Giant Crystal Ltd v. Energy International Investments Holdings Ltd
Read the full judgment text of HCMP 1903/2015 on BabelCite. This High Court CFI judgment was delivered on 31 August 2015.
1. On 5 August 2015, the Petitioner (“ Giant Crystal ”) issued a Petition against the Respondent (the “ Company ”) for various declaratory and injunctive reliefs on the ground of unfair prejudice against Giant Crystal.
Cited by 5 cases · Cites 6 cases
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HCMP 1903/2015 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE MISCELLANEOUS PROCEEDINGS NO1903 OF 2015 ____________
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_____________ DECISION A. INTRODUCTION 1.On 5 August 2015, the Petitioner (“Giant Crystal”) issued a Petition against the Respondent (the “Company”) for various declaratory and injunctive reliefs on the ground of unfair prejudice against Giant Crystal. 2.By the present summons of the same date, Giant Crystal applies for an interim injunction restraining the Company from:
3.The Placing EGM was held the day before this hearing. The shareholders present unanimously passed the resolutions authorizing the CB Placing. Giant Crystal nonetheless seeks to restrain the Company from issuing the CBs, as the CB Placing will dilute Giant Crystal’s shareholding. In addition, there is no urgency in proceeding with it and no genuine need for funds. B. BACKGROUND FACTS 4.The Company was incorporated in the Cayman Islands but has an established place of business in Hong Kong. It is listed on the Stock Exchange of Hong Kong (the “SEHK”). It and its subsidiaries (“the Group”) are principally in the businesses of generation of electricity and heat, mining, and oil production. Tricor Tengis Limited (the “Registrar”) was and is at all material times its Hong Kong branch share registrar and transfer office. 5.Giant Crystal was incorporated in the BVI. It became a shareholder of the Company as a nominee of the vendor pursuant to an Acquisition Agreement under which the Company acquired an oil project. It presently holds 584,800,000 shares (ie 24.85%) in the Company and CBs convertible into 785,200,000 shares. By the terms of the CBs, Giant Crystal cannot convert the CBs to achieve more than 29.5% shareholding in the Company. 6.Zhou Juzhi (“Zhou”) has been the sole director of Giant Crystal since 3 December 2014. 7.On 18 May 2015, the Company issued an Announcement (“the May Announcement”) concerning (1) the Share Placing under a 2014 general mandate; (2) the proposed CB Placing under specific mandate; and (3) resumption of trading. It was announced that an EGM will be convened for item (2). As of that date, Giant Crystal was a single major shareholder holding 29.47% of the issued shares. 8.On 3 June 2015, the Company issued a Notice for the AGM to be held on 30 June for passing 6 resolutions, including appointment of directors, grant of a general mandate to directors to allot and issue additional shares the Company not exceeding 20% of the share capital. 9.On 12 June 2015, Giant Crystal gave written notice and/or made a requisition proposing a resolution to appoint 5 nominated directors to replace 6 existing directors (“the Director Replacement Resolution”) which was to be considered at the AGM. However, the Company ignored the request. 10.On 12 June 2015, there was issue of 369,417,012 new shares pursuant to the Share Placing. It had the effect of diluting Giant Crystal’s shareholding from 29.47% to its current 24.85 %. 11.On 30 June 2015, Zhou was denied attendance at the AGM. At the AGM, all the proposed resolutions were passed. 12.On 28 July 2015, the Company issued a notice to convene the Placing EGM to approve the CB Placing Agreements. 13.On 31 July 2015, Giant Crystal issued a notice to convene an EGM for the purpose of considering the Director Replacement Resolution (“the Rival EGM”) to be held 5 hours before the Placing EGM. 14.On 13 August 2015, the Grand Court of the Cayman Islands issued an injunction (“the Cayman order”). It provided, amongst others, that:
15.On 17 August 2015, at the Placing EGM, all shareholders present approved the CB Placing Agreements and authorized the placing of CBs in the principal amount up to HK$300,000,000. Holders of CBs would be entitled to convert the principal amount into ordinary shares of the Company (“the Conversion Shares”) at the initial conversion price of HK$0.158 (subject to adjustment) per Conversion Share. The directors of the Company were granted a specific mandate to allot and issue the Conversion Shares. The long stop date for fulfillment of the conditions precedent is 9 September 2015. 16.On 5 August 2015, Giant Crystal issued the Petition on the unfair prejudice ground. It asserted that:
The Petition sought to restrain the Company from proceeding with the CB Placing or holding the Placing EGM. It also sought to set aside the resolutions at the AGM. 17.It is Giant Crystal’s case that even if a single act was not serious enough to constitute unfair prejudice, the cumulative effect of the conduct within a short period of time as described in the preceding paragraph showed “conduct designed to react on the rights of members as such”: Yun Jip Auto Services Ltd v Yuen Sau Fai [1990] 1 HKC 20, at p 23. 18.The respondent contends that there is no unfair prejudice as the dilution applies to all the existing shareholders. The CB Placing is to obtain funds needed by the Company. Independent public investors unanimously approved the move at the Placing EGM. C. ACTS SAID TO CONSTITUTE UNFAIR PREJUDICE C1. Legal principles on unfair prejudice 19.For a petitioner to maintain a case of unfair prejudice, the conduct complained of must be both unfair and prejudicial. It is not sufficient if the conduct would satisfy only one of these tests: Re Texgar Ltd [2002] 1 HKLRD 687, per DHCJ Poon (as he then was), §22. 20.Breach of the terms (as embodied in the Articles of Association or in collateral shareholder agreements) on which a member agreed that the affairs of the company should be conducted may entitle him to complain of unfairness: O’Neil v Phillips [1999] 1 WLR 1092, 1098H to 1099A, per Lord Hoffmann; adopted in Wong Man Yin v Ricacorp Properties Ltd (2003) 6 HKCFAR 265. 21.The exercise of powers for improper purposes or in bad faith, such as diluting a member’s shareholding, will amount to unfair prejudice: Tseng Yueh Lee Irene v Metrobilt Enterprise Limited [1994] 2 HKC 684. 22.There can be no complaint if there is genuine need for injection of funds and the dilution is not designed to benefit the controller of the company: Ng Yat Chi v Max Share Ltd and anor [2001] 1 HKLRD 561, per Rogers VP, at 575H-576F, 577C-G. 23.If an independent organ has expressed a corporate will against certain conduct, there cannot be any complaint about its being unfairly prejudicial: Smith v Croft (No. 2) [1988] Ch 114, at 184-185. In that case, the plaintiffs (representing 11.86% shareholding) sued the company, its chairman, directors and companies associated with some directors, claiming that the directors had paid themselves excessive remuneration. The defendants together held 62.54%. There were small percentages of persons or corporate shareholders supporting either the plaintiffs or the defendants. However, W Ltd, not under the control of either party, held 19.66% of the shares and was opposed to the continuance of the plaintiffs’ action. Knox J held that it was proper to have regard to the views of the independent shareholders whose votes would be cast for reasons genuinely thought to be for the company’s advantage. The statement of claim was struck out. 24.I shall now broadly consider the conduct said to constitute unfair prejudice as stated in paragraph 16 above. C2. Denial of attendance at the AGM 25.Giant Crystal prepared the proxy form and its written resolutions appointing Zhou to attend the AGM. They were submitted to the Registrar on 26 June (Friday). The Registrar raised no query. In fact the name of Giant Crystal and Zhou appeared on the attendance list outside the conference room on the day of the AGM. However, Zhou was denied attendance at the AGM (the following Tuesday). 26.The AGM took place with the result that all the 6 proposed resolutions were passed without objection by all shareholders of the Company present (ie holders of 452,863,397 shares). Had Zhou been allowed to attend, Giant Crystal could and would have sufficient shares (ie 584,800,000 shares) to vote down or veto the proposed resolutions. 27.Giant Crystal asserts that the Company had breached Articles[1] 79 and 85 which stated that at any general meeting, a corporate shareholder by its “duly authorized representative” or by proxy shall have one vote for every share. Under Article 92(A), a corporate shareholder may, by resolution of its directors, authorize any person to act as its representative at any meeting of the Company. Giant Crystal asserts that it had fully satisfied the requirements set out in these Articles. Denial of Zhou’s attendance was an interference with Giant Crystal’s right and was in itself unfair prejudice: Wong Man Yin v Ricacorp Properties Ltd. 28.Further, Giant Crystal submits that although the Notice of AGM did not show an immediate plan to issue any new Shares, after passing of the resolutions on 30 June 2015, the Company was equipped with the 2015 general mandate to allot and issue additional shares not exceeding 20% of the issued capital of the Company without further approval from the shareholders. If the Company does so in the coming 12 months, it will further dilute Giant Crystal’s shareholding. 29.The Company explains that the last standing instructions of Giant Crystal by letter dated 20 May 2014 to the Company was that valid instructions from Giant Crystal required signatures of any 2 of 3 authorized signatories but Zhou was not one of them. The change culminating in sole directorship in Zhou was never brought to the attention of the Registrar. 