Poon Yee Kan Andrea Eleanor v. New Paradigm E-technology Ltd
Read the full judgment text of HCMP 3682/2003 on BabelCite. This High Court CFI judgment was delivered on 14 September 2004.
1. Ms. Andrea Poon claims that New Paradigm granted her an option to purchase up to 8% of New Paradigm's shares at par value. She says that the option was given in consideration of her becoming New Paradigm's "Vice-President - Marketing & Process Planning". She says that she validly exercised the option in May 2002.
Cited by 2 cases
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HCMP 3682/2003 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE MISCELLANEOUS PROCEEDINGS NO. 3682 OF 2003 ____________
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____________ HCMP 11/2004 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE MISCELLANEOUS PROCEEDINGS NO. 11 OF 2004 ____________
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____________ Before: Hon Reyes J in Court Date of Hearing: 3 September 2004 Date of Judgment: 14 September 2004 _______________ J U D G M E N T _______________ I. Introduction 1.Ms. Andrea Poon claims that New Paradigm granted her an option to purchase up to 8% of New Paradigm's shares at par value. She says that the option was given in consideration of her becoming New Paradigm's "Vice-President - Marketing & Process Planning". She says that she validly exercised the option in May 2002. 2.New Paradigm accepts that an option was discussed in October 1999. But New Paradigm says that nothing concrete was ever agreed. The company seeks to rectify its Register of Members which currently shows Ms. Poon as the allottee of 48,174 shares through exercise of the disputed option. 3.There are 2 principal questions for me to decide:-
II. Background 4.In 1999 IVRS (International) Limited decided to establish a new company. IVRS provides information technology solutions to Hong Kong corporations. The new company was intended to provide internet software solutions to Hong Kong businesses. The new company was to be New Paradigm. 5.At a meeting of IVRS shareholders on 9 October 1999 it was agreed that:-
6.The 9 October 1999 meeting was attended by Mr. Cheung, Mr. Lai, Mr. Peter Chan and Dr. Kenneth Wong. Mr. Cheung held a 30% legal and beneficial interest in IVRS. Mr. Chan and Dr. Wong each held 20% legal and beneficial interests in IVRS. Dr. Wong held the legal title to a further 30% of IVRS shares on trust for Ms. May Tse. Ms. Tse is Mr. Lai's wife. She participated in IVRS' business through her husband. 7.It was hoped that the granting of shares to Ms. Poon, Mr. Yen and another executive would encourage senior management to work for and remain with New Paradigm. 8.On 29 October 1999 Mr. Lai invited Ms. Poon to join New Paradigm and to become a New Paradigm director upon incorporation. 9.By a Letter of Employment dated 1 November 1999 signed by Mr. Cheung on behalf of New Paradigm, Ms. Poon was offered a position in New Paradigm from 1 November 1999. 10.The letter provided that Ms. Poon's salary would be $60,000 per month with annual raises at New Paradigm's discretion based on performance. The letter further stated (at cl.4):-
11.Clause 6 of the letter referred to "Other Benefits" as follows:-
12.At about the same time New Paradigm employed Mr. Yen as "Vice-President - Business Development" on identical terms. 13.New Paradigm was incorporated on 24 November 1999. Ms. Poon and Mr. Cheung were the original subscribers to New Paradigm's shares, each being allotted 5,000 $1 shares. The two were appointed directors of New Paradigm on 29 November 1999, at which time Ms. Poon was also appointed company secretary. 14.On 29 December 1999 New Paradigm's board approved the transfer of 1,000 shares by Ms. Poon and 5,000 shares by Mr. Cheung to IVRS. 15.On 5 January 2000 New Paradigm's authorised share capital was increased from $10,000 to $1 million. A company resolution of the same date authorised the board "to allot shares and to make or grant offers, agreement, and options which would or might require shares to be allotted after the expiration of this approval". 16.On 6 January 2000 New Paradigm's board allotted 594,000 shares to IVRS, thereby increasing IVRS' holding in the company to 600,000 shares. 17.By a letter dated 1 May 2000 Ms. Poon's terms of employment were revised. Her salary, however, remained at $60,000 per month. The revised contract provided:-
18.By e-mail dated 9 May 2002 to Mr. Lai, Mr. Cheung, Ms. Tse, Dr. Wong and Mr. Chan, Ms. Poon wrote:-
