Talal El Makdessi v. Team Y&R Holdings Hong Kong Ltd

HCMP 1054/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1054 OF 2011

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J U D G M E N T

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1.In these proceedings, Mr Talal El Makdessi (“Mr El Makdessi”), a 20% shareholder in Team Y&R Holdings Hong Kong Ltd (“Team Y&R”), seeks inspection of certain accounting and other records of Team Y&R pursuant to section 152FA of the Companies Ordinance (Cap 32).

2.Mr El Makdessi was one of the founders of a number of businesses involved in advertising and marketing in the Middle East. By a sale and purchase agreement dated 28 February 2008 (“the SPA”), he and the other founder of those businesses, a Mr Joseph Ghossoub (“Mr Ghossoub”), agreed to sell a majority stake in the businesses to the WPP Group, a well known international name in the advertising and marketing industry. Team Y&R was incorporated in Hong Kong in November 2007 to serve as a vehicle for the transfer of part of Mr El Makdessi’s and Mr Ghossoub’s interests in those businesses to WPP and to form part of the corporate structure following a restructuring of those businesses.

3.In summary, the terms of the sale under the SPA (so far as relevant for present purposes) were as follows:-

(1)  WPP Group would acquire a 60% interest in the businesses, which were to be held through Team Y&R.  WPP Group therefore acquired 60% of the shares in Team Y&R, which it held through Cavendish Square Holdings B V (“Cavendish”) as to 47.4% and Young & Rubicam International Group B V (“Young & Rubicam International") as to 12.6%.  Mr El Makdessi and Mr Ghossoub each retained a 20% interest in the businesses, by each obtaining a 20% shareholding in Team Y&R.

(2)  The consideration for the 60% interest in the businesses to be acquired by WPP Group was to be paid in four stages. Each of Mr El Makdessi and Mr Ghossoub was to receive:-

(a)  An initial payment (called the Completion Payment) of US$34 million on completion of the SPA;

(b)  A further payment (called the Second Payment) of US$31.5 million to be paid into an escrow account on completion of the SPA (the SPA contained terms for the operation of the escrow account and the release of funds in it to Mr El Makdessi and Mr Ghossoub).

(c)  A third payment (called the Interim Payment), to be paid on its due date, which was to be calculated by a formula based on Team Y&R’s OPAT – this being its audited consolidated operating profit calculated in accordance with international financial reporting standards.  The formula was:-

(8 x Average 2007-2009 OPAT x 47.4%) – US$63 million

(d)  A fourth, and final, payment (called the Final Payment), to be paid on its due date, which was also to be calculated by reference to Team Y&R’s OPAT.  The formula for the Final Payment was:-

(M x Average 2007-2011 OPAT x 47.4%) – (US$63 million + the amount of the Interim Payment).

(3)  Clause 15 of the SPA gave Mr El Makdessi a put option (“the Put Option”) to sell all or part of his 20% shareholding in Team Y&R to Cavendish.  The Put Option had to be exercised in the first three months of any calendar year and, if exercised, would entitle Mr El Makdessi to payment of an amount calculated by reference to Team Y&R’s average OPAT over a four year period – from the financial year prior to the exercise of the Put Option to the financial year two years after its exercise.  Thus, if the Put Option were exercised between, say, January and March 2011, the amount would be calculated by reference to Team Y&R’s average OPAT from 2010 to 2013.

(4)  Mr El Makdessi was to be a director of Team Y&R, and was under certain obligations regarding non-competition with the businesses transferred to be held under the Team Y&R group structure.

(5)  In the event that Mr El Makdessi was in breach of his obligations under the SPA, he would not be entitled to the Interim and Final Payments, and he would be required to sell his shareholdings in Team Y&R to Cavendish at a price known as the Defaulting Shareholder Option Price, which was based on the net asset value of Team Y&R.  If such a situation were to arise, it would follow that Mr El Makdessi would not be entitled to exercise the Put Option.

4.Following completion of the SPA, Mr El Makdessi was paid the Completion Payment.  The Second Payment was also paid into the escrow account, and has to a large extent been released to Mr El Makdessi, although an amount of US$4 million has not yet been paid to him.

