So Wing Kin v. Au Yeung Yue Kwong and Others

HCA 155/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 155 OF 2005

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BETWEEN

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Before: Deputy High Court Judge L. Chan in Court

Dates of Hearing: 8 to 12, 17 May 2006

Date of Judgment: 22 May 2006

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J U D G M E N T

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1.The plaintiff brought this action against the 1st and 2nd defendants and the other defendants for alleged breach by the 1st and 2nd defendants of an oral shareholders’ agreement.  The plaintiff and the 1st and 2nd defendants are the shareholders of the 3rd defendant.

Issue for determination in this trial

2.There are a number of matters and relief raised in the re-amended statement of claim and the amended defence and counterclaim.  However, the parties have requested me to just resolve whether there was a shareholders’ agreement and whether the registration of a lis pendens at the Land Registry should be vacated.  For everything else, they are left for disposal at a future hearing, if need be.

Background

3.Heung Fun Liu is situated at the west of Tai Wai in Sha Tin.  In the Ming Dynasty and in the early part of the Ching Dynasty, people used to make incense or joss sticks there; hence, its Chinese name.  It is now a quiet place covered with some vegetation.  There are also some squatters.

4.Lot No. 69ARP in DD 181 (“the Property”) is within Heung Fun Liu.  It is just off the Shing Mun River Channel.  It used to be wholly owned by a family of surname Tsang.  The Tsang family have two fongs and each fong used to own half of the interest in the Property. 

5.Since 1978, the Tsangs had been trying to change the user of the Property from agricultural to residential or other more profitable use.  Between 1978 and 1994, they had, through the 1st defendant, Mr Au Yeung Yue-kwong, made a number of applications for this purpose but without any success.

The 1st defendant

6.Mr Au Yeung is an architect by profession and has been practising through his own firm since 1970.  He has been a good friend of the Tsangs for decades.  In fact, his father went to school with one of the Tsangs.

The 2nd defendant

7.In 1995, Au Yeung at the request of the Tsangs approached the 2nd defendant, Kan Wing-ching, for help to change the user of the Property.  Au Yeung had known Kan since about 1990.  Kan was willing to take up the task.  Kan had a company called In Yam Development Limited which provided town planning consultancy service to landowners.  In Yam mainly provided professional services to a listed company in Hong Kong. 

The plaintiff

8.At that time, the plaintiff, So Wing-kin, was providing service to In Yam.  Kan regarded So as a member of his staff and one of his deputies, but So regarded himself as an independent contractor of In Yam or a partner of Kan in operating In Yam.  So and Kan had known each other since about 1986.  So used to spend half a day every day in the office of In Yam.  He was an engineer by profession and had his own companies to operate.  One of his companies was called Glad Link Properties Limited.  So was assigned by Kan to negotiate with the Tsangs on the project for changing the user of the Property.  There was an understanding that Au Yeung would also have a role to play in this project and this appeared to be known to the Tsangs.

The 3rd defendant

9.This project eventually led to So, Au Yeung and Kan acquiring the 3rd defendant, Ives Developments Limited, which later purchased ¹/₃ of the interests of the Property from the Tsangs.  However, this project further developed into this action where So accused Au Yeung and Kan of having breached an oral shareholders’ agreement made in early 1996.

Agreement for professional service to change user

10.After Kan had assigned So to negotiate with the Tsangs, Au Yeung then introduced So to the Tsangs in the middle of 1995 for them to negotiate the terms for the project for change of user.  Owing to the relationship between Au Yeung and the Tsangs, Au Yeung was kept informed of the progress of the negotiation by both So and the Tsangs. 

11.So said that he was only interested in acquiring a share of the Property and to develop it together with the Tsangs rather than merely providing professional service.  However, Au Yeung and Kan said in evidence that they initially only intended to provide professional service to the Tsangs in return for a fee and were not interested in taking part in developing the Property.  Nevertheless, one fong of the Tsangs did not want to pay any professional fees for the service.  Eventually, the Tsangs on the one hand and So, Au Yeung and Kan on the other hand agreed that the Tsangs would sell ¹/₃ of interest in the Property to them instead of paying them any professional fees.

12.The unit price of the Property was set at $120 per square foot.  According to Au Yeung, it was the then market price for agricultural land.  The sale of ¹/₃ of the interest of the Property to the three of them was for them to benefit from potential substantial appreciation in value which would materialise if they should succeed in changing the user of the Property.

13.The negotiation between the Tsangs and So took a number of months to bear fruit.  An agency agreement was signed on 5 March 1996 between two companies belonging to the Tsangs on the one hand and So’s company, Glad Link, on the other.  The two companies owned by the two fongs of the Tsangs were Konpar Estate Limited and Land Resources Limited.  The Tsangs had previously entered into agreements with them agreeing to sell their interests in the Property to them.

14.The agreement between these two companies and Glad Link was an agency agreement whereby Glad Link was appointed to negotiate with the Government for change of user and permission to develop the Property.  Glad Link was given one year to obtain the Government’s approval for change of user.  It had an option to extend this period by six months if the application should be submitted to the government within nine months from the date of the agreement.

15.This agency agreement further provided that in the event that the user of the Property was changed, Glad Link would be entitled to act as the developer and to apply to the government for land exchange for development and to obtain vacant possession from the occupiers, all to be done with remuneration.  Furthermore, if the parties to the agreement should proceed to build a development on the Property, Glad Link would have the first priority to be appointed the project manager of the development also with remuneration.  The agreement also stipulated that So should remain the major shareholder and a director of Glad Link, otherwise Glad Link would not be entitled to act as the developer or project manager as referred to above.  Kan said that he did not know that Glad Link would act as the developer and project manager until he saw the agency agreement.

16.In consideration of the service to be provided by Glad Link, Konpar and Land Resources agreed to sell ¹/₃ of their interests in the Property to Ives.  The purchase price was ¹/₃ of the area of the Property multiplied by $120 per square foot.  Ives is a BVI company and was acquired by So, Au Yeung and Kan to purchase the ¹/₃ interest in the Property.  Ives was referred to as Glad Link’s nominee in the agency agreement.

