Emperor Securities Ltd v. Smi Investment (HK) Ltd and Others

HCA 32/2019

[2020] HKCFI 881

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 32 OF 2019

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BETWEEN

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D E C I S I O N

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BACKGROUND

1.On 10 January 2020, and after a contested hearing in these proceedings, DHCJ William Wong, SC made the following order (“the Order”):

“1. Pending the final determination of this Action or further Order, Mr Fok Hei Yu and Mr Chow Wai Shing Daniel of FTI Consulting (Hong Kong) Limited of Level 35, Taikoo Place, 979 King’s Road, Quarry Bay, Hong Kong, be appointed as the receivers (‘Receivers’) to receive 829,185,517 shares in SMI Culture & Travel Group Holdings Limited (‘Subject Shares’ and ‘SMI Culture’) currently held and owned by the 1^st Defendant, SMI Investment (HK) Limited and to collect the interests, dividends or profits (‘Income’) arising therefrom, with powers to act jointly and severally.

2. The powers of the Receivers be limited and restricted to the terms set out in Annex I herein.

3. The 1^st Defendant do forthwith do all necessary acts and things to:

(a) Transfer and to procure the transfer of the registered title of the Subject Shares to the Receivers; and

(b) Deliver to the Receivers all effects, books and papers relating to the Subject Shares and the Income…”

2.In doing so, the learned Judge, inter alia, made the following observations in his Decision on even date (“the Decision”):

“2.1 ‘…However, I have come to the view that this is a very clear case to appoint an interim receiver over the Subject Shares in order to protect its value.’ (paragraph 22)

2.2 ‘…I am of the view that such complete disregard of the interests of the Plaintiff does not inspire confidence in the existing management of SMI HK and SMI Culture. The Plaintiff is perfectly justified to be concerned that the Subject Shares are in jeopardy.’” (paragraph 25)

3.In these circumstances and perhaps in anticipation that the appointed Receivers may be faced with further obstacles, the learned Judge further directed (in Annex I to his Order) that:

“2. The Receivers shall have the power to do all acts and things necessary for the purpose of complying with this Court Order, and carrying out his functions, including but not limited to each of the following power, namely, to:-

…

(c) Specifically, take control of, exercise or refraining from exercising any or all of the rights to which a registered holder and/or beneficial owner of the Subject Shares is entitled, including but not limited to:

…

(iii) Take steps to nominate and appoint one of the Receivers as a non-executive director of SMI Culture without the need for any further leave or sanction of the Court. Save as the aforesaid, the Receivers may exercise the right to requisition meetings to appoint or remove all or any directors and officers and agents of SMI Culture with the leave or sanction of the Court.

(d) Take all such steps as may be necessary to preserve the value of the Subject Shares;

…

6. The Receivers be at liberty to apply to the Court for any further directions or order.”

THIS APPLICATION

4.The relevant background to this matter is set out in the learned Judge’s Decision. It is not necessary to repeat the same here. 

5.The Receivers (the Applicants) with the support of the Plaintiff, now make the following application by Summons dated 12 March 2020:

“1. Leave be granted, pursuant to paragraph 2(c)(iii), Annex 1 to the Order of Deputy High Court Judge William Wong SC filed on 16^th January 2020 (‘Order’), to the Applicants to appoint or remove all or any directors and officers and agents of SMI Culture, and to do all things necessary and incidental thereto (including but not limited to requisitioning meeting(s) of SMI Culture, convening such meeting(s) and/or applying to the Supreme Court of Bermuda (‘Bermudan Court’) for orders for such meeting(s) to be called, held and conducted in such manner as the Bermudan Court thinks fit);

2. Leave be granted to Applicants, pursuant to paragraph 6, Annex 1 to the Order, to enter into negotiations for the purpose of entering into agreements to sell all or any part of the 829,185,517 shares in SMI Culture which are subject to the Order. Save that the Applicants shall seek leave or sanction of the Court before entering into any agreements to sell all or any part of the said shares;

3. Costs to be provided for; and

4. There be liberty to apply.”

6.The Applicants by further Summons dated 23 March 2020 seek leave to file and serve the 2^nd Affirmation of Fok Hei Yu together with exhibits as per the copy attached thereto and adduce the same as evidence.

