Scc Venture v. Holdco G, Ltd Ｖ. Zhao Changpeng
Read the full judgment text of HCMP 2770/2017 on BabelCite. This High Court CFI judgment was delivered on 26 March 2018.
1. There are before me two summonses:
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HCMP 2770/2017 [2018] HKCFI 670 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE MISCELLANEOUS PROCEEDINGS NO 2770 OF 2017 ______________
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___________________ D E C I S I O N ___________________ The applications 1.There are before me two summonses:
The interim injunction 2.On 27 December 2017, the plaintiff took out an ex parteapplication for an interim injunction. The injunction was sought in aid of arbitration. The application was before Li J that same day who acceded to the same and granted an injunction order (“the Injunction Order”). Its effect is to restrain the defendant (whether by himself or otherwise) “from engaging in any discussions or negotiations, and/or entering into any agreement and/or understanding, with any potential investor(s), person(s), company(ies) and/or entity(ies) (apart from the plaintiff or its affiliates) in connection with a Series A equity financing …” The Originating Summons was taken out the following day on 28 December 2017. It was taken out pursuant to section 45(2) of the Arbitration Ordinance, Cap 609. The Injunction Order was on 5 January 2018 continued by consent, pending substantive arguments on discharge/continuation. Directions for filing ofevidence were on the same occasion also agreed upon: the defendant to file his evidence in opposition by 2 February 2018, and the plaintiff to file its reply if any by 2 March 2018. The substantial hearing was subsequently set down to be heard on 11 April 2018. 3.The defendant filed his affirmation within time on 2 February 2018 (“D’s Affirmation”). Issues then arose as to whether the plaintiff was entitled to have copies of certain documents which D’s Affirmation allegedly made reference to. Extensive correspondence took place between Messrs Luk & Partners (“L&P”, solicitors for the plaintiff) and Messrs Herbert Smith Freehills (“HSF”, solicitors for the defendant). They managed to resolve most of their differences. The only exception is the draft IDG Term Sheet. By the Discovery Summons, the plaintiff is now seeking a copy of that document pursuant to Order 24, rules 10 and 11A. It also seeks an extension for it to file its reply until 7 days after the provision of the copy. Shortly afterwards, the defendant took out the Unless Order Summons. 4.As is clear from the procedural history summarized above, thetwo summonses are closely related. Disposal of the Discovery Summons will decide the other one. They were however taken out by the parties separately, and were originally listed before me for hearing on two different dates. Upon request made on behalf of the plaintiff, I on 8 March 2018 directed that the two summonses be heard together on 20 March 2018. The underlying disputes 5.The Court on this occasion is not requested to resolve the underlying disputes between the parties. For that the plaintiff has filed a Notice of Arbitration. Nor is the Court requested to consider whether the Injunction Order should be discharged. That will take place on 11 April 2018. A brief understanding of the underlying disputes between the partiesis however still necessary, in order that the relevance of the draft IDG TermSheet can be gauged, so that the Discovery Summons can be considered in the proper context. They are as follows. 6.The plaintiff and SCC Venture VI Holdco Ltd (“SCC”) are both special purpose vehicles established by a venture capital firm called Sequoia Capital China (“Sequoia China”). 7.The defendant is one of the founders and CEO of Binance, a centralized cryptocurrency exchange with a focus on crypto-to-crypto trading. Its online platform provides trading of virtual currency, including Bitcoin and Binance Coin. 8.In about early August 2017, Sequoia China began negotiation with the defendant on the possibility of it investing in the defendant’s business. On 25 August 2017, a document entitled “Sale of Series A Preferred Stock / BitDJ Limited / Summary of Terms” was signed (“the Term Sheet”). It was signed by SCC of the one part, and the defendant and Ms Yi He on behalf of BitDJ Limited (“BitDJ”) of the other. According to the introductory paragraph of the Term Sheet:
9.I point out, as is obvious from that introductory paragraph, that the Term Sheet did not constitute any legally binding agreement between the parties except for certain specific matters. It envisaged, if anagreement was ultimately reached, a restructuring which would enable the setting up of a Cayman Islands Company (according to the plaintiff later known as Binance Holdings Limited) which would in turn issue Series A Preferred Stock. The Cayman Company would acquire 100% equity interests of BitDJ Godogaisha and establish a Hong Kong company which would acquire all the assets and business of BitDJ. 10.I point out further that although the word “Exclusivity” appears in the introductory paragraph of the Term Sheet, the Term Sheet in fact does not contain any exclusivity or lock-out provision. 11.On 1 September 2017, the defendant (as the Payor) signed a promissory note in favor of the plaintiff (as the Holder) (“the Promissory Note”). The following provisions in the Promissory Note are relevant for our present purpose:
12.It is the plaintiff’s case that Clause 1(c) of the Promissory Note imposed upon the parties a lock-out period, that the term “Series A Financing” is a common market term in the tech start up arena which refers to the first round of financing from external investors (ie not founders, family and friends of seed investors), and that on about 18 December 2017 (which date was before the expiry of the lock-out period), the defendant was, in breach of Clause 1(c) of the Promissory Note, on the verge of foregoing the transaction with the plaintiff in favor of IDG Capital (“IDG”),which was another investor and a competitor of the plaintiff. The plaintiff therefore moved for the Injunction Order on 27 December 2017. 13.The defendant does not dispute that Clause 1(c) of the Promissory Note imposed upon the parties a lock-out period. The crux of the matter, according to the him, is the meaning of the term “Series A Financing”. His case is that his discussion with IDG did not relate to Series A Financing as defined in the Promissory, but related to some Series B Financing that was proposed to take place subsequent to the closing of the Series A Financing. There was therefore no breach of Clause 1(c). According to what the defendant has said in D’s Affirmation:
14.Exhibit ZCP-1/66 produced by the defendant in D’s affirmation is a one-page document bearing the heading of “IDG WeChat Message History on 18 December 2017 from 17:41 to 1751”. The first three messages thereon are most relevant for the present application. They were from Huang Feng of IDG. The first one reads:
Immediately following that is a screen shot of the draft IDG Term Sheet (“the Screenshot”) showing several paragraphs thereon. The third message reads:
15.In a letter dated 28 February 2018 from HSF to L&P, HSF “copy-typed” and reproduced therein what they said was the full text of the Screenshot. I adopt that version and reproduce it here:
It is also relevant to note from that same letter that HSF said as follows:
16.L&P for the plaintiff maintained that the plaintiff was entitledto a copy of the draft IDG Term Sheet. HSF for the defendant insisted that it was not. This difference led to the issue of the Discovery Summons. The parties’ submissions 17.In gist, Mr Wong, counsel appearing for the plaintiff, submits that “it is plain that the IDG Term Sheet was referred to in the Exhibit”, and that its production, given the defendant’s reliance on it to support his defence, is necessary in accordance with Order 24, rule 13. 18.Ms Cheung, counsel appearing for the defendant, opposes the Discovery Summons on the following bases:
19.An important plank of Ms Cheung’s submissions is that if a document is not referred to in the textual part (or “the narrative evidence” as described by Ms Cheung’s, which term I will adopt) of an affirmation, mere reference to that document in an exhibit attached to the affirmation does not qualify as “reference” for the purpose of Order 24, rule 10. She relies on Bank of India v Bhagwandas Kewaleram Murjani (unreported, CACV 84/1989, 11 July 1989, CA). She submits that that case is the only decision from the Court of Appeal which deals with this specific point, and any subsequent inconsistent decisions which did not refer to Murjani should not be followed as having been given per incuriam. She submits that a restrictive interpretation of the meaning of “reference” is consistent with the structure of Order 24, which contains other rules (rules 3 and 7) that permit discovery based on “relevance”. Discovery of a document which is relevant but is otherwise not referred to in any pleadings can be sought under those rules. She further submits that such a restrictive interpretation makes perfect sense as, whist a deponent can control what he says in the narrative evidence and what exhibits to produce, he cannot control what an exhibit otherwise makes reference to. The “reference” issue
20.Order 24, rule 10 provides as follows:
21.Order 24, rule 10 should be read in conjunction with Order 24, rule 13, paragraph (1) of which provides:
22.On the operation of Order 24, rule 10 and its relationship with Order 24, rule 13, the observations of Fok JA (as he then was) in Moulin Global Eyecare Holdings Ltd v Olivia Lee Sin Mei[2013] 3 HKLRD 72 are important, that:
His Lordship then cited Dynamic Way International Ltd v Ho Kui Chee [2000] 4 HKC 138 (CA). He continued at paragraph 35, that:
23.However, the issue remains—what does the clause “reference is made to” in Order 24, rule 10 mean? In Moulin Global, the insurance policy which the plaintiff sought discovery of was referred to in the narrative evidence of the affidavit concerned. There was therefore no dispute in that case that “reference” had been made to it within the terms ofOrder 24. The issue that we are concerned with in the present application was not specifically considered in Moulin Global. 24.The scope of the clause “in whose pleadings, affidavits or witness statements … reference is made to any document” in Order 24, rule 10 indeed has some practical significances. Whilst there can be littledoubt that reference to a document in the narrative evidence of an affirmation is sufficient “reference” for the purpose of Order 24, rule 10 (I call this “direct reference” for ease of discussion below), should a reference in an exhibit only (I call this “indirect reference in exhibit”) be accorded the same significance when considering whether Order 24, rule 10 is triggered? If so, how about some more remote references (eg an exhibit referring to a document which in turn refers to another document)? Where should the line be drawn? 25.Murjani involved an appeal by seven debtors against summaryjudgments that had been entered against them. An application for specific discovery founded upon Order 24, rule 10 was made before the Court of Appeal. The application related to a document referred to a circular which had been exhibited to the evidence in the court below. It is apparent that the appellants in that case sought to run the defence that in some way there had been directions issued by the Reserve Bank of India which were breached in the lending to them by the plaintiff bank. In delivering the judgment of the Court, Hunter JA observed that:
In the end, after considering the issue of relevance in the context of the proposed defence, Hunter JA held that “In those circumstances it seems to me plain that there is no substance in the defence … There is likewise no substance in this application which in my view has to be rejected.” 26.Relying on Murjani, Ms Cheung submits that “Order 24 Rule 10 itself however, and the case law, does not cover discovery of documents referred to in the exhibits themselves…In other words, [Murjani] excludes documents alluded to in an exhibit of an affidavit from Order 24 Rule 10”. 27.I have considered Murjani carefully. What Hunter JA observed was that “Hinchliffe does not cover specifically, any more than… the rule does, discovery of documents referred in the exhibits themselves.” In other words, His Lordship was of the view that Order 24, rule 10 was notspecific as to whether it covers indirect reference in exhibit. In the light of that, he came back to the issue of relevance. That is different from, and does not support¸ the positive proposition put forward by Ms Cheung that Murjani excludes from Order 24, rule 10 indirect reference in exhibit. If that were indeed the conclusion reached by Hunter JA and the ratio decidendi of that case, His Lordship could have (and perhaps with respect should have) dismissed the appellants’ application on that basis without considering the question of relevance. 28.In Dynamic Way, the Court of Appeal was concerned with an affirmation which had, as an exhibit, a sealed envelope containing a list of purchase orders placed by various customers. Inspection of that exhibit was objected to, on the basis that it contained confidential information. Discovery was permitted by the Court, on the basis that a party should not, except in very unusual circumstances, be faced with having to deal with evidence which it is not permitted to see. The ratio in that case is consistent with the trite position that an exhibit forms part of the affidavit. The Court in that case otherwise did not address specifically the issue as to whether Order 24, rule 10 excludes indirect reference in exhibit. 29.In Shun Kai Finance Co Ltd v Japan Leasing (HK) Ltd (in liq)[2001] 1 HKC 636, Le Pichon JA observed at page 641D–I that:
30.For the following two reasons, my view is that Shun Kai Finance is not a binding authority for the proposition that Order 24, rule 10 covers indirect reference in exhibit. To start with, that issue never arose. The issue in that case was whether the implied undertaking arising on discovery applies to documents supplied pursuant to Order 24, rule 10— see Moulin Global at paragraph 49. Secondly, it is not clear whether, by observing that “A similar rule applies to exhibits to an affidavit”, Le Pichon JA was expressing the view that Order 24, rule 10 covers indirect reference in exhibit, or that Her Ladyship was only saying that Order 24, rule 10 applies to exhibits (in the sense that a party is entitled to serve a notice for discovery of exhibits). My view is that Her Ladyship was onlysaying the latter. That becomes quite clear when one notes that Hinchliffe was cited in support of the existence of that “similar rule”. In Hinchliffe, Lord Herschell was dealing with certain documents that were annexed to an affidavit but were, according to the then practice in respect of the types of proceedings concerned, not lodged and filed together with the affidavit. Lord Herschell held at page 120 of the judgment that those documents “form as much part of the affidavit as if they had been actually annexed to and filed with it.” As has been observed by Hunter JA in Murjani, “Hinchliffe does not cover specifically, any more than … the rule does, discovery of documents referred in the exhibits themselves.” 31.Murjani was considered by Deputy Judge McCoy SC in Zida Technologies Ltd v Tiga Technologies Ltd[2001] 3 HKLRD 698. Perhaps having the same concern as I have about the exact ratio in Murjani, His Lordship made the observations (at paragraph 30) that:
The learned Deputy Judge ultimately did not decide on the issue, but observed at paragraph 32 that:
32.Mr Wong has further drawn to my attention AXA China Region Insurance Company Limited and Another v Pacific Century Insurance Company Limited and Others (unreported, HCA 9093/2000, 18 May 2005),wherein Chu J (as she then was) observed at paragraph 12 of the judgment that:
33.Ms Cheung’s submission is that AXA China was given per incuriam on the issue as to whether Order 24, rule 10 cover indirect reference in exhibit, as Murjani was not cited to the Court. 34.Having considered the authorities as I have above, I am of the view that there are no decided cases from the Court of Appeal binding on this Court on the issue as to whether Order 24, rule 10 excludes indirect reference in exhibit. In the circumstances, and having considered the matter afresh, I reach the view that the clause “in whose … affidavits … reference is made to any document” in Order 24, rule 10 does cover indirect reference in exhibit. My reasons are as follows:
Application of the law on the issue of “reference” 35.I have explained above how reference was made to the draft IDG Term Sheet in Exhibit ZCP-1/66. In my view, there has been sufficient “reference” for the purpose of Order 24 rule 5. 36.In the Screenshot, only several paragraphs of the draft IDG Term Sheet were shown. Should discovery be confined only to those parts, or should the entire document be discovered? I find that, subject to the issue of relevance and Order 24, rule 13 (which I will come to), the entire document becomes subject to discovery. The third message by Huang Feng of IDG did refer to “TS”, which I take it to mean the draft IDG Term Sheet. And more importantly, as observed by Le Pichon JA in Shun Kai Finance, “A pleading should be approached on the basis that it sets out in full all the documents which are referred to in that pleading. So if a party refers to documents in pleadings without their being set out in extenso, there is a right to require the pleading party to produce the document”— see paragraph 29 above. The same reasoning is applicable here. The draft IDG Term Sheet is not like, for example, a set of account books which would by its nature contains other totally irrelevant entries (in which case those irrelevant entries can be redacted out)—see Quilter v Heatly (1883) 23 Ch D 42. Relevance, and Order 24, rule 13 37.I consider the two matters together. Extensive submissions have been made to me by Mr Wong and Ms Cheung on the issues of relevance and whether discovery of the draft IDG Term Sheet is necessary for the purpose of Order 24, rule 13. I may be forgiven for not reciting them in full here, save that I have considered them. In my view, the draft IDG Term Sheet is clearly relevant, and is necessary for disposing fairly of the cause or matter or for saving costs. My reasons are as follows. 38.I have set out above the underlying disputes between the parties. Whilst the Court is not required to resolve those disputes on 11 April 2018,they remain highly relevant during that hearing. One of the grounds whichthe defendant seeks to rely upon during his application to have the Injunction Order discharged is that there is no serious issue to be tried in this case. He does not dispute there had been negotiations between him and IDG during the lock-out period. He says however that those negotiations concerned some Series B Financing, which he says are different from Series A Financing defined in the Promissory Note, and hence there has been no breach of Clause 1(c). He made the decision to introduce throughExhibit ZCP-1/66 the draft IDG Term Sheet, which contained terms relating to “Series B1 Preferred Shares” and “Series B2 Preferred Shares”. The purpose of introducing into the evidence the draft IDG Term Sheet is clear. In the way his lawyers put it in their letter of 28 February 2018, “… the IDG Group Message, including the Screenshot, is relied upon by our client as evidence of the fact that our client’s discussion with IDG related to a potential ‘Series B Financing’. In the light of the issues involved, and give the reliance, the contents of draft IDG Term Sheet is clearly relevant as to what had in fact been discussed between the defendant and IDG. That document may indeed, as L&P have suggested in the course of correspondence, go to support the defendant’s case. 39.Now that the defendant has introduced into the evidence the draft IDG Term Sheet in support of his case, he cannot maintain, as HSF has tried to argue on his behalf, that “the Screenshot and Mr Zhao’s evidence in connection with it constitutes sufficient evidence for the Court to decide the issues presently in dispute”—see paragraph 15 above. The plaintiff is entitled not to take what the defendant has said at their face value, but to require sight of the entire document. Conclusion 40.For the reasons stated above, I am of the view that the draft IDG Term Sheet is discoverable pursuant to Order 24, rules 10 and 13. I so order. An alternative approach 41.I return to Murjani. If I am wrong in my analysis of the law above, and that Murjani is in fact binding on this Court, I need to, as Hunter JA has observed, “come back” to the issue of relevance. Followingthat approach, and having considered the issues of relevance and necessity as I have in paragraphs 37 to 39 above, I would still allow the Discovery Summons. Disposal 42.I allow the Discovery Summons. I order that the defendant do by 4:00 pm on 28 March 2018 provide a copy of the draft IDG Term Sheet to the plaintiff’s solicitor. For the avoidance of doubt, my order is at this stage confined only to the draft IDG Term Sheet itself, together withany attachment or annexure thereto which forms an integral part of the same, but not any additional documents which the draft IDG Term Sheet makes reference to. The parties are granted liberty to come back to me should dispute arise in this regard in the compliance of the Order. Time for the plaintiff to file its reply, if any, is extended to within 3 days from the date of the receipt of the draft IDG Term Sheet. 43.I accordingly dismiss the Unless Order Summons. 44.I make an order nisi that the plaintiff shall have costs of both Summonses, to be taxed if not agreed. If the parties are to seek summary assessment, or otherwise seek any variation of the orders nisi, parties are at liberty to write in within 7 days for directions.
Mr Jonathan Wong, instructed by Luk & Partners, for the plaintiff Ms Elizabeth Cheung, instructed by Herbert Smith Freehills, for the defendant |
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