"Mediation on Shareholders'

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"Mediation on Shareholders' Probate Disputes" 

• Date Time 3 June 2011 (Friday), 700 p.m. to
  830 p.m. Venue  Room 210, Wing Lung Bank
  Building for Business Studies, HKBU Organized
  by Corporate Governance and Directorship (HKBU)
  Society(????????????????), Centre for Corporate
  Governance and Financial Policy

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Recent Examples of Disputes in Hong Kong

• Between siblings in relation to the position of
  chairman and chief executive
• Kwok Ping Sheung Walter v Sun Hung Kai Properties
  Ltd 2008 3 HKC 465 Kwok Ping Sheung Walter v
  Sun Hung Kai Properties Ltd 2009 2 HKLRD 11
• Between cousins in relation to Trade Mark
• Ng Yiu Ming v Leung Yee (unrep, HCA7462/1998,
  HCMP1730/1999, 1999 HKEC617

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The Civil Justice Reform (CJR)

• The Civil Justice Reform (CJR) implemented in
  HK in 2009 set out a number of underlying
  objectives as stated in Order 1A Rule 1 of the
  Rules of the High Court (RHC).  One of the
  objectives is to facilitate the settlement of
  disputes.  The Judiciary also promulgated a
  Practice Direction on Mediation (PD 31) which
  was made effective from 1 January 2010.  The main
  feature of PD 31 includes the filing of a
  Mediation Certificate, a Mediation Notice and
  Response.  The court will take the conduct of the
  parties into account in deciding on cost
  sanctions if any party unreasonably refuses to
  consider mediation.

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Discussions Today

• Legal Rights of minority shareholders
• E.g. Applications under Section 168A of the
  Companies Ordinance
• Mediation of Shareholder Disputes

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Usual questions from your Client?

• Q1. Could I contact the other side when a civil
  litigation is in progress?
• Q2. My chance to win the case?
• Q3. Litigants told you about his chance of
  winning the case by mentioning very technical
  legal grounds, like, unfair prejudice or just
  and equitable winding up. (Where do they learn
  this from?)

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Usual questions from your Client contd

• Q4. Court directed us to mediation, why?
• Q5. Could my staff, relatives and friends attend
  the mediation?
• Q6. Is it expensive?
• Q7. Where could I find a mediator?
• Q8. Could I use the information I get from
  mediation for further litigation (fishing
  information)?
• Q9. Is the settlement agreement binding?

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Common Reasons for Shareholders Disputes

• Disputes between shareholders arise for any
  number of reasons, but it is not uncommon for the
  following issues to cause tension
• breach of directors duties
• the companys strategy management
• dividend policies
• disparities between salaries
• separate business interests
• failure to provide financial, accounting and
  statutory information
• exclusion from meetings, removal of directors,
  oppression of a shareholder
• breaches of shareholders agreements/ partnership
  deeds

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In fact, the above could be classified into three
categories

• Firstly, management disputes on day to day
  operational matters, such as contracts,
  suppliers, human resources, premises and so on.
  Deeper divisions can arise in relation to
  strategic decisions such as mergers and
  takeovers.
• Secondly, personal disputes can arise around
  matters such as succession and divorce.
• Thirdly, issues can arise around misconduct, such
  as loans to directors, transactions with
  connected persons, diversion of corporate
  opportunity and exclusion/removal from management.

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Issues for Auditors

• A companys auditor is likely to be asked for
  advice on how to deal with such disputes
• A key issue for any auditor is to ensure that he
  avoids conflicts of interest.
• If an auditor has to question if he has a
  conflict of interest, it is likely that he does!
  As with any potential conflict of interest, the
  auditor should abide by the Institutes ethical
  guidelines
• Auditors need to be careful in issuing Audit
  Reports on companies which are the subject of
  internal strife
• It is not uncommon for disputes to lead to
  embarrassing disclosures regarding the
  companys tax affairs that the auditor was
  previously unaware of
• Issues that can come up include secret bank
  accounts and under the counter cash payments to
  staff
• Accordingly, auditors need to watch out for
• Criminal act of Money Laundering, Theft and
  Fraud, Company Law Enforcement and various Tax
  legislation

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Talking About Legal Rights of Shareholders

• Legal Rights of Shareholders are governed by
• the law Companies Ordinance, case law
• the Memorandum and Articles of Association
• Shareholders Agreement, if any

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Unless there is a Shareholders Agreement to the
contrary, the general law that normal MA provide
that

• Management of the company is in the hand of the
  Board of Directors (A.82 Power and Duties of
  directors)
• The Board is elected by the Shareholders
• The Majority Shareholders can dictate the
  composition of the Board
• Minority has no automatic right to management
• Majority shareholder is not a fiduciary
• There is no mechanism for no-fault divorce

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Management can be conducted in a way adversely
affecting the value of the Shareholding, for
instance

• not declaring dividends but paying excessive
  remuneration to Directors
• selling assets of the Company at undervalue to
  related parties
• (for quasi-partnership companies) excluding the
  Minority from
• participating in management
• mis-management/negligence
• diverting business away from the Company to
  related parties
• hiring relatives of Directors at excessive pay
• issuing new shares unnecessarily
• contravening the law (unlawful return of capital,
  unlawful loan to directors )
• not providing information to Shareholders

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What can Minority shareholders do in such a
situation?

