HCMP 593/2015
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
MISCELLANEOUS PROCEEDINGS NO 593 OF 2015
____________
 IN THE MATTER OF the Companies Ordinance (CAP. 622)
 and
 IN THE MATTER OF CHINA SHANSHUI CEMENT GROUP LIMITED (“Shanshui Cement”)
____________
BETWEEN  
 CHINA SHANSHUI INVESTMENT COMPANY LIMITED
(中國山水投資有限公司) Petitioner
 and 
 ZHANG CAIKUI (張才奎) 1st Respondent
 ZHANG BIN (張斌) 2nd Respondent
 CHINA SHANSHUI CEMENT GROUP LIMITED
(中國山水水泥集團有限公司) 3rd Respondent
 CHINA NATIONAL BUILDING MATERIAL COMPANY LIMITED
(中國建材股份有限公司) 4th Respondent
____________
Before : Hon Harris J in Chambers
Date of Hearing : 6 July 2015
Date of Judgment: 31 August 2015
________________
JUDGMENT
________________
INTRODUCTION
1. On 13 March 2015 I granted leave to the Applicants in HCMP360 of 2015 leave to bring unfair prejudice proceedings in the name of China Shanshui Investments Co. Ltd (“Investments”), in which they hold 17.44% of the issued share capital, to advance complaints made in respect of 2 matters concerning the affairs of China Shanshui Cement Group Ltd (“Company”), which is incorporated in the Cayman Islands and listed on The Stock Exchange of Hong Kong Limited (“Stock Exchange”). Those 2matters concern a subscription agreement for issue of new shares to China National Building Material Company Limited (“CNBM”) representing 20% of the then existing share capital of the Company and shares options offered on 27January 2015 to its employees
2. On 16 March 2015 Investments applied for an interlocutory injunction to restrain the Company from acting on the share options and holding an extraordinary general meeting (“EGM”) convened for 20March 2015 (“EGM”) at which shareholders could consider a resolution to approve the share options in respect of 2 directors (whoseoptions needed shareholders’ approval), who are the 1st and 2ndRespondents, namely, Zhang Caikui (“Zhang Sr”) and his son ZhangBin (“Zhang Jr”). The summons was first heard by me on 17March 2015. I indicated that I was minded to grant an injunction to restrain the extraordinary general meeting. The Company undertook to adjourn it until after the determination of this summons which was fixed for hearing on 6July 2015. The EGM was subsequently adjourned until after the determination of the summons.
3. At the hearing before me on 6 July 2015 Investments was represented by Victor Joffe and MC Law. The Company was represented by Ambrose Ho SC and Victor Dawes SC. On 24 July 2015 Iinformed the parties that I would dismiss the application. These are my reasons.
BACKGROUND
4. This application is part of a series of actions involving Investments and the Company. In the case of Investments the applicants are not always the same. Broadly they fall into 2 groups. The first group consists of those who applied successfully for leave to commence the present derivative action, who are substantial minority shareholders in Investments (who I shall refer to as the “Applicants”). The second group consists of a substantial group of employees or former employees of the cement business which has become the Company (who I shall refer to as the “Employees”), who say that Zhang Sr holds 38.5% of the shares in Investments, which are registered in his name, on trust for them as absolute beneficial owners. The total proportion of shares held on trust for employees was at the time I gave leave to commence the derivative action61.77%, but not all the employees have become plaintiffs in the action concerning how precisely those shares are held. ZhangSr contends that the employees are not absolute beneficial owners, but merely members of the class of beneficiaries under two discretionary trust governed by the law of the British Virgin Islands on which the shares are settled.
5. The Employees and Zhang Sr reside in the Mainland. TheEmployees, or at least some of them, have been very vocal in their complaints about what they see as Zhang Sr’s dishonest attempts to take control of their shares. Complaints have been made to the Mainland authorities. The Applicants suggest that in order to try and protect himself ZhangSr agreed with Mr. Song Zhiping the Chairman of CNBM, who is politically well connected that CNBM would take a sizable stake in the Company in order to obtain Mr. Song’s assistance in dealing with the complaints made against him by the Employees to the Mainland authorities.
