張才奎所託管中國山水投資有限公司股份And Another v 張才奎And Another

Judgment Date23 July 2015
Year2015
Judgement NumberHCA1564/2015
Subject MatterCivil Action
CourtHigh Court (Hong Kong)
HCA1564/2015 張才奎所託管中國山水投資有限公司股份AND ANOTHER v. 張才奎AND ANOTHER

HCA 1661/2014,
HCA 1766/2014,
HCA 2191/2014,
HCA 623/2015,
HCA 939/2015 &
HCA 1564/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NOS 1661, 1766, 2191 OF 2014 &

623, 939 AND 1564 OF 2015

____________

BETWEEN
張才奎所託管中國山水投資有限公司股份
相關員工
1st Plaintiffs
李延民所託管中國山水投資有限公司股份
相關員工
2nd Plaintiffs
and
張才奎 1st Defendant
李延民 2nd Defendant

____________

(Heard together)

Before: Hon Au-Yeung J in Chambers
Date of Hearing: 22 July 2015
Date of Decision: 23 July 2015

____________

DECISION
____________

Introduction

1. This is an application by the Receivers for directions from the court as to how to vote at an EGM in 7 days’ time. The Receivers want to vote for the removal of some of the existing directors (including D1 and his son) of a listed company, which is objected to by D1. D2 is absent in these proceedings.

Background

2. By orders dated 20 May 2015 in the first 5 of these actions and another order on 14 July 2015, G Lam J and I appointed the Receivers in respect of a total of 456, 325 shares (“the Shares”) and the income arising therefrom. The Shares represent 45.6% of the issued shares in China Shanshui Investment Co Ltd (“CSI”), which were registered in the names of D1 (“Zhang Sr”) admittedly as a trustee.

3. Upon transfer of the Shares to the Receivers, the shareholding of CSI is as follows:

Receivers 45.6%
Zhang Sr 36.11%
Minority shareholders (including Yu Yuchuan) 18.26%

4. As at 7 July 2015 when the Receivers were appointed to the board of CSI, the directorship is as follows:

(a) Zhang Sr;

(b) Zhang Bin (“Zhang Jr”), Zhang Sr’s son;

(c) Mr Yu;

(d) LIU Yiu Keung, Receiver;

(e) YEN Ching Wai David, Receiver;

(f) KOO Chi Sum, Receiver.

5. CSI is not a trading company but its most valuable asset is approximately 25.09% of the issued capital of Shanshui Cement, a listed company in Hong Kong.

6. The shares of Shanshui Cement are held as follows:

Shareholder Shareholding
CSI 25.09%
Tianrui (International) Holding Co Ltd (“Tianrui”) &
Bliss Talent Investment Limited (“Bliss Talent”)
28.16%
Asia Cement Corporation (“ACC”) 20.9%
China National Building Material Co Ltd (“CNBM”) 16.67%
Public shareholders 9.18%

7. The composition of the board of directors of Shanshui Cement is as stated in the table in paragraph 11 below.

8. On 17 June 2015, whilst dealing with an application by Zhang Sr for leave to appeal against the first 5 receivership orders, Godfrey Lam J directed (in §18 of his decision) that the receivers should not seek to alter the composition of the board of directors of Shanshui Cement without further directions from the court (“the §18 direction”). This direction was also incorporated into the receivership order that I granted.

9. By a notice issued on 8 July 2015, Shanshui Cement gave notice that an EGM will be held next week on 29 July 2015, at 10:00 am (“the EGM”) upon requisition of its minority shareholders, Tianrui and Bliss Talent (its affiliate). The proposed resolution is to remove all but one existing directors and appoint 7 new directors nominated by Tianrui to the board (“the Tianrui Resolutions”).

10. CNBM and ACC have indicated that they will vote against the Tianrui Resolutions. In other words, the CSI’s votes will have a determinative effect.

11. With the assistance of professional advisors, the Receivers have prepared 2 Reports dated 18 and 20 July 2015 (“the earlier report” and “the latter report” respectively). The latter was done upon receipt of further materials and after Zhang Sr has filed his affirmation in opposition to the present application. The Receivers’ proposals in the 2 Reports have been summarized by Ms Wong SC (leading Ms Theresa Chow) as follows:

1 2 3 4 5
Name Directorship Resolutions proposed by Tianrui Proposed Primary Vote of Receivers (under the latter report) Proposed Alternative Vote of Receivers (under the earlier report)
Zhang Jnr (CSI) ED & Chairman Remove For Against
Zhang Snr (CSI) ED Remove For For
LI Cheung Hung (CSI) ED Remove For For
CHANG Zhangli (CNBM) NED Remove Against Against
WU Xiaoyun INED Remove For For
ZENG Xuemin INED Remove For Against
SHEN Bing INED Remove For Against

LI Liu Fa (Tianrui) ED & Chairman Appoint For For / Against*
LI Heping (Tianrui) ED Appoint For For
YANG Yongzheng (Tianrui) ED Appoint For For / Against*
LI Jiangming (Tianrui) ED Appoint Against Against
CHEUNG Yuk Ming INED Appoint For For
LAW Pui Cheung INED Appoint For Against
HO Man Kay, Angela INED Appoint For For
Lee Champion Kuan Chun NED No change No change No change

* The Receivers suggest appointing either one of these as director.

