Cheong Chee Hwa v China Star Food Group Ltd (formerly known as Brooke Asia Ltd)

• Jurisdiction: Singapore
• Judge: Belinda Ang Saw Ean J
• Judgment Date: 29 March 2019
• Neutral Citation: [2019] SGHC 86
• Court: High Court (Singapore)
• Hearing Date: 10 August 2018,27 June 2018,26 June 2018,28 June 2018
• Docket Number: Suit No 1177 of 2016
• Plaintiff Counsel: Foo Maw Shen, Ng Hui Min and Loh Chiu Kuan (Dentons Rodyk & Davidson LLP)
• Defendant Counsel: Joseph Tay Weiwen and Chng Yan (Shook Lin & Bok LLP)
• Subject Matter: Contract,Breach,Best commercial endeavours,Contractual terms,Implied terms,Companies,Reverse takeovers,Shares,Consolidation of shares,Financial and Securities Markets,Regulatory requirements,Listing and public offers,Catalist Rules
• Published date: 08 April 2020

Belinda Ang Saw Ean J: Introduction

The plaintiff, Mr Cheong Chee Hwa (“Mr Cheong”), is a shareholder of the defendant company, China Star Food Group Limited (“China Star”), a public company listed on the Catalist Board of the Singapore Exchange Securities Trading Limited (“SGX-ST”). China Star’s business operations, which are primarily in the production and sale of sweet potato snack food products, are in mainland China. Mr Cheong currently holds 4,158,000 shares in China Star, equivalent to 1.62% of the issued and fully paid up shares of China Star.

Like any reverse takeover (“RTO”), in the present case, the business of China Star Food Holding Pte Ltd (“CSFH”) was brought under Brooke Asia Limited (“BAL”), a company listed on the Catalist Board of the SGX-ST. Upon completion of the RTO, BAL was renamed China Star, and CSFH and its subsidiaries in mainland China became China Star’s wholly-owned subsidiaries. In this judgment, the defendant will be referred to as BAL prior to the name change, and as China Star after the name change.

Mr Cheong is a pre-RTO investor whose expectations of a handsome return on his pre-RTO investment of S$2 million after CSFH’s eventual listing (ie, BAL’s re-listing) did not materialise. He claims to have lost his capital and return on investment on account of the defendant’s breach of contract and that his loss is hardly an investment loss occasioned by investment risks as the defendant has countered in its defence.

The parties are at disagreement as to the construction of the contractual documents between them. This judgment will examine whether China Star, as Mr Cheong alleges, owes Mr Cheong a contractual obligation (express or implied) to re-list BAL in order for the BAL/China Star shares to be freely tradeable on the Catalist without undermining Mr Cheong’s “potential upside on the value of his 16,632,000 BAL[/China Star] shares (and accordingly his original investment of S$2,000,000)”.¹ Another consideration in the determination of this action is whether the “best commercial endeavours” provision has been breached. Central to the dispute is the consolidation of China Star’s shares and China Star’s subsequent issuance of consolidated placement shares at a price lower than the theoretical consolidated price. Mr Cheong refers to this lower price as having included a steep discount, and argues that the discount is detrimental to his pre-RTO investment. As to whether, in reality, the issuance of the consolidated placement shares to the public at the determined issue price was priced with a steep discount, this judgment will review the related relevant documentation disclosed in this action.

In the present action, Mr Cheong is represented by Mr Foo Maw Shen (“Mr Foo”) and China Star is represented by Mr Joseph Tay Weiwen (“Mr Tay”). Mr Cheong led evidence at the trial; Mr Liang Cheng Wang (Chairman and Chief Executive Officer of China Star) (“Mr Liang”) and Mr Mark Liew (Chief Operating Officer of PrimePartners Corporate Finance Pte Ltd, China Star’s RTO sponsor) (“Mr Liew”) testified on behalf of China Star.

Facts

As stated, BAL was a company listed on the Catalist Board of the SGX-ST prior to the RTO described earlier. Its shares were suspended from trading because it became a “cash company” as defined under Rule 1017 of the SGX-ST Catalist Rules (the “Catalist Rules”). BAL was under the threat of being de-listed if it was unable to meet the requirements under the Catalist Rules within 12 months. In other words, it had to acquire new operating businesses before the end of the 12-month period. CSFH was interested in seeking a listing via a RTO and BAL was the target company. Accordingly, through a RTO, CSFH acquired BAL and the operating business of CSFH was effectively brought under BAL. After completion of the RTO, BAL changed its name to China Star.

The facts of the case are mainly not in dispute and the parties have helpfully provided a list of agreed facts (the “Agreed Facts”). I will set out the factual background, before explaining the parties’ respective case. The narrative below explains the RTO exercise in some detail with reference to the relevant documentation. Notably, in some instances, the language used in the documentation does not amount to firm commitments, but rather assumptions and examples for illustration purposes.

