張才奎所託管中國山水投資有限公司股份相關員工 AND OTHERS v. 張才奎 AND ANOTHER

HCA 1661, 1766, 2191/2014 & HCA 623, 939, 1564/2015 (Consolidated) [2018] HKCFI 194

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE ACTION NOS 1661, 1766, 2191 OF 2014 AND 623, 939, 1564 OF 2015 ______

BETWEEN 張才奎所託管中國山水投資有限公司股份相關員工(其名字詳情見傳訊令狀之附表一) 第一批原告人 Relevant employees whose shares in China Shanshui Investment Company Limited were held by ZHANG CAIKUI on trust (Please refer to Schedule 1 attached to the Writ of Summons for names of the relevant employees) The 1st Group of Plaintiffs 李延民所託管中國山水投資有限公司股份相關員工 (其名字詳情見傳訊令狀之附表二) 第二批原告人 Relevant employees whose shares in China Shanshui Investment Company Limited were held by LI YANMIN on trust (Please refer to Schedule 2 attached to the Writ of Summons for names of the relevant employees) The 2nd Group of Plaintiffs and 張才奎 (ZHANG CAIKUI) 1st Defendant (第一被告人) 李延民 (LI YANMIN) 2nd Defendant (第二被告人) ____ (Consolidated pursuant to the Order of The Honourable Mr Justice G Lam dated 20 August 2015) _____ Before: Hon G Lam J in Chambers Date of Hearing: 1112 July 2017 Date of Decision: 31 January 2018 ____

D E C I S I O N ____ The applications This is the court’s decision on the following applications: the application of the 5 plaintiffs represented by Stephenson Harwood (“SH”) for an order that the existing 3 receivers (Stephen Liu, David Yen and Koo Chi Sum, all of Ernst & Young Transactions Ltd) (“Receivers”) be discharged and be replaced by Fok Hei Yu and Daniel Chow; alternatively, the Receivers be directed to exercise the rights attached to the CSI shares in receivership and/or their rights as directors of CSI with a view to causing Fok and Chow to become the only directors of CSI as soon as practicable; the application of 1,072 plaintiffs (also represented by SH) for the same orders; there was a dispute whether SH had authority to act for them but that was the subject matter of another summons which had fallen away. For present purposes I shall refer to all 1,077 plaintiffs as the “SH plaintiffs”; the application of the 1st defendant (“Zhang Snr”) for the discharge of the receivership; or a direction that the Receivers procure CSI to vote its shares in CSCG in accordance with the individual wishes of the shareholders of CSI and in proportion to their respective shareholdings (“split voting direction”); and an order that the plaintiffs fortify their undertaking as to damages given in relation to the receivership order by payment into court of the sum of HK$1.773

billion; and the Receivers’ application to strike out certain passages in the affirmations filed on behalf of the SH plaintiffs for their applications. Immediately after the hearing of these applications, I gave directions expediting the trial of the actions which has since taken place. This decision will be handed down at the same time as the judgment in the actions. Since the Receivers have by the previous orders been appointed until the final determination of the actions, their appointment ceases in any event upon judgment being given in the actions. It nevertheless seems to me that the above applications should be disposed of, albeit more briefly than might otherwise have been the case. Background The 6 actions China Shanshui Investment Co Ltd (“CSI”) is a Hong Kong company which currently holds 25.09% of the shareholding in China Shanshui Cement Group Ltd (“CSCG”), the holding company of a group whose shares are listed on the Stock Exchange of Hong Kong. The background to the creation of this group of companies and to the listing is described in my judgment on the actions at §§635. Prior to the listing, 3,947 employees in the Mainland had participated in a stock ownership scheme in the group (“participating employees”). As a result of the corporate restructuring culminating in the listing of CSCG, their interests were shifted from the relevant Mainland companies (in

particular, Shandong Shanshui Cement Group Company Limited (“Shandong Shanshui”)), to CSI. The relevant shares in CSI were purportedly put into two BVI trusts of which Zhang Snr and the 2nd defendant were trustees. The 2nd defendant has since transferred the shares registered in his name to Zhang Snr. There were also 7 senior officers of the group who directly held shares in CSI (nos.3 to 9 in the table in §12 below). They have been referred to as the “Minority Shareholders”. Together they hold 182,579 CSI shares. In about 2013, disputes arose between the Minority Shareholders and Zhang Snr. Disputes also began to emerge between certain employees and Zhang Snr. In particular, Zhang Snr contends that the relevant CSI shares are held on two discretionary BVI trusts, but some of the participating employees contend that the shares are held absolutely for them on fixed trusts. It appears that a “Rights Protection Committee” (維權委員會) (“RP Committee”) was established by certain members of the senior management, including the Minority Shareholders in CSI, to promote and protect the interests of the participating employees. Eventually, the 6 actions herein were commenced in Hong Kong, one after another, between August 2014 and July 2015 in the name of 2,631 out of the 3,947 participating employees. The plaintiffs were all, at that time, represented by the solicitors firm of K & L Gates

(“KLG”). I shall refer to the plaintiffs represented by KLG as the “KLG plaintiffs”. The state of legal representation is described in my judgment in the actions at §§3943. The appointment of receivers On 20 May 2015, I ordered the appointment of receivers over the shares that are the subject matter of the first 5 actions herein on the application of the plaintiffs of those actions. The reasons are set out in my judgment handed down on that date. On 17 June 2015, while refusing Zhang Snr leave to appeal, I directed the Receivers not to seek to alter the composition of the board of directors of CSCG without obtaining further directions of the court (see §18 of my decision handed down on 17 June 2015.) On 14 July 2015, for similar reasons, AuYeung J appointed receivers over another parcel of shares which had become the subject matter of the sixth action herein. A similar direction was given to the Receivers concerning the composition of the board of CSCG. The 6 actions have since been consolidated. Together the receivership covers 456,325 shares in CSI, representing 45.6325% of the issued share capital. Tianrui’s acquisition and CSCG’s current shareholding structure Meanwhile, a Mainland group headed by Tianrui (International) Holding Company Limited (“Tianrui”) had, by April 2015, acquired enough shares from the market to become the single largest shareholder of CSCG, holding