• Sell his Shares?
• Not always possible for private companies
• Problem of valuation
• Call for a General Meeting?
• s.111(2) (court may order AGM to be held on
  default),
• s.113 (5 shareholder may file requisition a
  general meeting),
• s.114B (court order general meeting when one
  cannot be called)
• no use if meeting controlled by Majority
• Fire the delinquent Director?
• got to have 50 (s.157B) note the cumbersome
  procedures

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Legal ways against Abusive Majority

• Derivative Action is an exception to The
  principle of majority rule which provides that-
• Only the company can sue the wrongdoer
• Only a majority of the board can decide whether
  to take legal action
• (In a derivative action
• a Minority is suing the wrongdoer on behalf of
  the Company (form of action A suing on behalf of
  all shareholders of the Company except B)
• an action in the name of the Company
• all recoveries go to the Company
• but the Minority may bear the costs consequences
  of losing)

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• s. 168A petition (unfair prejudice)
• s. 177(1)(f) petition (just and equitable winding
  up) Chime Corp Ltd 2004 HKLRD 922
• Inspection Order (s.152FAs.152FE)

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• Injunction Order (s.350B)
• (Interlocutory injunction or appointment of
  receivers/provisional liquidators is available in
  limited circumstances
• Generally need to show breach of duties, unfair
  prejudice or that the conditions for derivative
  action are satisfied (fraud on minority and
  wrongdoer control)
• Generally not available to creditors
• When can they apply (s.350B(1))-
• contravention of CO (e.g., illegal loan to
  directors, unlawful return of assets, financial
  assistance to purchase own shares)
• breach of fiduciary duties of any officers (not
  just for directors, maybe CEO or others)
• breach of fiduciary or other duties by directors
• attempt or conspiracy to do the above)

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• Imagine if you are a minority shareholder and you
  are informed by your lawyer for the about Legal
  Rights
• What would you do?

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• Case
  HCCW
  154/2010
• IN THE HIGH COURT OF THE
• HONG KONG SPECIAL ADMINISTRATIVE REGION
• COURT OF FIRST INSTANCE
• COMPANIES (WINDING-UP) NO. 154 OF 2010
• ----------------------
•  IN THE MATTER OF YUNG KEE HOLDINGS LIMITED 
• and IN THE MATTER OF SECTIONS 168A AND 327(3)(C)
  OF THE COMPANIES ORDINANCE, CAP. 32
• ----------------------
• BETWEEN    
• KAM KWAN SING (???) Petitioner 
• and    
• KAM KWAN LAI (???) 1st Respondent 
• KAM LIN WANG CARREL (???) 2nd Respondent  
• LEGCO INC.    3rd Respondent 
• EVERWAY HOLDINGS LIMITED  4th Respondent 
• YUNG KEE HOLDINGS LIMITED5th Respondent   
• ----------------------
• Before  Hon Chung J in Chambers

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• 2.  The background leading to this application is
  largely undisputed and can be summarised as
  follows.
• 3.  In the 1940s, the father of the petitioner
  and the 1st respondent (KL Kam) founded a
  Chinese restaurant in the Central District.  In
  time, the restaurant became of fame and is now
  located in a building in Central owned by a
  related company.
• 4.  After the petitioner and KL Kam came of age,
  they were brought into the management of the
  restaurant at different stages.  When the father
  passed away in 2004, they became in effect the
  only individuals managing the restaurant (their
  younger brother, who later passed away in 2007,
  took up a role in the kitchen).

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• The Petition
• 6.  The petitioner commenced this petition in
  March 2010 relying on s. 168A, Companies
  Ordinance (Cap. 32) (unfair prejudice) and
  s. 327(3)(c), Cap. 32 (just and equitable winding
  up).  Various misconduct on the respondents part
  has been set forth in the petition, but this is
  irrelevant for present purposes.
• 7.  It is undisputed the primary relief sought is
  for the petitioners shares in Yung Kee Holdings
  to be purchased by KL Kam.  The winding up of
  Yung Kee Holdings is sought by way of alternative
  relief.  The petition also seeks damages, but
  this is also irrelevant for present purposes.

