Joseph Ghossoub v. Team Y&R Holdings Hong Kong Ltd and Others

HCMP 1074/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1074 of 2015

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DECISION
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1.This was an application by summons dated 4 November 2015 (“the stay summons”) taken out by Team Y&R Holdings Hong Kong Limited (“the Company”), Cavendish Square Holding BV (“Cavendish”), Young & Rubicam International Group BV (“Y&R”) and WPP PLC (“WPP”) (collectively “the respondents”) for a stay of a petition presented by Joseph Ghossoub (“the petitioner”) on 30 April 2015 “pending determination of the issues raised therein by the High Court of Justice of England and Wales on the ground that the allegations in the [p]etition consist of or give rise to issues or disputes which the [p]etitioner has agreed should be referred to the exclusive jurisdiction of that court”. At the conclusion of the hearing judgment was reserved which I now give.

BACKGROUND FACTS

2.The petitioner holds 20% of the issued shares in the Company.  The other shareholders are (1) Cavendish (as to 47.4%), (2) Y&R (as to 12.6%) and (3) Talal Elias Makdessi (“M”) (as to the remaining 20%).

3.Cavendish and Y&R are Dutch companies wholly owned by WPP.  WPP itself was incorporated in Jersey with its main management and executive offices based in the United Kingdom.

4.The Company was incorporated in Hong Kong on 27 November 2007 and is a holding company, holding various subsidiaries and other business entities (collectively “the Group”) that carry on business in advertising, media buying and public relations in the Middle East.

5.In about 1994 M in collaboration with the petitioner founded the original business, operating in United Arab Emirates, Lebanon and Saudi Arabia.  In the late 1990s Y&R acquired a 25% stake in the business.  Sometime in 2000 WPP acquired Y&R.

6.In about 2006 WPP wished to increase its stake in the business to a majority interest and began negotiations with the petitioner and M.  The parties reached agreement and pursuant thereto the business was restructured.

7.In outline it was agreed that the Company would be incorporated for the purpose of holding the business following WPP’s acquisition.  The existing business including various entities and subsidiaries would be injected into the Company for new shares to be issued by the Company to the existing shareholders so that the shares would be held as to 419 to the petitioner, 455 to M and 126 to Y&R.  The petitioner and M would then sell 219 and 255 respectively of their shares in the Company to Y&R.

8.On 28 February 2008, for the purpose of implementing the acquisition and restructuring the parties executed a series of agreements including the following:

(1) The petitioner, M, Y&R and WPP 2005 Ltd (“WPP 2005”) entered into a sale and purchase agreement whereby the petitioner and M agreed to sell in the aggregate 47.4% of the shares in the Company held by them to Y&R (“the SPA”).  WPP 2005 acted as a guarantor of the purchaser’s obligations.

(2) The petitioner and the Company entered into a Service Agreement under which the petitioner was employed as sole chief executive of the Company (“the SA”).

9.On the following day, by a Deed of Novation, Cavendish replaced Y&R as the purchaser of the 47.4% of shares in the Company from the petitioner and M (collectively “the sellers”) “as if [Cavendish] were named in the SPA in place of [Y&R]”.

10.The salient provisions of the SPA, for present purposes, include the following:

(i) US$34 million to be paid on completion to the sellers, the remainder (subject to a total maximum of US$147.5 million) to be paid over several instalments.

(ii) If a seller whose employment with the Company was summarily terminated for acts of gross misconduct or is found to have engaged in a competing business (a “defaulting shareholder”), the instalments then unpaid would not be payable: clause 5.1 and schedule 12, §1.

(iii) If the seller becomes a defaulting shareholder, the purchaser has an option to acquire all the shares of that defaulting shareholder at the defaulting shareholder option price which is calculated by reference to the net asset value and hence significantly lower than the actual value of the shares: clause 5.6 and schedule 12, §1.

(iv) The sellers and the purchaser agreed to procure the Company and its subsidiaries to promptly distribute as dividends the maximum amount of profits that may lawfully be distributed as dividends at the end of each financial year: clause 13.4.

(v) The purchaser agreed to procure that the sellers would be kept informed as to the financial and business affairs of each of the companies in the group: clause 13.6.

(vi) Each of the sellers is entitled to remain a director as long as he continues to hold shares in the Company: clause 14.2.

(vii) Each seller has an option to require the purchaser to purchase from him all his shares in the Company at a price calculated by a formula by reference to the audited consolidated operating profit of the group (“OPAT”) and in the case of the petitioner he could only exercise the option between 1 January and 31 March 2017 and any subsequent year: clause 15.2.

(viii) Clause 6 contains provisions for the calculation of OPAT and the resolution of differences.

(ix) Clause 23.2 reads:

“The English courts have exclusive jurisdiction to settle any dispute arising out of or in connection with this agreement and the parties submit to the exclusive jurisdiction of the English courts.” (emphasis added)

11.It is to be noted that following the execution of the Deed of Novation, the only parties to SPA are the petitioner, M, WPP 2005 and Cavendish.  Thus the respondents other than Cavendish are not parties to the SPA.

12.The SA is an employment contract between the Company and the petitioner governing the latter’s role in the Company.  For present purposes it is only necessary to mention the following provisions:

(i) The petitioner to be the sole chief executive of the Company and entitled to serve on its board: clause 1.

(ii) The Company shall not appoint anyone to act jointly with the petitioner unless the latter is unable through illness or incapacity to carry out his duties: clause 3.2(c).

(iii) The petitioner will be accountable directly to the board and the Company shall not insert tiers of management between the petitioner and board: clause 3.3.

(iv) Clause 29.2 reads:

“This Agreement is governed by and interpreted in accordance with the laws of England and Wales and the parties submit to the exclusive jurisdiction of the English Courts.” (emphasis added)

13.None of the respondents other than the Company is a party to the SA.

