Dennis Kwok Hon Ming v. Poon Sui Cheong Albert and Others
Read the full judgment text of CACV 9/2017 on BabelCite. This Court of Appeal judgment was delivered on 24 April 2019.
1. I agree with the judgment of Barma JA and the orders he proposes to make.
Cited by 1 case · Cites 2 cases
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CACV 9/2017, CACV74/2017 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF APPEAL CIVIL APPEAL NOS 9, 74 AND 169 OF 2017 (ON APPEAL FROM HCMP 1526, 1527 AND 1528/2013) --------------------------- (ON APPEAL FROM HCMP 1526/2013) ---------------------------
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__________________ J U D G M E N T __________________ Hon Cheung JA: 1.I agree with the judgment of Barma JA and the orders he proposes to make. Hon Barma JA: Introduction 2.There were before us three appeals against judgments of Deputy High Court Judge Ismail SC given in relation to three petitions issued by the petitioner, Mr Dennis Kwok, pursuant to what was section 168A of the old Companies Ordinance (Cap 32), seeking orders that his beneficially owned shares in Minloy Limited, Top Master Development Limited and Wealth Island International Limited (which were registered in the names of Madam Man Pui Fong and Mr Law Joe Lok, the mother and father of the 5th respondent, Ms Helen Law) be bought out by four of the other five shareholders of those companies (“the majority shareholders”), on the grounds of allegedly unfairly prejudicial conduct on the part of the majority shareholders against him. HCMP 1526/2013 concerned Minloy, HCMP 1527/2013 concerned Top Master, and HCMP 1528/2013 concerned Wealth Island. 3.In each of the petitions, the 1st to 8th respondents were, respectively, Mr Albert Poon, Ms Irene Tseng (who, having unfortunately passed away before the trial, was substituted as 2nd respondent by her son and executor, Mr Solomon Tseng), Mr Norris Yang, Mr William Lo, Ms Helen Law, Asian Adventure Limited, Enchantment Properties Limited and China Funds Development Limited. Asian Adventure, Enchantment Properties and China Funds were corporate vehicles for Irene Tseng, Norris Yang and William Lo respectively, through which they held their interests in the three companies (although, in the case of Minloy, Irene Tseng held her shares in her own name). The majority shareholders consisted, in each case, of Albert Poon, Irene Tseng/Asian Adventure, Enchantment Properties and China Funds. No allegations were made, and no relief was sought, against the 5th respondent, Helen Law. Originally, the three companies were named as 9th respondents to the respective petitions, but they were removed as respondents prior to the trial by an order of Harris J at an earlier stage of the proceedings. 4.The parties’ shareholdings were the same in respect of each of the three companies. The petitioner held 10.714% (through his nominees - Madam Man, in the case of Minloy and Top Master, and Mr Law, in the case of Wealth Island). Helen Law held 17.857% (again through a nominee, her mother Madam Man). As for the majority shareholders, Albert Poon held 21.429%, Irene Tseng/Asian Adventure held 35.714%, Enchantment Properties held 7.143% and China Funds also held 7.143%. The formation of the companies and the Shareholders’ Agreement 5.The background to the formation of the companies can be briefly summarised as follows. In about late 1991, Dennis Kwok and Helen Law (who at one time were cohabitees) identified an opportunity for the acquisition of some 900,000 square feet of land on Lantau Island for a price of some HK$6.80 per square foot. In order to proceed with the acquisition, funds of HK$7,000,000 would be required. In order to raise the necessary funds, they sought additional investors. Mr Kwok contacted his former colleague Mr Poon, while Ms Law contacted her friend Ms Tseng. Ms Tseng brought in Mr Lo, who in turn brought in Mr Yang. Although each of the eventual investors knew one or more of the others, it does not appear that they all knew each other, or that they had any prior business or other relationship in which they were all involved. 6.Following a number of meetings and site visits, the six investors agreed to pursue the proposed investment in the land. To this end, they entered into an undated written agreement (made in about January 1992) to set out the terms on which they would enter upon the investment – this agreement has been referred to throughout as “the Shareholders’ Agreement”. Initially, it was envisaged that the entire investment would be made through Minloy, which is the company referred to in the Shareholders’ Agreement. However, it was eventually decided that the land should be acquired by three separate companies (i.e. the three companies), and although no further agreements were entered into in relation to Top Master and Wealth Island, it was accepted by all parties that the Shareholders’ Agreement governed the relationship of the investors in respect of all three companies. 7.The Shareholders’ Agreement is of central importance to these proceedings. The key arguments on the issues of whether or not there has been unfairly prejudicial conduct, both before us, and in the court below, turn on its proper interpretation. Accordingly, it is best set out in full. It is in the following terms (sub-clause numbers in square brackets were inserted by the Deputy Judge for ease of exposition):
