RE CEIBS PUBLISHING GROUP LTD

HCCW 12/2021

[2025] HKCFI 5736

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 12 OF 2021

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J U D G M E N T

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1.  By petition presented on 8 January 2021[1] (“Petition”) the Petitioner, China Europe International Business School (中欧国际工商学院) (“P”), seeks to wind up CEIBS Publishing Group Ltd (“Company”) on the just and equitable ground under s.177(1)(f) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32).

2.  On 2 February 2021, the Company applied for an order to stay the Petition pending determination of an arbitration commenced by the Company against P on 23 November 2020 (“Arbitration”) on the ground that the dispute falls within the arbitration agreements reached between the parties.

(1)  The application was heard on 26 October 2021.

(2)  By letters dated 27 October 2021, each of Digital B-School China Limited (“Digital”)[2], 江蘇雲學堂網絡科技有限公司 (“YXT”)[3] and CEIBS Management Limited (“ManCo”)[4], which were not parties to the arbitration agreements, gave an undertaking to the court that it agreed to be bound by the findings and the determination of the arbitral tribunal (“Tribunal”) in the Arbitration.

(3)  By Decision handed down on 22 November 2021 [2021] HKCFI 3513 (“Stay Decision”), this Court ordered the Petition to be stayed (“Stay Order”) with liberty to the parties to restore the Petition upon determination of the Arbitration.

3.  In this Judgment, unless otherwise stated, the abbreviations used in the Stay Decision are adopted.

4.  By Partial Final Award (“PFA”) dated 15 January 2024, the Tribunal dismissed the Company’s claims and substantially upheld P’s counterclaim in the Arbitration and made a number of declarations sought by P in the counterclaim.

5.  On 12 April 2024, R1-R3[5] (defined as “Chengwei Parties” in the PFA) and Digital applied to set aside the PFA in HCCT 32/2024 (“Setting Aside Application”). Shortly thereafter, P commenced HCCT 33/2024 to enforce the PFA[6] (“Enforcement Proceedings”).

6.  On 7 January 2025, Mimmie Chan J dismissed the Setting Aside Application, granted leave to P to enforce the PFA as a judgment of the court, and entered judgment in terms of the PFA (“Enforcement Decision”) [7].

7.  On 28 March 2025, P applied for leave to lift the stay of the Petition. The application was unnecessary as the Stay Order gave liberty to the parties to restore the Petition upon determination of the Arbitration.

8.  At the hearing before this Court on 11 July 2025, leave was granted to P to re-amend the Petition to (1) remove the allegation of quasi partnership and the complaints relating thereto, (2) add the findings and declarations made in the PFA and (3) remove all named respondents to the Petition. The latter reflects the fact that the only relief sought in the Petition is a winding up order, it is unnecessary to name any respondent to the Petition. If any shareholder wishes to oppose the Petition, it can file a notice of intention to appear pursuant to rule 30 of the Companies (Winding up) Rules (Cap. 32H).

9.  P’s case is simple. As Mr Rimsky Yuen SC[8] submits, P’s complaint on exclusion from the management of the Company and the Company Group for the last 5 years is fully vindicated and confirmed in the PFA:

(1)  The Tribunal found that, by reason of the Chengwei Parties’[9] and Digital’s breaches of the SPA and the M&A, P was deprived of equal board representation, relative majority voting power in shareholders’ meetings and its ability to participate in the Company’s management, and its interests as a shareholder have been seriously and unfairly prejudiced[10].

(2)  This alone is sufficient to justify the court making a winding up order against the Company on the just and equitable ground.

(3)  Since Digital took control, the Company’s operating entities in the Mainland (i.e. CE International and Fenghe) (together “PRC Operating Entities”) have been making substantial losses and the value of the business severely damaged. The cause of such losses is unknown to P due to its exclusion[11].

10.  Further, if necessary, P also relies on (1) a complete functional deadlock at both the shareholder and board levels[12] and (2) the lack of probity of the New Directors in purporting to act on behalf of the Company, including by commencing the Arbitration and instructing the Company’s secretary to prepare a board resolution to effect the resignation of one of the New Directors without authority[13].

11.  Only Digital appears and opposes the Petition. Mr Kwan Ping Kan, counsel for Digital, submits that the past wrongdoings committed against P are not sufficient for the court to make a winding up order. Digital has proposed a series of undertakings to regulate the appointment of the fifth director and secure quorum at board and general meetings, and has offered to waive certain veto powers. These would resolve any potential deadlock in the Company.

12.  For the reasons explained below, I do not think that Digital’s proposals are workable or that they constitute a valid ground in opposition to the Petition. The proposals in effect require P to accept Digital/YXT to be its joint venture partner when neither of them were parties to the 2007 Agreements. There is no proper basis to compel P to accept and be bound by the contractual terms with a new party which it neither chose nor trusted.

A.  Factual Background

13.  The material facts of the case are set out in Section B of the Stay Decision. For present purposes, the essential background may be summarised as follows.

14.  The Petition arose out of a shareholder dispute between P, which holds 40% of the Company’s equity in the form of Class A Common Shares, and the following parties[14]:

(1)  Chengwei Parties namely, (a) Chengwei Evergreen Capital LP (“Chengwei Evergreen”), (b) Chengwei Ventures Evergreen Advisors Fund LLC (“Chengwei Ventures”) and (c) Chengwei Partners LP (“Chengwei Partners”) who are parties to the 2007 Agreements and collectively held Preferred Shares representing 39% of the Company’s equity until 29 January 2019;

(2)  Digital, which acquired 39% of the Company’s equity on 29 January 2019 following the transfer of the Chengwei Parties’ Preferred Shares;

(3)  YXT, an affiliate of the holding company of Digital; and

(4)  ManCo, a special purpose vehicle established to hold 21% of the Company’s equity in the form of Class B Common Shares (“ManCo Shares”).

15.  Following the stay of the Petition, P advanced counterclaims against the Chengwei Parties and Digital in the Arbitration for breaches of contract, breach of common understandings and legitimate expectations, and breach of an implied duty of good faith under the 2007 Agreements and the M&A. These counterclaims arose from undisclosed dealings concerning the ManCo Shares, wrongful board appointments, and the wrongful refusal to recognise or give effect to P’s director appointments.

16.  In the PFA, the Tribunal made the following declarations:

(1)  Both the 2016 Transfer and the 2020 Transfers (a) were made by the Chengwei Parties in breach of section 7.2 of the SPA, (b) were invalid and ineffective in transferring beneficial ownership of the ManCo Shares, and (c) were ineffective in directly or indirectly transferring the beneficial ownership of the Class B Common Shares[15].

(2)  Since both the 2016 Transfer and the 2020 Transfers were ineffective in transferring the beneficial interest in the ManCo Shares to Chengwei HK and Unicentury, the appointment of Ms Ma Ying and one of the New Directors to the Company’s board was invalid under the M&A[16].

(3)  The Chengwei Parties breached section 2.3(e) of the VA by purporting to appoint the New Directors to the Company’s board without P’s consent[17].

(4)  Digital had wrongfully refused to recognise and effectuate P’s nominated directors, in breach of sections 2.2(b) and 2.3(b) of the VA and Articles 73(b) and 74 of the M&A[18].

(5)  By reason of the aforesaid matters[19]:

(a)  P had suffered a loss of equal representation on the Company’s board;

(b)  P had suffered a loss of relative majority voting power in shareholders’ meetings;

(c)  P had been deprived of its ability to participate in the management of the Company; and

(d)  P’s interests as a shareholder of the Company had been seriously and unfairly prejudiced.

B.  Applicable Principles

17.  The principles are well-established and have been summarised in Re South Asia Group (HK) Ltd[2024] HKCFI 2070, §§155-156, citing Lau v Chu [2020] 1 WLR 4656 §§20-21, 52:

(1)  Winding-up is a shareholders’ remedy of last resort. This does not mean that winding up is unavailable to members if they have other remedy. The member retains a significant element of choice in the remedy to be sought, even though the court has the last word.

(2)  The court carries out a three-stage analysis and asks (a) Is the petitioner entitled to some relief? (b) If so, would a winding up be just and equitable if there were no other remedy available? (c) If so, has the petitioner unreasonably failed to pursue some other available remedy instead of seeking winding up?

(3)  The legal burden of proof is on the petitioner at stages (a) and (b). But it shifts to the respondent at stage (c). A judge may reasonably expect the respondent to put forward one or more remedies which it is alleged were both available and sufficiently attractive as an alternative to make it unreasonable to continue to seek a winding up.

18.  In considering whether it is just and equitable to order the company to be wound up, the court construe the words “just and equitable” generally, and apply the concept of justice and equity in its widest sense. It is wrong to create categories of headings under which cases must be brought if the just and equitable ground is to be applicable (Re Klimvest plc [2023] 1 BCLC 388, §§189-193).

19.  Where a winding up petition is presented on the “just and equitable” ground, and the underlying disputes between the parties are arbitrable:

(1)  The court retains exclusive jurisdiction to decide whether it is just and equitable to wind up a company, and whether a winding up order should be made on that ground (PI1 & PI2 v MR[2025] HKCFI 1110, §29(2) per Mimmie Chan J; FamilyMart v Ting Chuan [2024] 1 All ER (Comm) 697, §80).

(2)  In doing so, the court would have regard to all the relevant circumstances at the date of the hearing (FamilyMart, §81), including the reasoning and findings of fact made by the arbitral tribunal, which would be binding on the parties to the arbitration and those undertook to be bound (FamilyMart, §§92, 93).

(3)  In this regard, declarations made by the arbitral tribunal that the majority shareholder had breached equitable rights of the minority shareholder, and that the relationship had broken down, would be highly relevant to an application for just and equitable winding up of the company or an application for a share buyout order (FamilyMart, §96; PI1 & PI2, §24).

(4)  Ultimately, the court would consider, whether by reason of the oppressive and discriminatory conduct considered and found by the tribunal and on the evidence adduced before it at the hearing of the petition, it is just and equitable to wind up the company (PI1 & PI2, §38).

C.  Discussion

C1.  Exclusion from Management

20.  It is well-established that a breach of a shareholder’s right and entitlement to appoint and remove a director so as to participate in the management of a company may be sufficient for the court to make a winding-up order on the just and equitable ground (Re A&BC Chewing Gum Ltd [1975] 1 All ER 1017, 1028e-f per Plowman J). Similarly, exclusion from management in breach of mutual understandings could constitute unfair prejudice and render it just and equitable to wind up the company (Kam Leung Sui Kwan v Kam Kwan Lai (2015) 18 HKCFAR 501, §§56, 58, 61).

21.  In the present case, the Chengwei Parties’ and Digital’s breaches of the 2007 Agreements and the M&A and their conduct in excluding P from the management of the Company, as found in the PFA, are both unfair and prejudicial to P’s interests. This finding is sufficient for the court to make a winding up order against the Company on the just and equitable ground. The reasons are as follows.

22.  It is well established that the concept of injustice or unfairness can form the basis of a just and equitable winding up (Re Saul D Harrison &Sons plc [1994] BCC 475, 489F, per Hoffmann LJ (as he then was), citing the seminal passage in Re Westbourne Galleries [1973] AC 360, per Lord Wilberforce. The approach to the concept of unfairness in unfair prejudice petition runs parallel to the concept of “just and equitable” as a ground for winding up (O'Neill v Phillips [1999] 1 W.L.R. 1092, 1099B, per Lord Hoffmann).

