18 May, 2019
The High Court dismissed a S$2.48m claim by a pre-RTO investor against an SGX-listed company for breach of a sale and purchase agreement by, allegedly undermining the value of his shares in undertaking a share consolidation and then issuing compliance placement shares.
In Cheong Chee Hwa v China Star Food Group Limited [2019] SGHC 86, the Plaintiff, a pre- RTO investor and shareholder of the Defendant company, alleged that the Defendant was under express and implied contractual obligations not to unilaterally undermine its value and hence the value of the Plaintiff’s shares in the Defendant, prior to the re-listing of the Defendant’s shares on the Catalist board. The Plaintiff alleged that the Defendant, by undertaking a share consolidation of 4:1 shares and then issuing the compliance placement shares at a much lower price than the theoretical price of the shares had there been no share consolidation, had undermined the value of the Plaintiff’s shares. Justice Belinda Ang dismissed the Plaintiff’s claim, holding that there was no breach of the express terms of contract and further, that the term proposed by the Plaintiff should not be implied.
Joseph Tay and Chng Yan from Shook Lin & Bok LLP acted successfully for the Defendant in the case.
Facts
This case involved a reverse takeover (“RTO”) of Brooke Asia Limited (“BAL”), a company listed on the Catalist board of the SGX-ST, by China Star Food Holdings Pte Ltd (“CSFH”) pursuant to a sale and purchase agreement ( “SPA”) between BAL and CSFH’s shareholders (“Vendors”). Under the SPA, the Vendors would sell to BAL all the shares in CSFH for a consideration of S$168,000,000, which was to be satisfied by BAL by the issuance and allotment of 840,000,000 shares in BAL to the Vendors. Upon completion of the RTO, BAL changed its name to the Defendant’s name, China Star Food Group Limited.
The Plaintiff, Cheong Chee Hwa, became a shareholder of CSFH and a vendor under the SPA through a convertible loan of S$2m under a convertible loan agreement (“CLA”) and a supplemental agreement (“Supplemental Agreement”). The Plaintiff’s investment was automatically converted into shares in BAL.
Clause 2.9 of the SPA provided that for the purposes of satisfying requirements under the Catalist Rules, the Defendant may be required to place new shares pursuant to a compliance placement and that the issue price for shares to be placed out pursuant to a compliance placement shall not be less than $0.20.
Upon completion of the SPA, trading of the Defendant’s shares remained suspended as the minimum shareholding spread and public float requirements under the Catalist Rules had not been met. The Defendant then undertook a share consolidation of 4:1 shares, stating that it was to provide flexibility in determining the issue price of compliance placement shares and thereby facilitate the completion of a compliance placement.
The Defendant eventually completed the compliance placement by issuing placement shares at S$0.23 per share with two free detachable warrants. Thereafter, the Defendant’s shares resumed trading on the Catalist.
The Plaintiff claimed that the Defendant had breached express and implied terms in the SPA and Supplemental Agreement by undertaking the share consolidation and compliance placement at S$0.23 per share with two free detachable warrants, namely:
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(a) clause 2.9 of the SPA which obliged the Defendant to place shares pursuant to a compliance placement at not less than S$0.20 each;
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(b) a best commercial endeavours warranty clause under which the Defendant was to ensure that all of its shares when issued will be duly listed and admitted for trading on the Catalist; and
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(c) an implied term that the Defendant would not unilaterally undermine its value and hence the value of the shares issued to the Plaintiff (at S$0.20 per share), prior to the shares of the Defendant being re-listed on the Catalist.
The Plaintiff claimed that a consolidation of the Defendant’s shares or an issuance of placement shares with detachable warrants were not contemplated in the SPA, nor in the CLA or the Supplemental Agreement. The Plaintiff’s complaint was essentially that because the defendant did not issue the consolidated placement shares at the theoretical price of S$0.80 per share, as a result of the share consolidation, the Plaintiff paid four times more than his original cost per share, and thereby lost or was deprived of the profit element.
The Plaintiff quantified his loss at S$2,483,989.20, representing the difference between a value of S$0.20 per share that he held before the share consolidation, and S$0.2026 per share that he held after the share consolidation.