14.Upon completion of the acquisition and restructuring, the petitioner became the sole chief executive of the Company. M was the non-executive chairman of the Company until his resignation as such in April 2009 and in July 2009 he resigned as non-executive director of all companies in the Group save for the Company itself.  In April 2011 M was removed from the Company’s board.

15.As appears from §§60 – 64 of the judgment of the Supreme Court dated 4 November 2015 in Cavendish Square Holding BV v Talal El Makdessi [2015] UKSC 67 (“the Makdessi case”), in December 2010 Cavendish and the Company commenced proceedings against M, with Cavendish suing for breach of the SPA and the Company for breach of fiduciary duty based on M’s breach of certain restrictive covenants by soliciting/poaching clients and customers away from the Group.

16.M subsequently admitted that from 1 July 2008 he had been in breach of the SPA and his fiduciary duty to the Company which rendered him a defaulting shareholder for the purposes of the SPA.  The Company’s claim for breach of fiduciary duty was settled by its acceptance of a payment into court by M of US$500,000.

17.Cavendish sought a declaration that M was a defaulting shareholder and obliged to sell all his shares in the Company to Cavendish at the defaulting shareholder option price.  The issue ultimately determined by the Supreme Court was whether clauses 5.1 and 5.6 of the SPA were valid and enforceable as Cavendish contended or whether those provisions constituted penalties and were void and unenforceable.  The Supreme Court upheld the validity of those provisions.

THE PETITION

18.Pending the hearing of the Makdessi case by the Supreme Court, the petitioner presented a petition pursuant to section 724 of the Companies Ordinance, Cap 622 (“the Ordinance”) based on the unfairly prejudicial conduct of the Company by WPP, Cavendish and Y&R and seeks an order for a buyout of his 20% shareholding in the Company without any discount for the fact that his shareholding represents a minority shareholding.

19.The petitioner’s case is summarised in §26 of the petition, namely, that by reason of the provisions in the SPA and the SA and the circumstances in which the petitioner sold part of his interest in the Group to WPP, it was the mutual understanding between all shareholders of the Company and the legitimate expectation of the petitioner that:

(1) The petitioner would be entitled to participate in and would not be excluded from the management of the Company and the Group.

(2) The petitioner would be kept informed and be consulted on all major matters concerning the Company and the Group.

(3) Any major decisions affecting the Company and the Group and in particular their financial position, would be reserved to the petitioner as sole chief executive and/or to the board as a whole.

(4) So long as the petitioner remained a shareholder of the Company, each of the companies within the Group, including the Company, would promptly distribute by way of dividend the maximum amount of profits lawfully available for distribution at the end of each financial year.

(5) As part of or in order to give effect to the above entitlements, the petitioner would be kept informed and be supplied with information as to the financial and business affairs of each of the companies within the Group.

20.The petitioner’s unfair prejudice complaints are threefold, namely:

(1) The Company’s failure to declare or distribute any dividends to the petitioner.

(2) Wrongful exclusion of the petitioner from the management of the affairs of the Company.

(3) Improper stewardship by WPP of a major corporate asset in that the Company settled its claim in the English court against M for his widespread breaches of contractual and fiduciary and financial obligations owed to the Company (“the Makdessi dispute”) for a token sum, in circumstances where WPP was acting in its own best interests but contrary to the best interests of the Company and petitioner.

21.The Company has been in operation since the restructuring mentioned above but has not declared any dividends despite the fact that it has been generating substantial profits every year.  The petitioner had communicated his demand for payment of dividends to WPP on a verbal basis since 2011 and in writing since 2013.

22.Those demands culminated in the letter dated 11 February 2015 from the petitioner’s solicitors threatening proceedings to enforce his rights failing an unconditional acknowledgment by WPP of its obligation to procure the Company to declare and pay dividends.

23.The letter led to a chain of correspondence between the parties’ respective solicitors trading allegations and counter allegations.

24.The petition was presented on 30 April 2015.

PROCEEDINGS IN ENGLAND

25.Two sets of proceedings were commenced in England after the petition was presented.

26.About two weeks after the presentation of the petition, on 15 May 2015 the respondents and WPP filed anti-suit proceedings in England seeking declarations that the Hong Kong proceedings are in breach of clause 23 of the SPA and clause 29.2 of the SA respectively, and injunctions prohibiting the petitioner from (i) further pursuing the Hong Kong proceedings; (ii) commencing or pursuing any proceedings relating to the “Disputes” in any court or tribunal other than the High Court of Justice of England and Wales; and (iii) an injunction requiring the petitioner to discontinue the Hong Kong proceedings (“the anti-suit proceedings”).

27.The “Disputes” referred to in the claim form are described in §27 of the particulars of claim of the anti-suit proceedings as concerning the questions whether (i) Cavendish was in breach of the SPA by failing to procure the distribution of profits of the Company by way of dividends; (ii) Cavendish and the Company have wrongfully excluded the petitioner from management in the Company; and (iii) the conduct of the Makdessi dispute by the Company and Cavendish was improper.  It is to be noted that no mention was made of either WPP or Y&R’s involvement or role (if any) in the “Disputes”.

28.Second, on 21 December 2015, Cavendish and the Company commenced an action against the petitioner (“the substantive English proceedings”) in England.  Cavendish sought a declaration that the petitioner is a defaulting shareholder for the purposes of the SPA and is obliged under clause 5.6 to transfer all of his shares in the Company to Cavendish at the defaulting shareholder option price as well as specific performance.  The Company’s claim was for an account of profits and damages from the petitioner for alleged breaches of duty.

