vote at the EGM.  Thereafter, David Yen questioned Chang on the basis of the decision and sought an adjournment of the EGM, and a representative of ZL (as ACC’s proxy)  stated that ACC objected to CSI’s right to vote.  Representations were also made by Samuel Ngo of KLG against the idea that CSI’s votes would not be valid.  Nevertheless, as chairman, CSI again stated that CSI should not have the right to cast its votes.

524.  There is no allegation that ACC acted in any way improperly at the EGM by stating its objection to CSI voting its shares.  Where it is entirely usual for the likely chairman of a general meeting to have a pre-prepared script, there cannot be any complaint or assumption of “stage management” or improper pre-determination.  Further, where there is no allegation of bad faith against the person acting as chairman, his decision was final and conclusive and not amenable to challenge.

525.  At the 2^nd EGM, the resolutions to remove Zhang Sr, James Li and Wu Xiaoyun were passed, by an overwhelming majority of 95%.  Even if Chang had allowed CSI to vote, Tianrui would not been able to appoint any of its nominated directors to the CSC Board, given the failure to comply with Article 16.4 of the Articles.

526.  Indeed, turning to the Article 16.4 issue, I have set out that provision above.  I have already pointed out that this point is not pleaded, and is therefore not open to the plaintiffs to invoke as a part of the conspiracy.  But, in any event, there is simply no dispute that the requirements of Article 16.4 were not complied with.  Further, the CSC Board had no duty to remind the requisitionists, who were legally advised, of compliance with the requirements under the Articles (even though there had in fact been a reminder to shareholders of those requirements of Article 16.4 in the circular on 22 September 2015).

527.  The theme of most of the cross-examination on this issue was on the basis that there was advice that it was almost certain that a third requisition would be made, leading CSC to incur further expenses and tying up management time, whereas the failure to comply with Article 16.4 was a technical point which could potentially be ratified at the EGM.  From that, it was suggested to James Li that the removal of items 1 to 5 of the 2^nd Requisition was not in the interests of CSC and was not a proper use of the CSC Board’s power.  Reliance was also placed on an earlier email from Maples dated 18 September 2015 which suggested that CSC might include an additional ordinary resolution to seek approval from the members to ratify non-compliance, whilst at the same time being unable to point to any express provision in the Articles that permitted acceptance of a defective nomination.

528.  I accept Mr Sussex’s submission that the language of Article 16.4 is inconsistent with the power on the part of the shareholders to waive or ratify non-compliance.  The provision states in terms that no person shall, unless recommended by the Board, be eligible for election.  The material proposals did not concern candidates recommended by the Board, and so the relevant persons put forward “shall not be” – and were not – eligible for election.

529.  Before leaving the topic of the 2^nd EGM, it can be pointed out that the removal of Zhang Sr as director (supported by both ACC and CNBM)  is fundamentally inconsistent with the alleged conspiracy, and the pleaded unlawful object of assisting Zhang Sr, in collaboration with ACC and CNBM, to continue to control CSC (Limb 1, until it was abandoned).

530.  There was also the perfectly legitimate reason to avoid the removal of Zhang Jr as Chairman of CSC, as that would trigger the COCC in the 2020 Notes, which CSC could not afford to repay.  I therefore accept the submission that not to have removed Zhang Jr was to protect CSC’s interests, rather than injure them – and I note that David Yen accepted in evidence that he could not criticise the decision to keep Zhang Jr at that stage, to avoid triggering the COCC.  Nothing relating to the matters of complaint on the 2^nd EGM can give rise to a breach of proper purpose duty or bona fide duty (not pleaded)  or support the alleged conspiracy.

S.  Board Appointments on 14 October 2015

531.  This is Issue 4.8.

532.  By reason of the removal of three directors at the 2^nd EGM, the CSC Board was left with only two INEDs and two members of the audit committee, resulting in a lower number than the minimum numbers required under the Listing Rules.  The CSC Board had also lost two EDs.

533.  On 14 October 2015, the CSC Board appointed three directors, namely Doris as ED, Cai Guobin as NED and Ou Chin-der as INED.  The Board also re-designated Chang from a NED to become an ED.

534.  As pleaded at §36 of the BPSOC, the complaint is as follows:

36.  In anticipation of their intended Caymans Proceedings, the Original Executive Directors, with the collaboration of ACC and CNBM, in breach of the Original Executive Directors’ fiduciary duties to CSC and acting unlawfully procured the Board to cause CSC to breach Rule 26.4 of the Takeovers Code (which is cited in paragraph 27 above)  by causing CSC:-

(1)  On 13 October 2015 (the same day as the abovementioned CSC shareholders’ EGM)  to appoint:-

(a)  the 4^th Defendant (of CNBM)  as a CSC executive director;

(b)  Mr Cai Guo-bin (a vice-president of his nominator, CNBM)  as a CSC non-executive director;

(c)  the 5^th Defendant (the chief financial officer of her nominator, ACC)  as a CSC non-executive director; and

(d)  Dr Ou Chin-Der (nominated by ACC)  as a CSC non-executive director.

(2)  On 14 October 2015, to appoint the 5^th Defendant, on the nomination of ACC, as a CSC executive director.

535.  However, in closing submissions, the first phrase “In anticipation of their intended Caymans Proceedings” was also abandoned. 

536.  A useful starting point for the analysis might be to note that though the Issue as framed raises the allegation against each of the Original EDs, it is difficult to see how the issue could concern James Li.  He was himself removed as a director at the 2^nd EGM on 13 October 2015.  In so far as additional directors were appointed afterwards to fill casual vacancies, they were appointed by the remaining members of the Board, which did not include James Li. 

537.  Indeed, in her closing submissions, in her summary of this aspect of the claim, Ms Lam appeared to recognise this fact by only making reference to the Zhangs as having acted in breach of duties by causing CSC to appoint the directors on 14 October 2015 (though I note that she then went on to make reference to all of the Original EDs as having acted in breach of the proper purpose duty and bona fide duty).  In any event, I accept that there can be no good claim against James Li in this regard. 

538.  Indeed, Zhang Sr was also removed as a director at the 2^nd EGM held on 13 October 2015.  He also provided a (probably ante-dated)  letter claiming to have resigned even earlier, on 1 October 2015. I have already noted that the RRASOC asserts that despite his 13 October 2015 removal, Zhang Sr nonetheless continued to be a shadow director of CSC. However, no particulars were provided as to how he maintained a shadow directorship, and this was not a topic pursued at the trial. 

539.  It was also not a point run in closing submissions, where Ms Lam only sought to emphasise (1)  Zhang Sr’s reluctance or unwillingness to leave the Board, but that he was “forced to do so” by CNBM and ACC, and (2)  the bargain which Ms Lam said “one might surmise” was that the parties had already reached some form of agreement during the Shanghai meetings that in exchange for Zhang Sr’s removal or resignation, Zhang Jr would remain on the board and CNBM and ACC would increase their representation on the board. Leaving aside that that was not the pleaded case, it seems to me that those submissions are contrary to any suggestion that Zhang Sr remained a shadow director, or otherwise remained subject to fiduciary duties after his removal from the Board on 13 October 2015.

540.  Further, even against the Zhang Jr, the appointments were really only said to be wrongful because they caused CSC to be in breach of Rule 26.4 of the Takeovers Code.  That is how Issue 4.8 is framed.  Further, Ms Lam’s submission on the proper purpose duty was that the immediate substantial or primary purpose for which the power of appointment was in fact exercised was to assist CNBM and ACC in taking further control over the board of CSC in breach of Rule 26.4.  A similar point was made in relation to the bona fide duty. 

541.  Yet, despite the intense scrutiny given at various times by the regulators, they have never raised any issue on non-compliance with Rule 26.4 of the Takeovers Code.

542.  In any event, where no firm “offer” had been made, it must follow that neither CNBM or ACC could be “offerors” for the purposes of Rule 26.4.  I accept Mr YL Wong’s submission that the Executive’s role is important over how the Takeover Code provisions are to be construed, and their application to the circumstances of any particular case, and that the Executive has in fact provided guidance on the purpose and interpretation of rule 26.4, namely that it applies only to MGOs, with its purpose to encourage offerors to proceed with the MGO without undue delay.  Ms Lam’s invitation to interpret the word “offeror” more “expansively and purposively” is rejected.

543.  More fundamentally, by the end of the trial, I thought the plaintiffs had accepted that Rule 26.4 of the Takeovers Code was not engaged, because the potential VGO was not a firm offer.  Lastly, the allegation that there had been a breach of Rule 26.4 was not put to any witness.

544.  In light of the allegation that all parties to the alleged conspiracy (which I have rejected)  must have agreed that there were to be no Tianrui representatives on the Board (despite being the largest shareholder of CSC), it is worth making the following comment.  Tianrui was plainly not seeking just some representation on the Board.  Rather (in concert or combination with the Receivers)  Tianrui was seeking total control and membership of the Board (despite being only one – or with CSI, two – of the shareholders of CSC).  References in the evidence to “the other side” need to be seen in that context.

545.  Indeed, this is one of the areas where Ms Lam’s submissions made it look like that she was actually acting on the instructions of Tianrui – as the complaint she emphasised was the lack of “Tianrui candidates on the board”.  It is trite that there is no requirement for any particular shareholder, even a substantial one, to have any representation on the board.

T.  Introducing Unlawful Amendments

546.  This is Issue 4.9, and it relates to an allegation made only against the Zhangs.

547.  The claim is to be found in §§40-41 of the BPSOC, as follows:

40.  In anticipation of their impending ouster as pleaded in paragraph 38(4)  above (the “Anticipated Ouster”), in or about late October 2015, the Zhangs acting in bad faith and for their own benefit and in dishonest breach of their fiduciary duties to each of the Plaintiffs purported (using a company chop which they had misappropriated from Pioneer)  to amend the memorandum of association and articles of association of Shandong Cement inter alia so as:-

(1)  to reduce the number of permitted Shandong Cement directors from 6 to 3 (namely, the Zhangs and their loyal nominee, Chen Xue Shi – collectively the “Zhangs Board”);

(2)  to delete the article reserving the right of its shareholder (Pioneer)  to replace Shandong Cement’s directors at any time and replacing it with an article which prevents the Zhangs Board from being removed within 3 years of their 28 October 2015 re-appointment (unless any director is disqualified from acting as a director under PRC Company Law);

(3)  to delete the article precluding the company from paying directors remuneration;

(4)  to add a new article which empowers the Zhangs Board (not the company’s owner, its shareholder, Pioneer)  to decide all matters relating to any merger or dissolution or restructuring of the company;

(5)  to delete the article reserving to the shareholder (Pioneer)  the right to appoint the company’s chairman and to replace it with an article conferring such power upon the Zhangs Board;

(6)  to delete the article reserving to the shareholder (Pioneer)  the right to require the commencement (or, failing that, to commence itself)  of legal proceedings against the company’s directors and management (i.e. the Zhangs Board)  and to replace it with an article conferring such powers upon the Zhangs Board themselves;

(7)  to delete the article providing that, should the company be wound up, the winding up is to follow the PRC Company Law procedures for the winding up of foreign owned enterprises and to replace it with an article providing that, should the company be wound up, the winding up is to follow the PRC Company law procedures for domestic companies; and

(8)  to delete the article reserving to the shareholder (Pioneer)  the right to amend the company’s articles of association and to replace it with an article conferring such power upon the Zhangs Board (collectively, the “Unlawfully Altered Articles”).

41.  Thus, the net effect of the misfeasant purported amendments to the Shandong Cement articles of association (i.e. the Unlawfully Altered Articles)  was:-

(1)  to remove CSC’s ability (through Pioneer)  to control and to manage its own wholly-owned subsidiary Shandong Cement and its subsidiaries;

(2)  contrary to the best interests of Shandong Cement, to entrench for 3 years the Zhangs Board as the non-removable directors of Shandong Cement;

(3)  to prevent or bar Shandong Cement from bringing any Mainland China legal proceedings against the Zhangs Board including any legal proceedings in respect of the Zhangs misappropriation of Shandong Cement’s assets (or other acts of misfeasance against Shandong Cement);

(4)  essentially, to enable the Zhangs to misappropriate the 1^st to 3^rd Plaintiffs’ most valuable subsidiary, Shandong Cement; and

(5)  to prevent the actual owners of Shandong Cement (Pioneer and its owners HK Cement and CSC)  from making the necessary corrective amendments (“Corrective Amendments”)  to Shandong Cement’s Unlawfully Altered Articles in order to correct the Zhangs’ misfeasant theft of the Plaintiff’s most valuable subsidiary, Shandong Cement together with its gross assets of about RMB34.8 billion (see paragraph 4 above).