23.  The Chengwei Parties’ and Digital’s breaches of the 2007 Agreements and the M&A were fundamental, as they subverted the carefully calibrated governance structure agreed between P and the Chengwei Parties. As the Tribunal found:

(1)  The 2007 Agreements were designed to establish “a careful balance of power” within the joint venture between P and the Chengwei Parties, and that the “finely-tuned balance of power ensured that neither [P] nor [the Chengwei Parties] would have the ability to unilaterally control the [joint venture]”[20].

(2)  The intention of the voting and share transfer restrictions in the 2007 Agreements and the M&A was to prevent beneficial ownership of any of the Company’s securities, including Class B Common Shares, from passing into the hands of a person that had not undertaken to be bound by the applicable share transfer and voting restrictions in the 2007 Agreements[21].

(3)  This carefully calibrated governance framework agreed under the 2007 Agreements and the M&A was undermined by the following breaches (collectively “Breaches”):

(a)  First, each attempt to shift control of ManCo (and thereby the Class B Common Shares), including the 2016 Transfer and the 2020 Transfers, was found to be in breach of section 7.2 of the SPA and, consequently, were “invalid and ineffective”[22];

(b)  Second, the purported actions by ManCo to join force with the Chengwei Parties and Digital to elect a fifth director to the Board (including Ms Ma Ying and one of the 3 New Directors) pursuant to the invalidly acquired voting rights from ManCo Shares were found to be “substantively invalid under the [M&A]”[23];

(c)  Third, the appointment of the New Directors in place of Mr Li, Ms Ping Ping and Ms Ma Ying without the prior written consent of P was found to constitute a breach of section 2.3(e) of the VA[24]; and

(d)  Fourth, Digital’s wrongful refusal to recognise and effectuate P’s requested replacement of directors unless P withdrew its objections to the appointment of the New Directors constituted a breach of sections 2.2(b) and 2.3(b) of the VA and Articles 73(b) and 74 of the M&A[25].

24.  It was also found by the Tribunal that the Breaches had the direct and prejudicial consequence of depriving and undermining P’s rights to participate in the management of the Company in accordance with the terms of the M&A and the 2007 Agreements[26] in that:

(1)  P had suffered a loss of equal representation on the Company’s board, the composition of which at all times should have been 2 directors nominated by P and 2 directors nominated by the Chengwei Parties;[27]

(2)  P had suffered a loss of relative majority power in shareholders’ meetings, subject at all times to the minority rights of the Chengwei Parties under the M&A and the VA[28]; and

(3)  P had been deprived of its ability to participate in the management of the Company in that it had been (a) prevented from appointing 2 directors to the Company’s board and (b) deprived of the relative majority voting power in shareholders’ meeting and, consequently, the ability to nominate the CEO of the Company[29].

25.  The manner by which the Chengwei Parties exited the joint venture, and with YXT (through its control over Digital and Unicentury) substituted as P’s joint venture partner has compounded the unfair prejudice to P. As the Tribunal found:

(1)  The Chengwei Parties’ exit of the joint venture was “stealthy and sharp”: the Chengwei Parties “kept the transaction and all of the steps leading up to it entirely secret from [P], informing [P] only after the deal had closed”[30]. Concomitantly, YXT also “made a strategic decision not to discuss the contemplated acquisition” with P[31].

(2)  The change of control resulting from YXT’s acquisition of a controlling stake in the Company radically altered the nature of the joint venture and relegated P to the status of a minority shareholder without the protections it was originally afforded:

“… [the Chengwei Parties] had never disclosed to [P] that it had purported in 2016 to acquire indirect ownership of the Class B Common Shares, or that it had purported in 2018 to appoint a director to the fifth position on the [Company’s board]; indeed, [the Chengwei Parties] had never at any point sought to exercise control over [the Company] in any fashion. Following the YXT Transaction[32] however, YXT purportedly would control [the Company] and the entire [the Company] Group, and [P] would be relegated to the position of a minority shareholder – without the benefit of any of the minority shareholder protections that [the Chengwei Parties] had enjoyed under the Voting Agreement. It is difficult to imagine a more dramatic change to the situation to [shareholder level of the joint venture]”.[33]

(3)  This radical alteration of the joint venture was not merely the replacement of one financial investor with another. Rather, “What was especially surprising was that [the Chengwei Parties] did not merely swap in a new financial investor, but rather purported to sell control of the [joint venture] to a strategic buyer that was in the same industry as [the Company]. The result was a radical change to the structure of the [joint venture]”[34].

C2.  Digital’s grounds in opposition

26.  Mr Kwan (rightly) does not dispute the findings of unfair prejudice made by the Tribunal but urges the court not to make a winding-up order on the following grounds:

(1)  The Company remains operational and viable;

(2)  There is no deadlock at the Company’s board level or shareholders’ level;

(3)  There is no loss of substratum;

(4)  The past wrongdoing as found by the Tribunal cannot be equated with lack of probity on the part of Digital, and in any event, cannot justify a winding up order which is “a disproportionate response that punishes all stakeholders, including employees and creditors, for issues that can be resolved through less drastic means”; and

(5)  Liquidation is “value destructive” and lacks utility.

27.  Mr Kwan submits that winding up is a remedy of last resort[35], and the court’s jurisdiction in granting a remedy to unfair prejudice is prospective and the court should fashion relief that “put[s] right and cure[s] for the future” (Re Neath Rugby [2008] BCC 390, §245[36]).

28.  The second to fourth grounds (§26(2)-(4) above) are predicated on Digital’s proposals, which Mr Kwan submits are sufficient to address P’s contention that there will be deadlock at the board and shareholders’ level. The proposals may be summarised as follows:

(1)  Digital undertakes to meet the quorum requirement for board and general meetings[37];

(2)  To avoid deadlock at the board level, the fifth board seat will be filled through the following mechanism[38]:

(a)  A 2-member nomination committee comprising one director appointed by each of YXT and P will be formed;

(b)  P’s nominated director will chair the committee to reflect its status as the relative majority shareholder;

(c)  The committee will appoint an external recruitment consultant as advisor, who will prepare a set of objective criteria for candidate selection to be approved by the committee, and provide independent expert opinion;

(d)  Each committee member can nominate a candidate independent of P, Digital or their affiliates;

(e)  The advisor will issue a non-binding opinion on the more suitable candidate, and the committee will recommend a single candidate with any disagreements noted; and

(f)  The appointment will be subject to shareholders’ approval pursuant to the Article 73(d) of the M&A.

(3)  To avoid deadlock at the shareholders’ level, Digital offers to[39]:

(a)  waive wholly its veto rights over the adoption or amendment of annual budget and operating plan;

(b)  subject to certain qualifications, waive its veto rights over the appointment or removal of counsel or auditor and increases in CEO remuneration; and

(c)  raise the threshold amount for its veto right in relation to financial commitments, expenditures, creation of pledges or encumbrances, disposal of the Company’s assets and settlement of litigation.

29.  Mr Kwan characterises the proposals as substantial concessions which would enhance the operational flexibility of the Company; maintain and respect P’s relative majority voting right and the ability to pass ordinary resolutions in accordance with the 2007 Agreements; and at the same time, preserve Digital’s residual reserve powers over important matters such as major share issuances, amendments to the M&A, and voluntary winding up[40].

30.  In my view, the starting point is that P has made out its case that by reason of exclusion from management, the affairs of the Company have been conducted by the Chengwei Parties, YXT and Digital in an unfairly prejudicial manner. This is a sufficient ground for the court to wind up the Company on the just and equitable ground. While in considering whether to grant the relief sought by a petitioner, the court “is entitled to look at the reality and practicalities of the overall situation, past, present and future” (Grace v Biagoli[41] at §73), this does not mean that the court must consider and assess the proposals put forward by a respondent who was found to have engaged in unfairly prejudicial conduct, and decide whether they are sufficient to redress the wrong done to the petitioner. This is particularly so when the proposals are put forward by Digital (under the control of YXT), an entity with which P has never agreed to cooperate in pursuing the joint venture business, and the proposals have the effect of re-writing the terms of the 2007 Agreements. The reason is obvious. It is not the function of the court to consider whether the commercial terms proposed by the respondent are sufficient or acceptable to the petitioner. The court is not well placed to make that commercial judgement for the parties. It is for the respondent to persuade the petitioner to accept the proposals. If the respondent fails to persuade the petitioner to accept the proposals, I am unable to see any proper basis (none has been identified) for the court to intervene, still less to require the petitioner to accept a new joint venture partner.

31.  Even if, contrary to my view, it is necessary for the court to assess Digital’s proposals, I do not think that they provide a sufficient basis to deny the winding up relief sought by P:

(1)  The background of the Company is unique: P is a premier business school established with the support of the Government of the People’s Republic of China and the European Commission, and the Company was formed to promote P’s reputation as a leading business school in the Mainland[42]. The terms of the 2007 Agreements were carefully calibrated after extensive negotiations between P and the Chengwei Parties.

(2)  YXT was not a party with whom P chose to cooperate. Worse still, YXT (acted through Digital) was found to have taken part in the covert acquisition of a controlling majority stake in the Company through the impugned 2019 Transfer and the 2020 Transfers which had been deliberately concealed from P. The replacement of the Chengwei Parties with YXT as the effective joint venture partner of P was found to be a “forced marriage” between the parties[43].

(3)  If the court were to accept Digital’s proposals, it would in effect be imposing upon P a suite of re-written 2007 Agreements and forcing P to cooperate with a party it did not choose nor trust. Such course would not be just or equitable.

32.  P’s stance is that it has lost all the trust and confidence in Digital’s management and does not accept the bona fides of Digital’s assertion that it is prepared to cooperate with P in the operation of the Company[44]. Such stance is amply justified in light of Digital’s past conduct, which continues even after the conclusion of the Arbitration:

(1)  Digital’s proposals only surface 5 years after YXT acquired an indirect interest in the Company, and 1.5 years after the Tribunal handed down the PFA[45].

(2)  The only reason given for the delay is an assertion that YXT’s management was occupied by the launch of several other business initiatives during the first half of 2025, and only by June 2025 “found time to consider the way to deal with the investment in the Company”[46]. Such explanation is not what one would expect from a party who genuinely wishes to address and remedy its serious wrongdoings in the past.

(3)  Digital is not an innocent party. It had funded the New Directors to contest the Arbitration, which was described by the Tribunal as a “hostile litigation against [P] in the context of the Parties’ contest for control of [the Company]”[47], and subsequently attempted to set aside the PFA together with the Chengwei Parties[48].

(4)  Having lost the Arbitration and the Setting Aside Application and being ordered to pay costs, Digital has not complied with the costs orders made by the Tribunal on 20 November 2024 (“Arbitration Costs Order”) or the costs order made by Mimmie Chan J in the Enforcement Decision (“Enforcement Costs Order”) (collectively “Costs Orders”).

(5)  There is nothing to indicate that Digital has any intention to pay the costs ordered against it. Digital’s legal representatives in the Enforcement Proceedings (King & Wood Mallesons) have ceased to act for it in those proceedings[49], and its current solicitors state that they have no instructions to accept service of statutory demand in relation to the Arbitration Costs Order or the Enforcement Costs Order[50].

