Re Kingboard Copper Foil Holdings Ltd

• Jurisdiction: Bermuda
• Judgment Date: 10 November 2015
• Date: 10 November 2015
• Docket Number: Commercial Jurisdiction 2011 No 255
• Court: Supreme Court (Bermuda)

[2015] Bda LR 97

In The Supreme Court of Bermuda

Commercial Jurisdiction 2011 No 255

In the matter of Kingboard Copper Foil Holdings Limited

And in the matter of the Companies Act 1981, section 111

Annuity & Life Reassurance Ltd

Petitioner

and

Kingboard Chemical Holdings Limited

Jamplan (BVI) Limited

Kingboard Laminates Holdings Limited

Excel First Investment Limited

Kingboard Copper Foil Holdings Limited

Respondents

Mr J Woloniecki and Mr S Dyer for the Petitioner

Mr W Wong SC of counsel and Mr J Elkinson for the Respondents

The following cases were referred to in the judgment:

Latimer Holdings Ltd and Powell v Sea Holdings Ltd [2004] NZCA 226

Thomas v HW Thomas Ltd [1984] 1 NZLR 686

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

Scottish Co-operative Wholesale Society Ltd v MeyerELR [1959] AC 324

Re Orient Express Hotels LtdBDLR [2010] Bda LR 32

Re Full Apex Holdings LimitedBDLR [2012] Bda LR 9

Knight v Warren and anorBDLR [2010] Bda LR 27

Fidelity Advisor Series VIII et al v APP China Group LtdBDLR [2009] Bda LR 35

Rhesa Shipping Co sA v Edmunds (‘The Popi M’)WLR [1985] 1 WLR 948

In re London School of Electronics LtdELR [1986] Ch 211

Minority shareholder's petition — Affairs of company conducted in unfairly prejudicial manner — Respondents' application for strike-out — Whether majority shareholders had acted oppressively — Verification of petition — Hearsay — Preferential pricing

JUDGMENT of Kawaley CJ

Introductory

1. The present action is brought by a minority shareholder which complains that the affairs of the Company, the 5^th Respondent, have been conducted in an unfairly prejudicial manner. It is believed to be only the second such local proceeding brought in respect of a publically listed company. What amounts to unfair prejudice in legal and factual terms has to be determined against the background of an elaborate, vigorous and protracted battle for commercial justice. It is a battle in which the combatants not only have conflicting commercial interests and have defined commercial justice in contrasting ways; they come from diverse backgrounds as well.

2. The Petitioner is incorporated in Bermuda but is a subsidiary of a Delaware company. A prominent director is based in (and possibly from) Memphis, Tennessee. The Company is incorporated in Bermuda, but managed principally from Hong Kong. Its shares are listed on the Singapore Stock Exchange but its key commercial activities take place in China. The majority shareholders of the Company, although variously incorporated in the British Virgin Islands and the Cayman Islands, are ultimately controlled by a closely-knit group of individuals related by blood or marriage who are based in (and possibly from) Hong Kong.

3. The 1^st Respondent is the ultimate holding company in the Kingboard Group, which is a leading producer of printed circuit boards (‘PCBs’). The Company manufactured copper foil which was an essential “raw” material for the production of PCBs and other copper-based products. The Company was incorporated on September 10, 1999. An Initial Public Offering Prospectus dated December 6, 1999 (‘the Prospectus’) was issued and resulted in a listing on the Singapore Stock Exchange (‘SGX’). The Company's business model involved selling almost all of its copper foil to an indirect majority shareholder, the 3^rd Respondent (‘Laminates’). The shares of Laminates were listed on the Hong Kong Stock Exchange in 2007.

4. From the outset, there was an inherent and admitted tension between the Company's interest in maximising its own profits and reducing its dependence on a key customer forming part of the Kingboard Group and the majority shareholders' interest in maximising Group profits by benefitting from a “bulk discount” cosily negotiated with a “captive” supplier of the main raw material required for its products. The SGX Listing Rules addressed this tension by requiring what qualified as an Interested Person Transaction (IPT) to be approved by the minority shareholders whenever a new Supplies Agreement was entered into between the Company (through its operating subsidiary) and Laminates. The Supplies Agreement was approved by the minority shareholders from time to time until 2011. The Petitioner characterised the terms on which the Company sold its products to Laminates and the alleged negative impact on the Company's profit margins as (unfair) ‘transfer-pricing’. The Respondents characterised the pricing system as nothing more than a ‘volume discount’.

