The Companies Law (2016 Revision) v and QIHOO 360 Technology Company Ltd
| Jurisdiction | Cayman Islands |
| Judge | Justice Ingrid Mangatal |
| Judgment Date | 19 December 2018 |
| Court | Grand Court (Cayman Islands) |
| Docket Number | Cause No.: FSD 129 of 2016 (IMJ) |
| Date | 19 December 2018 |
The Hon. Justice Ingrid Mangatal
Cause No.: FSD 129 of 2016 (IMJ)
IN THE GRAND COURT OF THE CAYMAN ISLANDS
FINANCIAL SERVICES DIVISION
Section 238 Proceedings — Application for previously Court — ordered Forensic audit to he terminated — Company's leave to instruct expert witness be revoked — and Company be debarred from relying on factual evidence at trial
Mr. Robert Levy QC instructed by Mr. Rupert Bell and Mr. Patrick McConvey of Walkers for the Dissenting Shareholders/Applicants
Mr. Thomas Lowe QC instructed by Ms. Jessica Williams, Mr. Paul Madden and Mr. James Elliott of Harney Westwood and Riegels for the Company/Respondent
This is an application by (a) Maso Capital Investments Limited ( “Maso”); (b) Blackwell Partners LLC —Series A ( “Blackwell”); and (c) Crown Managed Accounts SPC acting for and on behalf of Crown/Maso Segregated Portfolio (together with Maso and Blackwell, the “Dissenting Shareholders”) for an order against Qihoo 360 Technology Co Ltd (the “Company”), in the following terms:-
-
“1. The Forensic Audit (as defined at paragraph 6 of the Order dated 27 July 2017, (the “July Order”) be terminated forthwith and the obligations of the parties and the Forensic Expert (as defined at paragraph 6 of the July Order) pursuant to paragraphs 8 to 12 of the July Order cease forthwith.
-
2. The Company be solely liable for all costs arising out of and in connection with the Forensic Audit, and shall reimburse the Dissenting Shareholders with all costs paid to Alvarez & Marsal Dispute & Investigation Limited in relation to the Forensic Audit within 7 days of the date of this Order.
-
3. The Company's leave to instruct an expert witness and serve expert evidence at the trial of these proceedings be revoked and that the following paragraphs of the Order for Directions dated 25 October 2016 (the “Directions Order”), be amended to remove the following references and to make consequential amendments where necessary:
-
(a) the words “….(a) Petitioner; and” in paragraph 7;
-
(b) the obligation for the meetings held pursuant to paragraph 9 to be held jointly;
-
(c) paragraph lie;
-
(d) the requirement for any joint expert meetingfs) pursuant to paragraph 12 and a joint memorandum to be prepared pursuant to paragraph 13; and
-
(e) the words “The Petitioner and” in paragraph 15.
-
-
4. Paragraph 13 of the July Order be amended so that the time for the Dissenting Shareholders' expert to serve his report be extended to six weeks after the date of this Order.
-
5. The Company cannot rely on any factual evidence at the trial of these proceedings.
-
6. The Company pay the costs of the Summons and all costs related to or arising from the Forensic Audit on the indemnity basis, to be taxed forthwith if not agreed.” (The “Summons”)
By a Consent Order dated 25 October 2016 (the “Consent Order”), the Company agreed to give discovery of documents in the manner therein provided. That discovery process was supposed to have been completed by 18 November 2016. The time for discovery was extended to 10 January 2017 at a directions hearing on 21 December 2016. Harney Westwood and Riegels ( “Harneys”), the Company's present attorneys, had at that time just been instructed by the Company, and sought extensions of time to comply with the Consent Order. The Court granted extensions of time, but for shorter periods than requested by the Company. By the varied directions, discovery was to be completed by 10 January 2017 and the trial of this case was to be fixed not before 29 May 2017.
Not satisfied with the Company's approach to its discovery obligations, the Dissenting Shareholders filed a summons dated 3 March 2017 (the “March 2017 Summons”) by which, amongst others, they sought orders, that the Company preserve its electronic data, that a forensic expert be appointed to conduct an audit and search of documents based on key word searches.
The March 2017 Summons was heard over two days on 11 and 12 May 2017 and the Dissenting Shareholders succeeded. This Court gave judgment on 27 July 2017 (the “July 2017 Judgment”) reported at [ 2017 (2) CILR 43].
