News of Asia Television Limited (“ATV”) was reeling off the press recently.   In the recent decision of Antenna Investment Limited v Asia Television Limited & Ors unreported, HCMP 2840/2012 (8 December 2014), the Court granted a novel order to address the unfair prejudices suffered by the shareholders of ATV.

Background

Back in June 2007, ATV had four shareholders.  They were Alnery No. 112 Limited (“Alnery”), Panfair Holdings Limited (“Panfair”), Dragon Viceroy Limited (“Dragon Viceroy”) and China Light Group Limited (“China Light”), holding 47.58%, 10.75%, 14.81% and 26.85% of the shares of ATV respectively.

In late 2008, a shareholder of Alnery wished to sell its shares.  The Cha’s brothers who were the other shareholders of Alnery then invited the Tsai’s family to acquire those shares.  A new company, Antenna Investment Limited (“Antenna”), was subsequently set up by the Cha’s and the Tsai’s to replace Alnery as a shareholder of ATV.

The deal was approved by the board of ATV (the “Board”).  However, as the Tsai’s made no commitment to provide the necessary medium and long term funding to ATV, the Cha’s looked for an alternative source and they managed to identify Wong Ching, a Mainland businessman.

Residence Requirement

It is relevant to note in passing that, the regulation of broadcasting in Hong Kong is governed by the Broadcasting Ordinance (Cap 562) (the “Broadcasting Ordinance”).  Paragraph 20 of Part 1 of Schedule 1 to the Broadcasting Ordinance prohibits a person not ordinarily resident in Hong Kong, and who has not been so for one continuous period of 7 years, from controlling more than 2% of a licencee without the prior approval of the Communications Authority (formerly the Broadcasting Authority, the “Authority”).  Section 8 of the Broadcasting Ordinance also contains restrictions on the corporate character and control of a licence holder, one of which being that a licence holder must be ordinarily resident in Hong Kong.

Through various sale and purchase agreements, Wong Ching successfully acquired the shareholdings in Panfair, Dragon Viceroy and China Light and thus controlled 52.42% of the shares of ATV.  Nevertheless, Wong Ching clearly failed to satisfy the residence requirement to become a substantial shareholder and director of ATV.  To circumvent the residency restriction, Wong Ching then purportedly sold to Wong Ben Koon (“BK Wong”) his shareholdings in Panfair, Dragon Viceroy and China Light.   As a result, Wong Ching/BK Wong became the ultimate majority shareholder of ATV.  A chain of incidents then ensued.  Eventually, Antenna presented a Petition under section 168A of the old Companies Ordinance (Cap 32) (now section 724 of Cap 622).

As Antenna believed that ATV could have a viable future if it were to be managed properly, it did not seek the conventional order that Wong Ching and/or the companies he controlled buy out Antenna’s shares at a value determined on the basis that the unfair prejudicial matters had not occurred; instead, Antenna sought a novel order to appoint managers over ATV and to order the sale of Panfair’s shares in ATV to an independent third party (so as to change the control of the majority shareholder at board level).

The Law

Section 168A(1) of the Old Companies Ordinance (Cap 32) provides that any shareholder of a company, who seeks to complain that his/her interest in the company has been unfairly prejudiced, may make an application to the Court by way of petition.  To establish unfair prejudice, the act(s) complained of must be: (i) prejudicial in the sense of causing prejudice to the relevant interests of the shareholder; and (ii) conducted unfairly.  Whether or not a particular act is unfair has to be judged by reference to the agreements that the shareholders have reached.  Accordingly, the articles of the company and any shareholders agreement will form the criteria by reference to which unfairness will be assessed.

Once unfair prejudice is established, the court has wide discretion in granting an order to put right and cure for the future the unfair prejudice which the aggrieved shareholder has suffered at the hands of the other shareholders of the company.

Unfair Prejudice: Factual Issues

Harris J analyzed the case based on the following four aspects, namely:

·             Wong Ching’s active involvement in managing ATV;

·             The Consulting Agreement between Wong Ching and James Shing;

·             Wong Ching’s extensive involvement in financing ATV; and

·             The conduct of the Wong Aligned Directors.

