Melvin Waxman and Another v. Li Fei Yu and Another
Read the full judgment text of HCA 1972/2012 on BabelCite. This Court of First Instance judgment was delivered on 19 July 2013 before Anthony To J.
Civil procedure – conflict of laws – forum non conveniens – stay of proceedings – application by Hong Kong-incorporated 2nd defendant to stay plaintiffs' action in favour of Xiamen courts – oral shareholders' agreement among four individuals (two US plaintiffs and two PRC defendants) to pool investments in group of companies and set up Sino-foreign joint venture – oral agreement partly oral and partly in writing – no express or implied choice of governing law – whether Xiamen courts clearly or distinctly more appropriate than Hong Kong court – whether PRC courts have exclusive jurisdiction under article 266 of Civil Procedure Law of the People's Republic of China – whether shareholders' agreement governed by Hong Kong law or PRC law – whether plaintiffs would be deprived of legitimate personal or juridical advantages – three-stage test from Spiliada Maritime Corporation and Cansulex Ltd [1986] 3 WLR 972 and Adhiguna Meranti [1987] HKLR 904 – article 266 of PRC Civil Procedure Law (exclusive jurisdiction over Sino-foreign joint venture disputes) – article 265 of PRC Civil Procedure Law (jurisdiction based on place of performance) – company law of the People's Republic of China articles 3, 19 to 36, 143 to 150 – Supreme People's Court Judicial Interpretation [2004] 民四他字第26號 – whether transfer of shares requires capital contribution by transferee under PRC law – beneficial ownership under common law not recognised under PRC law – subject matter located in PRC (three PRC companies) – principal shareholders' agreement distinguished from subsidiary joint venture agreement – corporate veils not lifted – Hong Kong law supports existence of agreement by recognising beneficial ownership – PRC law would call for its abortion – 2nd defendant a Hong Kong company – jurisdiction founded as of right – 1st defendant resident in Xiamen not served out of jurisdiction – no defence yet filed – absence of arguable defence – whether court can dismiss application for want of arguable defence – distinguished from Bayer Polymers Co Ltd v Industrial and Commercial Bank of China, Hong Kong Branch [2000] 1 HKC 805 – weight of connecting factors – application dismissed at Stage I failure fatal – Stage II/III would also fail because plaintiffs would be deprived of ability to invoke beneficial ownership concept and face risk that agreement declared void for want of capital contribution – costs of application to plaintiffs' costs in the cause with certificate for two counsel.
Legal issues: Whether the 2nd Defendant's application for stay should be dismissed for want of an arguable defence · Whether Xiamen courts are clearly or distinctly more appropriate than Hong Kong courts (Stage I of Spiliada/Adhiguna Meranti test) · Whether PRC courts have exclusive jurisdiction over the dispute under article 266 of the Civil Procedure Law · Governing law of the Shareholders' Agreement · Whether the Plaintiffs would be deprived of legitimate personal or juridical advantages if the action is tried in Xiamen (Stages II and III)
Outcome: The 2nd Defendant's application for a stay of proceedings in favour of the Xiamen forum on the ground of forum non conveniens is dismissed.
Cited by 9 cases · Cites 5 cases
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HCA 1972/2012 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO 1972 OF 2012 ____________ BETWEEN
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INTRODUCTION 1.This is the hearing of the 2nd Defendant’s application for stay of proceedings pursuant to Order 12, rule 8 of the Rules of the High Court and the inherent jurisdiction of the court on the ground of forum non conveniens. 2.The Plaintiffs filed an indorsement of claim on 22 October 2012 and subsequently a statement of claim on 6 November 2012. On 7 December 2012, the 2nd Defendant filed the present summons with supporting affirmations applying to have the proceedings stayed. In its supporting affirmations, the 2nd Defendant identified certain deficiencies in the manner in which the Plaintiffs had put their claim. On 14 February 2013, the Plaintiffs filed an amended statement of claim. 3.The originating process has been duly served on the 2nd Defendant within the jurisdiction. However, it has not been served out of the jurisdiction on the 1st Defendant who is a resident in Xiamen of the People’s Republic of China (“the PRC”). Dramatis personae 4.The 1st Plaintiff (“Melvin”) is a United States national. He has been in the plumbing business for over fifty years. He is a director and shareholder of Waxman’s Industries Inc and a group of companies referred to as the Waxman Group with its Asian base in Hong Kong. 5.The 2nd Plaintiff (“Larry”) is Melvin’s son and a member of the Waxman Group. He assists Melvin in his plumbing business. 6.The 1st Defendant (“Frank”) is a PRC national, resident in Xiamen. He owns and controls a group of companies referred to as the Swell International Group. He is also responsible for the day‑to‑day management of WDI Group (see below). 7.The 2nd Defendant, Solut (Hong Kong) Company Limited (“Solut”), is a company incorporated in Hong Kong and wholly owned by Frank. 8.Yu Yuebin (“Ben”) is Frank’s brother‑in‑law. 9.WDI Group is a collection of companies owned by Melvin, Larry, Frank and Ben, (collectively referred to as the “WDI Beneficial Shareholders”) and comprises of:
Except for WDI International HK and WDI International US which were incorporated in Hong Kong and the United States respectively, the other five companies were incorporated in the PRC. The Plaintiffs’ pleaded case 10.The Plaintiffs’ pleaded case is as follows. Melvin came to know Frank at a conference in 1989. Together they established WDI Plumbing in Xiamen, which is held by Melvin and DaChun in equal shares. DaChun is a PRC company owned by Frank and Ben. The business of WDI Plumbing flourished. Five other companies were formed between 1995 and 2002 to engage in other aspects of the plumbing business. Since reaching the age of 65 in 1999, Melvin began to leave the day‑to‑day management of their business to Frank. 11.By July 2002, the manufacturing facilities WDI Plumbing were about to reach full capacity. Frank proposed to set up a Sino‑foreign equity joint venture to take advantage of the more favourable land prices and tax incentives available to such joint ventures to acquire a piece of land in Xiamen’s Haicang Xinyang Industrial Zone for building a new factory for WDI Group. On the basis of Frank’s proposal, Melvin, Larry, Frank (on behalf of himself and Solut) and Ben entered into an oral agreement on 5 August 2002 (the “Shareholders’ Agreement”) on, inter alia, the following terms:
