Veron International Ltd v. Rcg Holdings Ltd
Read the full judgment text of CACV 126/2012 on BabelCite. This Court of Appeal judgment was delivered on 30 May 2013.
1. I have read, in draft, the judgment of Yuen JA. I agree with it and an order will be made in term of paragraphs 39-41 hereof.
Cited by 3 cases · Cites 2 cases
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CACV 126/2012 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF APPEAL CIVIL APPEAL NO. 126 OF 2012 (ON APPEAL FROM HCMP NO. 343 OF 2011) ____________
______________ J U D G M E N T ______________ Hon Yeung V-P: 1.I have read, in draft, the judgment of Yuen JA. I agree with it and an order will be made in term of paragraphs 39-41 hereof. Hon. Yuen JA: 2.This is an appeal from a judgment of Barma J (now Barma JA) refusing an application for an order under s.152FA Companies Ordinance (“the Ordinance”) for inspection of records of a company. Introduction 3.The company from which inspection was sought is RCG Holdings Ltd (“the Company”). It was first listed on the AIM (Alternative Investment Market) of the London Stock Exchange in July 2004 and on the PLUS market also on the same exchange in June 2007, and then on the main board of the Hong Kong Stock Exchange by way of introduction on 10 February 2009. 4.The applicant for inspection is Veron International Ltd, the single largest shareholder of the Company. Between 2005 and 2007, it acquired a substantial shareholding in the Company, reaching more than 27%. Its shareholding in the Company has since been reduced to 16% (according to the Company, 19%). It does not have a seat on the board. 5.1 The application for inspection revolved around the Company’s acquisition (through a subsidiary) of shares in two companies, Vast Base Technology Ltd (“VB”) and Strong Aim Ltd (“SA”). 5.2 Both VB and SA are BVI companies. Both were involved with Radio Frequency Identification (“RFID”) technology, a technology for data acquisition by way of radio frequency transponders and a host system. SA’s business involved the use of RFID technology in connection with the use of mobiles phones as RFID reading devices. Vast Base 6.1 The Company acquired 80% of the shares of VB between December 2007 and November 2008 for a total consideration of about $735m in cash. Three years later, the Company disposed of the shares for $50,000. 6.2 The Applicant claims that this showed that the entire investment has been lost. 6.3 Mr Coleman leading counsel for the Company said in his skeleton submissions that “this is untrue and misleading as it ignores the profits generated by [VB] since the acquisition (which would be no less than HK$250 million if nothing else than by reason of the profits guarantee)”. 6.4 However there is no evidence before us that any profits had been generated. The “profits guarantee” at best amounted to no more than a reduction in the acquisition cost. Strong Arm 7.1 As for SA, the Company acquired 70% of the shares in 2010 for a total consideration of $185m, comprising more than $37m in cash and the rest in shares issued at a price of $8.2. An announcement was made in this regard on 26 April 2010. One year later, the Company disposed of the shares for $3,000. 7.2 There is some evidence that during the year ended 31 December 2010, a profit of $149m was made. However the Company has disclosed (albeit after the judgment) that 6 months later, at the 2nd quarter of 2011, SA was loss-making (although the reason for that is disputed). The Applicant’s case 8.1 According to the Applicant, it sought inspection of the Company’s records relating to the acquisition of these 2 investments, not only because of the substantial losses made and their disposal (which came after the proceedings commenced), but also because of certain matters (discussed below) which led to a reasonable suspicion that the Company’s directors had failed to perform their duties to the Company when they decided to make these investments. 