5.Mr El Makdessi also became a director (and non‑executive Chairman) of Team Y&R.  However, it appears that his role in these positions was short-lived.  According to Mr El Makdessi, at the first board meeting of Team Y&R in April 2009, he was pressured to resign.  This led to his resignation as non-executive Chairman in July 2009, after which he says he was no longer involved in the management or affairs of Team Y&R, although he was not formally removed as a director until April 2011.  Cavendish and Team Y&R, however, say that Mr El Makdessi has been in serious breach of his non-competition obligations (a contention which Mr El Makdessi denies).

6.These allegations would appear to be the reason why the balance of the Second Payment has not been paid to Mr El Makdessi, and nothing has been paid to him in relation to the Interim Payment or the Final Payment.  In 2011, Cavendish and Team Y&R commenced proceedings against Mr El Makdessi in the English High Court, alleging that Mr El Makdessi was in breach of his obligations under the SPA; that he was not, in consequence, entitled to any further payments; and that Cavendish was entitled to acquire his 20% shareholding in Team Y&R at the Defaulting Shareholder Option Price.  These proceedings are being defended by Mr El Makdessi, who has counterclaimed for payment of the balance of the Second Payment, and payment of the Interim and Final Payments as well.  At Mr El Makdessi’s suggestion, the English proceedings have been made the subject of an order for a split trial, with questions of liability to be determined first, and questions of quantum to be stood over until later.  The trial on liability (which will involve a substantial hearing) is presently expected to take place in October or November this year.  It appears that, as a result of the split trial order, discovery in the English proceedings has been similarly split, with discovery and disclosure of documents relating to quantum postponed until after the issue of liability has been determined.

7.Quite apart from these disputes, Team Y&R fell into breach of its obligations under the Companies Ordinance in relation to the holding of general meetings, and in relation to its accounts.  No audited accounts had been prepared in respect of it prior to the commencement of these proceedings by Mr El Makdessi in June 2011, and accordingly, its shareholders had never received any such accounts.

8.Dissatisfied with the failure of Team Y&R to provide him with even its audited accounts, Mr El Makdessi commenced these proceedings by issuing an Originating Summons dated 8 June 2011.  Initially, he sought orders for the convening of general meetings for the purpose of laying before the shareholders of Team Y&R its audited accounts for the financial years ending 31 December 2007 through to 31 December 2010, provision to its shareholders in advance of such general meetings of the audited accounts for those financial years, and disclosure of certain records of Team Y&R to him and his professional advisers.  At this stage, disclosure was sought of the consolidated audited financial statements of Team Y&R for the financial years ending 31 December 2007, 2008, 2009 and 2010 (or unaudited financial statements if no audited ones were available), consolidated and/or combination trial balances for Team Y&R’s balance sheets and income statements for those financial years, board minutes and papers, and documents recording payments of dividends or other returns of capital in respect of the financial years in question.

9.The Originating Summons was first heard before me on 16 November 2011.  Shortly before that hearing, some accounting information was made available to Mr El Makdessi.  However, according to Mr El Makdessi and his advisers the information provided was insufficient, and the timetable proposed for the provision of audited accounts and calling of general meetings was too long.  When it became apparent that matters could not be resolved by agreement, Team Y&R sought to file evidence out of time to oppose the application.  In the event, at the hearing on 16 November 2011, I gave leave for the filing of such evidence, and gave directions to enable Mr El Makdessi to file evidence in reply, and for a hearing date to be fixed.  Team Y&R also undertook to supply the audited accounts for the financial years in question as soon as possible, and in any event by 31 January 2012, and to convene general meetings for the purpose of considering the accounts so supplied.  Such proceedings were issued in February 2012, and were heard at the same time as this application, with orders being made to enable such meetings to be held out of time.

10.Following the filing of Mr El Makdessi’s reply evidence, Mr El Makdessi applied for leave to amend his Originating Summons to reflect the fact that meetings would be held, and to extend the range of Team Y&R’s records in respect of which he sought inspection. This was not opposed, and on 29 March 2012, Mr El Makdessi filed his Amended Originating Summons.  This sought inspection of:-

(1)  Audited financial statements of Team Y&R and all Group Companies (as defined in the SPA) for the financial years ended 31 December 2007, 2008, 2009 and 2010, and if these were not available, unaudited financial statements.

(2)  Consolidation and/or combination trial balances for balance sheets and income statements of Team Y&R and each subsidiary in the Group for the same financial years.

(3)  Supporting schedules to the adjustments made in consolidation workbooks including narrations, amount applicable to each subsidiary and the nature and reason for the adjustments.

(4)  Board minutes and papers of Team Y&R.

