Luck Continent Ltd v. Cheng Chee Tock Theodore and Others

Press Summary (English)

Press Summary (Chinese)

FACV 4 of 2014

IN THE COURT OF THE FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

FINAL APPEAL NO. 4 OF 2014 (CIVIL)

(ON APPEAL FROM CACV NO. 107 OF 2012)

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Between :

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REASONS FOR JUDGMENT

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Mr Justice Ribeiro PJ :

1.At the hearing, the appeal was dismissed without entering into the merits and with the appellants ordered to pay the respondent’s costs on an indemnity basis, for reasons to be provided.  These are the Court’s reasons.

2.This appeal arises out of proceedings brought by petition under section 168A of the Companies Ordinance[1] in relation to the conduct of the affairs of C Y Foundation Group Ltd (“CYF”), a Bermudan company registered in Hong Kong and listed on the Hong Kong Stock Exchange. 

3.The respondent is the petitioner, Luck Continent Ltd (“LCL”), a BVI company owned and controlled by Dato Poh Po Lian (“Dato Poh”).  It was the largest shareholder in CYF, holding 46.58% of the company’s issued shares at the date of the trial before Barma J[2] which began on 28 March 2011.  The two individual appellants, Cheng Chee Tock Theodore (“Mr Cheng”) and his wife Leonora Yung (“Mdm Yung”), own and control the 3^rd to 8^th corporate appellants which together held 25.211% of CYF’s issued shares at the material time.  The 9^th respondent, CYF, was formally joined as a party but was unrepresented before us and can be ignored.

The course of events

4.Dato Poh and Mr Cheng had both been members of CYF’s board, but they fell out during 2009 and Dato Poh resigned as director.  He then sought to convene a Special General Meeting of CYF with a view to voting Mr Cheng’s nominees off the board and appointing his own nominees in their place. 

5.However, Dato Poh was confronted with bye-law 86(4) of CYF’s Bermudan articles which required any removal of directors before expiry of their term of office to be by way of a special resolution carried by a majority of 75% of the shareholders present and voting.  With Mr Cheng and Mdm Yung controlling just over 25% of CYF’s shares, they were in a position to block any such resolutions aimed at removing their nominees from the board or at altering the bye-laws so as to permit removal by an ordinary resolution.

6.The LCL camp noted that bye-law 86(4) was inconsistent with the Stock Exchange’s Listing Rules which stipulated that under the articles of listed companies, an ordinary resolution should suffice for the removal of directors.  They expressed concern that failure to bring CYF’s bye-laws into line with that requirement might endanger CYF’s listed status, a concern given some substance by communications from the Stock Exchange.  Dato Poh made three attempts during 2010 to have bye-law 86(4) amended by special resolution, but they were all blocked by the votes of Mr Cheng’s camp preventing attainment of the requisite 75% majority.

7.Pursuing a parallel strategy, Dato Poh managed on 26 February 2010 to have the bye-laws changed to increase the permitted number of directors on CYF’s board to 25, his intention being to take control of the board by LCL causing 13 of his nominees to be appointed as directors.  However, that plan could only be implemented at the following AGM when the period of office of the existing directors expired. 

8.In the meantime, on 14 April 2010, LCL presented the section 168A petition, alleging that by voting their shares so as to block amendment to CYF’s articles and thus preventing it from bringing bye-law 86(4) into line with the Listing Rules’ requirement, the appellants were putting the listed status of CYF at risk and were thereby causing CYF’s affairs to be conducted in a manner unfairly prejudicial to the interests of LCL as a member of the company.

9.On 30 August 2010, CYF’s offices were raided by officers of the Independent Commission Against Corruption and Mr Cheng was subsequently charged with an offence of fraud in relation to a transaction involving CYF. On the following day, 31 August 2010, trading in CYF’s shares was suspended.