The factual background to these proceedings 8.In her judgment, the Deputy Judge set out in some detail the events between the setting up of the companies and the final breakdown of the relationship between the parties that resulted in the petitioner bringing these proceedings. For present purposes, however, it is sufficient to set out the key events that led to the Deputy Judge’s conclusion that there had been breaches of the Shareholders’ Agreement amounting to unfairly prejudicial conduct by the majority shareholders making it appropriate to order them to buy out the petitioner’s shareholdings in the companies. These related to:
9.The first set of key events relate to the proposals presented by the petitioner and the 5th respondent for the sale of parcels of Non-Core Land. These were as follows:
10.As for the Government land resumption, the sequence of events can be summarised as follows:
11.So far as the removal of the petitioner (and the 5th respondent) as managers and directors of the companies is concerned, this came about shortly afterwards. On 7 April 2008, EGMs of the companies were convened for 9 May 2008, at which such removal was to be considered. At such meetings, a majority of the shareholders voted in favour of such removal. 12.As for the subsequent failure to distribute any of the resumption compensation proceeds, the sequence of events was:
13.The complaint to the police against the petitioner arose from the preparation of the cashier orders mentioned in paragraph 12(5) above. Following the 1st respondent’s complaint of 6 December 2008, in January 2009 a board resolution of Top Master was passed authorising the 1st respondent to make a report to the police alleging theft by the petitioner from Top Master of the amount of the cashier orders. The 1st respondent made such a report on 18 January 2009. The Deputy Judge found that, in making the report, the 1st respondent made false statements to the police regarding Top Master’s dividend policy, and regarding whether or not Top Master owed any money to the petitioner (and the 5th respondent). The police investigation continued for about two years, following which it was brought to an end, apparently on the basis that there was insufficient evidence to justify taking it further. 14.It seems clear from the Deputy Judge’s findings that matters had reached an impasse, and that as from mid-2008 onwards, the two camps of shareholders (the petitioner and the 5th respondent on one side, and the majority shareholders on the other) were unable to work together in relation to the companies’ affairs. From time to time after his removal as a manager, until the second half of 2012, the petitioner pressed for compensation for such removal. Eventually, on 22 November 2012, the petitioner requested the majority shareholders to buy out his shares and arrange for the repayment of his shareholders’ loan to the companies, given the inability to agree on his compensation and the general impasse as to the companies’ continued activities. Finally, on 20 June 2013, the petitioner issued the unfair prejudice petitions in respect of the companies. The alleged unfairly prejudicial conduct 15.In his petitions, the petitioner complained of the following allegedly unfairly prejudicial conduct by the majority shareholders:
The Main Judgment 16.Following the trial, the Deputy Judge gave judgment on 14 December 2016 (“the Main Judgment”) dealing with whether or not a buy out of the petitioner’s shares should be ordered, whether the petitioner should be awarded compensation in respect of his role as manager of the companies, and dealing with certain issues relating to valuation of the petitioner’s shareholding. 17.For present purposes, the following conclusions are of importance:
Further Decisions and Judgments 18.Following delivery of the Main Judgment, a number of further hearings took place. These were concerned mainly with the manner in which the valuation should be conducted. However, a number of substantive points were also raised, which were dealt with by the Deputy Judge in decisions given in respect of such hearings. For present purposes, it will suffice to note the following:
The three appeals 19.As noted at the beginning of this judgment, there are three appeals before us. CACV 9/2017 is an appeal by the majority shareholders against the Main Judgment, in which the petitioner has filed a respondent’s notice. CACV 74/2017 is an appeal by the majority shareholders against aspects of the February Decision. CACV 169/2017 is an appeal by the petitioner against an aspect of the July Judgment. 20.There was also before us an application by the majority shareholders, by summons dated 22 January 2018, seeking to restore their application to this court dated 13 April 2017 for a stay of the Main Judgment, and the February and March Decisions, on the basis that if this were not done, it would be necessary to continue with the valuation process and go ahead with a hearing in relation to the petitioner’s interim payment application in the period between the hearing of this appeal and delivery of judgment, which would result in considerable wasted effort and costs if the majority shareholders’ appeals proved to be successful. At the conclusion of the hearing, we granted the stay sought pending delivery of this judgment. 