(6)  Digital’s assertion that it has been actively liaising or pressing the Chengwei Parties towards the satisfaction of the Costs Orders rings very hollow.

33.  For completeness, I do not think that approach set out in Re Neath Rugby is applicable to the present case. There, the court found that the proposed offer of settlement preserved the spirit of the original agreement between the existing shareholders, the identity of the shareholders remained unchanged, and the prejudice found was not so serious as to warrant a buy-out (§290). By contrast, Digital’s proposals cannot preserve the spirit of the 2007 Agreements made between P and the Chengwei Parties, as the negotiated bargain has been fundamentally subverted by the substitution of YXT (acting through Digital) as P’s joint venture counterparty.

C3.  Alleged Reliance on the Chengwei Parties’ Misrepresentations

34.  In his affirmation dated 18 August 2025, Mr Xiang (on behalf of Digital) asserts that Digital acted in the manner found to be seriously and unfairly prejudicial because the Chengwei Parties had misrepresented that the 2020 Transfers were effective; “but for” those misrepresentations, YXT, Digital and the New Directors would not have undertaken the impugned conduct[51].

35.  Whether the affairs of the Company have been conducted in a manner unfairly prejudicial to the interests of its members is an objective test; it is irrelevant whether it was intended to be so (Re Sam Weller & Sons Ltd [1990] Ch 682, 690-E). Digital’s conduct was, as found by the Tribunal, unfairly prejudicial to P’s interests.

36.  In any event, even if Digital were misled, its recourse lies against the Chengwei Parties. The Tribunal found that YXT had engaged lawyers to conduct legal due diligence and negotiated extensive warranties and indemnities in the agreement by which equity in Digital and ManCo was transferred to Unicentury, which reflected both an awareness of risks as to the transferability of the shares and a deliberate allocation of that risk to the Chengwei Parties and Zhou[52]. Mr Kwan (rightly) does not press this point in his oral submissions.

C4.  P’s Alternative Grounds for Winding Up

37.  It is unnecessary to deal with the alternative grounds advanced by P. For completeness, I shall briefly explain why I consider the alternative grounds advanced by P are well-founded.

38.  Despite Digital’s proposals, there remains a real possibility of functional deadlock between P and Digital:

(1)  At the board level, the core structure remains a 2:2 split between P and Digital; each of P and Digital is entitled to appoint 2 directors and neither party is entitled to appoint the fifth director. As such, no business can be transacted at the board level absent cooperation between P and Digital[53].

(2)  Digital’s proposed nomination and appointment mechanism for the fifth director does not remedy this concern, as it nonetheless requires consensus between P and Digital: both parties have equal say on the nomination committee, and any appointment requires shareholder approval by a majority in voting power[54]. Deadlock may still happen at the stage of appointment.

(3)  At the shareholder level, while P enjoys a relative majority shareholding (by 1%), Digital’s written consent remains necessary for significant corporate actions, such as the adoption or amendment of the annual budget and operating plan of the Company[55].

(4)  While Digital has offered certain concessions on the exercise of its veto rights, significant areas of management remain subject to Digital’s veto right where the matters exceed the proposed thresholds, including major capital expenditure, provision of guarantees, and hiring, dismissal or remuneration of the CEO. Given the parties’ acrimonious relationship, it is unrealistic to expect them to be able to cooperate, let alone in a meaningful manner over any matters. Such disagreement would only paralyse the management of the Company.

(5)  Finally, as regards Digital’s undertaking to meet the quorum requirements at both board and the shareholders’ levels, I agree with Mr Yuen that if Digital reneges upon its undertaking, P’s only recourse would be to return to court, which is undesirable as the court cannot be expected to supervise commercial undertakings on an ongoing basis. In view of Digital’s failure to honour the Costs Orders, it would not be safe or proper to rely on the undertakings given by Digital.

39.  As for the second alternative ground (i.e. the New Directors’ lack of probity), I accept that, viewing the facts in the round, the following conduct, taken cumulatively, demonstrates a want of probity:

(1)  The New Directors kept the 2020 Transfers confidential from P;

(2)  The New Directors purported to act on behalf of the Company in commencing the Arbitration against P’s interests; and

(3)  The New Directors instructed the Company’s secretary to prepare a board resolution to effect the resignation of one of the New Directors without proper authority[56].

C5.  Lack of Alternative Remedy

40.  Finally, while Mr Kwan flags the possibility of a buy out in his skeleton, no proposal has in fact been put forward by Digital.

41.  On the other hand, P has pleaded that buy out is not an appropriate remedy for the following reasons[57]:

(1)  P is not prepared to be bought out where to do so would confer upon the other shareholders a unilateral right to use and access P’s trademarks, trade names, service marks, logos and business names to the detriment of P’s reputation and goodwill;

(2)  P is not desirous of buying out the shares of Digital, as it does not wish to carry on the business of the Company on its own; and

(3)  It would be unreasonable and unjust to require P to purchase Digital’s shares as Digital had since June 2020 wrongfully controlled the Company and deprived P of its right to participate in the management of the Company. During their management, the PRC Operating Entities continued to suffer substantial losses and their value has been severely damaged. It would be unjust for P to purchase Digital’s shares, even if adjustments can be made to the value of the Company (which has not been made out), as the present state of the PRC Operating Entities are very different from the time when P was still involved in the management of the Company.

D.  Disposition

42.  For all the reasons set out above, I hold that:

(1)  P has been deprived of its rights to participate in the management of the Company for 5 years, and its rights and interests as a member of the Company have been seriously and unfairly prejudiced[58];

(2)  The management and conduct of the Company are such that it is neither just nor equitable to require P to continue as a member[59];

(3)  There is no alternative remedy available to redress the wrong done to P; and

(4)  it is just and equitable for the court to make a winding up order against the Company.

43.  As for costs, I make a costs order nisi that the costs of and occasioned by the Petition, including all costs reserved, be paid by Digital to P, the Company and the Official Receiver, to be taxed if not agreed with certificate for 2 counsel.

Mr Rimsky Yuen SC leading Mr Alexsander Wong, Mr Justin Ho and Mr Jonathan Fung, instructed by Chong & Partners LLP, for the Petitioner

Mr Kwan Ping Kan, instructed by Davis Polk & Wardwell, for Digital

The Company is not represented and absent

The Official Receiver is absent

HCCW 12/2021

[2021] HKCFI 3513

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 12 OF 2021

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D E C I S I O N

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A. Overview

1.  By petition presented on 8 January 2021 (as amended on 4 October 2021) (“Petition”) the Petitioner, China Europe International Business School (“P”), seeks to wind up the 7^th respondent, CEIBS Publishing Group Ltd (“Company”), on the just and equitable ground under s.177(1)(f) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) (“CWUMPO”). 

2.  It is P’s case that the Company is a quasi partnership between P and the 1^st to 3^rd Respondents (“R1-R3”), and R1-R3 acted in breach of the “2007 Agreements” (as defined in §20 below) and the “Common Understandings” (as defined in §60 below) reached between P and R1-R3 when the Company was set up in 2007. 

3.  As at the date of the hearing, the Petition was only served on the Company.  P obtained leave to serve the Petition out of the jurisdiction on the 1^st to 6^th respondents on 2 September 2021 but has not effected service on any of them. 

4.  By summons dated 2 February 2021, the Company applies under Order 18 r.19(1), (3) of the Rules of the High Court and inherent jurisdiction of the Court for an order to stay the Petition “pending the outcome of the arbitration between [P] and the [Company]” (“Summons”).  The Company contends that the substance of the disputes in the Petition falls within the ambit of the arbitration agreements contained in the 2007 Agreements. 

5.  Mr Benjamin Yu SC (leading Ms Bianca Yu), counsel for the Company, submits that the Petition should be stayed for the following reasons:

(1)  Save for the Quitclaim, each of the 2007 Agreements contains an identical or substantially similar “Arbitration Clause” (as defined in §21(5) below) (collectively “Arbitration Agreements”).

(2)  The substance of the disputes in the Petition falls within the scope of the Arbitration Agreements.  Specifically, the same matters have been raised by P (a) in the Petition as grounds for seeking a winding up order and (b) to oppose the Company’s claim in “Arbitration” (as defined in §46 below) on the basis that the incumbent directors have no authority to commence the Arbitration. 

(3)  The Petition forms part of P’s attempt to circumvent the Arbitration Agreements and to delay the Arbitration so that it can continue to use the “Property” (as defined in the Quitclaim) in its own business, in breach of the Quitclaim.

6.  On the other hand, Mr Rimsky Yuen SC (leading Mr Alexsander Wong and Mr Justin Ho), counsel for P, opposes the Summons on the following grounds:

(1)  The Company has no interest in the disputes in the Petition and should not be allowed to pursue the Summons. 

(2)  The substance of the disputes fall outside the scope of the Arbitration Agreements in that: (a)a significant part of the disputes concern the common understandings between the original shareholders which do not arise out of the 2007 Agreements; and (b) the complaints in the Petition and the question whether it is just and equitable to wind up the Company should be determined as a whole and cannot be hived off for arbitration.

(3)  The disputes affect third parties who are not parties to the Arbitration Agreements.  This is far removed from the situation in Re Quiksilver Glorious Sun JV Ltd [2014] 4 HKLRD 759 where the “class” interested was limited to the 2 shareholders who were parties to the arbitration agreement.

(4)  A stay should be refused because the Arbitration only concerns P and the Company and the narrow issue of whether P breached the Quitclaim.

7.  Accordingly, the issues which require determination of the Court are:

(1)  Whether there is a dispute between the Company and P and, if so, whether the Company should be allowed to pursue the Summons (section E1 below);

(2)  Whether the substance of the disputes falls within the scope of the Arbitration Agreements (section E2 below); and

(3)  Whether the Court should exercise its discretion to order a stay of the Petition having regard to the matters relied on by P in opposition to the Summons (section E3 below).   

B.     Factual background

8.  The following facts and matters are taken from the Agreed Facts or the Petition and are not in dispute for the purpose of the Summons.

B1.    Parties

9.  P was established in 1984 as a non-profit making joint venture under an agreement made between the Mainland Government (through the Ministry of Foreign Trade and Economic Cooperation) and the European Commission.  Shanghai Jiaotong University and European Foundation for Management Development were appointed as the Chinese and European joint venture partners of P respectively.  P is the first business school in the Mainland to offer full time MBA and Executive MBA programs, and other Executive Education programs which have received global ranking listings. It operates a main campus in Shanghai and has representative office and teaching facilities in Beijing, Shenzhen, Zurich and Accra[1].

10.  China Europe International Business School Foundation (上海中欧国际工商学院教育发展基金会) (“Foundation”) is a registered charitable foundation founded in 2005 under the Mainland laws.  It has been the major platform through which P receives donation.

11.  R1-R3 are companies incorporated in the Cayman Islands and their founder and managing director was (and still is) Mr Eric Xun Li (“Li”)[2]. Until 29 January 2019, R1-R3 were shareholders of the Company, holding 39% shareholding.