8.2 For convenience, this has been referred to as the “directors’ due diligence” point. It should however be noted that it is common ground that there is no established definition of the term “due diligence”. One must therefore be careful when using the term. 8.3 The Company says “due diligence” had been performed by a firm of Malaysian lawyers before the Company acquired VB, and by a firm of PRC lawyers before it acquired SA. 8.4 However what the Applicant means by that term in the present case is an exercise that the directors should have undertaken to assess the risks and verify matters which were material to the decision whether to acquire shares in VB and SA. The Applicant says that it has a reasonable suspicion that the directors had not performed that duty and the application for inspection of the Company’s records was for the Applicant
Concerns over the Company’s acquisition of VB and SA 9.The Applicant’s concern over the Company’s acquisition of VB stemmed from discrepancies between two press releases and the Company’s listing document. 10.1 The press releases were issued by the Company for the purpose of compliance with AIM rules. 10.2 In the press release of 16 May 2008 (“Press Release 1”) on the Company’s acquisition of a majority interest in VB, the Company announced that it had secured contracts with at least 19 major hospitals on the mainland to supply, install and maintain RFID tags for patients. The release said:
The 19 major hospitals were said to include Tianjin Central Hospital, Shanghai RuiJin Hospital and JiNan QianFoShan (“the 3 named hospitals”). 10.3 Six months later, the Company issued another press release on 17 November 2008 (“Press Release 2”) on the Company’s acquisition of an additional 20% equity interest in VB. It was announced that VB
There was no correction or withdrawal of any statements made in Press Release 1. 11.1 Three months later, the Company’s listing document (“the Listing Document”) was issued on 4 February 2009 for the purpose of its listing by way of introduction on 10 February 2009. The business model revealed in the Listing Document showed that VB would not be providing RFID technology to end users (such as hospitals) directly, but had contracted with only 4 distributors. The Listing Document said (p.92):
11.2 At p.93, it said:
11.3 At p.94, it said:
12.1 The business model announced in the Listing Document (where VB contracted with only 4 customers, of which THJ would distribute the technology to end-user hospitals) is therefore different from that announced in the Press Releases (where VB secured contracts with 19 major hospitals which had “committed to [VB]” to purchase RFID tags). 12.2 It is important to note that (i) according to the Listing Document, VB’s agreements with THJ were made on 2 May 2008 (“VB-THJ agreements”), two weeks before Press Release 1, and six and a half months before Press Release 2, and (ii) the press releases were issued for compliance with the AIM rules. Thus it may be reasonably expected that the press releases had been verified as correct, in which case doubt would be thrown on the real date when the VB-THJ agreements were actually signed. 13.The other concern of the Applicant over VB is that according to reports from its investigators, only 1 of the 3 named hospitals existed and used VB’s RFID technology. The other 2 did not exist at all. A number of hospital staff interviewed by the investigators said they had not heard of VB or THJ or any products supplied by them. 14.As for SA, the Applicant’s suspicions at first were not as particularised as those regarding VB, but fresh evidence before this court has bolstered them. This will be discussed later. Summons to add fresh evidence 15.At the appeal, the Applicant applied to add fresh evidence of the Company’s announcement dated 19 December 2012 (after the judgment) on the disposal of its interests in VB and SA. It was agreed between the parties that the fresh evidence could be considered de bene esse but in my view the conditions of Ladd v Marshall are clearly satisfied. Law 16.I shall first discuss the law relating to applications under s.152FA. 17.The section provides:
18.It is clear from the language of the section that:
19.The relevant principles have been set out in Acehill Investments Pty Ltd v Incitec [2002] SASC344 at para. 29, adopted by this court (Chu JA, Suffiad and Bharwaney JJ) in Lehman & Co Management Ltd v Effiscient Ltd [2011] 5 HKLRD 668, C.A. at para. 31, which is set out below for ease of reference.