28.16% of the issued share capital. This reduced the public float of CSCG shares to 9.18%, well below the Stock Exchange’s requirement, with the result that trading in CSCG shares has remained suspended since 16 April 2015. Following Tianrui’s acquisition, the shares of CSCG have been held as follows: Shareholder Number of shares Proportion Tianrui 951,462,000 28.16% CSI 847,908,316 25.09% Asia Cement Corporation (“ACC”) and Yu Yuan 850,906,500 25.18% China National Building Material Co Ltd (“CNBM”) 563,190,040 16.67% Public shareholders 165,673,384 4.90% Total 3,379,140,240 100.00% Shareholding in CSI Shortly after the appointment of the Receivers, the relevant CSI shares were registered in their name, and the shareholding structure in CSI became as follows: 1 Zhang Snr (holding as trustee of the BVI trusts) 361,096 36.11% 2 Receivers (in 6 actions as between Zhang Snr and 2,631 plaintiffs) 456,325 45.63% 3 Yu Yuchuan 43,542 4.35% 4 Dong Chengtian 41,765 4.18% 5 Zhao Liping 30,479 3.05% 6 Zhao Yongkui 27,743 2.77% 7 Mi Jingtian 15,627 1.56% 8 Li Maohuan 15,260 1.53% 9 Wang Yongping 8,163 0.82% Total 1,000,000 100.00% There have been further changes to the shareholding structure in CSI and another receivership has come into being, which I shall describe below. Composition of the CSI board The Receivers concluded that, to carry out their duties, they needed to be appointed to

the board of CSI, which they managed to achieve in early July 2015. In addition, on 12 August 2015, 2 persons nominated by the Receivers, Chong Cha Hwa (“Chong”) and Hwa Guo Wai (“Hwa”), were also appointed as directors of CSI. Together they became the majority on the CSI board. An application by Zhang Snr to the court in effect to reverse the appointment of the Receivers and Chong and Hwa to the CSI board was rejected by Deputy Judge Seagroatt on 30 September 2015 (with reasons handed down on 9 October 2015). On 20 November 2015, CSI in general meeting voted Zhang Snr and his son Zhang Bin (together “the Zhangs”) out of the CSI board. As at the date of the hearing before me, the board of CSI consisted of the 3 Receivers, Chong, Hwa and Zhao Yongkui, one of the Minority Shareholders. Composition of the CSCG board An EGM of CSCG was requisitioned by Tianrui to be held on 29 July 2015, to consider resolutions for the removal of all but one of the then directors and the appointment of 7 new directors nominated by Tianrui. On 23 July 2015, on the application of the Receivers for directions on how to vote at the EGM, AuYeung J, for the detailed reasons she gave, refused to give directions to enable the Receivers to vote in favour of a change in the management of CSCG. The resolutions proposed by Tianrui for persons nominated by it to be appointed to the board of CSCG were all

defeated. As stated in §15 above, Zhang Snr applied for an order to remove Chong and Hwa from the board of CSI or to restrain them from acting as such, alleging inter alia that the Receivers and their nominated directors were acting in concert with Tianrui. In a trenchant judgment dated 9 October 2015 Deputy Judge Seagroatt refused the application. Zhang Snr’s attempt to obtain an interim injunction pending an application for leave to appeal was refused by the Court of Appeal on 12 October 2015 (HCMP 2498/2015). At another EGM of CSCG held on 13 October 2015, CNBM and ACC voted for the removal of Zhang Snr and two others from the board, but allowed Zhang Jnr to remain a director and chairman of CSCG’s board. The resolutions proposed by Tianrui to remove certain directors were again defeated. On 15 October 2015, however, Tianrui issued another requisition notice for an EGM proposing to replace the directors of CSCG. On 16 October 2015, the Receivers obtained from Deputy Judge Seagroatt a direction that they be free to vote at any board meeting of CSI in a manner including causing changes to the composition of CSCG’s board, and to accept any offer of appointment of the Receivers as directors of CSCG. Zhang Snr’s attempt to obtain leave to appeal against this direction was dismissed on 18 November 2015. Accordingly, at an EGM of CSCG held on 1 December 2015, CSI and Tianrui voted

to replace the entire board of directors of CSCG. Stephen Liu (one of the Receivers), and Chong and Hwa, as well as certain persons nominated by Tianrui including its chairman Li Liufa and Li Heping, were appointed to the board. As at the date of the hearing before me, the board of CSCG consisted of 3 executive directors, namely, Stephen Liu (chairman), Li Heping (CEO) and Hwa, and 5 INEDs. 4 for 1 open offer and placement proposals On 3 June 2016, CSCG made an announcement referring to a proposed open offer of 4 new shares for 1 existing share to raise about HK$4 billion (which would mean a subscription price of about HK$0.30 per new share). If implemented and if CSI did not subscribe, Tianrui as the potential sponsor could take up the shares unsubscribed for, and CSI’s shareholding in CSCG would be diluted from 25.09% to about 6.2%. After objections were raised by the RP Committee apparently on behalf of the plaintiffs, the open offer was abandoned. Subsequently, a proposal to place between 910 million and 950 million shares (representing 21.22% to 21.94% of the enlarged share capital assuming the placement had proceeded) at a price of not less than HK$0.50 per share (yielding total proceeds in the range of HK$455 million to HK$475 million) was announced in September 2016. The main reason given for the placement was to restore the public float of CSCG. If proceeded with, the