29.The petitioner has not yet been served in either the anti-suit proceedings or the substantive English proceedings (collectively “the English proceedings”).  Mr Smith SC, leading counsel for the respondents, blamed the petitioner for his alleged lack of cooperation in accepting service.  I pause here merely to observe that it would appear that both sides were not shy at resorting to similar procedural tactics.

THE PRESENT APPLICATION

30.The stay summons was not issued until 4 November 2015, more than six months after the presentation of the petition. In support of the substantive stay application, Mr Smith submitted that:

(1) The English court is the proper forum for determining the scope and effect of the exclusive jurisdiction clauses and its impact on the petition.

(2) The disputes raised in the petition arise out of and/or are connected with the SPA and SA and are subject to the exclusive jurisdiction of the English court.

(3) The findings, orders and determinations made in the substantive English proceedings will affect the petitioner’s ability to maintain his claim for the various reliefs claimed in the petition.

31.Ms Chan contended that the stay application must fail for the following reasons:

(1) The court should not grant a stay on the basis of the jurisdiction clauses because:

(a) most of the petitioner’s complaints do not fall within the scope of the jurisdiction clauses;

(b) the Company, Y&R and WPP are not parties to the SPA; and

(c) Cavendish, Y&R and WPP are not parties to the SA.

(2) If and in so far as the jurisdiction clauses apply or govern any of the petitioners complaints, they are at their highest a private agreement between two shareholders.  As such, they cannot override the agreement between all shareholders made at the time when they chose to incorporate the Company in Hong Kong that the Company should be subject to and be governed by the Ordinance.

(3) The petitioner’s right as a shareholder to present an unfair prejudice petition cannot be fettered by the jurisdiction clauses and to that extent they should not be given effect.

(4) The petitioner cannot obtain effective relief in the English courts because the remedy of buyout is not available.

(5) Under forum non conveniens principles, Hong Kong is the more appropriate forum and substantial justice would not be done in the English courts because the remedy of buy-out is not available.

32.It only transpired upon receipt of the respondents’ written skeleton that, in addition to seeking a stay pursuant to the stay summons, they were also seeking an interim stay pending the anti-suit proceedings although no summons seeking that relief is before the court.

33.Not surprisingly, Ms Chan SC (leading counsel for the petitioner) protested at the last minute application depriving the petitioner of a proper opportunity of dealing with it and filing evidence in response. I pause here to observe that the respondents’ legal advisers should have known better.  It is conduct that merits the strongest disapproval and matter can be dealt with swiftly.

34.I propose to deal with the issues that arise under the headings below.

I. INTERIM STAY

35.It is not suggested that this court is not competent to decide the stay application.  Nor is it suggested that English law is different for the purpose of determining the stay summons.  In fact, since the Company was incorporated in Hong Kong, the Hong Kong court is the most natural and appropriate forum for determining matters concerning its legal status and internal affairs since the law of the place of incorporation governs those matters. Moreover, service of the two sets of English proceedings has yet to be effected.

36.In short, no good reason has been articulated as to why the court should entertain an application for an interim stay. Nothing more needs be said on the subject.

II. SCOPE OF EXCLUSIVE JURISDICTION CLAUSES

37.Mr Smith submitted that the term “arising out of” in jurisdiction clause is liberally construed: Donohue v Armco Inc [2002] 1 All ER 755 (at §14).  He submitted that as long as the substance of the dispute to be determined falls within the jurisdiction agreement, it will still be subject to the jurisdiction clause notwithstanding the fact that the issue/dispute arises in the context of an unfair prejudice petition, citing Re Vocam Europe Ltd [1998] BCC 396 and Fulham Football Club (1987) Ltd v Richards and Anor [2012] Ch 333.  Those authorities are considered in greater detail below.

(A) Position of non-parties

38.The question that arises in the present case is whether on the assumption that the petitioner is bound by the jurisdiction clause vis-a-vis Cavendish, he should not be allowed to bring the petition against the remaining three respondents namely the Company, Y&R and WPP who are not parties to the SPA.  A similar point arises in relation to the SA.

39.Re Vocam Europe Ltd [1998] BCC 396 concerned an agreement that contained an arbitration provision for settling all disputes “whether or not they arise under the agreement”.  In that case, the court exercised its discretion to grant a stay (similar to that granted to the other party to the agreement) to three other respondents to the petition that were non-parties to the agreement.  Two of them were individuals beneficially interested in the majority shareholder with one of them holding one of the shares on trust for the majority shareholder.  The third was the company which was a nominal respondent.

40.This appears to be a difficult area of the law. Support can be found for diametrically opposed views: contrast the approach of Rix J in Credit Suisse First Boston (Europe) Ltd v MLC (Bermuda) Ltd [1999] 1 All ER 237 (at 252 a–c) and Lord Scott’s approach in Donohue v Armco (at §§60 – 61) which Norris J applied in Winnetka Trading Corp v Julius Baer International Ltd [2009] 2 All ER (Comm) 735 (at §27 – 29).  The other members of the court in Donohue did not address that issue except that it would appear that Lord Bingham did not share Lord Scott’s view: see Donohue at §76.

41.Teare J reviewed those authorities in Morgan Stanley & Co International plc v China Haisheng Juice Holdings Co Ltd [2010] 2 All ER (Comm) 514 (at §§17 – 19).  He concluded (at §§21, 23) that the true construction of the exclusive jurisdiction clause must depend upon its own terms.  The key question is whether it would reasonably be understood that the parties to the agreement had promised each other that claims arising out of the agreement would be brought in England regardless of whether the claims were against the other or a non-party to the agreement.

42.He also considered the argument that rational businessmen are likely to have intended that all disputes arising out of or connected with the relationship into which they had entered would be decided by the same court.  It was an approach that Lord Hoffmann had adopted as a starting point for the construction of an arbitration clause in Fiona Trust & Holding Corporation v Privalov [2007] 4 All ER 951 at §13.

