Aivita Healthy New Zealand Ltd v Unipharm Healthy Manufacturing Company Ltd
| Jurisdiction | New Zealand |
| Judge | R M Bell |
| Judgment Date | 16 June 2021 |
| Neutral Citation | [2021] NZHC 1401 |
| Docket Number | CIV-2019-404-333 |
| Court | High Court |
UNDER the Companies Act 1993, section 174
JUDGE R M Bell
CIV-2019-404-333
CIV-2021-404-477
IN THE HIGH COURT OF NEW ZEALAND
AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA
TĀMAKI MAKAURAU ROHE
Civil Procedure, Companies — interlocutory applications for discovery and interrogatories — application by the defendant for consolidation — shareholder dispute — confidentiality — assessment of scope of interrogatories — High Court Rules 2016 — Companies Act 1993
T J Rainey and Lydia Tawse for Aivita Healthy New Zealand Ltd
Chen Jiang for Unipharm Healthy Manufacturing Ltd, ANC NZ Ltd and Qing Feng Chen.
This judgment was reissued by me on 16 June 2021 at 3:00pm
pursuant to Rule 11.5 of the High Court Rules
Registrar/Deputy Registrar
Discord in Unipharm Healthy Manufacturing Co Ltd has led to these proceedings. Aivita Healthy New Zealand Ltd, a shareholder, is seeking relief under s 174 of the Companies Act 1993. In the other proceeding, Unipharm and the other two shareholders seek declarations that certain share transfers were valid and sue Aivita for misuse of confidential information. Many discord cases are resolved by one side buying out the other. A purchase price is negotiated after each side has obtained expert valuation advice. Counsel agreed that was a likely outcome in this case.
In the meantime, interlocutory applications need attention. In Aivita's proceeding:
In its proceeding, Unipharm has applied for the two proceedings to be consolidated.
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(a) Unipharm has applied for particulars;
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(b) Aivita has applied for discovery against Unipharm;
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(c) Unipharm has applied for discovery against Aivita;
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(d) Aivita has applied for Unipharm to answer interrogatories; and
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(e) Unipharm has applied to strike out parts of Aivita's prayer for relief.
By the hearing, some of these matters had been resolved. Aivita had given Unipharm the particulars it sought. Aivita's discovery application had narrowed. Unipharm no longer sought orders on its discovery application. Unipharm no longer pursued its strike-out application. The matters left for decision are:
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(a) the remaining part of Aivita's application for discovery against Unipharm;
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(b) Unipharm's application for consolidation; and
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(c) Aivita's interrogatories application.
On Aivita's discovery application I give directions to safeguard confidentiality of documents. The proceedings are not consolidated but are to be heard together for two weeks beginning 18 July 2022. I reduce the interrogatories Unipharm is to answer.
This comes mainly from Unipharm's case. Aivita does not accept it all, but as Unipharm provided fuller information, it is convenient to use that information, so long as it is kept in mind that Aivita disagrees with the way that Unipharm has characterised events and transactions.
Unipharm Healthy Manufacturing Co Ltd was incorporated on 20 September 2016 and began business in early 2017 manufacturing health supplements for the New Zealand and Chinese markets. It was established as a joint venture of three men, Chinan Xie (Charlie), Qingfeng Chen (Kevin) and Haibing Du (Wilson). Charlie made an initial capital investment of $1,112,000 in Unipharm. Kevin invested $240,000. Wilson invested $240,000, but that was through Aivita.
Pengli Teng, Charlie's de facto partner, is an accountant in public practice and has prepared the company's financial statements. Yibo Weng is Pengli's son. He was initially appointed a director of the company but did not take any active part in the management or decision-making of the company. He held shares, representing Charlie's investment in the company. Charlie says that Yibo held the shares on trust for him.
Charlie had been a director of Tong Ren Tang (New Zealand branch), a traditional Chinese medicine supplier. Kevin worked for a pharmaceutical company, GMP Pharmaceuticals Ltd, on the production side. Wilson also worked for GMP Pharmaceuticals Ltd as its Asian sales and marketing manager. Unipharm bought an existing pharmaceutical manufacturing business from Evergreen Life Ltd for $2.2m. As well as the capital contributions from the three men, the ASB lent $1 million, $600,000 of which went to the purchase price.
On Unipharm's incorporation, there were 1,600,000 shares: 960,000 shares held by Yibo Weng, 320,000 shares by Kevin, and 320,000 shares held by Aivita Healthy Ltd. Wilson's wife, Yinghua Xu (Wendy), was Aivita's sole director and shareholder.