6. The Applicants suggest that the resulting allotment of shares to CNBM and the prospective allotment of shares pursuant to the share options are part of a strategy to dilute Investments’ interest in the Company and its potential ability to influence decision making. Inparticular it is suggested that it will dilute Investments’ shareholding below 25% and as a result prevent it being able to block special resolutions.
7. The complaints made by the Employees and the Applicants are explained in more detail in my reasons for decision in HCMP360/2015 dated 17 March 2015 and the two decisions of Godfrey Lam J in HCA1661, 1766 and 2191 of 2014 dated 13 May 2015 and HCA1661, 1766, 2191, 623 and 939 of 2015 dated 20 May 2015. It is not necessary to repeat the more detailed explanation contained in those decisions of the background to the present application and the various complaints made against Zhang Sr here. Whatis necessary is to explain the change in the shareholdings in the Company and the potential impact of the share options.
SHAREHOLDINGS
8. Until 3 November 2014, Investments held 847,908,316 shares in the Company representing about 30.11% of the then issued share capital of the later. Shortly before that on 27 October 2014 the Company entered into the subscription agreement under which CNBM agreed to subscribe for 563,190,040 shares representing, as I have said, 20% of the then existing share capital. The result following the allotment of these shares was that Investments interest of the Company was diluted to 25.09%.
9. On 27 January 2015 the Company announced that it had passed a resolution that, subject to Stock Exchange approval, share options for a total of 207,300,000 new shares in the Company be offered to ZhangSr and Zhang Jr and other employees at an exercise price of HK$3.68 per share, being the closing price on the date of grant which was the same date as the resolution. The share options offered vest after 6months and can be exercised any time within 10 years from the date of grant.
10. The options to employees other than the Zhangs do not require shareholder approval. Those options total 154,700,000 and have been granted to 136 employees.
11. Zhang Sr and Zhang Jr were offered 23,600,000 and 20,000,000 respectively. Another director, Li Cheung Hung, was offered 9,000,000 shares. If all the options were exercised it would result in the further dilution of Investments’ interest in the Company from 25.09% to23.64% and below the holding necessary to be able to block a special resolution. Zhang Sr, Zhang Jr and Mr. Li have all undertaken not to exercise their voting rights in respect of any shares acquired by exercising any options approved at the necessary EGM until after trial. This would still leave Investments with less than 25% of the voting rights pending trial although the shortfall would be reduced as would the risk of Investments being unable to block a special resolution.
12. On 16 April 2015 the Company announced that it was suspending trading in its shares as the public float had fallen below the25%required by Rule 8.08 of the Listing Rules. According to the announcement the immediate cause of this was due to the Tianrui Group’s increase in its shareholding. As at 16 April 2015 according to the announcement the shareholdings were as follows:
Shareholders As at the date of this announcement:
 Approximate
 No. of Shares %
Tianrui Group 951,462,000 28.16
China Shanshui Investment Company Limited  847,908,316  25.09
Asia Cement Corporation 706,253,500  20.90
China National Building Material Company Limited 563,190,040  16.67
Public Shareholders 310,326,384  9.18
 ___________ _______
 3,379,140,240 100.00
 ========== =====
13. The closing price of shares on 16 April 2015 was HK$6.29. The share price had begun to rise substantially since October 2014. Itwould appear that this was connected with the increasing interest of companies with related businesses taking strategic interests in the Company. Given the difference in the option price and the trading price of the shares it would seem likely that the large majority, if not all of the options, will be exercised.
14. There is nothing unusual in a public company having a share option scheme for its employees. Indeed the shares offered on 27January 2015 were offered pursuant to an option scheme adopted by the Company on 14 June 2008 and the Company had offered shares to employees in 2011. I explained the complaints made by the Applicants in respect of the share options in paragraphs 26 to 30 of my March decision. At that time the Company had not had the opportunity to file evidence addressing the Applicants’ complaints. It has now done so and I explain the Company’s case in the next section of this judgment.
