Speedy Brilliant Investments Ltd v. China Health Group Ltd (Formerly China Healthcare Holdings Ltd) and Another

HCCW 816/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 816 OF 2016

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D E C I S I O N

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The Application

1.On 1 June 2016 I heard an application by the petitioner, Speedy Brilliant Investments Limited (“Speedy”), for orders in the following terms against the 1^st respondent, China Health Group Limited (“Company”), which is incorporated in Bermuda and listed on the Main Board of The Stock Exchange of Hong Kong Limited, and the 2^nd respondent, Jia Hong Sheng, who is a director and Chairman of the Company:

“ (1) The 1^st Respondent be restrained, whether by their directors, servants, agents or otherwise howsoever, from

(a) obstructing or preventing or otherwise interfering with the requisitioning by Speedy of the special general meeting of the 1^st Respondent (“CHGL”) pursuant to Bye‑law 58 of CHGL’s Bye-laws (“Bye‑law 58”) or Section 74(3) of the Companies Act 1981 of Bermuda (“CA1981, s 74(3)”); or

(b) obstructing or otherwise interfering with the conduct of any SGM of CHGL which may be convened by Speedy pursuant to Bye‑law 58 or CA1981, s 74(3).

(2) The 1^st and/or 2^nd Respondents be restrained, whether by their directors, servants, agents or otherwise howsoever, from rejecting, not admitting and/or disallowing any vote(s) to be cast at any such SGM and/or any adjournment thereof by any authorized representative(s) of Speedy and/or any proxy appointed by Speedy in accordance with the Bye‑laws of CHGL.

(3) The 1^st Respondent be restrained, whether by its directors, servants, agents or otherwise howsoever, from using or applying funds and resources of CHGL in or towards pursuing the HCA, proceedings in Bermuda (Case No. 64 of 2016), or any other proceedings designed to obstruct or prevent or otherwise interfere with the requisition by Speedy of a SGM of CHGL pursuant to Bye‑law 58 or CA1981, s 74(3), or which may have that effect.

...”

2.The focus of the application is on restraining the current board from preventing Speedy voting its shares at a special general meeting (“SGM”) of the Company to take place on 5 June 2016 at which shareholders will be called on to consider and vote on resolutions to remove the current directors and/or elect 20 new directors.

3.Speedy was represented at the hearing by Victor Joffe and Rachel Lam, the Company by Benjamin Yu SC and MC Law and Mr Jia by Juliana Chow.

4.Mr Joffe agreed at the commencement of the hearing that given the limited time available to deal with the application I should deal only with the orders referred to in sub-paragraphs 1(1) and (2), although he invited me to consider making an order in respect of sub‑paragraph 1(3) in a more limited form which would require the Company to obtain the approval of the court before continuing with the litigation referred to in sub-paragraph 1(3).

5.Given the urgency of this matter my reasons for the decision I have reached are necessarily brief.

Background

6.Speedy is registered in the Company’s register of members as holding 276,510,000 shares.  It came to do so in the following circumstances.  In 2014 the Company was facing financial difficulties and needed to raise funds.  It did so initially by issuing convertible notes pursuant to agreements dated 10 April 2014 negotiated by one of the directors, Chung Ho, on behalf of the Company to Pacas Wordwide Limited (“Pacas”) and Zheng Hua Investment Ltd (“ZHI”) in the aggregate amounts of HK$30,000,000 and HK$195,000,000 respectively.  The conversion price in both cases was HK$0.15.  If conversion shares were to be issued pursuant to the notes they would amount to in excess of 50% of the existing share capital of the Company.  The Company now says that Mr Chung, Pacas and ZHI agreed to issue the convertible notes with a view to Pacas and ZHI obtaining control of the Company without having to make a mandatory offer to acquire the shares of independent shareholders pursuant to Rule 26 of the of the Takeovers Code (“Code”). I will address its reasons for so alleging later in this decision.