Distribution of the shares of the 3rd defendant

17.Ives had an authorised capital of US$50,000 and issued capital of US$100 divided into 100 shares of US$1 each.  These shares were distributed among So, Au Yeung and Kan at the rate of 39 per cent, 26 per cent and 35 per cent.

18.So said that he got 39 per cent of the shares because it was agreed that he would assume a dominant role in the project. 

19.Au Yeung said that he had never bothered about the respective sharing between So and Kan as he regarded So as Kan’s employee and he only dealt with Kan on the amount of shares he himself got.  He agreed with Kan that he would get a smaller percentage because Kan had to share part of the interest with his staff.  He thus agreed to take 26 per cent of the shares.  In fact, he would also be getting $800,000 as his fees for his work in the application for change of user.

20.Kan said that he agreed to let So take more shares as So said to him that he already had a lot of money but life was difficult for So. 

21.The shares belonging to So and Kan were registered in their own names while Au Yeung held his shares by the 5th defendant, Andaman Concept Limited.

Change user of the Property

22.On 5 March 1996, Ives paid Konpar and Land Resources a total of 1.5 million as deposit for the purchase of the ¹/₃ interest of the Property.  After the making of the agency agreement on 5 March, Glad Link entered into agreements with other professional consultants for their assistance in the application for change of user.  The staff of In Yam also made substantial contributions to the preparation of the application.

23.On 8 November 1996, the first application for change of user and rezoning of the Property from Green Belt and Village to Residential (Group B) was submitted by Au Yeung’s firm to the Town Planning Board (TPB).

24.In about March 1997, So and Kan fell out with each other because of other matters.  Since then, they were not on speaking terms.  So also did not work in In Yam anymore. 

25.The application submitted in November 1996 was unsuccessful.  It was rejected by the TPB on 18 July 1997.  So then revised the application and submitted it through a landscape consultancy called Team 73 HK to the TPB on 22 October 1997.  This application was again rejected by the TPB on 20 March 1998.

26.Kan then took over the project and submitted the application for the third time on 4 May 1998 also through Team 73 HK.  This time, the application was for changing the user to Comprehensive Development Area.  However, Kan later considered the third application not good enough.  He then withdrew it from the TPB on 5 August 1998.  He revised it and submitted it for the fourth time on 18 November 1998 also via Team 73 HK.

27.On 13 January 1999, there was a meeting of government officials at the Sha Tin Town Planning Office to consider the fourth application.  On 18 January 1999, Team 73 HK wrote to the TPB and postponed the submission of the fourth application pending provision of supplemental information to the TPB.  The supplemental information was supplied to the TPB on 24 February 1999.  The TPB eventually approved the change of user to Comprehensive Development Area on 14 May 1999.

First sale of the Property to Super Town and the rescission

28.Shortly after the submission of the first application for change of user in November 1996, So, with the consent of the Tsangs, had started to market the Property.  He negotiated with three listed developers.  Eventually, the Tsangs, Glad Link and Ives entered into a sale agreement and a supplemental agreement with a company called Super Town Investments Limited on 18 March 1997.  Super Town is a subsidiary of a listed developer and it agreed to purchase the Property at $790 million. 

29.The market price of real property fell in 1998 because of the Asian Financial Crisis.  The parties then made an addendum and a second supplemental agreement with Super Town on 7 January 1999 thereby reducing the price of the Property to $382,072,100 million.  Completion was extended to 17 June 1999.  By a second addendum of 17 June 1999, the price of the Property was further reduced to $325,610,115.  The completion date was also further extended to on or before 17 June 2000. 

30.Though the user had been changed, vacant possession had not been obtained by the extended completion date.  Super Town eventually rescinded the sale agreement on 19 September 2000.

Internal proceedings of the 3rd defendant and BVI proceedings

31.Moving back in time to the middle of 1999, after the TPB had allowed the change of user on 14 May 1999, the Tsangs, So, Au Yeung and Kan then proceeded to consider how to obtain vacant possession of the Property so as to complete the sale to Super Town.  They had a meeting on 4 June 1999, of which Kan did not attend.  They appointed a firm of surveyors to prepare a report on obtaining vacant possession together with an estimate of the costs required.  Ives was to bear ¹/₃ of such costs.

32.Since So and Kan had fallen out in March 1997, Ives apparently had not had any shareholders’ meeting or board meeting until May 1999.  All the books and records of Ives were then kept by So.  Since user of the Property had been changed, the board of Ives had to consider the way forward.  There was a board meeting on 12 May 1999 which approved a report of expenditure and contribution prepared by Glad Link for Ives and also the expenditure of Ives so far incurred.  So did not attend this meeting.

33.On 26 August 1999, Au Yeung telephoned So and requested for the company kit of Ives to be delivered to Ives’ then solicitors, Messrs Liau, Ho & Chan.  Au Yeung followed the telephone conversation by a fax on the next day.  However, So did not respond to his request.  Also on 27 August 1999, the solicitors for the Tsangs asked Ives to complete the purchase of ¹/₃ of the Property and to pay the balance of the purchase price.  So sent a cheque for $6,148,159 to the solicitors of Ives on the same day, but Au Yeung and Kan did not.  There was apparently an agreement between the Tsangs and Ives that completion should be deferred until after the approval for change of user had been gazetted.

34.Au Yeung and Kan then decided to convene a board meeting of Ives on 17 September 1999.  They intended to ask the board to approve transfers of Ives’ shares as held by Andaman and Kan to the 4th defendant, Maple Capital Limited.  They also wanted the board to resolve for completion of the purchase of the ¹/₃ of the interest of the Property.  Lastly, they also wanted the board to resolve to procure a company kit if So should fail to deliver the kit to the solicitors by 20 September 1999.

35.A notice of the said meeting and dated 13 September 1999 was issued by Au Yeung.  Au Yeung said he had asked the solicitors to send it to So, but the solicitors denied it.  In any case, Au Yeung had sent it to So on 15 September 1999 by fax.  So on 18 July 2000 said through his solicitors that he had not received it.  Furthermore, So said the period of notice for the meeting should be three days and Au Yeung’s fax was too late to be effective.