43.Teare J noted the fact that such an approach would result in “considerable imbalance between a party and a non-party” in that:

(i) there would be an absence of reciprocity in as much as the party would have to sue the non-party in the designated forum but the non-party would not be obliged to do so; and

(ii) the designated forum may not have jurisdiction over the non-party since it had not submitted to the jurisdiction or waived any objections to jurisdiction.

On the facts of the case before him, Teare J concluded that the parties did not promise each other that claims against non-parties could only be brought in England.

44.Turning to the exclusive jurisdiction clause in the SPA (see §10(ix) above), it will be seen that the first part is cast in very broad language conferring jurisdiction on English courts. However it is immediately followed by the second part of that clause which reads: “and the parties submit ...”.  That is a clear and express limitation of the submission to jurisdiction to the parties inter se: they were promising each other that claims against the other arising out of the SPA are to be decided by the English courts.  Nothing in the clause itself mentions disputes with or involving non-parties.

45.§§16 and 21 of the SPA contained provisions governing the transfer of shares.  §16.1 prohibited the sellers from disposing of the shares in his name and §21.2 restricted the purchaser’s right of assignment except as to entities within the WPP Group, requiring the sellers’ prior written consent in all other cases.  §21.11 went on to provide:

“Except as otherwise expressly stated in this agreement, a person who is not a party to this agreement may not enforce any of its terms under the Contracts (Rights of Third Parties) Act 1999.”

46.The express exclusion of third party rights is significant.  Those provisions taken together offer strong support for the view that the rights and obligations created are confined to and intended to take effect among the parties inter se only.  In other words only parties to the SPA could take the benefit of or invoke rights thereunder and, correspondingly, be subject to the obligations so created.

47.When those matters are coupled with the considerations of ‘imbalance’ between a party and a non-party discussed in the Morgan Stanley case, they support a construction that the parties to the SPA did not promise each other that claims arising out of the SPA were to be submitted to the English court regardless of whether the claims are against the other or a non-party.  In my view, the jurisdiction clause is not a bar to a party from bringing proceedings against non-parties in a jurisdiction other than England.

48.As regards the jurisdiction clause under the SA (see §12(iv) above), not only is it more restrictively worded, it is an employment contract.  The petitioner’s complaints are all directed against WPP.  It is well established that in unfair prejudice proceedings as here, the Company is joined as a nominal party and the real dispute is between the petitioner and WPP.  There is no dispute as such between the Company and the petitioner arising under the SA.  Further, nothing in the SA suggests that the jurisdiction clause was intended to cover claims against non-parties.

49.While a stay was granted against non-parties in Re Vocam, it would not appear from the judgment that the judge was troubled with arguments such as those made in the present case.  It seems that the issue of non-parties was not seriously debated if at all.

50.It was accepted in Re Vocam that “success on the petition was essentially dependent on the reliance the petitioners placed on the 1995 agreement”.  The question whether the complaints in the present case fall squarely within the SPA/SA is disputed and considered in §§52 – 67 below.

51.In conclusion, I do not consider that the two jurisdiction clauses prevent the petitioner from commencing and pursuing his petition in Hong Kong against non-parties and is not a legitimate reason for staying the petition at least vis-à-vis them.  The question as to how the court should exercise its discretion as regards Cavendish is considered later (see §§108 – 111 below).

(B) Whether the petitioner’s complaints fall outside the scope of the jurisdiction clauses

52.The first matter to consider is whether the petitioner’s complaints fall within the jurisdiction clauses.

53.As earlier noted, the petitioner has three complaints (see §20 above) relating to (1) the non-declaration and non-distribution of dividends, (2) exclusion from management and (3) improper stewardship of the Makdessi dispute. Mr Smith submitted that adopting the liberal construction approach, they could all be said to arise under the SPA/SA.

54.Ms Chan readily acknowledged that there was considerable overlap between the first head of complaint relating to dividends and breaches of section 26 of the SPA.  However the point made is that the complaints arise as a result of the mutual understanding between all shareholders of the Company and the legitimate expectation of the petitioner as set out and particularised in the petition rather than a contractual claim under the SPA.

55.But Mr Smith’s objection was more fundamental.  He submitted that the dividends complaint could only arise under section 26 of the SPA because the non-payment of dividend alone is not a ground for an unfair prejudice petition citing Harman J in In re A Company, ex parte Glossop [1988] 1 WLR 1068 (at 1075A) to the effect that no section 459 petition could be based upon conduct that has an equal effect on all the shareholders and was not intended to be discriminatory between shareholders.

56.The reasoning in Re Glossop was contrary to the views expressed by other judges in earlier cases (see Slade J in In re Bovey Hotel Ventures Ltd (unreported) 31 July 1981, Nourse J in In re RA Noble & Sons (Clothing) Ltd [1983] BCLC 273, 290, Hoffmann J in In re A Company [1986] BCLC 362, 367): see the detailed review by Peter Gibson J in re Sam Weller Ltd [1990] 1 Ch 682 (at 688F – 692G).  It was also clear that Harman J had not been referred to Meyer v Scottish Textile and Manufacturing Co Ltd (1954) SLT 273 where at 277 Lord Cooper said this:

“... The most dangerous type of ‘the oppressor’ is the person who, having other fish to fry, can afford deliberately to curtail or even destroy the business of the company in which he holds perhaps the majority of the shares, and if the section bears the meaning suggested by the respondents it will fail of effect in a class of case to which its spirit is plainly applicable ... The section is not concerned with the results to the oppressor but with the results to those who complain of the oppression. When the section inquires whether the affairs of the company are being conducted in a manner oppressive to some part of the members including the complainer, that question can still be answered in the affirmative even if, qua member of the company, the oppressor has suffered the same or even a greater prejudice.”

