Court of Final Appeal Unable to Agree on Sushi Battle
Introduction
On 1st April, the Court of Final Appeal
handed down its judgment in Cheng Wai
Tao and Others v Poon Ka Man Jason (Suing on behalf of himself and all other
shareholders in Smart Wave Limited except the 1st Appellant) and Another
FACV17/2015. The judgment marked an end of the protracted battle over
litigation between two partners of the successful chain of sushi restaurants,
Itamae.
Background
Jason, his sister Daisy, Ricky and Shigemitsu
Katsuaki were shareholders in a group of companies which were engaged in
operating and managing a chain of Japanese style noodle restaurants under the
name of “Ajisen Ramen” (味千拉麵). Each Ajisen Ramen restaurant was held
by a separate corporate entity.
In around 2004, the Ajisen shareholders decided to
develop a chain of sushi restaurants on a similar basis to their existing
arrangement (“the 2004 Agreement”).
It was agreed that separate corporate vehicles would be formed to hold the
interest of each said chain sushi restaurant business to be established and
then they would be allotted shares of and in the said corporate vehicles.
The first restaurant was opened by Smart Wave
Limited (“Smart Wave”), using the trade
name “Itamae” (板長壽司).
Apart from Ajisen shareholders, Smart Wave also had five minority
shareholders, who were suppliers and key staff. Ricky was the sole director of
Smart Wave. Three additional Itamae restaurants were opened within two years of
the first.
Disputes arose over the allotment of shares in the
subsequent Itamae restaurants. As a result, the Ajisen shareholders entered
into a shareholders’ agreement known as the Hero Elegant Agreement at the end
of 2015, under which it was agreed that Jason and Daisy would be allotted
shares in the Itamae sushi business through their corporate vehicle, Fine Elite
Group Limited (“Fine Elite”).
Ricky continued to open new Itamae restaurants in
separate companies, of which he was sole shareholder. From July 2007, he
commenced to open sushi restaurants using the trade name “Itacho” (板前壽司).
By HCA 1269/2008, Fine Elite sought specific
performance of the Hero Elegant Agreement against Ricky. Mimmie Chan J found
that Fine Elite had repudiated the Hero Elegant Agreement and the repudiation
had been accepted by Ricky such that Ricky was discharged from further
performance.
As a fallback strategy, Jason brought a derivative
action on behalf of Smart Wave against Ricky, complaining that Ricky breached
his fiduciary duties towards Smart Wave by opening further restaurants. The
trial judge dismissed the derivative claim against Ricky in respect of the
subsequent Itamae restaurants but ordered Ricky to pay damages to be assessed
in respect of the Itacho restaurants. The Court of Appeal reversed the judgment
in respect of the Itamae restaurants and ordered that in respect of the Itacho
restaurants, Jason could elect on behalf of Smart Wave for equitable
compensation or an account of profits. Ricky appealed.
The Issues
Ricky, being the sole director of Smart Wave, owed
the usual fiduciary duties to the company. As a fiduciary, he may not put
himself in a position where his own interest and duties to the company
conflict. The central question before the Court of Final Appeal was whether, in
the events that occurred, the fiduciary duties were limited or cut down so as
to enable Ricky to open further restaurants without breaching those fiduciary
duties (“Question 1”). The other question raised on appeal was
whether inconsistent conduct or the failure of an alleged obligation to call
“contrary evidence” was sufficient to deny the equitable relief which Jason
sought on behalf of Smart Wave (“Question
2”).
Majority Opinion
Unusually, the Court of Final Appeal was not able
to reach a unanimous decision. The majority held that Ricky was in breach of
his fiduciary duties by setting up further restaurants because, in addition to
the further restaurants being in competition with Smart Wave, there was also
the possibility that business opportunities were diverted from Smart Wave.
Further, Smart Wave, as the first restaurant in what was to become a chain of
restaurants, clearly had an interest in the establishment and operation of the
chain as it developed.
It was accepted by the majority that the scope of
fiduciary duties can be modified by the unanimous and fully informed consent of
the beneficiaries, in this case all the shareholders of Smart Wave. However,
the majority found that the agreement between Jason, Daisy and Ricky that Smart
Wave would be the first of a number of corporate vehicles, each operating one
restaurant, was expressly interconnected with an expectation and agreement that
they would be substantial shareholders in each such company. These two elements
were so closely interconnected that it could not be said that it was an
agreement simply allowing Ricky to open further restaurants on his own.
Further, the majority considered that there was insufficient evidence that the
minority shareholders in Smart Wave also agreed to authorize Ricky to open
further restaurants. Absent unanimous assent, Ricky was clearly in breach of
his fiduciary duties to Smart Wave.
The majority refused to entertain Question 2, since
it was only raised for the first time in the Court of Final Appeal.
Dissenting Opinion
Mr. Justice Tang PJ and Mr. Justice Bokhary NPJ
were in disagreement with the majority on Question 1. The minority found that
since Smart Wave was established as a limited purpose company, any fiduciary
duty which Ricky might owe to Smart Wave must therefore conform to and be
consistent with the terms of the 2004 Agreement. It followed that if any
shareholder of Smart Wave felt aggrieved by reason of not being allotted shares
in the further restaurants, the remedy would be contractual only. Further, any
breach of the 2004 Agreement was in fact compromised by the Hero Elegant
Agreement. The fact that the Hero Agreement miscarried by reason of Jason
committing a repudiatory breach, through no fault of Ricky, made no difference
to the contractual nature of the remedy.
The minority also found that there was an
overwhelming probability that the minority shareholders had been allotted
shares on the understanding that Smart Wave was to be the first of a chain of
companies, each operating one restaurant. As such, there was unanimous
authorization of all the shareholders of Smart Wave that Ricky could open
further restaurants.
On Question 2, the minority agreed with the
majority and refused to entertain the question.
Conclusion
In conclusion, the appeal on Question 1 was
dismissed by a 3-2 majority, and the appeal on Question 2 was dismissed
unanimously. The reasons given by the majority and minority are both
convincing, with good arguments. As Lord Browne-Wilkinson said in Henderson v Merrett Syndicates Ltd
[1995] 2 AC 145, the contract between the parties can and does modify the
extent and nature of any fiduciary duty that would otherwise arise. The
question is: to what extent?
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Important: The law and
procedure on this subject are very specialised and complicated. This article is just a very general outline for
reference and cannot be relied upon as legal advice in any individual case.
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Published by ONC Lawyers © 2016 |
