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

Appeals dismissed: see CACV325/2004 and CACV326/2004 (heard together) dated 6 December 2006
Case No.HCMP 3682/2003
Court
High Court CFI
Date14 Sep 2004
Judge
Case Document
100%Judiciary

HCMP 3682/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 3682 OF 2003

____________

 

IN THE MATTER of POON YEE KAN ANDREA ELEANOR

  and
  IN THE MATTER of 48,174 SHARES REGISTERED IN THE NAME OF THE APPLICANT AND SECTIONS 70 AND/OR 57C OF THE COMPANIES ORDINANCE, CAP. 32

____________

BETWEEN

  POON YEE KAN ANDREA ELEANOR Plaintiff
  and  
  NEW PARADIGM e-TECHNOLOGY LIMITED Defendant

____________

HCMP 11/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 11 OF 2004

____________

 

IN THE MATTER of NEW PARADIGM E-TECHNOLOGY LIMITED

  and
  IN THE MATTER of THE COMPANIES ORDINANCE, CHAPTER 32 OF THE LAWS OF HONG KONG

____________

BETWEEN

  NEW PARADIGM e-TECHNOLOGY LIMITED Plaintiff
  and  
  POON YEE KAN ANDREA ELEANOR Defendant

____________

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:-

(1)     Whether there was an option agreement between Ms. Poon and New Paradigm.

(2)     If there was an option agreement, what consequences arise.

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:-

(1)     60% of New Paradigm's issued shares would be held by IVRS;

(2)     the remaining 40% of New Paradigm's issued shares would respectively be held in portions of 8% each by Mr. Raymond Cheung, Mr. Franky Lai, Mr. Barry Yen; Ms. Poon and a yet to be recruited senior executive of New Paradigm; and,

(3)     the rights and obligations of New Paradigm's shareholders would be governed by an agreement to be negotiated among the relevant persons.

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):-

"You hereby agree that you shall not divulge to nor enter into a discussion with any third party at any time during your employment with regard to your salary and compensation package."

11.Clause 6 of the letter referred to "Other Benefits" as follows:-

"Upon satisfactory completion of the probation period, you will automatically become a member of the Company's Medical Scheme.  Your annual leave and all other benefits will be according to the Company's Human Resources Policy in force at the time."

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:-

"6.     Bonus  You may be entitled to the Company's bonus schemes from time to time, and will be notified of your entitlement in such schemes plus the details of their implementation separately as they become available.  Bonus is not negotiable and any bonus holding will be automatically terminated on leaving the Company's service."

18.By e-mail dated 9 May 2002 to Mr. Lai, Mr. Cheung, Ms. Tse, Dr. Wong and Mr. Chan, Ms. Poon wrote:-

"... I will exercise the option granted to me by the company for up to 8% of the company's authorised shares of 1,000,000 at par.  The exercise price of the option [is] par, i.e. HK$1.000 per share, and I will exercise the option in respect of 48,174 shares.  Therefore based on the existing paid up capital of HK$604,000, I will inject HK$48,174 into the company to own a total of 52,174 shares of New Paradigm e-Technology."

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:-

(1)     Although discussed, the material terms of the alleged option were never agreed.

(2)     If there was any agreement, the parties to the contract were Ms. Poon and individual shareholders of IVRS.

(3)     If there was any agreement, it could not have been with New Paradigm which did not exist when Ms. Poon was recruited and never ratified the option after incorporation.

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:-

"3.2   The major shareholder retains 60% of total company share.  4 management options, each consisting of 8% + 2% = 10% of shares, will be reserved for key staff.

3.3     Staff eligible for management options will be given a deadline to exercise his option allocation.

3.4     The company reserves the right to recall 2% from each management option should further investment opportunities arise.

3.5     Actual share allocation must receive final approval by the Board."

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:-

"In relation to the signing over of NP [New Paradigm] shares from Andrea back to the Group, attached pls find a list of queries that I received from Andrea and Barry seeking for further clarification and/or commitment.  I believe that the questions raised are both genuine and constructive.  After all, the ultimate objective for the introduction of a strategic investor to the Group is to amass adequate funding to speed up business and product development, so that the overall performance of the Group companies can be enhanced.

Please review the attached document, give it some thought and consolidate amongst ourselves so that we can feedback and clarify the Board's united position and plans to Andrea and Barry.

Also, we should also set a implementation schedule to execute the actual buying back of shares from NP's minor shareholders prior to finalisation of the deal with the SI."