placement would dilute CSI’s shareholding in CSCG from 25.09% to 19.59% or 19.77%. The RP Committee also opposed the proposed placement and voiced their objection to the Receivers. This time, however, the proposal was not withdrawn. It was announced on 30 December 2016 that an EGM of CSCG would be held on 17 February 2017 for the members to resolve upon the proposed placement. At about this time, around 2,346 of the plaintiffs, apparently acting via the RP Committee, instructed SH to take steps to oppose the proposed placement. Those plaintiffs also provided signed written instruction to change their solicitors on record from KLG to SH, but KLG and the Receivers did not recognise the validity of the instruction and disputed SH’s authority to act for the plaintiffs. On 16 February 2017, as there was evidence that both a vast majority of the plaintiffs (2,346) and the 1st defendant opposed the placement, on the application of those plaintiffs who had then instructed SH, I directed the Receivers, in effect, to cause CSI to seek an adjournment of the EGM of CSCG to allow them to ascertain the plaintiffs’ position with respect to the proposed placement. (Some of those 2,346 plaintiffs have since switched back to KLG.) In the reasons for decision handed down on 20 February 2017, I stated: “10. Whether the receivers think that such course is in the interests of CSCG is not the focus. As owner of shares, the parties to the consolidated action, for whose benefit the receivership has been created, do not owe any fiduciary duty to CSI, let alone to CSCG. Shareholders are generally entitled to vote their shares in their own interest as they see it: Eclairs Group Ltd v JKX Oil & Gas plc [2015] UKSC 71 at §40.

11. Accordingly, in considering the proposed resolutions of CSCG, the parties are entitled to prefer their own interests as CSI shareholders. They are entitled to be concerned that the proposed placement would dilute CSI’s shareholding in CSCG from 25.09% to 19.59% or 19.77%, the very thing the plaintiffs complained of when applying for the appointment of interim receivers in 2015; see §§19, 20 and 31 of my decision dated 20 May 2015 on the appointment of receivers. …” As it turned out, the Receivers did not manage to contact the plaintiffs to ascertain their position. SH made a proposal for a joint visit by KLG and SH and a third independent solicitors firm to ascertain the plaintiffs’ wishes, which was rejected by KLG. The Receivers asked SH to arrange meetings with the plaintiffs and this was declined by SH. The placement agreement expired. While another agreement was entered into on similar terms with a long stop date of 13 September 2017, the Receivers said that it was unlikely to proceed because it was highly unlikely the Stock Exchange would give the requisite approval. On 1 June 2017, in light of the forthcoming AGM of CSCG, the SH plaintiffs applied for a direction from the court that the Receivers should exercise their vote in CSI to cause CSI to vote at CSCG’s AGM against the grant of a general mandate to the board of directors to allot shares up to a maximum of 20%

of the issued capital. The SH plaintiffs were concerned that if the general mandate was exercised to the maximum, it would dilute CSI’s shareholding in CSCG to approximately 20.91%, leading to the loss of its “kingmaker” capacity in the contest between Tianrui and ACC for control of CSCG, and loss of the “control premium” attached to CSI’s stake. I declined to give that direction, for reasons handed down subsequently on 14 June 2017. Acquisition of the plaintiffs’ interests Another dimension that is relevant to the present applications is that it has subsequently transpired that shortly after the appointment of the Receivers, there were acquisitions and transfers of various interests in CSI. The evidence shows that by August 2015, and possibly before that, Tianrui was interested in acquiring the interests of the plaintiffs in CSI. The Chairman and CEO of Tianrui went to Jinan to see certain members of the RP Committee and proposed to acquire the plaintiffs’ interests in CSI. Because of various concerns on the part of Tianrui, an arrangement was eventually devised whereby (i) certain representatives would be nominated to acquire the plaintiffs’ interests in CSI; (ii) Tianrui would lend money to these representatives; (iii) the acquisition price would be calculated based on the last trading price of CSCG shares, ie HK$6.29 per share; (iv) the representatives would pay 70% of the

price to the plaintiffs, with the balance of 30% to be paid after the plaintiffs have acquired full title to the CSI shares from Zhang Snr. As a result, in August 2015, 2,142 of the 2,631 plaintiffs on record signed sale and purchase agreements (“SPAs”) to sell their interest in CSI shares, though the consideration and purchaser were left blank. The SPAs provided as follows (using one of the samples): “2. The Seller hereby irrevocably agrees and confirms the selling of the beneficial interests of the shares to the Buyer in accordance with the following terms: (a) The Buyer shall pay to the Seller RMB3,413 per share (“the selling price”), namely, a total of RMB1,385,678.00, for buying the beneficial interests of the shares. …The terms of payment are as follows: (i) Within 15 days from the date of execution of this agreement, the Buyer shall pay the Seller the first instalment, ie 70% of the selling price in the sum of RMB969,974.60. (ii) The second instalment, ie 30% of the selling price in the sum of RMB415,703.40, shall be paid in full by the Buyer within 30 days after the Seller has transferred the shares with beneficial interests held in the name of Mr Zhang Caikui into the name of the Buyer. (b) Except for the interests mentioned in 2(c) below, upon receiving the first instalment mentioned in 2(a) above, (i) all interests in connection to the beneficial interests of the