57.The Court of Appeal upheld the Meyer case and on appeal the House of Lords dismissed the appeal.  It could not have done so had it not accepted that conduct that adversely affected all of the members could amount to oppression.

58.Further, it has been held that a shareholder has a legitimate complaint in relation to the continuing non-payment of dividends where there are substantial reserves: see Quinlan v Essex Hinge Co Ltd [1996] 2 BCLC 417 at 427d.  The fact that re Glossop was not cited to the court in Quinlan does not undermine its authority when Harman J in re Glossop itself accepted (at 1076F) that as a matter of concept to retain profits which could with entire propriety and commercial ease be paid out to members in dividends must be capable of being an improper conduct of the affairs of the company under the just and equitable ground.

59.For my part, I am unable to accept Mr Smith’s submission.  In my view, non-declaration and non-distribution of dividends could constitute a ground for an unfair prejudice petition irrespective of whether there has been a breach of the SPA.

60.The second complaint concerns exclusion from management.  Again it is based on the mutual understanding and legitimate expectation of the petitioner.  It is also clear that while clauses 13 and 14 of the SPA concern certain aspects of the Group’s management, they are by no means exhaustive.  Other aspects including the Company’s internal management fall to be governed by general company law of the place of incorporation which is Hong Kong.

61.In so far as it was submitted by Mr Smith that WPP might seek to rely on the 1999 Act as regards enforcement of the exclusive jurisdiction clause in the SA, that submission cannot be correct.  A third party may not enforce any term of an employment contract against the employee: see section 6(3)(a) of the Contracts (Rights of Third Parties) Act 1999.

62.Ms Chan submitted that the exclusion from management complaint is not directed at the Company but at WPP.  It is not a claim made under the SPA.  Nor does it arise out of the SA since there is no claim made against the Company (which is joined as a nominal party).  It is the conduct of the other shareholders and WPP which is not a shareholder that is the subject matter of the complaint.

63.Thus analysed, the claim is not one that is based on breach of the SA or even the SPA.  I agree.

64.Mr Smith’s stance as regards the third complaint is that it is ‘linked’ to the SPA and SA and so adopting a liberal construction that complaint also falls within the jurisdiction clauses.  But the gravamen of the Makdessi dispute concerns WPP’s conduct (through the directors it caused to be appointed to the Company’s board) in advancing the interest of Cavendish at the expense and to the detriment of the Company and the petitioner.

65.The real advantage gained through acceptance of the payment in accrued to Cavendish.  It was thus able to take advantage of M’s admission of wrongdoing and so acquire M’s shares in the Company at an advantageous price on the basis that M was a defaulting shareholder.  But that advantage could only be gained at the expense the Company (and the petitioner).  By accepting the payment in, the Company gave up its claim in damages potentially worth many times the amount it accepted from M in settlement.

66.In those circumstances, the substance of the complaint concerns oppression by a non-party to the SPA/SA, I do not consider that the third complaint could possibly be said to fall within the jurisdiction clauses.

67.To sum up, I consider that (1) the complaints relating to exclusion from management and the Makdessi dispute do not fall within the jurisdiction clauses; (2) the dividends complaint falls within the SPA jurisdiction clause only in so far as the complaint is made against Cavendish; (3) the petitioner is at liberty to make the dividends complaint against the respondents other than Cavendish.  As to how the court should exercise its discretion as regards Cavendish, see §§108 – 111 below.

III. THE STATUTORY RIGHT ISSUE

68.On the basis that Cavendish has a prima facie entitlement to enforce the jurisdiction clause as regards the dividends complaint, Ms Chan submitted that it should not be enforced in as much as a stay of the unfair prejudice petition would be tantamount to a fetter on the petitioner’s statutory right as a minority shareholder of the Company to petition for a buyout under the Ordinance.

69.As a matter of law the fact that all the shareholders decided to incorporate the Company in Hong Kong has the important consequence that the Company and its operations including its status and internal affairs would be subject to the condition that all the provisions of the Ordinance would apply to the Company.  So if the articles of a company were to limit the right of a shareholder to petition for its winding up, those provisions would be invalid.

70.In re Peveril GoldMines Ltd [1898] 1 Ch 122 Byrne J held(at 124) that the right to petition to wind up is a right conferred by the Companies legislation:

“of which a contributory cannot be deprived, either entirely or in a modified way, by the terms of the articles of association unless upon the footing that by becoming a shareholder the petitioner has done what is equivalent to validly releasing an individual legal right, and I am of opinion that he has not done so.”

71.He considered that the right to petition to wind up by every single shareholder is a condition of incorporation under the Companies Acts whatever independent contract may be separately made between the company and an individual who happens to be or intends to become a shareholder, or between individuals who happen to be the shareholders.

72.The Court of Appeal upheld his decision.  As Lindley MR explained in In re Peveril Gold Mines Ltd [1898] 1 Ch 122 (at 131):

“... registered limited companies are incorporated on certain conditions; they continue to exist on certain conditions; and they are liable to be dissolved on certain conditions ... the any article which says that the company is formed on the condition that its life shall not be terminated when any of the circumstances mentioned in s. 79 [of the Act of 1862] exist or which limits the right of a contributory under s. 82 to petition for a winding up, would be an attempt to enforce on all the shareholders that which is at variance with the statutory conditions and is invalid. It is no answer to say that the right to petition may be waived by any contributory personally .... But to say that a company is formed on the condition that its existence shall not be terminated under the circumstances, or on the application of the persons mentioned in the Act is to say that it is formed contrary to the provisions of the Act and upon conditions which the Court is bound to ignore.”