COMPANY’S EXPLANATION FOR THE SHARE OPTIONS OFFER
15. The Company has been remunerating its senior management by a combination of relatively low salaries and more generous year end bonuses since 2003. The remuneration of the directors for 2014 was determined by the Remuneration Committee of the Company based on the terms of their respective service contracts on 21 March 2014. Therecommendations were summarised in a proposal of the Remuneration Committee to the Board. The Company had experienced a 50% drop in its net profit for the first half of 2014 when compared to the same period in 2013. The cash and equivalents held were about RMB2,154 million, butthe short term borrowing was about RMB4,835 million. Significantly, Standard and Poor’s also raised concerns about the Group’s liquidity and lowered the Company’s credit rating from “BB-” to “B+”. The Company faced difficulties in distributing year-end bonuses under the 2014 Bonus Plan in cash in January 2015. As a consequence Zhang Jr asked the Head of the Securities Division of the Group, Yao Tianjun, and the Head of the Financial Department of Shandong Shanshui Cement Group Co.Limited, LiHengwen, to consider alternatives to making cash payments. Theysuggested the grant of share options (instead of making cash payments) would be in the interest of the Company.
16. There were discussions between Mr. Yao and members of the Remuneration Committee from mid October 2014 about the possibility of issuing share options. A number of professional advisors were approached to advise in connection with this proposal and in December 2014 Deloitte was chosen to advise and assist in the implementation of a long term incentive plan. A feasibility study was then conducted by Deloitte.
17. The Company says that during this period extensive discussions took place about the grant of share options between executive directors, non-executive directors and independent non-executive directors.
18. A proposal was prepared by Deloitte. Revisions were made to the proposal as a result of discussions between the staff responsible and representatives from Deloitte. Between 7 and 9 January 2015, the Remuneration Committee was provided with a summary prepared by Mr.Yao of Deloitte’s proposal and related information. It appears that by this time Deloitte’s had conducted a survey of potentially affected employees about the proposal and the summary that Mr. Yao prepared was intended to be circulated to them. On 13 January 2015, the final proposal prepared by Deloitte was circulated to the Remuneration Committee, whoresponded to Mr. Yao and Zhang Jr with their comments.
19. Deloitte’s proposal dealt with the following features of the share options:
(1) allowing the employees to choose between cash payments or to participate in a share option plan;
(2) the vesting period of the share options (6 months) and that it would have to be exercised by the grantees within 10years from the date of the grant;
(3) the use of a multiplier for the calculation of the number of shares to make it more attractive; and
(4) the exercise price in light of the requirement under Chapter17 of the Listing Rules.
20. Deloitte also produced an announcement, notices and acceptance letters, which were necessary for the implementation of the proposed share options. They were provided to directors of the Company for their consideration.
21. Mr. Li Hengwen says that the exercise price was determined taking into account the average closing price of the Company’s shares in November and December 2014. I assume by this he means the anticipated exercise price was assessed taking into account the share price movement during the preceding months, as ultimately the exercise price would have to be determined so as to meet the requirements of the Listing Rules, which require it to be the price on the date of grant or the average of the preceding five days.
22. The relevant directors and staff met on 21 January 2015 to discuss the initial plan and the plan was then put forward again to members of the Remuneration Committee for their consideration. The rationale for deciding the exercise price and the multiplier for senior management were all decided, says the Company, after extensive and informed discussions.
23. In mid-January 2015, details of the share option plan were circulated to the employees for their consideration. They could voluntarily choose to either receive cash bonus payments under the 2014 Bonus Plan or to participate in the share option plan.
24. Draft written resolutions of the Remuneration Committee were prepared by Norton Rose Hong Kong and were provided to members of the Remuneration Committee in late January 2015.
25. The Company says, through the evidence of Mr. Wang Jian, who was a member of the Remuneration Committee, that the 2015 share options were granted on a completely different basis from the 2011 share options. The 2011 share options were granted in addition to the relevant remuneration received by those employees and were rewards given to them in light of the exceptional performance of the Group. On the other hand, the 2015 share options were granted as part of their remuneration to replace the year-end bonus payable to them under the 2014 Bonus Plan.
26. The Company says that the Remuneration Committee was clearly aware that:
(1) the 2015 Share Options were granted to those employees who were entitled to year-end bonuses under the 2014 Bonus Plan;
(2) the employees could voluntarily choose either to receive a cash bonus or share options;
(3) the exercise price was to be determined based on the requirements under the Listing Rules;
(4) there is a mechanism for determining the number of share options granted to the grantees; and
(5) Deloitte was the Group's professional advisor in respect of the share option plan.