At the outset, the Companies Office records showed Unipharm's directors as Yibo Weng, Kevin and Wendy. Unipharm, however, says Charlie, Pengli, Kevin and Wilson made the management decisions. Before the company began trading, a WeChat messaging group was established called “The Preparation Group” involving Kevin, Charlie, Pengli and Wilson. After the company started trading, Wilson started a new WeChat messaging group called “Unipharm Directors Group” in which Kevin, Charlie, Pengli and Wilson took part. Unipharm says that Wilson attended board meetings and signed board resolutions as a director. Wendy, on the other hand, although nominally a director, did not take any active part in management. Likewise, Yibo Weng, although a director in name, did not attend meetings whereas Charlie did as a director.
The shareholders, Yibo, Kevin and Aivita, made a written shareholders' agreement on 3 June 2017. Some provisions of the shareholders' agreement are in issue. In 2018, the company's solicitors prepared a constitution. There is no record of the constitution having been formally adopted. It is not registered in the Companies Office. Nevertheless, the shareholders' agreement refers to the constitution and there is therefore a question whether the constitution has been incorporated into the shareholders' agreement.
The shareholders' agreement contains provisions typically found in such agreement, including not competing against the company and preserving confidentiality and intellectual property. Clause 2.9 of the shareholders' agreement needs to be noted. The shares allocated to Kevin and to Aivita do not reflect their capital contributions to the company. Under cl 2.9, they acknowledge that they each held 80,000 shares on behalf of Yibo. The clause provides that Kevin and Aivita will be fully entitled to the additional 80,000 if performance targets are met for the next three years. If those targets are not met, they each undertake to transfer their 80,000 shares held to Yibo. Whether the performance targets were met was to be decided at the end of three years — that is, after 31 March 2020.
Unipharm did not do well in its first year. For the year ending 31 March 2018, it made a very substantial loss. Unipharm, Charlie and Kevin blame Wilson for this, saying that he did not obtain enough orders as sales and marketing manager. He had also taken over production, but he mis-managed that. Unsurprisingly, in a case involving company discord, Wilson rejects those allegations. By July 2017, the company needed more funds. The shareholders agreed to lend the company $500,000: Aivita $75,000, Kevin $75,000 and Yibo (on behalf of Charlie) $350,000. Charlie left Tong Ren Tang and became involved in the day-to-day management of Unipharm. Aivita says that this was contrary to the shareholders' agreement which provided that Yibo was not to be involved in the daily operations of the company.
By October 2017, the ASB demanded repayment of part of its loan. Wilson proposed that the business be sold to minimise losses. Kevin and Pengli agreed, but later changed their minds. Aivita says that Unipharm's board authorised Wilson to market the business for sale.
In November 2017, Yibo transferred his 960,000 shares to ANC NZ Ltd. That company had been incorporated on 16 February 2007. Charlie is its sole shareholder and director. Aivita says that the transfer of the shares from Yibo to ANC NZ Ltd was in breach of the pre-emption provisions of the constitution and the shareholders agreement, whereas Unipharm and ANC NZ Ltd say that the transfer was valid.
There is a dispute whether Wilson disclosed confidential information about Unipharm to third parties. The shareholders' agreement required shareholders to keep information about the company confidential. Unipharm says that Wilson was bound by that as the person behind Aivita. He also signed a separate confidentiality undertaking in December 2017.
Wilson's relationship with the others in the company deteriorated. In December 2017 he stepped down as sales and marketing manager. In December 2017, the 80,000 shares held by Aivita and Kevin respectively were transferred to ANC NZ Ltd. The stated reason was an alleged failure to achieve the performance target. Aivita says that these transfers were in breach of the shareholders' agreement. On the other hand, Unipharm seeks a declaration that the transfers were valid.
Unipharm's trading losses continued. Charlie lent the company $400,000 through ANC NZ Ltd. The loan was to be convertible to shares.
In February 2018 Unipharm also borrowed $300,000 from Full Joy Foods Pty Ltd, an Australian company. The man behind Full Joy Foods is a friend of Charlie. This loan was also convertible to shares. These injections of funds from Charlie and Full Joy Foods allowed Unipharm to pay the ASB. Aivita complains that the conversion of these loans into share capital diluted its shareholding. Unipharm says there was a resolution approving this at a shareholders' meeting on 3 March 2019. Charlie and Kevin outvoted...
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