36.The board meeting was held on 17 September 1999 without participation from So.  The matters aforesaid were all resolved without any objection. 

37.So did not deliver up the company kit to the solicitors by 20 September 1999.  Au Yeung then issued another notice dated 14 October 1999 for another board meeting to be held on 20 October 1999.  This notice referred to the resolution made in the last board meeting on 17 September 1999 and the fact that So had failed to deliver up the statutory book, the certificate of corporation, the common seal and the company chop.  It also referred to proposals to have a new statutory book recording the transfer of shares by Andaman and Kan to Maple Capital, and to procure a new certificate of incorporation, a new common seal and a new company chop.

38.So admitted in evidence that he had received this notice of meeting at about the time when it was issued.  He was therefore in about the middle of October aware that there was a board meeting on 17 September 1999 which resolved to require him to deliver up the company kit and approved the transfers of shares by Andaman and Kan to Maple Capital.  Though he said through his solicitors on 18 July 2000 that he had not been given any notice of this board meeting, he did not complain about this in mid-October 1999 or shortly thereafter.  He also did not attend the board meeting on 20 October 1999.

39.Au Yeung on 6 November 1999 issued another notice for a board meeting to be held on 11 November 1999 to change the correspondence address and the persons authorised to give instructions for Ives to the registered agent in BVI.  So again did not attend this meeting.  The meeting on 11 November 1999 then changed the correspondence address to that of the new solicitors of Ives and appointed Au Yeung and Kan to be the persons authorised by Ives to contact its registered agent.

40.Also on 11 November 1999, Au Yeung issued another notice for a board meeting to be held on 16 November 1999 to ratify and confirm the transfers by Andaman and Kan of their shares of Ives to Maple Capital and to adopt a new memorandum and articles for Ives.  So again did not attend this meeting.  The resolutions were duly passed.

41.On 6 December 1999, Au Yeung issued another notice for a board meeting on 9 December 1999 to clarify certain previous resolutions, to establish a bank account with Wing Lung Bank Limited and to appoint a new company secretary.  So again did not attend this meeting.  The meeting was duly convened and the resolutions resolved.  The meeting further appointed Alassio Resources Limited and Alfresco Group Limited as new directors with immediate effect and accepted the resignations of Au Yeung and Kan from the board.

42.According to Au Yeung and Kan, the transfers of shares to Maple Capital and the appointments of Alassio and Alfresco to replace the two of them on the board were done pursuant to a request from a Tai Wah Finance Limited.  Au Yeung and Kan wanted to borrow money from Tai Wah to cover the further expenditure, the funding for the purchase by Ives of the ¹/₃ of the interest of the Property and the funding for the development of the Property.  Tai Wah made these requests so as to have a more effective control over the security for the lending.  The security was the 61 per cent shares of Ives originally held by Andaman and Kan.

43.On 2 December 1999, Maple Capital made a further request to the board of Ives to convene a members’ meeting before the end of December 1999.  So and Kan probably on behalf of Alassio and Alfresco respectively issued a notice on 7 December 1999, calling for a board meeting on 10 December 1999 to consider the request of Maple Capital.  The board meeting was duly held on 10 December 1999.  So was again absent.  The meeting resolved to hold a members’ meeting on 17 December 1999.

44.The minutes of the board meeting and the agenda for the members’ meeting to be held on 17 December 1999 were sent to So by the solicitors of Ives by fax on 10 December 1999.  The agenda stated that the meeting would consider increasing the authorised capital of Ives to US$1 million of US$1 per share and authorised the majority of the board to issue a subscription letter to all shareholders to subscribe additional shares. 

45.Au Yeung said that this allotment of additional shares was to raise funding for Ives to complete the purchase of the ¹/₃ of the interest of the Property and to obtain vacant possession of the Property.  He and Kan had considered raising a bank loan.  However, So had kept the statutory book and common seal.  Ives thus could not obtain the certificate of good standing and certificate of incumbency.  Their negotiations with Shanghai Commercial Bank Limited and Citibank Limited for loans thus failed.  They had also considered shareholders’ loans to be advanced by the three shareholders, but there could be no agreement because So did not attend any meeting.  Finally, they resorted to allotment of additional shares on a pro rata basis to those existing members who were willing to subscribe. 

46.The members’ meeting of Ives was duly convened on 17 December 1999 and resolved in favour of the increase in authorised capital and of giving authority to the board to invite subscription for new shares.  A maximum of 300 shares could be allotted at $86,000 per share.  So again did not attend this meeting.

47.Before this meeting was convened, Alassio and Alfresco had on 15 December issued a notice for a board meeting to consider whether to approve the transfer of the 61 per cent shares of Ives by Maple Capital to Tai Wah.  That was for the purpose of using the shares as security for lending by Tai Wah to Maple Capital.  The board meeting was duly held and the transfer duly approved.  So again did not appear at the meeting. 

48.After the members’ meeting on 17 December, Au Yeung and Kan on behalf of Alassio and Alfresco respectively issued a notice on 21 December 1999, calling for a board meeting on 24 December to consider the issue of the subscription letter for the 300 new shares, the status of the purchase of the ¹/₃ of the interest of the Property and issues relating to vacant possession.  The board meeting was duly held and So was again absent.  The meeting authorised the issue of the subscription letter and resolved to pay the Tsangs the balance of the purchase price and Ives’ own share of the expenses for vacant possession.  Au Yeung and Kan were also appointed as directors in addition to Alassio and Alfresco.

49.Before 1999 came to a close, Alassio, Alfresco, Au Yeung and Kan issued another notice on 30 December 1999, calling for a board meeting on 3 January 2000 to review and accept the subscription for new shares.  The board meeting was duly held and So again did not appear.  The meeting resolved in favour of allotting 183 new shares to Maple Capital, thereby increasing its shareholding to 244 shares and also approved the transfer of the new shares to Tai Wah to stand as security as well.

50.On the same day, So also came out of dormancy.  He through his solicitors, Y S Lau & Co., issued a letter on that day to the board of Ives, disputing the validity of the board meetings held on 9 and 24 December 1999 and the members’ meeting on 17 December 1999 and all the resolutions passed in these meetings.  His ground of challenge was insufficient length of notice of meeting.  He also alleged that he was the only director of Ives as Au Yeung and Kan had resigned but Alassio and Alfresco had not been validly appointed.

