Kingboard Chemical Holdings v Annuity & Life Reassurance Ltd

• Jurisdiction: Bermuda
• Judge: Baker P,Bell JA,Clarke JA
• Judgment Date: 24 March 2017
• Court: Court of Appeal (Bermuda)
• Docket Number: Civil Appeal 2015 No 24
• Date: 24 March 2017

[2017] Bda LR 31

In The Court of Appeal for Bermuda

Before:

Baker P; Bell JA; Clarke JA

Civil Appeal 2015 No 24

Between:

Kingboard Chemical Holdings

Appellant

and

Annuity & Life Reassurance Ltd

Respondent

Mr W Wong QC, Mr J Elkinson and Mr B Adamson for the Appellant

Mr J Woloniecki for the Respondent

The following cases were referred to in the judgment:

Latimer Holdings Ltd v SEA Holdings NZ Ltd [2005] 2 NZLR 328

Bermuda Cablevision Ltd v Colica Trust Co LtdELR [1998] AC 198

Minority shareholders — Unfairly prejudicial or oppressive conduct — Whether license arrangements caused commercial prejudice — Refusal by minority shareholders to approve mandate

JUDGMENT of Clarke JA

1. The question in this appeal is whether the Chief Justice was right to find that the affairs of a publicly listed company had been conducted in an unfairly prejudicial manner.

2. The company is Kingboard Copper Foil Holdings Limited (‘the Company’), a Bermudian company and the fifth respondent to the Petition. (In the remainder of this judgment I refer to the parties by reference to their status under the Petition). It was incorporated here on September 10 1999. It is managed principally from Hong Kong. A Prospectus for an Initial Public Offering was issued dated December 6 1999 and, as a result, its shares became listed on the Singapore Stock Exchange. More than 60% of its shares were at the material times owned by Excel First Investment Limited (‘Excel’), a BVI company — the fourth respondent. Excel itself is owned by Kingboard Laminates Holdings Limited (‘Laminates’), a Cayman company — the third respondent. Laminates is owned as to nearly 75% by Jamplan (BVI) Limited – the second respondent, which is owned as to 100% by the ultimate holding company in the Kingboard Group of companies, namely Kingboard Chemical Holdings Limited (‘Holdings’), a Cayman company – the first respondent. These direct and indirect majority shareholders in the Company are ultimately controlled by a group of individuals related by blood or marriage who are based in Hong King.

3. The Kingboard Group is a leading producer of printed circuit boards (‘PCBs’). The Company manufactured copper foil, which is an essential material for the production of PCBs, in China, where it is one of the largest and most advanced manufacturers of that product. Its business model involved selling almost all of its copper foil to Laminates. Laminates was listed on the Hong Kong Stock Exchange in 2007.

4. A minority of the shares in the Company were held by those who were not members of the Kingboard Group. One of those was Annuity & Life Reassurance Ltd (‘the Petitioner’), the respondent to this appeal. The Petitioner is a subsidiary of Pope Investments II LLC (‘Pope II’), a Delaware company. Pope II is a pooled investment vehicle which invests on behalf of its clients. Pope II made its initial investments in the Company in respect of the shares which came to be owned by the Petitioner in July 2009 and acquired more thereafter. According to the Petition Pope II had initially purchased an ownership interest in the Company in November 2006. The Petitioner acquired its shares in the Company and became a registered shareholder on April 7 2011 in contemplation of the present proceedings. By July 18 2011 the holdings of the Petitioner and Pope II amounted to over 80 million shares being more than 10% of the Company's shares.

The History

5. As is apparent from the nature of the business carried on by Laminates and the Company there was a potentially acute divergence of commercial interests between the two. It was in the interests of Laminates to obtain copper foil as cheaply as possible in order to maximise its profits from the sale of PCBs; it was in the interests of the Company to secure as high a price as possible for the foil which it supplied.