In summary, the scheme was that the four WDI Beneficial Shareholders would pool their investments in the six existing companies together to form WDI Group; with their pooled resources, new capital of US$1.5 million from Frank and loans of US$1 million from the four WDI Beneficial Shareholders, the group would set up WDI Technology as a new member of the group to purchase land and build a factory for the group; and the interest of the WDI Beneficial Shareholders in each of the companies in WDI Group would be redistributed in accordance with the Agreed Shareholding. 12.The Shareholders’ Agreement is evidenced by at least five documents:
13.Pursuant to the Shareholders’ Agreement, Solut and WDI Plumbing entered into a Sino‑foreign joint venture agreement to set up WDI Technology (the “Joint Venture Agreement”). The four WDI Beneficial Shareholders and WDI Plumbing together injected US$8,000,000 into WDI Technology. The factory was completed at the end of 2004. Initially, the shareholding percentage of WDI Plumbing and Solut in WDI Technology was 18% and 82% respectively, but was changed to 39.98% and 60.02% respectively in November 2008. 14.The Plaintiffs allege that in breach of the Shareholders’ Agreement and in breach of trust, Frank failed to transfer the equity of the companies in WDI Group, including WDI Technology, in accordance with the Agreed Shareholding. By 2011, it was clear that Frank was attempting to assert greater ownership over the companies in WDI Group than his entitlement under the Shareholders’ Agreement. On 13 July 2011, Melvin convened a meeting of the board of directors of WDI Technology and secured a resolution directing, inter alia, (1) Solut to transfer its 60.02% equity in WDI Technology to WDI International HK; and (2) WDI International HK and WDI Plumbing to transfer their shares to the WDI Beneficial Shareholders in accordance with the Agreed Shareholding. Despite that, Frank refused to effect the transfer. 15.The Plaintiffs’ cause of action is based on breach of the Shareholders’ Agreement and breach of trust. They seek:
The defence 16.No defence has yet been filed by the Defendants. In support of its application for stay, Solut filed four affirmations made by WDI Technology’s in‑house counsel, Ms Bai Ping, and its PRC law expert, Mr Ye Yong. Ms Chan, counsel for the Plaintiffs, argues that despite the four affirmations, Solut has not been able to put forward a credible, let alone arguable, defence with sufficient particularity. The Plaintiff’s cause of action is Frank’s breach of the Shareholders’ Agreement and breach of trust. As can be gleaned from the affirmations filed by Solut, on the fact, Solut denied the existence of the Shareholders’ Agreement and hence any breach of express trust of the equity in WDI Technology. On the law, Solut asserted that there is no concept of beneficial interest in shares or equity of a company under PRC law. Bai also referred to Ye’s expert opinion that under article 266 of the Civil Procedure Law of the People’s Republic of China (“Civil Procedure Law”), PRC courts have exclusive jurisdiction over disputes arising from the performance of Sino-foreign joint venture contracts. The applicable legal principles 17.The law applicable to an application for stay in favour of an alternative jurisdiction has been very well settled since the decision of the House of Lords in Spiliada Maritime Corporation and Cansulex Ltd [1986] 3 WLR 972. Spiliada was applied by the Court of Appeal in Hong Kong in Adhiguna Meranti [1987] HKLR 904. In that case, Hunter JA set out a three stage approach at 907F‑908B for determining the appropriate forum:
In addition, where appropriate, proper regard has to be paid to the fact that jurisdiction has been founded in Hong Kong as of right: Spiliada, p.987D. As with the exercise of any discretion, the court will take into account all circumstances of the case including the conduct of the parties and decide whether it would be in the interest of justice to stay the action. The court will not make any finding of fact which is in dispute: see Wo Fung Paper Making Factory Ltd And Sappi Kraft (Pty) Ltd [1988] 2 HKLR 346. 18.Counsel have no disagreement with the above principles. In addition, Ms Chan refers to Bayer Polymers Co Ltd v Industrial and Commercial Bank of China, Hong Kong Branch [2000] 1 HKC 805 and submits that if an applicant for stay fails to identify any arguable defence, the court should not consider the application further but should dismiss it. That was a case in which jurisdiction in Hong Kong has been established as of right by reason of service upon the defendant’s branch here. Stone J held that even though there was no Order 14 application before him, the fact that the defendant was unable to identify for the court’s consideration any particular case on the merits is sufficient to dismiss the defendant’s application for stay of proceedings on the basis of forum non conveniens. I agree with that approach. It is just another way of saying that without identifying its defence for the court’s consideration, the defendant was unable to point to any other forum being clearly or distinctly more appropriate than the Hong Kong forum. NO ARGUABLE DEFENCE 19.Relying on Bayer Polymers Co Ltd v Industrial and Commercial Bank of China, Hong Kong Branch, Ms Chan submits that the application for stay should be dismissed for want of an arguable defence. It would be convenient to deal with this argument first before turning to the parties’ arguments based on the more familiar conventional principles of forum non conveniens. 20.Ms Chan refers to the fact that Bai is only an employee of WDI Technology and not a shareholder or director of Solut. She argues that even assuming that Bai had worked for Frank for seven years, ie since 2004 as alleged, it does not detract from the fact that she has no personal knowledge of the Shareholders’ Agreement made in August 2002 and the matters relating thereto and there is no evidence that she was privy to or involved in any of the dealings pertaining to the Shareholders’ Agreement. Frank is the only person from the Defendants’ side who has personal knowledge of the matters relating to the dispute, but Solut chose, without giving any explanation, not to cause him to file any evidence whether to refute the Plaintiff’s case or to support Bai’s bare assertions. Hence, Ms Chan submits that Bai’s bald denial of the existence of the Shareholders’ Agreement and breach of trust cannot be accepted in view of Frank’s unexplained failure to file any evidence, Bai’s lack of personal knowledge of the matters relating to the dispute and the evidence from the contemporaneous documents supporting the existence of the Shareholders’ Agreement which Solut failed to address. Hence, Ms Chan argues that the court should dismiss the application without further consideration. 