張才奎所託管中國山水投資有限公司股份及另一人 v. 張才奎及另一人

HCA 1661/2014,
HCA 1766/2014,
HCA 2191/2014,
HCA 623/2015 &
HCA 939/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NOS 1661, 1766, 2191 OF 2014 &

623 AND 939 OF 2015

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(Heard together)

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DECISION
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1.By his summons dated 3 July 2015, the 1^st defendant (D1) seeks 4 sets of directions from the court directing the interim receivers:

(a) To resist any attempt to change the board composition of a company known as China  Cement at the forthcoming EGM and to vote in a certain manner (“Direction 1”);

(b) To return the shares in CSI relating to those plaintiffs who have withdrawn or will withdraw from the action from time to time and to account for and return all income collected by the receivers, if any (“Direction 2”);

(c) To desist from investigating any affairs of China Cement (“Direction 3”);

(d) To limit the scope of their request for documents (Direction 4”).

2.D1 has agreed that the receivers shall take out an application for directions on how to vote by a certain time.  This decision is only about Direction 1.  The plaintiffs and receivers suggest that Direction 1 be dismissed as being unnecessary and pre-mature.  D1 suggests that costs be reserved till after the receivers’ position is clear.

Background

3.The background facts have been set out in §§6-44 of G Lam J’s 1^st decision dated 13 May 2015.  The same abbreviations will be adopted in the present decision.

4.The plaintiffs in these 5 actions were employees of a state-owned enterprise known as Jinan Shanshui set up in 1997.  They were participating employees to a stock ownership scheme and became beneficial shareholders in shares which can ultimately be traced to CSI.

5.CSI is a non-trading company whose most valuable asset is a 25.09% holding in China Cement, now listed on the Hong Kong Stock Exchange.

6.The equity interest of the participating employees was transferred on 15 December 2014 to 9 individuals known as “management shareholders”, including the 2 defendants.

7.Whilst exercising control over CSI, the defendants have engaged in a series of acts that were detrimental to the plaintiffs’ interests and in breach of the defendants’ duties to them. 

(a) The defendants entered into trusts in 2005 (“the BVI Trusts”) without the participating employees’ knowledge and consent.  Those were discretionary trusts which effectively stripped the participating employees of their proprietary interest in the trust assets or capital.

(b) In 2013, D1 proposed a repurchase plan to buy out the participating employees’ interest in 3 terms of 10 years each by using funds belonging to them.  This proposal alerted the participating employees to the BVI Trusts and commenced action. 

(c) On 27 October 2014, D1 caused Shanshui Cement to enter into a subscription agreement with CNBM which had the effect of diluting CSI’s shareholding in Shanshui Cement from 30.11% to 25.09%.  This triggered statutory derivative action by minority shareholders of CSI in HCMP 360/2015.

(d) On 27 January 2015, (after 3 of the present actions have been instituted) Shanshui Cement announced a board resolution to grant options to D1, his son and other grantees to subscribe for over 207,000,000 new shares, which had the effect of diluting CSI’s shareholding from 25.09% further down to 23.64%.

(e) On 14 June 2015, D1 entered into a sale and purchase agreement with CNBM under which D1 sold to CNBM 102,448 shares in CSI.  He sought to appoint one of CNBM’s officials, Cao, as a director of CSI but that has been restrained by an injunction imposed by Harris J.

8.In about April 2015 there had been steps taken in the PRC to threaten and bully a large number of plaintiffs, causing them to withdraw their actions in Hong Kong.

9.By his 2^nd decision on 20 May 2015, G Lam J appointed the receivers to receive a total of 432,861 shares in CSI registered in D1’s name (“the Trust Shares”) and the income arising therefrom.

10.By his 3^rd decision dated 17 June 2015, dismissing D1’s application for leave to appeal against the receivership order, Lam J stated expressly that:

“17. The concern of banks, suppliers and joint venture partners of CSC was really about what the receivers would do rather than about the appointment of receivers.

18. The primary concern of the Court in appointing receivers was to protect and preserve the trust assets including their value, not to achieve a complete change of management of the listed company. The receivers are there to hold the ring, not to act for one of the parties. … I had not when appointing receivers contemplated an immediate change of management of all the companies. The shareholding distributions in CSI and Shanshui Cement are delicate, there being other significant shareholders who are not party to this litigation as well as minority shareholders in CSI who are involved in separate litigation with the 1^st defendant. In the circumstances that have arisen it seems to me appropriate at this stage that the court should direct, which I do, that without obtaining further directions of the court, the receivers do not seek to alter the composition of the board of directors of Shanshui Cement”.

11.On 18 June 2015, Tianrui (International) Holding Co Ltd (“Tianrui”) and its associate, which hold approximately 28.16% of China Cement, requested China Cement to convene an EGM for the purpose of considering and, if thought fit, passing a series of ordinary resolutions replacing the entire board of China Cement except 1 non-executive director (“the proposed resolution”). 