(5)  Documents recording dividends or returns of capital (including trial balances, ledgers and shareholders’ current accounts) of Team Y&R and other Group Companies for the same financial years.

(6)  Copies of detailed ledger accounts showing all transactions recorded for shareholders and related parties in the same financial years.

(7)  Copies of management accounts and reports for the same financial years.

(8)  Copy of a Group Companies chart showing the relationship between the various subsidiaries of Team Y&R in each of the financial years mentioned above.

(9)  An executive management report provided in a board meeting held on 20 April 2009.

11.All of these documents were said to be needed to enable Mr El Makdessi to try to come to an assessment of the value of his shareholding in Team Y&R.  In particular, they (or most of them) were said to be necessary in order to enable him and his advisers to attempt to assess Team Y&R’s OPAT for the years 2007 through to 2010, OPAT being, as we have seen, something that was of prime relevance to the calculation of the amounts of the Interim and Financial Payments, and the amount that would be payable if Mr El Makdessi were to exercise the Put Option.  Evidence filed on behalf of Mr El Makdessi in early December 2011 by Ms Catherine Williams, a forensic accountant engaged by him, explained in some detail why the audited accounts (some of which had been made available to her either in draft or final form), and the documents that Team Y&R had made available for inspection, were not sufficient to enable OPAT to be worked out, and why the additional documents sought were relevant for this purpose.  No evidence was filed by Team Y&R to dispute what she has said, and I accordingly accept Ms Williams’ evidence in this regard.

12.Mr El Makdessi says that he wishes to have access to the records sought for the following purposes:-

(1)  To enable him to work out the amount that he is entitled to receive by way of the Interim and Final Payments;

(2)  To enable him to work out the amount of the Defaulting Shareholders Option Price (although he denies that he is a Defaulting Shareholder); and

(3)  To enable him to estimate the amount to which he might be entitled under the Put Option, so as to enable him to consider whether or not he should exercise it.

13.Ms Lam, who appeared for Mr El Makdessi, submitted that these were all proper purposes for inspection, which were pursued in good faith by Mr El Makdessi.  As she put it, in broader terms, the purpose of seeking inspection of the records sought is to enable Mr El Makdessi to ascertain the value of his shareholdings in Team Y&R, both those which he still retains, and those which he has disposed of under the SPA (for which he says he is entitled to further payments).

14.For Team Y&R, Mr Dawes opposed the application.  He submitted that Mr El Makdessi could not show that he had a proper purpose in seeking the information sought.  Mr Dawes submitted:-

(1)  That seeking to ascertain the OPAT values for the purpose of calculating the amount of the Interim and Final Payments was not a proper purpose, as that did not relate to, or engage, any interest of Mr El Makdessi as a shareholder of Team Y&R, since those payments were in respect of shares which he had (in effect) disposed of under the SPA, and in respect of which he was no longer a shareholder (strictly speaking, as Team Y&R only came into existence as a result of the SPA, Mr El Makdessi did not sell shares in it to the WPP Group, and was never an owner of any part of the shareholding now held by Cavendish and Young & Rubicam International).

(2)  The rights to the Interim and Final Payments (if any) arose as contractual rights under the SPA, so that the proper course to obtain information as to the value of those rights was through discovery in the English proceedings at the appropriate time, and not by an application under section 152FA.  As there had been a split trial, and split discovery, in those proceedings, Mr El Makdessi should not be permitted to get around the split discovery in this way.  In any event, calculation of the Interim and Final Payments would only become relevant if Mr El Makdessi succeeded on liability, which had not happened yet, so that there was no need to consider these matters at this stage.

(3)  Seeking to calculate OPAT values for the financial years 2007 to 2010 was not necessary for calculation of the Put Option consideration either, because:-

(a)  Mr El Makdessi had not exercised the Put Option yet, and the earliest he could do so would now be in early 2013.

(b)  Mr El Makdessi was not entitled to exercise the Put Option at all as he was a Defaulting Shareholder, and was liable to sell his shares to Cavendish at the Defaulting Shareholder Option Price.  Until such time as he succeeded on the question of liability, there could be no question of his exercising the Put Option.

(c)  In any event, even if Mr El Makdessi were to purport to exercise the Put Option at the next available opportunity (in early 2013), the relevant OPAT values for the calculation of the price to be paid to him would be those for 2012 to 2015 (information in relation to which would not be available for some time), while the documents sought did not relate to that period, but to the period from 2007 to 2010, which was irrelevant for this purpose.