21.I think the present case is distinguishable from Bayer Polymers Co Ltd. In that case the defendant, who was not able to even identify a defence, sought to argue for a stay on the basis of forum non conveniens. Hence, Stone J held that the application had to be dismissed as there was nothing for trial either in Hong Kong or elsewhere. In the present case, through its employee and through counsel, a defence consisting of a denial and based on PRC law has been identified. In the absence of evidence from Frank, I agree with Ms Chan that the defence looks suspect. However, it is permissible for an affirmant to give hearsay evidence provided that the source of the evidence has been identified. There is no proper application to strike out the defence or for summary judgment. Though without such applications, the court will, in an appropriate case, dismiss an application for stay in default of an arguable defence, such jurisdiction will only be exercised in very clear cases. In any application for stay, where a defence has been identified, usually the court will not consider the merit or credibility of that defence and will not lightly dismiss the application for want of a credible defence, without at least alerting the defendant that it is an issue for which proper evidence has to be filed. I would accept the defence at its face value. This is not an appropriate case to dismiss the application for stay based on the lack of an arguable defence or evidence in support of an identified defence. STAGE 1: ARE THE XIAMEN COURTS CLEARLY OR DISTINCTLY MORE APPROPRIATE THAN THE HONG KONG COURTS 22.There is no dispute that Hong Kong courts have jurisdiction over this action, jurisdiction having been established as of right. In Stage I, the burden is on the applicant, ie Solut, to show that the Xiamen courts are clearly or distinctly more appropriate than the Hong Kong courts for the trial of this action. The emphasis is on appropriateness rather than convenience. The court is required to focus on the appropriateness of a forum from point of view of the trial of the action, ie which is the forum in which the case may be tried more suitably for the interests of all the parties and the ends of justice. This involves identifying the forum with which the action has the most real and substantial connection: per Lord Keith in The Abidin Daver [1984] AC 398. The court must first look for connecting factors which include not only factors affecting convenience or expenses, such as availability of witnesses, but also other factors, such as the law governing the relevant transactions, and the places where the parties respectively reside or carry on business: per Lord Goff of Chieveley in Spiliada at 987. The approach is not just to load up factors which point to any particular forum, but to take a broad overall view of the factual circumstances bearing in mind the nature of the controversy in dispute and focus on the question of appropriateness from point of view of trial of the action. These factors are examined below. The Shareholders’ Agreement and the Joint Venture Agreement 23.It must be borne in mind from the outset that on the Plaintiffs’ case there are two agreements in issue: the Shareholders’ Agreement and the Joint Venture Agreement. The four WDI Beneficial Shareholders entered into the Shareholders’ Agreement to pool their investments in the six existing companies together to form WDI Group and to set up WDI Technology as a new member of the group. For that purpose, WDI Plumbing would enter into the Joint Venture Agreement with Solut to take advantage of the tax benefit and land concession available to Sino‑foreign joint ventures to purchase land and build a factory for the group. Thus this Shareholders’ Agreement is the principal agreement and the Joint Venture Agreement is the subsidiary agreement to implement the Shareholders’ Agreement. The parties to the two agreements are different. The parties to the Shareholders’ Agreement are the four WDI Beneficial Shareholders, while the parties to the Joint Venture Agreement are WDI Plumbing and Solut. Solut is the corporate vehicle to implement both agreements. But if the corporate veils of the various companies are lifted, it can be seen that the parties to the two agreements are the same two Americans citizens and two PRC mainlanders. The parties’ connection with Hong Kong or the PRC 24.Ms Chan argues that although the Plaintiffs are American citizens, they have strong connection with Hong Kong. For over twenty years, Melvin has spent about 35% of his time in Hong Kong and for the past eight years, he has rented an apartment on Kennedy Road. His business, ie the Waxman Group, has its Asian base in Hong Kong. Larry used to hold a Hong Kong work visa and identity card. On the other hand, Frank is a PRC citizen who has conducted business in Hong Kong and owns at least five Hong Kong companies other than Solut. Ms Chan further argues that as it was Frank who suggested using Solut to hold the shares in WDI Technology, that is a factor in favour of the Hong Kong forum. 25.On the facts of this case, the parties to the Shareholders’ Agreement are the four WDI Beneficial Shareholders, ie the two Americans and two PRC mainlanders. The parties to the Joint Venture Agreement are a Hong Kong company and a PRC company. That agreement, being a subsidiary agreement to implement the Shareholders’ Agreement, carries little weight on the issue of the parties’ connection with Hong Kong or the PRC. On balance, on the facts of the present case, the weight to be given to the parties’ connection with Hong Kong and the PRC just cancel out one another. The subject matter of the action 26.Mr Shieh, counsel for the 2nd Defendant, argues that the subject matter of the action, being shares in WDI Technology, are located in the PRC. On the other hand, Ms Chan argues that the subject matter of the Shareholders’ Agreement concerns not just the shareholdings in WDI Technology, but another six companies within WDI Group, including WDI International HK and WDI International US which are incorporated in Hong Kong and United States respectively. WDI International HK is a major entity within the group which has employed a permanent local staff and engaged local secretarial and auditing firms for over a decade. However, as pointed out by Mr Shieh, no remedy is sought against WDI International HK and WDI International US which are already held in accordance with the Agreed Shareholding insofar as the Plaintiffs are concerned, while WDI Precision and Voreto are