21.Shortly before the hearing of the appeals, the majority shareholders sought leave to re-amend their notice of appeal in CACV 9/2017. This was not opposed by the petitioner, and leave to re-amend was accordingly given at the outset of the appeal. 22.In CACV 9/2017, the majority shareholders appealed against the making of the buy-out order, and the order for the payment of remuneration to the petitioner as if he had remained a manager until the date of the share buy-out. 23.So far as the buy-out order was concerned, the main arguments advanced by Mr Joffe (who did not appear at the hearing below) for the majority shareholders were directed against the Deputy Judge’s conclusion that the majority shareholders were in breach of their obligations under Clause 6[2] of the Shareholders’ Agreement in failing to approve of the sales of Non-Core Land that had been brought forward by the managers, and had thereby frustrated what the Deputy Judge considered to be the purpose and objectives of the Shareholders’ Agreement. In essence, Mr Joffe’s complaint (elaborating on grounds 1 to 4 of the re-amended Notice of Appeal) was that the Deputy Judge had wrongly held that the shareholders were under a positive obligation to approve Non-Core Land Sales, when they in fact had an unfettered discretion as to whether or not to do so, and thus had wrongly concluded that they were in breach of their obligations under the Shareholders’ Agreement, resulting in their conduct being unfairly prejudicial to the petitioner. 24.So far as the order for payment of remuneration to the petitioner as manager was concerned, Mr Joffe’s contentions (elaborating on grounds 5 and 6 of the re-amended Notice of Appeal) focused on demonstrating that contrary to the Deputy Judge’s conclusion that the petitioner’s position as manager was entrenched so as to be, in effect, irremovable, there were implied terms entitling the majority shareholders to remove the managers, either for cause, or on reasonable notice, and that in the circumstances of this case, both routes to removal were available to the majority shareholders, so that there was no wrongdoing on their part in having resolved to remove the petitioner and 5th respondent as managers at the EGM held on 9 May 2008. 25.Although the re-amended Notice of Appeal (and Mr Joffe’s oral submissions) suggested that the first issue (raised by grounds 1 to 4) related to the buy-out and the second (raised by grounds 5 and 6) related to the compensation order, it seems to me that the second issue was also of importance in relation to the buy-out order, as it is one of the forms of unfairly prejudicial conduct complained of, which the Deputy Judge found to have been established. 26.A third complaint in the re-amended notice of appeal (ground 7) concerned the treatment of the shareholders’ loans to the companies – in essence, the complaint was that the Deputy Judge had overlooked the need to require the petitioner to procure the waiver of the shareholders’ loans advanced to the companies by his nominee shareholders (the 5th respondent’s parents). The argument here was that if this were not required, it would seem possible for the petitioner to receive payment for his shares on the footing that the shareholder’s loans had been repaid by 1997, but for the shareholders (his nominees) to then demand repayment of the loans as they were not parties to the proceedings and would not be bound by the judgment, giving rise to a risk of double recovery. This argument was not, I think, seriously contested by the petitioner. 27.Finally, the majority shareholders contended (ground 8) that even if the Deputy Judge had been right to order a buy-out, she had erred in ordering that the petitioner’s shareholdings should be valued without any discount for the fact that they were minority shareholdings, particularly having regard to her conclusion that the relationship between the shareholders was not one of quasi-partnership. 28.The petitioner’s respondent’s notice, ostensibly to affirm the Main Judgment on additional grounds, makes the following points:
29.Turning to CACV 74/2017, this was the majority shareholders’ appeal against two aspects of the February Decision. 30.The first aspect complained of (by grounds 1 to 3) related to the Deputy Judge’s ruling that liability for the buy-out was to be joint and several. It was contended that such liability should be several only, as the majority shareholders had acted individually and not in concert, that there had been no claim for joint and several liability, and there was nothing to suggest that a several liability to buy out would be impracticable or impossible. It was further suggested that joint and several liability might upset the balance of shareholdings as between the majority shareholders. 31.The second aspect complained of (by ground 4) related to the ruling that the majority shareholders should bear the costs of the valuation, in that it was premature to have determined that matter at this stage of the litigation, the correct approach being to await the outcome of the valuation process in order to make a proper assessment of how the costs of the process should be allocated, in the light of the different parties’ approach and behaviour regarding the valuation process. 