51.By a further letter of 12 January 2000, So’s solicitors further disputed the validity of the allotment of the 183 new shares to Maple Capital.  Maple Capital replied through its solicitors on 14 January 2000 and denied the allegations that the resolutions were invalid.  These solicitors nevertheless requested So, who alleged that he was the only director of Ives, to convene a members’ meeting of Ives to ratify all the resolutions passed at the board meetings held on 9, 10, 20 and 24 December 1999 and 3 and 10 January 2004 and the members’ meeting on 17 December 1999.  The request was made pursuant to the articles of Ives.  So, however, did not accede to the request.

52.Au Yeung, Kan, Alassio and Alfresco then through their own solicitors wrote on 26 January 2000 to So’s solicitors, disputing their claim of insufficient length of notices of meetings. 

53.So’s solicitors in their reply of 2 February 2000 said that the transfers of shares by Andaman and Kan to Maple Capital, the increase of authorised capital of Ives and the issuance of new shares to Ives had violated the stratum in setting up Ives and were prejudicial to So’s interests.

54.The solicitors for Au Yeung and Kan on 10 February 2000 asked So’s solicitors to clarify in what manner did the transfers of shares, increase of authorised capital and issuance of new shares violated the stratum in setting up Ives and how did these actions prejudice So’s interests.  So’s solicitors, however, did not make any reply or clarification.

55.Maple Capital repeated its request for a members’ meeting of Ives on 3 April 2000, but So still declined the request.  Maple Capital on 20 April 2000 applied by originating summons to the BVI High Court for an order requiring So to convene a members’ meeting. 

56.So made an affidavit on 7 June 2000 to oppose the application.  He said in paragraph 69:

“69.   After the approval of the planning application was obtained in April 1999, I found that Mr Kan and Mr Au Yeung started to take series of actions such as making up false invoices, transferring shares to a new company (that is the Applicant), appointing new corporate directors (that is, Alassio and Alfresco), issuing additional shares, and introducing a finance company (that is Tai Wah), as a member of the respondent.  I also found that Mr Kan and Mr Au Yeung had totally violated the rationale for setting up the Respondent and the agreement and understanding that Mr Kan, Mr Au Yeung and I would together operate the Respondent carry out the project.”

57.He also said in paragraphs 35 and 36 of this affidavit:

“35.   On 16 November 1999, Mr Au Yeung and Mr Kan conducted a meeting of the Board of Directors of the Respondent.  At that meeting, it was recorded that Andaman Concept Limited (Mr Au Yeung’s nominee company) and Mr Kan had resolved to transfer their total 61 shares of the respondent to the applicant.

36.    This resolution took me by surprise, as this was a deviation from the original spirit of the shareholders.  Since I was a minority shareholder and one of the three directors, I decided to keep a passive role in all the directors’ meetings in an attempt to see what were the intentions of Mr Au Yeung and Mr Kan in transferring their shares to the applicant.”

58.Despite So’s opposition, the High Court of BVI on 28 June 2000 ordered So to convene the members’ meeting, failing which the members of Ives be at liberty to convene such a meeting on due notice.  A members’ meeting was duly convened by Maple Capital on 17 July 2000 which appointed Alassio and Alfresco as directors and removed So from the board.  So was present in this meeting but his objections did not prevail. 

59.On 19 July 2000, Alassio issued a notice calling for a members’ meeting of Ives to be held on 28 July 2000 to ratify the resolutions of the board meetings on 9, 20 and 24 December 1999 and 3 January 2000 and the members’ meeting on 17 December 1999.  So had not attended this meeting.  In fact, So had gone with his solicitors to the office where the meeting was to be held and he stated to the solicitor of Au Yeung and Kan his stance that no meeting could be convened as Maple Capital was not a shareholder.  He then left.  The meeting duly convened in his absence and the resolutions ratified. 

60.So also made a strike at Au Yeung and Kan in the High Court of BVI.  He presented a petition on 31 October 2002 to wind up Ives, but he discontinued these proceedings on 9 December 2002. 

Second sale of the Property to Super Town and the institution of this action

61.In early 2001, Ives entered into a fresh sale and purchase agreement with the Tsangs (and not with Konpar and Land Resources) to purchase ¹/₃ of the Property.  Efforts were then made in 2001 to 2002 to obtain vacant possession of the Property.  Negotiations were also conducted with the government for in situ land exchange.  The Property was then marketed in late 2003 to mid-2004. 

62.By an agreement of 3 November 2004, the Tsangs and Ives agreed to sell the Property to Super Town again.  The price payable to Ives was $85 million.  However, So on 25 January 2005 issued this action, claiming, among other things, that Au Yeung and Kan had breached an oral shareholders’ agreement made amongst the three of them.  So also claimed that Ives could not have sold the Property and it held the Property on trust for the three of them.  The writ of summons was registered at the Land Registry.  This prevented Ives from completing the sale and purchase agreement with Super Town which was anticipated to take place in early 2005.  Super Town refused to complete on 15 December 2005.  It is now suing them in this court.  The Government has also stopped taking any further action on the application for in situ land exchange.  Au Yeung and Kan denied that there was any shareholders’ agreement as alleged by So.