Ms. Poon paid the $48,174 exercise price for the allotment by cheque dated 9 May 2002 made out to New Paradigm. 19.On 14 May 2002 Ms. Poon as director in charge of the day-to-day affairs of New Paradigm caused the company to allot 48,174 shares in her name. She remains in New Paradigm's Register of Members as the allottee of shares numbered from 604,001 to 652,174. 20.Ms. Poon resigned from New Paradigm's employment on 19 December 2002. 21.By a letter before action dated 3 July 2003 Ms. Poon complained that New Paradigm had failed to issue share certificates to her in respect of her holdings of 4,000 and 48,174 shares. 22.The dispute came before the Court by way of Originating Summonses with each side filing supporting affidavits. I asked counsel (Mr. William Wong for Ms. Poon, Ms. Linda Chan for New Paradigm) whether they wished to examine deponents of any affidavits. Both were content to proceed on the material before me without cross-examination. III. Discussion A. Whether there was an option agreement 23.Ms. Linda Chan contends that there was no concluded agreement. She relies on the following arguments:-
A.1 Were material terms of the option agreed? 24.In my judgment, there was an option agreement between Ms. Poon and New Paradigm. 25.An option was granted in return for Ms. Poon joining New Paradigm's senior management. The option consisted of a right to purchase up to 8% of New Paradigm's shares at par. The right was exercisable during Ms. Poon's employment, but before any takeover of New Paradigm, any listing of the company, or any injection of funds into the company by a third party investor. 26.The weight of the evidence points to the existence of an option agreement on such essential terms. I review elements of that evidence below. A.1.1Evidence of the October 1999 meeting 27.The shareholders of IVRS (New Paradigm's parent) having decided to allocate shares as an incentive to senior staff on 9 October 1999, it is inconceivable that no offer of shares was ever made to Ms. Poon as New Paradigm now claims. 28.Ms. Poon exhibits minutes of the 9 October 1999 meeting which sketches out the key terms of the option as decided by IVRS' then shareholders. The minute states:-
Accordingly, the option was supposed to involve a minimum of 8% to a maximum of 10% of New Paradigm's shares, depending on available investment opportunities, and was to have a limit to the time of exercise. A.1.2Confirmatory evidence of Dr. Wong and Mr. Lai 29.Dr. Wong and Mr. Lai, both of whom attended the October 1999 meeting, wrote to Ms. Poon on 22 April 2002 confirming that New Paradigm had granted an option to her to purchase up to 8% of new Paradigm's shares at par value. A.1.3Inconsistency in respect of Mr. Cheung's evidence 30.Only Mr. Cheung suggests that no concluded option agreement was ever reached. Mr. Cheung additionally disputes the minutes of the October 1999 meeting relied on by Ms. Poon. However, even Mr. Cheung acknowledges an agreement among IVRS shareholders that New Paradigm senior managers were to hold 8% of New Paradigm equity subject to the terms of a shareholders agreement. 31.Indeed, there are minutes of a meeting of IVRS shareholders dated 29 October 1999 in which Mr. Cheung is recorded as asking "about the custodianship of the 8% + 2% shares for the two key staff in the new company". The "two key staff" mentioned could only have been Ms. Poon and Mr. Yen. Why would Mr. Cheung definitively be referring to the custodianship of "the shares for the two key staff" unless it had been proposed to Ms. Poon and Mr. Yen that they would be entitled to hold some equity in New Paradigm? 32.I note further that, according to Ms. Poon and Mr. Yen, upon being pressed in August 2000 for formalisation of the option agreement in writing, Mr. Cheung orally assured both that they did not have to worry. A.1.4Evidence of employment contract 33.Ms. Linda Chan submits that Ms. Poon's employment contract does not mention a share option scheme at all. 34.This is not strictly true. There may be no direct reference. But there are indirect references for which no explanation has been proffered by New Paradigm. 35.Ms. Poon's employment letter of 1 November 1999 refers to a "compensation package" in addition to salary. The particulars of the package are not stated in the letter. But this is hardly surprising since the details of the package were supposed to be confidential. 