73.When Peveril was decided, the legislation did not give minority shareholders the option of petitioning for a buyout. That right was not conferred on them until 1948.  Ms Chan submitted that the principle Peveril established could not be circumvented by some private agreement between shareholders and the right to bring an unfair prejudice petition is indistinguishable from the right to petition for a winding up; both are statutory rights and as a matter of principle the same public policy rationale applies to both, citing the Court of Appeal’s judgment in Re Greater Beijing Region Expressways Ltd [1999] 4 HKC 807 (“GBRE”).

74.In that case, the Court of Appeal applying Peveril held that (i) the provisions protecting shareholders in respect of their interest in a company ultimately turn upon their right to present a petition under section 177(1) and their right to relief under section 168A; (ii) the right of contributories to present a winding up petition and their right to relief under section 168A of Cap 32 are statutory rights; (iii) any article that sought to preclude such statutory rights was contrary to public policy; (iv) if a matter is contrary to public policy, the court will not give effect to an agreement whether the agreement is constituted by the articles or whether it is constituted by some outside agreement: see GBRE at 816A – 817E.

75.In GBRE Rogers JA noted (at 816I) that both Lindley MR and Chitty LJ left open the question as to whether an individual shareholder could by contract fetter his personal rights.  But if the agreement (as in GBRE) purports to bind future shareholders, it operates beyond a personal contract between individual shareholders and would be struck down if its tenor were against the policy in the companies legislation: see the decision of J Lam J (as he then was) in Muir v Lampl [2005] 1 HKLRD 338 at §§15(e) and 19 where he rejected the attempted distinction made on the basis that the agreement was one inter se among the shareholders concerning their individual or private rights and did not purport to bind future shareholders.

76.Central to Mr Smith’s response to the petitioner’s statutory right submission is the English Court of Appeal’s decision in Fulham Football Club (1987) Ltd v Richards [2012] Ch 333 to which I now turn.  In that case, the petitioner was a member of F Ltd and R was its chairman.  The petitioner presented an unfair prejudice petition alleging that R’s actions had caused F Ltd to conduct its affairs in a manner that was unfairly prejudicial to the petitioner’s interests as one of its members.  The issue for the English Court of Appeal was whether to stay the unfair prejudice petition presented under section 994 of the Companies Act 2006 (“CA 2006”).  The case proceeded on the basis that all the matters complained of in the petition fell within the arbitration agreement.

77.The court in Fulham was concerned with two competing public interests: (a) the public interest in giving certainty to arbitration agreements is evident from the Arbitration Act 1996 which “give[s] primacy to the arbitration agreement even in domestic disputes by making a stay of court proceedings relating to the same dispute mandatory”: see per Patten LJ in Fulham, §31; and (b) the statutory right of a minority shareholder to present an unfair prejudice petition conferred by the Companies Act.

78.It was in that context that the court considered whether there was any rule of public policy that had the effect of rendering the arbitration agreement either void or unenforceable in so far as it purported to bind the parties to an arbitral determination of unfair prejudice issues that fell within section 994.  It concerned the arbitrability of particular issues, with the court recognising that there are certain types of disputes that are non-arbitrable.

79.Patten LJ was of the view that the relevant considerations in each case was whether the matters in dispute engage third party rights or represent 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 and 42.

80.It is stated at §77 that:

“The determination of whether there has been unfair prejudice consisting of the breach of an agreement or some other unconscionable behavior is plainly capable of being decided by an arbitrator .... We are not therefore concerned with a case in which the arbitrator is being asked to grant relief of a kind which lies outside his powers or forms part of the exclusive jurisdiction of the court. Nor does the determination of issues of this kind call for some kind of state intervention in the affairs of the company which only a court can sanction. A dispute between members of a company or between shareholders and the board about alleged breaches of the articles of association or a shareholders’ agreement is an essentially contractual dispute which does not necessarily engage the rights of creditors or impinge on any statutory safeguards imposed for the benefit of third parties.”

81.The issue was thus seen and evaluated exclusively from the perspective of arbitrability because of the mandatory requirement of a stay in every case concerning a matter that is arbitrable. That has to be borne in mind when considering the observations made in Fulham that address the scope of public policy considerations and their applicability or otherwise in other contexts.

82.The same observation applies to Patten LJ’s restrictive reading of Peveril to the effect that the decision is “limited to the narrow point of whether the articles of a company can effectively restrict or re-model the conditions for the presentation of a petition” under section 122 of the Insolvency Act 1986 and did not decide whether an agreement to resolve disputes between shareholders which might justify a winding up would be void on grounds of public policy or infringe the statute. It was assessed from the standpoint of arbitrability only.  On that basis the English Court of Appeal was able to hold that there was no binding authority to prevent it from deciding “whether the provisions of section 994 are to be construed as restricting the resolution of unfair prejudice disputes to the exclusive jurisdiction of the court”: Fulham, §§80 – 83.

83.Patten LJ concluded that the arbitration would operate as an agreement not to present a petition until the underlying dispute has been referred to arbitration.  If the arbitrator upholds the complaints of unfair prejudice, the shareholder would then be entitled to present a petition based on the arbitrator’s determination.

84.Because the issue of arbitrability was at the core of Fulham and necessarily coloured its approach, I do not consider that decisionto be of particular relevance in the statutory right debate. When one dispenses with the filter of arbitrability, the right to present an unfair prejudice petition is undoubtedly a statutory right for the reasons given by Rogers JA in GBRE: see §75 above.  No valid distinction can be drawn between the right to present a winding up petition and the right to present an unfair prejudice petition.  Both rights are conferred by statute for the protection of shareholders.

85.Further, on the respondents’ case, the effect of a jurisdiction clause would be seriously adverse to the petitioner: not only would he be deprived of his right as a minority shareholder to present an unfair prejudice petition under section 724 of the Ordinance, as considered more fully at §§90 – 101 below, the parallel English provision is not available to him in the English court as it does not apply to foreign companies like the Company and, as will become apparent, he would not be able to obtain an effective remedy from the English court should his complaints be upheld.