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:-

"I think it would be better to set up a face to face discussion with Andrea and Barry rather than giving the answers through e-mail.  If it is acceptable to you, I will ask Euris to firm up the meeting with Andrea and Barry soon."

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:-

"....  Any further request for acquisition of shares from NP's minor shareholders will be to be re-negotiated after this deadline.

-- In order to exercise out previous agreement, your good self as the designated representative of the Board of IVRS, is requested to provide Barry and myself with satisfactory responses to our queries as listed on the attached document.  Please note that this is the same list of queries that have previously been forwarded to you by Franky on November 15.  Please also note that the actual selling of shares of NP's minor shareholders will only be upon mutual agreement on your input to our queries.

--  Should the need to re-negotiate the terms of acquisition of shares from NP's minor shareholders arises after 17:00 pm, I hereby inform you that Barry Yen will no longer be able to represent my interests in any further discussions.

Looking forward to your reply to the above at your earliest convenience."

45.Again, instead of categorically denying the existence of any oral agreement for an option, Mr. Cheung replied as follows:-

"Sorry to keep you waiting.  It has taken us much more time than we expected to formulate a consensus view within IVRS in general and among the Directors in particular.  We have spent much efforts in revising your queries presented to Mr. Franky Lai, CEO of New Paradigm dated November 15, 2001 as it will certainly involve extra investments and commitments from IVRS.

It will be beneficial to both Barry and you, and IVRS if we would come up with a more quality and meaning proposal.  As some of the Directors are on vacation during this holiday season, I would like to request that if you will consider to extend the closing time to February 11, 2001 [2002?].

Please confirm whether this schedule is acceptable to you."

46.On 2 January 2002 Dr. Wong wrote to Mr. Cheung by e-mail as follows:-

"I am willing to be one of the representatives of IVRS to negotiate with the minor shareholders of NP on the acquisition of both Andrea Poon and Barry Yen's shares in NP, as well as to discuss on a fair and complete co-operation among the group companies in future, including NP, on or before the dare and time requested by Andrea...."

47.On the same day Mr. Cheung responded thus to Dr. Wong:-

"Since you are on IVRS' Board, I don't see why you can't represent IVRS' interest  I am referring to the nine questions raised by Andrea, please state your views accordingly."

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:-

"....

--  As a prelude to further discussion on the acquisition of the 8% each from Barry and myself, we raised the request for the completion of the remaining $4M funding out of the originally committed $12 M on or before the end of April 30, 2002.  We would provide a one-page summary of NP's intention to use this portion of the funding, and awaits the decision by IVRS shareholders

....

Last but not the least, as resolution to the above were not settled and agreed before 17:00 January 4, 2002, the terms of acquisition previously agreed between Raymond Cheung and Barry Yen has officially expired.  Whilst Barry and I are open for further dialogue, Barry will no longer be representing my interests and discussions between us and IVRS will have to be carried out individually."

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:-

"WHEREAS

(A)    The Seller [Ms. Poon] was employed and is currently still employed by New Paradigm e-Technology Limited ('NP');

(B)     The Seller holds 4,000 shares of HKD1.00 each in NP;

(C)    The Purchasers, being the beneficial shareholders of IVRS (International) Limited ('IVRS'), has invested in NP through IVRS; and

(D)    The purchaser has agreed to allow the Seller to purchase up to 8% of the entire share capital in NP including the 4,000 shares in NP already registered in the name of the Seller ('the Right') and there is no mentioning of the exercise price per share  and the exercise period.

NOW both the Purchasers and the Seller agree to enter into this Agreement as follows:

In consideration of the sum of HKD1,200,000.00 to be paid by the Purchasers in the proportion as stated in Annex A to this Agreement to the Seller in accordance with the Payment Schedule as stated in Annex B to this Agreement, the Seller hereby agrees to:

(A)    Forfeit the Right; and

(B)     Waive her claim whatsoever at present or in future for any losses ad damages against NP or any or all of the Purchasers or to future shareholders of NP due to capital restructuring or equity investment by any investment into NP."

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:-

"1.     Having seriously considered your reply and maintained the consistency and fairness to your fellow colleague Mr. Barry Yen, we regret to inform you that we will have to keep our original offer without any changes.  And also to the best interests of IVRS' shareholders, we don't see why the valuation will change tremendously within a few days."

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:-

"Since my last correspondence to you April 26, 2002 regarding an offer from IVRS shareholders to buy my 8% option & 4000 shares in New Paradigm, and an alternative invitation from you to discuss plans to increase my shares in NP up to 8%.  I have not received any response from you since.