12.  The 4^th respondent, Digital B-School China Limited (“Digital”), is a company incorporated in the Cayman Islands.  Until 24 June 2020, its sole shareholder was CW MBA Digital Limited (“CW MBA”) which was a wholly owned subsidiary of Chengwei Capital HK Ltd.  R1 was the sole shareholder of Chengwei Capital HK Ltd.  On 24 June 2020, CW MBA transferred all the shares in Digital to Unicentury Group Ltd (“Unicentury”)[3]. 

13.  The 5^th respondent, 江蘇雲學堂網絡科技有限公司(Jiangsu Yunxuetang Network Technology Co., Ltd) (“YXT”), was established in the Mainland on 22 December 2011.  Its founder and legal representative is Mr Lu Xiaoyan (“Lu”), who controls 27.67% of YXT’s equity[4].  YXT is an affiliate of Unicentury.

14.  The 6^th respondent, CEIBS Management Limited (“ManCo”), is a company incorporated in the BVI. 

15.  The Company was incorporated under the former Companies Ordinance (Cap. 32) on 3 May 2007 to carry on publishing business in the Mainland and to offer products including CEIBS Business review, press books, China-specific cases and online programs under the brand name of “CEIBS”. 

16.  According to the register of members produced by the Company, the past and current shareholders of the Company are as follows:

Name	Date Acquired	Shares Acquired	Transferred out (transferee)	Shares held / (Shareholding)
P	31/10/2007	4,000 (40%) common shares	--	4,000 (40%) common shares
	13/11/2017	4,000,000 class A common shares	--	4,000,000 class A common shares
R1	31/10/2007	4,000,000 class A common shares	13/11/2007 (P)	Nil
		3,354,000 series A preferred shares	30/1/2019 (Digital)	Nil
		3,354 (33.54%) common shares	30/1/2019 (Digital)	Nil
R2	31/10/2007	351,000 series A preferred shares	30/1/2019 (Digital)	Nil
		351 (3.51%) common shares	30/1/2019 (Digital)	Nil
R3	31/10/2007	195,000 series A preferred shares	30/1/2019 (Digital)	Nil
		195 (1.95%) common shares	30/1/2019 (Digital)	Nil
ManCo	31/10/2007	2,100 (21%) common shares	--	2,100 (21%) common shares
		2,100,000 class B common shares	--	2,100,000 class B common shares
Digital	29/1/2019	3,900 (39%) common shares	--	3,900 (39%) common shares
		3,900,000 series A preferred common shares	--	3,900,000 series A preferred common shares

B2.    Inception of the Company

17.  In 2006, P intended to launch a publishing business in the Mainland that meets the growing need of business executives for state-of-the-art management concepts and skills.  Mr Zhou Xuelin, then a staff member of P (“Zhou”), got in touch with Li to explore investmentopportunities.[5]

18.  By a Memorandum of Understanding dated 23 January 2007 entered into between P and R2 (“2007 MOU”), the parties agreed that:

(1)  a company would be set up as the joint venture vehicle between Foundation (on behalf of P) and R2 (clause 1);

(2)  the shareholding structure of the Company would be: P to hold 40% shareholding, R2 to hold 39%, and the remaining 21% would be set aside for “strategic investors, board of directors, board of advisers and the top management” (clause 2F); and

(3)  the Company would have the exclusive right to use the Property for 30 years, but P can withdraw such rights when there are significant changes to the shareholding structure of the Company (clause 2E).[6]

19.  On 3 May 2007, the Company was incorporated with R1 as its sole shareholder[7]. 

B3.    2007 Agreements

20.  In furtherance of the 2007 MOU, a suite of agreements dated 3 May 2007 were entered into between Foundation, R1-R3 and the Company (collectively “2007 Agreements”):

(1)  Series A Preferred Share Purchase Agreement with respect to the Company (“SPA”);

(2)  Investor’s Rights Agreement (“IRA”);

(3)  Voting Agreement (“VA”);

(4)  Share Restriction Agreement (“SRA”); and

(5)  Quitclaim (權利放棄書) signed by P and the Company (R1-R3 are not parties). 

21.  The SPA provides, inter alia, as follows: 

(1)  P will hold 40% of the Company’s shares, R1-R3 to hold 39%, and ManCo to hold the remaining 21% (clause 3.2);

(2)  The parties acknowledge that:

“(i) [R1-R3] currently hold beneficially and of record all of the equity securities of [ManCo], (ii) [ManCo] currently holds 2,100,000 Class B Common Shares of the Company, and (iii) beneficial ownership of such Class B Common Shares held by [ManCo] is intended to be transferred for nominal consideration to members of the management team of the Company or otherwise disposed of as may be agreed by the Board (including the approval of each of the members of the Board designated by [R1-R3], if any).” (clause 7.2)

(3)  The parties agrees to use its best endeavours to consummate each of the transactions contemplated by the “Restructuring Plan”[8] as soon as practicable (clause 7.3);

(4)  The SPA (including the Schedules and exhibits thereto):

“constitutes the full and entire understanding and agreement among the parties with regard to the subjects hereof and thereof.  Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the majority of the voting power of each class or series of the equity securities of the Company” (clause 8.10) (“EAC”) (underlined added);

(5)  “Any dispute, controversy or claim arising out of or relating to this Agreement, or the interpretation, breach, termination or validity hereof, shall be resolved through consultation….  If within thirty (30) days following the date on which such notice is given the dispute cannot be resolved, the dispute shall be submitted to arbitration upon the request of either party with notice to the other” (clause 8.12(a)) (“Arbitration Clause”); and

(6)  Each party shall cooperate with the other in making full disclosure of and providing complete access to all information and documents requested by the other in connection with such arbitration proceedings, subject only to any confidentiality obligations binding on such party.” (clause 8.12(e)) (“Disclosure Clause”).

22.  As regards the governing law of the 2007 Agreements:

(1)  Clause 8.4 of the SPA provides that “This Agreement shall be governed by and construed under the laws of the Hong Kong Special Administrative Region, without regard to principles of conflicts of law thereunder”.

(2)  However, clause 8.12(d) of the SPA states that “The arbitrator shall decide any dispute submitted by the parties to arbitration strictly in accordance with the substantive law of California and shall not apply any other substantive law”. 

(3)  Each of the VA and the SRA contains the provisions identical to clause 8.4 and clause 8.12(d) of the SPA.

(4)  This notwithstanding, P and the Company agree that the reference to the “law of California” was a mistake[9]. The Arbitration was commenced and proceeded on the basis that clause 8.12(d) should be taken as a reference to “the law of Hong Kong”.

23.  Except the Quitclaim, each of the 2007 Agreements contains the same (or substantially the same) EAC, Arbitration Clause and Disclosure Clause.

24.  The VA provides, inter alia, that:

(1)  for as long as they hold any “Equity Securities”[10], each of R1-R3 and P shall have the right to nominate 2 directors on the board of each member of the “Company Group[11]”, and to request that any director be removed and be replaced by any director by submitting a written notice to the board (clauses 2.2, 2.3(a));

(2)  Li and Ms Ping Ping shall be deemed nominated to the board by R1-R3, while Mr Pedro Nueno (“Nueno”) and Zhou shall be deemed nominated to the board by P (clause 2.3(d));

(3)  the “holders of a majority of the Equity Securities of the Company” shall have the right to nominate one director on the board of each member of the Company Group (clause 2.2(c)); and

(4)  none of the parties shall sell, assign, transfer or dispose of in any way, all or any part of any interest in any Equity Securities unless the transferee:

“shall have entered into a binding instrument, in form and substance satisfactory to a majority of the Holders[12], acceding to the terms of this Agreement as if it were an original party hereto and thereto. Any sale, assignment, transfer, pledge, hypothecation or other encumbrance or disposition of any of the capital shares of the Company not made in conformance with this Agreement shall be null and void, shall not be recorded on the books of the Company, and shall not be recognised by the Company” (clause 4.1).

25.  Clause 3.1 of the SRA sets out the rights of first offer in this way (“RFOC”):

“(a) If at any time a Holder (an “Offering Holder”) proposes to transfer any of its Equity Securities (the “Available Securities”), then before offering such Available Securities to any third party that is not either a Holder or an affiliate of a Holder, the Offering Holder shall give each of [P] and the other Holders written notice (the “Offering Notice”) of the Offering Holder’s intent to transfer the Available Securities, which Offering Notice shall include a description of the Available Securities.”

26.  Under the Quitclaim, P agrees (and the Company acknowledges and agrees), inter alia, as follows:

“[P], as inducement for [R1-R3] to enter into the [SPA], hereby confirms that, as of the date hereof, (a) it relinquishes to the Company for use in the course of conducting the business described in Schedule A (the “Business”) [13] any right, interest or other claim (if any) that it has or might have, in any jurisdiction worldwide, in and to the trademarks, trade names, service marks, logos and business names (collectively, “Property”) that (i) the Company uses, will use or may use in the course of conducting the Business; and (ii) are related in any way to, or similar to, the names of ‘China Europe International Business School’ or ‘CEIBS’ (both Chinese and English), and any logo associated therewith; (b) as between it and the Company, it irrevocably and completely waives any and all of its rights, interest or other claim (if any) that it has or might have in and to the Property in any jurisdiction worldwide for use in conducting the Business; (c) it waives any and all lawsuits, arbitrations, other legal proceedings or claims of whatever nature in any manner in respect of the Company’s use of the Property in any jurisdiction worldwide in conducting the Business (collectively, the “Claims”) against the Company, its successors, assigns, affiliates, direct or indirect owners, and each or any of these entities’ agents, representatives, officers, directors, shareholders and employees (Collectively, the “Released Parties”), whether known or unknown, fixed or contingent, now existing or arising or coming into being in the future, and releases all liabilities of the Released Parties in connection with such Claims …”

27.  By an Amendment and Assignment Agreement dated 24 October 2007 (“Assignment”) made between Foundation, P, R1-R3 and the Company, the parties agree that:

(1)  Foundation assigns all its rights and obligations under each of the 2007 Agreements to P (clause 1);

(2)  The Restructuring Plan is replaced by Exhibit M thereto which envisages (a) Li to transfer the shares owned by him in ManCo to Zhou for US$1 and, thenceforth, Zhou will hold 100% shares in ManCo; (b) the Company will increase its authorised capital to US$20,000, divided into 16,100,000 common shares and 3,900,000 series A preferred shares both with par value of US$0.001. R1-R3, ManCo and P will hold 39%, 21% and 40% shareholding in the Company (clause 2.2, Exhibit M);

(3)  Clause 2.3(3) of the VA be amended, such that any replacement of any director nominated by P and R1-R3 to the board of the Company requires the prior written consent of the other party (clause 3.1); and

(4)  Any dispute arising out of or relating to the Assignment shall be governed by clause 8.4 and 8.12 of the SPA (clause 6). 

B4.    Disputes over transfers of shares and appointment of directors

28.  Until 2016, there has not been any issue between P and R1-R3.  At a meeting of the management committee of P held in September 2016, Mr Ding Yuan (“Ding”)[14] expressed his view that the Quitclaim presented a big risk to P as P essentially gave up all its rights to use the Property in the world indefinitely, and it was necessary to re-negotiate the cooperation model between P and R1-R3[15]. 

29.  On 30 June 2016, Zhou transferred all shares in ManCo to Chengwei Capital HK Limited, a subsidiary of R2 (“Chengwei HK”) (“2016 Transfer”), and the transfer was recorded in ManCo’s register of members[16].

