Seth Pinegar v Isoftstone Holding Ltd
| Jurisdiction | Cayman Islands |
| Judgment Date | 13 September 2013 |
| Docket Number | CAUSE NO: FSD 584 OF 2012 |
| Court | Grand Court (Cayman Islands) |
THE HON. CHIEF JUSTICE
CAUSE NO: FSD 584 OF 2012
IN THE GRAND COURT OF THE CAYMAN ISLANDS
Mr. Tony Heaver-Wren and Ms. Anna Gilbert of Appleby for the Plaintiff
Mr. Nigel Meeson QC and Mr. Michael Mulligan for the Defendant
The Plaintiff Mr. Pinegar is a citizen of the United States of America and at all material times, a resident of the People's Republic of China (the “PRC”).
The defendant (“IHL”) is a Cayman Islands company whose shares of a class called the American Depository Shares (“ADSs”), are listed on the New York Stock Exchange (“NYSE”).
IHL is engaged in Information Technology business through its subsidiary companies in China and in other places around the world. iSoftstone Information Technology (Group) Co Ltd (“IITG”) which is incorporated in the PRC, is one of those subsidiaries.
Mr. Tianwen Liu (“Mr. Liu”) is and was at all material times the founder, Chairman and CEO of both IHL and IITG.
This action is brought by the Plaintiff against IHL, claiming damages for breach of his employment agreement entered into with IITG; an agreement which includes vested share option agreements provided through IHL. The breach is alleged to have resulted in the loss of opportunity to convert IHL shares (acquired by exercise of options) into ADSs and to acquire and trade those ADSs to which the Plaintiff claims to have become entitled. Alternatively, the Plaintiff claims specific performance of the share option agreements; including the right of conversion to ADSs.
IHL counterclaims for the sum of USD 1,210,058 said to be due from the Plaintiff as withholding taxes arising from the exercise of certain of the vested share options. This is the amount IHL claims it is liable, as counter party to the share option agreements, to pay to the Revenue of the PRC and for which it is entitled to be indemnified by the Plaintiff.
On 13 September 2013, I heard competing applications: that by the Plaintiff to strike out IHL's counterclaim and a cross-summons by IHL for summary judgment on its counterclaim, in the event the Plaintiff's strike out application fails.
The basis of the Plaintiff's strike out application can be described briefly in terms of his summons: it is that the court has no jurisdiction to entertain IHL's counterclaim and/or that the counterclaim is not justiciable and is an abuse of process, being a claim for the enforcement indirectly in this jurisdiction of the revenue law of a foreign state.
IHL's cross—summons for summary judgment would proceed on the basis that barring the strike out application, the Plaintiff would have no prospect of a successful defence to its counterclaim.
It follows that I should deal first with the Plaintiff's strike out application, turning next to IHL's summary judgment application, only if the Plaintiff fails to strike out IHL's counterclaim.
According to his Amended Statement of Claim, in or around May and June 2008, the Plaintiff had discussions with Mr. Liu regarding possible employment: specifically this was about assisting IHL with mergers and acquisitions; with pre-initial public offering fund raising; attending meetings of the Board of Directors and other investor-related events, and to lead its initial public offering intended for listing on the NYSE.
The Plaintiff describes himself as an experienced investment banker who was at that time employed to UBS, a major international bank and based in New York. The discussions involved him having to leave UBS and relocate to Beijing.
His discussions with Mr. Liu resulted in his engagement from 1 July 2008 to 30 June 2011 with IITG as a Senior Vice President and Head of Corporate Development, based in Beijing. This involved him entering into an Employment Letter of Intent with IITG on the 1 July 2008 and at about the same time, a Labour Contract, in the Chinese language, also with IITG.
The terms of his engagement included the incentive of share options, to be exercised over shares in IHL and in keeping with the corporate incentive plans and the terms of specific share option agreements.
The first Share Option Agreement was entered into on 20 December 2008 (“the 2008 Agreement”). It granted the Plaintiff 2,176,462 options with respect to shares of IHL governed by the 2008 Share Incentive Plan (“the 2008 Plan”). The exercise price of the option was USD0.30 per share.
