Henderson J
IN THE GRAND COURT OF THE CAYMAN ISLANDS HOLDEN AT GEORGE TOWN, GRAND CAYMAN Cause No: 231 of 2010 BETWEEN: (1) TEMPO GROUP LTD (2) CHEN CHING CHIH (3) MAXIMA RESOURCES CORPORATION Plaintiffs AND: (1) FORTUNA DEVELOPMENT CORPORATION (2) NEW FRONTIER DEVELOPMENT CORPORATION (3) WYNNER GROUP LIMITED (4) BATES GROUP LIMITED (5) STEVEN WORD DRISCOLL (6) LII SAN-RONG Defendants Appearances: Mr. Stephen Phillips QC instructed by Mr. Mac Imrie & Mr. Jan Golaszewski of Maples and Calder for the first to third Plaintiffs Mr. Richard Hacker QC instructed by Mr. Graeme Halkerston and Ms. Katie Brown of Appleby for the first to third defendants Before: Hon. Justice Henderson Heard: February 14, 15 & 16, 2012 RULING
This application presents issues involving the extended res judicata principle coupled with questions of pleading and a request for summary judgment within the context of a minority shareholder's action following upon an unsuccessful request for a winding up.
The issues are: 1) Should the claim be struck out because it is plain and obvious that it is an abuse of process? 2) Should the claim be struck out because it discloses no reasonable cause of action? Alternatively, should the defendants be granted Summary Judgment on the contractual claims? 22 The Pleaded Claim 23 24 3. The first Defendant Fortuna Development Corporation ("Fortuna") was incorporated in 1994 to hold (through a series of intermediaries) the investments held previously by CT & D Taiwan ("CT & D"). CT & D was the product of a Joint Venture Agreement between 3 individuals: Dr. Chen Ching Chih ("Dr. Chen"), Mr. Lawrence Ting Shan Li ("Mr. Ting") and Mr. Tsien Peng Lun ("Mr. Tsien"). CT & D was a quasi-partnership. It was agreed that each of the three men would participate equally in the venture and that no one would be excluded from management without his consent. 1 The plaintiffs say that this agreement concerning CT & D carried over and 2 was applicable also, implicitly if not expressly, to Fortuna. 3 4 4. The three men agreed that the principal shareholders of Fortuna would be 5 the first Plaintiff Tempo Group Limited ("Tempo" - Dr. Chen's Company), 6 the second Defendant New Frontier Development Corporation ("New Frontier" – Mr. Ting's Company) and the third Defendant Wynner Group Limited ("Wynner" – Mr. Tsien's Company). Each of Tempo, New Frontier 9 and Wynner were allocated 30% of Fortuna's shares, the balance being 10 allocated to the fourth Defendant Bates Group Limited ("Bates"). Bates at 11 that time was owned by Tempo, New Frontier and Wynner in equal 12 shares. Later, Mr. Albert Hsu ("Mr. Hsu") acquired a 30% interest in Bates 13 and became a director of Fortuna. 14 15 5. Each of Dr. Chen, Mr. Ting and Mr. Tsien became directors of Fortuna. 16 Decisions were reached by a consensus of the three directors. 17 18 6. Later, with the agreement of his quasi-partners, Mr. Tsien caused Wynner 19 to sell 5% of Fortuna's shares to the third Plaintiff Maxima Resources 20 Corporation ("Maxima") which was and is owned and controlled by Mr. 21 Philip Fei Niu ("Mr. Niu"). 22 1 7. By June, 2004 there was considerable animosity and disagreement 2 among the three quasi-partners. It is alleged that Mr. Ting and Mr. Tsien 3 resolved between themselves to remove Dr. Chen's ability to influence the 4 affairs of Fortuna. 5 6 8. On June 2, 2004 a directors' meeting of Fortuna was held in Beijing. The 7 plaintiffs say that the manner in which Mssrs. Ting and Tsien gave notice 8 of the meeting to the other directors was contrived so as to prevent their 9 attendance. Meetings had been held in the past in Taipei, where the 10 quasi-partners were resident, at times which were agreed in advance. Dr. 11 Chen, Mr. Hsu and Randy Chen (Dr. Chen's son and also a director) were 12 unable to attend because of the short notice and an inability to make the 13 necessary travel arrangements. The directors resolved to convene an 14 Extraordinary General Meeting ("the EGM") on June 22, 2004 in Beijing. 