548.  The blue-pencilling, however, completely struck out the pleading in what was §§65-66A, under the heading ‘Ongoing misappropriation of Shandong Cement’.  That is, the entire allegation of misappropriation of Shandong Shanshui was dropped.  This is also apparently why in the plaintiffs’ opening submissions, Ms Lam claimed only the legal and other professional expenses flowing from this alleged misconduct, with damages to be assessed.

549.  By the trial, six years after the claim was first made, the plaintiffs still failed to adduce any evidence on any relevant loss, be it legal fees or otherwise.  There being no order for any split trial, the plaintiffs have simply failed to prove any relevant loss to complete the cause of action.

550.  I might also say that it is not entirely clear to me why the costs involved in pursuing legal action would not be recoverable under any appropriate costs orders made in that action, rather than as some form of damages in this one.

551.  In the circumstances, there is no need to address at any length the parties’ respective cases in respect of the alleged Unlawful Amendments, or to make any particular findings. 

552.  However, I can certainly see considerable force in the criticisms Ms Lam made of the Zhangs in this regard.  In essence, what the amendments sought to achieve is not a matter in dispute – nor can it be. The dispute arose as to the motives.  The plaintiffs suggested the motive was to misappropriate Shandong Shanshui and/or its assets (though the misappropriation claim has since been deleted).  The Zhangs suggested that the amendments were made on the basis that they considered the amendments to be in the interests of Shandong Shanshui. 

553.  Shandong Shanshui is a PRC company, and it is common ground that this aspect of the claim would be governed by PRC law. However, after consideration of the relevant evidence on PRC law, I would broadly accept the proposition that the substance of Hong Kong law can nevertheless be relevant to the proper determination of this issue.  This is because, under PRC law, the Zhangs owed “duties of loyalty and diligence” to the company, even though the label of “fiduciary” is not used.  There is clearly significant overlap with the proper purpose duty, bona fide duty and custodial duty under common law.

554.  There is real force in Ms Lam’s submissions that the substantial purpose for which the power was in fact exercised was to entrench the Zhangs’ positions as directors of Shandong Shanshui, and hence their power over the Group’s actual operations.  This can be seen from the following:

(1)  The collective effect of the amendments was that the Zhangs would have had at least three more years of, in effect, absolute control over the operations of Shandong Shanshui – which the consequent unjustified conflict of interest.  The three-year period is not easy to reconcile with the suggestion made by the Zhangs in these proceedings that the amendments were temporary measures to protect Shandong Shanshui from a predator (when Zhang Jr was not able to provide any convincing explanation in evidence as to how these were only temporary measures, and when such measures would be reversed if at all).

(2)  The timing points to the same conclusion.  The resolution in respect of the amendments was passed on 14 October 2015, immediately after the 2^nd EGM on 13 October 2025, when Zhang Sr had most reluctantly been removed as a director of CSC.  It may also not be coincidence that the resolution was passed on the same day as the 3^rd Requisition.

(3)  After Au-Yeung J had on 6 January 2016 ordered the Zhangs to execute corrective amendments to Shandong Shanshui’s articles, the Zhangs failed to carry them out.  Ultimately, the corrective amendments had to be performed by the Registrar.

555.  I do not think Mr Wou’s submissions relating to the government working group (“GWG”)  installed by the People’s Government of Jinan City at Shandong Shanshui detract much from the above submissions.  It may well be that the GWG was set up to supervise the Group’s assets, business and operations conducted through Shandong Shanshui and its subsidiaries, and that it was the GWG which was provided active hindrance to Tianrui and the Receivers from obtaining complete control over Shandong Shanshui.  But, even if correct, those seem to me to be rather different matters than the amendments themselves.

556.  If I was required to make findings, I would likely have accepted the plaintiffs’ case on this aspect.  However, that the amendments to the articles were made in the way that they were, and in light of the apparent refusal or intransigence to make the ordered corrective amendments, this only shows more unlikelihood that this breach was connected to any part of the alleged conspiracy, or that the nature of the conspiracy as alleged in reality existed.

U.  Jinan EGM

557.  This is Issue 4.11.

558.  With respect, this part of the claim was – to adopt and approve a word used by many of Counsel for the defendants – “hopeless”.

559.  The original and pleaded suggestion on behalf of the plaintiffs was that it was “unprecedented” to hold a general meeting of shareholders of CSC in Jinan.  The evidence clearly establishes the contrary. There have been at least a total of nine EGMs or AGMs held in Jinan, with at least one each year since 2009 until the material events in 2015.  In fact, it was only the two EGM’s in July and October, triggered by the 1^st and 2^nd Requisitions, which were held in Hong Kong.  Further, David Yen accepted in evidence that it was not unusual for CSC to hold AGMs and EGM is in its headquarters at Jinan (which raises the question why he could ever have thought it appropriate to sign the statement of truth of the pleading which alleged it to be “unprecedented”).

560.  Further, to suggest that the holding of the EGM in Jinan was a breach of fiduciary duty, or was for a collateral purpose intending to injure CSC’s interests, is a nonsensical assertion.  The location of the EGM would not realistically affect the interests of CSC in the way suggested.  Nor has there been suggested any factual or legal basis for alleging that it was unlawful to hold the EGM in Jinan.

561.  It is also telling how the case on the Jinan EGM was dealt with by Ms Lam at trial.  Initially, she put to Zhang Jr that the true reason to call the EGM in Jinan was because he wanted to control the outcome of the EGM.  Zhang Jr gave the perfectly reasonable answer that he did not think he could control the outcome of the EGM, because the voting was by the shareholders.  Ms Lam is about to move onto the next topic before I asked her whether she was going to put to Zhang Jr how he could control the outcome of the EGM by its being held in Jinan.  Then Ms Lam put that by calling the EGM in Jinan, that would “inconvenience, amongst other people, Tianrui and CSI”, and that Zhang Jr could prefer parties that he considered friendly with him, for instance ACC and CNBM (with which two propositions Zhang Jr disagreed).

562.  When it came to the other witnesses, Ms Lam repeated the inconvenience idea.  But there is nothing in this idea.  Tianrui is based in the Mainland, and it is difficult to see how an EGM in Jinan could inconvenience Tianrui.  Zeng said during her cross-examination that “the entity of CSI” was also in the Mainland.  On the other hand, ACC is based in Taiwan, and it is difficult to see how an EGM in Jinan could bring advantage to ACC. Nor has anyone ever suggested any practical difficulty in getting to Jinan, or voting by proxy.  I reject the suggestion that the intention was to inconvenience Tianrui or the Receivers.  In any event, as a matter of fact, representatives of Tianrui and CSI were able to and did attend the EGM in Jinan (David Yen amongst them)  for the purposes of adjourning it to Hong Kong.

563.  The explanation for holding the 3^rd EGM in Jinan was recorded in the Board minutes of 31 October 2015, namely that from the perspective of saving costs and enhancing inefficiency the directors decided that the general meeting should be held at the conference room of the headquarters of the Group in Jinan.  That reason was also explained by Doris and Champion and Zeng in their evidence, which I accept.  I reject the point put to Zhang Jr by Ms Lam in cross-examination that the reason recorded in the minutes was not the true reason.

564.  The other allegation pleaded that holding the EGM in Jinan was in order to avoid the jurisdiction of this Court in Hong Kong was rightly not pursued at trial.

V.  Cayman Proceedings

565.  This is Issue 4.12.

566.  This is another area where it is claimed that the various parties acted in accordance with a “pre-arranged programme”.  The core of the claim is that:

(1)  On 5 November 2015, the CSC Board held a meeting to consider and deliberate the then current financial situation of the company, and the measures to be taken accordingly.  The minutes recorded that the directors unanimously considered that the crisis was yet to be resolved, and it was worth considering the appointment of provisional liquidators.

(2)  On 10 November 2015, the CSC Board held another meeting at which the directors were recorded to have unanimously concluded that there was no better option for CSC than to file a winding-up petition in the Cayman Islands to facilitate an application for the appointment of JPLs.

(3)  The plaintiffs assert that by resolving to commence the Cayman Proceedings, the directors breached their proper purpose duties (the Zhangs, Chang, Doris, Champion, Zeng and Shen)  and bona fide duties (the Zhangs).

(4)  It is alleged that the purposes of holding the meeting and passing the 10 November 2015 Resolution were for Zhang Jr, Chang, Doris, Champion, Zeng and Shen:

(a)  to pre-empt the December EGM, because they anticipated that all the members of the Board would be removed and replaced, and

(b)  to enable the JPLs to be recruited by the Concert Party to take over the functions of the Board and thereby to facilitate a scheme of arrangement involving the issue of new CSC shares whereby the Concert Party might increase its shareholding in a manner that would give the Concert Party control of CSC.

(5)  The plaintiffs assert that the 10 November 2015 Resolution was null and void, and any steps taken by the defendants in pursuance of that resolution were unlawful and invalid.

(6)  In response to the fact that the Board actually sought and obtained independent legal advice on the advisability and merits of making application in the Cayman Proceedings before its commencement, the plaintiffs aver that the minutes of the board meeting on 10 November 2015 were a self-serving, cosmetic exercise designed to give the Board the appearance of independence.

(7)  The plaintiffs accept that the main justification relied upon for the Cayman Proceedings was that CSC was facing a serious liquidity crisis by late 2015.  However, they assert that this was “merely the ultimate motivations or reasons for the application, whose immediate effect would be to pre-empt the 3^rd EGM and prevent the Tianrui candidates from joining the board”.

567.  It can be noted that no allegation is made against James Li – rightly, because he was removed as a director on 13 October 2015 – and even though he had significant involvement in the consideration of the Cayman Proceedings. 

568.  Further, in so far as the allegation is made against Zhang Sr (presumably on the basis of his being a shadow director, notwithstanding having been removed as a director on 13 October 2015), I have already explained why I think that must fail. 

569.  Further still, where the plaintiffs have dropped the bad faith allegations against Chang, Doris, Champion, Zeng and Shen – and have accepted that they in fact acted honestly and bona fide in the best interests of the company – it seems to me that the assertion made in the penultimate sub-paragraph above (about a “cosmetic exercise” giving only the “appearance of independence”)  cannot stand, at least as against them, and therefore as against the majority of the directors who passed the relevant resolution. 

570.  It also follows, where even if he was acting in bad faith Zhang Jr could not by himself have passed the resolution, any such bad faith would not have been operative or causative.

571.  In her closing submissions, Ms Lam expressly said that, in so far as Zeng and Shen are concerned, the case against them is that they have not seriously questioned or scrutinised the others’ decision to initiate the Cayman Proceedings but have allowed the other directors’ views to dominate the board, thus failing to exercise any independent judgment.  At best, that sounds like a plea in negligence.  But there is no pleaded case in negligence against them.

572.  As to the last sub-paragraph above (as to “merely ultimate motivations”, but a different “immediate effect”), this obviously incorrectly confuses or conflates intention and result.  In any event, it is difficult to see how the plaintiffs can accept the ultimate motivation was to seek to deal with the serious liquidity crisis (for most directors on an honest basis bona fide in the best interests of CSC), yet still say that the purpose was in fact to effect pre-emption of the 3^rd EGM.  This is illogical.

573.  The starting point of the more detailed analysis is the financial context.  As already touched on above, in August 2015 CSC had started serious discussions as to the Group’s liquidity position, leading to the setting up of the special Finance Committee precisely to explore financing options.  Between August and October 2015, CSC and the Finance Committee had explored various potential financing options to address the liquidity problem (including, for example, the Open Offer).

574.  There is no dispute that CSC was certainly facing a continuing liquidity crisis by October 2015, and there were concerns on the part of at least some of the directors.  The plaintiffs do not allege that CSC’s inability to repay was untrue.  It is beyond dispute that CSC had become cash flow insolvent by the end of October 2015 (even though it remained balance sheet insolvent).  This was conceded by David Yen in cross-examination, on a number of occasions, but it is also clearly borne out by the objective evidence.  Indeed, the Group had total indebtedness of approximately US$2.55 billion.