32.As for CACV 169/2017, this was an appeal by the petitioner against what he suggested was a ruling in the July Judgment that there was no further scope for further damages to be awarded to the petitioner in respect of the unfairly prejudicial conduct, and that the order for lost remuneration should be limited to such remuneration up to the time of the buy-out, rather than on a perpetual basis. CACV 9/2017 33.I shall consider first the contentions in CACV 9/2017 that the Deputy Judge fundamentally erred in her interpretation of the Shareholders’ Agreement, both in respect of whether or not the shareholders were obliged, by the terms of Clause 6[2], to agree to any sale to outside parties introduced by the managers as long as the price exceeded the floor price provided for in Clause 6[3], and in respect of what she found to be the entrenched, or effectively irremovable, position of the managers, so long as they remained shareholders of the companies, and in consequence was wrong to conclude that there had been any such unfairly prejudicial conduct as would call for the making of a buy-out order. Depending on the outcome, the other issues raised in this and the other appeals might be rendered academic. Whether the shareholders were obliged to approve sales of Non-Core Land 34.As for Clause 6[2], as we have seen, the Deputy Judge concluded that the shareholders were obliged by Clause 6[2] of the Shareholders’ Agreement to approve of sales of Non-Core Land where an offer was made by an outside buyer, so that the majority shareholders were in breach of this obligation by failing to approve of the various offers made in September and November 1997, and by Chun Wo in 2006. 35.Her reasoning was set out in paragraphs 35 to 45 of the Main Judgment. She first noted that under Clause 3 of the Shareholders’ Agreement the objective was not the immediate sale of all of the land, but to sell some of the Non-Core Land in the short term to repay the shareholders’ loans and interest thereon. She went on to note that Clause 6[1] required the managers to use their best efforts to dispose of the Non-Core Land as soon as possible, in order to allow the recoupment of the shareholders’ investment and interest thereon in full. 36.The Deputy Judge went on to set out the procedure for Non-Core Land sales under Clause 6[2]. She described this as follows:
37.She went on to express her view that the floor price mentioned in Clause 6[3], which deals with the situation where a shareholder wishes to make an offer to buy Non-Core Land, is equally applicable to sales to outsiders pursuant to Clause 6[2]. 38.She then referred to Clause 8, stating that it “provides generally that a decision to sell any land asset is a decision requiring 100% shareholder approval (until such time as the shareholder loans have been fully repaid)”. 39.She then concluded that Clause 6[2] created a specific obligation on the part of the shareholders to approve any sale to an outside party which was not matched by a shareholder within the period indicated in Clause 6[2], and rejected the view that the shareholders had an unfettered discretion as to how to vote on any proposed sale, as this was, she said, inconsistent with the terms of Clause 6[2], the objectives stated in Clause 3 for the sale of Non-Core Land as soon as possible to recoup the shareholders’ loans and interest, and the obligation on the part of the managers (pursuant to Clause 6[1]) to similar effect. She also regarded the interest rate of 2% per month attaching to the shareholders’ loans to be indicative of an intention to have those loans repaid as quickly as possible, rather than remaining outstanding and racking up large amounts of interest. 40.Mr Joffe submitted that:
41.I start by considering the language of Clause 6[2]. This states that:
42.In my view, Mr Joffe is correct to submit that the language of the first sentence of the clause, in particular the phrase “the shareholders will have to approve of the sale first”, reads more naturally as a precondition that must be satisfied, rather than as an obligation imposed on the shareholders. What they suggest is that when an offer is received from an outside buyer, the first thing that needs to happen is that the approval of the shareholders of the offer should be obtained. But they do not obviously suggest that the shareholders are required to give such approval. 43.Indeed, if the shareholders were obliged to give their approval, so that they had no choice in the matter, that phrase would be otiose. The clause would have exactly the same effect if they were left out. It would have sufficed to have said that when an outside buyer submitted an offer, the shareholders would have the first option to match the purchase, failing which the land would be sold to the outside buyer. In order to give some real meaning to the provision that “the shareholders will have to approve of the sale first”, it must be understood as a precondition, rather than an obligation. Put another way, there would be no real need to obtain the approval of the shareholders if they had no choice in the matter. 44.I would also agree with Mr Joffe that the provision at the end of the clause that “if no shareholders match the offer within the period, the land will be sold to this outside buyer” does not suggest that Non-Core Land for which an offer is received must necessarily be sold. All that this provision does is to make clear that where the hurdle of shareholder approval has been cleared, and no matching offer is thereafter received, the sale will go ahead. 