15 16 9. The purpose of the EGM was to pass a series of special resolutions aimed 17 at removing Tempo and Dr. Chen from Fortuna. These resolutions were 18 very broad and far-reaching. They effected changes in the quorum 19 requirements, the voting procedures, and the number of authorized 20 shares; they imposed new obligations upon members concerning 21 speaking to government and the media (a source of contention with Dr. 22 Chen); and they required a member to sell its shareholding to a party 23 designated by the board if it determined the shareholder had breached 1 certain provisions of the Articles. Two ordinary resolutions were also 2 proposed which would reduce the number of directors to two and appoint 3 Mssrs. Ting and Tsien as the only directors. In effect, the special and 4 ordinary resolutions gave Mssrs. Ting and Tsien a means to oust Dr. Chen 5 from Fortuna. 6 7 10. There was a difficulty: the special resolutions would pass only if supported 8 by members holding two-thirds of the shares. Mssrs. Ting and Tsien 9 controlled 65% of the shareholding through New Frontier, Wynner and 10 Bates; they needed the support of Mr. Niu. 11 12 11. Gayle Tsien, Mr. Tsien's daughter, visited Mr. Niu and attempted to 13 persuade him to support the coup; he demurred. No formal notice of the 14 meeting was given to him. 15 16 12. On June 22, 2004 Dr. Chen and Mr. Niu managed to arrive at the site of 17 the EGM at the appointed time (although they deny they were given 18 appropriate notice). Mr. Niu intended to support Dr. Chen at the meeting. 19 He was refused entry to the meeting on the ground that Maxima had 20 already delivered a proxy to be exercised by Mr. Tsien. It is alleged that 21 the proxy was a falsity; it has never been produced. 22
With Mr. Tsien casting Maxima’s votes, all the special and ordinary resolutions were adopted. The result was that Dr. Chen and Tempo were then excluded from participating in the management of Fortuna.
The prayer for relief is lengthy; essentially, the plaintiffs seek a number of declarations establishing the invalidity of the EGM and the resulting ordinary and special resolutions; an injunction restraining the defendants from acting upon them; an order reinstating Dr. Chen to the board of directors; and damages for breach of contract. 11 Procedural History
This action was not commenced immediately. Tempo chose to file on August 3, 2004 a Petition seeking the winding up of Fortuna. In support of its position that the actions of the majority shareholders were unfair, oppressive, and in breach of the quasi-partnership agreement, Tempo made all of the same allegations about the EGM and the events leading to it as are asserted in the present Statement of Claim. These allegations did not stand alone in the Petition; other improprieties were also pleaded. 20 Maxima was not a party to the Petition.
On August 13th, 2004, this court appointed joint inspectors of Fortuna. They conducted an investigation into the allegations in the Petition and 1 issued a lengthy and exhaustive report. Soon after their appointment, it 2 became clear that the inspectors would need a considerable period of time 3 to complete their task. With the concurrence in substance of both parties, I 4 ordered that the Petition be stayed and an independent valuer be 5 appointed. The inspectors were to continue to complete their examination 6 into the affairs of the company as their observations would be useful to the 7 valuer. The order contemplated that once the independent valuer had 8 determined a value for the shares the majority shareholders would offer to 9 buy the shareholding of the minority at the valuation price. Upon 10 completion of the sale of Tempo’s shares to the majority shareholders the 11 Petition would be dismissed. That, essentially, is the procedure set down 12 in O’Neill v. Phillips, [1999] 1 W.L.R. 1092; [1999] 2 All E.R. 961; [1999] 2 13 BCCLC 1 ("the O’Neill procedure") for the resolution of disputes between 14 shareholders who are deadlocked. 15 16 17. A challenge by Tempo to the independence of the valuer was mounted 17 unsuccessfully. The inspectors delivered their report and the valuer 18 presented its valuation. Fortuna offered to buy Tempo’s shareholding at 19 the valuation price but the offer was refused. Ultimately, I dismissed the 20 Petition on the ground that the majority shareholders had made a 21 reasonable offer to purchase the minority shareholding which was refused.