575.  Once David Yen conceded that CSC did not have enough liquidity to repay the RMB2 billion onshore debt on 12 November 2015, there was no basis on which the plaintiffs could continue to assert untruthfulness in Zhang Jr’s affirmation that made that point.  Ms Lam also confirmed that she was not alleging that CSC’s cash flow insolvency was “self-created or false”.

576.  The evidence demonstrated that intensified competition in the cement industry since 2014 had arisen because of consolidation policies then implemented by the PRC Government.  This led to a significant decrease in the revenue and gross profits of the Group.  Further, Tianrui’s actions dealt a serious blow to the Group on a number of levels.  Its acquisition of over 28% of CSC’s shares in April 2015 led to the suspension in trading of CSC’s shares.  It also triggered the COCC under the 2016 Notes, with the resultant obligation on CSC to spend approximately US$378 million in repurchasing those Notes.  The repeated requisitions led to significant uncertainty in the market, also deterring financial institutions from lending. Market confidence in the Group was falling, and credit agencies were downgrading the credit rating of CSC and Shandong Shanshui.  Starting from June 2015, the National Association of Financial Market Institutional Investors (“NAFMII”)  issued several notices expressing concerns about the ability of Shandong Shanshui to repay its onshore debts when due, and the risk of a trigger of the COCC in the 2020 Notes.

577.  In an email dated 31 October 2015, to various legal advisers, Doris and Chang, James Li expressed his comment that matters should not be taken by adopting a passive and ad hoc approach at the first board meeting.  He said he agreed with Chang that the “other side” always takes a head start previously in court hearings and media reports.  Therefore, how to present the account of the inability to repay to win the sympathy of the judges, the investors, the media, and the employees would be a very important basis affecting whether board approval could be obtained, the Court’s order for provisional liquidation, the debt restructuring, and upon the affirmations and announcements.  Ms Lam has criticised that email, and in particular the reference to “other side”.  But I think the criticism is unfair.  As I read it, James Li was merely stating that in the face of a hostile third party which had sometimes acted first, it was necessary for CSC to be careful in its presentation of why it might take the proposed approach of applying for provisional liquidation.  The email seems to me also to show that board approval was not a foregone conclusion.

578.  As to the idea that the Cayman Proceedings were intended to pre-empt the 3^rd EGM, that does not logically follow in any event.  In evidence, David Yen accepted as correct that there is no question that the Board was actually somehow trying to use the JPLs to pre-empt the 3^rd EGM, because the consistent legal advice was that even if the JPLs were in place, then the EGM should still proceed because then shareholders could vote for the new board, even if the new board would have limited powers. There is nothing to be made of the possibility that the proposed JPLs had at some point indicated a willingness to be relatively flexible with regard to the EGM, and in fact Maples suggested that the order appointing the JPLs should provide for the JPLs to act as Chairman, and that it was anyway highly unlikely for delegation of that role to any of the directors.

579.  This logic was also contemporaneously recognised by Doris, for example as shown in an email from her dated 3 November 2015.  In that email she stated that she had kept on reminding that all significant matters must be reported to the board first, not only providing a single solution to the directors for their discussion during the board meeting.  First, this negates any suggestion of a determination to pursue any one particular course, rather than to consider potential solutions before deciding on one.  Secondly, it is not the attitude of a co-conspirator to pursue any unlawful object, or of a director seeking to breach of fiduciary duty.

580.  In her oral evidence at trial, Doris explained that by the email she intended to convey that (1)  the company was insolvent, (2)  there was a need to fulfil the duty to the creditors, to the company and to interested parties, (3)  best effort should be taken to solve the financial problems of the company, (4)  if in the end there was no other alternative, the route of restructuring would have to be selected, (5)  that would have to be done in good faith, and in a way that everyone would understand the directors had tried their best to fulfil their duty, (6)  recognising that there would be later scrutiny by anyone who may suffer loss, and acknowledging that after the 3^rd EGM there may be a new Board of Directors.  She also recognised – one might even say prophesised – that if Tianrui might not be able to pay all the money, it might seek to shift responsibility to the previous Board.  I accept that evidence.

581.  In an earlier email on 2 November 2015, Doris also stated her view that matters should be handled professionally, based on the facts, explaining why it was absolutely necessary, and to elaborate how with more time allowed part of the debt problems might be handled (flowing from the causes of CSC’s financial difficulties).  She identified that the financial difficulties mainly came from two levels, being: (1)  the surface level requiring an explanation as to the management, the operational problems in 2015 which led to the negative capital inflow, explanations regarding industrial comparisons in future outlook, and the progress of business forecast to help improve future finances; and (2)  at the core level, coming from the negative impact caused by the disputes on the shareholding, resulting in financial institutions’ refusal to extend loans and shareholders’ unwillingness to raise capital, mutually aggravating the situation.

582.  She also referred to the efforts made by herself and Chang to approach the onshore Chinese banks, as well as Taiwan and offshore banks, and gave a description (also in tabular form)  of the reasons why those efforts could not proceed.  I reject the suggestion that these efforts were simply attempts to build up an “argument” or somehow to “build the case for winding up”.  Doris’ conclusion was as follows:

The company’s capital is negatively affected by the business operations.  Raising capital and loans became impossible due to the disputes on the shareholding.  If the company is to repay its debts by assets disposal, I believe it would not be the most satisfactory solution to the creditors; and it would cause greatly affect the shareholders of the listed company.  Therefore, applying for debt restructuring would be a win-win approach.

583.  David Yen agreed in evidence at trial that the CSC Board did not rush into a decision to commence the Cayman Proceedings.  He also agreed that it was proper for directors faced with a liquidity crisis to consider applying for appointment of provisional liquidators, to stay proceedings, to negotiate and hopefully come up with a restructuring plan with creditors.  He accepted that although some might disagree with the Board’s decision to commence the Cayman Proceedings, the Board acting properly was entitled to reach that conclusion. 

584.  Indeed, as was set out in a PwC draft report dated 6 November 2015, produced as part of the consideration, the appointment of JPLs is a method commonly accepted by the Cayman Court of restructuring a company (as opposed to just being a step to official liquidation)  and is often used in conjunction with a scheme of arrangement.  It noted that once a stay is obtained, it will give the JPLs time to reach out to the Noteholders, and to put forward restructuring proposals to them.  On this company in particular, PwC opined that there was reason to believe that additional financing could be obtained in a reasonable timeframe, and additional cash could be generated through the liquidation of the Group’s current assets.

585.  As to the pleaded allegation that the JPLs to be appointed would help the co-conspirators devise a scheme of arrangement to achieve preferential allotment of shares in favour of the Concert Party, that was in effect abandoned at trial.  Further, there was no proper basis for suggesting that the proposed JPLs might act without the relevant independence and professionalism, as was grudgingly accepted by the plaintiffs’ witnesses at trial.  The idea that the JPLs might be “recruited by the Concert Party” – in effect, to join a conspiracy – is wholly without basis.

586.  Instead, during cross-examination, Ms Lam resorted to the different suggestion that if JPLs were successfully appointed, there would be a “possibility that ACC and CNBM could participate in the restructuring to a greater degree”.  This rather weak suggestion of “possibility” cannot on its own constitute any unlawful object, or identify any breach of fiduciary duty. 

587.  In any event, a greater participation in debt restructuring would not necessarily mean that ACC and CNBM would stand to obtain more allotment of shares than Tianrui and CSI.  The quantum leap involved in the proposition was cogently answered by Doris when she pointed out that with the appointment of JPL on the financing restructuring, and concerning the finance restructuring, it would require the onshore and offshore creditors, the SFC and the SEHK, and the regulatory authorities in the PRC to be involved and to give consent. 

588.  Further, debt restructuring under the hands of JPLs, and under the scrutiny of the Court, could take many forms.  That would be a matter for JPLs to consider in the best interests of CSC, its creditors, shareholders and other stakeholders, in accordance with their independent view and subject to Court approval.  It would presumably also require approval, or at least non-objection, from the Noteholders.

589.  The contemporaneous evidence shows that the Board consulted lawyers and professionals and obtained their advice.  However, it is important to note that many of the directors were not privy to the interim advices on which Ms Lam sought to rely in her cross-examination and closing submissions (mainly the preliminary correspondence by email amongst FBD, NRF and Maples).

590.  It is fair to say that the application was considered difficult, and this difficulty was recognised by the Board.  But the Board in its judgment considered the application necessary.  It is important that the final advice given jointly by Jeremy Goldring QC, Maples and FBD – expressly representing their collective view – was that: (1)  the application for the appointment of JPLs should be made ex parte; (2)  CSC’s arguments in favour of the appointment of JPLs had a reasonable prospect of success (say 50:50), and it was more difficult to be any more definitive than that until sight of the evidence to be filed by any participants in the proceedings, including the attitude of the proposed JPLs; and (3)  as regards the winding-up petition which needed to be presented as a precursor to the application, if JPLs were to be appointed, the usual course would be for the petition to be adjourned, perhaps repeatedly over a long period of time, to allow the attempts to restructure the Group as a going concern to proceed.  What would happen if the attempt to get JPLs appointed did not succeed was also discussed.

591.  I accept the evidence given by Doris, Champion and Chang that they recognised the proposed course should not be taken lightly, and that it required a conscientious assessment of its pros and cons.  They understood that the application, on its own, would be sufficient to trigger the terms of early repayment of the 2020 Notes, but with the looming default of the onshore debt approaching, the risk of early repayment was anyway inevitable.  Agreement to the Cayman Proceedings was ultimately decided to be a good way to restructure the Group financially in light of the then financial situation and with the benefit of the legal advice given at the time.  Other attempts to raise funding had not proved fruitful.  The financial situation of the Group had only deteriorated since June 2015.  There appeared to be no way to avoid the default of the RMB2 billion Onshore Notes on 12 November 2015, likely to trigger cross-default for other debts of the Group.  The Group’s liquidity position had been made worse by Tianrui’s actions, with the CSI Minority Shareholders manipulating matters behind the scene, and with the Receivers siding with them and Tianrui.  Maintaining normal production business to ensure ongoing operation appeared most beneficial to the shareholders and creditors but, where there were cash flow difficulties without financing available, having provisional liquidators to undergo debt restructuring would be the best solution in the face of operating capital deficiency.  Commencing onshore insolvency proceedings was not thought to be possible or appropriate.

592.  I also accept the evidence given by Zeng that, even if CSC did not take the initiative to proceed to apply for provisional liquidation, the creditors might do so ahead of that, so that it appeared the application for provisional liquidation was the only feasible option for consideration.  Hence, it was her understanding that the last chance of saving CSC might be lost. 

593.  Similarly, I accept the evidence given by Shen which seems to me clearly to show that he did exercise independent judgment, did not intend to pre-empt the 3^rd EGM, did not disregard legal advice on the merits of the Cayman Proceedings, and did not intend to assist the alleged Concert Party to gain control.  Given that the onshore debt was due on 12 November 2015, Shen genuinely considered that onshore debt to be more urgent.  Indeed, as David Yen accepted, the Board was not ignoring legal advice or refusing to contact creditors, but was simply prioritising the onshore debt situation which was clearly more imminent.  I also accept that Shen took appropriate care to give anxious scrutiny to Tinrui’s offer or undertaking before was rejected.  Of course, events have proved the caution adopted entirely correct.

594.  It was recognised that the Cayman Proceedings might fail, but it is fair to point out that no one envisaged or gave advice as to the basis upon which the application ultimately was refused.  The decision refusing the application was based solely on a point of law, and the Cayman Court did not make any factual finding for or against any of the parties.

595.  As to the complaint that there was no prior negotiation with the creditors, I accept that the lawyers had variously suggested the need to negotiate, on the basis that the Court might expect to be told that there had been such negotiations and their results.  However, I accept Doris’ and Chang’s evidence that they concluded – I think, reasonably – that it was impossible to do that because of the regulations of the SEHK, and that it would not be possible to negotiate only with one or two noteholders as they would all need to be told the same information simultaneously (which would be difficult if not impossible).  Further, it was recognised that it may take a significant period of time to locate all the noteholders of the 2020 Notes. There was also the complication of the interaction between the onshore and offshore debts, and the practical reality that once an announcement was made about the onshore debt, the entirety of the debt would need to be restructured.

596.  Overall, the view formed was that the proper way to overcome the multitude of complex and inter-related problems was by way of the Cayman Proceedings, which would hopefully allow an orderly restructuring of the entirety of the debt, such that the assets of CSC could be preserved, the operation could be stabilised and, ultimately, the source of cash could be regenerated.