27. In summary the Company says that its evidence demonstrates that the grant of the share options was a bona fide commercial decision made after proper consultation and with the assistance of independent professionals. It also argues that in any event an injunction is not necessary. First, the suggestion that there is any immediate risk to Investments’ interest is illusory. If all the options were to be exercised this would only result in a reduction of its interest to 23.64% and the chances of sufficient shareholders voting in favour of a special resolution to which Investments objects to pass it is theoretical and not real. Secondly, in the event that Investments were to be successful at trial it could be compensated by an award of damages sufficient to allow it to buy in the open market sufficient shares to regain an interest of 25%.
28. Before turning to consider Investments’ response to the Company’s case I will consider the principles which govern the assessment of the application and, in particular, the Company’s argument that something more than a serious case to be tried has to be demonstrated if Investments is to be successful.
LEGAL PRINCIPLES
29. I do not understand the following principles that are relevant to the present case to be in issue, at least for the purposes of the present application. First, that if Investments were able to establish that the share options had been granted for an improper, collateral purpose, namely, thefurtherance of the Zhang-Song Agreement the share options would be liable to be set-aside[1]. Secondly, any grantees of an option would not be entitled to specific performance and damages would be an adequate remedy[2].
30. It is well established that normally the approach to the grant of an interlocutory injunction involves addressing three issues:
(1) whether there is a serious issue to be tried;
(2) whether damages would be an adequate remedy for the applicant; or whether the respondent would be adequately compensated by an undertaking as to damages for the loss it would have sustained; and
(3) if there is doubt as to the adequacy of the respective remedies in damages, then the question of balance of convenience arises. Where other factors appear to be evenly balanced, it is a counsel of prudence to take such measures as are calculated to preserve the status quo[3].
31. Investments says that in the context of an unfair prejudice petition, it is more important than normal to preserve the status quo pending the final determination of the proceedings. In Re A Company (No.002612 of 1984) [4] at pages 82-83, Harman J suggests that existing share structures should be maintained unless change is essential. Theseobservations were cited with approval by Godfrey J (as he then was) in Tseng Yueh Lee Irene v. Metrobilt Enterprise Ltd [5]. Mr. Joffe argued that this approach supported restraining a change in the structure of the shareholding of the Company and preventing Investments’ holding being diluted below its holding at the time of issue of the proceedings. Hereferred me to the decision of the House of Lords in Garden Cottage Ltd v. Milk Marketing Board [6] in which Lord Diplock, at page 140C D, explains that the relevant status quo to which reference was made in American Cyanamid is the state of affairs existing during the period immediately preceding the issue of the proceedings. At the time the present proceedings were issued the options had not vested and, therefore, had not affected Investments’ shareholding.
32. Harman J and Godfrey J’s observations were made in the context of private companies. I agree that generally in the context of private companies where there is a dispute about lawfulness of proposed changes in shareholding it will be desirable to maintain the existing shareholding arrangement unless there is good reason to do otherwise. However, different considerations may arise in the context of public companies. The present case illustrates this. We are not here concerned with a placement, but with share options which form part of the consideration provided to a large number of the Company’s employees. Granting an injunction to prevent the employees exercising the options, which is the affect of the order Investments seek, may impact on their morale and as a consequence impact on the commercial interests of other shareholders. It seems to me that the correct approach to this case, asindeed it is to any other regardless of its subject matter, is as explained by LordHoffman at paragraphs 16 to 18 of his judgment in National Commercial Bank Jamaica v. Olint Corporation [7]:
“16. … The purpose of such an injunction is to improve the chances of the court being able to do justice after a determination of the merits at the trial. At the interlocutory stage, the court must therefore assess whether granting or withholding an injunction is more likely to produce a just result …
17. In practice, however, it is often hard to tell whether either damages or the cross-undertaking will be an adequate remedy and the court has to engage in trying to predict whether granting or withholding an injunction is more or less likely to cause irremediable prejudice (and to what extent) if it turns out that the injunction should not have been granted or withheld, as the case may be. The basic principle is that the court should take whichever course seems likely to cause the least irremediable prejudice to one party or the other. This is an assessment in which, as Lord Diplock said in the American Cyanamid case [1975] AC 396, 408:
‘It would be unwise to attempt even to list all the various matters which may need to be taken into consideration in deciding where the balance lies, let alone to suggest the relative weight to be attached to them.’