The allegations in the Petition upon which the request for a winding up was based were never litigated. The Petition was not heard and determined on its merits. Indeed, the very reason for adopting the O’Neill procedure was to avoid the time and expense which such a hearing would entail. The O’Neill procedure is an alternative to hearing a winding up petition in the usual way. Thus, there has been no judicial determination of the allegations (made in the Petition and repeated in the present Statement of Claim) about the EGM on June 22, 2004 and the directors’ meeting which preceded it.
This action was commenced on June 21, 2010, the last day upon which it could have been commenced in light of the applicable 6-year limitation period. Tempo has never given to Fortuna any sort of formal warning that the action might be brought but, in light of the 8-year history of bitter litigation between the parties, it must come as no surprise. 1) Should the claim be struck out because it is plain and obvious that it is an abuse of process?
Fortuna, New Frontier and Wynner (to whom I will refer collectively as “the defendants”) say that the pursuit of the present claim by Tempo, Dr. Chen and Maxima (to whom I will refer collectively as “the plaintiffs”) offends what is sometimes called the “extended” form of the res judicata rule, expressed in Henderson v. Henderson 3 Hare 100 at p. 114 in these terms: The plea of res judicata applies, except in special cases, not only to points upon which the court was actually required by the parties to form an opinion and pronounce a judgment, but to every point which properly belonged to the subject of litigation, and which the parties, exercising reasonable diligence, might have brought forward at the time. (underlining added) Obviously, the rule in its classic form cannot apply because no court has made findings of fact and given judgment on the claim about the EGM and the resulting resolutions. The extended form of the res judicata principle applies to points which might have been, but were not, advanced in the earlier litigation. The present claim by the plaintiffs was pleaded in the Petition but not tried because the proceeding took a different course. Thus, the present situation does not fit readily within either branch of the rule. In recognition of their difficulty, the defendants have argued that Tempo should have brought this proceeding "in parallel with" the Petition and not waited until its Petition had been dismissed. The res judicata rule has been explained and restated by the House of Lords in Johnson v. Gore-Wood [2002] 2 AC 1 in terms which shift the focus to a "broad merits-based judgment" of whether, in all the circumstances, the proceedings amount to an abuse: But Henderson v Henderson abuse of process, as now understood, although separate and distinct from cause of action estoppels and issue estoppels, has much in common with them. The underlying public interest is the same: that there should be finality in litigation and that a party should not be twice vexed in the same matter. This public interest is reinforced by the current emphasis on efficiency and economy in the conduct of litigation, in the interests of the parties and the public as a whole. The bringing of a claim or the raising of a defence in later proceedings may, without more, amount to abuse if the court is satisfied (the onus being on the party alleging abuse) that the claim or defence should have been raised in the earlier proceedings if it was to be raised at all. I would not accept that it is necessary, before abuse may be found, to identify any additional element such as a collateral attack on a previous decision or some dishonesty, but where those elements are present the later proceedings will be much more obviously abusive, and there will rarely be a finding of abuse unless the later proceeding involves what the court regards as unjust harassment of a party. It is, however, wrong to hold that because a matter could have been raised in earlier proceedings it should have been, so as to render the raising of it in later proceedings necessarily abusive. That is to adopt too dogmatic an approach to what should in my opinion be a broad, merits-based judgment which takes account of the public and private interests involved and also takes account of all the facts of the case, focusing attention on the crucial question whether, in all the circumstances, a party is misusing or abusing the process of the court by seeking to raise before it the issue which could have been raised before. As one cannot comprehensively list all possible forms of abuse, so one cannot formulate any hard and fast rule to determine whether on given facts, abuse is to be found or not. (per Lord Bingham, at p. 23)
Tempo was denied a judicial finding on the points now raised in the present claim by its own willingness to adopt the O’Neill procedure as an alternative to the “nuclear option” of a winding up. That approach left Fortuna in business and avoided any risk of a sale of the assets on a break-up basis. It was intended to save time and cost (although that may not have been the result). Tempo’s acceptance of the O’Neill procedure was in the interest of all parties. Put more generally, it is in the public interest that when the relationship of trust and confidence between quasi-partners is broken the O’Neill procedure (rather than a winding up of a solvent company) be used to resolve the dispute.