45.This construction of Clause 6[2] is, I think, clearly reinforced by Clause 8. The latter clause makes it clear that the operational decisions to be made by the managers do not include decisions relating to “sale of any land asset”, which is among the decisions reserved to the shareholders. The reference in Clause 8 to “any land asset” does not seek to distinguish between Core and Non-Core Land. On the contrary, it expressly relates to “any” land. To say that Clause 6[2] requires the shareholders to approve of any offers from outside buyers brought to them by the managers would mean that in relation to Non-Core Land, the managers, and not the shareholders would be the effective decision makers. This would be clearly inconsistent with the terms of Clause 8, and the very opposite of what that clause states in relation to land sales. 46.As Mr Joffe submitted, there were sound commercial reasons why the shareholders would wish to have a say over whether or not particular offers should be accepted. While they might well be keen to recoup their investment in a reasonably short time frame, they would be equally concerned to ensure that the best possible price was achieved for any land that was sold. Further, the provisions of Clause 4 relating to manager remuneration would tend to incentivise the managers to sell sufficient land to enable the initial investment to be recovered, and it is therefore reasonable for the other shareholders to be able to satisfy themselves that proposed sales were for a proper price, by providing for all land sales to be subject to their approval, whether unanimous or by a 60% majority. 47.It should also be noted that the requirement for 100% approval in the early stages of the companies’ operation was not absolute. If a substantial majority (75%) of the shareholders were in favour of a sale, it would be open to them to bring the matter up for consideration again, and thereafter for the company to buy back the shares of the dissentient member, thereby enabling the majority’s preferred course of action to be pursued. Such a buy-back by the company could be made out of distributable profits or the proceeds of a fresh issue of shares made for the purpose of financing the buy-back (see sections 49B and 49A of the old Companies Ordinance). 48.The Deputy Judge also considered that her interpretation of Clause 6[2] was supported by Clause 3 and Clause 2. However, in my view, neither of these provisions justifies an interpretation of Clause 6[2] which does not accord with its natural meaning, and which is inconsistent with Clause 8. Clause 3 simply sets out the general objectives of the companies. While it indicates that Non-Core Land is to be sold in the short term, it does not mandate that this must be done, and does not purport to set out the procedure to be adopted for such sales – that is dealt with by Clauses 6 and 8. 49.Similarly, although it is fair to say that the interest rate specified in Clause 2 in respect of the shareholders’ loans is a high one, given that they would not affect the relative economic interests of the shareholders in the companies, and could, if necessary, be waived by the shareholders, this does not justify giving a strained interpretation to Clause 6[2]. 50.Mr Joffe’s final point, regarding the non-promissory nature of Clause 4, so that the shareholders were not obliged to bring about a situation in which the managers could start earning remuneration also appears to me to be a valid one. 51.All of this said, Mr Joffe readily accepted that it was probably anticipated by the shareholders that sufficient Non-Core Land would be sold to enable the shareholders’ loans to be repaid within a reasonably short time. However, as he submitted, it does not follow from this that the shareholders must have agreed that they were under an obligation to achieve this result. 52.For all of the foregoing reasons, I am satisfied that the Deputy Judge erred in her construction of Clause 6[2], and that there was in fact no obligation on the part of the shareholders to approve the sales to outsiders brought forward by the managers. It follows that the majority shareholders were not in breach of the Shareholders’ Agreement in failing to approve of the proposed land sales in 1997 and 2006, and in the absence of any finding that their failure to approve was due to some improper motivation, the finding of unfairly prejudicial conduct arising from such non-approval cannot be sustained. Whether the managers could be removed 53.Turning to the question of whether or not the managers’ position should be regarded as entrenched, the Deputy Judge held that there was no implied term entitling the shareholders to remove the managers, whether for cause or not. In support of this conclusion, she suggested (at paragraph 48 of the Main Judgment) that this was not obviously intended, given that the petitioner and 5th respondent were the only persons with knowledge of Lantau property, whose expertise would have formed the basis of the project. As for the 2nd respondent, the Deputy Judge considered that her position as the largest single shareholder tended to suggest that she, too, should not be at risk