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• 18.  But in this application, Yung Kee Holdings
  is not the company which directly owns or
  operates the restaurant business rather, it is a
  company which in effect holds 80 of the shares
  of the company which does (namely, Yung Kee
  Restaurant Group Ltd.) (the YKR shares).
• 23.  The assets held by Yung Kee Holdings through
  the share-holdings of its various subsidiaries
  are very substantial in value-
• (a) the total cash deposits amounted to about
  882 million at the end of February 2010
• (b)    the restaurant building located in Central
  and the godown units are unencumbered and must be
  worth substantial sums (the petitioner mentioned
  sums in the billions)
• (c) according to the audited accounts of Yung Kee
  Restaurant Group Ltd. for the financial year
  ending April 2009, the restaurants net profits
  were about 51 million (about 54.89 million in
  2008) and its net assets were about 126.9
  million.

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• ???????????? Yung Kee Holdings Limited,???????????
  ????,??????????????
• ????????????????,??????,???????? 45,??
  10?????????????????? 55,????????
• ??????????????,?2010? 3????????,??????,???????????
  ?,??????????????????????????,??? 10???
• ??????????????,??????,????????????????????,???????
  ??????,???????????,??????????????,??????????????

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• ???????????????
• 1.???????????????2.????????????,????????3.??????
  ??????????????????,?????????? 4.5??4.????????????
  ??5.???????????,????????????6.??????????????7.?
  ???????
• ??????????

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Compare to the above mentioned Recent Examples of
Disputes in Hong Kong

• What are they in common???
• Between siblings in relation to the position of
  chairman and chief executive
• Kwok Ping Sheung Walter v Sun Hung Kai Properties
  Ltd 2008 3 HKC 465 Kwok Ping Sheung Walter v
  Sun Hung Kai Properties Ltd 2009 2 HKLRD 11
• Between cousins in relation to Trade Mark
• Ng Yiu Ming v Leung Yee (unrep, HCA7462/1998,
  HCMP1730/1999, 1999 HKEC617

25
Role of Mediation

• The legal costs of a Boardroom/Shareholder
  dispute can be very significant if it reaches the
  steps of the High Court
• A very attractive option for dealing with such
  disputes is to appoint an experienced Mediator
  who has a good understanding of Shareholders
  disputes and who can act as honest broker
  between the disputing parties
• The Rules of the Commercial Court make provision
  for the use of Mediation.
• Apart from the significant savings on legal
  costs, there should also be the benefit of no
  publicity
• Mediated settlements can also help to ensure that
  there is less acrimony between the parties after
  the settlement is reached

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Mediators concern in Shareholders Disputes

• Rebuild parties long term relationship if
  possible,
• Material Issues Material level, people have
  different
• Meanings and associations with material goods
  money
• Ways of negotiating
• Ways of measuring assigning value
• Ways of assigning priorities
• Handling Emotional Aspects
• Cultural Differences, Ethical groups, religious,
  age, balance of power, etc..

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Case Re Dianoor International Limited - 2009
HKCU 2103

• Court of First Instance Hon Barma J in Court
  HCCW 576/2008 HCCW 577/2008 HCCW 27/2009 HCMP
  789/2009 23 December 2009
• Companies and Corporations Winding up
  Receivership Appointment of provisional
  liquidators Validation order Paying off of
  petitioning creditors Whether companies be
  wound up

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• 1 These proceedings concern the affairs of
  three companies called Dianoor International
  Limited ("DIL"), Dianoor Jewelcraft Limited
  ("DJL") and Checkers Limited ("Checkers"). Each
  of them is at present in receivership, Mr Edward
  Middleton and Mr Patrick Cowley of KMPG Hong
  Kong, and Mr Kevin Roy Mawer ("the Receivers")
  having been appointed as interim receivers on an
  ex parte basis on 25 April 2008 by Kwan J in HCMP
  789 of 2008.
• 2 The companies are also the subject of winding
  up petitions. Creditors petitions were presented
  against DIL and DJL respectively on 3 December
  2008 by former employees of those companies, on
  the basis of unpaid Labour Tribunal awards
  against them. Each of these petitions is also
  supported by a number of other employees, who
  have also obtained awards against the companies
  in the Labour Tribunal. Checkers is the subject
  of a petition for winding up on the just and
  equitable ground, pursuant to a petition dated 13
  January 2009 that was presented by itself acting
  through the Receivers.

