"Mediation on Shareholders'
& Probate Disputes"
Date & Time: 3 June 2011 (Friday), 7:00 p.m. to 8:30
p.m.
Venue: Room 210, Wing Lung Bank Building for
Business Studies, HKBU
Organized by: Corporate Governance and
Directorship (HKBU) Society
(香港浸會大學公司管治及董事學學會), Centre for
Corporate Governance and Financial Policy
Recent Examples of Disputes in Hong
Kong
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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
The Civil Justice Reform (“CJR”)
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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.
Discussions Today
Legal Rights of minority shareholders
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2.
E.g.: Applications under Section 168A of the
Companies Ordinance
Mediation of Shareholder Disputes
Usual questions from your Client?
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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?)
Usual questions from your Client –
cont’d
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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?
Common Reasons for Shareholders
Disputes
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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 company’s 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
In fact, the above could be classified
into three categories:
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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.
Issues for Auditors
A company’s 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 Institute’s 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 company’s tax affairs that the auditor was
previously unaware of:
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Issues that can come up include “secret” bank accounts and “under the
counter” cash payments to staff
Accordingly, auditors need to watch out for
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Criminal act of Money Laundering, Theft and Fraud, Company Law
Enforcement and various Tax legislation
Talking About Legal Rights of
Shareholders
Legal Rights of Shareholders are governed
by:
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the law: Companies Ordinance, case law
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the Memorandum and Articles of
Association
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Shareholders Agreement, if any
Unless there is a Shareholders Agreement to the contrary,
the general law that normal M&A provide that:
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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”
Management can be conducted in a way adversely affecting the
value of the Shareholding, for instance
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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
What can Minority shareholders do in
such a situation?
Sell his Shares?
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Not always possible for private companies
Problem of valuation
Call for a General Meeting?
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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?
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got to have 50% (s.157B) – note the cumbersome
procedures
Legal ways against Abusive Majority
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Derivative Action is an exception to The
principle of majority rule which provides that:
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Only the company can sue the wrongdoer
Only a majority of the board can decide whether to take
legal action
(In a derivative action
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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.152FA–s.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?
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 (甘琨勝)
Petitioner
and
KAM KWAN LAI (甘琨禮)
1st Respondent
KAM LIN WANG CARREL (甘連宏)
2nd Respondent
LEGCO INC.
3rd Respondent
EVERWAY HOLDINGS LIMITED
4th Respondent
YUNG KEE HOLDINGS LIMITED5th Respondent
---------------------Before: Hon Chung J in Chambers
Date of Hearing: 13 July 2010
Date of Handing Down Decision: 21 July 2010
2. The background leading to this application is
largely undisputed and can be summarised
as follows.
3. In the 1940’s, 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).
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 petitioner’s 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.
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 restaurant’s 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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遭呈請清盤的海外註冊公司 Yung Kee
Holdings Limited，是鏞記酒家集團有限公司的
母公司，母公司同時持有多間附屬公司。
兩兄弟對持有母公司的股份亦有爭議，按甘健成
所說，原先他與二弟各持 45%，餘下 10%由三
妹甘美玲持有。及後他發現二弟持有 55%，相
信是來自三妹。
大哥甘健成不滿二弟的所作所為，於2010年 3月
向法院提出呈請，要求法庭頒令，要二弟買下他
的母公司股份，或交替要求頒令把公司清盤。若
二弟要全數收購兄長的股份，料需達 10億元。
二弟甘琨禮力指母公司財政穩健，持有可觀資產，
清盤呈請會對鏞記酒家的生意及運作造成不利，
員工士氣及顧客信心均受影響，擔心鏞記酒家是
否會結業，既然兄長主要要求他買下其股份，故
向法庭申請將清盤呈請剔除。
大哥甘健成對二弟甘琨禮指控概要
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1.剝奪他管理公司及集團業務的權利
2.二弟委任其子甘連宏為董事，奪取董事
局控制權
3.二弟促使公司向其子甘連宏及女兒甘蕎
因發放過高薪金，每周工作數小時月薪達
4.5萬元
4.限制他取得及使用集團財務資料
5.集團擁有巨額利潤及現金，卻拒應他要
求公佈發放股息
6.將集團旗下柴灣的貨倉據為己用
7.未有調查問題交易
資料來源：呈請人甘健成
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
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Role of Mediation
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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
Mediator’s concern in Shareholders
Disputes
Rebuild parties long term relationship if
possible,
Material Issues: Material level, people have
different:
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2.
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3.
4.
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..
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
[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. Creditor’s 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.
[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").
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…
Mediation in Practice
1. Power imbalance (esp., one party with lawyer)
2. Establish trust from both parties by premeeting, always stay neutral.
Mediator’s concern and reminder to them:
1. Base on the past relationship, was there any
ways to re-establish their future relationship
2. Their religion
3. Will their trade name be hurt if litigation goes
on? They are serving NGOs, schools
4. How much time they could afford on preparing
and going into litigation?
5. How much money they need to spent on legal
experts?
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.
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 HK$770,000.00 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.
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 Company’s 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.
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. Lau’s 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.
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 team’s work for it. I
therefore dismiss the application with an order
nisi that the 1st Respondent pay the Petitioner’s
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 ..
Reference Materials for the Seminar
1. 香港调解守则
2. 调解协议
Thank you
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