The present claim is before me now because Tempo refused Fortuna’s reasonable offer to buy its shares. The O’Neill procedure contemplates that that might be the result. A minority shareholder who refuses a reasonable offer cannot be heard to complain of its exclusion from the affairs of the company and its winding up petition will be dismissed or struck out (see O’Neill, supra) but it remains a shareholder and retains the rights of a shareholder, including the right to seek the assistance of this court if the agreement embodied in the company articles is violated. To ask for such assistance on the basis of allegations which were contained in the Petition but were not the subject of adjudication is hardly redolent of unjust harassment, unfairness, or an abuse of the process of the court.
The defendants say that Tempo should have initiated in 2004 a writ action covering the present claims which (it implies) would have proceeded along a course parallel to the Petition and have been tried around the time the share valuation was in progress. I fail to see how this would have been preferable from the viewpoint of any party. When the parties embarked upon the O’Neill procedure they did so in good faith and with the hope and intention that it would lead to a buyout of the minority shareholding and thus a severance of the relationship. In that atmosphere, no party would have wanted a parallel action to proceed to trial and no party would have wished to expend time and money on it.
A further complaint by the defendants is that Tempo and Dr. Chen have failed to act in a transparent manner because they “failed to intimate in any way that they wished to bring, or reserved the right to bring, further claims/proceedings based on the same fact pattern” (Skeleton, para. 28). The cases cited in support (Johnson v. Gore-Wood, supra; Aldi Stores Ltd. v. WSP Group plc and others [2007] EWCA Civ 1260 (CA); and Stuart v. Goldberg Linde and others [2008] 1 WLR 823 (CA)) show that the absence of a warning is a relevant factor although not, on its own, determinative of anything.
The Petition advanced a number of serious allegations which, if established, might have entitled Tempo and Dr. Chen to a winding up. An experienced legal practitioner would have known when the Petition was filed that those same allegations contained in a statement of claim might, if established, have entitled Tempo and Dr. Chen to a different form of relief. It was entirely predictable that if the O’Neill procedure failed to bear fruit Tempo and Dr. Chen would seek an adjudication of these factual issues. That was my assumption at the time; I think it likely that the defendants 1 foresaw the possibility also. As a consequence, the absence of a warning 2 is not a factor of any real significance. 3 4 28. The defendants’ final complaint under this heading is that the plaintiffs’ 5 “attempt to re-litigate the issues in these proceedings is commercially 6 unreasonable” (Skeleton, para. 28). I do not view the present proceeding 7 as an attempt to re-litigate but as an attempt to obtain for the first time an 8 adjudication upon the merits. Moreover, to pursue a writ action in parallel 9 with the Petition, which is what the defendants say Tempo and Dr. Chen 10 should have done, would itself have been commercially unreasonable if 11 the action were to progress beyond an exchange of pleadings. 12 13 29. For these reasons, I will not strike out the claim on the ground of extended 14 res judicata. 15 16 2) Should the claim be struck out because it discloses no reasonable 17 cause of action? Alternatively, should the defendants be granted 18 Summary Judgment on the contractual claims? 19 20 30. The defendants make a number of arguments under these headings; it is 21 convenient to consider the two forms of relief together. 22 23 24 25 1 Novation 2 3 31. First, they complain that the agreement for equal participation in management was an accord reached by the three individuals – Dr. Chen, Mr. Ting and Mr. Tsien – but the claim for damages for breach of contract is asserted only against the three corporate entities (Tempo, New Frontier and Wynner). Thus, it is said that this part of the claim cannot possibly succeed. 9 10 32. The Statement of Claim also contains an overly terse assertion (in para. 12) that the agreement of the principals was “implicitly novated”. The paragraph includes a muddled reference to the subject of the novation as “the agreement between the parties” although several parties to this action had nothing to do with the alleged agreement. Evidently, the plaintiffs say that the three individuals agreed to replace their own agreement with a similar agreement entered into by the three corporate entities (which, of course, were owned and controlled by those same individuals). 