20.1 During the course of this appeal, it was argued that there were two approaches to applications under s.152FA, a “liberal” approach adopted by Harris J in Wong Kar Gee Mimi v Hung Kin Sang Raymond [2011] 5 HKLRD and a “less liberal” approach adopted by Deputy Judge Coleman SC at first instance in the Lehman & Co case. 20.2 At first instance in the present case, Barma J thought it unnecessary to decide whether there was a difference in approach, and if so, which one was to be preferred, as he was not inclined to order inspection even on a more generous approach to the section. 20.3 For my part I do not find it constructive to enter into an academic discussion as to whether there were two approaches, and if so, which one should prevail. 20.4 Nor do I see why the legislation should be applied differently in the case of a listed company as compared with a private company. Whilst there may be more information in the public domain for listed companies, shareholders of a listed company lack the personal relationships that are normally present in private companies which enable shareholders to know more or less how the company is being run. 20.5 In my view the real issue is how the court, guided by the principles set out in the preceding paragraph, should apply the legislation to the facts of the individual case. Barma J’s judgment 21.1 Briefly, Barma J accepted that the application was made in good faith (i.e. the 1st condition) but he held that it lacked proper purpose (the 2nd condition). Regarding the latter he held in respect of the Applicant’s concerns over VB, that:
21.2 As for SA, the learned judge held that the Company’s announcement of 26 April 2010 had provided information relating to the valuation of SA. 21.3 However Barma J was not informed that between the date of hearing and the date of judgment, the Company had disposed of SA for $3,000. 22.The learned judge refused to make an order for inspection, holding that “no proper purpose for inspection has been made out” (para. 44), i.e. the Applicant had failed to satisfy the 2nd condition. 23.1 It is important to note that the learned judge did not refuse the application in the exercise of his discretion. 23.2 In fact he held that if the Applicant had satisfied the 2nd condition of proper purpose, he would have made an order but restricted to certain documents only. He said (para. 44):
23.3 The Applicant has not sought to expand the scope of records that the learned judge indicated he would have ordered (ie paras. 1, 2, 3, 5, 6 and 8 of the Schedule to the Amended Originating Summons). 23.4 It would be noted that there is no respondent’s notice from the Company that the application should be refused in any event in the exercise of the court’s discretion. Position of the appellate court 24.1 As the learned judge had refused the application because he considered the 2nd condition for inspection had not been met, i.e. a conclusion drawn from facts disclosed in the documents and affirmations, this court is in the same position as the learned judge to make inferences and draw conclusions from the materials. This is particularly so in view of the fresh evidence. 24.2 In any event, I consider that even if the learned judge had refused the application in the exercise of his discretion, this court would find it proper in this case to reconsider the matter, as the Company had failed to inform the learned judge of the disposal of its interests in SA before judgment was delivered. (There seems to be an inconsistency on the materials as to the date of the Company’s disposal of SA shares. In some materials the date is said to be 19 March 2012 ie prior to the Company’s announcement on 29 March 2012 of its disposal of VB, and in some materials it is said to be 30 March 2012. However nothing turns on this for the purposes of this judgment). 24.3 The disposal of SA at nominal consideration may well have been relevant to the exercise of the learned judge’s discretion, coming as it did soon after the disposal of VB also at nominal consideration. The disposal of SA as a loss-making business is inconsistent with the picture painted of SA being an ongoing profitable operation. 24.4 In this respect, on 14 September 2011 Lawrence Ying Kan Man, an Executive Director and Chief Operating Officer of the Company made an affirmation in which he said, in relation to VB:
and in relation to SA:
In fact, by June 2011, no sales at all had been recorded by VB or SA and their businesses had in effect ceased. 24.5 The accumulative effect of the disposals of both substantial loss-making investments in RFID would have been relevant to the exercise of discretion (had the learned judge got to that stage of the exercise). Discussion VB 25.The Applicant’s case stems from its suspicion as to what the Company’s directors knew about the business model of VB, in particular in relation to patient tagging and tracking, whether VB had directly contracted with 19 major hospitals in the PRC (as announced in the Press Releases) or whether VB had contracted only with 1 distributor THJ (as announced in the Listing Document). Of course there may have been good commercial sense in dealing through a distributor, rather than dealing directly with end users, but the issue is whether the directors of the Company had properly examined VB’s business model, what the risks of that business model were, and whether they considered if VB’s award of the distributorships was beneficial. The inconsistencies between the Press Releases and the Listing Document (both being documents which would have been vetted by professional advisers before publication) throw up the question when and why VB had decided to contract only with THJ, instead of with the hospitals directly as announced earlier. 