18. Among the matters which the court may take into account are the prejudice which the plaintiff may suffer if no injunction is granted or the defendant may suffer if it is; the likelihood of such prejudice actually occurring; the extent to which it may be compensated by an award of damages or enforcement of the cross-undertaking; the likelihood of either party being able to satisfy such an award; and the likelihood that the injunction will turn out to have been wrongly granted or withheld, that is to say, the court’s opinion of the relative strength of the parties’ cases.”
33. In other words the Court weighs the strength of the case and the impact granting or not granting an injunction will cause and determines which course is likely to cause the least irremediable prejudice to one party or the other.
IMPACT OF GRANTING OR DECLINING THE INJUNCTION
34. Mr. Joffe argued that the adverse impact of granting the injunction Investments seeks will be limited. In the event that any employee who accepted the offer of an option wishes to exercise it now that it has vested and as a consequence of an injunction is prevented from doing so, he will have a claim for damages against the Company. As I have already noted, it is not in dispute that he would not have a claim for specific performance. Thus, develops the argument, the adverse impact on an employee would be minimal. It seems to me that this is over simplistic. The share options were granted as an alternative to employees receiving cash bonuses for 2014. Part of the purpose of offering options was to provide an incentive to employees. Its purpose is linked to staff morale. Itseems to me that if employees are told that the options they accepted cannot be exercised they will inevitably react negatively. The employees reside and work in the Mainland. They are unlikely to be familiar with the Hong Kong legal system or understand the refined legal arguments advanced by Mr. Joffe. Their perception of the state of their employer and the reliability of its management will be adversely affected. Theirimmediate reaction is likely to be that they have been held out of their bonus. If they are told that they can claim any loss resulting from an inability to exercise the options they are likely to be uncomfortable doing so. No employee is going to be comfortable making demands for payment for breach of an agreement from his or her employer.
35. It also seems to me that there is considerable force in the Company’s argument that even if the options were all to be exercised it would be highly unlikely to have any immediate adverse impact on the degree of control that Investment would have over the affairs of the Company. The small diminution in shareholding would result in it dropping below 25%, but I agree with Mr. Ho that it is highly unlikely that if Investments voted against a special resolution it would be passed. It also seems to me that looked at more generally it would have little impact on the current balance of power between shareholders. I have set out in paragraph12 the current major shareholdings of the Company. It can be seen that there are currently 4 major shareholders and, it would appear from the business press, recent moves by at least one of them to obtain control of the Company. A small reduction in Investments’ shareholding is unlikely to make any difference as the different shareholders jockey for control of the Company. In the event that Investments were to be successful at trial it would be possible to require the Company to pay such sums as were necessary for Investments to acquire sufficient shares to return it to the position it would have been but for the exercise of the options. Applying the conventional American Cyanamid principles this of itself suggests this is not an appropriate case in which to grant an injunction, because the breach of duty complained of can probably be adequately compensated by an award of damages. I accept, however, thatif one approaches the application from the more holistic perspective explained by Lord Hoffman and mindful of the preference expressed by Harman J for maintaining the existing capital structure prior to the determination of a dispute over allotments of shares, it may be that even if the Court thinks that it is probable that any loss to the applicant shareholder can be compensated for by damages if the injunction is declined, if the claim is strong and any damage done by the granting of the injunction compensatable, the Court may be inclined to grant an injunction which preserves the capital structure existing before the proceedings were commenced.
THE STRENGTH OF THE PETITIONER’S CASE
36. I was satisfied when granting leave to commence this action that the Applicants had demonstrated a serious question to be tried in respect of the purpose of the grant of the options. It seems to me that for the reasons considered in the previous paragraphs a rather stronger case is necessary to justify granting an order.
37. There are 2 elements to Investments attack on the purpose of the share options. The first is the Zhang-Song agreement. There is no direct evidence of such an agreement. The only evidence filed so far concerning the Zhang-Song agreement was contained in the affirmation of ZhaoYongkui in support of the application for leave to commence the derivative action. In paragraph 4.23 and 4.24 of his first affirmation he says this:
“4.23 In or about October 2014, the Applicants (including me) managed to meet with a few former senior management staff of the Shanshui Cement Group including Mr. Gao Zhenwu (高振武) (“Gao ZW”), Mr. Liu Xian Liang (劉現良) (“Liu XL”) and Mr.Zhao Dong Wei (趙東偉) (“Zhao DW”) in Jinan, Dongdong Province. GaoZW was then the deputy general manager of the Shanshui Cement Group; and he resigned and left the group in about 2010. Liu XL was the personal assistant to the Shanshui Cement Group’s general manager, and he resigned in about 2009; and Zhao DW was the general manager of a wholly-owned subsidiary of the Shanshui Cement Group, and he resigned in about 2013.