10.As CYF’s AGM approached, Dato Poh’s plan to appoint the majority of directors on the board met obstacles involving an attempt to postpone the AGM indefinitely and an attempt to disqualify LCL from voting.  After those obstacles were overcome, the AGM was held on 8 April 2011, at which Dato Poh succeeded in gaining control of the board.

11.After the trial which took place between 28 March and 18 April 2011, Barma J delivered judgment on 25 April 2012, holding in favour of the petitioner.  He ordered bye-law 86(4) to be amended by replacing the word “special” with the word “ordinary” so that directors could at any time be removed by ordinary resolution.  No stay of that order was sought and, on 17 July 2012, the Stock Exchange allowed trading in CYF shares to resume.

12.On 19 October 2012, Barma J ordered costs in favour of LCL save in respect of certain transactions and applications. 

13.The Court of Appeal[3] dismissed the appellants’ appeal on 2 August 2013 and ordered them to pay LCL’s costs. 

14.On 26 August 2013, the appellants issued a motion seeking leave to appeal which was granted by the Court of Appeal on 27 January 2014 on the basis that two questions of great general or public importance ought to be submitted to this Court.

15.Those questions raise the issue of whether, to what extent and on what basis a shareholder’s exercise of his voting rights in his own interests and in accordance with the provisions of a public company’s articles may be regarded as constituting or resulting in unfairly prejudicial conduct under section 168A.

Late revelations

16.On 24 November 2014, two days before the start of this appeal, the Court received a letter from counsel for the respondent[4] indicating that by 21 September 2012, the 1^st to 8^th appellants had drastically reduced their shareholding in CYF from 25.211% to 1.57% and that while their current shareholding was unknown, it was clearly less than a 5% holding since a disclosure requirement under the Securities and Futures Ordinance would otherwise have been triggered.

17.It was only on 25 November 2014, the day before the start of the hearing of this appeal, that the Court was informed by Mr Victor Joffe, counsel for the appellants, that he had been told by his solicitors late on the previous day that (i) save for a small parcel of 10,000 shares held by the 4^th appellant, the appellants had disposed of their shares in CYF in or by September 2012; and (ii) that the bye-laws were amended pursuant to the judgment of Barma J and that trading in the shares had resumed by about 17 July 2012.

An academic appeal

18.In the light of those revelations, it is plain that this appeal has become completely academic.  As we have seen, the dispute is between two blocks of shareholders struggling for board control.  The appellants’ contention has throughout been that they have every right to vote their shares in their own interests, even if that resulted in defeating a resolution which left CYF with a bye-law inconsistent with the requirements of the Listing Rules, thereby possibly endangering its listed status.  The respondent’s contention has been that voting their shares with that result justifies relief under section 168A.

19.Dato Poh had gained control of the board on 8 April 2011 and, by Barma J’s order dated 25 April 2012, bye-law 86(4) had been amended to permit removal of directors at any time by ordinary resolution.  So at that stage, the legal battle for board control had apparently been won by the Dato Poh camp.  And we now know that after trading resumed on 17 July 2012, Mr Cheng’s camp sold off almost all their CYF shares so that by September 2012, they retained no meaningful interest in the company.  They effectively no longer had any CYF shares to vote and, anyone would have thought, must have given up the struggle over amendment of bye-law 86(4) and board control.

20.But somewhat astonishingly, without disclosing the loss of their status as holders of more than 25% of the shares, on 30 and 31 May 2013, some eight months after they had disposed of their shareholding, the appellants proceeded to argue the appeal before the Court of Appeal.  Then, having lost that appeal, they lodged an application dated 26 August 2013 for leave to appeal to this Court.  That application was granted by the Court of Appeal on 27 January 2014, and the hearing of the present appeal was set down for 26 November 2014.

21.It is hard to discern any reason for the appellants to have persisted in the appeals when they no longer had any meaningful interest as shareholders in CYF.  Even if the Court of Appeal or this Court had been persuaded to overturn Barma J’s Order and to restore bye-law 86(4) to its original form, it could make no difference to the appellants since they no longer had the shares to block a special resolution and had in any case lost board control. 