86.Mr Smith prayed in aid Millett LJ’s observation in Aggeliki Charis Cia Maritime SA v Pagnan SpA, The Angelic Grace [1995] 1 Lloyd’s Rep 87, 96 that he saw no difference in principle between an injunction to restrain proceedings in breach of an arbitration clause and one to restrain proceedings in breach of an exclusive jurisdiction clause. But there was no issue of the arbitration agreement being a fetter in that case and hence no discussion of that issue.  On that basis, it cannot assist in the determination of the statutory right issue.

IV. NO EFFECTIVE REMEDY

87.The petitioner also submitted that his complaints are not confined to strict legal rights but a breach of his legitimate expectations arising out of circumstances concerning the share sale.  The applicable principles are those explained by Lord Hoffmann in O’Neill v Phillips [1999] 1 WLR 1092, 1098D-1099F. Those equitable considerations apply to a petition pursuant to section 724 but not to a claim in contract for breach of the SPA.  In those circumstance to limit the petitioner’s remedies to a claim in contract would be unjust and unfair.

88.The plaintiff in the substantive English proceedings is Cavendish only.  While the parties to the share sale included WPP and Y&R, they are not parties to the SPA.  Further, it was submitted that if by reason of section 994(3) of CA 2006, the English court has no jurisdiction to deal with unfair prejudice because the Company is a foreign company, it would also lack jurisdiction to deal with the valuation of shares for a buyout as a result of unfair oppression.  In such a case the basis of valuation is very different for a buyout in normal circumstances: see Lord Millett’s judgment in CVC/Equal Equity Partners Ltd v Demarco Almeida [2002] 2 BCLC 108 at §§36 – 40 where the different bases are considered.

89.As I understand it, Mr Smith’s answer is that (a) all the petitioner’s claims can be brought and adjudicated by the English court in response to the substantive English proceedings; and (b) the petitioner can obtain the remedy he is seeking from the English court.

90.Mr Smith’s approach is that there is nothing to stop the petitioner from joining Y&R and WPP as parties to the substantive English proceedings and seek appropriate declarations from the English court for relief that mirror §76 of the petition for a buyout with the desired adjustments to cure any unfair conduct made out as the SPA contains the contractual mechanism for the petitioner’s exit from the Company.

91.In short, however it is put, Mr Smith’s submission necessarily entails the circumvention of section 994(3) and the exercise by the English Court of jurisdiction that it does not have. For that reason the respondents’ submission is unattractive and merits immediate rejection.

92.Mr Smith’s other argument is that the relief the petitioner seeks is a buyout.  Under the SPA, if the petitioner were held not to be a defaulting shareholder, he would be able to exercise a put option during the first quarter of any year commencing 2017 requiring the purchase of his shares by Cavendish, the option price to be calculated by applying the formula stipulated in §15.3 of the SPA.  It was submitted that given that the contractual mechanism already exists for a buyout, the petitioner could obtain the relief he seeks from the English court.

93.An order for a buyout made on a section 724 petition and the basis of valuation of the petitioner’s shareholding a court could order has nothing to do with the put option negotiated and agreed between the parties to the SPA.  For one thing, severance of the relationship through the exercise of the put option does not turn on unfairly prejudicial conduct: it merely caters for the possibility of an exit of a contracting party as a commercial reality but in circumstances that do not involve unfairly prejudicial conduct which triggers the application of equitable considerations.

94.Moreover, why should the petitioner be subject to the constraints of the put option and the formula for calculating the price that obviously was not negotiated or drawn to take wrongdoing into account?  As already noted, where there is unfairly prejudicial conduct, the basis of valuation could be very different: see §88 above and CVC/Equity Partners Ltd v Demarco Almeida (supra).

95.In was then said that provided the petitioner could obtain ‘substantial justice’ in the substantive English proceedings the fact that the form of relief he seeks is unavailable is not sufficient reason for not granting a stay, citing the approach adopted in Li Guozhu v New Century Iatrical Investment Management Ltd, unreported, HCMP 3353/2014, 13 November 2015 at §30.  It is therefore necessary to consider Mr Smith’s further submissions concerning the contractual mechanism for exercising the put option and the question whether the mechanism in §6 of the SPA would be available to take into account, inter alia, the true value of the Makdessi dispute.  What matters could be taken into account using the §6 mechanism was disputed, with the parties espousing entirely different positions.

96.The relevant provisions are §§6 and 15 of the SPA and central to those provisions is “OPAT”, defined in Schedule 12 as “the audited consolidated operating profit or loss of the Group”.  §15 governs the calculation of the put option price.  The immediately striking feature is that one is not in a position to calculate the price until three years after the option is exercised.  This is the result of the stipulated formula requiring the average OPAT for four years coupled with the fact that the petitioner may not exercise his put option except during the first quarter of any year commencing 2017.  The formula itself cannot be applied until the lapse of two full calendar years after the calendar year during which the put option is exercised.  That necessarily already involves a delay at least two years plus nine months.  The accounts would then have to be prepared which requires time and disregarding the possibility of objections which could delay matters even further.

97.The respondents do not disagree that payment under the put option is a delayed payment.  In my view that is a major and serious disadvantage from the perspective of the petitioner that seriously undermines the value and effectiveness of the remedy.  Significantly, there is no such delay involved in a court ordered buyout under section 724.

98.Mr Smith also submitted that §6 of the SPA contains a dispute mechanism enabling the petitioner to raise a dispute in relation to the draft OPAT, suggesting that the petitioner could use that mechanism to require the independent auditor to take into account, for example, the improper settlement of the Makdessi dispute and adjust the accounts accordingly.