15.Section 152FA provides that on the application by members holding not less than one-fortieth of the voting rights in a specified corporation, the court may made an order authorising the applicant or some other person (acting on the applicant’s behalf) to inspect any records of the specified corporation.  However, section 152FA(3) provides that such an order may only be made if the court is satisfied that the application is made in good faith, and that the inspection applied for is for a proper purpose. Here, Mr El Makdessi holds 20% of the shares in Team Y&R, which is a specified corporation as it was incorporated in Hong Kong.  He is therefore qualified to make the application.  The question is whether he satisfies the requirements of good faith and proper purpose.

16.Section 152FA has now been considered in a number of Hong Kong authorities.  In Re Lehman Brown Ltd [2011] 5 HKLRD 668, Chu JA said:-

“33. Under s 152FA, a … shareholder does not prima facie enjoy a right of inspection. He is required to make an application and to satisfy the court that he is acting in good faith and the inspection is for a proper purpose. ... The burden is on the applying member to demonstrate that his application is made in good faith and for proper purposes. It is only when he has discharged the burden that an order for inspection may be granted.

34. We accept that s 152FA expresses a composite notion so that the inspection is to be made in good faith and for a proper purpose. This does not however mean that if a proper purpose is proved, a case of good faith shall follow or is to be assumed. The position is [as] explained by Brooking J in Knightswood Nominees Pty Ltd v Sherwin Pastoral Co Ltd (1989) 15 ACLR 151, 156. [citation omitted] … Brooking J went on to point out that what is capable of being regarded as a proper purpose “must be affected by the consideration that the right to apply for an order is given only to members of the company”, agreeing with the position in the United States that a proper purpose “must be a purpose ‘germane to his status as a stockholder’, or ‘reasonably related to the interest of such person as a member or stockholder’, or ‘reasonably related to the status of a stockholder’.”

35.  An applicant must therefore show that his application is made not out of a mere desire to obtain information, that the purpose of the inspection must be to assist him in his capacity as a member, and … that the proper purpose set up must be genuine and not a pretence.”

17.Here, Mr El Makdessi’s stated purpose for seeking inspection of the records sought is to enable him to assess the value of his shares in Team Y&R (both those still held, and those which he suggests have effectively been disposed of).  In principle, at least in respect of the shares which he currently owns, this must, I think, be a proper purpose, particularly where the possibility of a disposal of that investment is in prospect.  The value of a shareholder’s stake in a company is, I think, self-evidently germane to his interests as a shareholder.  In the first instance decision in Re Lehman Brown [2011] 4 HKLRD 237, Deputy Judge Coleman recognised that a genuinely held desire to assess the value of an applicant’s shareholding, for example in the context of settlement of a shareholders’ dispute, could be a “proper purpose” for the purposes of section 152FA (see paragraph 75 of the judgment).  Although this is not a shareholders’ dispute of the nature that more commonly arises under section 168A of the Companies Ordinance, or in windings up on the just and equitable ground, it seems to me that in principle, the desire to value his shares in Team Y&R does constitute a proper purpose within the meaning of section 152FA.

18.In saying this, I would accept that if the only purpose put forward by Mr El Makdessi were that he wished to have inspection for the purpose of carrying out calculations of OPAT in order to ascertain the amounts of the Interim and Final Payments under the SPA, this would not amount to a proper purpose on his part, since it would relate not to his status as a shareholder of Team Y&R, but to the price to be paid for his interest in the businesses partially disposed of.  But that is not the only purpose that is put forward, and the fact is that Mr El Makdessi remains, at present, a significant shareholder in Team Y&R.

19.In my view, the further purposes that Mr El Makdessi seeks to advance – of ascertaining the correct value to be ascribed to the Defaulting Shareholder Option Price, and the assessment of the likely (or approximate) price that he might expect to option under the Put Option, so as to inform his consideration of whether or not to exercise it, are proper purposes within section 152FA, as they relate to the valuation of his shareholding in Team Y&R.  It suffices to focus on the latter of these purposes, since that is the one for which the documents sought are said to be necessary.

20.As far as the latter of those purposes is concerned, I do not accept the submissions of Mr Dawes as to why it should not be regarded as a proper purpose:-

(1)  As to the point that Mr El Makdessi has not exercised the Put Option, while it is correct that he has not in fact exercised the Put Option, it seems to me to be reasonable for him to wish to be able to assess the likely price that he might obtain for his shares in order to consider whether or not to exercise it.

