Read the full judgment text of HCA 1661, 1766, 2191/2014 & HCA 623, 939, 1564/2015 (Consolidated) and HCA 1282/2017 on BabelCite. This Court of First Instance judgment was delivered on 31 January 2018 before Godfrey Lam.
Equity and trusts – employee stock ownership scheme – construction of trust arrangements over shares in Hong Kong company – whether BVI discretionary trusts validly established or whether fixed trusts arose under Hong Kong law in favour of participating employees – Mainland law characterisation of entrustment relationship – resettled of fixed trust assets on discretionary trust – ratification of BVI trusts by 2008 Confirmation – Participating employees of Jinan Shanshui contributed capital to Employees Stock Ownership Scheme (ESO Scheme) established in 2000-2001, with shares held by 9 employee shareholding representatives because Mainland Company Law limited number of shareholders to 50 – 3,938 participating employees were 'actual contributors' and the 9 representatives (later 9 Management Shareholders including Zhang Snr and Li YM) were 'nominal shareholders' under Mainland law – on 15 December 2004, shares in Jinan Innovation (renamed Shandong Shanshui) transferred to 9 Management Shareholders – on 11 April 2005, 1 million CSI shares transferred to 9 Management Shareholders for HK$1 in same proportions as Shandong Shanshui – in September 2005, assets injected into Pioneer/CSHK/CSI – on 28 November 2005, Zhang Snr and Li YM executed BVI trust deeds purporting to establish absolute discretionary trusts over 617,669 CSI shares for 2,549 and 1,391 participating employees respectively – in April 2008, participating employees signed 2008 Confirmation – in November 2013, Zhang Snr proposed buyout repurchase plan which employees opposed – first action HCA 1661/2014 brought on 23 August 2014 – five further actions consolidated in August 2015 – Receivers appointed over 456,325 shares – new action HCA 1282/2017 commenced in 2017 for SH plaintiffs – Whether participating employees were real owners under Mainland law – court held yes, participating employees were actual contributors and real owners under Mainland law, and Zhang Snr and Li YM were merely nominal shareholders entitled to exercise shareholders' rights but unable to dispose of shares without employee consent, applying Articles 24-25 of SPC Provisions on Company Law (III) and Article 106 of Property Law – Whether BVI trusts were declared on 11 April 2005 – court held no, no evidence of express declaration; Paul Weiss draft of 28 April 2005 was for fixed trust not discretionary trust; first contemporaneous documents mentioning discretionary trust were BVI trust deeds in November 2005 – Whether fixed trusts arose under Hong Kong law on 11 April 2005 – court held yes, Zhang Snr and Li YM held 523,668 and 94,001 CSI shares on fixed trusts for participating employees, as evidenced by their intention, the 2005 entrustment declaration, and the draft memorandum on offshore reorganisation of 17 February 2005 stating shares would be held 'by way of trust' – Whether BVI trusts validly re-settled the shares in November 2005 – court held no, without consent of participating employees (beneficial owners under fixed trusts), Zhang Snr and Li YM had no power to re-settle shares on less favourable BVI trusts; shares remained subject to original fixed trusts – Whether 2008 Confirmation ratified BVI trusts – court held no, express references to discretionary nature and power to vary distributions were deleted; no full informed consent; objectively did not mention BVI or discretionary trust and was equally consistent with fixed trust – Plaintiffs succeeded – declaration that Zhang Snr held 456,325 CSI shares on trust for plaintiffs individually – order for transfer of 456,325 shares to plaintiffs or their nominees – Receivers' appointment to cease – order nisi for costs limited to one set with certificate for two counsel – liberty to apply
Legal issues: Characterisation of ESO Scheme relationship under Mainland law (2001 to 11 April 2005) · Whether BVI trusts were expressly established on 11 April 2005 · Whether fixed trusts arose under Hong Kong law on 11 April 2005 · Validity of re-settlement of CSI shares on BVI trusts in November 2005 · Whether the 2008 Confirmation constituted valid ratification of the BVI trusts
Outcome: Plaintiffs succeeded. The court declared that Zhang Snr held 456,325 shares in CSI on trust for the plaintiffs individually, and ordered transfer of those shares to the plaintiffs or their nominees. Zhang Snr's strike-out application was refused.
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