597.  I accept – and indeed Ms Lam accepted – that at least each of Chang, Doris, Champion, Zeng and Shen honestly believed that debt restructuring as would flow from the appointment of JPLs was in the interests of the Group, it shareholders and creditors.  I also accept that Zhang Jr voted in favour of the motion with the genuine belief that CSC’s interests would be best served by the making of the application for appointment of JPLs in the then prevailing circumstances.

598.  I reject the suggestion that there was any breach of fiduciary duty.

W.  Retaining Multiple Lawyers and accountants for Cayman Proceedings

599.  This is Issue 4.7A.

600.  I am dealing with this issue out of numerical order from the Agreed List of Issues, because it seems to me logically to follow the consideration of the matter relating to the Cayman Proceedings.

601.  There is obviously some irony in, or some tension between, (1)  an allegation that the directors acted in breach of fiduciary duty by commencing the Cayman Proceedings, despite the fact that they took significant legal and accountancy advice (and, as the evidence shows, were careful to act appropriately in good faith with the benefit of that advice), and (2)  the simultaneous allegation suggesting that the directors acted in breach of fiduciary duty by retaining the lawyers and accountants who gave that advice.

602.  Essentially this issue stands or falls with Issue 4.12.  From the plaintiffs’ point of view, it falls.

X.  The Application under Section 329 of the SFO

603.  This complaint is found in §59 of the RRASOC, and is directed only against the Original EDs, which reads as follows:

59.  On the evening (Hong Kong time)  of 23 November 2015, in Hong Kong, the Original Executive Directors, acting in bad faith and for and on behalf of the Concert Party, through the 3^rd Defendant authorised and instructed Hong Kong solicitors and Counsel to make an ex parte application to this Court’s Duty Judge seeking orders intended and designed to prevent Tianrui, CSI and the Receivers from being able to vote their CSC shares at the impending CSC shareholders’ 1 December 2015 EGM.  CSC’s application was supported by an affirmation from the 3^rd Defendant purporting to suggest that the 11 named Respondents thereto may have breached the Takeovers Code.  Despite the matters which are pleaded above, the 3^rd Defendant offered no explanation as to why the Board considered it necessary for CSC to apply ex parte or as to why the application had not been made to Mr Justice Harris.  At the hearing (in respect of which no notice was provided to most of the Respondents including the Receivers, who were therefore absent), Mr. Justice Anthony Chan declined to make the ex parte orders sought.

604.  However, the issue is not included in the Agreed List of Issues.

605.  In any event, at least as regards James Li, I agree with Mr Lung that it is unclear from the pleading on what basis it is said that James Li “acting in bad faith … authorised and instructed Hong Kong solicitors and Counsel” to make the application.  As at 23 November 2015, James Li was not a director of CSC.  But a role in “instructing” lawyers was consistent with the job nature of the company secretary, and James Li acting in that way would only have been implementing what the Board had decided, and what he should follow at the practical level of giving instructions to the lawyers.

606.  Nor is there any mileage to be made from the fact that James Li made an affirmation in support of the application.  At the time, none of the directors were in Hong Kong, and it cannot be said that James Li was not the appropriate person in Hong Kong in a position to sign the affirmation. 

607.  In any event, in her closing submissions on this issue, Ms Lam did not make any reference to James Li – and asserted instead that it was the plaintiffs’ case that the section 329 application was made in breach of the Zhangs’ proper purpose duties and bona fide duties. Obviously, any attempt to include James Li in this complaint has been rightly recognised as going nowhere.

608.  Insofar as the allegation is made against Zhang Sr, he had also been removed as a director prior to that date, and I have already identified above why the suggestion that he continued to act as a shadow director has not been made out.

609.  That leaves the pleaded complaint only as against Zhang Jr. the complaint is not pursued against any other director as was, or might have been involved, in the process of the decision to make the section 329 application, or to pass the Board resolution making that decision.

610.  The basic underlying facts are as follows:

(1)  on 14 November 2015, four days after the commencement of the Cayman Proceedings, solicitors were retained by CSC to advise on a possible investigation by CSC under section 329 of the SFO and consequential proceedings.

(2)  By 16 November 2015, the terms of the mandate had been finalised (and only part of it was the possible investigation relating to section 329).

(3)  On 19 November 2015, CSC served investigation notices under section 329 of the SFO, setting a deadline for response of 20 November 2015.

(4)  Recipients of the notices included Tianrui, Bliss Talent, CSI and the Receivers, but also others including financial institutions such as Credit Suisse, JP Morgan and Deutsche Bank, and Zhang Sr.

(5)  On 20 November 2015, KLG on behalf of Tianrui sought an extension of time for responding to the notice.

(6)  On 22 November 2015, Doris sent an email to Champion, apparently following a conference with solicitors and Leading Counsel, also attended by Chang.  The email stated that the legal opinion was that the listed company should apply for a “freezing order” against all parties who do not respond.  Further, while the freezing order does not bind the exercise of voting right, further research would be made on whether this would help in applying to postpone the general meeting or requesting regulators to express views as to the voting. 

(7)  On 23 November 2015, notice was given of a CSC Board meeting to be held by telephone to be held on that day to consider making an application for freezing order by means of ex parte application in respect of the EGM on 1 December 2015.

(8)  On 23 November 2015, Doris sent an email to Champion agreeing to the resolution for her stated reasons that since Tianrui acquired the shares through illegitimate ways, and it assisted the acquisition of CSI, ignoring the interests of the company, repeatedly requisitioned for the reconstruction of the Board of Directors, which led to difficulties for the company to refinance, resulting in default in debts, and causing great losses and adverse impact on the company and interested parties.

(9)  At some point on 23 November 2015, the Board must have passed the resolution to proceed with the application (though I do not think I have seen a formal record of the resolution).

(10)  Later on 23 November 2015, the application was made ex parte, seeking that the shares in respect of which the defendants (to the application)  respectively or jointly interested be subject to the restrictions of Part XV, Division 12 of the SFO.

(11)  The skeleton argument used at the hearing explained the concerned that the sudden change of shareholdings in circumstances which indicated private arrangements or agreements existed between the defendants and/or with person or persons unknown with respect to the voting rights in the shares of CSC, there has been contravention of the SFO and/or the Takeovers Code.  It was said that the only remedy open to CSC as regards any person’s failure to comply with section 329 was to seek a restriction order under section 366.

(12)  The ex parte application was refused by Anthony Chan J.

611.  In her closing submissions, Ms Lam said that the proper purpose for which the power under section 329 exists is threefold: to induce compliance with disclosure notice, to protect the company and shareholders against having to make decisions about their respective interests in ignorance of relevant information, and to punish non-compliant shareholders.  However, she submitted, the immediate and substantial purpose for making the section 329 application was to derail the 3^rd EGM on 1 December 2015 by applying for restrictions on Tianrui, CSI and the Receivers’ voting shares, amongst others.  She submitted that this is established by reference to the absence of meaningful deliberation, the haste with which the application was made and the fact that the effect of the application was intended to restrict Tianrui, CSI and the Receivers’ voting rights amidst the board fight.

612.  I recognise that the section 329 application, which was ultimately dismissed as having no merit, gives rise to the suspicions relied upon by Ms Lam in her closing submissions. 

613.  However, the simple answer to this complaint seems to me to be four-fold.  First, the pleaded factual averment that it was the Original EDs who authorised and instructed solicitors and Counsel to make the application is not made out, when the authorisation came from result of a meeting of the Board as a whole.  Secondly, it is clear that other directors voted in favour of a resolution to make the section 329 application, and there is no allegation made that those other directors acted in any improper way, in bad faith or otherwise (in fact there is no allegation against them at all). Thirdly, even if he was acting in bad faith, Zhang Jr on his own could not have given the relevant authorisation and instructions to make the section 329 application.  Fourthly, the application could not have had the suggested effect.

614.  The thrust of the complaint (as opened on behalf of the plaintiffs at trial)  was that the section 329 application was a blatant and illegitimate attempt to derail the 3^rd EGM, and for the CSC Board to retain their control over CSC.  Reference in closing submissions seems to have been focused on the word “freezing” used in some of the communications, apparently on the assumption that what would be “frozen” is the right to vote at the EGM.  But the section 329 application would not have had that effect, even if it had succeeded.

615.  As stated above, the order sought was to declare the shares of Tianrui (and others)  to be subject to the restrictions of Part XV, Division 12 of the SFO.  Pursuant to section 369 of the SFO, the only restriction on shares under that Part and Division was that, so long as the shares are directed to be the subject of the restrictions, a transfer of those shares would be void.  The provisions are different from those applicable in, and considered by the Courts in, the UK.

616.  Therefore, the section 329 application would have had no impact on the 3^rd EGM or Tianrui’s right to vote at it. Indeed, Doris had actually pointed out that was part of the advice given by Leading Counsel (see above)  when she reported that advice to toehr members of the CSC Board.

617.  This issue cannot assist the establishment of the alleged conspiracy.

Y.  Fiduciary Theft

618.  This is Issue 4.13.

619.  The claim as pleaded is to be found in the RRASOC at §63, and the BPSOC removing the claim as it was originally extended (wholly without any basis)  against Chang and Doris.  That paragraph reads:

63.  In anticipation of the outcome of the 1 December 2015 CSC shareholders’ EGM and in order to block or impede any investigations and the criminal and civil prosecutions that would ensue therefrom, prior to 1 December 2015, in contravention of the Theft Ordinance (Cap. 210), the Zhangs together with CSC’s other then executive directors (the 4^th Defendant and 5^th Defendant) plus its company secretary, the 3^rd Defendant, all acting in bad faith and for and on behalf of the Concert Party, illegally and unlawfully removed from the CSC Office the essential books and records of CSC, HK Cement, Pioneer and the Group (the “Plaintiffs’ Records”)  including:-

(1)  all of the accounting records of the Plaintiffs and of the Group (which is also a criminal offence under the Inland Revenue Ordinance, Cap. 112);

(2)  all of the 1^st to 3^rd Plaintiffs’ bank statements and bank account records;

(3)  most of the 1^st to 3^rd Plaintiffs’ employment records;

(4)  all of CSC’s records of its dealings with the SEHK (a breach of the SEHK Listing Rules)  and with the SFC;

(5)  all the records of the abovementioned litigation to which CSC was a party; and

(6)  all computer data on the only 4 Group lap-top computers left in the CSC Office.

620.  As can be seen, though this aspect of the claim has been termed “fiduciary theft”, the claim is pitched at the level that the Zhangs and James Li committed the criminal offence of theft in contravention of the Theft Ordinance.  Indeed, as Mr Lung pointed out, the term “fiduciary theft” has no special meaning under the Theft Ordinance or general law; it only means theft committed by a fiduciary.  There are five essential elements of “theft” under section 2 of the Theft Ordinance, two of which are dishonesty and an intention permanently to deprive the owner of the property.

621.  It is convenient to deal first with the allegation in so far as it is made against James Li.  In her closing submissions, Ms Lam recognised that James Li was no longer a director owing fiduciary duties at the material time, but she submitted that his acts were nevertheless consistent with the tort of conversion, a “lesser allegation” within the allegation of fiduciary theft.  With respect, I disagree.

622.  First, there is no pleading of the tort of conversion.  Secondly, it is not possible to shoehorn the tort of conversion into a plea of acting in contravention of the Theft Ordinance.  As Ms Lam identifies, the elements of the tort of conversion are different from the elements of the crime of theft, and are (1)  a plaintiff who has a superior possessory right, (2)  a deprivation of the plaintiff’s full benefit of that right, and (3)  and assumption by the defendant of that right.  I disagree that those constituent elements are what have been pleaded in §63 of the BPSOC.  I reject Ms Lam’s invitation to rely on the “greater includes the lesser” principle.

623.  In any event, I do not think that dishonesty, or the intention permanently to deprive, has been established against James Li on the evidence.  I agree with Mr Lung’s submission that the fact that James Li handed over the records to Li Hengwen and Yao Tianjun – and prepared a list in the process, and obtained various receipts for them – is inconsistent with him having a dishonest intention or the intention permanently to deprive CSC of the records.

624.  I acknowledge that it might be said the pleaded case requires proof only on the balance of probabilities at a civil trial.  But the allegation pleaded is one of a criminal offence.  That at least requires compelling or cogent evidence before that can be accepted, even on the civil standard.