99.The right given to the petitioner under §6.3 is to challenge the draft statement of OPAT circulated simultaneously with the audited accounts of the Group within 42 days by notice to the purchaser (ie Cavendish), such notice “to include reasonable details of the reason for any disagreement and, where practicable, any suggested amendment”.  The independent accountant appointed is to act as an expert and not as an arbitrator.  The first matter to note is that no right is given to challenge the consolidated accounts.  Indeed, as Ms Chan pointed out, there is no mechanism for ensuring the reliability of the Group’s audited accounts.

100.Then what matters would be in the draft OPAT that could be challenged?  In the definition of OPAT in Schedule 12, one finds an extensive list of what should and what should not go into the calculations for OPAT.  For example, if an item had not been taken into account in the draft OPAT statement when it should have been or a wrong deduction made, they would be matters that would fall within the mechanism and could be corrected or obtaining redress, much less adequate redress, for unfair prejudice complaints that are substantiated.

101.In the circumstances, I do not accept that the petitioner would be able to obtain substantial justice in the English court if he were to have his complaints aired in that forum in the substantive English proceedings.

V. OTHER RELEVANT CONSIDERATIONS

102.Mr Smith referred to the Court of Appeal’s decision in Makdessi v Team Y&R Holdings Hong Kong Limited, unreported, CACV 199/2012 where the court stayed an order of Barma J ordering the Company (the defendant in that case) to provide inspection to M of nine categories of accounting and other records in the Company.  M had issued proceedings in Hong Kong in 2011 under section 152FA of Cap 32 in exercise of rights as shareholder and obtained the order for inspection on 11 July 2012.

103.For reasons that are not apparent, it took over two and a half years before the appeal was heard.  Meanwhile, on 8 October 2012, the Company settled the Makdessi dispute (Petition §59).  Much also happened in relation to the Makdessi case.  Burton J rejected M’s penalty clause argument.  The English Court of Appeal reversed him and when the appeal from Barma J came to be heard, the Supreme Court had granted leave to appeal from the English Court of Appeal decision.

104.As Cheung JA observed that “subsequent developments have a material bearing on the outcome of the appeal” and recognised (at §9) that Burton J’s decision had a direct bearing on Barma J’s judgment: see §§6 and 9 of the Reasons in CACV 199/2012. For those reasons, that decision has little relevance as this court faces a wholly different set of circumstances.

105.I accept that where there is a jurisdiction clause in a contract, the starting point is that the parties should be held to their bargain but the rule is not absolute, as it is for the courts to ultimately determine where the interests of justice lie.  They may in exceptional cases ignore the contractual bargain but strong reasons must be demonstrated if the court is to free the parties from their contractual bargain.  It is not a matter of weighing up the connecting factors as though the court were faced with a stay application based on forum non conveniens: Noble Power Investments Ltd v Nissei Stomach Tokyo Co Ltd [2008] 5 HKLRD 631 at §§27, 29, 36 and 40.

106.Both sets of English proceedings are at the commencement stage.  As earlier noted, they have not progressed beyond issuance of the writs.  Mr Smith emphasised that if the petitioner were found to be a defaulting shareholder in the substantive English proceedings triggering the default shareholder option provision, he would not even have the relevant locus standi to pursue an unfair prejudice petition because in those circumstances he would no longer be a member of the Company.

107.I can see the force of the argument.  At the same time, I am seriously troubled by the absence of ‘reciprocity’ in that the petitioner would not be able to obtain adequate redress or substantial justice from the English court if his complaints of unfair prejudice are made out, quite apart from the fact that WPP and Y&R are not parties to the English proceedings.  If circumstances so warrant, it would be open to the judge hearing the petition to stay the execution of any order made on the petition pending the English court’s adjudication of the defaulting shareholder issue.  On the other hand Cavendish would not be correspondingly handicapped if it were willing to have its complaints adjudicated here.

VI.   EXERCISE OF THE COURT’S DISCRETION

108.I am conscious that the existence of multiplicity of proceedings on the same or similar issues may lead to inconsistent decisions and findings and, where possible, it is desirable to avoid such conflict from arising.  Nevertheless, situations could arise where this cannot be avoided.  The Morgan Stanley case is one example.  In that case, under the master agreement between the claimant (MSIP) and the defendant (CH) the parties submitted to the exclusive jurisdiction of the English court.  The defendant brought proceedings in China against both the claimant and MSAL an affiliate of the claimant.

109.Teare J (after holding that the defendant had not promised not to sue MSAL in England but only the plaintiff) came to the conclusion (at §38) that the case was one where the court could not ensure that all issues are determined in one jurisdiction.  In such circumstances, the best that the court could legitimately do in accordance with the ends of justice was to ensure that all claims and counterclaims concerning MSIP were heard in one jurisdiction (viz England) by reason of the exclusive jurisdiction clause.  Significantly, Teare J noted that there was no strong reason for refusing to grant the injunction restraining CH from pursuing its claims against MSIP in China in that case.

110.In the present case, strong reasons do exist in that there is no effective remedy available to the petitioner were he to bring his complaints against the respondents in England, assuming they (other than Cavendish) are willing to be joined as parties.  That is not an outcome that would serve the ends of justice.

111.Equally important are public policy considerations: as the exclusive jurisdiction clause fetters the petitioner’s statutory right to present an unfair prejudice petition, to that extent it must be held to be inoperative.

VII. CONCLUSION

112.For all the reasons considered above, I have little hesitation in refusing the stay and dismissing the respondents’ stay summons.  There is to be an order nisi of costs in favour of the petitioner with a certificate for two counsel.

Ms Linda Chan SC, leading Mr Keith Lam, instructed by Holman Fenwick Willan, for the petitioner

Mr Clifford Smith SC, leading Mr Kerby Lau, instructed by Deacons, for the 1^st to 4^th respondents