7.By further Summons dated 17 April 2020, the Applicants seek leave to file the Affirmation of Chow Wai Shing Daniel (“Mr Chow”) together with exhibits attached thereto.

8.Messrs Deacons who have represented the 1^st, 2^nd and 3^rd Defendants have indicated in a letter to the Court dated 26 March 2020 that their clients will make no submissions in respect of the present application.

9.On 24 March 2020, DHCJ Roxanne Ismail, SC determined that the present application would be heard on documents alone.  However, having considered the Applicants’ written submissions, I concluded that the Court would need further assistance from Counsel, and that an oral hearing was necessary. Furthermore, given that the reconstitution of the Board of a public company was sought, I determined that the matter should be heard in open court.

10.Having considered their position, the Applicants in their evidence in support of the current application, have identified the following obstacles to their duties to protect the Subject Shares:

10.1. The Applicants say that they “have essentially come up against a brick wall”, that SMI Culture’s board of directors (“the Board”) has essentially ignored all the letters sent by them and disregarded the fact that they have been appointed over the Subject Shares.  They also note that it was only after the issuance of the present application that Mr Chow was appointed as a non-executive director of SMI Culture despite repeated requests by the Applicants.

10.2. The Applicants’ evidence also discloses that on 31 December 2019, following the hearing before DHCJ William Wong, SC but before the handing down of the Decision, SMI Culture announced that the Board was adopting a “Share Award Scheme” whereby shares would be issued to “selected employees” for no consideration and without any conditions or sale restriction.  The Board then resolved to grant a total of 263,200,000 shares to 41 selected employees on 17 February 2020 (“the Share Award Scheme”).

10.3. The Applicants further note that out of those 41 “selected employees”, it appears that at least 20 of them must have started working for SMI Culture and related entities some 6 months before their award.  The Applicants further contend there can be no justification for the Share Award Scheme considering, in particular, the precarious financial and cash position of SMI Culture.

10.4. The Applicants have also referred to the learned Judges’ observation in the Decision that:

“In fact, under Clause 6.9 of the Share Charge, the Plaintiff is entitled to have all the directors of SMI Culture be removed and SMI Culture has an obligation to procure the appointment of the directors nominated by the Plaintiff to its board.” (paragraph 47)

Hence the Applicants submit that the present application is entirely consistent with the Plaintiff’s contractual rights under Clause 6.9 of the Share Charge.

11.The Applicants now wish to enter into negotiations with potential purchasers of the Subject Shares in view of the current economic conditions and the drop of the share price of SMI Culture, in order to preserve the value of the Subject Shares.

12.I have considered the evidence of Fok Hei Yu in his 1^st and 2^nd Affirmations dated 12 March 2020 and 23 March 2020 respectively, and the affirmation of Mr Chow in his Affirmation dated 24 April 2020. The evidence discloses that:

12.1. The Applicants, inter alia, sent the following letters to the Board, all of which appear to have been entirely ignored:

(1) By a letter dated 10 January 2020, the Applicants informed the Board of the Order, and the appointment of the Receivers over the Subject Shares, and stated that they would like to meet the Board in their capacity as the majority shareholder of SMI Culture to discuss matters in relation to the company’s affairs.

(2) By a letter dated 14 January 2020, the Applicants sought to exercise their powers under the Order and instructed the Board to appoint Mr Chow as a non-executive director and to take the necessary steps to effect the appointment.  The Applicants also asked for all relevant information in relation to the SMI Culture’s intended purchase of a cinema business from the 2^nd Defendant and Poly Culture Group Corporation Limited by the issuance of 65,000,000,000 new shares (“the Intended Transactions”) and SMI Culture’s management accounts, so that they could assess the financial impact of the Intended Transactions on the value of the Subject Shares.

