Deanna Law and Nicole Chui (acting for D1 and D2) successfully resisted P’s claims for breach of an agreement not to issue shares without P’s prior consent, that the notice for EGMs held were irregular and/or that decisions to convene EGMs to allot new shares were made in bad faith / for an improper purpose.
In April 2021, D2 was appointed the exclusive distributor of BYD vehicles in Hong Kong from May 2021 to April 2026. Subsequently, P agreed to lend D2 HK$5 million for working capital on various conditions such as 8% interest p.a., provision of a personal guarantee from D1 (D2’s sole director and then-sole shareholder) and the allotment of 1,400 shares in D2 to P.
Further, cl. 1(7) of the loan agreement provided that “if [D2] is to issue new shares or introduce new shareholders/investors, [P]’s consent shall be obtained before this can be proceeded with, otherwise it would be regarded as a breach of this Loan Agreement”.
After P and D2 reached final settlement regarding D2’s repayment obligations under the loan agreement, D1 issued the 1st EGM Notice to approve, inter alia, the allotment of 5 million new shares in D2 at the price of HK$1 per share to existing shareholders in proportion to their shareholdings to provide additional working capital for D2. P, complaining that this would be in breach of the loan agreement, did not attend the 1st EGM. Pursuant to D2’s articles, the EGM was adjourned and the relevant resolutions passed.
P did not attend the 2nd EGM and did not respond to D1’s invitation for P to apply for a pro rata share of the allotment, failing which the new shares would be allotted to others. Therefore, all 5 million shares were allotted to D1.
DHCJ Le Pichon agreed with D1 and D2 that on a proper construction of cl.1(7), it ceased to have effect upon satisfaction of D2’s repayment obligations under the loan agreement. In reaching this conclusion, the judge considered, inter alia, the objective facts known to both parties, the inoperability of cl. 1(8) which (in contrast to cl.1(7)) expressly referred to the “Loan Period” and the lack of commercial justification of giving P, a one-off lender and 12.3% shareholder a permanent power of veto to any future allotment of shares.
The court rejected P’s arguments that cl.1(7) served to protect P’s interests as a minority shareholder and not a lender, or that it imposed a continuous obligation since it was not expressly confined to the “Loan Period”. On P’s construction, P’s prior consent is required so long as he is alive, even if he is no longer a shareholder in D2 (§§14-28). As such, D2 was not in breach of the loan agreement and P’s claim that D1 assisted, procured / induced D2’s breach also fell away (§29).
The EGM notices issued by D2 did not breach s.576(1)(e)(ii) of (Cap. 622) nor Art. 29(4)(e)(ii) for failing to include information or explanation that was reasonably necessary to indicate the purpose of the proposed resolution. There is no prescribed statutory format. In a private company with a small number of members, the need for the board to send an explanatory statement is rare. It is sufficient if the information contained in the notice enables a member to make further enquires if he so wishes. This was the case here; P could have made further enquires but chose not to (§§30-41).
There was no breach of fiduciary duties by D1. In the absence of D2’s breach of the loan agreement and the EGM notices being valid, P’s complaint that D1’s decision to convene the EGMs and to propose resolutions to entrench control or dilute P’s shareholding was nothing more than the inevitable consequence of any minority shareholder deciding not to take up his entitlement in a rights issue (§§42-47).
For Deanna’s full profile, see: https://parksidechambers.com.hk/people/deanna-law/ and https://www.linkedin.com/in/deannawslaw/
For Nicole’s full profile, see: https://parksidechambers.com.hk/people/nicole-chui/ and https://shorturl.at/MLuxB
For the Court’s decision, see: https://shorturl.at/DgMiC