18 19 33. The pleading requires amendment. The assertion that there was a novation is merely a statement of the conclusion the plaintiffs are urging upon the court. The facts from which that conclusion is to be drawn must be pleaded. The plaintiffs must plead that all 3 individuals agreed (expressly or by implication) that the rights and obligations embodied in 1 the original contract would be transferred to the three corporate entities. 2 The acceptance by each of the three companies of their new contractual 3 obligations should be pleaded also, as should the consideration for the 4 novation. Since it is said that the novation was implicit, the facts 5 supporting such a conclusion must be set out in concise form in the 6 Statement of Claim. 7 8 34. The plaintiffs have applied for leave to amend their Statement of Claim. 9 The six-year limitation date has now passed but that is of little 10 consequence as this is not the addition of a fresh claim but a rectification 11 of an imperfectly-stated existing one. The suggested amendment is not in 12 proper form when it addresses the alleged novation. The plaintiffs are at 13 liberty to apply for leave to amend on the basis of a properly drafted 14 amended statement of claim. If they fail to do so, the defendants may 15 apply again to strike out the claim. 16 17 17 Damages 18 19 35. The defendants’ second complaint relates to damages. The Statement of 20 Claim contains (in para. 60.7 and Prayer, item (13)) a claim for “damages 21 for breach of contract, together with interest thereon, to be assessed”. No 22 actual damage is described and no special damages are mentioned. 23 Special damages must be pleaded expressly (see Precedents of 1 Pleadings; Bullen, Leake & Jacob; 12th edition, p. 379). Under O. 14 r. 2 12(1) of the Grand Court Rules a defendant is entitled to summary 3 judgment if the plaintiff "has no prospect of recovering more than nominal damages". During argument Mr. Phillips accepted that the Statement of 5 Claim is deficient and described in general terms the damage he says the 6 plaintiffs have suffered. 7 8 36. My order is that the plaintiffs are to provide particulars within 14 days of 9 the actual damage they have suffered and are claiming. The particulars 10 must be accompanied by affidavit evidence sufficient to show that the 11 plaintiffs have some prospect of obtaining more than nominal damages. If 12 the defendants consider that the evidence fails to do that, they are at 13 liberty to apply for summary judgment. 14 15 Mitigation 16 17 37. A further complaint by the defendants is that the plaintiffs have failed to 18 mitigate their loss, which they could have done by accepting the buyout 19 offer resulting from the O'Neill procedure. This point was not pressed. 20 This is a proposition which the defendants may plead and argue for at trial 21 if so advised. The argument cannot support an award of summary 22 judgment at this juncture as the claim for damages has yet to be 23 particularized. 4 38. The defendants argue that an agreement between some but not all of the shareholders cannot have the effect of altering the Articles. Because Bates was never a party to the pleaded agreement, the agreement cannot operate so as to change any provision in the Articles, which is a contract between all of the shareholders. This submission is well-founded. Even an agreement between 99.9% of the shareholders in a corporation would be ineffective to alter a provision in the Articles: see Cane v. Jones [1981] 1 All ER 533, 539; and Schofield v. Schofield [2011] EWCA Civ 154 (CA). 12 The result is that the validity of the resolutions must, as the defendants argue, depend upon conformity with the Articles as they were in 2004 and not upon conformity with the intentions of the quasi-partners. 16 39. The defendants characterize the plaintiffs’ claim as relying upon a series of mere “irregularities” in corporate governance to invalidate the ordinary and special resolutions. They say that the notice given to members of the EGM did conform to the literal provisions of the Articles so it is of no consequence. They say that while Maxima may not have received a notice of the EGM at all this irregularity is cured by s. 18.4 of the Articles which is a saving provision against an “accidental” omission to give notice. 