30.  In 2017 and 2018, P and R1-R3 engaged in several rounds of negotiations but did not reach any consensus.

31.  Since December 2018, P has prohibited all its professors from working with the Company without the approval of the dean.  In March 2019, P demanded the Company to vacate its office located in P’s campus.

32.  On 29 January 2019, R1-R3 transferred their 39% shareholding in the Company to their affiliate, Digital (“2019 Transfer”)[17].  On 30 January 2019, Digital executed a Deed of Accession under which it agreed to be bound by the terms of the IRA, VA and SRA, as required by clause 4.1 of the VA.

33.  On 24 June 2020:

(1)  Chengwei HK and R1-R3 transferred all the shares in ManCo and Digital to Unicentury (“2020 Transfers”); and

(2)  Unicentury appointed 3 directors in the Company, namely Lu, Ms Qian Zhen (“Qian”) and Mr Zu Teng (collectively “New Directors”), said to have been made pursuant to article 73 of the M&A.

34.  By letter dated 17 August 2020, P referred to the retirement of Nueno and requested the Company to replace Nueno with Mr Jain Dipak Chand (“Chand”) as director pursuant to art. 73-74 of the M&A.

B5.    Disputes over Quitclaim and appointment of directors

35.  On 20 August 2020, P commenced HCA 1400/2020 against the Company (“HCA”) seeking inter alia a declaration that the Quitclaim was not binding on P as it was not executed as a deed and the Company did not provide any consideration in exchange for the rights and interest under the Quitclaim. 

36.  On 26 August 2020, Digital requisitioned an extraordinary general meeting (“EGM”) to be held to consider resolutions (1) to approve and ratify the appointment of the New Directors, (2) to appoint Lu as spokesperson and CEO of the Company, and (3) to appoint King & Wood Mallesons (“KWM”) to advise the Company on the 2007 Agreements and any subsequent disputes in relation thereto (collectively “Proposed Resolutions”). 

37.  On 27 August 2020, Zhou’s employment with P was suspended.

38.  On 31 August 2020:

(1)  KWM filed acknowledgement of service in HCA and reserved the right of the Company to dispute jurisdiction of the Court; and

(2)  P referred to art. 73-74 of the M&A and the removal of Zhou, and requested the Company to appoint Ding as a director to fill the vacancy left by Zhou. 

39.  On 5 September 2020, a board meeting of the Company was held at which resolution was passed to convene the EGM requisitioned by Digital.

40.  By letter dated 8 September 2020, KWM referred to P’s requests for appointment of replacement directors, and stated that (1) the Company had not received any resignation letter from Nueno, and (2) the procedure prescribed by the Companies Ordinance (Cap. 622) (“CO”) for removal of Zhou should be complied with.  KWM requested P to provide the resignation letter of Nueno and a proposal for removal of Zhou in accordance with the requirements of the CO and the M&A.

41.  In their letter dated 16 September 2020, Chong & Partners LLP, P’s solicitors (“CP”), stated that under art. 73 of the M&A, P had the right to unilaterally elect and remove 2 out of the 5 directors of the Company, and ss.462, 463 and 578 of the CO do not apply to the removal of Zhou.  In the same letter, they stated that Zhou had been replaced with effect from 24 August 2020 and he could not attend any board meeting or sign any notice or minutes of any meeting qua director of the Company.

42.  On 21 September 2020, CP provided a copy of Nueno’s resignation letter of the same date to KWM. 

43.  On 28 September 2020, the Proposed Resolutions were passed at the EGM, which was attended by Digital and ManCo.

44.  By letter dated 9 October 2020, KWM stated that (1) P’s failure to attend the EGM was in breach of clause 2.3 of the VA, (2) the EGM was held to ratify the appointment of the New Directors, (3) the transfers of the shares in the Company from R1-R3 to Digital were valid as Digital was as an affiliate of R1-R3.  The Company proposed to pass board resolution to convene an EGM or to use unanimous shareholders’ resolutions to deal with the resignation of Nueno and the appointment of Chand upon P’s confirmation of the appointment of the New Directors. 

45.  On 9 November 2020, P discontinued the HCA.

B6.    Arbitration and Petition

46.  On 23 November 2020, the Company submitted a Notice of Arbitration to the HKIAC (“Arbitration”) and served the same on CP.  In the Notice, the Company stated that:

(1)  a dispute had arisen in respect of the Quitclaim and the SPA (as amended by the Assignment) in that P acted in breach of its contractual obligations under the Quitclaim and in breach of the SPA by disputing the validity and enforceability of the Quitclaim;

(2)  the Company recently discovered that P has since at least 2016 been using the Property in its online courses offered through livestreams and recordings on its website and in its cooperation with Microsoft in developing an “offline+online” dual resources Microsoft AI Business School; and

(3)  the Company seeks a declaration on the binding nature of the Quitclaim and damages or account of profits against P arising from breach of the Quitclaim and the SPA. 

47.  In their letter dated 2 December 2020, CP challenged (1) the validity of the 2020 Transfers and the appointment of New Directors on the basis that they had been done without P’s knowledge and approval; (2) the authority of KWM to represent the Company; and (3) the Company and KWM’s act in “unreasonably and unlawfully” obstructing P’s right to remove Zhou in accordance with the M&A. 

48.  By letter dated 8 December 2020, KWM refuted P’s allegations and requested P to confirm its agreement (1) to appoint Chand as director by way of written resolutions and (2) to convene an EGM under ss.462 and 578 of the CO to pass resolutions to remove Zhou and appoint Ding as director of the Company. 

49.  On 11 December 2020, CP stated that (1) P reserves its right to challenge the authority of the Company to commence the Arbitration and to object to the jurisdiction of the tribunal in relation to the Arbitration; (2) the 2019 Transfer and the appointment of the New Directors were done without P’s knowledge or consent and, as such, constituted a violation of the SPA, VA, the M&A and the “mutual agreements and understandings” between P, R1-R3 and Digital.  The Company and KWM have “unreasonably and unlawfully obstructed the exercise of [P’s] rights to remove [Zhou] under the Company’s M&A”.  Nevertheless, P confirmed its intention to appoint Chand by way of written resolutions of members and to convene a meeting to remove Zhou as director. 

50.  On 8 January 2021, P presented the Petition. 

51.  On 12 January 2021, P submitted its Response to Notice of Arbitration (“Response”) in which it:

(1)  reserved the right to challenge the Company’s “locus standi or authority to commence” the Arbitration and “the tribunal’s jurisdiction to dealt [sic] with or adjudicate on the matters or alleged disputes which form the subject-matter(s) of this arbitration” (§2);

(2)  raised an intended challenge on the 2019 Transfer and the 2020 Transfers, and the exercise of rights by Digital and YXT to gain control of the board and general meeting of the Company on the grounds that they were done in breach of the SPA, VA, SRA, the Assignment and the “various common understandings between the parties (or alternatively acting contrary to [P’s] legitimate expectations) upon which the [Company] was set up”, which are the subject of the Petition (§§16-22); and

(3)  contended that the Company (controlled by Digital/YXT) “does not have any right or locus standi to commence and/or continue this arbitration”; and reserved its right to apply for a stay of the Arbitration under s.181 of the CWUMPO pending final resolution of the Petition (§23).

52.  On 2 February 2021, the Company issued the Summons. 

B7.    Stay Application

53.  On 25 May 2021, being the due date for P to serve its Statement of Defence, P made an application for stay of the Arbitration (“Stay Application”) on the following grounds:

(1)  P disputes the validity of the appointment of the New Directors and the constitution of the board.  There is a hotly contested issue as to whether the Company and KWM have valid authority to commence the Arbitration (“Authority Issue”); 

(2)  The Authority Issue goes to the jurisdiction of the arbitral tribunal (“Tribunal”) to determine the reference, which should be determined before the substance of the Arbitration;

(3)  The correct or most appropriate forum to determine the Authority Issue is the Petition, as the Authority Issue is “closely bound up with the issues to be determined in the Petition Proceedings, which concern the very basis of cooperation between the original shareholders of the [Company] and the circumstances in which new shareholders (and hence, new directors) could be brought into the [Company]”;

(4)  The determination of the Authority Issue by the Tribunal “would unnecessarily lengthen and complicate this Arbitration, the subject matter of which does not concern the underlying relationship between the shareholders of the [Company] at all”; and

(5)  The parties relevant to the determination of the Authority Issue are not before the Tribunal.  At least ManCo and YXT are not parties to the Arbitration Agreements.

54.  The Tribunal heard the Stay Application on 7 July 2021.  At the hearing, the Tribunal requested P to confirm whether it intended to make an “Article 23 Objection” to challenge the jurisdiction of the Tribunal. 

55.  On 21 July 2021, P confirmed to the Tribunal and the Company that it wished to lodge an Article 23 Objection.  On 4 August 2021, instead of lodging an Article 23 Objection, P confirmed that all its grounds for jurisdictional challenge had been set out in the Stay Application.

56.  On 6 August 2021, the Tribunal directed that P’s Article 23 Objection would constitute a formal jurisdictional objection and extended the time for P to file its statement by 10 August 2021.

57.  On 10 August 2021, P filed its Statement of Article 23 Objection (“Art 23Statement”) contending that the Company did not have authority to commence the Arbitration. The contents of the Art 23 Statement are almost identical to those in the Petition. 

58.  The Company filed its Response to the Art 23 Statement on 10 September 2021.

59.  On 20 October 2021, the Tribunal denied the Stay Application without prejudice to P’s right “to renew the Application at a later date should circumstances so warrant”.

C.     P’s Case

60.  It is P’s case that the Company was established on the basis of the relationship of trust and confidence between P and R1-R3 and the following common understandings and legitimate expectations (collectively “Common Understandings”) existed between them:[18]

(1)  The Common Understanding / Legitimate Expectation regarding RFOC[19] that the “pre-emption” right should not be sidestepped or circumvented by R1-R3 first transferring their shares to an affiliate and then to a non-affiliate company, given the object of RFOC was to ensure that P would have the right of first refusal as regards any acquisition of R1-R3’s shares so as to keep them (or their affiliates) as joint venture partners. 

(2)  The Common Understanding / Legitimate Expectation regarding ManCo’s 21% shareholding[20] that the ultimate intended beneficiaries were not R1-R3, but the management team of the Company[21].  Pending implementation of the Restructure Plan, R1-R3 should not (a) transfer the 21% shares to anyone, or (b) enjoy a controlling majority shareholding or be able to control the board through exercising ManCo’s voting rights.  In this regard, R1-R3 have not exercised the voting rights,[22] such as by nominating a fifth director, since the incorporation of the Company in 2007.[23]

(3)  The Common Understanding / Legitimate Expectation of Participation, Consultation and Access to Information[24] which arose out of and/or were evidenced by the fact that P and R1-R3 each had the exclusive right to appoint 2 directors. 

61.  P contends that the Common Understandings formed the basis of the parties’ cooperation, existed from the start of the joint venture and were not superseded by any subsequent written agreement, but applied once the Company was formed.  Reliance is placed on the 2007 MOU (set to expire on 31 January 2007 unless renewed)[25] which, it is said, was “to express the intent” of the parties. 