shares owned by the Seller shall belong to the Buyer and the Seller is only entitled to the second instalment of the selling price from the Buyer. The Seller shall have no say regarding any interests in connection to the beneficial interests of the shares. Moreover, before the shares have been formally transferred from the name of Mr Zhang Caikui into the name of the Buyer, the Seller must follow the Buyer’s instructions upon the Buyer’s request to assist the Buyer in exercising any interests in connection to the beneficial interests of the shares without objection; (ii) the Seller shall irrevocably, without any compensation, assist and authorize the Buyer to recover from Mr Zhang Caikui the Seller’s shares held in his name with the beneficial interests, and transfer the same to the Buyer. In this regard, the Seller also irrevocably promises to sign any related documents upon the Buyer’s request for recovering the shares from Mr Zhang Caikui. (c) Regardless of the clauses in other parts of this agreement, (i) before the Seller has received the second instalment mentioned in 2(a)(ii) above, any dividends of the shares distributed to the shareholders by the company/companies shall still belong to the Seller; and (ii) within 14 days from the Buyer’s written request of transferring the shares in Mr Zhang Caikui’s name into the Buyer’s name, the Seller may cancel this shares sale

and purchase agreement via written confirmation and notification to the Buyer. In that case, the Seller shall within 10 days thereafter return the full sum of the first instalment mentioned in 2(a)(i) above without interest. To avoid unnecessary misunderstanding, if the Buyer has not received any written confirmation from the Seller for cancelling this sale and purchase agreement within 14 days after issuing the above mentioned written request, or has not within 10 days after the notification received from the Seller the abovementioned first instalment payment, the Seller shall have no right to cancel this agreement and must cause the equity interests to be transferred into the Buyer’s name according to the stipulation in 2(b) above without objection.” A total of 11 employees became the “representatives” under this scheme (“11 Representatives”), who were also plaintiffs herein themselves. They were procured to sign certain loan agreements, after which funds were transferred into their bank accounts, which were then paid out to the selling plaintiffs. A total of about RMB700 million was paid out in August 2015. The loan agreements, dated 17 August 2015, provided as follows (using one of them as example): “Article 1 Party B undertakes that within 15 days after this agreement comes into effect, Party B is to provide Party A with a loan with the credit limit of RMB75,000,000. Party

A allows Party B to pay by instalments and the loan amount provided by Party B to Party A is the amount paid in each instalment. Article 2 Party A undertakes to use all the abovementioned amounts borrowed from Party B to fulfil the duties of paying the relevant share owners the consideration for share transfers in accordance with the shares sale and purchase agreements which stipulate that Party A shall bear such duties. …… Article 4 The loan period of this loan agreement is 24 months and both parties may negotiate and confirm issues of extension 3 months before the end of the loan period. Article 5 In order to guarantee Party A’s performance of the duties of repaying the loan and all the interest as specified in this agreement, Party A and Party B also execute a Pledge Agreement of Beneficial Interests of Shares (“the Shares Pledge Agreement”) on the same day of executing this agreement. Party A undertakes to pledge the assigned interests it has acquired to Party B and to assist Party B to go through the pledging procedures. Article 6 Party A’s duty of repayment is discharged if: (1) with Party B’s written consent, Party A has repaid the loan and all interest in cash or with other equivalence; or (2) in the event that Party A is unable to repay the loan and all the capital and interest, Party A, as instructed by Party B, has transferred all its assigned interests to Party B or

a third party specified by Party B; or (3) when Party A and Party B terminate the Shares Pledge Agreement, Party A has paid Party B proceeds of the disposal of the pledge or an amount equal to the net asset value corresponding to the assigned interests or any other amount agreed between the parties; or (4) when the Shares Pledge Agreement is still in effect, [CSI] is bankrupted, dissolved or stops operating, and Party A has repaid Party B all the proceeds obtained by it from the liquidation of [CSI]. Article 7 Party A hereby irrevocably promises Party B that: (1) throughout the existence of [CSI], without written consent from Party B, Party A shall neither transfer shares/interests in [CSI] obtained through the shares sale and purchase agreement nor create other pledges or any third party’s rights on the shares; (2) throughout the existence of [CSI], Party A is to obtain prior agreement or approval from Party B before exercising shareholder’s voting right on the following major matters: (i) changing the Articles of Association; (ii) adding or reducing the registered capital and changing the structure of the registered capital; (iii) changing the business objective and main business; (iv) external borrowing and providing guarantee; (v) selling, transferring, leasing out, disposing or acquiring any asset with a total value of over RMB1 million (whether via a oneoff deal or via a

series of connected transactions), except for commodity transactions within the scope of business in daily operations; (vi) electing different members of the Board of Directors; (3) without Party B’s written consent, Party A cannot take any action or agree for others to take any action that may cause [CSI] to stop operating or go into liquidation or bankruptcy, save for acting as required in accordance with any law, decree, ordinance and order. Article 8 In order to protect Party B’s interests under this agreement, both Party A and Party B agree that should Party A be in breach of this agreement and its duties under this agreement, Party A’s unrepaid loan in this agreement shall become due immediately and Party B may immediately exercise its rights in the Shares Pledge Agreement (executed by Party A and Party B).” It is said that when the 11 Representatives signed the loan agreements, the lender and amount were in blank and they were not given a copy. In February 2017, however, one Chen Hongqing emerged and claimed to be the lender. There is apparently also a shares pledge agreement signed by each of the 11 Representatives with Chen Hongqing, with a clause restricting the pledgor’s exercise of voting rights without the pledgee’s consent. In my view there is serious doubt whether Chen Hongqing is in fact the “lender” because: The banking documents suggest that the money