(2)  As to the argument that he is a Defaulting Shareholder, and hence not entitled to exercise the Put Option (since he is liable to sell his shares to Cavendish at the Defaulting Shareholder Option Price), I do not think that the fact that Team Y&R and Cavendish regard him as a Defaulting Shareholder makes a difference. Whether or not they are right in that contention is not a matter for determination in these proceedings: it will be considered and dealt with in the forthcoming trial of the English proceedings.  Merely because Team Y&R and Cavendish consider that he is a Defaulting Shareholder does not make Mr El Makdessi one.  Until such time as this is determined against him, it seems to me that he is in principle entitled to consider whether or not, and if he thinks it appropriate to do so, to exercise the Put Option.  No doubt if he were to do this, Cavendish would decline to comply with any demand that it should purchase his shares on the terms of the Put Option, but there is no reason why Mr El Makdessi should not seek to crystallise the position by exercising it if he thinks it in his best interests to do so.

(3)  As for the argument that the records sought under this application are irrelevant to the assessment of the value of the shares which are the subject of the Put Option, since they relate to financial years earlier than those that are relevant for the calculation of the Put Option price, I am persuaded by Ms Lam that notwithstanding that the documents sought do not relate to the years that are to be taken into account for the calculation of the Put Option price, they are still likely to be of assistance to Mr El Makdessi in his consideration of what to do about the Put Option, since they are likely to represent the best information available as to Team Y&R’s financial performance in recent years, and as such are likely to provide some guide (even if an imperfect one) as to Team Y&R’s OPAT for the years 2012 to 2015.  In whichever year Mr El Makdessi exercises the Put Option, he is unlikely to have available to him the necessary information to fully calculate the relevant OPAT figures.  As the Put Option must be exercised between January and March in any given year, it is extremely unlikely that audited accounts for the year ended the previous December will be available to Mr El Makdessi, so as to enable him to work out at least the first of the four relevant years’ OPAT.  That being so, it would be reasonable for him to seek to assess the likely value of the Put Option by reference to such information and records as are available.  In these circumstances, I am satisfied that this objective of Mr El Makdessi’s constitutes a proper purpose for seeking inspection.

21.Further, I do not think that the fact that the English proceedings are ongoing, and that a split trial has been ordered, so that disclosure of the documents sought through the discovery process in those proceedings is not presently available, means that Mr El Makdessi’s purpose is not a proper one, or that he should be considered to be acting otherwise than in good faith.  As Ms Lam submitted, it may well be of assistance to Mr El Makdessi to have access to the records sought, even in the context of the English proceedings, as it is likely to enable him better to inform himself as to his position in respect of those proceedings.  In particular, it may well enable him to make an assessment of the value of his 20% shareholding on the basis of an exercise of the Put Option, and on the basis of the Defaulting Shareholder Option Price.  Depending on the outcome of that comparison, there may be better prospects of an overall settlement of the dispute between him and Cavendish and Team Y&R.  The information provided will also, incidentally, enable him to assess what is at stake in terms of the Interim and Final Payments, which is also likely to be relevant in the context of a possible settlement.

22.More fundamentally, I have some difficulty in seeing what advantage might accrue to Mr El Makdessi in the context of the English proceedings if he were allowed to inspect the records which he now seeks –none was articulated by Mr Dawes.  In those circumstances, I do not think that the fact that the documents sought would not be available on discovery in the English proceedings at this stage is a particularly relevant consideration, and certainly not something that should lead to the conclusion that Mr El Makdessi is acting otherwise than in good faith.

23.I am therefore satisfied that Mr El Makdessi has shown that he seeks to inspect the documents sought under the Amended Originating Summons in good faith, and for a proper purpose.  I shall therefore make an order in terms of paragraph (3) of the Amended Originating Summons, with liberty to the parties to apply for the purpose of fixing the time frame within which such inspection should be afforded to Mr El Makdessi or his agents.  So far as costs are concerned, as I indicated at the hearing, I do not propose to make an order nisi and the parties are directed to fix a hearing date, with a suitable amount of time reserved for the hearing, at which the question of costs can be considered.  If directions are needed as to this, these can either be given on paper, or at a short hearing arranged for that purpose.

Ms Rachel Lam, instructed by Clifford Chance, for the plaintiff

Mr Victor Dawes, instructed by Deacons, for the defendant