The plaintiff’s case

63.So pleaded the shareholders’ agreement in paragraph 15 of his re-amended statement of claim as follows:

“15. Under the Shareholders Agreement, the following terms were, inter alia, expressly and/or impliedly agreed amongst the Plaintiff, the 1st Defendant and the 2nd Defendant (“the 3 shareholders”):

(a) that the nature of the 3 shareholders agreeing to deal with the investment and development and otherwise dealing with the Property through the 3rd Defendant shall be by way of a quasi-partnership in that, inter alia, each shareholders shall owe a fiduciary duty to each other and each shall be acting in good faith to each other in the conduct of the matters and business of the investment, development and otherwise dealing with the Property through the 3rd Defendant;

(b) that the 3rd Defendant shall be used as the only corporate vehicle for the 3 shareholders in respect of their investment, development or otherwise dealing concerning the ¹/₃ interest in the Property which the Plaintiff has successfully negotiated with the Tsang’s family through Glad Link;

(c) that the Plaintiff shall hold 39%; the 1st Defendant through the 5th Defendant 26%; and the 2nd Defendant 35 % of the shares of the 3rd Defendant;

(d) that except that the 5th Defendant be used to hold the 26% shares of the 1st Defendant in the 3rd Defendant at the request of the 1st Defendant not to disclose his identity in the investment in the Property, there shall be no change in the aforesaid shareholdings of the Plaintiff, the 1st Defendant and the 2nd Defendant;

(e) that there shall be no new shareholders to be added to the aforesaid shareholdings arrangement without the prior unanimous consent of the 3 shareholders;

(f) that the Plaintiff, the 1st and 2nd Defendants shall be the only directors of the 3rd Defendant;

(g) that the directorship of the Plaintiff, the 1st Defendant and the 2nd Defendant would remain unchanged and would not be transferred or terminated and there shall be no addition or reduction of directors in the 3rd Defendant without the prior unanimous consent of the 3 shareholders;

(h) that the issued share capital of the 3rd Defendant shall remain at US$100.00 out of the US$50,000.00 authorised share capital divided into 50,000 ordinary shares of US$1.00 for each share;

(i) that any funds required for the investment, development or otherwise dealing with the Property shall be raised by the Plaintiff, the 1st Defendant and the 2nd Defendant through their own resources or means according to their shareholding ratio of 39 %, 26 % and 35 % respectively;

(j) that under no circumstances shall the shares of the 3rd Defendant be transferred or pledged to any financial institutes nor shall the 3rd Defendant be made liable for any loans for the purpose of raising funds for the investment, development or otherwise dealing with the Property;

(k) that the only asset of the 3rd Defendant, namely the ¹/₃ interests in the Property shall not be sold, transferred or otherwise disposed of without the prior knowledge and prior consent of all the 3 shareholders;

(l) that the Plaintiff shall be directly involved in the management of the 3rd Defendant and in the investment, development and otherwise dealing with the ¹/₃ interest in the Property; and

(m) that the Plaintiff, the 1st Defendant or the 2nd Defendant shall not seek to enter into any undisclosed transactions or to obtain any secret or undisclosed profits either through the 3rd Defendant or in the course of investing, developing or otherwise dealing with the Property.”

64.So clarified in further and better particulars that the terms in (a) to (l) were express terms while the term in (m) was an implied one.  He also pleaded in the re-amended statement of claim that the shareholders’ agreement was made by reference to and by incorporating the terms of previous course of dealing between him and Kan in similar property investment which involved similar terms agreed orally. 

65.In the further and better particulars, he clarified that the previous investments were in some agricultural lots in DD 91 in Sheung Shui and in the redevelopment of the Gun Club in Tsuen Kam Road.  In his witness statement, he dealt with the shareholders’ agreement as follows:

“The Shareholders Agreement

52. During the period between December 1995 and February 1996, several discussions were held between the 1st Defendant, the 2nd Defendant and I.  The following terms of shareholders agreement were reached and so was the spirit, understanding, trust and confidence for the agreement among shareholders in the co-operation in and through of the 3rd Defendant for the investment of the Property. 

(a) It was agreed that I shall play a dominant role in the project concerning the Property (“the Project”) like what happened in the Maxtell project with the 1st and 2nd Defendants and similarly for, in Lot 1 and Lot 2 with the 2nd Defendant.  In fact, I chaired all the meetings of the 3rd Defendant from 1996 to 1999. 

(b) This is in fact a requirement and pre-condition of our acquiring the ¹/₃ interest in the Property as imposed by the Tsang’s family.  This also explains why I got 39% shares in the 3rd Defendant in contrast to their respective 26% and 35% and why in the Joint Venture Agreement there is a clause and condition that “So Wing Kin shall be and must remain the major shareholder and a director of the Agent; particularly, the Agent shall not be entitled to act as the Developer under 7.4 hereof or to be appointed as the project manager under 7.5 hereof if So Wing Kin ceases to be the major shareholder and a director of the Agent.”  This reflects my dominant position in the management and beneficial interest in the Project.

(c) It was agreed that subject to the 1st Defendant acting through the 5th Defendant, only the 1st, 2nd Defendant and I were and shall remain the shareholders and directors of the 3rd Defendant.  There was no change in the shareholding of Maxtell, Kingston and Grace Manor.  In the subsequent investment under Lot 2, the 2nd Defendant transferred his shareholding to Lam only with the consent of all shareholders.

(d) Each shareholder and director shall act in a spirit of mutual co-operation, trust and confidence and that we shall use all means reasonably available to us to give effect to the success of the investment, development and otherwise dealing with the Property through the 3rd Defendant.  This was only adopting the same mode we three had in Maxtell and in Lot 1 and Lot 2 with the 2nd Defendant as reflected in the Shining Agreement. 

(e) The 3 of us as shareholders also agreed that the 3rd Defendant shall be used as a corporate vehicle and it shall not be engaged in other business save for the investment or participation in the Property.  This is in line with what happened in Maxtell, Kingston and Grace Manor.

(f) All shareholders shall at all times use our best endeavours to keep our shareholding and other secret information in the 3rd Defendant confidential.

(g) It was agreed any material change or drastic variation of the business of the 3rd Defendant could only be made with the prior consent of all the shareholders.

(h) The shareholders shall not sell, charge or create any security interest in his shareholdings without the prior consent of all the other shareholders.  No sale and/or charge of shares of Maxtell and Kingston were allowed or made previously.  This condition was also present in the Shining Agreement.

(i) It was agreed that the shareholders shall use their own resources and best endeavours to procure any funds themselves personally to purchase the lands, additional working funds for the change of use or otherwise funds required for dealing with the Property according to their shareholding ratio.  If money is borrowed from banks or other similar sources, a shareholder shall not allow any prospective lender as a condition of any loan, any right to participate in the equity of the 3rd Defendant or the Property.  Such a term is also present in Lot 1 and Lot 2.  Therefore, all the funds for the investment in the Property were derived from shareholders’ loan raised and provided by the 3 shareholders ourselves from March 1996 to December 1999.  Similarly all funds for Maxtell, Lot 1 and Lot 2 were derived from shareholders.  In the Shining Agreement, lending was only allowed in particular for building mortgage for the redevelopment of the land into housing units during construction, and only with the consent of all shareholders concerned. 