625.  I also accept that the plaintiffs’ case appears to have shifted away from “illegal and unlawful removal” to an allegation that the handover to Li Hengwen and Yao Tianjun was not authorised by the CSC Board, and hence the handover procedure was somehow inappropriate or otherwise not up to standard.  That is, however, not the pleaded case.  There may well have been imperfections in the handover procedure, but they do not themselves escalate to or give rise to a “theft”.  As Mr Lung pointed out, the two recipients at the handover were hardly strangers to CSC, seeing as they occupied very senior positions within the Group.  At the time of James Li’s departure on 25 November 2015, there were no other senior staff based in Hong Kong, and it might be thought that it was responsible of him to have arranged handover of the various records to members of the Group was just senior management for return to Jinan.

626.  For myself – though I acknowledge that Au-Yeung J may have formed a different view –  I also find it inherently unlikely that James Li would go to the trouble of preparing a handover list, and obtaining signed receipts for some information and documentation handed over, if he knew and intended that he was handing over the materials not to suitable personnel within the Group, but to the agents of Zhangs acting privately for their own purposes, trying to steal the materials, and to prevent or hinder their use against them.  First, James Li handed over the materials at the moment he was leaving the company.  Secondly, it would not have been very clever for James Li to have created that paper trail in those circumstances, and he did not come over in his evidence as someone stupid.

627.  Though I shall come back to the point below, it is also clear that at least a significant number of the items alleged to have been stolen were later recovered, having been found at the Jinan headquarters. In a Voluntary Announcement dated 31 January 2026, the Board of CSC announced that, with the assistance of the Jinan local police force, on 30 January 2015, CSC had smoothly taken over the headquarters and additional three factories of Shandong Shanshui.  The announcement also stated that, except for the seal of Shandong Shanshui, all other chops and licenses retained by the former directors had been found and returned to each of its subsidiaries respectively.  Further the company was taking stock of the books, other important documents and fixed assets of Shandong Shanshui in its headquarters. That progress would be announced when appropriate.

628.  In his evidence, Stephen Liu was not able to confirm that all books and records of CSC had been recovered, (only)  on the basis that all along they had not been sure.  Perhaps understandably, this had a ‘Rumsfeldian’ quality: there were unknown unknowns, and he did not know what he did not know.

629.  However, there is evidence in a letter dated 2 May 2019 that even items long asserted as having been missing were stated to have been found in the position of Shandong Shanshui all along.  The letter stated that, since the Board of Directors was restructured on 26 July 2018, all documents and accounts had been checked.  During the process, the documents (then listed in the letter), which were brought back by the original management members and other persons, had all along been kept in the office building of the headquarters.  Amongst those things found to have been kept all along was a data server.

630.  As to the items listed in §63 of the BPSOC:

(1)  §63(1):

In answer to interrogatories, the plaintiffs have confirmed (through an affirmation of Chang Ming-Cheng, incidentally the independent director who has authorised the continuation of these proceedings)  that those records are kept in the Financial Module of the Group’s Enterprise Resource Planning System (“EPRS”), which records for Shandong Shanshui date back to 2006, whilst those records for the other plaintiffs date back to 2009.

So, in his evidence, David Yen accepted that the allegation in §63(1)  is incorrect because it is correct to say that what he meant was that there should have been a copy of the consolidated group financial statements kept in Hong Kong, and that the allegation that there was illegal and unlawful removal of all the accounting records of the plaintiffs of the group cannot be right, because all of the accounting records were maintained in the Jinan headquarters.

This is consistent with what James Li said was the purpose of his handover.

(2)  §63(2)-(5):

In the contempt proceedings action HCMP 1574 of 2016, brought by the first three plaintiffs against the Zhangs, there was no mention of these items.  The claim, as advanced on 24 December 2015, had presumably been overtaken by events since then.

(3)  §63(6):

Under cross-examination, James Li frankly admitted that he had, for confidentiality reasons, deleted the data in his own laptop computer, after first backing up the data onto the office server.  It expressly was put to him by Ms Lam, and he agreed, that he did that of his own accord, and no one had asked him to do it.  But he also said he did not know what had happened to the other laptop computers in the Hong Kong office, as he left the company before the other staff, and this answer was not challenged.

631.  It is also important to keep in mind that the fiduciary theft allegation, advanced on 24 December 2015, was in the context that the new Board installed on 1 December 2015 were having difficulties in taking full possession of Shandong Shanshui and the various assets in Jinan, including its various books and records.  As events within a month or so after that identified, the accusation of theft from Hong Kong was a pretty strong accusation to make in circumstances when the new Board had not had much opportunity to check the truth of the position regarding what books and records were held elsewhere (though I accept Stephen Liu gave evidence that when the Hong Kong office was repossessed, there was nothing there and all books and records had been removed).

632.  Further, as Mr Wou submitted, the improper purpose pleaded – namely, in anticipation of the outcome of the 3^rd EGM, to block or impede any investigations and the criminal and civil prosecutions that would ensue – tends to show the underlying suspicion or belief on the part of the new Board that there must have been something to hide, and is little more than bare assertion based upon that suspicion or belief.

633.  Ultimately, I am not satisfied that the allegation of theft has been made out as against James Li.

634.  As against the Zhangs, Ms Lam’s first submission is that the Zhangs are seeking to reopen the issue in the present action, when they are barred from doing so because it is res judicata.  She relies on the decisions made in the contempt proceedings brought against the Zhangs in HCMP 1574/2016, because they had failed to obey court orders for delivery up and disclosure of the plaintiffs’ records.  (NB, the contempt proceedings were not brought against James Li, and he actually was a witness for the plaintiffs at the trial of those proceedings – though Au-Yeung J did not accept all of his evidence.)

635.  In the first instance decision in those proceedings (“Contempt Judgment”), Au-Yeung J made the following findings, upon which Ms Lam placed reliance:

(1)  “Before the new board of the Plaintiffs took over in early December 2015, the records in the Plaintiff’s office were stolen.  The computer data was erased.  At that time James Li was the person in Hong Kong in charge of the Plaintiffs’ Records.  That was how the December Injunction Order came about.” (§86)

(2)  “James Li claimed that the handovers were to Li and Yao “of the 1^st Plaintiff”.  I am unable to agree.  Li and Yao were sent by the Zhangs as their agents at a time when Zhang Jr was P1’s chairman.  Li had never been an employee of the Plaintiffs and had never worked in the Plaintiffs’ HK Office.” (§89)

(3)  “On the evidence, after 15 February 2016, at least items (l), (q)  and (u)  identified from James Li’s handover to Yao, some bank documents, correspondence with lawyers and regulators, the data server and some emails, were not recovered”. (§91)

(4)  “It was plainly the case that the Zhangs are still in possession, custody or power of some of the Plaintiffs’ Records; and just the data server alone would have justified a finding of breach of the Preservation Order and Delivery Over Order.  I find it proved beyond reasonable doubt that the Zhangs are guilty of Charges 1 and 2.  Their disobedience simply defeated the purpose of the Preservation Order and Delivery Over Order.” (§101)

636.  Ms Lam submitted that those same records form part of the subject matter of the fiduciary theft allegation, so that all the requirements for res judicata are satisfied: (1)  the Contempt Judgment is a judicial decision by a competent court; (2)  it is a decision of a final character; (3)  the same question is sought to be re-litigated in this action, namely whether the Zhangs have misappropriated the essential books and records of CSC; (4)  the issue concerns exactly the same parties and is part of the same action; and (5)  the findings were made under the higher criminal standard of proof, which would necessarily have crossed the civil standard applicable to the present action.

637.  Ms Lam acknowledged that the Contempt Judgment was then the subject of an appeal, and that once the Court of Appeal had handed down its judgment, that judgment (“CA Contempt Judgment”)  would become the new source of any estoppels.

638.  I have found and read the CA Judgment, handed down on 4 August 2021.  Prior to the substantive appeal, new evidence was admitted by the Court, showing that the four missing items the subject of the prior conviction had, in fact, been recovered and kept at the Jinan HQ.  The Court also admitted on a provisional basis evidence said to show that, after January 2016, it was wrong for the plaintiffs to maintain the allegation that the Zhangs had removed all accounting records of the plaintiffs because they knew that all of them (dating back years)  had been maintained in the financial module of the ERPS in Jinan HQ.

639.  However, the Court of Appeal thought it important to identify the proper context of Au-Yeung’s findings that the Zhangs were in breach.  They referred to her findings (as now relied on by Ms Lam)  and noted that she had accepted that the plaintiffs had recovered a lot of documents in and after the seizure in January 2016.  But she held that after 15 February 2016 (the date when the Zhangs were served with the orders in breach of which they were found to be in contempt)  some important records remained missing, including the four missing records, and that without the required disclosure by the Zhangs it was simply not possible for the plaintiffs to identify the volume of missing records.  Further, she had not accepted that the Zhangs no longer had access to or power to retrieve documents simply because they and their agents had been evicted from the Jinan HQ on 30 January 2016. Rather, she had been satisfied that the Zhangs in fact remained in possession, custody or power over some of the records.

640.  The Court of Appeal held that Au-Yeung J was entitled to draw an adverse inference against the Zhangs and to find the relevant charges proved beyond reasonable doubt.  It held that the new evidence and the provisional new evidence did not affect the soundness of her findings. This was essentially because it was consistent with Au-Yeung J’s conclusion that the Zhangs remained in possession, custody or control of, at the very least, the four items after 15 February 2016, and that they were only returned to Shandong Shanshui sometime between 16 February 2016 and 26 July 2018. 

641.  As there was ample evidence and a proper basis for finding the Zhangs guilty on the relevant charges, the appeal was dismissed.

642.  I accept that the matter is, therefore, res judicata as regards the Zhangs.  It does not matter whether I would or would not have reached the same conclusion on the materials before me, which were essentially the same as those at least before the Court of Appeal.

643.  However, there is no plea or evidence of any loss suffered by the plaintiffs in this regard as a result of apparently being kept out of possession of some of the records until they were returned (as the Court of Appeal thought)  sometime between 16 February 2016 and 26 July 2018.

Z.  Qilu Claim

644.  The Qilu Claim is a stand-alone claim, pursued against the Zhangs only, and relates to the transaction in which Shandong Shanshui purchased a 30% interest (“30% Interest”)  in Qilu Property Co Ltd (“Qilu”).  It is now essentially a claim in negligence.  However, that was not the original formulation of the Qilu Claim and, because Mr Wou places some reliance on the various iterations of the Qilu Claim, it is necessary to review some of the procedural background.

645.  As already identified, on 4 November 2016, CSC, CSCHK and Pioneer obtained an ex parte worldwide Mareva injunction order from Au-Yeung J against the Zhangs.  Shandong Shanshui was subsequently joined to the action and the plaintiffs’ summons to continue that injunction was amended to include Shandong Shanshui.  The Zhangs took out a cross-application to discharge or vary that injunction.  The applications were heard by G Lam J, leading to his judgment of 18 July 2017.

646.  The application for the injunction was founded on, amongst others, the Qilu Claim.  At the time the matter was heard, the Zhangs had not filed any defence.  G Lam J approached the matter by reference to the usual considerations of good arguable case, real risk of dissipation, sufficient assets within jurisdiction, and material non-disclosure.

647.  As to the Qilu Claim, G Lam J noted that the claim was based on the fact that the new management had been unable to locate the original of the equity transfer agreement (“ETA”)  – by which it was said the acquisition of 30% Interest in Qilu had been made – or any meaningful documentation, books or records of Qilu, for audit purposes.  On that basis, a note in the 2015 audited accounts of CSC identified that the Group had fully impaired the carrying amount of the investment of RMB146.88 million. Recognising that the plaintiffs had to show a good arguable case on their claims “in the sense of a case which is more than barely capable of serious argument, and yet not necessarily one which the Judge believes to have a better than 50% chance of success”, G Lam J noted one prominent feature of the case was that the Zhangs had neither applied to strike out any claim nor filed any defence, which was significant in the assessment of the strength of the plaintiffs’ case at the inter partes stage.  Therefore, his conclusion was:

The fact is that Shandong Cement had parted with substantial funds, at a time when the Zhangs were in charge of the Group and under fiduciary duties, and yet there is no document available now to show that Shandong Cement received anything of value. It seems to me that the plaintiffs have established a good arguable case for this claim, though this is not inconsistent with there being potentially arguable defences available to the Zhangs.