totalling RMB700 million came from Tianrui. Chen Hongqing appears to have been only a midlevel manager. It is doubtful if he himself had assets of RMB700 million and, even assuming he did, that he would spend them on purchasing the plaintiffs’ “interests” in CSI. There is evidence suggesting he was a midlevel manager in the Tianrui group not that long ago. The same Chen Hongqing had also recently sought to enforce a share pledge by 4 of the Minority Shareholders (namely, Mi Jingtian, Zhao Liping, Li Maohuan and Yu Yuchuan) allegedly given as security for the loan made to the 11 Representatives. As a result of his application, on 27 June 2017 Mimmie Chan J appointed 2 accountants from the firm of BDO as receivers over 10.49% of the shareholding in CSI in HCMP 962/2017, pending determination of a CIETAC arbitration between Chen Hongqing and those 4 Minority Shareholders. There were documents evidencing a tortuous route through which these funds of RMB700 million, originating from Tianrui, first went to 3 individuals, and from them to another 13 individuals, and from them to the 11 Representatives in August or early September 2015, and from the 11 Representatives to the individual selling plaintiffs. The evidence is that, 2,090 of the 2,142 plaintiffs had long been paid 70% of the price under the agreements they signed. Together they had interests in 306,610 CSI shares

representing approximately 30.66% of the capital of CSI. There is some doubt whether the money used to pay the plaintiffs was in fact a “loan” to anyone because, in the afore-mentioned proceedings brought by Chen Hongqing in HCMP 962/2017, his case was that: “… the understanding was that when the employees succeeded in the Trust Action against Zhang for recovery of their beneficial interests in the shares in CSI, the Borrowers would transfer to Chen the CSI shares purchased with the Loan, instead of repaying the Loan.” (see para 10 of Mimmie Chan J’s judgment in HCMP 962/2017 dated 27 June 2017) The evidence is that, following the hearing on 16 February 2017 and the adjournment of the EGM of CSCG in consequence (see §27 above), these 2,090 plaintiffs have been paid the remaining 30% of the purchase price under the SPAs. However, they were apparently not all paid by the same party: 1,073 plaintiffs were paid the balance of 30% by the 11 Representatives in around March 2017. How this was funded is in dispute. The SH plaintiffs contend that it was funded by the 6 Minority Shareholders lending to the 11 Representatives out of the proceeds of sale of their own CSI shares to ACC, whereas the KLG plaintiffs contend that it was funded with money taken from Shandong Shanshui. At the same time, these plaintiffs signed documents confirming their instructions to SH. It is not clear whether

these plaintiffs signed any further agreement with anyone in connection with the 30% payment. No further agreement has been disclosed. Of the remaining 1,017 (2,090 – 1,073) plaintiffs who had been paid 70%, some (and the exact number is unknown) received the balance of 30% apparently from Chen Hongqing in March 2017. They also entered into a further agreement and apparently signed documents to state that they had not previously voluntarily instructed SH, and to confirm their instructions to KLG. Separately, between 7 March and 7 April 2017, of the other plaintiffs who had not been paid any money in 2015, 343 entered into memoranda of understanding (MOU) to sell to ACC the shares they may have in CSI at a price based on the reference price of HK$4.40 per CSCG share. The MOU is however conditional upon the plaintiffs succeeding in establishing their absolute beneficial interest in the CSI shares and CSI’s interest in CSCG not falling below 25.09%. The price payable is apparently held in some escrow account pending completion of the MOUs. At around the same time, ACC entered into the same form of MOU with 637 participating employees who are not plaintiffs in these actions. In around March 2017, the 6 Minority Shareholders (ie all except Zhao Yongkui) also sold their CSI shares (totalling 154,836 shares) to ACC at a price likewise based on HK$4.40 per CSCG share. Payment of legal

fees It has also transpired that the plaintiffs have thus far not forked out a single cent for the payment of KLG’s legal fees, which — no doubt in very substantial sums having regard to the scale and history of these actions — have instead been paid by an undisclosed source. There is evidence from what Mi Jingtian said at a meeting in January 2017 that it was Li Liufa (the Chairman of Tianrui) who had been funding KPG in this litigation. According to Zhao Yongkui, however, in order not to offend Zhang Snr, Li Liufa declined the plaintiffs’ request to provide funds for the litigation, but instead introduced them to an “independent friendly third party”. This “friend” remains unidentified because, it is said, he does not want his identity disclosed, and, as he is acting out of charity, there is nothing in writing to evidence the arrangement. It is apparently said that the sums were advanced without security and interestfree. It seems to me this explanation, to say the least, raises more questions than it answers. How is it contemplated that this friendly lender will be able to seek repayment from the 2,631 plaintiffs, especially the 2,090 who had been paid? It would be contrary to the whole tenor of the SPAs for the selling plaintiffs to be in any way responsible for those fees. Fallout between Tianrui and the Minority Shareholders It appears that in around December 2016, there

was a falling out between 6 of the Minority Shareholders (viz all except Zhao Yongkui) on the one hand and the management of CSCG on the other (consisting of persons nominated by Tianrui and the Receivers). On 20 December 2016, CSCG announced that it had suspended all the duties of Mi Jingtian in Shandong Shanshui and its subsidiaries with immediate effect. Zhao Yongkui was appointed to take over his duties. On 12 January 2017, CSCG further announced that it would investigate into Mi Jingtian’s suspected misconduct. On 16 February 2017, shortly before the EGM of CSCG to be held on 17 February 2017, there was an EGM of CSI. The 6 Minority Shareholders sought to remove Chong, Hwa and Zhao Yongkui from CSI’s board and replace them with 3 of the 6 Minority Shareholders, while Zhang Snr proposed to appoint himself, Chen Xueshi and Yu Zhihai to CSI’s board. However, Stephen Liu, supported by David Yen and Zhao Yongkui’s proxy, excluded Zhang Snr’s votes by relying on the terms of a Mareva injunction obtained by CSCG against Zhang Snr in a separate action (HCA 2880/2015). Zhang Snr considered it was a tactical move by the Receivers and Zhao Yongkui to prevent any reconstitution of CSI’s board. The Mareva injunction had since been varied to make clear that it did not restrain Zhang Snr from exercising voting rights on his shares, there being no attempt to defend the Receivers’ decision