30.Although Zhou claims to have talked to one Li Weijun (who was close to the Company directors) about the change in Giant Crystal’s directorship, there was no basis to say that Li Weijun’s notice, if at all, should bind the Company. Nevertheless, Zhou had produced the updated register of members to the Company’s representative outside the conference room but the representative doubted its authenticity. 31.There was of course no law which required Giant Crystal to notify the Registrar of its change of directorship. However, Giant Crystal is a BVI company. One queries how else the Registrar could have verified the authority of Zhou except in accordance with prior instructions of Giant Crystal. The denial of attendance appears to be of Giant Crystal’s own making. 32.On the other hand, inclusion of Zhou and Giant Crystal on the attendance list was at least prima facie evidence that the Registrar was satisfied that Giant Crystal’s papers were in order. The letter of 20 May 2014 was never exhibited. One question whether the Company could by the Registrar’s view on an administrative matter override Giant Crystal’s right to attend. Added to these was the issue of the writ in Cayman Islands on 2 July 2015 which apparently could not have been prepared over night. There is evidence to show that the Company had resiled from its initial position to deny Zhou’s attendance and there was some plans to interfere with Giant Crystal’s rights as shareholder. C3. The Board’s refusal to accept Giant Crystal’s Director Replacement Resolution 33.Prior to the AGM, Giant Crystal requested the Company to include the Directors Replacement Resolution at the AGM, failing which, the notice would be deemed to be a requisition and Giant Crystal would itself convene an EGM. 34.All that the Company did was to make a public announcement 3 days later stating that it was seeking legal advice in relation to the notice and that additional time was required to consider the appropriate course of action. The Company took no further action. 35.Giant Crystal thus issued its own notice on 31 July 2015 to convene the Rival EGM. The Company issued an announcement dated 4 August 2015 stating that it was seeking legal advice as to the validity of the purported convening of the EGM but did nothing further. 36.It transpired that the Company (as stated in Admiral Chan’s affirmation) regarded the Director Replacement Resolution as “a highly unusual request”. It claimed not to have received complaint against the directors; that the replacement directors were PRC residents and that the Company was unable to verify their qualifications (despite credentials being provided by Giant Crystal). These were opinions as to facts and not law which, in my view, could hardly override Giant Crystal’s right to make the requisition or call an EGM. 37.Giant Crystal’s notice, however, did not meet the requirements of Articles 64 and 65. Article 64 provides that an EGM shall be held within 2 months after the deposit of a shareholder’s requisition. If within 21 days of such deposit the directors fail to proceed to convene such meeting, the requisitionist himself may do so in the same manner. Article 65 provides that a meeting for the passing of a special resolution shall be called by at least 14 days’ notice in writing. 38.The notice issued by Giant Crystal was served on the Company on 4 August 2015. It gave less than 14 day’s notice for the meeting on the 17th. There is no room for Giant Crystal to complain. C4. Complaints against the CB Placing 39.Giant Crystal’s complaint is that the CB Placing will have the effect of diluting its shareholding to 13.75% of the entire issued shares at least for a period of time from 17/8/2015 until 31 December 2015 (assuming that there would be full conversion). It was for improper purposes and not of the genuine need of funds. The Company also failed to consider the alternative of a rights issue or open offer. It is thus necessary to examine the nature of the CB Placing. 40.Firstly, the CB Placing gives no benefit to those in control:
41.Secondly, the dilution would be borne equally by all the existing shareholders. It was not “unfair”. 42.As regards Giant Crystal, the dilution will be temporary and practically small:
43.Thirdly, there is a dispute as to whether or not the Company needs the funding from the CB Placing. 44.In the July Circular, the Company has explained that there was genuine need of funds for (i) working capital to meet liabilities; (ii) acquiring a power plant; and (iii) restarting a mining business. 45.With regard to (i), the Annual Report of 2014 showed the Group’s loss to be approximately HK$759,774,000 for the year ended 31 December 2014. The net current liabilities amounted to some HK$93,797,000 although most of the relevant loans comprising in the non-current liabilities were interest-free, and repayable in July 2016. 46.The auditors’ views were that the Group’s loss and net current liabilities indicated “the existence of a material uncertainty which may cast significant doubt about the Group’s ability to continue as a going concern.” 47.With regard to (ii), there is negotiation to acquire a power plant for clean energy. It is an attempt to move the Group’s business towards clean energy because of the anti-pollution policy of the Mainland government. Funding of HK$200 million is required. 48.With regard to (iii), the Company’s interest in a mining project had been misappropriated but the Group obtained final judgment in its favour in April 2015. To restart the mining project requires initial capital expenditure of RMB 1,133 million and funding injection of HK$84.5 million in this financial year. 49.Giant Crystal criticizes the Board’s purported explanation for item (i) as lacking commercial sense in view of the low net liabilities and interest-free loans. Negotiation in respect of item (ii) is only at the preliminary stage. The Company does not need funds for now. 50.I am unable to agree with Giant Crystal. In real life, it is unrealistic to expect a Company to try and seek funding only on the eve of signing an agreement for a project. Given the Company’s explanations and the auditors’ views, it can hardly be said that the need of funds was not genuine. 51.Fourthly, Giant Crystal has queried whether funding could have been raised by way of open offer or rights issue. However, the Board has already considered other options as explained in various notices to the public and in the affirmation of Admiral Chan:
52.Once it is shown that a company does need funds, it is a matter for its management and its commercial decision on whether those funds should be raised by way of placement or other methods. The Court should not interfere with bona fide management decisions and substitute its own opinion for that of the management: Kwok Shun On v Wong Sai Wing [2001] 3 HKLRD 811, per Yuen J (as she then was) at §73. 53.Fifthly, Giant Crystal complains that the conversion price for CBs at HK$0.158 per Conversion Share represents a huge discount of approximately 56.11% to the closing price of HK$0.36 per Share on 24/7/2015 (the Friday before the Company issued the July Circular). 54.It is wrong to point to a discount from market price and on this basis allege mismanagement or bad faith. Pricing is a complex commercial decision involving commercial judgment and market evaluation: Able Success Asia Ltd v China Packaging Group Co. Ltd & Ors, HCMP No 1091 of 2014, 15 May 2014, per G. Lam J at §68. 55.The pricing has clearly been explained by the Company in Admiral Chan’s affirmation. The market has reacted positively as the Company’s stock price rose immediately after the May Announcement and in the ensuing weeks. In any case, for the reasons given in paragraph 42(b), it is misleading to say that Giant Crystal would not convert because the conversion price is above the stock’s market price. The complaint against pricing is hardly arguable. 56.Sixthly,independent public investors have expressed a corporate will supporting the commercial decision. At the Placing EGM, Giant Crystal only held 584,800,000 shares (24.85%) stake in the Company. None of the directors whom Giant Crystal wanted to replace held any shares. By a unanimous vote of the 696,573,357 shares (75.15%) present, all being public investors, the resolutions approving the CB Placing were passed. Hence, even as the single largest shareholder and even in the absence of the Cayman order, Giant Crystal would not have been able to vote down the resolutions. 57.In his reply submission, Mr Kenneth Chan submits that if one were to take out the newly allotted shares of 369,417,012 under the Share Placing, the number of shares voting would only become 327,156,345, which was far less than the 584,800,000 shares held by Giant Crystal. 58.With respect, this is untenable as the Share Placing had been completed. There was no application in the Petition or this summons to set it aside either. 59.In summary, the CB Placing is not “unfair” as dilution of shareholding applies of all existing shareholders. There is temporary prejudice to Giant Crystal for 4.5 months between 17 August and 31 December 2015 when its shareholding will be reduced to 13.75% although the eventual reduction will only be 2.3%. The voting rights of Giant Crystal might be affected in the interval. The CB Placing gives no benefit to those in control. It is to raise funds for purportedly genuinely needs of the Company. The Board has considered other options before entering into the CB Placing Agreement. The pricing of the CBs has been explained by the Company. It was a commercial decision for the Company’s management and the court should not interfere. The market reaction and positive support from independent shareholders holding more shares than Giant Crystal was an indication of the commercial sense of the Company’s decision: Smith v Croft. C5. GIANT CRYSTAL NOT CONSULTED ON THE CBPLACING 60.Giant Crystal complains that as the largest single shareholder, it has never been consulted at all in relation to the purported resolutions passed at the AGM and Placing EGM. It only learnt about relevant matters from the public announcements and notices. 