62.  From 2007 to 2016, the Company had 4 directors.  The shares in ManCo were not transferred to the management team, and R1-R3 did not appoint a 5^th director through exercising the voting rights of the 21% shareholding held by ManCo.[26]

63.  From 2019, R1-R3 acted in breach of the 2007 Agreements, the Common Understandings and/or the M&A in that:  

(1)  On 29 January 2019, the 2019 Transfer was made without P’s notice or consent[27], and P only found out from the Company’s 2019 Annual Return filed on 3 May 2019;[28]

(2)  In June 2020, YXT through the 2020 Transfers acquired 60% of the Company’s shareholding and became the controlling shareholder;[29]

(3)  On 24 June 2020, Li, Ms Ping Ping and Ms Ma Ying resigned and the New Directors were appointed without P’s consent.  The EGM was held against the repeated objection from P;[30]

(4)  Since March 2020, P has repeatedly requested for change of its 2 nominated directors but to no avail[31].  P remains unable to appoint a single director of its choice (“Exclusion from Management”);[32] and

(5)  In August 2020, YXT published certain advertisements under its name which contained representations as to the Property without any authorisation from P (“Misuse of Property”).[33]

64.  The above breaches led to a complete and irretrievable breakdown of mutual trust and confidence between P and R1-R3/Digital[34].

D.     Applicable principles

65.  The following principles are not in dispute. 

66.  Hong Kong is a pro-arbitration jurisdiction (Shandong Hongri Acron Chemical Joint Stock Co Ltd v PetroChina International (HK) Corp Ltd, CACV No. 31/2011, 25 July 2011 at §13, per Cheung CJHC (as he then was)).  It is common for commercial parties to include arbitration clauses in their corporate/partnership documents. As pointed out in Born, International Commercial Arbitration,3^rd ed (2021) vol 1 §10.07:

“It is common in some legal systems to include arbitration clauses in the constitutive document for a legal entity. Examples include arbitration clauses in articles of association (or corporate charters) of a company or a deed of a partnership. Parties include such provisions in corporate/partnership documents for obvious commercial and business reasons: the members of a corporate body or a partnership wish to have their disputes resolved in a private, commercially-oriented manner, over which they have a substantial degree of control. The ongoing cooperative nature of corporate or partnership relations makes arbitrations particularly well-suited for resolving shareholder or partnership disputes.

  In most legal systems, arbitration clauses in corporate or partnership documents are valid and enforceable.  This is merely a straightforward and commercially-sensible application of the general rule under leading international arbitration conventions and national legislation that arbitration agreements are presumptively valid.  This rule applies with particular force in corporate or partnership contexts, where parties have special reasons for desiring a commercially-experienced tribunal and the privacy and informality of the arbitral process.”

67.  In construing the scope of an arbitration clause, the Court starts from the presumption of a “one-stop method of adjudication”, covering all disputes between the parties to a given contract, will apply in almost every case (Merkin and Flannery on the Arbitration Act 1996, 6^th ed., p.323).  The rationale for adopting this approach was explained by Lord Hoffmann in Fiona Trust v Privalov [2008] 1 Lloyd’s Rep 254, at §13:

“In my opinion the construction of an arbitration clause should start from the assumption that the parties, as rational businessmen, are likely to have intended any dispute arising out of the relationship into which they have entered or purported to enter to be decided by the same tribunal. The clause should be construed in accordance with this presumption unless the language makes it clear that certain questions were intended to be excluded from the arbitrator’s jurisdiction. As Longmore LJ remarked, at para 17: ‘if any businessman did want to exclude disputes about the validity of a contract, it would be comparatively easy to say so.’” (underlined added).

68.  Although winding up proceedings do not fall within s.20 of the Arbitration Ordinance (Cap. 609)[35], the Court has inherent jurisdiction to grant a stay of a petition presented on the just and equitable ground in favour of arbitration.  In considering whether to grant a stay, the Court will first “identify the substance of the dispute between the parties and ask whether or not the dispute is covered by the arbitration agreement”.  Where the substance of the dispute falls within the arbitration clause, the Court may require the parties to have their dispute be determined by arbitration, before the Court considers whether to grant a winding up order (Re Quiksilver Glorious Sun JV Ltd [2014] 4 HKLRD 759[36], §§14-15, 21-23, per Harris J). 

69.  The basis for requiring the shareholders subject to an arbitration agreement to have their dispute being determined by arbitration has been explained by Patten LJ in Fulham Football Club (1987) Ltd v Richards [2012] Ch 333, at §§83-84 in this way:

“83. … In [petitions under s.122(1)(g)[37] to wind up the company on just and equitable grounds] the arbitration agreement would operate as an agreement not to present a winding up petition unless and until the underlying dispute had been determined in the arbitration. The agreement could not arrogate to the arbitrator the question of whether a winding up order should be made. That would remain a matter for the court in any subsequent proceedings. But the arbitrator could, I think legitimately, decide whether the complaint of unfair prejudice was made out and whether it would be appropriate for winding up proceedings to take place or whether the complainant should be limited to some lesser remedy. It would only be in circumstances where the arbitrator concluded that winding up proceedings would be justified that a shareholder would then be entitled to present a petition under section 122(1)(g). In these circumstances the court could be invited to lift any stay imposed on proceedings under section 9(4)[38]. In much the same way, it would, I think, be open to an arbitrator who considered that the proper solution to a dispute between a shareholder and the company was to give directions for the conduct of the company’s affairs to authorise the shareholder to seek such relief from the court under section 994. But such cases are likely to be rare in practice. If the relief sought is of a kind which may affect other members who are not parties to the existing reference, I can see no reason in principle why their views could not be canvassed by the arbitrators before deciding whether to make an award in those terms. Opposition to the grant of such relief by those persons may be decisive. Similarly if the order sought is one which cannot take effect without the consent of third parties then the arbitrators’ hands will be tied.

84. But, as explained earlier in this judgment, these jurisdictional limitations on what an arbitration can achieve are not decisive of the question whether the subject matter is arbitrable. They are no more than practical consequences of choosing that method of dispute resolution: see Societe Commerciale de Reassurance v ERAS (International) Ltd (formerly Eras (UK)) [1992] 1 Lloyd’s Rep 570 and Wealands v CLC Contractors Ltd (Key Scaffolding, Third Party) [1999] 2 Lloyd’s Rep 739.” (underlined added)

70.  Where the complaints “all form part of one continuing narrative”, the Court will be reluctant to stay the petition on the ground that some (but not all) the factual matters in dispute are the subject of an arbitration clause “unless it is clear and obvious that a dispute the subject of an arbitration clause would be central and probably determinative of the factual issues raised by the Petition” (Champ Prestige International Ltd v China City Construction (International) Co Ltd[2020] HKCFI 355 §12, per Harris J). 

71.  Mr Yuen submits that given the jurisdiction to grant a stay is a discretionary one, the general principles in relation to case management stay are relevant.  The Court will take into account all relevant circumstances including: (1) what will serve the ends of justice between the parties and the administration of justice generally; and (2) whether a stay will cause injustice to any party.  In particular, where an action was commenced as of right, the Court should only grant a stay when there are very good reasons and in rare and compelling circumstances (Poon Ka Man Jason v Cheng Wai Tao[2018] HKCFI 771 §§36-39, per Au-Yeung J; 廈門新景地集團有限公司v Eton Properties Limited[2018] HKCFI 910 §§23-28, per Mimmie Chan J). 

72.  I am unable to agree with the submissions.

(1)  The considerations for a “case management” stay are different from the considerations of a stay for arbitration.  In an application for a case management stay, the plaintiff is not bound by any arbitration agreement and is entitled to bring the action as of right.  The Court is asked to stay the action in favour of another forum which the plaintiff has never agreed to.  It is for this reason that the Court said that it is only when there are very good reasons and compelling circumstances that a stay would be granted. 

(2)  By contrast, in an application for stay of the petition in favour of arbitration, the petitioner is bound by the arbitration agreement, and the Court is being asked to give effect to that agreement by requiring the petitioner to refer the dispute to arbitration. 

(3)  In my view, once it is shown by the party seeking a stay that the substance of the dispute falls within the scope of the arbitration agreement, the burden then shifts to the petitioner to satisfy the Court as to why it should be allowed to act in breach of the arbitration agreement by pursuing the dispute in Court.  This accords with the principle that the Court would normally give effect to the contractual bargains between the parties, whether in a commercial dispute commenced by an action or in a shareholder dispute commenced by a petition, as elaborated in §§83-84 below.

E.     Discussion

E1.    Whether the Company should be allowed to pursue the Summons

73.  Mr Yuen submits that it is “unusual” for the Company (and not any of the other respondents) to seek to stay the Petition in favour of arbitration, as it is clear and settled law that:

(1)  The disputes herein are disputes amongst shareholders of the Company.  The Company is only a nominal party and generally should not participate in these proceedings (Re Core Pacific-Yamaichi International (HK) Ltd, HCCW 804/2003, 17 October 2003 §43, per Barma J (as he then was)).

(2)  In order to participate in a dispute between the shareholders in a just and equitable winding up petition, the Company bears a “heavy onus” of demonstrating (by cogent and clear evidence) that it is necessary or expedient for it to have actively participated (Re a Company (No 1126/1992)[1993] BCC 325, 333;Re Core Pacific-Yamaichi §§43, 44, 47 & 48).

(3)  Hence, in Re Core Pacific-Yamaichi, it was held, in the context of the company’s application to stay a winding up petition pending arbitration, that the company was merely a nominal party.  As a result, there was no “dispute” between the petitioner and the company upon which any arbitration agreement could bite (§§37-38). 

74.  Further, Mr Yuen submits that it is common ground that the disputes covered by the Petition are “essentially shareholders’ disputes”[39], and P’s complaints are directed against R1-R3, Digital, YXT and ManCo, not the Company.  There is thus no “dispute” between P and the Company upon which the Arbitration Agreements can bite.  The Company’s contention that it has an interest in participating in these proceedings because (1) the Petition seeks to “forestall” its enforcement of the Quitclaim through arbitration, and (2) it has an interest in “enforcing the arbitration agreement between itself and the Petitioner”[40] has no merit given that:

(1)  even if the Company has an interest in enforcing the Quitclaim, it does not follow that it has an interest in the underlying disputes in the Petition;

(2)  P’s case as pleaded in the Petition involves equitable considerations including common understandings and legitimate expectations, the effect of which renders the insistence by a party on its strict legal rights in the company to be unjust and inequitable (Ebrahimi v Westbourne Galleries Ltd [1973] AC 360, 379D;Kam Leung Sui Kwan v Kam Kwan Lai(2015) 18 HKCFAR 501 §§43-46).  As such, the disputes plainly go beyond a pure contractual dispute (even if breach of contract is also involved) (cf. Re Team Y&R Holdings Limited, CACV 6/2017, 21 July 2017, §§14-17); and

(3)  as the Company accepts, the disputes are between the shareholders of the Company inter se.  In seeking to take an active stance in these proceedings, the Company has unnecessarily embroiled itself in the disputes and is misapplying its money to fund the present Stay Application (Re a Company (No. 004502 of 1988), ex parte Johnson [1992] BCLC 701).

75.  I do not think that there is a proper basis to disallow the  Company from pursuing the Summons for the following reasons. 