of being removed. The Deputy Judge went on to point out (at paragraphs 49 to 51 of the Main Judgment) that as the remuneration provisions in Clause 4 meant that no remuneration would be paid at all until after the initial investment had been recouped, but thereafter would be payable on all land sales, a right on the part of the shareholders to remove the managers should not be implied, as this would enable the shareholders to circumvent the managers’ entitlement to remuneration by the expedient of removing them just before (or just after) they were in a position to receive it. 54.Mr Joffe contended that this conclusion was wrong, and that there should be implied into the agreement, on the basis that it was an obvious implication, terms permitting the removal of the managers by the shareholders:
55.He went on to submit that there was clearly good cause for removal of the petitioner as a manager, having regard to his failure to inform the shareholders of the passing of the resolution to accept the Government’s offer of compensation in respect of the resumed land at Mui Wo, and his diversion of the compensation proceeds into his own bank account and failure at any material time to inform the majority shareholders of this. At the hearing, Mr Joffe accepted that the first of these failures would not, on its own, suffice to justify removal, but submitted that the second, whether taken on its own or in conjunction with the first, would suffice for this purpose. 56.As far as removal on notice was concerned, Mr Joffe submitted that reasonable notice had been given. 57.I shall deal first with the suggested implied term that the managers could be removed for cause. Mr Joffe submitted that this was a matter of obvious implication, as it would be absurd to suppose that a manager could never be removed, no matter how serious his misconduct. He also suggested (relying on authorities such as Jervis v Skinner [2011] UKPC 2) that such a term was consistent with the position in relation to employment contracts, where an employee may be terminated for conduct which undermines the trust inherent in the relationship of employer and employee. 58.I agree. This is clearly a matter which must be regarded as being so obvious that it goes without saying. None of the justifications put forward by the Deputy Judge for declining to imply a term entitling the shareholders to terminate a manager have particular force when considering termination for cause, in the case of misconduct which would have the effect of undermining the trust and confidence reposed in the manager concerned. Although the fact that the petitioner had expertise in and knowledge of Lantau land would be a good reason for his appointment as a manager in the first place, it does not follow that such expertise and knowledge would require him to be kept on in that position even if he were guilty of such misconduct. Similarly, the concern expressed as to the possibility that the shareholders could avoid the need to pay the managers their remuneration by the expedient of removing them loses much of its force where the removal is for good cause. 59.I am therefore satisfied that there must be implied into the Shareholders’ Agreement a term entitling the shareholders to terminate the appointment of a manager for cause. 60.Turning to the alleged misconduct on the part of the petitioner, the Deputy Judge held that while his conduct was unwise, it was perhaps understandable given his frustration at the way in which the project had failed to develop as he had hoped and expected. With respect, I am of the view that the complaints relied upon by Mr Joffe are well founded, and are serious matters that did justify the removal of the petitioner as a manager of the companies. While the failure to advise the other shareholders promptly of the fact that a board meeting of Top Master had been held on 26 December 2007 at which it had been resolved to accept the Government’s offer of compensation might not seem to be a particularly serious matter, the same cannot be said of the diversion of Top Master’s funds to a personal account of the petitioner. Such an action, undertaken without the knowledge or consent of the other shareholders, was clearly a serious breach of duty on the part of the petitioner. The reasons put forward for it (whether in relation to the allegedly more favourable rate of interest obtainable, or for ease of obtaining cashier orders, or fears of being held up by the other shareholders) cannot be regarded as justifications for the course taken. More significantly, it is notable that despite being asked about the whereabouts of the resumption compensation proceeds, the petitioner did not at any time before his removal inform the shareholders that the monies had been transferred to his personal account where they remained for some two months before being transferred back to Top Master when questions were being asked. Such conduct would clearly, in my view, give rise to a justifiable loss of confidence in the petitioner on the part of the other shareholders. As such, I have no doubt that it was misconduct which was serious enough to justify removal of the petitioner from his position as a manager. 