to exclude Zhang Snr’s vote on 16 February 2017. On 23 February 2017, the RP Committee, apparently with the support of the 6 Minority Shareholders, issued a letter to all group employees accusing Tianrui, the Receivers and Zhao Yongkui of acting in a conspiracy against the interests of CSI. On 13 March 2017, CSCG announced that certain persons including 3 Minority Shareholders (ie Li Maohuan, Yu Yuchuan, Zhao Liping) and Chen Zhongsheng (a senior employee in the SH plaintiffs’ camp) had been removed from their duties in Shandong Shanshui. On 29 March 2017, CSCG brought an action (HCA 762/2017) against 4 Minority Shareholders (namely, Mi Jingtian, Zhao Liping, Li Maohuan and Yu Yuchuan) and Chen Zhongsheng alleging, inter alia, misapplication of funds of Shandong Shanshui. On 11 April 2017, CSCG obtained an ex parte Mareva injunction against those 4 Minority Shareholders to the tune of RMB142 million. ACC however provided a bank guarantee as security for the action so that on 21 April 2017, the court ordered that the Mareva injunction did not prevent the sale of those 4 Minority Shareholders’ CSI shares to ACC. Current shareholding structure of CSI As at the hearing before me, the shareholding structure of CSI was as follows: 1 Zhang Snr (holding as trustee of the BVI trusts) 361,096 36.11% 2 Receivers (in the actions between Zhang Snr and 2,631 participating

employees) 456,325 45.63% 3 Receivers appointed in HCMP 962/2017 in respect of the shares of Yu Yuchuan, Zhao Liping, Mi Jingtian and Li Maohuan 104,908 10.49% 4 Zhao Yongkui 27,743 2.77% 5 Dong Chengtian 41,765 4.18% 6 Wang Yongping 8,163 0.82% Total 1,000,000 100.00% Zhang Snr’s application for discharge of receivership On behalf of Zhang Snr, Mr Wou advanced a number of grounds for the application to terminate the receivership, including that the reasons for the appointment had ceased, the appointment had been obtained by false or misleading evidence, and champerty and maintenance. No party has submitted that this court lacks jurisdiction to vary or discharge the receivership order if the grounds are established. The nature of an order for the appointment of interim receivers pending the determination of an action is akin to an interlocutory injunction. Such an interlocutory order does not result in the question being res judicata and immune from review pending the trial, at any rate if there is new evidence that seriously justifies reconsideration of the issue or if there has been a material change of circumstances: see Chu Hung Ching v Chan Kam Ming [2001] 1 HKC 396, 402 (CA); Wong Pak Sum v Hong Kong Furniture & Decoration Trade Association Ltd (unrep, HCMP 2946/2013; 17 October 2014), §82, per DHCJ Marlene Ng. In my view there has been a highly material change of

circumstance. The Receivers were appointed at the behest of the plaintiffs as an interim protection pending the determination of the underlying dispute. It was considered “just or convenient” to appoint interim receivers for the benefit of the plaintiffs who were thought to be persons having an interest in the relevant CSI shares. In fact, it has now transpired that 2,142 plaintiffs had contracted to sell their interests under the SPAs and 2,090 of them had been paid 70% of the price in August 2015 and the remaining 30% balance in March 2017 (see §40 above). The SPA was drafted in “the early part of 2015” by KLG as a “pro forma skeletal document”. It was not disclosed who instructed KLG to prepare it. This document was ultimately adopted verbatim to become the SPA. As a result, at least these 2,090 plaintiffs (who claim 306,610 shares in CSI) had in reality no further interest in the subject matter of the litigation. This was recognised by the Receivers in the 2nd affirmation of Stephen Liu dated 17 February 2017 (§§2528) where it was said that the right of action now belonged to “the purchaser of [the plaintiffs’] rights of action, namely Tianrui or the purchaser”. It would appear that all the steps taken in those plaintiffs’ name after their receipt of 70% of the price were taken pursuant to clause 2(b)(ii) of the SPAs for the benefit of the purchaser(s). It is not clear

whether the SPAs can be rescinded by the purchaser(s) if the plaintiffs’ actions fail, but even so, the plaintiffs’ interest in pursuing the action would be in securing victory against Zhang Snr and thereby securing the SPAs, not in preserving the value of the CSI shares. Appearing for the KLG plaintiffs, Ms Eu SC submitted that the selling plaintiffs still had an interest because under clause 2(c)(ii) of the SPAs they could cancel the agreement within 14 days after being asked to transfer the CSI shares. In my view this does not answer the point. First, it does not alter the fact that under clause 2(b)(ii) of the SPAs, the litigation was being carried on to enable the purchaser, not the plaintiffs, to recover the CSI shares from Zhang Snr. Secondly, the plaintiffs sold their interest in CSI at a price equivalent to HK$6.29 per CSCG share. This was the last trading price before suspension and the highest trading price since 2013, and higher than what the Receivers said the CSCG shares would attract on the market. It is hard to imagine any selling plaintiff would, of his own accord, want to back out from the deal and refund the price already received. Thirdly, it is doubtful if there would be alternative purchasers willing and able to put up large amounts of funds to enable a substantial number of plaintiffs to make a refund and cancel the SPAs. Fourthly, the SPA envisaged that