4.24 During the said meeting in Jinan, they all mentioned to us that based upon their earlier respective discussions with the senior management of the Shanshui Cement Group, they discovered that Zhang Sr had already sealed up an agreement (the “Zhang-Song Agreement”) with Song at CNBM in about March 2014, enabling Song to come to the help of Zhang Sr in defending the Contributing Employees’ action and the possible investigation by the Mainland authorities, on the basis that:-
(1) Zhang would procure Shanshui Cement to allot shares to CNBM so as to make CNBM the second largest shareholder of Shanshui Cement;
(2) Should CNBM later want to become the largest shareholder of Shanshui Cement, Zhang Sr would provide assistance to procure that result; and
(3) Should CNBM later become the largest shareholder of Shanshui Cement, Zhang Jr would still be retained by Shanshui Cement to manage the operation of Shanshui Cement.”
38. In the absence of any direct evidence, the existence of the Zhang Song agreement has to be inferred from the fact that disgruntled employees were making complaints to the authorities about Zhang Sr and the speedy and informal way in which the subsequent subscription agreement with CNBC came to be concluded. Mr. Joffe submitted both on the leave application and the present application that it was suspicious that ZhangSr had not gone on oath to deny the agreement and had left it to his Son to say he knew nothing about it, but it does not seem to me that adds much weight to the strength of the claim. Although I am satisfied that there is a serious question to be tried in respect of the purpose of the CNBC’s subscription it does not seem to me that it can be said, given the absence of direct evidence, that this claim is strong.
39. The Zhang-Song agreement is the foundation of the attack on the share options. I do not understand the Applicants to suggest that if, contrary to their case, CNBC’s subscription was a genuine bonafide commercial transaction there was anything wrong with the share options. The attack on the share option scheme assumes that it was made in furtherance of the Zhang-Song agreement.
40. The claim in respect of the share options lies on fairly soft foundations. There is no direct evidence of the share option scheme being formulated for any reason other than as an alternative to paying cash bonuses. Mr.Joffe undertook a forensic analysis of the progress of the share options proposal. He identified eight reasons why he submitted it could be inferred that the share options were granted for an improper purpose, namely, to dilute Investments’ interest in the Company and advance the Zhang Song agreement.
41. First, the 2014 bonus plan produced by the Company is very different from the bonus plans previously adopted. It bears no date, nocompany seal and no signature. It is not clear who prepared it and when it was issued.
42. Secondly, whilst it is accepted that the annual remuneration of staff would consist of 2 elements, i.e. “monthly salary” and “cash bonus”, the “cash bonus” portion could only be assessed and determined after the completion of a financial year when the audited accounts of the various companies within the Shanshui Group have become available. It is very dubious for Shanshui Cement to resolve to issue the 2015 Share Options in January2015 before the 2014 results were available.
43. Thirdly, it is strange for the Group to award substantial share options when the performance of the Group was poor. The Company issued a “profit warning” on 13 March 2015 indicating that a “significantdecrease in net profit for the twelve months ended 31December 2014 as compared with that of the corresponding period in 2013”.
44. Fourthly, notwithstanding the Court’s indication at the hearing on 17 March 2015 that the salaries of the staff appear to be modest compared to the substantial share options granted to the employees, the Company has not disclosed any evidence regarding the salaries of those employees to whom share options were granted. From the evidence given by Mr. Zhao, it appears that the share options granted to the employees are so disproportionate to the staff’s remuneration that the obvious inference is that the 2015 Share Options was granted for the improper purpose of diluting the shareholding of Investments. The Company purports to explain this by showing that there would be loans provided by BOC International to finance the share options on the basis that immediately following exercise of an option the shares would be sold. But the only evidence that the Company has adduced is an advertising brochure. Nodraft contracts or loan documents with BOC havebeen produced.