Of particular significance to the present action, the 2008 Agreement provided under the heading “Withholding taxes” that:
“You will not be allowed to exercise this option unless you make acceptable arrangements to pay any withholding or other taxes that may be due as a result of the option exercise or sale of shares under this option. In the event that the Company determines that any federal, state, local or foreign tax or withholding payment is required relating to the exercise or sale of shares arising from this grant, the Company shall have the right to require such payments from you, or withhold such amounts from other payments due to you from the Company or any Affiliate.”
And further that:
“The Company has the authority to deduct or withhold or require [the grantee in question] to remit to the Company, any amount sufficient to satisfy applicable national, state, local and foreign taxes arising from this Option Award....”
Two share option agreements were entered into in 2009. By the First 2009 Agreement, the plaintiff was granted 170,000 options with respect to shares governed by the IHL 2009 Share Incentive Plan (the “2009 Plan”). On 1 August 2010, pursuant to the Second 2009 Agreement (and when read with the First 2009 Agreement), the plaintiff was granted an additional 435,292 options with respect to shares governed by the 2009 Plan.
According to the Plaintiff's pleadings, the terms of the First 2009 Agreement, Second 2009 Agreement and 2009 Plan were substantially in form similar to the 2008 Agreement and 2008 Plan, save that:
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(1) The exercise price was US$0.50 per option and US$0.65 per option respectively;
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(2) The options were “deemed exercised” upon completing the exercise procedures, payment of the exercise price and any applicable withholding tax;
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(3) The grantee was given the right to elect to pay relevant taxes by the withholding of shares, the surrender of other shares or cash payment.
The Plaintiff avers that in or about early November 2010, Mr. Liu agreed verbally with the Plaintiff on behalf of IHL to accelerate vesting of the Plaintiff's 2008 options. This he says, was agreed in order to compensate him in respect of a short-fall in compensation earlier agreed.
Further from those discussions, that it was the understanding of both himself and IHL that following the Initial Public Offering (“IPO”), the shares issued to him pursuant to his options would become tradable on a stock exchange. That this represents normal practice in an IPO and was necessary to give value to the options granted to him as remuneration and incentive for his employment.
On or about 14 December 2010, IHL completed its IPO of ADSs which thus became listed on the NYSE: “NYSE:ISS”.
The IHL ADSs traded on the NYSE are governed by a Deposit Agreement dated on or about 14 December 2010 between IHL and JP Morgan Chase N.A. (“JPM”) as Depository and Holders of ADSs from time to time (the “Deposit Agreement”). The Deposit Agreement is governed by New York law.
Pursuant to clause 3 of the Deposit Agreement, upon a deposit of IHL shares, JPM would then issue ADSs in the form attached to the Deposit Agreement (at a rate of one ADS for each ten (10) ordinary IHL shares).
However, shares issued or to be issued to management of IHL and its affiliates were subject to a 180 day Lock Up period following the IPO, during which such shares could not be traded. This Lock Up period ended on 10 June 2011.
The Plaintiff avers to having received on 4 May 2011 an email sent to option-holder employees by Linda Tang — then head of IHL's Legal Department — introducing them to Computershare, a web-based application IHL had produced to allow employees to be able to exercise options and automatically sell shares, following the conversion of shares to ADSs and following expiration of the IPO Lock Up. The e-mail included an individualized log-in and password.
The Plaintiff avers that on 10 June 2011, he received a group email from Ms. Tang informing him that he would be able to sell his shares commencing 13 June 2011 (in the form of ADSs) and he would be required to conform to the Insider Trading Policy attached to the email.
Notwithstanding his preference for ADSs upon exercise of the 2008 options when he had elected to do so on 12 January 2011, the Plaintiff had then been advised by another of IHL's lawyers (a Ms. Lv), that although he would be allowed to exercise the options, no ADSs would be issued during the Lock Up period.
Accordingly, on or about 24 January 2011, the Plaintiff wired the sum of USD489,718.92, of which all but USD20 (viz: USD489,698.92) was received by IHL on or about 9 February 2011. His notice of exercise was hand-delivered to Ms. Lv, and, as required for due diligence purposes, IHL had a copy of his passport on file. A reference letter was also provided in respect of him by IHL's United States lawyers, thus completing all formalities as far as he was concerned.
In confirmation of his exercise of the 2008 options, on 15 February 2011 the plaintiff was sent a share register for IHL showing that he had been issued 1,632,346.00 ordinary shares in IHL (the “2008 Shares”).
According to the Plaintiff, in issuing shares to him, IHL did not raise any concern about withholding taxes (as it might have...
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