clause 2(c)(ii) would operate at a time before the selling plaintiffs had been paid the 30% balance. In fact, most of them had now been paid the 30%. Indeed, it appears that the documents signed by the plaintiffs with Chen Hongqing in March 2017 have, inter alia, abrogated clause 2(c)(ii). As such, these 2,090 plaintiffs have already recovered in full what they considered they could realistically expect for their interest in CSI. They are no longer real stakeholders in any part of the 456,325 CSI shares under receivership and do not require further protection in the preservation of the value of those CSI shares. Apart from those 2,090 plaintiffs, there were another 343 plaintiffs who had signed the MOUs to sell their interest in CSI to ACC (see §41 above). In addition, a main purpose of the original order for the appointment of receivers was to insulate the plaintiffs and protect them from being pestered with approaches to acquire their interests. In particular, it was stated in my decision of 20 May 2015 on the appointment of receivers that: “29. … some of the plaintiffs, as beneficiaries of a trust, have been threatened to make them give up their claims being brought in the court of Hong Kong against the trustee, and have been pressurised to sell out their interests in the trust to some unknown persons, possibly acting for the trustee. A purchase by the trustee from his

beneficiary is always a transaction which the courts will watch with the “utmost jealousy” (Ex p Lacey (1802) 6 Ves Jr 625). In my view these matters cry out for the intervention of the court and interim protection of the plaintiffs as beneficiaries. … 31. … There is in addition the jeopardy to the interests of the plaintiffs themselves whether under the BVI trusts or the trusts the plaintiffs contend for. They are faced with intimidation and pressure to give up their claims and to part with their interests under the trusts. … … 34. … the receivers could ameliorate the position of the plaintiffs as far as the intimidation and bullying is concerned. By an order for the appointment of a receiver the court assumes control of the property affected, both in terms of the legal estate and any equitable title. No transfer of the relevant shares in CSI could take place without the involvement of the receivers. Any transfer of any equitable interest under the trust, if it could take place at all, would also properly have to involve the receivers who would have temporarily displaced the trustee. …” It has now transpired that a great majority of the plaintiffs have in fact been approached and have, willingly it seems, sold their interests and received the proceeds in full, without informing this court at all at the time. It is not clear whether the Receivers were aware of the SPAs and the

payments to the plaintiffs. What is clear, however, is that the Receivers have not established any direct lines of communication with and have not acquired the means of directly contacting the individual plaintiffs. Thus, for example, when this court directed the Receivers in February 2017 to ascertain the wishes of the plaintiffs on the question of the proposed placement of shares in CSCG (see §27 above), the Receivers did nothing after SH declined to organise a meeting for that purpose. Plainly, the purpose of insulating the plaintiffs has not been achieved in relation to the 2,142 plaintiffs who have signed the SPAs and the 343 plaintiffs who have signed the MOUs with ACC. Thirdly, although the SPAs were signed and 70% of the purchase price was already paid in August 2015, this was not revealed to the court at the time. When the Receivers applied to the court in September 2015 for directions to permit them to become directors of CSCG, the plaintiffs, through KLG, turned up in strong support for the application without disclosing either (i) 2,142 of them had sold their interests, 2,090 of whom had received 70% part payment and signed documents to enable KLG to pursue the action for the benefit of the purchaser; (ii) the RMB700 million paid to them apparently originated from Tianrui, the largest single shareholder in CSCG; and (iii) KLG’s fees were not being funded by the

plaintiffs but allegedly by an unnamed “friend” of the Chairman of Tianrui. The apparent involvement of Tianrui in the acquisition is highly relevant because: Tianrui had already acquired 28.16% of the issued shares of CSCG on the market. If it acquired further interests in CSCG, there might be implications in terms of the requirements for disclosure of interests under the Securities and Futures Ordinance (Cap 571) and the obligation to make a mandatory general offer under Rule 26 of the Takeover Code, particularly given the potential concern that the 7 Minority Shareholders were acting in concert with Tianrui at the time. It is to be noted that one of the Minority Shareholders, Yu Yuchuan, also appeared by counsel in support of the plaintiffs’ and the Receivers’ position at the hearing before Deputy Judge Seagroatt on 30 September 2015. Tianrui was and is a competitor of CSCG in the industry: see decision of AuYeung J dated 23 July 2015 in these proceedings, at §31. Her Ladyship also recognised (see §§5355 & 6668) that ACC and CNBM had “legitimate concerns” that the resolutions proposed by Tianrui at that time were strategic moves to strengthen and embed its control over CSCG to the exclusion of the other substantial shareholders. It called into question for whose interests KLG were really acting (at least after August 2015) (and likewise for SH) and the source of their

instructions. Fourthly, one of the original purposes of the appointment of receivers was to protect the CSI shares from the activities of Zhang Snr as management of the CSCG. The management has since been completely replaced. It has become quite apparent that the full picture was not presented by the plaintiffs (or anyone else who had knowledge) to Deputy Judge Seagroatt in the applications before him in September to November 2015, and in particular before he granted the Receivers on 16 October 2015 a direction permitting them to vote in CSI to cause a change in the composition of the CSCG board and to become directors of CSCG themselves. Specifically, it is plain that his Lordship was not informed and did not know that by then (i) 2,142 out of 2,631 plaintiffs had sold their interests and 2,090 of them had been paid 70% of the price; (ii) the selling plaintiffs had effectively agreed to allow the purchasers to take steps against Zhang Snr in the selling plaintiffs’ name; (iii) the purchase money (approximately RMB700 million) they received had originated from Tianrui; (iv) the SPAs they signed were in a form drafted by KLG; and (v) KLG, the solicitors on record for the plaintiffs, were being funded by an undisclosed person said to be a friend of Tianrui’s chairman. In fact, as far as I am aware, none of this was disclosed to the court until February 2017 and then only because