Failure to disclose to the Court

22.It is reprehensible that the position of the appellants and the academic nature of the appeal was not disclosed to the Court of Appeal or, until the last minute, to this Court.  While counsel were unaware of the change of status, we were told by Mr Joffe that the solicitors acting for the appellants knew from September 2012 that the appellants had sold their shares.  No explanation has been provided for the solicitors failing to ensure that the Court of Appeal was so informed at the hearing of the appeal and when leave to appeal to this Court was sought.  We were merely told that non-disclosure was “an oversight”, which is not an acceptable excuse. 

23.If the true position had been disclosed, there is every likelihood that the Court of Appeal would have refused to entertain the appeal.  It would certainly have refused to give leave for the appeal to progress to this Court.  Very significant resources have consequently been expended by the Courts and by the respondent on a matter which is of no practical consequence to the appellants.

24.It is now over five years since the Civil Justice Reforms came into effect.  Every legal practitioner must be expected now to be familiar with the underlying objectives listed in Order 1A r 1 of the Rules of the High Court and of the duty imposed by Order 1A r 3 on the parties and their legal representatives to assist the Court to further those objectives.  Of particular relevance here are the objectives of ensuring that a case is dealt with as expeditiously as is reasonably possible; of ensuring fairness between the parties; and of ensuring that the resources of the Court are fairly distributed.  Non-disclosure of the centrally important change of shareholder status constituted a failure by the appellants and their solicitors in their duty to the Court. 

Discretion to decide academic appeals

25.Counsel for the appellants acknowledged that the appeal is academic (save for the question of costs) but invited the Court nevertheless to deal with the merits of the appeal.

26.In Po Fun Chan v Winnie Cheung (2007) 10 HKCFAR 676 at §18, the Court’s approach to academic appeals was stated as follows:

“Rarely and exceptionally, the public interest in having a particular point of law decided can be so great as to warrant leave to pursue an application or appeal even though the case has become academic as between the immediate parties save perhaps as to costs. Normally, however, such a case should proceed no further. And any issue as to costs should be dealt with on such an appreciation as can be formed on a broad view of the matter. This broad approach avoids further costs. It represents practical justice.”

27.Mr Joffe submitted that great public interest in having the relevant points of law decided exists.  He suggested that in finding that the present facts were capable of constituting unfair prejudice, the courts below had erroneously gone beyond well-established limits of the section 168A jurisdiction, making it important for such error to be corrected.  He also pointed to the respondent having invited the Court to re-formulate the test for or scope of section 168A relief as a reason for proceeding.

28.We are not persuaded that this is one of the rare and exceptional cases where, though academic, the Court should decide the merits of the appeal. 

29.We accept that difficult and interesting questions are raised by the appeal.  However, the context is a fact-specific private dispute between shareholders involving an unusual combination of facts, namely, that the company is a publicly listed company; that it happens to have a Bermudan bye-law which is at odds with the Listing Rules’ requirement relating to the removal of directors with possible consequences for the company’s listed status; that the respective shareholdings of the contending parties enabled special resolutions to be blocked by one faction; and that the petition is brought by the largest shareholder in a publicly listed company complaining of unfair prejudice instigated by parties holding a smaller parcel of shares.  As Barma J noted,[5] these features make this a highly unusual section 168A case. 

30.For these reasons, we dismissed the appeal without entering into the merits.  We considered indemnity costs appropriate since leave to appeal would not have been granted if the true position had properly been disclosed.

Mr Victor Joffe, Mr Kestrel Lam & Ms Theresa Chow, instructed by Peter K S Chan & Co, for the 1^st to 8^th respondents

Mr. Charles Sussex, SC & Mr. Douglas Lam, instructed by Henry Wai & Co, for the petitioner

Attendance of the 9^th respondent is excused.