648.  Somewhat later, the Zhangs applied to strike out (amongst other aspects)  the Qilu Claim and the parts of Stephen Liu’s and David Yen’s witness statements which addressed that claim.  By then, the Zhangs defence had been filed in September 2017, and the plaintiffs’ witness statements had been filed in January 2018.  Relevantly, CSC had made public announcements in October 2018 and March 2019, and CSC’s 2018 annual report was issued in April 2019.  I heard the application and gave judgment on 11 March 2020 [2020] HKCFI 3033.

649.  The precise nature of the then pleading in RASOC §§44D(1)  and (2), together with the introductory part of §44D, read as follows:

44D.  In anticipation of their Anticipated Ouster and since their 1 December 2015 ouster from the Board/CSC, each of the Zhangs has committed the following further breaches of his fiduciary/constructive trustee’s duties:-

(1)  During the period July to September 2015, the Zhangs misappropriated RMB146.88 million of the funds of Shandong Cement, which, within the business records of Shandong Cement (the relevant parts of which the Plaintiffs recovered on or about 30 January 2016), the Zhangs attempted to disguise as a purported (but bogus)  purchase by Shandong Cement of a 30% interest in a Mainland Company named [Qilu Property].

(2)  Since then, in order to conceal their misconduct, the Zhangs have unlawfully misappropriated the relevant books and records of Shandong Cement and kept them from Shandong Cement’s lawful board of directors and auditors.

650.  The nature of that type of claim is clear.  It was (again)  a serious allegation of a dishonest misappropriation of a significant amount of corporate assets disguised as a real, but in fact a “bogus”, purchase transaction.

651.  In their defence, the Zhangs asserted that the acquisition was a genuine commercial transaction, and the claim was founded on the plaintiffs’ own management decision to impair the investment in Qilu, when the plaintiffs had recovered, or ought to have recovered Shandong Shanshui’s books and records since their seizure of its headquarters in January 2016.  In argument, reference was made to the fact that CSC made various public announcements admitting that it had indeed located both (a) the original ETA, and (b) the financial information in books and records of Qilu.

652.  In my judgment, I referred to:

(1)  CSC’s 2017 Annual Report, where (a)  the auditors expressed being unable to satisfy themselves as to whether any impairment loss or reversal of impairment loss should be recognised in consolidated profit or loss for the year then ended, but (b)  it was stated that as at 31 December 2017 the Group held investments in associates, including the 30% Interest in Qilu (which was not consistent with the suggestion of a “bogus” investment);

(2)  CSC’s announcement dated 31 October 2018, relating to the application made by CSC to the HKSE for resumption of trading in its shares, in which CSC stated that the issues of being unable to locate the ETA and the 2015 and 2016 financial information of Qilu had been resolved, and that CSC was conducting relevant assessment and communication with Qilu– again suggesting that the 30% Interest truly belonged to the Group, and was at its disposal;

(3)  CSC’s 20 March 2019 preliminary announcement of results for the financial year ended 31 December 2018, which in respect of Qilu stated that:

the Group was able to obtain access to the financial information and books and records of Qilu Property and Shanshui Heavy Industries as at 31 December 2018. Based on the management assessment with reference to the net book value of Qilu Property and Shanshui Heavy Industries as at 31 December 2018 as disclosed in Note 18, the recoverable amounts of Qilu Property and Shanshui Heavy Industries are assessed to be nil as at 31 December 2018.

(4)  CSC’s Annual Report for 2018 published on 23 April 2019, in which a note to the financial statements summarised the financial information for Qilu, which must have been on books and records being available.  Its net liabilities were identified as RMB113,475,000 (for 2017)  and RMB166,289,000 (for 2018), and it was on that basis – and not otherwise – that the carrying amount of the 30% Interest in Qilu was assessed to be nil for both financial years, and that there was no reversal of impairment losses made in the accounts.

653.  Therefore, throughout the period of four years after the claim was launched, CSC had not suggested to its shareholders or the investing public at large either (a) that the Zhangs had helped themselves to RMB146.88 million, or (b) that the acquisition of 30% of Qilu Property was in any way “bogus”.  Rather, the stated interest was consistently and repeatedly affirmed as having in fact been acquired and retained.

654.  I also referred to Stephen Liu’s and David Yen’s witness statements repeating verbatim only the stated inability to locate the original ETA, the assertion that the vendor shareholders would be able to deny the transfer if that original version cannot be produced, and the decision fully to impair Shandong Shanshui’s investment in Qilu.  I pointed to the stark mismatch between the content of the witness statements and the then pleaded case, where neither witness statement suggested any misappropriation or bogus transaction.  (This was, of course, notwithstanding that David Yen had verified the then Qilu Claim alleging the dishonest misappropriation disguised by a “bogus” transaction.)   I noted that the then pleaded case that the purchase of the 30% Interest in Qilu was bogus was not only not the case put forward in the witness statements, it was inconsistent with the public statements made by the Group, and no steps had been taken to unravel the transaction on the basis that it was not genuine.

655.  On the basis that it was bound to fail, I struck out the then Qilu Claim together with the relevant parts of the witness statements.  I also refused leave to amend the Qilu Claim in the form proposed during the hearing, but I did so without prejudice to any application that the plaintiffs might wish to make to amend the RASOC to raise some other claim relating to or arising out of the same transaction – where, at the time, it seemed to me that the case which the plaintiffs might wish to put forward was essentially a case that might be expected to allege some knowledge on the part of the Zhangs that they knew the investment was of no or of insignificant value.

656.  Whilst awaiting that decision, the plaintiffs issued a summons on 23 January 2020 seeking leave to amend the re-amended statement of claim in the terms of the draft annex to the summons, albeit in terms different from the draft amendment previously proposed.  By the summons, the plaintiffs sought to introduce alternative claims regarding the Qilu Transaction, being (1) a claim expressly identifying misapplication, in that the defendants knew or ought to have known that Qilu was valueless or of insignificant value, yet caused Shandong Cement to pay RMB146.88 million under the Qilu Transaction for the benefit of Qilu’s selling shareholders; and (2) an alternative claim in negligence, in that insofar as the defendants did not know that Qilu was valueless, the defendants were negligent in failing to make any or any sufficient enquiries of Qilu’s value before causing Shandong Shanshui to enter into the Qilu Transaction.

657.  Subsequently, by my decision dated 11 January 2021 [2020] HKCFI 2560, I dealt with that summons as proposed to be amended by a summons dated 28 August 2020, which proposed yet another draft amendment to the Qilu Claim, the plea proposed being to put forward two causes of action: one in negligence, and the other relating to an alleged misapplication of funds.

658.  I allowed the amendment, and that is the form of the claim now brought to trial.  The claim is as follows (ignoring underlining and striking through to show the amendments):

15A.  In his capacity as a director of each of HK Cement, Pioneer and Shandong Cement, each of the Zhangs also owed a duty to exercise reasonable care, skill and diligence and a duty to exercise independent judgment to each of those CSC subsidiary companies, such duty to include inter alia appropriate scrutiny into the conduct of the companies’ affairs, and due and proper assessment of any proposed deals, acquisitions, or any other deployment and use of the companies’ assets.

44D.  In anticipation of their Anticipated Ouster and since their 1 December 2015 ouster from the Board/CSC, each of the Zhangs has committed the following further breaches of his fiduciary/constructive trustee’s duties and/or duty of care (such duties as pleaded in paragraphs 14, 15 and 15A above): -

(1)  In July 2015, the Zhangs caused Shandong Cement to enter into an equity transfer agreement dated 23 July 2015 (“Qilu ETA”)  with five shareholders (“Qilu Shareholders”)  of Qilu Property Company Limited (“Qilu”)  by which Shandong Cement agreed to acquire 30% of the equity interest in Qilu from the Qilu Shareholders.  Under the Qilu ETA, the consideration was calculated by reference to a “base price” (comprising inter alia Qilu’s consolidated asset value)  and price adjustments between the date of the Qilu ETA and the completion date.

(1A)  Under the Qilu ETA, Qilu’s consolidated asset value was stated to be RMB659,784,845.64, such value purportedly justified by valuation reports (“Asset Valuation Reports”)  of Qilu and its subsidiaries prepared by Beijing Jianhexin Asset Appraisal Co., Ltd (“Qilu Valuer”), and a financial due diligence report dated 14 June 2015 (“FDD Report”)  prepared by Zhongzhun Certified Public Accountants (“Zhongzhun”).

(1B)  The Asset Valuation Reports, however, were deficient and outside the ambit of a responsible professional valuation opinion.  The Plaintiffs rely on the following matters.

(a)  The consolidated asset value of Qilu comprised the aggregate values of its subsidiaries, one of which was Jinan Shengming Development Co., Ltd (“Jinan Shengming”).

(b)  The value of each subsidiary was calculated inter alia by reference to the book value of the subsidiary’s assets, plus adjustments made by the Qilu Valuer.

(c)  In the case of Jinan Shengming, it had a negative book asset value of RMB25,935,610.08.  The Qilu Valuer made upward adjustments of RMB678,840,723.10, resulting in its valuation of Jinan Shengming at RMB652,905,113.02.

(d)  The Qilu Valuer valued Qilu at RMB659,784,845.64.  The value of Jinan Shengming therefore constituted over 98% of Qilu’s value.

(e)  The upward adjustments made to Jinan Shengming’s value resulted principally from purported revaluations made to Jinan Shengming’s property asset inventory.  Specifically, whereas the asset inventory had a book value of RMB183,350,868.19, the Qilu Valuer appraised the asset inventory at RMB864,297,309.61, an increase of RMB680,946,441.42.

(f)  The Qilu Valuer, however, did not give any or any meaningful explanation (such as examples of comparables or prevailing market data)  or justification for its appraisal of Jinan Shengming’s property asset inventory.

(g)  In fact, the Qilu Valuer failed to adopt the correct unit prices for Jinan Shengming’s property asset inventory in the appraisal.  Had the Qilu Valuer adopted the correct unit prices, it would have appraised Jinan Shengming’s property asset inventory at (at most)  RMB638.7 million.  In the circumstances, the Qilu Valuer overstated Jinan Shengming’s asset value by at least RMB225 million.

(h)  As regards the Asset Valuation Report of Qilu, the Qilu Valuer failed to take into account the negative equity value of Shandong Pingtong Regional Engineering Co. Ltd (“Pingtong)  being one of the Qilu’s subsidiaries. Had Pingtong’s value been property taken into account, Qilu’s consolidated asset value would have decreased by RMB29,461,328.

(1C)  The FDD Report was also deficient and outside the ambit of a responsible due diligence report.  The Plaintiffs rely on the following matters:

(a)  Zhongzhun merely adopted the valuations reached by the Qilu Valuer in the Asset Valuation Reports without scrutinizing the same with any or any sufficient rigour;

(b)  Zhongzhun failed to take into account Qilu’s liabilities under guarantees and asset pledges that Qilu had provided.  Had Zhongzhun properly taken into account such liabilities, Zhongzhun would have reduced Qilu’s valuaton by RMB73 million.

(1D)  The consolidated asset value of Qilu was therefore at best about RMB331 million and the value stated in the Qilu ETA was overstated by at least RMB320 million.

(1E)  Further:

(a)  The “premium amount of RMB59,199,323.28 stated in the Qilu ETA, which was included in the base price, was unexplained and unjustified.

(b)  In the Deed of Settlement dated 11 September 2015 (“Deed of Settlement”)  entered into between the Qilu Shareholders and Shandong Cement, the parties agreed to a downward adjustment of the base price by RMB20,405,020 to arrive at the equity transfer price of RMB146,878,494.12.  In doing so, however, the parties inexplicably increased the base price from RMB500 million to RMB510 million without any explanation or justification.

(1F)  In the premises, the Zhangs acted in breach of their duty to Shandong Cement to exercise reasonable care, skill, diligence and/or independent judgment by inter alia:

Particulars

(a)  failing to make enquiries of the Qilu Valuer and/or require the Qilu Valuer to explain or justify its appraisals of Jinan Shengming’s property asset inventory and the unit prices that it had adopted in appraising the inventory;

(b)  failing to make enquiries of the Qilu Valuer and/or require the Qilu Valuer to explain or justify its exclusion of Pingtong from Qilu’s consolidated asset value;

(c)  failing to make enquiries of Zhongzhun and/or require Zhongzhun to explain or justify its wholesale adoption of the Asset Valuation Reports, in particular the Reports for Qilu and Jinan Shengming;

(d)  failing to make enquiries of Zhongzhun and/or require Zhongzhun to explain or justify its exclusion of Qilu’s liabilities under various guarantees and asset pledges in appraising Qilu’s consolidated asset value;

(e)  failing to consider or consider sufficiently the justification for including a premium amount of RMB59,199,323.28 as part of the base price under the Qilu ETA;

(f)  failing to identify the discrepancy of the base price in the Deed of Settlement (RMB510 million)  and that in the Qilu ETA (RMB500 million)

(g)  failing to assess, scrutinize, appraise and consider independently (whether sufficiently or at all)  the conclusions reached in the or the terms of the Qilu ETA, the Asset Valuation Reports, the FDD Report and the Deed of Settlement; and

(h)  causing Shandong Cement to enter into the Qilu ETA, or to enter into the Qilu ETA on terms that require Shandong Cement to pay RMB146.88 million to acquire a 30% equity interest in Qilu.