76.  First, while it is correct that in general, a company should not take an active role in a dispute between the shareholders inter se, this is not to say that the Court has to take a blinkered approach and reject any application made by the Company in a petition on just and equitable ground.

(1)  As explained by Harman J in ex parte Johnson, (as approved by the Court of Appeal in Re CG&L Investments Ltd [1993] 1 HKLR 107, at 111(20)-112(15)), it is only if it is shown that the directors of a company have been causing the company’s money to be spent on financing the resistance to either a “pure” unfair prejudice petition or a winding up petition based on just and equitable ground that the Court would prevent such expenditure.  That is not to say that the company should not be allowed to incur any legal costs in the proceedings.  Rather, the Court is reiterating the need for the company to seek specific approval from the Court for any expenses incurred by the company in connection with the winding up proceedings (Re CG&L Investments Ltd, at 112(15)-(20)).  As and when the application for sanction is made, the Court will consider the nature of the expenses and decide whether or not the company is justified in incurring such expenses.   

(2)  Similarly, in Re a Company cited by Mr Yuen in support of his contention that “proof of cogent evidence” is required from the company, the requirement was stated by Lindsay J in respect of an application made by the company for a pre-emptive costs order to permit it to actively participate in the unfair prejudice petition in advance of the determination of the petition. It was in that context that the court said “such approval in advance is likely to be given only upon proof by cogent evidence of the most compelling circumstances” (at 334G-H).  It would be up to the trial judge to order that some or all of the company’s costs should be borne otherwise than by the party or parties who shall be directed to pay the costs of the petition (at 335A-B).

77.  Second, I agree with Mr Yu’s submissions that it is not correct to say that the Company has no interest in the Petition or that the Company is only a nominal party:

(1)  As can be seen from the events described in §§35 - 46 above, the dispute between the parties started when P claimed that the Quitclaim is not valid, followed by the commencement of HCA against the Company. Subsequently, both parties agreed that the disputes on the validity of the Quitclaim and whether P acted in breach of the SPA are covered by the Arbitration Agreements and should be determined in the Arbitration. 

(2)  As is clear from the Art 23 Statement, P relies on the same matters stated in the Petition as the bases for contending that the Company did not have authority to commence and pursue the Arbitration.  The Company takes issue with the matters raised by P in the Art 23 Statement, and the dispute will have to be determined in the Arbitration.   

(3)  On the basis of the above facts, the Company clearly has a dispute with P regarding the core contentions raised in the Petition.  These features distinguish the present case from Re Core Pacific-Yamaichi where the company was a mere nominal party in the dispute.

78.  Third, the Company has not applied for a validation order to sanction the legal costs incurred in pursuing the Summons. The question whether or not the Company is entitled to use its assets to pay the costs of the Summons is not an issue which the Court has to decide at this stage.  It is therefore wrong to assume that the Company will necessarily be entitled to use its assets to pay the costs of the Summons or that its use of funds to pursue the Summons per se constitutes a misuse of assets.   

E2.    Whether the substance of the disputes fall within the Arbitration Agreements

79.  Mr Yuen submits that the substance of the disputes in the Petition concerns the existence and breach of the Common Understandings which are not arbitrable. 

(1)  In the Petition, P relies heavily on the Common Understandings and the equitable constraints which the Court can impose on the exercise of legal rights by the shareholders.   

(2)  The substance of the disputes concerns whether the Common Understandings existed and whether there were any breaches thereof, which goes beyond the terms of the 2007 Agreements.

(3)  In any event, the issue whether the M&A has been breached falls outside the scope of the Arbitration Agreements.   

80.  Specially, in relation to conduct complained of in the Petition:

(1)  2019 Transfer: P’s case is that the Transfer was done in breach of the Common Understanding that the RFOC should not be sidestepped by R1-R3 first transferring their shares to an affiliate (Digital) and then to a non-affiliate company (YXT) without giving P notice.  Such Common Understanding can be inferred from (a) the 2007 MOU which provides that P can withdraw the right given to the Company to use the Property where there were “significant changes to the shareholder structure of the company” (clause 2E); and (b) the SPA that the shareholding structure is to be maintained.

(2)  Further, this complaint hinges upon the question whether art.  9 of the M&A, which provides that the Company shall only recognise and “register transfers of shares made in accordance with any agreements binding [on the Company]”, has been breached due to the non-compliance of clause 4.1 of the VA.  Whether there was a breach of the M&A is not arbitrable. 

(3)  2020 Transfers and voting rights over 21% shareholding in ManCo: The dispute concerns whether the Common Understanding regarding ManCo’s 21% shareholding existed and whether it was breached.  P contends that the parties intended ManCo to be beneficially owned by the management team of the Company, evidenced by clause 2F of the 2007 MOU, clause 7.2 of the SPA and clause 1 of the Restructure Plan (under the Assignment).

(4)  Appointment of New Directors and Exclusion from Management: This depends on whether the Common Understanding regarding ManCo’s 21% shareholding existed.  The breach of clause 2.3(e) of the VA requiring P’s consent to be obtained is not the substance of the issues in dispute.  P’s case on Exclusion from Management is also based on breach of art. 73(b) of the M&A. 

(5)  Misuse of Property: the dispute is not strictly about a breach of the Quitclaim, but whether there had been a breach by those in control of the Company (i.e. Digital / YXT) contrary to the Common Understanding. 

(6)  The complaint must be considered against the 40:39:21 shareholding structure with P to remain as the majority shareholder.  Otherwise, the Quitclaim would not make any commercial sense as the Property would be misused by a party that bears no connection with P.  This is also evident from the restructuring negotiations in 2017-18 where R1-R3 continued to accept P’s majority in the business.[41]

(7)  Breakdown of mutual trust and confidence: This is premised on the existence of a quasi partnership between the shareholders, which is beyond the Arbitration Agreements (cf. Champ Prestige§12; Re China CVS (Cayman Islands) Holding Corp, CICA (Civil) Appeal 7-8/2019, 23 April 2020, §§114-117).

81.  In my view, the substance of the disputes in the Petition fall within the scope of the Arbitration Agreements for the following reasons. 

82.  First, although Mr Yuen places much emphasis on the Common Understandings and the equitable constraints on the exercise of legal rights on R1-R3, it is clear from the Petition that until the incorporation of the Company, there was no prior relationship or dealings, let alone personal relationship or personal dealings between P and R1-R3, which are necessary for the Court to find that there was “something more” beyond what the shareholders had agreed in the 2007 Agreements.  This is fundamental because in considering a petition on just and equitable or unfair prejudice ground, the starting point is that shareholders are required to act in accordance with the contractual bargains, and the burden is on the petitioner to satisfy the Court that there is “something more” beyond what the parties agreed in contracts. 

83.  The importance of requiring the shareholders to act in accordance with the contractual bargains was explained by Hoffmann LJ (as he then was) in Re Saul D Harrison [1994] BCC 475 at 488F-H:

“In deciding what is fair or unfair for the purposes of s 459[42], it is important to have in mind that fairness is being used in the context of a commercial relationship. The articles of association are just what their name implies: the contractual terms which govern the relationships of the shareholders with the company and each other. They determine the powers of the board and the company in general meeting and everyone who becomes a member of a company is taken to have agreed to them. Since keeping promises and honouring agreements is probably the most important element of commercial fairness, the starting point in any case under s 459 will be to ask whether the conduct of which the shareholder complains was in accordance with the articles of association.” (underlined added).

84.  The petitioner needs to satisfy the Court that there is “something more” beyond what the parties agreed in contracts:

(1)  In Re Posgate & Denby (Agencies) Ltd [1987] BCLC 8Hoffmann J (as he then was) said at 14d-f:

“Although the answer to this question must in each case depend on the particular facts, it is well to recall that in Ebrahimi v Westbourne Galleries Ltd, Lord Wilberforce said that in most cases the basis of the association would be ‘adequately and exhaustively’ laid down in the articles. The ‘superimposition of equitable considerations’ requires, he said, something more. This was said in the context of the ‘just and equitable’ ground for winding up, but in my judgment it is equally necessary for a shareholder who claims that it is ‘unfair’ within the meaning of s 459 for the board to exercise powers conferred by the articles to demonstrate some special circumstances which create a legitimate expectation that the board would not do so. Section 459 enables the court to give full effect to the terms and understandings on which the members of the company became associated but not to rewrite them.” (underlined added)

(2)  In Ebrahimi v Westbourne Galleries [1973] AC 360, the “something more” are “considerations of a personal character between one individual and another” (at 379B-G, per Lord Wilberforce).

(3)  In Re Astec (BSR) plc [1998] 2 BCLC 556, 588e-f (cited with approval by Lord Hoffmann in O’Neill v Philips [1999] 1 WLR 1092, at 1011), Jonathan Parker J (as he then was) described the requirement of personal relationship or dealings between the shareholders as follows:

“… in order to give rise to an equitable constraint based on ‘legitimate expectation’ what is required is a personal relationship or personal dealings of some kind between the party seeking to exercise the legal right and the party seeking to restrain such exercise, such as will affect the conscience of the former. In my judgment, in the absence of a personal relationship or personal dealings of that kind a shareholder can reasonably and legitimately expect no more than that the board of the company will act in accordance with its fiduciary duties and that the affairs of the company will be conducted in accordance with its articles of association and with the Act. Such expectations merely affirm the existence of the shareholders’ legal rights. They do not constrain the exercise of those rights.” (underlined added)

85.  When asked about what is the basis for the Court to impose equitable constraints over R1-R3’s exercise of legal rights, Mr Yuen points to the background of P (§5 of Petition), the history of cooperation (§11), interaction between P and Li (§13) and the 2007 MOU in particular clause 2E (§§15, 18).    

86.  However, it seems to me that the above matters are no more than the background to the cooperation between P and R1-R3 based on the 2007 Agreements.  There is no averment of any prior relationship or dealings between P and R1-R3 which would give rise to any equitable constraints on the exercise of legal rights between the original shareholders. 

87.  In any event, it has not been explained by P as to how the Common Understandings, said to have existed before the 2007 Agreements, could survive in light of the EAC where the parties agreed that the SPA “constitutes the full and entire understanding and agreement among the parties with regard to the subjects hereof and thereof”.   

88.  Second, as Mr Yu submits, on P’s case, the existence of the Common Understandings involves a consideration of the proper construction of the 2007 Agreements against the factual matrix so as to determine whether the parties had such Understandings.  If and to the extent that P seeks to rely on the 2007 MOU or any pre-contractual negotiations to found the Common Understandings, such materials are inadmissible for the purpose of construing the meaning of the 2007 Agreements (Jumbo King Ltd v Faithful Properties Ltd (1999) 2 HKCFAR 279 at 296 D-I, per Lord Hoffmann NPJ).  In any event, the 2007 MOU is expressly stated to expire on 31 January 2007, before the 2007 Agreements were executed.   

89.  Third, even if (contrary to my view) P has pleaded a viable basis for the Common Understandings and the equitable constraints on R1-R3’s exercise of legal rights in the Petition, it is clear that the substance of the disputes falls within the scope of the Arbitration Agreements, which cover “any dispute, controversy or claim arising out of or relating to this Agreement”.  In my view, the Arbitration Agreements are wide enough to cover the disputes over the existence and effect of the Common Understandings as they are plainly disputes “relating to” the 2007 Agreements.  Such construction also accords with the approach of the Court in construing the scope of an arbitration clause, as discussed in Merkin and Fiona Trust.