There have been other subsequent applications by the Company, including seeking leave from the Court of Appeal, to appeal the July 2017 Judgment, in which leave was refused —see the Court of Appeal judgment, reported at [ 2017 (2) CILR 585]. It is not necessary to go into these other applications at this stage.
This application seeks very serious relief. However, the Dissenting Shareholders, represented by Queen's Counsel Mr. Levy, say that the case is “stark” The Dissenting Shareholders allege that, contrary to the express terms of the July Order which provided that the Company should preserve all data and other matters for the purposes of a Forensic Audit, the Company has expressly directed a number of employees to delete and destroy data (“the Destruction Instruction”).
The Dissenting Shareholders allege that that instruction is a flagrant breach of the July Order. They also say that the evidence filed by the Company, breaches Practice Direction 4 of 2015. To the extent that the Company's evidence on these points is admissible, the Dissenting Shareholders aver that the Company's answers to the core allegations on the data destruction issue are not only incredible, they are demonstrably incorrect. It is argued further that none of the assertions in the Company's evidence (to the effect that nobody acted on the Destruction Instruction), can be properly tested. The Forensic Expert (as defined at paragraph 6 of the July Order) cannot say with certainty whether data has been deleted, or that deleted data could be restored. Thus, the Dissenting Shareholders submit, a fair trial cannot be assured.
In addition to this, the Dissenting Shareholders take a further point. They say that the Company, which is a leading internet security and search engine provider in the People's Republic of China, (the “PRC”) which was valued at merger price at around US$9.8 billion and has subsequently re-listed in the PRC at many multiples of that amount (initially its market capitalization was approximately US$60 billion upon re-listing only a portion of its assets), has taken an incredible stance. The Company claims that because of alleged “eye issues”, its multi-billionaire chairman, Mr Zhou, did not have a computer or any electronic device issued to, used by or available to him, and that he has never used a computer since setting up the Company in 2006. Such items would be an “Electronic Device” within the ambit of the Forensic Audit.
The Dissenting Shareholders say that this is unacceptable. Not only is it incredible, but they submit that there is a wealth of material showing Mr. Zhou's evidence and the Company's case on this to be untrue. Reference was made to Mr. Zhou's autobiography in 2017, “A Disrupter; Zhou Hongyi Biography” where Mr. Zhou said “I've been using computers for 30 years” and that his “..requirements for living conditions are pretty low. As long as lean sleep and a space for my computer I'm ok”.
In addition to the autobiography referencing Mr. Zhou's love of his computer, the Dissenting Shareholders have also provided the Court with a recent video of Mr. Zhou in his office showing a large computer screen and keyboard on his desk. There is also evidence of Mr. Zhou engaging in archery. The Company has also put in evidence some photographs of Mr. Zhou's office which show no computer. That evidence Mr. Levy Q.C. submits, is self-serving and unreliable.
The upshot of this, Learned Comisel submits, is that there is no purpose in continuing the Forensic Audit. Further, that it should cease immediately and the Company should pay forthwith all of the costs of that exercise (both legal fees and the fees of the forensic auditor) incurred by the Dissenting Shareholders, on an indemnity basis. Additionally, because a fair trial is not possible, the Company should be barred from adducing expert evidence at trial. It was posited that the Company has, by its conduct, put itself in this situation.
The argument continues, that whilst the Court's power in such circumstances would usually result in an order for striking out the claim or defence, such relief is not appropriate in an appraisal case under section 238 of the Companies Law (2018 evision) (the “Companies Law”). This is because the statutory regime requires that there be a determination of fair value. As a result, it was submitted that the orders sought in the Summons are an appropriate sanction for the egregious conduct of the Company. It was submitted that there is precedent in the Cayman Islands in a section 238 case for such sanction being ordered following a breach of discovery obligations. Reference was made to the decision of McMillan J In the matter of Bona Film Group Ltd (Unreported, Grand Court, McMillan J. 13 March 2017). In that case the debarring order was preceded by an ‘unless’ order.
As pointed out by the Dissenting Shareholders, in the July 2017 Judgment, when taking the exceptional step of appointing a forensic expert to conduct a forensic analysis of the Company's information technology systems, the Court found as follows:
-
(a) “….the Company's approach to the discovery process has been in instances somewhat careless and cavalier resulting in incomplete and ineffective discovery,”
-
(b) there had been variations in responses to questions posed of the Company “some of which are hard to reconcile without full or complete discovery”;
-
(c) that a substantial suite of documents that the Company said no longer existed had been plainly shown to be in the Company's possession;
-
(d) that it was “strange that, at...
To continue reading
Request your trial