45. Fifthly, the Company relies upon Li Hengwen’s evidence that there would be an adverse financial impact on the Shanshui Group if the year end bonus under the 2014 Bonus Plan were to be distributed all in cash. The Company’s annual report does not support this.
46. Sixthly, there is no explanation for why particular multipliers were used for particular employees. Mr. Joffe took me to the 2ndaffirmation of Li Hengwen in which, in paragraph 9.1 he deals with the share options granted to Tin Kwong and Liu Luntang. He demonstrated that although Mr. Li says that their share options were calculated using a multiplier of 4, if one divides the number of options by what Mr. Li says were their respective salaries one gets figures of 3.68. This is correct. However, Mr. Li is clearly using approximate figures for the bonuses used to calculate the amount of the share options. In fact it seems to me reasonable to assume that if the share option scheme was concocted if anything it would be more likely that the figures would be precise because they were the result of a purely mechanical exercise and did not involve any genuine assessment of what an employee would receive.
47. Seventhly, the share option scheme adopted was not the same as that proposed by Deloittes. This seems to me equally consistent with the Company making changes to Deloittes’ proposal because it was giving genuine consideration to a bona fide scheme.
48. Finally, the potential bonuses awarded through the share options were considerably in excess of those in 2011.
49. I accept that these eight matters collectively establish a serious question to be tried. But in the absence of any direct evidence at all suggesting that the share option scheme is a concoction and in the face of the evidence filed by the Company that explains through the affirmations of a number of people the reasons for adopting the share options scheme as an alternative to cash bonuses and the means by which it came to be formulated and introduced, which in my view is plausible, it does not seem to me that it can be said that the Petitioner has demonstrated a case which at this stage can be assumed to have a strong prospect of success.
50. Some degree of caution in assessing the strength of the Petitioner’s case is in my view merited by 2 previous applications with which I have had to deal in which the Applicants have also relied on forensic points which turned out to be wrong. The first related to the subscription agreement with CNBC. It was suggested on the initial exparte application for an injunction that one reason for doubting the bonafides of the agreement was the fact that the subscription price was below the net asset value per share. Whilst reading the papers I checked on Bloomberg the share price at the close of trading on the day of the subscription and unsurprisingly, I thought, it was the same as the subscription price which is normal for a private placement in a public company. The second also arose on an ex parte application. On this occasion the application was to obtain an order for an early hearing of an application to appoint receivers over Investments. The urgency arose from, it was suggested in the papers sent to me, the Company fixing an early date (22 May 2015) for its annual general meeting with a view to have certain resolutions passed before Mr. Justice Godfrey Lam could determine an applications by the Employees for the appointment of receivers over the shares held on trust by Zhang Sr, which would impact on how Investments might vote its shares. What was not brought to the Court’s attention was the fact that the annual general meeting had been held at the same time in the previous 3 years, which I ascertained from a search on the Stock Exchange web site, and that the Company was required by the Companies Ordinance to hold its annual general meeting by the end of June in any event.
CONCLUSION
51. In my view the Petitioner has not demonstrated a strong enough case to justify granting an injunction to stop employees exercising the share options with the potential damage that such an order would be likely to have on the employees and their morale. It seems to me highly doubtful that the small dilution in Investments interests in the Company will impact on its ability to influence the passing or otherwise of any resolutions in general meeting and any damage done by the dilution will be capable of being remedied by an award of damages sufficient to allow the Petitioner to buy shares in the open market sufficient to put it back in the position it would have been if the options had not been exercised.
52. I will dismiss the application and make a costs order nisi that the Petitioner pay the Company’s costs forthwith.
 (Jonathan Harris)
 Judge of the Court of First Instance
 High Court
Mr Victor Joffe and Mr M L Law, instructed by Wong & Lawyers, for the petitioner
Mr Ambrose Ho SC and Mr Victor Dawes SC, instructed by Clifford Chance, for the respondents
________________________________________
[1] Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821
[2] Re Schwabacher (1908) 98 LT 127, 128, per Parker J
[3] American Cyanamid v. Ethicon [1975] AC 396 at 407-408, per Lord Diplock, HL
[4] [1985] BCLC 80
[5] [1994] 2 HKC 694 at 691-692
[6] [1984] AC 130
[7] [2009] 1 WLR 1405