90.  Fourth, as regards P’s case that the 2019 Transfer and the 2020 Transfers were made in breach of the M&A, it seems to me that such disputes also fall within the scope of the Arbitration Agreements as they are disputes “arising out of” and “relating to” the 2007 Agreements.    

91.  I also agree with Mr Yu’s submissions that whether the 2019 Transfer and the 2020 Transfers were made in breach of the M&A turns on whether the Transfers were made in breach of the 2007 Agreements, specifically, clause 2.3(e) of the VA, as amended by clause 3 of the Assignment. 

92.  Fifth, it appears from the contents of the Art. 23 Statement that P itself considers that the disputes over the existence / breach of the Common Understandings and the breach of the M&A are disputes falling within the scope of the Arbitration Agreements as P relies on the same allegations pleaded in the Petition as the bases for suggesting that the Company did not have authority to commence the Arbitration.  This is not surprising given that on P’s own case, the Common Understandings (and hence the equitable constraints on R1-R3’s exercise of legal rights) are said to have existed at the time of the incorporation of the Company when the shareholders were P, R1-R3 and ManCo (which was then under the control of R1-R3).

93.  I note that in the Decision on the Stay Application dated 20 October 2021, the Tribunal stated (at §24) that:

“… nothing in the rules applicable to this arbitration appears to prevent [P] from bringing its claims for breach of agreement and breach of common understandings and/or legitimate expectation as merits claims in this arbitration, for resolution together with the Authority Issue. Those claims are asserted primarily against [R1-R3] (and their affiliate, [Digital]), with whom the agreements and common understandings are alleged to have been formed”.

94.  For the above reasons, I hold that the substance of the disputes raised in the Petition falls within the scope of the Arbitration Agreements.  It follows that the disputes should be determined in arbitration unless P can discharge the burden of satisfying the Court as to why it should be allowed to pursue the disputes by way of the Petition to which I now turn.

E3.    Whether the matters raised by P can justify a stay

95.  Mr Yuen relies on the following matters.

96.  First, where, as here, the complaints in the just and equitable petition are bound up with certain facts and complaints which are beyond the Arbitration Agreements, a stay is not appropriate.  Champ Prestigeand the decision of the Cayman Islands Court of Appeal in Re China CVS are examples where the Court refused to stay the petitions in favour of arbitration. 

97.  Second, the issues in the Petition affect third parties who are not parties to the Arbitration Agreements (and whose views are presently unknown). 

(1)  This is an independent and powerful factor militating against the grant of a stay (De Cruyenaere v Green Acres Memorial Gardens Limited (1961) 30 DLR (2d) 627, 630-631). 

(2)  The referral to arbitration must be viewed as engaging third party rights in the sense that it is an attempt to “delegate to the arbitrators what is a matter of public interest which cannot be determined within the limitations of a private contractual process” (Fulham §40). 

(3)  Both ManCo and YXT are not parties to the Arbitration Agreements.  Yet, ManCo is plainly affected by the Petition qua shareholder of the Company. Reliance is placed on §72 of the Petition, where there is an express allegation that the 2020 Transfers were wrongful.  Similarly, there are numerous allegations directed at YXT as the ultimate beneficiary of the 60% shares originally under the control of R1-R3.[43]  It is impossible to see how the disputes between the parties can be resolved in the Arbitration in their absence. 

(4)  The issues in the Petition cannot be properly resolved without these parties being joined to the proceedings.[44]  It is wrong for the Company to suggest that the inclusion of these parties in the Petition is “not directly relevant to the subject disputes herein”.[45]

98.  Third, the nature of the Petition is a class remedy.  This feature renders it inappropriate to stay the Petition in favour of arbitration. 

99.  Fourth, a stay of the Petition will only necessitate further costs and expenses and lead to duplication of resources, as any determination by the Tribunal would still leave the underlying disputes between the shareholders, who are non-parties to the Arbitration Agreements, unresolved.

100.  Fifth, the sole arbitrator was appointed based on his expertise in intellectual property rights.[46]  He is not a qualified Hong Kong or English lawyer.  Besides, although the Tribunal dismissed the Stay Application, he expressly stated that the application can be renewed depending on the decision of the Court.

101.  At the hearing, this Court enquires with Mr Yu as to whether ManCo and YXT will be willing to participate in the Arbitration and whether they agree to be bound by the findings and determinations of the Tribunal.  The latter consideration is relevant given that if ManCo and YXT are not parties to the Arbitration, they are not bound by any findings and determinations made by the Tribunal.  It is possible that ManCo and YXT will insist on the Court determining the same disputes irrespective of the findings of the Tribunal.  Mr Yu confirms that both ManCo and YXT are willing to provide an undertaking to the Court that they agree to be bound by the findings and determinations of the Tribunal. 

102.  In response, Mr Yuen submits that P has already indicated that it will not agree to have the disputes vis-a-vis ManCo and YXT to be determined in the Arbitration.  More importantly, even if ManCo and YXT agree to be bound by the findings of the Tribunal, it is difficult to see how the Tribunal can fairly or completely determine the disputes as ManCo and YXT will not be under any obligation to give evidence or to provide discovery of documents relevant to the disputes in the Arbitration.   

103.  I should add that after the hearing, in their letter dated 29 October 2021, KWM enclosed 3 identical undertaking given by each of Digital, ManCo and YXT on 27 October 2021 (together “Undertakings”) in these terms:

“In the event that this Honourable Court shall accede to the Company’s application and grant a stay of the Petition pending the outcome or determination of the Arbitration, we hereby undertake to this Honourable Court that on the basis of the issues which are presently before the Tribunal including in particular the issues raised by the [P] in their Statement of Article 23 Objection dated 10 August 2021, we agree to be bound by the findings or determinations of the Arbitral Tribunal in the Arbitration on such issues insofar as such findings or determinations affect our rights and obligations.” (underlined added)

104.  In CP’s letter dated 3 November 2021, P contends that the Court should not give any weight to the Undertakings, and effectively repeats the same points already made by Mr Yuen at the hearing.   

105.  For the reasons explained in §§106 - 113 below, I do not think that the matters relied on by Mr Yuen are sufficient justifications for P to pursue the disputes by way of the Petition.

106.  First, the matters which are said to fall outside the scope of the Arbitration Agreements are issues concerning the existence / breach of the Common Understandings and the breach of the M&A.  For the reasons explained in §§88 - 93 above, I consider that such issues fall within the scope of the Arbitration Agreement.  The present case is very different from Champ Prestige and Re China CVS, where only one out of the many issues between the parties fell within the scope of the arbitration agreements. 

107.  Second, the third party rights or interests identified by Mr Yuen are matters for ManCo and YXT.  It is not for P to say that their rights or interests will be affected.  In any event, in their Undertakings, both ManCo and YXT agree to be bound by the findings and determinations to be made by the Tribunal.  The effect of such agreement is that ManCo and YXT will not be able to raise the same disputes in these proceedings.  This also takes away the fourth point made by Mr Yuen about the duplication of resources and the need to determine the same issues in the Petition. 

108.  Mr Yuen says that as non-parties to the Arbitration, ManCo and YXT will not be required to give evidence or to make discovery in the Arbitration.  While this may well be correct, it does not mean that their evidence and documents will not be adduced. This is because:

(1)  R1-R3 and Digital, being the counter-parties to or were involved in the impugned transactions or the conduct complained of by P, are obliged to participate in the Arbitration if so required by P or the Company.  They will have to adduce evidence and make discovery of the documents relevant to the disputes in the Arbitration. 

(2)  In any event, it has not been demonstrated by P as to why the evidence of ManCo and YXT are relevant or necessary to the determination of the disputes in the Arbitration.  I say this because on P’s own case, the Common Understandings were reached between P and R1-R3 (not ManCo or YXT).  On the basis of the evidence filed by the Company in support of the Summons, there is no dispute on the fact that the 2019 Transfer, the 2020 Transfers, the appointment of New Directors took place and that the 2 new directors nominated by P has not been appointed to the board.

109.  Third, contrary to Mr Yuen’s submissions, a winding up petition presented on the just and equitable ground is a dispute between the shareholders, not a class remedy as such. 

(1)  In presenting a petition on the just and equitable ground, the petitioner has to show that it has the necessary interest in pursuing the petition.  This requires the petitioner to plead and prove that the company is solvent.  So long as the company is solvent, the interests of the creditors are not engaged as the company will be able to pay all its debts, and the creditors do not have the necessary interest to participate in the proceedings. 

(2)  By contrast, a petition on insolvency ground is a class remedy, which is a convenient label to describe the nature of the winding up proceedings commenced by a creditor on insolvency ground. Upon such a petition having been presented against the company, it is unnecessary (and indeed impermissible) for the other creditors to present their own petition against the same company. Instead, the other creditors may participate in the proceedings by filing the requisite notice of intention to appear in accordance with rule 30 of the Companies (Winding-up) Rules.   

110.  I should say something about the joinder of ManCo and YXT in the Petition.

(1)  Although ManCo and YXT are joined as respondents to the Petition.  Their joinder is not necessary as the only relief sought by P is a winding up order against the Company.  No order is sought against either ManCo and YXT. 

(2)  If they have not been joined as respondents, ManCo and YXT can choose to participate in the proceedings by filing the requisite notice to appear in accordance with rule 30, but there is no obligation for them to do so. 

(3)  Even after ManCo and YXT have been joined as respondents, it does not mean that they have to take an active role in the proceedings.  They can remain neutral and inform the Court that they will abide by any order which the Court decides to make in respect of the Petition or they can oppose the Petition. 

111.  Irrespective of the stance of ManCo and YXT, the question whether it is just and equitable to wind up the Company does not arise unlessand until P has discharged the burden of proving its case as pleaded in the Petition.  It is only then that the Court will have to decide whether on the basis of the case as established by P, the Company should be wound up.

112.  There is nothing objectionable for the Tribunal to resolve and determine the disputes raised by P in the Arbitration (which, as stated above, are the same as the disputes in the Petition), and for the Court to consider the findings and determinations made by the Tribunal in deciding  whether or not the Company should be wound up.  Indeed, that was the approach described by the English Court of Appeal in Fulham Football (see §69 above). 

113.  Lastly, I do not think it is open to P to suggest that the sole arbitrator does not have the requisite qualification or experience to determine the disputes in the Arbitration, having itself agreed to the appointment.   

F.     Disposition and costs

114.  For the above reasons, I consider that this is an appropriate case to exercise the discretion to stay the Petition pending determination of the disputes in the Arbitration. 

115.  I make the following order:

(1)  Upon the Undertakings given by Digital, ManCo and YXT, the Petition be stayed pending determination of the Arbitration. 

(2)  Upon determination of the Arbitration, the parties do have liberty to restore the Petition for further directions or order.

116.  As for costs, I make a costs order nisi that P shall pay the costs of and occasioned by the Summons, with certificate for 2 counsel.  The costs will be assessed by way of gross sum assessment.  The Company shall lodge its statement of costs for gross sum assessment within 3 days of this Decision, and P to provide its comments, if any, within 3 days thereafter.