61.Although the shareholders were not aware of this misconduct on the petitioner’s part prior to his removal, this makes no difference, as they are entitled to rely retrospectively on a valid ground for termination even though they were unaware of it at the time (see e.g. Boston Deep Sea Fishing and Ice Co v Ansell (1888) 39 Ch D 339, Chitty on Contracts (32nd ed) para 24-014). Indeed, having regard to the fact that the petitioner did not disclose what he had done, despite having several opportunities to do so, it is scarcely surprising that the shareholders were not aware of it. 62.In these circumstances, the termination of the petitioner’s position as a manager of the companies cannot be regarded as being a breach of the Shareholders’ Agreement, and hence does not amount to being unfairly prejudicial conduct as against him. 63.I note that the Deputy Judge suggests in the Main Judgment that the termination of the petitioner’s management was a breach of the Shareholders’ Agreement because it was (1) not unanimous and (2) not accompanied by payment of compensation. However, nothing in the Shareholders’ Agreement suggests any requirement of unanimity for such a decision (which is based on an implied term, and not any express provision in the Shareholders’ Agreement), and a requirement of unanimity would not appear to be apt in respect of a decision to terminate the position of one of the shareholders as a manager, as it is inherently unlikely that the shareholder in question would be likely to agree to the termination proposed. As to the non-payment of compensation, given that the termination was justified and was for cause, there would not seem to be any reason why compensation should be provided. 64.In the light of my conclusions as to termination on the basis of an implied term relating to termination for cause, it is not necessary to come to any determination as to whether or not there was also an implied right to terminate the managers’ appointments on reasonable notice. However, I would accept that the Deputy Judge’s concerns, expressed in paragraphs 49 to 51 of the Main Judgment, have considerable force in this context. Whether the buy-out order should have been made 65.Having regard to the foregoing, the two principal findings of unfairly prejudicial conduct, arising from alleged breaches of the Shareholders’ Agreement, cannot stand. In their absence, I do not think that the remaining complaints which the Deputy Judge found to be made out are sufficient to justify the making of a buy-out order against the majority shareholders. The failure to agree to the distribution of the resumption compensation monies was a relatively minor matter, which could not of itself justify the grant of the relief sought. The complaint to the police was a matter which the Deputy Judge regarded as rendering the breaches of the Shareholders’ Agreement more serious, but in the light of my conclusions that there were, in fact, no relevant breaches of the Shareholders’ Agreement, this too, is inconsequential. 66.I would therefore set aside the findings of unfairly prejudicial conduct in respect of the alleged breaches of the Shareholders’ Agreement, and set aside the order for a buy-out and payment of compensation pursuant to section 168A. Remaining issues in respect of CACV 9/2017 67.The remaining points raised by the re-amended Notice of Appeal relate to the terms of the buy-out. 68.As to the complaint that the Deputy Judge erred in ordering a buy-out with a valuation to be made on the assumption that the shareholders’ loans had been fully repaid, without making it a condition of the buy-out that the petitioner should ensure that the shareholders’ loans were waived by his nominees, this was not seriously disputed by the petitioner, and had it been necessary to do so, I would have varied the buy-out order to cater for this. 69.As to the argument that in the light of the finding that the companies were not quasi-partnerships, the buy-out should have been on the basis of a valuation that took into account the fact that the petitioner’s shareholding represented a minority interest, I would leave the question of the appropriate approach – whether there should be a presumption in favour of a discount, or no presumption either way – for consideration in a case in which it actually arises for decision, as the matter is one that is necessarily fact-dependent, and does not need to be decided in the present case. That said, whichever starting point is adopted, it does seem to me that having regard to the nature of the venture, which essentially envisaged that the shareholders would realise their investment and any return on it through the sale or development of the companies’ land assets over time, rather than through a sale of their stake in the companies, and the fact that had a buy-out order been appropriate, it would be something that the petitioner would have been driven to seek as a result of (on that hypothesis) unfairly prejudicial conduct on the part of the majority shareholders, I would have been inclined to the view that any buy-out should have been on an undiscounted basis. 