(3) By a letter dated 22 January 2020, the Applicants requested the Board to respond to the two previous letters above, and stated that they would formally requisition an extraordinary general meeting to consider the appointment of the non-executive director should the Board fail to respond by 29 January 2020.

(4) By a letter dated 30 January 2020, the Applicants asked the Board to provide information in relation to the winding-up proceedings commenced by A-Plus Financial Press Limited against SMI Culture on 22 January 2020 (“the Petition”), including but not limited to the current status of the proceedings and SMI Culture’s strategy in defending the same.

(5) By letters dated 10 and 24 February 2020, the Applicants put on record that the Board had failed to comply with their request to appoint Mr Chow as a non-executive director of SMI Culture, and requested the Board to call a special general meeting on or before 2 March 2020 for the purpose of considering and, if thought fit, passing the resolution for such appointment.

12.2. The Applicants also sent various letters to the individual directors of SMI Culture on 14 January 2020 and 10 February 2020 requesting them to appoint Mr Chow as a non-executive director of SMI Culture and to take the necessary steps to effect the appointment.  Again, the Board and its directors were completely silent.

12.3. It was only after the Applicants filed the Summons on 12 March 2020 that the Board and the company secretary of SMI Culture began to purport to meaningfully address some of the matters raised by Applicants.

13.As to the Share Award Scheme, on 18 February 2020, SMI Culture informed the public that the Board had resolved to grant 263,200,000 shares to 41 “selected employees” for nil consideration on 17 February 2020, which essentially exhausted its general mandate to allot and issue the maximum of 263,201,869 shares.  Thus, it appears that in consequence of the Share Award Scheme, the Subject Shares have been diluted from 63.01% to 52.5% of the shareholding in SMI Culture.

14.Furthermore, the Applicants have experienced difficulty in locating and taking control of the Subject Shares such that only approximately 42.81% of the shareholding in SMI Culture is currently within their control.

15.After the appointment of Mr Chow as a non-executive director of SMI Culture had been approved by the Board on 19 March 2020, the Board still repeatedly refused to cooperate with the Applicants:

15.1. Mr Chow by letter dated 20 March 2020 to the Board (and copied to the company secretary and two of the directors of SMI Culture) requested the Board by 24 March 2020 to provide him with information in relation to SMI Culture’s affairs, which included the contact details of the Board members, key personnel of SMI Culture, the corporate and financial information in relation to SMI Culture, inter alia, the Petition, the Intended Transactions and the Share Award Scheme, in order to prepare for a Board meeting scheduled for 31 March 2020. These requests were ignored.

15.2. On 25 March 2020, SMI Culture issued an announcement in relation to the potential acquisition of the Subject Shares by Time Oasis Limited without informing or consulting Mr Chow about the same.  Mr Chow complained about this in his letter dated 26 March 2020.  On the next day, one of SMI Culture’s directors, Mr Chen Wenbo by email replied that he could not provide the Applicants with the information in relation to the Share Award Scheme or the Intended Transactions since the relevant employees were being quarantined at home in the PRC.

15.3. On 30 March 2020, Mr Chow received an invitation from the representative of the company secretary at 3:18 pm to participate in the Board meeting on the next day.  Before and during such Board meeting, Mr Chow was not provided with sufficient documents or information for him to properly consider or scrutinise the draft announcement in relation to SMI Culture’s 2019 Financial Results.  He had no choice but to abstain from voting on the resolution to approve the said draft announcement.  SMI Culture then announced its 2019 Financial Results on 31 March 2020.  In the same Board meeting, Mr Chow followed up with the Board on the provision of information that he had previously requested but to no avail. 

15.4. On 6 April 2020, Mr Chow received an email from the company secretary of SMI Culture at 6:08 pm informing him a Board meeting had been scheduled to take place the next day in relation to a complaint raised by a major shareholder.  In response, Mr Chow sent a reply email at 9:04 pm on even date requesting, inter alia, the information relating to the complaint, but his request was not acceded to.  Mr Chow nevertheless attended the Board meeting.