36.The November 1999 employment letter also refers to the receipt of "other benefits" in accordance with New Paradigm's "Human Resources Policy in force at the time". New Paradigm has not elaborated on its human resources policy in November 1999. The grant of share options typically forms part of corporate schemes to motivate senior management and can be described as part of a human resources policy. 37.The May 2000 revision of Ms. Poon's employment contract mentions possible entitlement to "bonus schemes". There is no evidence from New Paradigm as to what else those schemes may have been, if not the option claimed by Ms. Poon. Interestingly, the May 2000 letter expressly refers to "any bonus holding" which is consistent with the holding of a share option as claimed by Ms. Poon. 38.Ms. Linda Chan relies on the fact that no written shareholder and option agreements were signed. 39.That does not preclude the possibility that the essential terms for an option were orally agreed. The terms from Ms. Poon's employment contract just discussed suggest that some form of compensation beyond salary was actually agreed, even if only orally. Often in business, essential terms are first agreed orally and details worked out later in writing. In such cases, the failure to finalise a written contract does not bar enforcement of the prior oral agreement. In particular, there will be no bar to the enforcement of an oral agreement where essential terms have already been agreed. A.1.5Evidence of parties's correspondence 40.Much of the correspondence passing between the parties is difficult to explain unless one assumes that an option had been granted. It is remarkable that New Paradigm did not immediately respond to such correspondence by refuting any suggestion of an option. New Paradigm did not explicitly deny the existence of an option an agreement until some time after Ms. Poon had resigned. 41.On 15 November 2001 Mr. Lai sent an e-mail to Mr. Cheung, Mr. Chan and Dr. Wong as follows:-
42.Mr. Cheung did not reply to this e-mail by denying that Ms. Poon or Mr. Yen had been granted any option. Instead, he only responded to Mr. Lai as follows:-
43.Between 21 and 22 December 2001, a further e-mail exchange took place between Ms. Poon and Mr. Cheung on the purchase of the minority shareholdings of Ms. Poon and Mr. Yen. 44.After complaining about the delay in resolving the question of acquiring shares from her and Mr. Yen, Ms. Poon proposed a deadline of 31 December 2001 for the ongoing negotiations. She ended her e-mail as follows:-
45.Again, instead of categorically denying the existence of any oral agreement for an option, Mr. Cheung replied as follows:-
46.On 2 January 2002 Dr. Wong wrote to Mr. Cheung by e-mail as follows:-
47.On the same day Mr. Cheung responded thus to Dr. Wong:-
48.One would have thought that, if Mr. Cheung truly thought that, there being no formal written option contract, Ms. Poon and Mr. Yen were not entitled to any 8% shareholding in New Paradigm, Mr. Cheung would have so written in answer to Dr. Wong. That is not what Mr. Cheung did. 49.On 4 January 2002 Ms. Poon e-mailed Mr. Cheung, Mr. Chan, Dr. Wong and Mr. Lai as follows:-
In the face of Ms. Poon's explicit references to her 8% entitlement, one would have expected an immediate refutation from Mr. Cheung and New Paradigm. There was none at the time. 50.On 16 April 2002 Mr. Cheung, Mr. Chan, Ms. Tse and Dr. Wong offered Ms. Poon $1.2 million to forfeit any right claimed by her in 8% of New Paradigm's share capital. The offer came in the form of a draft agreement which provided as follows:-
51.Ms. Poon rejected the offer. She proposed to be bought out at $3.6 million. That being refused, she counter-offered at $2.4 million. That also failed. 52.There are 2 points to note here. 53.First, Ms. Linda Chan argues that the buy-out offer does not indicate acceptance by New Paradigm that Ms. Poon held an 8% option. The offer simply represented (Ms. Chan says) a proposal from IVRS shareholders to settle Ms. Poon's claims without acknowledging their correctness. 54.But then why did the proposed settlement take the form which it did? Instead of stating that in consideration for $1.2 million Ms. Poon agreed to drop whatever claims she might have against New Paradigm, the draft agreement posits a right of share purchase which Ms. Poon agrees to forfeit. The draft was unnecessarily convoluted if it was truly believed (especially by Mr. Cheung) that Ms. Poon had no rights at all. 55.Second, Mr. Cheung rejected Ms. Poon's counter-offer because an agreement had earlier been reached by IVRS shareholders to purchase Mr. Yen's 8% option for $1,200,000. Mr. Cheung wrote in an e-mail to Ms. Poon on 25 April 2002:-