(j) It was agreed that the only asset of the 3rd Defendant was the ¹/₃ share in the Property and the sale or disposal of such asset shall only be made with the written and prior consent of all the shareholders.  All the shareholders informed consent were obtained for the sale of Lot 1.  I got the consent of the 1st and 2nd Defendants for the sale of the Property to Super Town in 1997 and entered into the Second Supplemental Agreement in 1999 with all the shareholders consent too.

(k) All shareholders and directors shall not seek to enter into any undisclosed transactions or to obtain any secret or undisclosed profits either through the 3rd Defendant or in the course of investing, developing or otherwise dealing with the Property.  All the matters in Maxtell were disclosed to all directors and shareholders by me when I was the mastermind.  It was the same in Lot 1 and Lot 2.”

Analysis of and conclusion on the plaintiff’s evidence

66.The first query I would raise is why did they not reduce these lengthy terms into writing as there were so many of them and it would not be easy to memorise them all.  Some of them were quite technical too.  It was not a case where they would choose to conduct their proceedings orally only and without leaving any written record.  They in fact had written minutes of board meetings.  The early board meetings of Ives were held on 1 March 1996 and 26 July 1996.  The minutes were prepared by So.  They recorded the ratio of distribution of the shares to the three of them.  The first set of minutes also authorised the making of an agreement with Konpar and Land Resources.  The second set of minutes resolved that Ives would be dissolved after completion of the project.  If there were such large number of terms agreed amongst the three of them in a few meetings between December 95 and February 96, one wonders why these terms were not recorded in the minutes dated 1 March 1996 or some earlier minutes.

67.Furthermore, in cross-examination, So said that his exclusion by Au Yeung and Kan from the application to obtain change of user since mid-1998 had upset him.  He agreed that such conduct was contrary to the shareholders’ agreement, but he did not raise any objection to either Au Yeung or Kan or told them that such was contrary to the shareholders’ agreement. 

68.He further said that he had learnt from the then solicitors of Ives’ at the beginning of 1999 that Au Yeung and Kan were trying to use Ives to borrow money.  That again was contrary to the shareholders’ agreement, but he again did not utter a word of objection.  He said he was on good terms with one of the Tsangs, Mr Tsang Wing-wah, and a Mr Leung of Super Town.  He therefore decided to complete the project as soon as possible so as to take his share of profit and leave.  However, I still do not think that such is a sufficient reason for him not even to register his objection and the basis of the objection, namely, that it was contrary to the oral shareholders’ agreement. 

69.When he received sometime in or after mid-October 1999 a notice for a board meeting to be held on 20 October, he knew that Andaman and Kan had transferred their shares to Maple Capital as this was referred to in the notice of meeting.  This was again contrary to the oral shareholders’ agreement, but he again did not say or do anything to register his objection that such was contrary to that agreement.  He had then already instructed solicitors to advise him.  It was therefore even more difficult to understand his silence and inaction. 

70.If there was indeed the oral shareholders’ agreement, then the breach in the board meeting on 9 December 1999 was more blatant as Au Yeung and Kan had appointed Alassio and Alfresco to the board to replace themselves.  Nothing about Alassio or Alfresco was known, but So did not make any complaint either by himself or through his solicitors. 

71.If the appointments of Alassio and Alfresco were not bad enough to evoke him into action, the notice dated 10 December 1999 advising a members’ meeting to be held on 17 December 1999 and the minutes of that meeting should have been intolerable to him, because they made known to him that 300 new shares would be allotted by Ives. 

72.Unless So intended to subscribe for his own portion, his percentage holding in Ives would be diluted from 39 per cent to less than 14 per cent when Au Yeung and Kan subscribed for their portions of new shares.  However, if Au Yeung and Kan should also subscribe for So’s unwanted portion, So’s percentage holding could be reduced to less than 10 per cent.  If there was indeed the oral shareholders’ agreement, there was absolutely no reason why he would not have objected to the allotment of new shares as proposed.  This was particularly so when he was advised by solicitors.

73.However, the meeting for the allotment was convened and the resolution passed without any objection by So or his solicitors either before the meeting or within a reasonable time thereafter.  So also did not subscribe for any new shares and his holding was diluted. 

74.Even if he did not want to take any action that would rock the boat or affect the progress of the project, there was still no reason at all for him to have kept quiet.  A solicitors’ letter to remind Au Yeung and Kan of the shareholders’ agreement, to register his complaint of breach and to reserve his rights would not have rocked the boat.  His solicitors should know very well that silence at this stage could work against him if Au Yeung and Kan should deny the existence of the agreement afterwards.

75.The subsequent board meeting on 20 December 1999, which approved the transfer of shares by Maple Capital to Tai Wah, was again a blatant breach of the alleged shareholders’ agreement, but the notice of meeting again did not evoke any objection from So or his solicitors. 

76.Despite So’s desire not to rock the boat and thus not raised any objection, his solicitors on 3 January 2000 did object to the validity of the resolutions of a few board meetings and the members’ meeting on 17 December 1999, but the letter did not mention a shareholders’ agreement at all.  The ground of objection was the length of notice of meeting.  If there was the shareholders’ agreement, one really wonders why it was still not mentioned and being relied on as the main ground of objection.

77.On 2 February 2000, So’s solicitors alleged to the solicitors of Au Yeung and Kan that the transfers of shares, the increase in authorised capital and allotment of new shares by Ives violated the stratum for setting-up of Ives.  However, when the solicitors of Au Yeung and Kan sought clarification for the basis of the charge, none was provided by So’s solicitors.  Again, if there was the shareholders’ agreement, one wonders why it was not referred to in answer to the request for clarification. 