12.On 22 June 2015, D1 informed the receivers of Tianrui’s request. D1 asked for the receivers’ views as to the proposed resolution.

13.Before expiry of the time which D1 gave the receivers to respond, D1 took out the present summons on 3 July 2015.  D1 claims that the receivers, Tianrui, the minority shareholders of CSI, and/or the plaintiffs were collaborating to oust the current management of China Cement. 

14.Till this hearing the receivers have not made up their minds. Meanwhile they have told D1 that they would make an independent assessment on how to respond to the proposed resolution and would seek the court’s directions if necessary.  By a letter dated 3 July 2015, the receivers admitted that Tianrui had approached the Receivers to discuss matters relating to CSI and China Cement including the composition of board of directors of China Cement” but declined to provide any further information.

15.The EGM of China Cement will be held on 29 July 2015 at 10 am. All shareholders, including CSI, have to submit authorization forms to attend the meeting 48 hours beforehand (ie 10 am on 27 July 2015).  Before that, CSI needs to give reasonable notice to hold a board meeting and to decide on how to vote and who shall be authorized to represent CSI. 

16.D1 claims that there is urgency to deal with CSI’s stance as stated in the preceding paragraph.  The receivers say that the Direction 1 was unnecessary and pre-mature.

Analyses

17.The application for Direction 1 is misconceived in my view.  G Lam J has already put in the safeguard against change in board composition in paragraph 18 of his 3^rd decision.  D1 does not have to take out this summons at all.  On a proper construction of paragraph 18 of the 3^rd decision, if the receivers make no application to the court for directions as to how to vote at the EGM, D1 would have achieved preservation of the status quo in the board of China Cement as he hopes for under Direction 1 with little costs incurred.

18.Mr Lam SC, leading Mr Wou, who act for D1, seeks to justify Direction 1 by submitting that the receivers have not been able to make up their minds and there was no indication that they would seek the court’s directions soon. So D1 finds it necessary to act “proactively” to take out this summons and inform this court of the potential impact of the proposed change on China Cement and, in turn, the Trust Shares.

19.With respect, this is putting the cart before the horse. Direction 1 assumes that the receivers will vote in favour of the proposed resolution wholesale and directs them to vote in accordance with D1’s wish. This is a wrong premise and has been flatly denied by Ms Koo, one of the receivers. 

20.The receivers are independent of each party.  Whilst they may consider the views of the minority shareholders, the plaintiffs or even the defendants, the receivers will not be dictated by their views. 

21.Looking at the evidence at this stage, I agree with the receivers that it is not a straight forward decision to vote for or against the proposed resolution.  They need to study the past financial documents and may need to take legal advice on PRC law before coming to a decision.

22.This “proactive approach” of D1 was in fact a hindrance to the proper discharge of the receivers’ duties.  As pointed out by the Ms Wong SC (leading Mr Justin Ho) for the receivers, a large part of last week was devoted to answering the application for Direction 1 when the receivers should be studying relevant materials to decide on how to vote at the EGM.

23.The proper approach is for the receivers to apply to court pursuant to paragraph 18 of the 3^rd decision, if necessary.  The High Court can deal with urgent applications made a short notice.  Time for issuing of a summons can be abridged if justified.    Urgent applications can be dealt with by the duty judge or if circumstances justify and with proper arrangement beforehand, be dealt with by specialist judges.  It is not for D1 to take over the duties of the receivers.

24.I have set out the history of this series of litigation (in paragraph 7 above). I agree with Mr Joffe (and Ms Rachel Lam with him) that what D1 has been doing was to try and maintain control over the CSI shares.  He was high-handed.  In the meantime the plaintiffs suffered from bullying.  D1 has not been cooperative such that the receivers only became appointed as directors only on 7 July.  The application for Direction 1 is yet another move to distract the receivers from their proper discharge of duties.

25.The wastage of costs in the present application must not be overlooked.  The plaintiffs are, in the words of Mr Joffe, “ordinary hard working people”.  They face what appear to them to be financial giants in these litigations. The costs of the receivership come out in the first instance of the subject matter of the receivership.  The court must be wary that costs must not blow out of such proportion as to deplete the value of the shares.

Conclusion

26.I therefore dismiss the application for Direction 1.  If deemed appropriate, the receivers can take out the appropriate application.

27.Costs in relation to Direction 1 require more input in terms of factual evidence whereas Directions 2-4 are more about construction of the receivership order.  75% of costs of the summons shall be to the plaintiffs and receivers to be borne by D1.  I shall summarily assess the costs on 22 July 2015.

28.I thank counsel for their assistance.

Mr Victor Joffe and Ms Rachel Lam, instructed by K & L Gates, for the 1^st and 2^nd plaintiffs

Mr Paul Lam SC and Mr Jean-Paul Wou, instructed by Deacons, for the 1^st defendant

Ms Lisa Wong SC and Mr Justin Ho, instructed by P.C. Woo & Co for the joint and several receivers of the shares in China Shanshui  Investment Co Ltd