One asks, the "valuation" of what? Mr. Cheung must be referring to the valuation of shares to which Ms. Poon was entitled. 56.On 10 May 2002 Ms. Poon sent the following e-mail to Mr. Cheung:-
57.Ms. Poon's case as to the option and its precise terms (including the duration of the option promised her) were clearly set out in the e-mail. Yet once more there is no denial of Ms. Poon's entitlement or the option terms summarised by her in any e-mail response. One would expect an immediate point-by-point rebuttal if the position of New Paradigm and Mr. Cheung was always as now contended. 58.No objection is voiced when Ms. Poon gives notice in May 2004 of her intention to exercise the option in respect of 48,174 New Paradigm shares. 59.Indeed nothing contrary to Ms. Poon's entitlement is raised by New Paradigm until long after Ms. Poon's resignation. Only by a solicitor's letter dated 18 July 2003 in response to Ms. Poon's letter of action was there a denial of any option agreement. 60.Prior to her resignation in December 2002, the company never having questioned the existence of an option agreement, Ms. Poon was lulled into thinking there was no dispute over her entitlement. Under that mistaken belief, upon resignation, she signed a standard confirmation that she had "no claim against the Company whatsoever". Ms. Linda Chan relies on this in support of her argument that there was no option agreement. However, read in context Ms. Poon's statement of "no claim" clearly has no such implication. A.1.6Evidence from Mr. Andrew Lau 61.Ms. Linda Chan says that Mr. Andrew Lau (then IVRS' Chief Financial Officer and since 12 July 2002 a director of New Paradigm) challenged Ms. Poon's claim to an option from an early stage. 62.Ms. Linda Chan relies in particular on §10 of Mr. Lau's Affidavit:-
By "Purported Allotment" Mr. Lau is referring to the allotment of 48,174 shares to Ms. Poon on 14 May 2002. 63.Mr. Lau appears to have been approached by Ms. Poon for advice on her claimed option agreement and in connection with an audit of New Paradigm. 64.In Mr. Lau's e-mail to Ms. Poon dated 5 August 2002 doubts are expressed over the validity of an option agreement in the absence of writing and board approval for the option scheme. Still, contrary to what Mr. Lau asserts, the e-mail's tenor is not of objection but rather of support for Ms. Poon. 65.Mr. Lau states in his e-mail:-
66.Mr. Lau plainly has no idea whether an oral option has been granted. He seems to be relying on information provided by Ms. Poon and to be advising her of the consequences. He is concerned that an oral option, where there is no written agreement and where no scheme has been approved by the company's board, may be unenforceable. He also doubts the validity of the allotment in May 2002 to Ms. Poon since in his view the approval of the directors or shareholders of the company is necessary. 67.Despite all the difficulties envisaged by him, by the underscored words Mr. Lau suggests that Ms. Poon go ahead and file the allotment with the Companies Registry as soon as possible. She should then see if any objection is taken. Presumably, if the Registry makes no comment, the allotment would be valid de facto whatever the strict legal position may be. 68.Mr. Lau's e-mail then is hardly evidence of a refutation by New Paradigm of Ms. Poon's claimed entitlement to an allotment of 48,174 shares. A.1.7Conclusion on evidence 69.The evidence is overwhelming as to the existence of an oral option agreement with Ms. Poon as an incentive for her to work for and remain with New Paradigm. A.2 Was the agreement with IVRS shareholders? 70.Ms. Linda Chan submits that, if there was an agreement for the grant of an option, it must have been with one or other or more of Mr. Cheung, Mr. Chan, Ms. Tse or Dr. Wong. This was because, when Ms. Poon was recruited, New Paradigm had not yet been incorporated. 71.I disagree with Ms. Chan. 72.The context shows that Ms. Poon was approached by IVRS' shareholders on behalf of New Paradigm. Ms. Poon was contacted to benefit New Paradigm, not individual IVRS shareholders. 73.Further, although not wholly impossible, it would be odd if the IVRS shareholders were offering an option agreement for shares which they as individuals would not be able to allot to Ms. Poon. A.3 Was the agreement with New Paradigm? 74.Ms. Linda Chan says that the option agreement could not have been with New Paradigm. This is because New Paradigm did not exist when Ms. Poon was approached by the IVRS shareholders. 75.But Mr. William Wong in answer points to Companies Ordinance (Cap.32) ("CO") s.32A. That provides:-