Wong Ching’s active involvement in managing ATV

Although Wong Ching was not (and could not be) a director of ATV, he quickly took an active role in directing ATV’s affairs: he nominated 6 directors (including James Shing) to the Board (the “Wong Aligned Directors”), thereby reconstituting the Board with his nominees forming a majority;[1] he appeared at ATV’s headquarters and told the press that he had mapped out ATV’s long and mid-term goals; he held internal meetings within ATV and also attended meetings of ATV’s Mainland subsidiaries.  Despite having no official title, he had his own office in ATV.

The Consulting Agreement between Wong Ching and James Shing

After James Shing was appointed as “Executive Director” with extremely wide terms of reference, unknown to the Board, James Shing and Wong Ching signed a Consulting Agreement, which described itself as a personal agreement of James Shing to pay Wong Ching an undetermined fee for consultations in relation to ATV’s affairs, and to appoint Wong Ching as “Senior Consultant”.  The consulting period was not defined.  Moreover, it was revealed that no consultancy fee was ever paid to Wong Ching.

Notwithstanding the undertakings given by Wong Ching and BK Wong to the Authority that Wong Ching would not be entitled to exercise de facto control over ATV (the “Undertakings”), the Authority, after investigation, formed the view that the Consulting Agreement was mere disguise to permit Wong Ching to exercise control over ATV’s day-to-day management and operations.  The Authority found that ATV was in breach of the terms of the Licence (which allows ATV to operate a free to air television station) and therefore imposed a fine of HK$1 million.

The Court also had a similar finding.  Harris J held that the agreement between Wong Ching and BK Wong was bogus in nature and was intended to circumvent the residency restriction imposed by the Broadcasting Ordinance as well as the terms of the Licence and the Undertakings.

Wong Ching’s extensive involvement in financing ATV

By September 2013, Wong Ching had already made unsecured loans of some HK$720 million to ATV but they had not been approved by the Board.  Wong Ching also entered into facility agreements with the ATV’s creditors for a total of HK$2.7 billion.

Wong Ching did not explain why he was willing to make such large unsecured advances to ATV which was loss-making and in which he had no equity interest and why he had aspirations to elevate the status of ATV.  In respect of BK Wong’s evidence, Harris J was of the view that he did not tell the Court the whole story, and his evidence was too vague to amount to a satisfactory explanation for the unusual state of commercial affairs.

The Court concluded that the facts point compellingly to the conclusion that Wong Ching was the real investor in ATV and was in de facto control of ATV.

The conduct of the Wong Aligned Directors

As demonstrated by the transcripts of the Board meetings, the Wong Aligned Directors were present at the meetings merely to ensure that resolutions introduced by James Shing were passed.

The actions of Wong Ching and the Wong Aligned Directors had directly contributed to the predicament faced by ATV – the Authority’s recommendation of non-renewal of the Licence upon its expiry.  With no licence to operate a free to air television station, Antenna’s economic interest in ATV will be destroyed.

By virtue of the conduct of Wong Ching and BK Wong in creating and implementing the scheme of deception, together with the Wong Aligned Directors’ assistance in its implementation, the continuation of the Licence and the continued viability of ATV had been put at serious risk.

Conclusion

Harris J held that the unfair prejudicial acts by Wong Ching and the Wong Aligned Directors rendered Antenna losing its investment and the opportunity to exploit the Licence effectively as a result of the Licence being lost and ATV being put into liquidation (which was assumed to be a consequence of non-renewal of the Licence).

Harris J reiterated that the focus of the Court was whether the order sought was a fair and equitable way of putting right for the future the unfair prejudice suffered by Antenna as a result of the actions and omissions of Wong Ching and the Wong Aligned Directors.  He held that, in the present case, what needed to be remedied was the conduct which had led to the Authority’s recommendation of non-renewal of the Licence and this could only be done by removing control from the hands of the Wong Aligned Directors.  Therefore, he ordered that managers be appointed over ATV and Panfair’s shares in ATV be sold to an independent third party.