The shaded rows reflect the change of stance of the Receivers in their 2 Reports.

12. In substance, the Primary Vote in column 4 removes all existing directors and will have the effect of leaving no CSI representative on the board. The Alternative Vote in column 5 retains Zhang Jr and 2 INEDs to prevent the serious financial consequences of a “change of control”.

13. The Plaintiffs support the Primary Vote.

14. Zhang Sr opposes both of the Primary Vote and Alternative Vote on the ground that the Receivers have adopted the wrong approach. He invites the court to direct the Receivers to vote against all of the Tianrui Resolutions or allow the Receivers, Zhang Sr and other shareholders of CSI to vote separately at the EGM in accordance with their own wishes (“the Split Vote”).

The role of the Receivers

15. It is important not to lose sight of the context in which the Receivers were appointed and the power given to them by court order.

16. The Receivers were appointed in respect of a portion of shares (§37 of Lam J’s 2nd decision dated 20 May 2015). They are to protect and preserve the Shares including their value: 3rd Lam J Decision dated 17 June 2015 and §§5(2) and (4) of each of the Receivership Orders. They must exercise their powers in accordance with the purpose of their appointment.

17. The Receivers are not the receivers “and managers” of either CSI or Shanshui Cement. On his own volition, G Lam J has specifically directed that the Receivers are not to achieve a complete change of management of Shanshui Cement: the §18 direction.

18. As officers of the court, the Receivers are to act impartially and in accordance with the directions of the court, in administering the Shares. It is a way to “hold the ring” between warring litigants until the disputed issues could be finally determined (§§6-7 of Lam J’s 2nd decision). He set out the role of the Receivers:

“33. The receivers, acting independently of the parties and under the supervision of the court, could see how best to exercise voting rights in relation to the block of shares in question (approximately 38.5% counting the plaintiffs in the first 3 actions, or approximately 43.3% counting the plaintiffs in all 5 actions commenced so far). They could properly perform the function of trustee of a substantial parcel of shares in a company, i.e. act in a manner that is necessary to safeguard that investment (Bartlett v Barclays Trust Co [1980] 1 Ch 515, 532-534), without being bedevilled by the conflicts of interests that beset the 1st defendant. The 1st defendant would remain the registered holder and in control of the balance of the 81.74% (sic) interest he has hitherto held in CSI. The 7 minority shareholders would continue to hold their shares which in aggregate represent an 18.26% stake. As things stand the receivers would not have a controlling stake in CSI, but as substantial shareholders they would be able to influence the voting power that CSI in turn has in Shanshui Cement. They would be able to take a disinterested stance in how the affairs of CSI should be conducted, particularly in relation to the complaints and litigation against Mr Zhang and in relation to its investment in Shanshui Cement, preventing the invidious conflicts affecting Mr Zhang. They could ensure that an independent mind is brought to bear, from the point of view of a shareholder of CSI, on the grant of the share options to the Zhang’s. They would be able to help ensure that the relevant shares in CSI are not improperly encumbered or otherwise utilised for improper purposes and that any dividend income CSI receives and any dividend downstream are properly accounted for. It is true that CSI only has 25.09% in Shanshui Cement and that, as I shall refer to below, another shareholder has overtaken CSI as the largest shareholder of Shanshui Cement, but 25.09% is nevertheless a substantial interest in a listed company. If the affairs of Shanshui Cement are being prejudicially conducted, the receivers would be in a much better position than the plaintiffs to cause CSI as a shareholder to take action. The directors of Shanshui Cement would be kept in check. (emphasis added)

34. Furthermore, the receivers could ameliorate the position of the plaintiffs as far as the intimidation and bullying is concerned. By an order for the appointment of a receiver the court assumes control of the property affected, both in terms of the legal estate and any equitable title. No transfer of the relevant shares in CSI could take place without the involvement of the receivers. Any transfer of any equitable interest under the trust, if it could take place at all, would also properly have to involve the receivers who would have temporarily displaced the trustee. The receivers would of course be officers of this court. Any interference with them or with property in their possession...

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