76.Mr. Wong relies on a number of acts as ratification by New Paradigm of the option offer made to Ms. Poon. In my view, the assurance by Mr. Cheung of August 2000 and the e-mail correspondence between Ms. Poon and Mr. Cheung which I have referred to above, constitute ratification by the company. 77.Mr. Cheung would have been giving his assurance in August 2000 and would have been replying to e-mail about the acquisition of Ms. Poon's shares, not simply as an IVRS shareholder, but also as a director of New Paradigm. In failing to query Ms. Poon's option and instead conducting negotiations on the basis of the option's existence, Mr. Cheung implicitly confirmed the reality of Ms. Poon's option on New Paradigm's behalf. 78.Accordingly, by operation of CO s.32A, there was a binding oral option agreement between Ms. Poon and New Paradigm. Section 32A operates retrospectively. The option is deemed to have been granted from the time of its purported grant on behalf of the company, namely, 1 November 1999. That was the date when Ms. Poon agreed to become Vice-President in return for the compensation package proposed in her letter of employment. B. What are the consequences of the option? 79.Although by the company resolution of January 2000 New Paradigm's board had authority to allot shares, no board meeting ever approved the allotment of 48,174 shares to Ms. Poon. As managing director of New Paradigm, Ms. Poon had simply engaged in self-help and caused the shares to be allotted to herself in May 2002. 80.Even if there had been a board approval, it could only have validated options granted after the January 2000 resolution, not before. The analysis in Section III.A of this Judgment results in the option being deemed as granted on 1 November 1999. 81.Counsel disagreed on whether the May 2002 allotment was nonetheless valid under Companies Ordinance (Cap.32) ("CO") s.57B and, if invalid, whether the allotment could be validated under CO s.57C. 82.It seems to me, however, that CO ss.57B and 57C are not material to these proceedings. It is unnecessary for me to determine the dispute over the import of those provisions. 83.There being an enforceable option agreement relating to shares in a private company, the Court can order specific performance. It is open to me simply to order New Paradigm to validate the May 2002 allotment insofar as it was defective. Equity may assist Ms Poon to ensure that the company complies with its obligation to her. 84.The allotment was purportedly done on the company's behalf. To forestall any doubt as to the status of the relevant shares, the company (acting in general meeting or by authorising the board) can ratify the allotment. Such ratification would have retrospective effect to 14 May 2002 when shares were purportedly allotted by New Paradigm. 85.Accordingly, the consequence of my finding of an option agreement ought to be an order for specific performance. I should direct New Paradigm to validate the allotment of 48,174 shares to Ms. Poon. 86.It follows that I should reject New Paradigm's application to rectify the Register of Members. There is little point in expunging the allotment to Ms. Poon, only for the company immediately to validate it. IV. Conclusion 87.I make the following Declarations:-
88.In consequence, I order that as soon as practicable from the date of this Judgment:-
89.New Paradigm's application for rectification of its Register of Members is dismissed. 90.There will be an order nisi that New Paradigm pay Ms. Poon's costs of the Originating Summonses dated 22 August 2003 and 5 January 2004, costs to be taxed if not agreed. 91.There will be a general liberty to apply in connection with working out of the precise terms of my Declaration and Order.
Mr. William M. F. Wong, instructed by Messrs. P. C. Woo, for the Plaintiff in HCMP 3682/2003 (Defendant in HCMP 11/2004) Ms. Linda Chan, instructed by Messrs.Johnson Stokes & Master, for the Defendant in HCMP 3682/2003 (Plaintiff in HCMP 11/2004) Appeals dismissed: see CACV325/2004 and CACV326/2004 (heard together) dated 6 December 2006 |
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