joint venture companies between WDI International HK and other PRC partners. Thus, the remedies are sought only against DaChun, WDI Plumbing and WDI Technology, which are all companies incorporated in the PRC. This points to a PRC connection. Though remedy is also sought against Solut indirectly in respect of its shareholding in WDI Technology, Solut is just Frank’s investment vehicle. The fact remains that in substance the remedies are sought against the shareholding in companies incorporated in the PRC. On balance, from point of view of the subject matter of the Shareholders’ Agreement, the dispute has a closer connection with the PRC than Hong Kong. The language and terminology used in the Shareholders’ Agreement 27.The Plaintiffs rely on the use of the English language in the documents evidencing the Shareholders’ Agreement. Those documents were either bilingual or in English. However, the mere fact that a contract is in English does not necessarily mean that its governing law is Hong Kong law as opposed to the law of a country which uses some other language. The WDI Beneficial Shareholders are Americans and PRC mainlanders. As a matter of practicality, the documents have to be written in either or both of these languages. As explained by Bai, the bilingual documents were for the benefit of the Plaintiffs and insofar as documents are in Chinese they are in simplified Chinese pointing to a closer connection with the PRC than Hong Kong. In the circumstances, the use of English or simplified Chinese in some of the documents evidencing the Shareholders’ Agreement is just neutral. 28.The Plaintiffs also rely on the use of the word “equity” in the documents evidencing the Shareholders’ Agreement as referring to a common law concept and therefore a pointer that the governing law of the Shareholders’ Agreement is Hong Kong law. For example, paragraph 3 of the 2002 Board Minutes stated:
The phrase “net equity of WDI Group” and “net equity of shareholders” were also used in the Equity Confirmation Letter. 29.Mr Shieh argues that the Plaintiffs are misreading the meaning of the word “equity” in its proper context and adopting a somewhat patronizing and insular view as to the level of sophistication of the WDI Beneficial Shareholders. I agree. The word “equity” has a variety of meanings depending on the context in which it is used. Apart from the technical meaning under the law of equity, in its ordinary and common usage, the word means a right, the issued share capital of a company, a shareholders’ interest in a company or ordinary shares. Indeed, the word has been liberally used by business communities in the PRC, United States and Hong Kong alike to mean something other than the rules of equity under common law, such as shares, share capital or net worth. It is used in article 266 of the Civil Procedure Law where the context is clear that it means shares or share capital and not the rules of equity. A monetary figure was also quoted for the “net equity of WDI Group” which suggests that the term means net worth. There is no doubt that the Plaintiffs’ case is that the Shareholders’ Agreement involved concepts of beneficial ownership, but as pointed out by Mr Shieh, the term “beneficial ownership” or “beneficial interest” were not used in the documents. It is only the legal consequence of such a beneficial interest which the Plaintiffs are contending for. In my view, the word “equity” in the context in which it was used in the documents simply meant shares or net worth. It is not indicative of a connection with any particular system of law or forum. 30.The Plaintiffs also rely on the use of the US currency in the documents evidencing the Shareholders’ Agreement as an indicator of the connection with Hong Kong law. As the US currency is an international currency, I agree with Mr Shieh that no inference whatever could be reasonably drawn from the use of that currency in the Shareholders’ Agreement. Complexity of the legal issues in dispute 31.Based on Bai’s and Ye’s expert opinion, Mr Shieh identified four legal issues on which expert evidence on PRC law will be required. These issues include:
Mr Shieh argues that given the complexity of the legal issues involved, if the trial is to take place in Hong Kong, the parties will have to spend a large amount of time and resources on adducing expert evidence as to PRC law and a substantial amount of court’s time would be spent on hearing, considering and evaluating principles of PRC law. These difficulties, time and expenses would be saved if the dispute is resolved in the PRC courts which will be able to apply the PRC law more surely than the Hong Kong courts. He therefore argues that these factors point to a closer connection between the Shareholders’ Agreement and PRC law. 32.I think Mr Shieh has correctly summarised the four issues identified by Bai and Ye and based on those issues he argues in favour of PRC law as the governing law of the Shareholders’ Agreement. However, on a closer reading of Bai’s and Ye’s affirmations, I think that argument is flawed. It is clear from paragraph 42 of Bai’s affirmation dated 6 December 2012 that she identified the issues on the assumption that “the closest system of laws that is applicable to all the relevant circumstances is that of the PRC”. Similarly, in paragraph 31 of Ye’s affirmation dated 6 December 2012, he also identified the issues on the assumption that the governing law is PRC law. It is therefore putting the cart before the horse to argue that those four issues point to a closer connection with PRC law, which is therefore the applicable or governing law of the Shareholders’ Agreement. Quite to the contrary, it is precisely because of the trust arrangement and the parties’ intention under the Shareholders’ Agreement that the Plaintiffs argue that the Shareholders’ Agreement has a closer connection with Hong Kong law. 33.This is a case in which jurisdiction has been established as of right. The issues would have to be framed in accordance with the case as pleaded by the Plaintiffs. I therefore accept Ms Chan’s submission that the issues in dispute are only factual ones such as whether the parties entered into the Shareholders’ Agreement and the terms of that agreement. This is supported by the Plaintiff’s expert, Mr Lin’s, opinion that “the dispute in the present case is one which concerns the existence of a personal agreement reached between the two Plaintiffs and the 1st Defendant and the company under his control”, namely Solut. (I would have thought the Shareholders’ Agreement was reached among the four WDI Beneficial Shareholders only and not with Solut which was just an investment vehicle of Frank; but that is besides the point.) I think, by “personal agreement”, Lin meant an ordinary agreement other than a Sino-foreign joint venture agreement as opposed to a Sino-foreign joint venture agreement. Thus, even approaching the dispute from point of view of PRC law, it is a dispute as to the existence of an ordinary agreement. The issues are to be determined by the pleading. The complexity or otherwise of the legal issues raised by the pleading does not determine the governing law of the agreement on which those issues are raised. Of course, in identifying which forum is clearly or distinctly the more appropriate forum, complexity of the legal issues certainly has an important bearing: see paragraph 51. Exclusive jurisdiction of the PRC courts over the Joint Venture Agreement 34.Solut relies on the exclusive jurisdiction of the PRC courts over the Joint Venture Agreement as a connecting factor in favour of the Xiamen forum. Article 266 of the Civil Procedure Law provides:
It is the common opinion of the parties’ PRC law experts that “exclusive jurisdiction” means that a judgment obtained in a foreign court in a case within the exclusive jurisdiction the PRC courts will not be enforced by the PRC courts. They also agree that if a claim falls within the ambit of this article, then PRC courts will have “exclusive jurisdiction”. The question is whether disputes over the Shareholders’ Agreement are disputes arising from the performance of contracts for Chinese-foreign equity joint venture. 35.Mr Shieh seeks to bring the present dispute arising from the Shareholders’ Agreement within the ambit of article 266. He argues that as the Shareholders’ Agreement is primarily concerned with the formation and shareholding structure of WDI Technology, disputes arising from that agreement clearly fall within “disputes arising from the performance of contracts for Chinese‑foreign equity joint ventures”, including disputes concerning the existence and validity of the Shareholders’ Agreement. Hence, he submits that pursuant to article 266 PRC courts have indisputable exclusive jurisdiction over the present case. This, Mr Shieh argues, points to the PRC forum as the forum with which this action has its most real and substantial connection. 36.With respect, I think Mr Shieh has quite overlooked the significance which I have referred to at the very outset that there are two agreements between different parties. The principal agreement is the Shareholders’ Agreement among the four WDI Beneficial Shareholders. The subsidiary agreement is the Joint Venture Agreement between Solut and WDI Plumbing, which is to implement the Shareholders’ Agreement. Disputes arising from the Joint Venture Agreement clearly fall within the ambit of article 266. But, there is no dispute between Solut and WDI Plumbing. The dispute here is one among the four WDI Beneficial Shareholders arising from the Shareholders Agreement, though the remedy sought requires a redistribution of the shares in WDI Technology, a Sino-foreign joint venture. By arguing that the dispute arising from the Shareholders’ Agreement is a dispute arising from the performance of the Joint Venture Agreement, Mr Shieh is blurring the significance that the two agreements were entered into by different parties. If the corporate veils of Solute and WDI Plumbing are lifted, it would be clear that the two agreements were made between the four WDI Beneficial Shareholders. However, the principle of corporate personality is deeply entrenched under both Hong Kong law and possibly PRC law. In respect of PRC law, article 3 of the Company Law of the People’s Republic of China (adopted by the 5th Session of the Standing Committee of the 8th National People’s Congress on 29 December 1993) (“Company Law of the PRC”) provides that all limited liability companies and companies limited by shares are enterprise legal persons. There is no reason to disrespect the individual corporate identities of WDI Plumbing and Solut. Thus, on the face, the dispute over the Shareholders’ Agreement is a dispute involving redistribution or transfer of shares in WDI Technology but not performance of the Joint Venture Agreement. Hence, the PRC courts do not have exclusive jurisdiction over the present dispute. 37.The above conclusion is supported by《最高人民法院關於德寶(遠東)有限公司與天鋒國際有限公司出資糾紛上訴一案合作協議效力問題的復函2004年7月27日 [2004] 民四他字第26號》, a judicial interpretation given by the Supreme People’s Court (“Judicial Interpretation”) quoted by Mr Lin, the Plaintiffs’ PRC law expert. Under the legal system of the PRC, a judicial interpretation issued by the Supreme People’s Court has the force of law. That Judicial Interpretation was given in a case in which two Hong Kong companies signed an agreement for one of them to transfer 49% of its shareholding in a Sino-foreign joint venture to the other. Then a dispute arose and one of the issues was the jurisdiction of PRC courts. The issue in that case was the implementation of the agreement between the two Hong Kong companies. The Supreme People’s Court was of the opinion that since that agreement would be performed in the PRC, PRC courts should have jurisdiction over the dispute according to article 243 of the 1991 Civil Procedure Law, which is the equivalent of article 265 of the current Civil Procedure Law. The Supreme People’s Court made no mention of the exclusive jurisdiction under article 266. Hence, Lin argued that had the Supreme People’s Court considered that the dispute over shareholding was a dispute about the performance of a Sino‑foreign joint venture agreement, it would certainly have exercised its exclusive jurisdiction under article 266 instead. Therefore, Lin opined that the dispute in the present case is not a dispute arising from performance of a Sino‑foreign joint venture agreement but one arising from a personal Shareholders’ Agreement reached between the Plaintiffs and the Defendants which both Hong Kong and Xiamen courts have jurisdiction. 