"Mediation on Shareholders' & Probate Disputes"

1. "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

2. 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

3. 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.

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

5. 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?)

6. Usual questions from your Client – cont’d • 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?

7. 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 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

8. 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.

9. 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: • 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

10. 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

11. Unless there is a Shareholders Agreement to the contrary, the general law that normal M&A 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”

12. 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

13. 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

14. 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)

15. 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)

16. 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)

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

18. 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

19. 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).

20. 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.

21. 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.

22. 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。

23. 大哥甘健成對二弟甘琨禮指控概要 • 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

24. 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

26. Mediator’s 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..

27. 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

28. [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.

29. [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").

30. 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…

31. Mediation in Practice • Power imbalance (esp., one party with lawyer) • Establish trust from both parties by pre-meeting, always stay neutral. Mediator’s 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?

32. 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.

33. 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 order1.… 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.

34. 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.

35. 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.

36. 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 ..

37. Reference Materials for the Seminar 1. 香港调解守则 2. 调解协议 Thank you - End -