It has been brought to my attention only in the last week that I-Group which includes NewParadigm, is in active discussions with a strategic investor (SI) for fund injection, and that this deal at final closing stage,  I would appreciate if you can confirm if this is true, and if so what is the actual deadline for me to exercise this option.  I would like to re-state that, as per the original agreement between IVRS and myself on this option, I hold the right to make a decision of either exercising my 8% option on par or selling my shares and options prior to the completion of any S & P [Sale & Purchase] agreement with any SI.  As IVRS' current discussions with the SI, which is a piece of information critical to my decision-making, was withheld from me both when IVRS first offered to buy my shares up to 8% on April 25, 2002, my right to exercise my options should not be affected in any way until I am given reasonable time to make my decision.  Otherwise I reserve my right to claim at present or in future for any losses and damage against NP or any or all of the Purchasers or to future shareholders of NP due to capital restructuring or equally investment by any investors into NP."

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:-

"As I knew that the Purported Allotment had never been approved by the Defendant, I immediately reported the matter to Raymond.  Since June 2002, I (on behalf of IVRS) have been raising objection on the Purported Allotment to the Plaintiff, both verbally and in writing.  There are now produced and shown to me marked 'LTHA-2' copies of the emails exchanged between the Plaintiff and I from 2nd August 2002 to 5th August 2002.

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:-

"....  My preliminary view on this matter according to the e-mail and the attachments are as follows:

1.      There is no written agreement for the granting of share options.

Assuming that a verbal confirmation on % of the share option to be granted to you exist, the exercise price per share and the exercise period are not still discussed.  This means the negotiation has not been completed.

....

In addition, an agreement should have been in place.

2.      A share option scheme in NP was not approved.

There was no mentioning of share options scheme as stated in the annual accounts of NP for the fiscal year 2000 and 2001.  According the secretarial records, no formal shareholders' meeting in NP held to approve a share option scheme was noted.

3.       No formal directors' meeting of NP was held to approve the issue of shares.

The attached notice was addressed to the company secretary of NP.  However a directors' meeting has not been convened to check with the share option agreement from shareholders of NP and to approve the allotment of shares.

I would like to emphasise that all allotment of shares should be approved by directors and/or shareholders of NP.  Otherwise the directors of NP are empowered to decline the registration of the issue of new shares.

4.       The offer from Mr. Cheung on behalf of other three persons to you is a purchase of 4,000 shares and 'air' if an option did not exist.  I would consider that the agreement is just for goodwill.

If the case of option is not genuine, I advise that the filing of the allotment of shares pursuant to this case should be notified to the Companies Registry as soon as possible.  It is up to the Companies Registry to challenge this filing is proper or not.

Please note that I have requested document for 1-3 above since last time I discussed with you and I am still awaiting them.  Please let me know if you have further information to the contrary, eg the endorsement from the shareholders.  Thus I can complete the audit for FY 2002 ASAP."  [Emphasis supplied.]

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:-

"(1)    Where a contract purports to have been made in the name or on behalf of a company at a time when the company has not been incorporated:--

(a)   subject to sub-section (2) and any express agreement to the contrary, the contract shall have effect as a contract entered into by the person purporting to act for the company or as agent for it, and he shall be personally liable on and entitled to enforce the contract accordingly;

(b)   the company may, after incorporation, ratify the contract to the same extent as if it had already been incorporated at that time and as if the contract had been entered into on its behalf by an agent acting without its authority.

(2)     Where a contract is ratified by virtue of this section, the person who purported to act for or on behalf of the company in making the contact shall not thereafter be under any greater liability than he would have been if he had entered into the contract on behalf of the company as an agent acting without its authority and after its incorporation."

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:-

(1)     On about 1 November 1999 New Paradigm granted Ms. Poon an option to subscribe for up to 8% of its share capital at par value, during the term of her employment with the company, 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.

(2)     Before her resignation from Mew Paradigm on 19 December 2002, Ms. Poon exercised that option by giving notice on 9 May 2002 to subscribe for 48,174 New Paradigm shares.

88.In consequence, I order that as soon as practicable from the date of this Judgment:-

(1)     New Paradigm validate the 14 May 2002 allotment of 48,174 shares to Ms. Poon; and,

(2)     New Paradigm deliver to Ms. Poon a certificate for 48,174 paid up shares of $1 par value each.

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.

  (A. T. Reyes)
  Judge of the Court of First Instance
  High Court

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
Other Judgments in This Case

Further hearings and rulings under HCMP 3682/2003