78.It was only in his affidavit made on 7 June 2000 in the BVI proceedings that he referred to the transfer of shares to Maple Capital, appointments of Alassio and Alfresco, allotment of new shares and transfer of shares to Tai Wah as violations of the rationale for setting up Ives and the agreement and understanding that the three of them would together operate Ives and carry out the project, but he still did not provide the details of the making of the shareholders’ agreement or its full terms.  If the three of them had indeed made the agreement with specific terms as now alleged, it would have been natural for him to provide the details in this affidavit.

79.He also said in this affidavit that the transfers of shares by Andaman and Kan to Maple Capital were deviations from the original spirit of the shareholders.  If there was indeed the alleged shareholders’ agreement, I do not think he would just talk about the esoteric spirit rather than the concrete details of the making of the agreement and its full terms. 

80.Even when he went to the shareholders’ meeting on 28 July 2000 and gave a reason on why Maple Capital was not a shareholder and thus no members’ meeting could be convened, he still did not refer to the shareholders’ agreement as a ground.

81.Though he did not refer to the shareholders’ agreement in the various letters and the BVI affidavit, one can detect the development of such an argument from the first complaint letter dated 3 January 2000 to this affidavit.  This argument was gradually taking shape and was nearly matured in So’s BVI petition for winding-up.  It was further refined in the statement of claim filed on 25 January 2005.

82.Mr Chan for the defendants further pointed out that there were discrepancies between the alleged terms pleaded in So’s BVI petition and those in the re-amended statement of claim.  I think these discrepancies were relatively minor.  There were more discrepancies between the terms pleaded in the re-amended statement of claim and in the oral evidence.  Such is to be expected as there were quite a number of terms with some of them being quite technical.  Even if there was indeed the agreement, such discrepancies between the actual terms and the oral evidence are to be expected.  But the difficulty of memorising so many terms makes it plain that it was unlikely for them to have agreed on those terms by word of mouth only instead of reducing them into writing and appending their signatures underneath them.

83.There is one other matter in So’s evidence that I would also discuss.  He said he attended a conciliation meeting on 7 April 2000.  Those present included Mr Tsang Wing-wah of the Tsangs, Mr Leung of Super Town and Au Yeung.  He said he had told the persons at the meeting about the oral shareholders’ agreement and suggested to record the same in writing.  He said he then tabled the draft shareholders’ agreement which was prepared on the basis of the oral agreement.  He further said that Au Yeung did not deny what he said but refused to discuss the issue. 

84.However, the draft he referred to has not been produced at this trial.  Neither Tsang Wing-wah nor Mr Leung was called to give evidence on this.  There is also a set of draft confidential minutes of this meeting which was dated 8 April 2000.  The relevant parts of the draft minutes stated the following:

“(e) A draft shareholder agreement was present (the content was not shown) and he (So) proposed all shareholders in Ives Developments Limited to enter into such an agreement with his shareholding remaining to be 39 per cent and prepare to pay interest for the amount of fund involved in his part (details terms and conditions not mentioned).

3. Mr Leung stated he is not in position to comment on the content of Mr So’s statements but subjected to circumstances beyond his knowledge, he would recommend a settlement on the matter by some form of shareholder agreement to the best interest of parties concerned.

4. Mr Y K Au Yeung expressed reservations on Mr So’s statement and not prepared to elaborate further as these are internal disputes between members of Ives Developments Limited.”

85.The content of this draft contradicted So’s evidence.  Nobody referred to this draft at the trial though it is in the bundle of documents.  I therefore have doubt on So’s evidence on this meeting.  I think he did have a draft shareholders’ agreement which he wanted the three of them to enter into so as to resuscitate his 39 per cent interest, but he should not have referred to any previous oral shareholders’ agreement.  I note that he still did not refer to the particulars of the making and the detailed terms of this agreement even in his BVI affidavit made in June 2000.  This meeting on 7 April and the draft agreement he had brought along might form one stage in the development of his case of an oral shareholders’ agreement.

86.On the whole, I find So’s case and his evidence that the three of them had made an oral agreement over a few meetings prior to 1 March 1996 incredible. 

Analysis of and conclusion on the evidence of the plaintiff’s other witnesses

87.However, I must also consider the evidence of his other witnesses before deciding the issue.  He called a Mr Alvin Lam Kwing-wai who is also known as Leslie Lam Kwing-wai.  Lam was one of the partners of So and Kan in the Sheung Shui investment project.  Mr Lam’s witness statement contained the full particulars of an alleged oral shareholders’ agreement for that investment.  However, he clarified in oral evidence that when he read the draft of the witness statement, he found that the terms tallied with the spirit of the investment, he thus accepted it as his evidence.  His oral evidence made it clear that there was never any occasion where the investors had sat together to knock out those terms. 

88.In fact, So, Kan and Lam had prior to 1994 worked together in a few investments.  Kan was responsible for public relations and entertainment.  So was responsible for application for change of user of the agricultural lots, management and operation.  Lam was the financier.  In fact, Lam had given So and Kan interest-free loans in this project.  They were then merely acquiring the lots for sale to a developer after changing the user.  They never developed the lots.  As Lam was the financier, there was also no question or need for raising funds from outside sources.

89.Lam’s evidence was that they would use one company for one project as the company holding the lots would be sold to a developer after the user was changed.  The thrust of his evidence was that they were long-time buddies who had co-operated for years.  They would work on the project in the same way as before and everything was in their tacit understanding or, in his own words, “盡在不言中”.  There was thus no evidence that they had expressly agreed on the terms as stated in his witness statement. 

90.He added in re-examination that if there should be addition of new shareholders, sale of shares or raising finance, there should be unanimous agreement.  However, their projects at that time were for shorter terms without any development after change of user.  Lam was also the financier.  I doubt whether there was any need for them to so agree.  I place weight on Lam’s evidence in cross-examination rather than his witness statement or re-examination.  I do not think his evidence in cross-examination can assist So’s case.

91.I also consider the Gun Club project.  It was merely a project for the three of them to provide professional services to the club to renew its lease and to update its facilities.  The club never asked them to undertake any development.  I do not think they would have entered into the kind of shareholders’ agreement as alleged for this property.  The Gun Club project was the only one that Au Yeung was involved before this Heung Fun Liu project.