61.I agree with Ms Eu SC that this is not a case of just and equitable quasi-partnership. There is no averment that Giant Crystal has any right to management or consultation. This complaint is hardly arguable. D. WHETHER AN INJUNCTION SHOULD BE GRANTED D1. The legal principles for the grant of interim injunction 62.This interim injunction will in effect determine the fate of the issue of CBs and, likely, the outcome of the originating summons. The court must therefore not only act on serious triable issues being shown but examine the merits more closely and take account of the parties’ prospects of success: Able Success, at § 35. 63.In the context of unfair prejudice proceedings, it is all the more important that the position of the company be not altered or disturbed more than is absolutely essential pending hearing of the petition: Tseng Yueh Lee Irene v Metrobilt Enterprise Limited [1994] 2 HKC 684, at §691H-692A per Godfrey J (as he then was); following Re a Company [1985] BCLC 80 at §82, Harman J. 64.The status quo is the state of affairs existing during the period immediately preceding the issue of the petition claiming the injunction; Garden Cottage Food Ltd v Milk Marketing Board [1984] 1 AC 130, at §140C-D, per Lord Diplock. D2. The prospects of success 65.There are some prospects of success on the issue of denial of attendance at the AGM but not the validity of the convening of the Rival EGM. Of all complaints of interference with shareholders’ rights, the analyses in sections C4 and C5 above are most directly related to this summons. The prospects of success of arguing that the CB Placing is unfairly prejudicial to Giant Crystal are dim. I would not have granted an injunction solely on the ground of denial of attendance at the AGM. D3. Balance of convenience 66.Assuming I am wrong on the prospects of success, I have considered whether or not damages will be an adequate remedy to either party, whether Giant Crystal is good for its undertaking as to damages and the delay of Giant Crystal. D4. Whether damages will be an adequate remedy 67.Mr Kenneth Chan submits that dilution of shareholding will lead to the loss of voting power. Such loss cannot be compensated for by damages. He relies on張才奎所託管中國山水投資有限公司股份相關員工 v 張才奎, HCA1661/2014, 20/05/2015, per G Lam J at §31. 68.The facts of張才奎were peculiar and G Lam J was careful to state that whether damages were sufficient compensation for dilution of shares depended on the circumstances. Dilution to 25.09%, together with jeopardy to the plaintiffs’ interests under alleged trusts, intimidation to the plaintiffs, and pressure on them to give up their claims and to part with their interests under the trust, were held not to be matters that could be, or ought to be relegated to be, redressed by damages. The situation was plainly distinguishable from the present case. 69.Here, any loss Giant Crystal may suffer is likely to be quantifiable by reference to the percentage of dilution and the stock price: Leung Pik Wa v Poh Po Lian & Anr, HCA No. 681 of 2011, 4 July 2011, per Barma J (as he then was) at §39; Able Success, at §67. 70.On the other hand, blocking a company from raising funds can result in irreparable harm as the company might not be able to carry out the fund-raising later: Able Success, at §68. The CB Placing was adopted by the Company after considering other options. Aborting it at the last minute will cause irreparable harm to the Company in the light of the auditors’ doubts as to whether it can remain a going concern. Damages will clearly be an inadequate remedy to the Company. D5. Undertaking as to damages 71.Despite the Company’s direct query on Giant Crystal’s business, Giant Crystal has not stated its business in Zhou’s reply affirmation. It simply relies on the value of the shares in the Company to base its undertaking. 72.However Giant Crystal’s ownership in the shares has been challenged in the Cayman proceedings. 73.In May 2015, the PRC authorities brought criminal charges against the persons behind the vendor of the Acquisition Agreement which, if proved, would mean that the sale of the oil project to the Company was a fraud. The Company thus commenced the Cayman proceedings alleging that there had been false and misleading representations leading to the acquisition and conspiracy of the defendants to defraud the Company to pay the consideration. It asks for rescission of the purchase of the oil project and declarations that Giant Crystal’s shares and CBs are null and void or are being held in trust for the Company. 74.If, in the end, the Company succeeds in the Cayman proceedings, it would mean that Giant Crystal has no right to the shares and is not good for any undertaking as to damages. 75.Mr Kenneth Chan criticizes the conduct of the Company.