7.In about June 2014 Mr Chung also caused the Company to enter into an agreement with Lin & Li Investment Limited (“Lin & Li”) for the issue of another tranche of convertible notes in the sum of HK$195,000,000 also at a conversion price of HK$0.15.  Clause 7.4 of the agreement contained a lock-up period.  In addition, clause 2.1 contained a prohibition on transfer of the convertible note.  On 12 January 2015 Lin & Li wrote to the Company seeking an exemption from the lock-up requirements and the Company’s agreement to the transfer of the convertible notes to a third party.  This, says Mr Chung, was because Lin & Li had financial difficulties.  On 13 January 2015 a telephone board meeting took place (it would appear that nearly all board meetings took place in this manner).  Mr Chung has exhibited to his affirmation a transcript of the telephone meeting, which records Lin & Li’s request being discussed and approved.  The convertible note was subsequently transferred to Speedy and Ying Wei.  Speedy subscribed for HK$56,310,000, which could be converted into 375,400,000 shares and Mr Ying subscribed for HK$40,800,000 which could be converted into 272,000,000 shares.

8.Speedy issued a conversion notice on 16 April 2015.  A board meeting took place on 16 April 2015 at which the board resolved to issue the conversion shares and convene a SGM to seek shareholder approval. On 22 April 2015 Speedy was issued with a share certificate for 375,400,000 shares.  The certificate was signed by 2 directors of the Company one of which was Mr Chung.  The issue of shares to Speedy was mentioned in the Company’s public announcements.  Speedy subsequently transferred its shares into CCASS, bought and sold some shares, and then had them transferred back into its own name.  It currently has a share certificate dated 22 December 2015 for 276,500,000 shares again signed by 2 directors of the Company.  Speedy has also voted its shares at general meetings of the Company.

9.On 30 December 2015 Speedy along with Richer Global Holdings Limited requisitioned a general meeting for consideration of a resolution to remove the existing directors and/or replace them with 13 new directors.  Speedy says that this step was taken because of concerns about the competence of the board.  The board did not convene the meeting and Speedy took steps to convene a SGM itself to take place on 10 March 2016.  On 25 February 2016 the Company commenced HCA 503 of 2016 challenging Speedy’s status as a shareholder.  On the same day the Company sought successfully an injunction in Bermuda restraining the convening of the meeting.  The injunction was subsequently set aside.  The court in Bermuda found, amongst other things, that Hong Kong was the more appropriate forum for resolution of the dispute.  However, the injunction had the effect of preventing the SGM going ahead on 10 March 2016.

10.Speedy requisitioned another SGM by a notice dated 6 April 2016 to remove the existing board and replace it with 20 new directors.  Subsequently the Company took steps to convene a SGM to consider Speedy’s resolution, but it remained the Company’s position that Speedy and Mr Xing should not be permitted to vote their shares and as a result Speedy has made the present application.

The Issues

11.Broadly, the issues for determination are as follows:

(1) Whether it is sufficient for the purposes of the present application for Speedy to establish a serious question to be tried or, on the ground that the order if granted will determine the substantive dispute between the parties, Speedy has to establish that the Company has no real chance of succeeding at trial.

(2) Whether the Company’s evidence demonstrates that it is at least at this stage arguable that Mr Chung breached his fiduciary duties in exercising his powers for an improper purpose, namely, causing the convertible notes and subsequently the conversion shares to be issued with a view to enabling 4 concert parties, Pacas, ZHI, Speedy and Mr Xing to obtain control of the Company, with the consequence that the allotment to Speedy is liable to be set aside.

The test Speedy has to satisfy

12.Mr Joffe disputed the Company’s argument that the practical reality is that given Speedy and Mr Xing’s shareholding it is a forgone conclusion, one, that if they vote their shares the resolution, at least to appoint additional directors, will pass resulting in a change of control and, two, that this will result in the challenge to Speedy’s status as a shareholder being abandoned, thus if I grant the order sought it will finally determine this and HCA 503 of 2016.  Mr Joffe argued that there was no conclusive evidence that Speedy and Mr Xing held sufficient shares (they currently hold under 30%) to ensure Speedy’s resolution passes and no evidence that if the new directors are appointed they will not take an independent view of the strength of the Company’s claim against Speedy.  I disagree.  It seems to me that on the basis of the records produced by the Company showing the turnout at general meetings it is highly likely the resolutions will be passed and it seems to me that the reality is that if the board is reconstituted the directors who will have come to be appointed at Speedy’s instigation are unlikely to do anything other than conclude that there is no reason to challenge Speedy’s status.