38.Mr Shieh seeks to distinguish the present case from the one before the Supreme People’s Court on the basis that that case concerned a private transfer agreement between two Hong Kong companies of shares in a Sino‑foreign joint venture whereas the present case concerns a redistribution of shareholding among existing shareholders under the Shareholders’ Agreement. With respect, that is a distinction without difference. In the present case, the Shareholders’ Agreement is an agreement behind the Joint Venture Agreement. More importantly, the parties to the Shareholders’ Agreement and the Joint Venture Agreement are different. Thus, the Shareholders’ Agreement is no different from the private transfer agreement in that case. The dispute in that case was not about performance of a Sino‑foreign joint venture agreement but about the private transfer agreement. That must be the inarticulate major premise why the Supreme People’s Court found it inappropriate to invoke its exclusive jurisdiction under the equivalent of the current article 266, but relied on the equivalent of article 265 of the current Civil Procedure Law. I think the present case is on all fours with the one before the Supreme People’s Court. By virtue of article 265 of the Civil Procedure Law and by reason of the subject matter of the Shareholders’ Agreement, the Supreme People’s Court also have jurisdiction over the present action, but that jurisdiction is not exclusive. The place of performance of the Shareholders’ Agreement 39.The place of performance of the Shareholders’ Agreement coincides with the location of its subject matter, ie Xiamen. The major remedies sought under the Shareholders’ Agreement require the parties to take steps to transfer the shares of the companies in WDI Group to the WDI Beneficial Shareholders in accordance with the Agreed Shareholding and to give an account of the profits of the seven companies in WDI Group. This requires the transfer of the shares in three PRC companies, namely, DaChun, WDI Plumbing and WDI Technology and the giving an account of the profits of five PRC companies and two Hong Kong companies. The major place of intended performance of the Shareholders’ Agreement must be the PRC. This factor points to a closer connection with the PRC. Remedies sought 40.As mentioned above, the major remedy sought requires the parties to transfer the shares in WDI Technology, WDI Plumbing and DaChun to the WDI Beneficial Shareholders in accordance with the Agreed Shareholding. Assuming that Frank’s and Ben’s interests in DaChun were subsumed in WDI Plumbing just as were Melvin’s and Larry’s capital contribution, it would still be necessary to redistribute the shareholdings in WDI Plumbing and WDI Technology which are Sino-foreign joint ventures. Those companies are located in Xiamen. Even accepting that the present dispute arose from the Shareholders’ Agreement and is not a dispute arising from the performance of a Sino-foreign joint venture so that the PRC courts do not have exclusive jurisdiction, the redistribution can only be effected in accordance with the law of the place where those companies are located, ie Xiamen. 41.It is Ye’s opinion that under PRC law, a shareholder has to be someone who has injected capital into the company and obtained a capital contribution certificate, whose name is recorded in the company’s articles and registered with the local Administration of Industry and Commerce. He further opined that any agreement between shareholders in respect of the shareholding and equity percentages of the company contrary to the actual capital contribution is not in accordance with the Company Law of the PRC and is unenforceable. He seemingly suggested that the transfer could not be effected for want of actual capital contribution from the Plaintiffs. His opinion is not contested by Lin. 42.Despite that, I am somewhat perplexed by Ye’s opinion which is apparently inconsistent with articles 143 to 150 of the Company Law of the PRC which prescribe a scheme of transfer of shares in limited liability companies. Under articles 19 to 36, there is a capital contribution requirement by the original shareholders in establishing a limited liability company. But there is no such requirement under articles 143 to 150 in respect of transfer of shares after the company has been established, though there are requirements that the transfer must be carried out through a legally established stock exchange (article 144) and by means of endorsement or other means as stipulated by law or by administrative regulations (article 145). 43.In the case quoted in the Judicial Interpretation, the Supreme People’s Court held that the agreement between the two Hong Kong companies regarding the transfer by one of the party’s shareholding in a Sino‑foreign joint venture to the other was a shareholding transfer agreement which was void and unenforceable for want of compliance with necessary governmental endorsement procedures. The Supreme People’s Court held: “關於合作協議書所反映法律關係的性質,同意你院審判委員會的第二種意見。湖北德寶實業有限公司的原始資本構成中不含香港天鋒國際有限公司的投資,兩當事人的簽約行為發生在合作企業合同訂立之後且約定轉讓香港德寶(遠東)有限公司的股權,故依法應認定合作協議書屬股權轉讓法律關係,認定隱名投資法律關係沒有事實和法律依據。該合作協議書未履行法定的報批手續,依法應認定無效。”
It is not entirely clear whether such want of compliance with procedure could be remedied. While referring to the fact that the transferee company was not an original contributory to the share capital of the Sino‑foreign joint venture, the Supreme People’s Court did not actually rule that the transfer was void for want of capital contribution. The ratio decidendi was that the shareholding transfer agreement was void and unenforceable for want of compliance with necessary governmental endorsement procedures. In the circumstances, I could give no weight to Ye’s opinion about the need for capital contribution in a transfer from the original shareholder to a transferee. This particular aspect of PRC law has no bearing as a connecting factor. 44.More important is that people enter into contract with the intention that it will be performed to the letter. The contract, therefore, has an affinity to the law which supports its existence rather than the law which calls for its abortion. Thus, if it is accepted that the Shareholders’ Agreement is void under PRC law for want of capital contribution, this must be a factor which points to a closer connection with Hong Kong law than PRC law. The governing law of the Shareholders’ Agreement 45.Where there is no express or implied agreement as to the governing law of the contract, the system of law with which the contract has the closest and most real connection will count: see S Megga Telecommunications Ltd v Etowaru Co Ltd [1995] 2 HKC 761 at 767D‑E, per Bokhary JA, as he then was; and The Conflict of Laws in Hong Kong (2nd edition) at paragraph 5.007. The court will consider all circumstances of the agreement, including the location of the subject matter of the contract, the place of intended performance, the place of making or negotiating the agreement, the adoption of particular legal terminology, language of the agreement and related transactions: see The Conflict of Laws in Hong Kong (2nd edition) at paragraph 5.010. 46.The Plaintiffs’ case is that the Shareholders’ Agreement is partly in writing and partly oral and there is no express or implied agreement as to the governing law. Ms Chan submits that the governing law must be Hong Kong law, as the most crucial part of the Shareholders’ Agreement involves the concept of beneficial ownership, with various individuals holding their shares on trust for the WDI Beneficial Shareholders according to the Agreed Shareholding. She also relies on the use of the word “equity” in the minutes dated 5 August 2002. Furthermore, it is Bai’s and Ye’s opinion that under PRC law, there is no concept of beneficial ownership over property. Hence, Ms Chan argues it would be absurd for the parties to have intended their agreement to be governed by a system of law which does not have the concept which is at the very heart of the Agreement. 47.On the other hand, Mr Shieh argues that the Joint Venture Agreement provides the most crucial indication as to the governing law of the Shareholders’ Agreement. He relies on the following dicta of Hooper J in Dow MBF Ltd v Detrick Ltd [1988] 1 HKLR 344 at 350:
The Joint Venture Agreement governs the obligations of WDI Technology’s shareholders before and after the setting up of WDI Technology, including the funding obligations of the parties, which would determine or substantially affect the shareholding in WDI Technology. Clause 41 of the Joint Venture Agreement provides that the formation, effect, interpretation, performance and resolution of disputes of the joint venture agreement are to be governed by PRC law. Hence, Mr Shieh argues that similarly, on the Plaintiffs’ case, the Shareholders’ Agreement deals with the incorporation of WDI Technology, including its shareholding proportion and if the Shareholders’ Agreement existed, it would form part and parcel of the Joint Venture Agreement or otherwise supplement or vary the same. Therefore, he submits that the Shareholders’ Agreement, being a related agreement, should also be governed by PRC law. 48.With respect, Mr Shieh has overlooked the significance that the Shareholders’ Agreement is the principal agreement while the Joint Venture Agreement is the subsidiary agreement to implement the Shareholders’ Agreement with Solut as the parties’ investment vehicle to carry out the two agreements. Were the two agreements free standing independent agreements as in the case referred to in the Judicial Interpretation, I would have agreed with Mr Shieh. However, where the two agreements are related with one being the principal agreement and the other being a subsidiary agreement, the inference which would be more readily drawn is that the governing law of the subsidiary agreement should follow that of the principal agreement. However, on the facts of the present case, because of the PRC statutory regime in Sino-foreign joint ventures, the governing law of the subsidiary Joint Venture Agreement had to be PRC law. As for the governing law of the principal Shareholders’ Agreement, it has never been the parties’ case that it is United States law. The parties to the Shareholders’ Agreement are two American citizens and the two PRC mainlanders. There could only be two systems of law to choose from: the PRC law being the law of the place of performance of the Joint Venture Agreement and Hong Kong law being the law of the place where the majority equity partner to the joint venture is located. To give effect to the parties’ intention under the Shareholders’ Agreement and their intention as expressed in paragraph 3 the Board Minute, the Shareholders’ Agreement had to adopt a system of law which recognizes beneficial interest in shareholding. Under circumstances such as these, it is not unusual, and indeed it is reasonable, for the principal agreement to be governed by one system of law to give effect to the intention of the parties and for the subsidiary agreement to be governed by another system of law required by the regime in the place of performance of the subsidiary agreement. 49.Of all the pointers argued by counsel and discussed above, only the subject matter of the Shareholders’ Agreement and the place of performance of the Shareholders’ Agreement are in favour of a connection with PRC law. As the Shareholders’ Agreement is concerned with the beneficial interest in the shareholding of WDI Technology, a concept which is not recognised by the PRC law, it must have a closer connection with Hong Kong law which supports its existence rather than PRC law which calls for its abortion. The other pointers are neutral or do not carry much weight. Stepping aside to take a detached view of the facts of the case as pleaded by the Plaintiffs, at least for the present purpose, the irresistible inference is that the Shareholders’ Agreement has the closest and most real connection with Hong Kong law which recognizes such beneficial interest under the Shareholders’ Agreement. Hong Kong law is therefore the governing law of the Shareholders’ Agreement. Whether Xiamen court is clearly or distinctly the more appropriate forum 50.I have considered the various connecting factors for the purpose of determining the governing law of the Shareholders’ Agreement. Those factors are also relevant for determining the ultimate issue of whether Xiamen courts are clearly or distinctly the more appropriate forum for the trial of this action. The subject matter of the Shareholders’ Agreement and the place of performance of that agreement point to Xiamen courts as the forum with which the action has the most real and substantial connection, while the governing law of the Shareholders’ Agreement is in favour of the Hong Kong forum. I have rejected Solut’s argument that a judgment given by a Hong Kong court will not be enforced by PRC court as being in violation of its exclusive jurisdiction over Sino‑foreign joint ventures. The other factors which have to be considered from point of view of appropriateness of the forum are: complexity of the legal issues involved, availability of witnesses and enforcement of judgment. 51.The law governing the relevant transaction is an important factor in determining whether or not the forum is one with which the action has the most real and substantial connection. Here, complexity of the legal issues involved has a bearing on the question as to which forum is clearly or distinctly more appropriate. If the governing law is foreign law, if the legal issues under that system of law are complex and if the legal systems between the home and foreign forum are very different, the general principle that a court applies its own law more reliably than does a foreign court will help to identify the more appropriate forum: Dicey, Morris & Collins (15th ed) at paragraph 12‑034. This is because plainly no court applying another system of law can perform that function as surely as the home court: see Xinjiang Xingmei Oil Pipeline Co Ltd v China Petroleum & Chemical Corp unreported, HCCL 6/2004, 2 February 2005. As the governing law of the Shareholders’ Agreement is Hong Kong law, the difficulties and problems arising from a beneficial interest under a system of law which does not recognise that interest as envisaged by Bai and Ye