The Plaintiffs reserve the right to plead further particulars or amend this paragraph.

(1G)  But for the Zhangs’ breaches of duty as particularized above, Shandong Cement would not have acquired any interest in Qilu, alternatively would have acquired the interest in Qilu at a much lower consideration.

(1H)  The Zhangs’ breaches of duty caused loss to Shandong Cement.

Particulars

(a)  The consideration paid to the Qilu Shareholders being RMB146,878,494; alternatively

(b)  The overpayment for a 30% equity interest in Qilu, being at least RMB108 million.

(1I)  Further or alternatively, the Zhangs knew or ought to have known that Qilu was worth much less than the value ascribed to it in the FDD Report and the Asset Valuation Reports, but nevertheless caused Shandong Cement to enter into and complete the Qilu ETA.  In the premises the RMB146,878,494 paid to the Qilu Shareholders was misapplied for the benefit of third parties.

(1J)  Specifically, Wang Jian being one of the Qilu Shareholders was an independent non-executive director of CSC until 22 May 2015 and was a “connected person” within the meaning of the Hong Kong Listing Rules in the transaction arising out of the Qilu ETA.

(5)  In December 2015, in the knowledge of their 1 December 2015 ouster from the Board/CSC plus the knowledge that they had no lawful authority to do so, the Zhangs misappropriated RMB18 million of Shandong Cement’s funds, which they paid to themselves and to their loyal nominees within Shandong Cement as purported (but unearned)  “bonuses in lieu of [CSC] share options.”

44E.  In the premises, each of the Zhangs is liable to account to Shandong Cement as a constructive trustee or to pay equitable compensation to Shandong Cement and/or the other Plaintiffs for the property and funds of Shandong Cement which he has misapplied and/or misappropriated, including those pleased in paragraph 44B to 44D above.  Further or alternatively, each of the Zhangs is liable to pay damages occasioned as a result of their negligence to Shandong Cement.

659.  In my judgment granting leave to amend, I noted that §15A (in addition to the pre-existing §§14 and 15)  pleads the alleged duty of care owed by the defendants, and the other elements of the cause of action in negligence are set out in the sub-paragraphs of §44D.  For example, §§(1A)  to (1E)  identify the alleged problems with the underlying relevant documentation, §(1F)  pleads the breach, §(1G)  pleads the causation, and §(1H)  pleads the loss.  The claim relating to misapplication is to be found in §(1I).

660.  I also specifically noted that there seemed to be a significant area of factual evidence ripe for exploration at trial.  In the evidence filed to meet the amendment application, the defendants seemed to assert that (a) there were genuine and lengthy discussions amongst board members about the Qilu Transaction, and (b) they were entitled to rely on the various reports.  But, there were no minutes of any discussions or particularisation of any detail as to what was discussed (though Zhang Jr suggested that minutes of the discussions were prepared, and ought to be in the records kept by Shandong Shanshui). 

661.  Of the documents then available, I noted (a) a simple one-page board resolution which merely approves the Qilu Transaction; and (b) the DD Report and the ARVs themselves (none of which had been mentioned in the Defence filed or in the evidence responding to the original Mareva application and/or the strike out application, despite it being the obvious thing to have raised).  I also noted some WeChat records which showed the various reports being transmitted, as were then disclosed by the defendants, but which did not of themselves further evidence any lengthy discussion or other reason of entitlement to have relied on the content of the reports.

662.  I subsequently gave directions for expert opinion evidence in three main respects:

(1)  expert evidence from accountants and/or professional surveyors or professionals with experience in PRC real estate valuation (“Valuation Experts”)  on

(a)  the value of the real estate (being all real estate, whatever its state of build or completion, and of whatever form or nature)  held or owned by Qilu or any of its subsidiaries as at (a) 30 April 2015 and (b) 29 July 2015, including: (i) Living Cambridge Phase C (Phase I)  (澗橋C期(一期)), Phase II (澗橋二期), and Phase IV (澗橋四期)  held by Jinan Shengming Property Development Co., Limited (“Jinan Shengming”); (ii) Living Cambridge Greenwich Plaza (澗橋格林威治廣場)  held by Jinan Shengming; and (iii) the Property known as “Villa” (別墅)  held by Jinan Shengming; and

(b)  whether the 8 Asset Valuation Reports ("AVRs")  were deficient in the aspects as pleaded in paragraphs 44D(1B)  of the RRASOC;

(c)  if so, whether such deficiencies fell outside the reasonable ambit of a responsible professional valuation opinion with reference to applicable laws, rules and standards in the PRC;

(d)  if so, what was the financial impact, if any, on the value of the 30% Interest in Qilu which Shandong Shanshui acquired pursuant to the ETA dated 29 July 2015 (“Acquisition”);

(e)  whether the Financial Due Diligence Report ("FDD Report")  was deficient in the aspects as pleaded in paragraphs 44D(1C)  of the RRASOC;

(f)  if so, whether such deficiencies fell outside the reasonable ambit of a responsible financial due diligence report with reference to applicable laws, rules and standards in the PRC;

(g)  if so, what was the financial impact, if any, on the value of the 30% Interest in Qilu which Shandong Shanshui acquired pursuant to the Acquisition.

(2)  expert evidence from professionals in the field of accountancy and/or corporate finance (“CF Experts”)  on:

(a)  the value (namely, the value that a willing buyer and a willing seller in an arm’s length transaction would agree upon)  as at (a) 30 April 2015 and (b) 29 July 2015 of the 30% equity Interest in Qilu which Shandong Shanshui acquired pursuant to the Acquisition (“CF Q1”); and

(b)  the price (or range of prices)  that would have been commercially acceptable to the board of a company such as Shandong Shanshui, considering the Acquisition on an arm’s length basis (“CF Q2”);

(3)  expert evidence from PRC lawyers on PRC law as to:

(a)  what the legal requirements are for establishing civil liability by a company against a director; and

(b)  how the legal requirements should apply in the context of the plaintiffs’ Qilu Claim as pleaded in paragraphs 44D of the RRASOC.

663.  It is against that history that Mr Wou has referred to the ‘Qilu Claim Version 4.0’.  There is some force in his submission that the fact that it has taken four versions to come up with even a viable claim is at least not an auspicious beginning for the plaintiffs.

664.  Having reached this point, Ms Lam submitted that the background facts giving rise to the Qilu claim a largely uncontroversial.

665.  On 20 July 2015, Shandong Shanshui’s board resolved to acquire 30% Interest in Qilu from its five existing shareholders. The written resolution was signed by 4/5 directors, being Zhang Sr, Zhang Jr, Chen Xueshi an Huang Kehua.  The director absent was Tian Guang.

666.  On 23 July 2015, the ETA was entered into, whereby the shareholders agreed to transfer the 30% Interest, and Shandong Shanshui agreed to pay them 30% of the “equity transfer price”, defined in clause 4.1 of the ETA to mean the sum of the “base value” (specified to be RMB500 million)  and a “price differential” between the reference date of 30 April 2015 and the “settlement date”.

667.  As explained in clause 4.1, the base value was calibrated by making adjustments to Qilu’s consolidated NAV as of 30 April 2015, as follows:

Item	Amount (in RMB)
Consolidated asset value on reference date	659,784,846
Less unpaid account	- 206,292,079
Less non-performing assets	- 12,692,090
Premium amount	59,199,323
Base value:	500,000,000

668.  Qilu’s consolidated asset value was taken from a financial due diligence report dated 15 June 2015 (“FDD Report”)  prepared by Zhongzhun Certified Public Accountants (“Accountants”).  The FDD Report in turn refers to and relies upon asset valuation reports (“AVRs”)  of Qilu and its seven subsidiaries, prepared by Beijing Jianhexin Assets Appraisal Co Ltd (“Valuers”)  all dated 12 June 2015.

669.  On 20 August 2015, the Accountants issued a supplementary financial due diligence report (“Supplementary FDD Report”), explaining that by reason of further information provided by Qilu, it is NAV should be reduced by RMB10,476,139.

670.  On 11 September 2015, Qilu’s shareholders and Shandong Shanshui entered into a deed of settlement (“Deed of Settlement”). The parties agreed that the settlement date would be 29 July 2015 and the price differential would comprise two components, namely (1)  the downward adjustment of RMB10,476,139 explained in the Supplementary FDD Report, and (2)  downward adjustment of RMB9,928,881, representing Qilu’s operating loss between 30 April and 29 July 2015.  Accordingly, the equity transfer price was RMB146,878,494.

Item	Amount (in RMB)
Base Price	510,000,000
Less price differential (net assets)	- 10,476,139
Less price differential (operating loss)	- 9,928,881
Total	489,594,980
Equity transfer price (times then percent):	146,878,494

671.  On 21 December 2016, Qilu acknowledged that the selling shareholders had received the equity transfer price in full by 28 September 2015.

672.  Ms Lam submitted that the plaintiffs’ case is that the Zhangs, being directors of Shandong Shanshui, were negligent in causing it to enter into the ETA, or to enter into the ETA on terms that required payment of RMB146.88 million to acquire the 30% Interest. Specifically, Qilu was worth much less than the assessed value in the FDD Report, and the Zhangs’ negligence caused Shandong Shanshui to overpay, thereby suffering a loss.

673.  The plaintiffs’ case was intended to be proved without calling factual evidence, but relying on various experts (permitted in accordance with my expert evidence directions: see above).

674.  It is first convenient to deal with the question of PRC law, against the well-known background that the PRC adopts a civil law system, and only “guiding cases” issued by the Supreme People’s Court have guidance value.

675.  There is no dispute that PRC law governs the relationship between Shandong Shanshui and the Zhangs.  PRC legal experts were called, Ms Fu Changyu and Mr Jiang Sheng for the plaintiffs and the Zhangs respectively.

676.  Both experts were in agreement that:

(1)  At the time of the execution of the ETA in July 2015, the Company Law of the PRC (2013 revision)  applied.

(2)  The particular articles of the Company Law are Articles 147-149.

(3)  But only the duty of diligence under Article 147 is relevant.

(4)  Whilst not clearly defined in PRC law, the duty of diligence means that a director or senior manager should, in the performance of his duties, have the care of a good manager and with reasonable care of an ordinarily prudent person for the best interests of the company.

(5)  For a claim for breach of the duty of negligence, the requisite elements are that: first, the company must have suffered damage; secondly, any detrimental act must be the violation of laws, administrative regulations or by law by the actor in the performance of his duty (including the breach by a director of the duty of diligence); and thirdly, there must be causation between the illegal act and the damage suffered by the company.

677.  The experts differed as to whether a fourth requisite element exists in the claim for breach of duty of diligence.  Mr Jiang opines that there is a fourth element, namely the actor acted at fault, in that he must be negligent or intentional.  Ms Fu does not agree that there is an additional fourth element.  Further, there is disagreement as to whether, within the alleged fourth element, it must be shown that the actor acted with gross negligence, as opposed to ordinary negligence.

678.  Ms Fu pointed out that Article 149 of the Company Law sets out only three requirements in a claim for breach of duty: (1)  violation of law, (2)  causation, and (3)  loss – essentially the first three agreed elements, albeit slightly rearranged.  Ms Fu accepted that where Article 149 is silent on how one particular element is to be applied or assessed, reference may be made to the Tort Liability Law of the PRC (“Tort Law”). However, that does not mean importing other aspects of the Tort Law in considering a claim under Article 149.  Accordingly, Articles 147 and 149 of the Company Law should be regarded as a complete code for the assessment of a claim for breach of the duty of diligence.  It is unnecessary, and wrong, to import a fourth element from the Tort Law to analyse the claim.  The special law of the Company Law applying to company -related disputes should prevail over the general law of the Tort Law applying to general tort disputes.