70.Turning to the respondent’s notice, the only issue of substance raised by it is the correctness of the decision that the companies were not quasi-partnerships. In the light of my conclusion that there is no sufficient unfairly prejudicial conduct to require the making of a buy-out order, there is no real need to revisit this question. In any event, I see no reason to disagree with the Deputy Judge’s finding in this respect, having regard to the background to the setting up of the companies, in particular the absence of a pre-existing relationship between all the shareholders, and the fact that they chose to regulate their relationship by way of the detailed provisions of the Shareholders’ Agreement. CACV 74/2017 71.So far as CACV 74/2017 is concerned, the main question that it raises relates to whether the buy-out order should have been made on a joint and several basis, or simply on a several basis. Again, in the light of my conclusion that the buy-out order should be set aside, it is not necessary to express a final view as to this. While I can see some force in Mr Joffe’s suggestion that the way in which the buy-out order is framed should, so far as possible, recognise and maintain the respective proportionate shareholdings of the different shareholders, it would also have been necessary to ensure that the buy-out order would have been effective to extricate the petitioner from the companies completely. A purely several liability to buy him out, proportionately to the majority shareholders’ respective shareholdings inter se, might well fail to achieve this. Thus, even if the primary position were to have been that the buy-out should be effected by the majority shareholders each buying out a proportionate quantity of the petitioner’s shares, provision would, I think, have had to be made for the eventuality that one or more shareholders did not comply with their buy-out obligations. 72.As to the other issue raised in CACV 74/2017, concerning the liability for the costs of the valuation, this too, does not arise now that the buy-out order is to be set aside. CACV 169/2017 73.Turning finally to CACV 169/2017, which is the petitioner’s appeal against the July Judgment, seeking a determination in his favour that compensation for his loss of office as a manager should be assessed on the basis that his entitlement to compensation was perpetual, I can see no merit in the appeal. 74.The July Judgment principally dealt with the giving of directions for the further conduct of the proceedings, and in particular the valuation process. The part of the judgment that the petitioner complains of is paragraph 8, which addressed his application for an assessment of damages to be fixed for hearing at the same time as the hearing to determine the valuation of his shareholding. The petitioner suggests that this was a rejection by the Deputy Judge of his contention that he should be entitled to damages assessed on the basis of a perpetual entitlement to manager’s remuneration. 75.However, it is apparent from that paragraph that all that the Deputy Judge was saying was that there was no scope for a further assessment of damages because the question of compensation for lost remuneration had already been dealt with in the Main Judgment at paragraph 260, as part of the remedies for the unfairly prejudicial conduct which the Deputy Judge had found to have taken place. 76.In fact, a similar point had been raised by the petitioner at the hearings and in the submissions that resulted in the February and March Decisions, and the possibility of a further award of damages assessed on the basis of a perpetual entitlement to compensation was rejected by the Deputy Judge in both of those decisions (see paragraph 19 of the February Decision and paragraph 20 of the March Decision). 77.In these circumstances, I think Mr Joffe was right to say that paragraph 8 of the July Judgment was merely a reiteration of the earlier rulings, and that the petitioner should have sought to appeal against paragraph 260 of the Main Judgment, or the relevant paragraphs in the February and March Decisions, but was now well out of time for doing so. 78.In any event, the appeal cannot succeed, as the compensation sought was predicated on there having been a breach by the majority shareholders of the Shareholders’ Agreement when they removed the petitioner as a manager. For the reasons given earlier in this judgment, there was no such breach in this case. The question of compensation being payable therefore does not arise at all. 79.Finally, it should be noted that as appears from paragraph 21 of the March Decision, the amount of compensation had in fact been agreed at some HK$592,000 odd, at a time when the petitioner was still legally represented. In the light of that agreement, there would not seem to be any basis for revisiting this issue. 80.It follows that the petitioner’s appeal in CACV 169/2017 must be dismissed. Disposition and costs 81.I would therefore make the following orders in respect of the appeals:
82.So far as costs are concerned, I would propose to make orders nisi as follows:
83.Finally, I wish to thank all parties for their submissions, and would like to apologise for the time it has taken to deliver this judgment. Harris J: 84.I agree and would make the orders in paragraphs 81 and 82.
The petitioner acting in person in all appeals Mr Victor Joffe, Mr Justin Ho and Mr Tom Ng, instructed by Lo & Lo, for the 1st to 4th and 6th to 8th respondents in all appeals The 5th respondent acting in person in all appeals | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cases cited in this judgment
Other judgments that cite this case
Further hearings and rulings under CACV 9/2017