On 5 November 2014, BAL entered into a sale and purchase agreement (the “SPA”) with all the original shareholders of CSFH (the “Original Vendors”). At this point in time, Mr Cheong had yet to enter the picture. Clauses 2.3 and 2.4 of the SPA provide that the Original Vendors would sell to BAL all the issued and fully paid ordinary shares in CSFH for S$168,000,000 (the “Proposed Acquisition”), which was to be satisfied by BAL issuing and allotting 840,000,000 new and fully-paid ordinary shares in the capital of BAL (the “Consideration Shares”) to the Original Vendors in proportion to their equity interest in CSFH at the “Issue Price” defined in cl 1.1 of the SPA. The “Issue Price” for each Consideration Share, as provided under cl 1.1, is S$0.20. Besides the Consideration Shares to be allotted, there are three other categories of shares stipulated under the SPA: The Arranger Shares (cl 2.5): an arranger fee of S$5.5 million payable was to be fully satisfied at completion by way of issuance and allotment of an aggregate 27,500,000 new shares to the Arranger at the Issue Price (defined in cl 1.1); The PPCF Shares (cl 2.6): a professional fee of S$700,000.00 payable to PrimePartners Corporate Finance Pte Ltd (“PPCF”), which was China Star’s sponsor for the RTO, was to be fully satisfied at completion by way of issuance and allotment of 3,500,000 new shares to PPCF at the Issue Price (defined in cl 1.1); and The Compliance Placement Shares (cl 2.9): BAL may be required under the Catalist Rules to place out new shares to satisfy the minimum distribution and shareholding spread requirements following completion by way of a compliance placement.

Clause 2.9 of the SPA on the Compliance Placement Shares forms a central disagreement between the parties:² 2.9 Compliance Placement. The Parties agree that, in connection with the Proposed Acquisition, the Purchaser may be required under the Listing Rules to place out new Shares to satisfy the minimum distribution and shareholding spread requirements of 15% of the Purchaser’s enlarged share capital to be held by 200 public shareholders on Catalist following Completion (“Compliance Placement”) and the issue price for any new Shares to be placed out pursuant to a Compliance Placement shall not be less than S$0.20. The Parties also agree that Vendors may also sell such number of their respective Consideration Shares as may be expressly permitted in writing by PPCF and subject always to compliance with the Listing Rules to meet the above requirement.

Pausing here, the “Issue Price” in cl 2.4 is defined in cl 1.1 and it is S$0.20 cents. However, the “issue price” in cl 2.9 is not the same as the “Issue Price” in cl 2.4. Clause 2.9 concerns the minimum issue price for RTOs and it duly tracks the admission standard applicable to RTOs.

The relevant rules in the Catalist Rules are Rule 406(1) and Rule 1015(3), and it can be seen that cl 2.9 is a reproduction of these Rules:³

Part III Catalist Admissions

406

A listing applicant seeking admission to Catalist need not meet any minimum operating track record, profit or share capital requirement but is expected to meet the following conditions:

(1) Shareholding Spread and Distribution (a) The proportion of post invitation share capital in public hands must be at least 15% at the time of listing. … (b) In the computation of the percentage of shares to be held in public hands, existing public shareholders may be included, subject to an aggregate limit of 5% of the issuer’s post-invitation issued share capital and provided such shares are not under moratorium. … (c) The number of public shareholders of the securities must be at least 200.

…

Part VIII Very Substantial Acquisitions or Reverse Takeovers

1015

(3) For reverse takeover, the incoming business and the enlarged group must comply with the following: (a) the requirements in Rule 406, Part IX of Chapter 4 … With regard to Rule 406(1), the proportion of share capital in public hands must be at least 15% based on the total number of issued shares excluding treasury shares of the enlarged group. …; and

…

(c) where the consideration for the acquisition of assets by the issuer is to be satisfied by the issue of shares, the price per share of the issuer after adjusting for any share consolidation must not be lower than S$0.20.

These Rules should be read together with SGX-ST’s guidance note that “[i]ssuers seeking a listing on SGX via a Reverse Takeover (RTO) are expected to comply with the same admission standards as IPO [ie, initial public offer] aspirants”, and “the S$0.20 minimum issue price for IPOs should also apply to RTOs”.⁴

Under the SPA, BAL warranted that “…it will use its best commercial endeavours to ensure that all of the Consideration Shares, PPCF Shares and Arranger Shares will be, when issued, duly listed and admitted for trading on the Catalist” in para 5 of Schedule 6 (the “Best Commercial Endeavours Warranty clause”).⁵

On 5 November 2014, BAL made an announcement (“the Nov 2014 Announcement”) on the Proposed Acquisition and stated the pertinent terms of the SPA, including cl 2.9. The announcement explained that it was expected that the Original Vendors would collectively hold up to approximately 90.8% of the enlarged issued share capital after the issuance and allotment of the Consideration Shares, the Arranger Shares and the PPCF Shares. Thus, BAL would not meet the shareholding spread and distribution requirements set out in Rule 406(1) and Rule 1015(3)....