do not exist. Mr Shieh has not referred me to any other complex legal issues which may arise if the trial is to take place in Hong Kong. 52.There might be problems arising from enforcement of a judgment by a Hong Kong court requiring Frank to transfer his equity in DaChun and requiring Solut to transfer its equity in WDI Technology to the Plaintiffs. Likewise the Plaintiffs may have to transfer 10% of their equity in WDI Plumbing to Frank and Ben. Ye suggested that the Shareholders’ Agreement might be void and unenforceable for want of capital contribution. Insofar as that requirement is concerned, in view of the Judicial Interpretation and for reasons as already explained, I could give little weight to Ye’s opinion. As for the requirement for endorsement or compliance with other governmental regulations are concerned, it is not entirely clear whether such non-compliance could not be remedied. If it could not, it is a factor to be weighed against the Hong Kong forum. But, there is no evidence to the extent that such non-compliance could not be remedied. 53.Furthermore, as submitted by Ms Chan, if the Plaintiffs succeed in their claim, Solut and Frank would be obliged to procure the transfer of, inter alia, such of Solut’s 60% equity in WDI Technology to the Plaintiffs and Ben in accordance with the Agreed Shareholding. Neither Frank nor Solut has said that they would not comply with any order to be made by the Hong Kong court to that effect. If they would comply, there would be no need for enforcement action to be taken in Xiamen. I have rejected Solut’s argument that PRC court has exclusive jurisdiction over this dispute. No satisfactory expert evidence on other difficulties or impossibility of enforcement has been advanced by Solut. I can only assume that none exists. In any event, insofar as Solut is concerned, it is a Hong Kong company situated in Hong Kong. Various enforcement tools are available against Solut and through it against Frank. 54.On the location of the parties, Solut was incorporated and located in Hong Kong. Frank is resident in the PRC. The Plaintiffs are resident in the United States and have no particular Hong Kong connection, though Melvin has a Hong Kong address. Though it is argued that Solut is merely a corporate vehicle used by Frank, it is a party against whom remedies are sought and the legal owner of the equity in WDI Technology. It could be compelled to comply with an order of the court. From point of view of appropriateness of the Hong Kong forum, location of the parties is a factor in favour of the Hong Kong forum. 55.None of the potential witnesses are ordinarily resident in Hong Kong. Melvin has rented a flat in Hong Kong. Frank, Ben and their witnesses are resident in Xiamen which is conveniently near to Hong Kong. There is nothing to suggest that any of them could not attend trial in Hong Kong. From the Defendants’ point of view, it may be convenient if the trial is to take place in Xiamen. Where the trial is to be conducted makes no difference to the Plaintiffs as they had to travel to either of the forum anyway. Given the convenience of travel in this day and age, location of the witnesses carries little weight. 56.The starting point in this type of inquiry is that the Plaintiffs founded this action as of right against the applicant, ie the 2nd Defendant which is a company located in Hong Kong. This is a relevant factor to refuse to grant a stay: Spiliada, Pei Zheng Middle School and China Pui Ching Education Foundation Ltd CACV 262/2005, 21 February 2006; Nan Tung Bank Ltd, Zhu Hai v Wangfoong Transportation Ltd [1999] 2 HKC 606 and Yap Lup Man v Good First Investment Ltd [1998] 1 HKC 726. Even assuming that Xiamen courts are in as good a position to apply Hong Kong law in the trial of this action as Hong Kong courts and given its benefit of being able to enforce its own judgment in Xiamen, for reasons stated above there is nothing to suggest that the Xiamen forum is clearly or distinctly more appropriate than the Hong Kong forum. In conclusion, Solut has failed to discharge its burden of proving that Hong Kong is not only not the natural or appropriate forum for the trial, but that Xiamen is clearly or distinctly the more appropriate forum than Hong Kong. Its failure at this stage is fatal. STAGE II AND STAGE III 57.In view of my conclusion in respect of Stage I, it is unnecessary for me to consider Stage II and Stage III. It will only be a futile exercise to assume on the contrary that the Xiamen forum is more appropriate when I have found it is not and then to balance the advantages and disadvantages, as the answer must turn out to be the same. I shall, nevertheless, make a few observations very briefly. 58.If the action is to be tried in Xiamen, the Plaintiffs will be deprived of the advantage of being able to invoke the concept of beneficial ownership under Hong Kong law, which according to the PRC law experts of both parties do not exist under PRC law. According to Solut’s PRC experts, presuming this contention is correct, the Plaintiffs’ claim would inevitably fail if the action is tried in Xiamen. 59.Furthermore, Solut’s PRC experts assert that under PRC law, shares may not be transferred to a transferee who has not actually contributed capital to the joint venture company. This is clearly not the position under Hong Kong law. While I have doubts about the validity of such a proposition, there is a risk that it is correct. If that is the case, the Shareholders’ Agreement would be ruled to be void and unenforceable. 60.I am therefore satisfied that the Plaintiffs will be deprived of important legitimate personal or juridical advantages, if the action is tried in Xiamen. The Plaintiffs will suffer fatal disadvantages, such that no balancing exercise under Stage III is required. The answer is obvious. CONCLUSION 61.In conclusion, I am not satisfied that the 2nd Defendant has discharged the burden of showing that the Xiamen forum is clearly or distinctly more appropriate than the Hong Kong forum. The 2nd Defendant’s application for staying the action in favour of the Xiamen forum is therefore dismissed. 62.In view of the nature of the issues in dispute, this is a case in which it is appropriate that the Plaintiffs should be awarded their costs of this application only if they are successful in the action. I therefore make a costs order nisi that the costs of the 2nd Defendant’s application be to the Plaintiffs’ costs in the cause with certificate for two counsel.
Ms Linda Chan, SC and Mr Hugh Kam, instructed by Oldham, Li & Nie, for the Plaintiffs Mr Paul Shieh, SC and Mr Jenkin Suen, instructed by Skadden, Arps, Slate, Meagher & Flom, for the 2nd Defendant |
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