there was a rift within the plaintiffs’ camp which became divided into the KLG plaintiffs and the SH plaintiffs. It is not for me to speculate whether Deputy Judge Seagroatt would have decided the various applications before him in the same way if he had known of these matters. Suffice it to say that I have no doubt they are material facts which should have been placed before the court. It is true that the hearings in question were not ex parte, but Zhang Snr was not privy to these facts and could not be expected to be able to inform the court of them. Mr Wou has not gone through the affidavit evidence filed at the time with a fine toothcomb to identify any positive false statements made to the court. But by continuing to rely on the plaintiffs’ complaints that individual plaintiffs were being bullied and pressurised, and in refuting Zhang Snr’s complaint that the plaintiffs and Tianrui (and possibly the Receivers) were acting in concert, without disclosing any of the above facts, I regret to have to say that the picture presented to the court by those using the names of the plaintiffs verged on the misleading. Given all these developments and revelations in the evidence, if the actions had still had some way to go before a final determination, it seems to me the appropriate and proportionate response of the court would have been to discharge the appointment of the Receivers in

any event. Zhang Snr’s application for split voting direction Zhang Snr’s application for a split voting direction can be shortly dealt with. It had previously been proposed by Zhang Snr but rejected by AuYeung J in July 2015: see decision dated 23 July 2015 at §§7783. Contrary to the general structure of company law, such a direction would involve placing in the hands of each of CSI’s shareholders individually the decision over how to vote a proportionate part of the CSCG shares held by CSI. While Mr Wou submitted it could be achieved by an amendment of CSI’s articles, he was unable to find any precedent for an order to that effect. It should be recalled that the Receivers were simply receivers over 45.63% of the shares in CSI. The function of the interim receivership was to hold the ring and preserve the asset while the dispute over ownership was fought, not to change the fundamental attributes of the asset pending the trial. In the absence of the plaintiffs’ consent, I do not think this court should make an order premised on a fundamental reform of the constitution of CSI in the manner suggested. Zhang Snr’s application for fortification In light of my conclusion above, it is unnecessary to deal with Zhang Snr’s alternative application for fortification of the plaintiffs’ cross-undertaking as to damages. SH plaintiffs’ application to replace the Receivers The SH plaintiffs

apply for replacement of the Receivers on the ground that they had put themselves in an embarrassing position which involves actual and perceived conflict of interests and duties having regard to their triple roles as receivers of 45.63% CSI shares, directors of CSI and directors of CSCG. It is said that the Receivers have through their acts and omissions lost the trust and confidence that the parties have in them as fully independent receivers. The gravamen of the complaint is that the owners of 45.63% shares in CSI and the directors of CSCG have different interests, especially, as regards further allotment of shares in CSCG, and that the Receivers failed to appreciate that, which led to their proposal of the 4 for 1 open offer and subsequently the placement of 20% new shares. Further, it is said that in advocating for those issues of new shares, the Receivers had acted in such a way that a reasonable observer may justifiably think that they had been acting in the interests of Tianrui. In light of my conclusion on Zhang Snr’s discharge application, it is neither necessary nor desirable for me to determine the various allegations made in support of the SH plaintiffs’ application. SH plaintiffs’ application for alternative direction The alternative order sought by the SH plaintiffs as set out in §1(1)(b) above would leave the Receivers in office but place the management of CSI

in the complete control of 2 individuals nominated by the SH plaintiffs who would not be answerable to the Receivers or to the court. It is in my view an impossible arrangement. Receivers’ application to strike out parts of the affirmations As to the Receivers’ application to strike out certain passages from the affirmations filed on behalf of the SH plaintiffs, the ground relied upon is that those passages constituted comments, opinions or submissions rather than deposition of factual matters, or were scandalous and oppressive. Given that the SH plaintiffs’ application had been heard without crossexamination, it was unnecessary at the hearing to rule on these evidential objections to the affirmations and it is unnecessary to deal with them now. Conclusion For the above reasons, there will be the following orders: (a) Insofar as necessary, upon the 1st defendant’s summons of 31 May 2017, the appointment of the Receivers be discharged; (b) As an order nisi, the KLG plaintiffs and the SH plaintiffs do pay the costs of the 1st defendant in relation to his summons of 31 May 2017; The SH plaintiffs’ 2 summonses both dated 26 May 2017 be dismissed, with an order nisi that they pay the costs of the other parties in relation to those summonses; There be no order on the Receivers’ strikeout summons dated 16 June 2017, and on a nisi basis, no order as to the costs of that summons, save

that the Receivers’ costs be paid out of the assets in receivership. (Godfrey Lam) Judge of the Court of First Instance High Court Mr Jose Maurellet SC and Mr Alexander Tang, instructed by Stephenson Harwood, for 1,077 Plaintiffs Ms Audrey Eu SC and Mr Law Man Chung, instructed by K& L Gates, for the other Plaintiffs Mr JeanPaul Wou, instructed by Deacons, for the 1st Defendant The 2nd Defendant was not represented and did not appear Mr Barrie Barlow SC and Mr David Chen, instructed by PC Woo & Co, for the Receivers