6. It was no doubt in the light of the tension between these rival commercial interests that the Prospectus included the following two statements:

‘The price at which any copper foil is to be sold to the Kingboard Group after the listing…shall not be lower than that at which the [Company and its subsidiaries] would have at the relevant point of time sold to other customers generally…

The gross profit margin achieved from sales to the Kingboard Group after the listing…shall not be lower than that currently achieved…until [the Company] meaningfully diversifies its sales…’

7. The Prospectus stated that future inter-Group sales would be regulated by a Supplies Agreement the terms of which were summarised [73]1. That Agreement was dated 29 November 1999 and was amended by Supplemental Agreements of 5 November 2006 and 13 December 2008. These Agreements were between the Company and Holdings. The first Agreement provided, in essence, that sales of copper foil should be on arms-length terms and on the standard terms for the supply of foil by the Company and its subsidiaries to third parties and at no less favourable a price than that at which the Company would have sold to third party customers. The latter two Agreements provided that the price should be in accordance with the then prevailing market price and that in no event should the terms be more favourable to the Kingboard Group than that offered by the Company and its subsidiaries to independent third parties.

8. The Prospectus also said:

‘All transactions involving the sale of products of the KBCF Group to the Kingboard Group will be summarised and submitted to the Audit Committee for regular periodic review to ensure that the terms of the Supplies Agreement, including those relating to the determination of the price of copper foil to be sold to the Kingboard Group, are adhered to.’

And

‘The Audit Committee will review all existing and future related party transactions on a quarterly basis to ensure that they are carried out on normal commercial terms and not prejudicial to the interests of the Company's shareholders. The Audit Committee will also review all the related party transactions to ensure that the then prevailing rules and regulations of the SESTL2 (in particular, Chapter 9A of the Listing Manual) are duly complied with…’

The Audit Committee had four members, including what were described as three independent directors. Mr Ong, an independent director and Audit Committee member, who gave evidence via Skype, said that the Committee understood that its role was to form an objective view of the fairness of Interested Person Transactions [‘IPTs’]. The Chief Justice accepted his evidence [78] and found that generic issues relating to the fairness of IPTs were considered from time to time although not necessarily at every quarterly meeting.

9. Chapter 9 of the SGX (i.e. Singapore Stock Exchange) Listing Manual had Listing Rules on IPTs under which the Company had to obtain a Mandate from its shareholders in order for it and its subsidiaries to sell copper foil to the members of the Kingboard Group, being, for this purpose, Holdings and its subsidiaries and associated companies other than the Company and its subsidiaries and associated companies. These constituted ‘interested persons’.

10. In 2006, 2007, 2008, 2009 and 2010 the Company sought and obtained various Shareholder Mandates pursuant to Chapter 9. By these Mandates the shareholders approved the Supplies Agreement pursuant to which the Company and its subsidiaries were to sell copper foil to the Kingboard Group. In accordance with the SGX requirements only disinterested i.e. minority shareholders could vote to approve the relevant Mandates.

Developments in 2011

11. On 21 February 2011, the Petitioner requisitioned a Special General Meeting (‘SGM’) to consider a resolution that an independent auditor be appointed to investigate historical internal transfer pricing and report on whether the Company had fulfilled the commitments made in the Prospectus.

12. On 21 April 2011, the resolution proposed was defeated at the SGM held on that date.

13. At the AGM held on 29 April 2011, the minority shareholders refused to approve an IPT Resolution as required by Chapter 9 of the Listing Manual, which would have renewed the Mandate previously given in respect of interested party transactions. The proposed Mandate contained the following paragraph:

‘Review Procedures for Interested Person Transactions.

In general, there are procedures established by the Company to ensure that Interested Person Transactions are undertaken on an arm's length basis. The terms offered to the Kingboard Group shall be on normal commercial terms similar to those offered to unrelated third parties and consistent with the Company's usual business practices and policies which are no more favourable to the interested persons than those extended to unrelated third parties. The sale of copper foil is governed by the terms and conditions of the Supplies Agreement ….

A register is and will be maintained by the Company to record all Interested Person Transactions that are entered into pursuant to the Mandate. The annual internet audit plan shall incorporate a review of all Interested Person Transactions and the amounts paid therefor as well as transaction prices with other unrelated parties’.

14. This veto created a major problem. In the light of the refusal to renew the Mandate the Company could not, consistently with its obligations to the SGX, sell copper foil to companies in the Kingboard Group. But, since Laminates was its major customer, it faced the prospect of having practically no one to whom to sell.

15. On 4 May 2011, the Company received a ‘Note on options available to Kingboard Copper Foil Holdings Ltd’ from Allen & Gledhill to which I refer at paragraphs 31 – 32 and 85 – 87 below.

16. The way out of the dilemma adopted by the Company was as follows. On 3 August 2011, the Company announced that its subsidiary Hong Kong Copper Foil Limited had granted to Harvest Resources...