92.The next witness was a Mr Lung Siu-wing, who was an assistant solicitor in the employ of Ives’ former solicitors.  In his witness statement, he said in early 1999, Au Yeung told him that Au Yeung and Kan intended to borrow a bank loan through Ives and Au Yeung requested him to convey this to So.  When he told So about this, So raised a serious objection on the ground that it was contrary to the shareholders’ agreement that the shareholders themselves should provide funds through their own resources and they should not pledge the shares of Ives.

93.When Lung gave evidence, he voluntarily retracted this.  He said he could only remember that So was very unhappy about the borrowing of a bank loan and said that they had agreed not to raise loans.  Even accepting this evidence, it only proves that there was an agreement not to raise outside loans by pledging the shares of Ives.  It still did not prove the shareholders’ agreement as alleged.

94.I also think that it was unlikely that they would have agreed not to use the shares of Ives or the interest of Ives in the Property as security to raise loans.  The evidence is plain that So was eager to develop the Property with the Tsangs.  The funds required from Ives for a full development could be many tens of millions.  Even listed developers would rely on building mortgages to fund their developments.  I doubt if the three of them would have entered into such a term to tie their hands.  It was more likely than not that they would have left it to be discussed if the need should arise.  This was very probable in the light of the very close relationship they had, particularly as between So and Kan. 

95.If So should have told Lung that the three of them had agreed not to raise outside funding by pledging the shares of Ives, I would hold that So was not telling Lung the truth.  It was more likely than not that So wanted to cause trouble to Au Yeung and Kan as he had fallen out with Kan whilst Au Yeung appeared to be on Kan’s side.

96.So also called a member of his staff Miss Leung Siu-ching.  Miss Leung said that in September 1999, So told her that Au Yeung and Kan intended to borrow money from bank and that was in breach of their agreement.  For the same reason I applied on what So had told Lung, I do not think So was telling the truth to Miss Leung if he had indeed told her so. 

97.What he had allegedly said to Lung and Leung cannot change the picture painted by his absolute inaction since mid-1998 to the end of 1999.  His case of a shareholders’ agreement only began its metamorphosis from early January onwards.

98.So has also called Mr Stan Fung to challenge the credibility of Kan.  Fung is the boss of Team 73 HK.  The story is about a debit note for $400,000 issued by Team 73 HK to Glad Link for services and a promissory note signed by Fung in favour of Kan to repay Kan $350,000.  Fung said this was a scheme by Kan to milk Ives.  However, the bulk of Ives’ shares are owned by Au Yeung and Kan.  So only had less than 14 per cent.  It does not appear to be an ingenious plan from Kan’s angle unless he wanted to cheat Au Yeung as well, but this is a relatively small sum compared with what they would gain from the project. 

99.I think Fung’s evidence is open to doubt.  I also do not think Fung would have signed a promissory note for $350,000 without a good reason but just to assist Kan in his plot against his fellow shareholders. 

100.However, I also have doubt over the $400,000 debit note.  Team 73 HK had issued quotations to Glad Link to provide service in the change of user project.  Those quotations were only for sums less than 40,000 and the first sum of 38,000 was slashed to 33,000 only.  There is, however, nothing to support this debit note.  Kan said that Team 73 HK had made four submissions of the application for change of user and it was reasonable to pay Fung $100,000 for each submission.  There were in fact three submissions of the application and one submission of supplemental information by Team 73 HK.  If that should be the case and in the light of the services provided in the quotations and the fees thereof, the submissions were made in an extremely expensive manner.  I therefore find Kan’s evidence on this doubtful. 

101.I do not think I have heard sufficient evidence to enable me to adjudicate on the genuineness or otherwise of the debit note or the promissory note.  However, this doubt does not affect the outcome of this case as my finding in this case is mainly based on the evidence of So. 

The plaintiff’s criticisms of the evidence of the defence

102.I would also deal with Mr Chow’s submissions.  Mr Chow referred to the defendants’ case that they had only agreed to acquire Ives to purchase ¹/₃ share of the Property, to distribute Ives’ shares amongst themselves and to have the three of them to act as the initial directors.  Mr Chow said that such version of evidence was inherently improbable.  I cannot agree.  When Glad Link entered into the agreement with Konpar and Land Resources in March 1996, the three of them still did not know how far they would go in this project.  They could sell after user was changed or they might proceed to putting up blocks of flats.  In the light of the close relationship between So and Kan and the two of them owned 74 per cent of Ives, they had every reason to believe that problems could be resolved in board meetings.  At that time, So would not have dreamed that he would fall out with Kan and that Au Yeung would side with Kan.

103.To raise loans from banks to erect developments is common in Hong Kong.  Most building developments are subject to building mortgages.  I do not see why the three of them needed any specific agreement on outside finance back in early 1996. 

104.Mr Chow also raised some relatively minor criticisms on the evidence of Au Yeung and Kan, especially on whether they had been informed by So the terms for the provision of the professional service to the Tsangs in the course of their negotiation and on the concrete basis for So to have a larger share in Ives than Kan.  I think these are relatively minor matters that would not cast grave doubt on the credibility of Au Yeung and Kan.  On the negotiation for terms of service with the Tsangs, it took place 10 years ago.  I doubt if anyone would have a crystal clear memory of it.  On the distribution of shares to So and Kan, given their close relationship, I do not think they needed an extremely good reason to allow So to have a few more per cents. 

105.I also think that the evidence suggested So was in the part-time employ of In Yam, but given the close relationship between him and Kan, he was not required to closely observe the etiquette of an employee.

Findings and order

106.Finally, I find that there was no oral shareholders’ agreement as pleaded in the re-amended statement of claim and I find against So on the issue that I have to find in this trial.  I also order the lis pendens registered against the Property be vacated from the Land Registry.

Costs

107.I dismiss the plaintiff’s claim with costs of the action and the costs of that part of the counterclaim that relates to the vacation of the lis pendens.   

Mr Anderson Chow, SC, and Mr Bernard Yuen, instructed by Messrs Y S Lau & Partners, for the Plaintiff

Mr Warren Chan, SC, and Mr M C Law, instructed by Messrs Woo, Kwan, Lee & Lo, for all the Defendants