No Rubber Stamp: Rectification of Register of Members is a Discretionary Remedy, Not Automatic

No Rubber Stamp: Rectification of Register of Members is a Discretionary Remedy, Not Automatic

The High Court recently confirmed that a shareholder’s application to rectify the register of members under section 633(1) of the Companies Ordinance is subject to the Court’s discretion. There is no automatic right to rectify. In exercising its discretion, the Court shall take into account all surrounding facts and circumstances, including the parties’ position in parallel foreign proceedings and the foreign courts’ findings on identical issues, which in this case are the PRC courts.

DLA Piper (Kevin Chan and James Wong) represents the successful Respondents in resisting both of the Applicant shareholder’s applications for rectification of register of members and for convening an Annual General Meeting (AGM).

 

Factual background

In view of the complexity of the facts, Recorder Winnie Tam SC directed a hearing be held, for determining the factual circumstances in which Mr Shi acquired his 6,000 shares in A-Sun. At the hearing, the factual witnesses (including Mr Shi and A-Sun’s representative Mr Gu) were cross-examined on their affirmations. The Court’s material factual findings are summarized below.

Mr Shi, holder of 6,000 shares of Hong Kong A-Sun Group Co., Limited (A-Sun), applied to the High Court for rectifying A-Sun’s register of members by cancelling two allotments of shares in 2015 and 2019, which diluted his shareholding from 30% to 0.6% and then 0.26%, and for convening an AGM with consequential directions on the laying of accounts. His complaint was that the shares were allotted at meetings without giving proper notice to him, who is A-Sun’s shareholder.

A-Sun’s case is that Mr Shi acquired his 6,000 shares under a temporary security arrangement. By way of background, A-Sun’s subsidiary, Ya Xin, was the developer of a real estate project in Shanghai. It had engaged a contractor company, Dong Ya, in the development. The contract sum for the works was over RMB300 million. Mr Shi was Dong Ya’s representative, who was responsible for liaising between Dong Ya and Ya Xin in relation to the project.

In order to finance the project and pay Dong Ya’s outstanding project, Ya Xin had entered into various agreements with Dong Ya, Shi, and a company called Jiu Wei in which Shi owned 90% shareholding. These agreements related to Ya Xin’s satisfaction of its payment obligation to Dong Ya, primarily by way of property transfer, which later became impossible due to changes in local regulations. As a temporary security arrangement pending the satisfaction, 6,000 shares in A-Sun would be transferred to Shi at the consideration of HKD6,000, which is far below the value of the shares.

Shi contended that he obtained the 6,000 shares under a separate arrangement with the Mr Feng, the de facto controller of A-Sun.

The relevant parties have engaged in various court proceedings in the PRC. The PRC courts have given their rulings. Pursuant to one of the PRC Judgments, Ya Xin had already paid the entire outstanding contract sum (RMB187,730,000) to Jiu Wei, which represented Ya Xin’s full satisfaction of the contract sum which it owed to Dong Ya.

 

Decision

Mr Shi’s legal representatives submitted that courts do not look behind the shareholding of a company into the beneficial ownership of the shares. The register of members is the only evidence by which the right of members to vote at a general meeting could be ascertained. There was no reason for A-Sun not to give notice to Mr Shi of the shareholders’ meetings which led to the 2015 and 2019 allotments.

Recorder Tam SC said the Court must not lose sight of the fact that the remedy is discretionary, not automatic. To exercise its discretion properly, the Court is required to take into account all the relevant circumstances. The onus remains squarely on the applicant to show it will be just and convenient to make the order. The Court cannot shy away from exercising its discretion by taking into account the surrounding facts and evidence, including the positions taken by the parties in the PRC proceedings, and findings made by the PRC courts on identical issues. The Court shall consider whether in all the circumstances, there is compelling evidence that Mr Shi holds the shares on trust for A-Sun as a transitional security arrangement, the secured obligation under which has been discharged, or as Mr Shi suggested, there was separate and independent agreement between him and the controller of A-Sun Mr Feng. The Court must also consider whether any issue estoppel arises based on the PRC court judgments.

The learned Recorder reiterated the well-established principles on issue estoppel:

1. There is an earlier judicial decision which was pronounced;
2. The tribunal had jurisdiction over the parties and the subject matter in the earlier decision;
3. The tribunal determined a question raised in the later litigation;
4. The earlier decision was final and on the merits; and
5. The parties are the same or their privies.

The Court held that the Respondents are successful in establishing that, based on the PRC judgments, Mr Shi is estopped from contending that he holds the 6,000 shares other than pursuant to a transitional arrangement which has already lapsed. It follows that Mr Shi has no basis to retrain legal or beneficial title to the shares. It is therefore unnecessary for the Court to make findings on the facts.

The Court also found in favour of the Respondents on the alternative ground that, if the Court has to make factual findings, she would have found on a balance of probabilities that Mr Shi holds the shares as a bare trustee for A-Sun.

Accordingly, the Court dismissed Mr Shi’s both applications with costs.

 

Commentary

This decision confirms the discretionary nature of the Hong Kong Court’s power to rectify a company’s register of members. A shareholder has no automatic right to seek a rectification order from the Court. The Court is prepared to look into the relevant facts and circumstances in order to exercise its discretion on whether to grant a rectification application.

This decision also reiterates the principles on issue estoppel, or res judicata, based on foreign judgments (including PRC court judgments). In cross-border disputes, it is not uncommon for parties to engage in litigation in more than one jurisdiction. Issue estoppel is a powerful tool for a successful party in a foreign court to utilize the favourable foreign judgment in the Hong Kong court, which saves judicial resources and the parties’ time and costs on re-litigating the case.