23 They argue that even if “Mr. Tsien was permitted to vote as Maxima’s proxy" the Articles (ss. 19.6 and 21.9) provide that this irregularity cannot vitiate the resolutions because the Chairman, whose opinion in the matter is binding, has not determined that the "magnitude of the error" was sufficient to do that. All of this appears to be a self-serving mischaracterization of the plaintiffs' case. The real claim is that Mssrs. Ting and Tsien were defrauding the minority shareholders by the use of a false proxy and the illegitimate exclusion of Mr. Niu (whose vote would have been crucial) from the EGM so as to wrest control of Fortuna away from Dr. Chen. The several allegations are not of mere irregularities but amount to a concerted course of fraudulent conduct. There is, at the very least, a reasonable argument that the Articles have no curative effect over these "irregularities" and everything which took place at the EGM, including any determination the Chairman may or may not have made, is invalid. I will not strike out the claim or grant summary judgment on the part of the claim attacking the validity of the EGM resolutions. Ratification A further argument advanced by the defendants concerns ratification. On April 13, 2011 (after the commencement of this action) an EGM of the members of Fortuna was held in Taipei. Dr. Chen and Mr. Niu were present. The stated purpose of the meeting was to ratify the ordinary and special resolutions passed at the 2004 EGM. The members were not asked to vote afresh on any resolution but to "confirm and ratify [the resolution] effective from 22 June 2004". The proposal to ratify each of the special resolutions was defeated as Tempo and Maxima were opposed. Their expressed position was that the 2004 resolutions were incapable of ratification. The ordinary resolutions were supported by shareholders representing a majority shareholding and were therefore "ratified" although Tempo and Maxima voted against ratification. If the plaintiffs are able to establish all that they are alleging there is at least a reasonable argument that the ordinary resolutions were incapable of ratification. The deliberate exclusion of Mr. Niu on the basis of a "false" proxy, when set in the context of all of the surrounding circumstances which have been pleaded, could satisfy the trial judge that no part of the EGM was valid and the resolutions passed at it are mere nullities incapable of ratification. The plaintiffs say that the ordinary resolutions, which required only a bare majority to pass, would have been passed whether the EGM was conducted properly or not. Neither the use of the allegedly false proxy nor the exclusion of Mr. Niu could have prevented the ordinary resolutions from succeeding. That may be so, but in the overall context of the claim it is of no significance. Again, If the plaintiffs are able to establish all that they are alleging there is at least a reasonable argument that the ordinary resolutions are nullities.
A final complaint is that the plaintiffs should have simply voted for the ratification of the resolutions at the 2011 meeting, thus rendering this action moot and unnecessary. It must be remembered, however, that the plaintiffs were being asked to ratify these resolutions, not pass them for the first time. The intention was that the ratification would extend back to 2004 and validate any act which may have been taken pursuant to the resolutions. Fortuna says that no use has been made of them. Dr. Chen says he has been excluded from management since 2004 and does not know what use may have been made of the impugned resolutions. I am unable to view his refusal to acquiesce in the ratification proposal as unreasonable in the circumstances or as something which should disentitle him now from proceeding with this action. Amendment Paragraph 36 of the Statement of Claim alleges that each of the special resolutions was oppressive of the minority and neither bona fide nor in the best interests of Fortuna. There is no comparable allegation concerning the ordinary resolutions; the plaintiffs seek leave to amend so as to 1 include one. I will not grant leave. The limitation date has passed. The 2 requested addition is sufficiently fundamental as to amount to the pleading 3 of a new cause of action. 4 5 Costs 6 7 46. The plaintiffs have been successful, but not completely so. They must 8 amend their Statement of Claim and provide Particulars of the damage 9 they claim to have suffered. In light of those deficiencies, I award to the 10 plaintiffs 50% of their costs of this application. 11 12 Dated this 4th day of April, 2012 13 14 Henderson, J. 15 Henderson, J. 16 Judge of the Grand Court