26.The learned judge held that although at least Press Release 1 contradicted the Listing Document, that did not call for an investigation by way of inspection of the Company’s records, because one would expect the contents of the Listing Document to have been more accurate (para. 34). 27.1 With respect to the learned judge, it seems to me that that conclusion failed to take into account the fact that the Press Releases had also been issued for compliance with regulatory requirements (those of AIM), and so one would also expect those announcements similarly to have been carefully verified by the Company’s AIM nominated advisers for accuracy and reliability (see the AIM Rules on disclosure set out in Hui Yip Wing II, para. 24). 27.2 It is to be noted that there is no evidence to explain why, if the VB-THJ agreements had been signed 2 weeks before Press Release 1, and more than 6 months before Press Release 2, those agreements were not known to the Company. (Indeed all the distributorship agreements, VB-Bellson dated 26 October 2007, VB-Top Venture dated 12 February 2008 and VB-THJ dated 2 May 2008 pre-dated Press Release 1). 27.3 Nor is there evidence, contemporaneous with the Press Releases, that the distributorship business model was known to the Company but the relevant information had somehow been miscommunicated to their nominated advisers. 27.4 Nor is there contemporaneous evidence that the Company had properly passed on the relevant information but it had somehow been misunderstood by the nominated advisers to be an arrangement whereby VB contracted directly with the end-users. 28.The learned judge also held that the Applicant had failed to satisfy the 2nd condition because the Listing Document had disclosed that an independent valuation had been performed prior to acquisition. 29.1 However it is clear that the valuation had been performed on the basis of various assumptions (p.74 of the Listing Document). Certain information had been reviewed by the valuers, but would not have been verified by them (p.75). 29.2 More importantly, the valuations were made on the basis of the “income approach”, ie the value of the contracted income under the contracts to which VB was party. VB itself had only been incorporated 5 months before the Company acquired a substantial holding. As for the income expected, the source were the distributorship agreements VB had with Bellson, Top Venture and THJ, companies with no long term track record with VB and which had been interposed between VB and the end-users. 29.3 The risk was recognized by the Company at the time of the Listing Document, hence the following statement in the section on Risk Factors:
29.4 Put simply, VB’s business to a large extent would only be as good as their distributors. 29.5 The crux is whether the directors had recognized this risk before the Company acquired VB and had made a proper assessment of the risk. Although it was stated in the Listing Document that the previous major shareholders of VB “has had a relationship of two to four years” with the distributors, it was not disclosed what these “relationships” were. As for VB itself, it had a business relationship with Bellson and Top Venture for about 1 year and with THJ for less than 1 year. There were no profit guarantees from these distributors. It is noted that according to the Company’s announcement of 19 December 2012, “the recoverability of trade debts owed by customers [presumably meaning the distributors] was considered doubtful and had to be fully provided for”. The Listing Document did not disclose who were the ultimate beneficial owners of these distributors, nor whether any attempts had been made to see if the distributors were backed up by substantial parent companies, or if they were not, whether personal guarantees were obtained from the ultimate beneficial owners or indeed anyone else. Not surprisingly the Applicant wishes to know whether the Company assessed and verified these matters before investing $734m in VB. 29.6 This is what the Applicant seeks to find out from the records of the Company and with respect to the learned judge, these are not materials which can be found from those parts of the valuation which were summarized in the Listing Document, nor from any of the affirmations filed on behalf of the Company. 30.1 The Company’s case is simply that “due diligence” had been performed by a firm of Malaysian lawyers. 30.2 As noted earlier, the term “due diligence” does not have an established definition. There is no evidence before the court on the instructions given to the Malaysian lawyers. Nor is there evidence on the exercise they performed. It may, or may not, have been simply what might be called a “legal audit”, ie only checking that legal documentation is in place. 30.3 Hence that does not provide an answer to the questions posed in para. 29.5 above. 31.1 The learned judge also found some flaws in the reports of the investigators retained by the Applicant. For example, they identified themselves as market survey agents, and consequently the persons they interviewed may not have provided them with correct answers. 