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• 3 The background to this matter arises out of
  divorce proceedings in the United Kingdom,
  between a Mr Mubarak and his former wife, Mrs
  Mubarik. It appears that Mr Mubarak was involved
  in the jewellery business. Having initially
  commenced such business in Kuwait in the early
  1980s, he set up a similar business in Hong Kong
  .
• 4 In 1997, Mr Mubarak set up the IMK Family
  Trust ("the Trust") in Jersey, into which he and
  Mrs Mubarik transferred their shares in Twenty
  First Century. The Trust thus became the owner of
  the whole of the Dianoor group of companies.
• 5 In 1998, Mr Mubarak moved out of the family
  home, and took steps to have Mrs Mubarik excluded
  as a beneficiary of the Trust. Mrs Mubarik then
  petitioned for divorce, setting off an extensive
  series of litigation between them. In December
  1999, Mrs Mubarak was awarded a sum of slightly
  under GBP 5 million and further sums for
  maintenance by way of financial settlement as
  against Mr Mubarak by the English High Court.
  When Mr Mubarak failed to pay, proceedings were
  taken by Mrs Mubarik in Jersey, in which Mr Mawer
  and a colleague of his were appointed receivers
  of the Trust ("the Jersey Receivers").

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• Case DCCA11xx/2008
• DCCA 56XX2008
• In this case, it was a partnership dispute on an
  education business
• They were good friends. Two families were very
  close
• The business had been running for almost 10 years
• Verbal contract of splitting business
• But one play tricks on getting more good
  clients
• One side setup another company of the same name
  and cashed cheque from clients
• The other side reported to police
• Further trouble including reporting to customs on
  educational materials, etc

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• Mediation in Practice
• Power imbalance (esp., one party with lawyer)
• Establish trust from both parties by pre-meeting,
  always stay neutral.
• Mediators concern and reminder to them
• Base on the past relationship, was there any ways
  to re-establish their future relationship
• Their religion
• Will their trade name be hurt if litigation goes
  on? They are serving NGOs, schools
• How much time they could afford on preparing and
  going into litigation?
• How much money they need to spent on legal
  experts?

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• Case HCCW 6XX/2009
• In another case, superficially, it is a winding
  up petition of a limited company which holds a
  land and some industrial operations in YL.
• In fact, the winding up petition is only the 1st
  step of winding up of another couple of companies
  if the 1st one petition is granted.

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• 1.  On 25 February 2010 I made a validation order
  on the application of the 1st Respondent the
  material provision of which is as follows
• (a)All incoming payments into the Company Bank
  Accounts, including but not limited to deposit of
  cheques, incoming payments by autopay and
  electronic fund transfers (b)Payments out of the
  Company Bank Accounts up to a total sum of
  HK770,000.00 per month BUT SUBJECT to approval
  by the Petitioner and the 1st Respondent by their
  joint signature
• 2.  On 19 April 2010 the 1st Respondent issued a
  summons seeking an order that The Petitioner and
  the 1st Respondent do procure that all cheques in
  respect of payments covered by the validation
  order granted by Harris J. dated 25th February
  2010 to be duly signed .... The 1st Respondent
  also sought an order that a penal notice be added
  to the order 1.

1 If an injunction is served on a defendant with
a penal notice attached, breach of the
injunction can result in the defendant being
imprisoned.
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• 3.  ...I made directions for the filing of
  evidence. I also explained ...that it seemed to
  me that the application as framed in the summons
  and explained in his submissions filed for the
  hearing on 22 April was misconceived. .If the
  payments covered by the order were required in
  order for the Companys business to continue
  operation it may well be that a director (which
  the petitioner is) complying with his fiduciary
  duty to act in the best interest of the Company
  should sign them. If he refused to do so thus
  breaching his fiduciary duty my view was that the
  correct course was for the 1st Respondent to
  apply for a mandatory injunction that he sign the
  cheques. I asked Mr. Lau to consider this when
  advising on the further evidence that was to be
  filed and to consider whether or not the evidence
  filed was appropriate for a revised application.

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• 7.  It is unfortunate that after I have
  specifically explained to Mr. Lau how I thought
  the 1st Respondent should probably proceed to
  solve the problem of which he complains the
  application has not been reformulated, at least
  in the alternative. I asked why this had not been
  done and Mr. Laus answer was that it would have
  taken too long to recast the application. As it
  is I do not have an application before me for the
  grant of an injunction to require the petitioner
  to comply with his fiduciary duties and sign
  cheques in respect of particular payments indeed
  I do not have an application for an order that
  Petitioner sign cheques in respect of any
  particular payments.

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• 10.  In my view the 1st Respondent has not framed
  his application in an inappropriate way ..I do
  not think it would be appropriate for me to try
  and reformulate the application for the 1st
  Respondent and do its legal teams work for it. I
  therefore dismiss the application with an order
  nisi that the 1st Respondent pay the Petitioners
  costs in any event. This order will become
  absolute within 7 days of the handing down of
  this decision unless either party notify the
  Court in writing that they wish to challenge it.
• 11.  If the parties are incapable of agreeing the
  payments amongst themselves the 1st Respondent
  will have to issue another particularised
  application ..

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Reference Materials for the Seminar

• 1. ??????
• 2. ????
• Thank you
• - End -