679.  Ms Fu also stated that if a fourth requirement of “negligence or intention” existed, it would have been expressly stated in Article 149 – as can be seen by comparison with other Articles of the Company Law, such as Articles 94 and 189.

680.  Mr Jiang opined that the Interpretation of Company Law of PRC dated March 2013, published by the NPCSC’s Legislative Affairs Commission (“LAC”)  is highly persuasive legal authority, on the basis of which Article 6 of the Tort Law should apply to the interpretation of Article 149 of the Company Law.

681.  Article 6 of the Tort Law provides that (1)  fault can be either intentional harm or negligence, (2)  negligence refers to a psychological state where a defendant fails to perform his or her duty of care due to his or her negligence or gullibility, (3)  the duty of care as a reasonable person refers to the degree of attention that most people should perform in a given situation, and (4)  negligence is assessed based on the behaviour of a normal person in the situation where the defendant was.  Further, Mr Jiang thought that the liability of a director to a company can only be tortious as it definitely does not come from any contract (and he spoke of tort-related debt).  Hence, it is only appropriate to apply the adequate provisions from the Tort Law.  On the basis that there is no non-default based category of debt in this case, the other category of default-based debt must apply.

682.  Mr Jiang also cautioned against adopting a negligence test set “too low” in view of the commercial reality in China, as the explanation for why a gross negligence requirement is applicable.

683.  In the end, I prefer the evidence of Ms Fu.  I accept Ms Lam’s submission that if the Tort Law is applicable to Article 149 claims because such claim is concerned “tort liability”, then Article 149 of the requirements set out in it would be redundant, because one could simply apply Tort Law without any reference to Article 149 of the Company Law.  I also accept there is no provision in the Tort Law itself which states that Article 6 applies in the company law context.  Most importantly, I accept that the suggested fourth element appears to add little if anything to the first three elements.  In her evidence, Ms Fu expressed agreement with my suggestion that what Mr Jiang had done was to add a fourth element, whereas the relevant questions that he posed by the fourth element might be encapsulated within the first “violation” requirement; in other words, if any question of negligence arises on a particular case, the relevant fault aspect of negligence is dealt with when considering whether there is a violation or not, so that Mr Jiang had moved the requirement from the first “violation” requirement to add it unnecessarily as an additional requirement.

684.  On that basis, it is not strictly necessary for me to decide whether the fourth requirement would encompass the standard of gross, as opposed to ordinary, negligence.  However, I tend firmly to the view that even if the fourth requirement existed, the standard for liability would remain that of ordinary negligence.  I do not think that sets the bar “too low”, not least because I would expect an assessment as to violation to provide appropriate recognition to the director’s exercise of judgment, where it is exercised in good faith and not for an irrelevant purpose (as would be similar in the Hong Kong law context).

685.  On that basis, Ms Lam advanced three principal propositions in support of the argument that there was a breach of the duty of diligence:

(1)  The AVRs were deficient and outside the reasonable ambit of a reasonable professional opinion.

(2)  The FDD Report was deficient and outside the reasonable ambit of a reasonable professional opinion.

(3)  The Zhangs acted in breach of their duty of diligence by failing (among other things)  to make sufficient enquiries of the Valuers and the Accountants in respect of the AVRs and the FDD Report in various aspects.

686.  The formulation of those propositions identifies that Ms Lam has in effect advanced an indirect negligence claim against the Valuers and the Accountants.  In that context, there seems to me to be considerable force in the submissions made by Mr Wou that:

(1)  There is no suggestion (let alone evidence)  that any members of the then Shandong Shanshui board had expertise in the fields of surveying, accounting and corporate finance.

(2)  The very fact that reliance is placed in this proceeding is on three experts, with dozens of pages of expert reports, seeking to discredit the AVRs and the FDD Report speaks volumes to the artificiality and frailty of this claim.

(3)  Taking Shandong Shanshui’s expert evidence at its highest, it could only show that the FDD Report and/or the AVRs were deficient and perhaps outside the ambit of reasonable reports, as assessed by the experts.

(4)  But the Zhangs were laypersons, and could not be expected to spot the suggested deficiencies, for example as to the valuation methodology applicable to completed buildings as opposed to those under construction, let alone to appreciate the impact of such a deficiency on the appraised value of Qilu.

(5)  At the time of the Qilu Transaction, Shandong Shanshui did not engage any corporate finance expert to value the 30% Interest, and it is not any part of the pleaded case that a corporate finance expert ought to have been engaged.  Hence, the evidence from the corporate finance expert adds little, if any, probative value to the necessary determination of this issue.

(6)  The expert’s reports were in any event prepared in 2021, some six years after the material FDD Report, Supplementary FDD Report, and the AVRs.  They are bound to be of limited value, not least where a common complaint between all of the plaintiff’s experts was that they did not have access to the necessary data for them to conduct their analysis.

687.  I also accept that Shandong Shanshui might have called a number of factual or other witnesses, who were actually involved in the Qilu Transaction, including;

(1)  Liu Yumin, the Group’s then Deputy General Manager for Procurement and Supply Management, who spearheaded the acquisition project and was responsible for negotiating and concluding the ETA;

(2)  Li Hengwen, the Group’s then CFO, who caused Shandong Shanshui to engage the Accountants and Valuers, and who was responsible for reviewing their professional work;

(3)  the Accountants who conducted the financial due diligence, and who prepared the FDD Report and the Supplementary FDD Report;

(4)  the Valuers who conducted independent appraisals, and prepared the AVRs; and

(5)  the other two members of the board who also approved the acquisition of the 30% Interest.

688.  Considerable expert opinion evidence was called and subject to close scrutiny and cross-examination at the trial.  Ultimately, however, I do not think it necessary for me to go through each part of it and seek to identify which opinion might be preferable.  The key question seems to me to be not whether the FDD Report and the AVRs fell below the standard of care of those persons who produce them but, if so, whether the Zhangs failed to exercised the relevant reasonable care when acting on them.

689.  Ms Lam submitted that there was a failure to exercise reasonable care in five material respects:

(1)  First, there was a failure to make inquiry of the Valuers and the Accountants regarding the appraisal of the relevant property inventory.

(2)  Second, there was a failure to make enquiries of the Valuers and the Accountants regarding the exclusion of Pingtong (a company with a negative assessed value)  being excluded from Qilu’s asset value.

(3)  Thirdly, there was a failure to make enquiries of the Accountants regarding Qilu’s liabilities under various guarantees and asset pleasures, and the exclusion of such exposes in Qilu’s consolidated net asset value.

(4)  Fourthly, there was a failure to consider (at all or sufficiently)  the justification for including the premium amount of about RMB59.2 million as part of the base value under the ETA.

(5)  Fifthly, there was a failure to identify the unexplained discrepancy of the base price in the Deed of Settlement (RMB510 million)  and the ETA (RMB 500 million).

690.  However, none of the sub-issues relating to the first point were actually put in cross-examination of Zhang Jr.  This may be because this, and indeed the other issues, essentially rely on criticisms through the layers not just of the Valuers and the Accountants, but of the internal staff led by Liu Yumin and Li Hengwen who had the primary job to consider (and as appropriate test)  the materials provided by the Valuers and the Accountants.  This is where I think the absence of evidence culled from those persons is a significant problem for the plaintiff’s argument.

691.  It also seems to me to be telling that, even in the argument summarising and dealing with the obviously even much greater detail of the various expert opinions, Ms Lam took up 38 pages of closely argued written submissions seeking to persuade of the suggested failures on the part of the Zhangs.  With respect, that only tends to show the artificiality and frailty of the Qilu claim as it is now brought in its fourth iteration.

692.  Balancing the matters overall, it seems to me that Shandong Shanshui has not established that the Zhangs breached their duty of diligence and PRC law.  Any potential claim over is irrelevant.

693.  The self-standing Qilu claim is therefore also dismissed.

AA.   Conclusion

694.  Having covered the A-Z above, I dismiss the claims.

695.  I see no need to address alleged loss.

BB.   Costs

696.  It is unlikely to be a matter of substantial dispute that costs should follow the event.

697.  There is also likely to be at least the reasonable argument that cost should be payable by the losing party on a higher (indemnity)  basis, as was requested on behalf of some of the defendants in closing submission.

698.  There was even a suggestion that an order might be sought relating to payment of costs by a third party or parties.

699.  I also have in mind the number of parties, their respective involvement, and the number of Counsel involved.

700.  But I have not had the benefit of argument in light of the various aspects of my decision canvassed above.  Therefore, it seems to me that all questions of costs should be appropriately argued only after the parties have had the opportunity to read and consider this Judgment.

701.  Unless I am otherwise persuaded, I propose to deal with the question of costs on paper submissions only.  But I leave that question open for the parties’ consideration as well.

702.  I would ask the parties representatives to consider, and hopefully agree, the appropriate method and timings for costs submissions, so as to enable me to make the relevant costs orders.

CC.   Postscript

703.  This action was commenced in the most cavalier of fashions, with undue haste, without performing anything approaching a fair and proper analysis, and almost certainly in a fit of pique arising from the fact that Tianrui and the Receivers had been frustrated in their combined attempts to wrest control of the CSC Board from their predecessors, apparently blind or uncaring as to the damage that might be caused to CSC by their activities.

704.  The Receivers were supposed to have acted impartially in accordance with their duties.  They did not.  Notwithstanding that they had been reminded of their duty by the Court on at least two occasions, not long after their appointment the Receivers had joined forces with Tianrui to wage war on the Zhangs and anyone who they thought took the Zhangs’ side.  As it turns out, with the benefit of information now available, it is more than probable that the Receivers took up that position in order to join forces with Tianrui – engineered and facilitated by the surreptitious actions of their lawyers.

705.  Albeit hampered by the lack of direct knowledge, those persons behind this claim have cast their eyes backwards over the past, cherry-picking only those things that might appear (or might be twisted)  to support their chosen narrative.  The rest was either ignored, or criticised as being a facade.  The liberally-scattered claims of dishonesty and bad faith were largely imagined, and in reality nothing but the reflection of those who caused this action to be brought.

706.  The later suggestion that the action was brought so quickly so as to seek redress for the removal of CSC’s books and records against the Zhangs and James Li is flatly contradicted by the original text of the Indorsement of Claim.  I do not suggest there was no possible room for concerns about the actions of at least the Zhangs, and a properly formulated claim based upon them, but those concerns have been exaggerated and elevated far above what they might reasonably bear.

707.  Around the chosen events was woven a thin gossamer of conspiracy.  But so thin was the gossamer that it was blown away by the slightest draft caused merely by opening the door to a few actualities. 

708.  The conspiracy was said to be evidenced by a series of breaches of fiduciary duty, which breaches were themselves said to have been motivated by the conspiracy.  This circular and self-supporting theory was bound to collapse in on itself once the essential foundation of the theory was removed.  Collapse it did.

709.  Though it should have been recognised and acted upon much sooner, by the end of the plaintiffs’ own case it was clear that the claim formulated was essentially unsustainable and should never have been advanced.  Nevertheless it was still continued, with considerable attempted fluidity or ‘wriggling’, and admittedly with rather less enthusiasm.

710.  To continue the culinary analogy with which I began this Judgment, most of the claim had more holes than a sieve.  Despite Ms Lam’s best but late efforts to patch it up, it was never going to hold water.

Ms Rachel Lam SC, leading Mr David Chen and Mr Jonathan Lee, instructed by Haldanes, for the 1^st to 4^th plaintiffs

Mr Jean-Paul Wou and Mr Simon Ho, instructed by Deacons, for the 1^st and 2^nd defendants

Mr Vincent Lung, instructed by Simmons & Simmons, for the 3^rd defendant

Mr Charles Sussex SC, leading Mr Jason Yu and Mr Avery Chan, instructed by Swartz, Binnersley & Associates, for the 4^th and 9^th defendants

Mr Charles Manzoni SC, QC, leading Mr Mike Lui, instructed by Woo, Kwan, Lee & Lo, for the 5^th and 6^th defendants

Mr Simon Wong and Mr Geoffrey Yeung, instructed by Chan & Ho, for the 7^th defendant

Mr Raymond Leung SC, leading Mr John Leung, instructed by Cheung, Tong & Rosa, for the 8^th defendant

Mr Wong Yan Lung SC, leading Mr Val Chow, instructed by Dechert, for the 10^th defendant