31.2 Whilst that is true, the evidence remains, in my view, disturbing. Even now Schedule 1 to Mr Ying’s affirmation filed on behalf of the Company refers only to use of the RFID technology by just 1 of the 3 named hospitals in Press Release 1, and provides no information at all about the other 16 “major hospitals” which the Company had announced were committed users. 31.3 Mr Ying’s excuse is that there may have been confusion in the names of the hospitals and the Company’s case is that basically the end-users did not matter. This is inconsistent with the approach taken by the Company in Press Release 1, where the identities of the hospitals were considered important enough to be disclosed. 32.1 The learned judge also held that patient tagging and tracking was only one area where RFID technology would be used, as it was also anticipated that it would be used for event ticketing. 32.2 However the points made about the lack of long term track record for THJ applies similarly to Bellson and Top Venture the distributors for RFID use in event ticketing, and the fact is that the Company has disposed of its interests in VB at a substantial loss due to the failure to recover from its customers which include Bellson and Top Venture. 33.In conclusion I take the view that, with respect to the learned judge, the Applicant has made out a reasonable case that there was a need to investigate what had or had not been done by the directors to safeguard the interests of the Company prior to its acquisition of VB, and inspection of the Company’s records was sought for this proper purpose. SA 34.As for SA, the Applicant’s case against the Company is less strong but it was in a similar line of business, the business model was similar, the assumptions made in the valuation were similar, the same income approach was taken in the valuation, the same risk factors were present, SA was also recently incorporated before the Company’s acquisition, there is a similar dearth of information regarding its customers, nothing is known of the scope of the “due diligence” undertaken by the firm of PRC lawyers and similarly a very substantial loss was made by the Company on disposal. In my view, the application for inspection of the Company’s records on the SA acquisition was also for a proper purpose. 2nd Condition satisfied 35.By reason of the above, I find the 2nd condition under s.152FA(3)(b) has been satisfied for inspection of the Company’s records relating to both VB and SA. Exercise of discretion 36.At this stage this court would then have to consider whether to order inspection in the exercise of its discretion. 37.1 As noted earlier, the judge would have made an order in the exercise of his discretion had he found the 2nd condition satisfied and there is no respondent’s notice challenging that. 37.2 We have been referred by counsel for the Company to Knightswood Nominees Pty Ltd v Sherwin Pastoral Company Ltd (1989) 15 ACLR 151 where it was held that
I am satisfied that the records sought should be useful to the Applicant in its consideration whether to write off its investment in the Company or seek to recover damages in derivative proceedings against one or some of the Company’s directors or others for breach of duty. At this stage it would not be appropriate to say more. 38.1 Of course the Applicant could have sought a seat on the board and obtain access to the Company’s records through that route, instead of making an application under s.152FA. 38.2 The fact that the applicant may have other means of obtaining the information elsewhere does not mean that he cannot satisfy the two conditions (Hanks v Admiralty Resources NL [2011] FCA 891, para. 33(8)), but it is relevant to the court’s decision whether to exercise its discretion to grant an order. 38.3 I am satisfied in the circumstances of this case that even if it is assumed that the Applicant would have been able to obtain a seat on the board of the Company, the duties placed on a director are such that the court cannot insist that the Applicant must seek to become a director to obtain the records it seeks, rather than exercise its statutory rights as a shareholder. I note that the Company is being investigated by the Commercial Crimes Bureau and so the duties of the directors would be more onerous than usual. 38.4 I also do not find that the Company would suffer any substantial prejudice in complying with an order. Order 39.I would make an order in terms of the summons to adduce fresh evidence contained in Robert Clark’s second affidavit. 40.I would make an order in terms of the Amended Originating Summons but restricted to the records listed in para. 44 of Barma J’s judgment (ie paras. 1, 2, 3, 5, 6 and 8 of the Schedule to the Amended Originating Summons). If the Company has possession of such documents of its subsidiaries, inspection should be given but not otherwise (Wong Kar Gee para. 46). Although VB and SA have been disposed of, it would be premature at this stage to consider what the effect of that disposal may be on the execution of the order. 41.I would allow the appeal and also make an order nisi that the costs of the Originating Summons proceedings and of the appeal be to the Applicant, with certificate for two counsel. Hon Lam JA: 42.I agree with Yuen JA’s judgment.
Mr Benjamin Yu SC and Mr Laurence Li, instructed by Deacons, for the Plaintiff (Appellant) Mr Russell Coleman SC and Mr Douglas Lam, instructed by Henry Wai & Co, for the Defendant (Respondent) | |||||||||||||||||||||
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