5. The Petitioner is a subsidiary of Pope Investments II LLC (‘Pope II), a Delaware company. The Petitioner acquired its shares in the Company as a nominee and became a registered shareholder on April 7, 2011 in contemplation of the present proceedings. Pope II, a pooled investment vehicle which invests on behalf its clients, made its initial investment in the Company in July 2009. Its investment advisor, Pope Asset Management LLC (‘Pope Management’). The Petitioner's holdings together with those of the other two Pope entities amounted to 80,251,528 shares or more than 10% of the Company's shares by July 18, 2011 (the ‘Pope Holdings’). In practical voting power terms, the Pope Holdings by the date of the Petition were able to control the minority shareholder approval of any IPT mandate. The Pope Holdings were expanded by further share purchases, not just after concerns were first identified about the management of the Company but even after the presentation of the Petition.

6. The Petition was presented on August 3, 2011 against the following background described in the Petition. On February 21, 2011, the Petitioner requisitioned a Special General Meeting (‘SGM’) of the Company (which was held on April 21, 2011) to consider a resolution that an independent auditor be appointed to audit and review historical transfer pricing and whether the Company had complied with commitments made in its Prospectus. At the SGM the resolution proposed by the Petitioner was defeated. At the AGM subsequently held on April 29, 2011, minority shareholders refused to approve an IPT resolution required by Chapter 9 of the Listing Manual which would have renewed the mandate previously given in relation to related party transactions (the ‘IPT Mandate’). On August 3, 2011, the Company announced that its subsidiary Hong Kong Copper Foil Limited (‘the Licensor’) had granted Harvest Resource Management Limited (‘Harvest’) the exclusive right to use the Company's copper foil producing business in return for a monthly fee which, controversially, was alleged to be ‘wholly uncommercial’.

7. On January 16, 2012 in dismissing the Respondents' strike-out Summons, I summarised the complaints made by the Petitioner as follows:

• ‘(a) as set out in the original Petition filed on August 3, 2011, the Company's management (acting on behalf of the majority shareholders) failed to honour or confirm that it was honouring representations made in the IPO Prospectus designed to ensure that the business conducted with related parties was not prejudicial to the rights of minority shareholders. These broad allegations were found to be too speculative to warrant pre-action discovery in support of a minority shareholder prejudice claim by the High Court of Singapore in 2010; and

• (b) as set out in the draft Amended Petition, by way of amendment, the Company's management (acting on behalf of the majority shareholders) caused a wholly-owned subsidiary to subvert the minority shareholders' right to approve major related-party transactions through the Harvest License Agreement of August 2011. Under the License Agreement, the Company's entire assets and operations were transferred to Harvest on uncommercial terms. This transaction had the effect of sidestepping the resolution passed by minority shareholders including the Petitioner and Pope to terminate the Company's mandate to sell the vast majority of its products to the Kingboard Group.’1

8. At the end of seven days of trial, the critical question appeared to me to remain whether the Petitioner could establish what I adjudged to be the crucial question at the strike-out stage, namely whether the majority shareholders had acted oppressively in the requisite technical sense by:

‘respond[ing] to the [minority shareholders'] legitimate blocking of a mandate seeking their approval of the terms upon which the Company would contract with the majority's Group to rearrange the Company's operations, without the minority's assent, so that such approval was no longer required.’2

Legal findings: the requirements for seeking relief under section 111

Section 111

9. Section 111of the Companies Act 1981 (‘Alternative remedy to winding up in cases of oppressive or prejudicial conduct’) provides as follows:

‘111 (1) Any member of a company who complains that the affairs of the company are being conducted or have been conducted in a manner oppressive or prejudicial to the interests of some part of the members, including himself, or where a report has been made to the Minister under section 110, the Registrar on behalf of the Minister, may make an application to the Court by petition for an order under this section.

(2) If on any such petition the Court is of opinion —

• (a) that the company's affairs are being conducted or have been conducted as aforesaid; and

• (b) that to wind up the company would unfairly prejudice that part of the members, but otherwise the facts would justify the making of a winding up order on the ground that it was just and equitable that the company should be wound up,

the Court may, with a view to bringing to an end the matters complained of, make such order as it thinks fit, whether for regulating the conduct of the company's affairs in future, or for the purchase of the shares of any members of the company by other members of the company or by the company and, in the case of a purchase by the...