76.Mr Kenneth Chan submits that the Company did not and had no intention to treat Giant Crystal as a shareholder. 77.Mr Kenneth Chan also submits that this court is not bound by the Cayman order. Unlike the Cayman Court, this court has considered evidence and heard arguments from both sides. He relies on Hong Kong Civil Procedure 2015, Vol 1, §29/1/4 which provides that :
78.The acts of the Company in proceeding in Cayman Islands may seem to be high-handed towards Giant Crystal. However, despite the persuasive arguments of Mr Kenneth Chan, this court does not sit on appeal from the Cayman order. Unless and until the Cayman order has been set aside, it is valid. After all, the issues facing that Court are very different from those facing the Hong Kong court and presumably the Cayman court has evidence before it to support the serious allegations. 79.On balance, this court is not satisfied that Giant Crystal is good for its undertaking as to damages. D6. Delay of Giant Crystal 80.A party seeking interlocutory injunctions must do so promptly and without delay; any delay should be explained: King Fung Vacuum v Toto Toys [2006] 2 HKLRD 785, per Rogers VP at §20. 81.In an injunction against a listed company, delay is all the more unacceptable since public investors are entitled to expect to be able to trade in the shares continuously. In Able Success, at §70, the court took into account the company’s open offer on 22 April but the shareholder did not issue proceedings until 2 May and did not take apply for the injunction until 5 May. 82.Giant Crystal had intended to voteat the AGM. Thus the period of delay before 30 June should not be taken into account on the issue of denial of attendance at the AGM. 83.However, it took Giant Crystal almost 3 months after the May Announcement to issue the Petition and this summons with regard to the CB Placing. There was no complaint in the meantime in Giant Crystal’s notice dated 12 June 2015, not in its solicitor’s letter dated 30 June (complaining about being denied attendance at the AGM) and not in its originating summons in HCMP No 1673 of 2015 (now withdrawn). Nothing was done in July. The call-over hearing of the Summons was on 14 August 2015, the Friday immediately before the Placing EGM and Rival EGM. 84.The delay can hardly be explained by Giant Crystal’s attempt to resolve the matter by alternative means with the Company. Giant Crystal should have acted promptly in the circumstances of this case as investors may be prejudiced and left without recourse if the injunction is granted. CONCLUSION 85.Considering the limited prospects of success with regard to the CB Placing and balancing the convenience, refusing the injunction will in my view cause the least irremediable prejudice. 86.I dismiss the summons. There shall be costs to the Company in the cause with certificates for Ms Eu SC and Mr Laurence Li. 87.I thank counsel for their assistance.
Mr Kenneth CL Chan and Mr Billy Ma, instructed by Mason Ching & Associates, for the petitioner Ms Audrey Eu SC leading Mr Laurence Li and Mr Tony Chow, instructed by C.L. Chow & Macksion Chan, for the respondent [1] All references to “Articles” in this decision are to the Articles of Association of the Company. | ||||||||||||||||||||||||||||||
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