The Defendant’s case was that it had complied with its obligations under the SPA and the Catalist Rules by carrying out the share consolidation and issuing the compliance placement shares at S$0.23 per share with two free detachable warrants. The Defendant argued that there was no express or implied obligation under the SPA or the Supplemental Agreement on the Defendant to:
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(a) issue a fixed number of shares in a compliance placement;
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(b) issue the consolidated placement shares at S$0.80 per share;
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(c) guarantee the value of the Defendant’s shares post-RTO and the value after a compliance placement to be
of certain amounts; or
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(d) guarantee the Plaintiff’s shares to be of a certain value.
The Defendant averred that the value of a listed company is determined by the market and not the company itself.
The decision
The Honourable Justice Belinda Ang held that there was no breach of the SPA. Firstly, the Judge held that there was no obligation in the SPA that the Defendant had to place a fixed number of shares at a price of S$0.20 under clause 2.9 of the SPA and to guarantee that its valuation would be a certain amount after a compliance placement. There was also no obligation in the SPA that the shares had to be placed on a non-consolidated basis.
Secondly, the Judge rejected the Plaintiff’s argument that the best commercial endeavours warranty clause should be interpreted to mean that the Defendant must undertake best commercial endeavours to ensure that it would not unilaterally undermine its value and hence the value of the shares issued to the Plaintiff, prior to the re-listing of the Defendant’s shares on the Catalist.
The Judge found that the share consolidation and issuance of the consolidated placement shares at S$0.23 per share were commercially necessary and were undertaken in the commercial interests of the Defendant and its shareholders. In arriving at this finding, the Judge considered that the poor market conditions and events which unfolded at the material time were reasons for the Defendant to take the necessary actions to comply with the Catalist Rules so that the suspension on the trading of its shares would be lifted.
In the circumstances, the Judge held that the Defendant, in consolidating the shares and issuing the consolidated placement shares at S$0.23 per share in the compliance placement did not breach the best commercial endeavours warranty clause.
Thirdly, the Judge held that the Plaintiff failed to establish an implied term that the Defendant was not to unilaterally undermine its value and hence the value of its shares issued to the Plaintiff at S$0.20 each prior to the re-listing of the Defendant’s shares on the Catalist. While the Judge held that there was a gap in the SPA as parties did not contemplate undertaking a share consolidation, the Defendant could avail itself of the mechanisms under company law, as such, there was no necessity to imply any term to fill the gap. This was what the Defendant did – to seek the approval of its board, shareholders and SGX for the share consolidation and compliance placement. The proposed implied term would fail the officious bystander test, as it in effect imposed an obligation on the Defendant to maintain its value at a certain figure in all circumstances prior to resumption of trading. The Judge commented that the “proposed term would erode China Star’s commercial freedom to comply with the Catalist Rules to lift the suspension on the trading of its shares”.
Conclusion
This is the first reported case in Singapore involving a shareholder bringing an action against a listed company for allegedly undermining the value of his shares by undertaking a share consolidation prior to completing a compliance placement. The Court had to decide whether to imply a term in the sale and purchase agreement, which would have effectively prevented the listed company from undertaking a share consolidation and then issuing compliance placement shares. The Court held that no such term was to be implied – the listed company was under no obligation to issue shares on a non-consolidated basis. This decision shows that the Court, in interpreting contractual provisions, will adopt a commercially sensible approach having regard to the listed company’s financial performance, the market conditions and the time pressure the company was facing at the time.
In the absence of an express term in a sale and purchase agreement, there is no obligation that compliance placement shares have to be placed on a non-consolidated basis. In a similar vein, the Court will also not easily imply a term which would deprive a company of its commercial freedom to comply with the applicable listing rules or to impose an obligation on a company to guarantee its value or the value of its shares.
This is a significant decision for listed companies which, because of various reasons, may have to adopt certain mechanisms such as a share consolidation in order to comply with the spread, distribution and price requirements under the listing rules.
For further information, please contact:
Joseph Tay , Partner, Shook Lin & Bok
joseph.tay@shooklin.com