ANALYSIS

Application to appoint or remove directors

16.The approach to be taken by courts when dealing with applications which seek to reconstitute a board of directors was succinctly explained by the Court in Acropolis Limited suing on behalf of itself and all other shareholders in AESO Holding Limited v Chan Siu Chung & Others [2018] HKCA 184, per Chow J:

“57. It is well established that the court should only make an order which has the effect of determining the composition of a board of directors in very special circumstances, and may only interfere in the management of a company if it is absolutely essential to do so (see Re Chime Corp Ltd [2003] 2 HKLRD 905, at paragraph 26). We do not consider the present circumstances to be such as would justify the court doing either, which would be the practical effect of granting the injunction sought by the Plaintiffs.” (emphasis added)

17.Mr Lok, Counsel for the Applicants, has sought to persuade this Court that this very high threshold has been met in this case.

18.Mr Lok’s primary submission is that the directors of SMI Culture have consistently disregarded the rights of the Plaintiff and have repeatedly taken steps designed to dilute the controlling stake inherent in the Subject Shares.  That the directors have consistently refused and are still refusing to cooperate with the Applicants, and in particular, have not provided most of the information requested by the Applicants.  As noted, Mr Chow was appointed to the Board on or around 19 March 2020, but despite that this, he has been effectively excluded by other members of the Board from effective participation in the affairs of SMI Culture.

19.In my view, the evidence discloses that the members of the Board of SMI Culture have conducted a deplorable exercise of obstruction in their dealings with the Applicants.  Of further concern to the Court is the conduct of the four independent non-executive directors (“the INEDs”) (the fifth INED being Mr Chow).  As their title suggests, such directors are tasked with exercising independent judgment in promoting and protecting the affairs of publicly listed companies. The evidence discloses, at the very least, that these four INEDs have concurred in the collective obstruction of the Applicants in their duties.

20.However, having considered the evidence carefully, I do not think that the present level of obstruction through failure to provide information and general non-cooperation amounts to “very special circumstances” or that it is, in consequence, “absolutely essential” to reconstitute the composition of this Board of directors.

21.In Re Chime Corp Ltd [2003] 2 HKLRD 905, Rogers VP observed:

“26. … A court should only interfere in the current management of a company if it is absolutely essential to do so. At the moment, the petitioners have shown a need to be given information. They have not, as yet, shown any need to interfere. The appointment to the boards is put largely on the basis of the need to have information. In my view, it is unnecessary at the moment for the administrators to be appointed to the board and I would not be disposed to grant any order in this respect.”

22.Whilst frustrating to the Applicants, and whilst such obstruction is to be deprecated, the same is not, in my view, of the nature and degree which would justify the Court’s intervention at this time.  The Court in coming to this view asked Counsel for the Applicants whether there was in fact any current and immediate threat to the value of the Subject Shares which now makes it absolutely essential to replace the entire Board of SMI Culture.  Mr Lok fairly conceded that there was not, although he drew the Court’s attention to the earlier dilution in the Subject Shares as a result of the Share Award Scheme, and also took issue of whether the threat had to be imminent before the Court could act.

23.The Share Award Scheme has already occurred on 18 February 2020, and although the Court has noted the complaints that Counsel levelled about the scheme, the Court is concerned with the question as to whether today and in the current circumstances it is absolutely essential to grant the reliefs sought.

24.Mr Lok further emphasised that significant weight should be accorded to the professional and commercial views expressed by the Applicants.  Mr Lok is correct in this.  However, it is noteworthy in this case that the Applicants have not been appointed over the assets of SMI Culture itself, but instead, in respect of the Plaintiff’s interest in the Subject Shares.  Mr Lok submitted that the Applicants were appointed to safeguard the value of these shares and again, he is correct in this.   However, account must also be taken of the fact that this is a public company which has far greater transparency than a private company, which has INEDs and would be closely scrutinised by the regulatory authorities if there were any attempt to “run down” the company (see H v H (Public Company: Imposed Director) [2011] 1 HKLRD 1048, at paragraph 64).  Although I have expressed concerns about the attitude of the current INEDs towards the Applicants, it is nevertheless to be expected at this stage that they will discharge their duties conscientiously and thus together with Mr Chow provide a further layer of protection to the company.

