We are reminded that shareholders of BVI holding companies may
well have to look to the BVI Court to resolve unfair prejudice
claims in seeking a buy-out order or other relief.
The Yung Kee Restaurant on Wellington Street is one of Hong
Kong's treasures. Established in the 1930s, it is famous for
its scrumptious roast gooses and thousand year old eggs. Apart from
being a renowned landmark restaurant, a recent judgment handed down
by the Honourable Justice Jonathan Harris involving the restaurant
serves as a reminder and re-affirms the Hong Kong Court's
limited jurisdiction over foreign companies in unfair prejudice
claims.
Facts
Kam Kwan Sing ("Petitioner"), who was the eldest son of
the founder of Yun Kee restaurant ("Kam Senior"), brought
a claim against his younger brother Kam Kwan Lai ("Kwan
Lai") and several companies in which Kwan Lai owns shares. One
of these companies is Yung Kee Holdings Limited, named the Fifth
Respondent in the proceedings, and it is the company whose affairs
are concerned ("Company").
The Petitioner's primary claim was that the affairs of the
Company have been conducted in a manner that is unfairly
prejudicial to him as a member, and he seeks for the Hong Kong
Court, pursuant to s.168A of the Companies Ordinance (Cap.23)
("CO"), to order Kwan Lai to purchase his shares.
Alternatively, he sought to purchase Kwan Lai's shares or have
the Company wound up.
The parties had initially agreed in principle that one of them
should purchase the other's shares. However, despite attempts
to negotiate and mediate, the parties were unsuccessful and had to
resort to trial and indeed proving unfair prejudice.
The Structure
The Company was incorporated on 1 December 1994, pursuant to the
International Business Companies Act of the laws of the British
Virgin Islands ("BVI"). Its registered office is located
in Tortola. The Company was established to act as an investment
holding company to hold all the issued shares in another company
incorporated in the BVI, Long Yau Ltd. ("Long Yau"),
which in turn was originally a trust company formed by Kam Senior
for the benefit of his family members.
The Petitioner, Kwan Lai, Legco Inc, a BVI company controlled by
Kwan Lai ("Legco"), and Everyway Holdings Limited were
all shareholders of the Company. The Company had nine direct and
indirect subsidiaries (together known as the
"Group").
The Petitioner made his claim for relief from unfair prejudice
pursuant to s.168A of the CO, which pertains to "specified
corporations," defined in s.2(1) of the CO to include a
"non-Hong Kong company." Pursuant to s.332 of the CO, a
non-Hong Kong company is defined as companies incorporated outside
Hong Kong which establish a place of business in Hong
Kong.
Hong Kong Court's Jurisdiction
One of the issues before the Court was whether it had jurisdiction
to entertain the Petitioner's claim and whether the Company had
sufficient nexus with Hong Kong. The Court held that non-Hong Kong
companies will not be considered to have established a place of
business in Hong Kong "unless they have business activities of
some substance, which have to be undertaken sufficiently regularly
to justify establishing a base in Hong Kong" (paragraph 30).
Ultimately, the Company was held not to have established a place of
business in Hong Kong and consequently, the Hong Kong courts did
not have jurisdiction over the Company, and could not entertain the
Petitioner's claim.
Interestingly, the Court found that the structure of the Group
reflected that there was an intention not to establish a place of
business in Hong Kong, particularly in light of the fact that upon
its creation, Hong Kong still had estate duty. The judge made note
that the Company's sole asset was deliberately another BVI
Company Long Yau. The judge held that:
"What seems likely...is that in establishing a BVI company,
Long Yau, to act as trustee of Kam Senior's business interests
in Hong Kong and arranging for its shareholders, Holly Join and
Capital Adex to be BVI companies, she [the director of the Company]
was consciously distancing ultimate ownership of the Unit Trust
assets from Hong Kong. Consistent with this, Holly Join and
Capital Adex were not registered under Part XI of the Companies
Ordinance." (paragraph 23)
Accordingly, carrying out internal affairs within Hong Kong
therefore does not necessarily indicate that a foreign company has
established a place of business here. For example, the fact that
directors of a company meet from time to time at a particular
location and deliberate upon its affairs does not turn that
location into a place at which the company has established a place
of business. If a foreign holding company, carrying out a business
internationally through subsidiaries, some of which operate in Hong
Kong, decides to hold some of its regular board meetings in Hong
Kong, that does not itself mean that it has established a place of
business here, even if its subsidiaries have clearly done so
(paragraph 38).
In concluding that that the Company had not established a place of
business in Hong Kong, the Court took the following factors into
account:
- It was an offshore investment holding company;
- Its sole asset was shares in another BVI company, Long Yau, and it did not have a bank account in Hong Kong;
- It did not trade or run any business in Hong Kong, nor did it play any role or function in the business or operations of the Group, despite the Petitioner's suggestion that had an interest after April 2009;
- It had no creditors, employees or income other than dividends from a subsidiary;
- It had no accounts and its activities (which were directed to changing the membership of the board and the payment of dividends) did not necessitate establishing a place of business in Hong Kong;
- It had not entered into any agreement which allowed it to occupy any part of the Yung Kee Building, nor had it had any dealings or legal arrangements with any third parties in Hong Kong;
- It was not registered under Part XI of the Companies Ordinance, and none of its directors, shareholders or professional advisers had ever advanced a view or advised that the Company should be registered under Part XI of the Companies Ordinance (Cap 32).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.