13.The authorities establish that in considering applications for injunctions the court aims to adopt a course which carries the lowest risk of causing injustice[1]. I accept Mr Yu’s submission that if granting an injunction will determine the action it should generally only be granted if the court is satisfied that the other party has no realistic chance of success[2].  The assessment of whether or not this is the case has to be based on the evidence before the court.  It is not sufficient for a respondent whose case is weak to suggest that “something may turn up” if the action proceeds to trial.

The Company’s case

14.Mr Yu accepted that in order for the Company to succeed with its case it has to establish that Mr Chung breached his fiduciary duties, in other words, it has to establish that he procured the Company to issue the convertible notes with a view to assisting Pacas, ZHI, Speedy and Mr Xing take control of the Company, although it might suffice for the Company to establish that this was at least the case in respect of Speedy.  There is no direct evidence of this.  The Company’s case is based on inference drawn from the circumstances in which the convertible notes came to be issued.  Mr Yu identifies what the Company says are facts that justify the inference that it draws in paragraph 2.11 and 2.16 to 2.19 of his written submissions, which he developed before me.

15.I accept for the purposes of this application the following:

(1) That the quantity of shares which the convertible notes potentially made available to the alleged concert parties would clearly have given them control of the Company and it is likely that they would have appreciated this.

(2) Speedy’s evidence explaining why it would have wanted to acquire a substantial interest in a company which was facing financial and commercial difficulties is vague and invites doubt about whether Speedy invested simply because it expected the Company’s performance to improve and the share price to increase.

(3) The way in which each of the alleged concert parties approached the negotiation and completion of the convertible notes was casual and shows an alacrity which is surprising given the financial performance of the company.

(4) It seems to me arguable that Speedy and the other alleged concert parties did acquire the convertible notes with a view to obtaining control of the company.  A brief consideration of the Company’s financial statements suggests that at a conversion price of HK$0.15 they would have been able to obtain control of a listed company which was balance sheet solvent at no more than the value of its listed status.

16.It follows that if it were sufficient for the Company to demonstrate that there was a serious issue to be tried in respect of the alleged concert parties’ intentions when they acquired the convertible notes and subsequently shares I would be satisfied that at this stage the Company had demonstrated a prospect of successfully defending this action and successfully prosecuting HCA 503 of 2016.  That is not, however, the case.

17.The Company does not dispute that the convertible notes were issued because the Company was in immediate need of money.  It should have been apparent to the directors that issuing convertible notes in the sums that were approved was likely to result in issuance of shares in numbers that would change voting control of the Company.  I would certainly have expected that to have been appreciated by Mr Chung who was experienced in corporate finance matters.  I would also have expected the directors to appreciate that the investors would be aware of this and to have taken it into account in making their decision to purchase convertible notes in a poorly performing company.  I would also have expected the directors to appreciate that the investors might in the fullness of time take a view on the performance of the directors and possibly conclude that they were not performing satisfactorily and should be replaced.

18.I cannot see how one can sensibly or fairly infer from the matters relied on by the Company that Mr Chung when negotiating the convertible notes was consciously facilitating a scheme which would allow Pacas, ZHI, Speedy and Mr Xing, or a combination of them, to take control of the Company.  The short point is that when the board approved the various convertible notes the board approved transactions which, if the notes were converted, would result in the alleged concert parties acquiring voting control of the Company.  There was nothing furtive about what was taking place at all.

19.The reliance on Rule 26 of the Code in the present context seems to me to be a red herring.  If Pacas, ZHI, Speedy and Mr Xing, or a combination of them, acting in concert hold 30% or more of the voting rights of the Company, Rule 26 requires them to make a general offer.  It may be that Rule 26 has at some stage been engaged, but rather than constitute a basis for setting aside the allotments is a reason for requiring a general offer to be made.  I cannot see why, assuming that Speedy and others have failed to comply with Rule 26, this is a reason to infer that Mr Chung when negotiating the convertible notes was consciously facilitating a clandestine take over of the Company.

Conclusion

20.It seems to me on the basis of the evidence put before me by the Company it has no realistic prospect of successfully challenging the allotment of shares to Speedy.  I will, therefore, make the order sought by Speedy.

Mr Victor Joffe and Ms Rachel Lam, instructed by K & L Gates, for the petitioner

Mr Benjamin Yu SC and Mr MC Law, instructed by Chiu & Partners, for the 1^st respondent

Ms Juliana Chow, instructed by David Lo & Partners, for the 2^nd respondent