25.Mr Lok further referred to what he called “joint wishes of the parties”, submitting joint wishes of the parties to the lis is a weighty consideration when the Court considers what the Applicants should be directed to do.

26.Whilst the Court puts into the balance the wishes of the Plaintiff in respect of the Subject Shares, it is, in my view, not correct to equate the non-participation of the Defendants in these proceedings as amounting to “joint wishes of the parties”.  Furthermore, whilst the Court considers the position of the Plaintiff, the management of SMI Culture cannot be regarded as a purely private matter between shareholders, since there are other shareholders and creditors who would be affected by the management of SMI Culture (see H v H, supra, at paragraphs 56 and 62).

27.Mr Lok has also emphasised that Clause 6.9 of the Share Charge provides the Plaintiff with a contractual right to have all the directors of SMI Culture removed, and SMI Culture has an obligation to procure the appointment of the directors nominated by the Plaintiff to its board, and that the Plaintiff has sought to exercise its right in this regard.  However, the Defendants in their Defence and Counterclaim dated 23 December 2019 have denied that there is an “event of default” under the Loan Agreement and deny that the Share Charge is presently enforceable (paragraph 31 thereof).

28.These are not matters to be determined in interlocutory proceedings, and with respect, these contractual rights under the Share Charge do not in any way lead to a conclusion that it is now absolutely essential to reconstitute the Board.

29.In conclusion, and despite Mr Lok’s careful and comprehensive submissions, I am not persuaded that there are very special circumstances which would justify an order enabling the Applicants to reconstitute the Board of SMI Culture, and that in my view it is certainly not absolutely essential to do so now.  It may be that the Applicants decide to consider less intrusive remedies to confront the difficulties that they are currently facing with the Board, and in this regard, the Court grants general leave to apply. 

APPLICATION TO ENTER INTO NEGOTIATIONS

30.As noted, the Applicants, by paragraph 2 of their Summons, seek leave to enter into negotiations for the purpose of entering into agreements to sell all or any part of the Subject Shares.  Mr Lok has submitted that in view of the current economic conditions it may become necessary for the Applicants to sell some of the Subject Shares in the future in order to preserve their value. 

31.Mr Lok’s application is predicated upon seeking the leave or sanction of the Court before entering into any agreement of sale. 

32.I can conceive of no objection or prejudice in granting the leave sought by the Applicants in this regard and order accordingly.

DISPOSITION

33.Leave be granted for the Summons dated 17 April 2020 to be filed, and that the said Summons be filed within 21 days upon the re-opening of the Court’s registry, and re-service of the said Summons be dispensed with.

34.Leave be granted to the Applicants to file and serve the 2^nd Affirmation of Fok Hei Yu and Affirmation of Chow Wai Shing Daniel together with exhibits attached thereto.

35.Paragraph 1 of the Applicants’ inter partes Summons dated 12 March 2020 seeking leave to the Applicants to appoint or remove all directors and officers and agents of SMI Culture is dismissed. 

36.There be an order in terms of paragraph 2 of the said Summons for leave for the Applicants to enter into negotiations for the purpose of entering into agreements to sell all or any part of the Subject Shares. 

37.The 1^st, 2^nd and 3^rd Defendants have not participated in the current applications.  The Applicants have not succeeded upon their main application to reconstitute the Board.  In these circumstances there will be no order as to costs in regard to the Applicants’ Summonses dated 12 March 2020, 23 March 2020 and 17 April 2020 respectively.

38.There be liberty to apply.

Mr Michael Lok and Mr Terrence Tai, instructed by W. K. To & Co., for the applicants

Ms Tinny Chan, instructed by Michael Li & Co., for the plaintiff

Attendance of Deacons, for the defendants, was excused