The dispute in the case of Kung Kin Wing and Another v Splendid Profit International Holdings Ltd (2020) HKCFI 894 arose from the acquisition of a business relating to the noodle shop business using the names “SOUR AND SPICY NOODLE” and “傷心酸辣粉” (together the “Trade Name”) between acquaintance.
Kung Kin Wing (“Kung”) and Chan Man Wai (“Chan”) are the main parties involved in the dispute. Kung used to work for Chan as a driver prior to starting the noodle business (the “Business”) and by chance Kung and Chan met again in the third quarter of 2009 when Chan became interested in the Business. The parties eventually made an investment agreement (the “Investment Agreement”). According to a document (the “Written Agreement”) recording the contents of the meeting held at Chan’s restaurant in Guangzhou at 10:00pm on 12 December 2009 signed by 4 persons including Kung, Mr Tse Fook Cheung who was Kung’s partner (“Tse”), Chan and Mr Lin Renxin who is Chan’s cousin (“Lin”), the parties made a “初步協議” (preliminary agreement) for an investment plan to be commenced on 1 January 2010, expanding the number of shops to 5 and involving a financial contribution of HK$6 million to be provided by Chan.
The “Written Agreement”
The preamble of the Written Agreement reads :-
“[Chan] 投資於深水陟經營的兩間傷心酸辣粉鋪 (福榮街#94及#116號) 及傷心酸辣粉的未來發展, 佔該公司的三分之一股權及資產。”
“[Chan] invests in the (business) operated at the 2 shops at Nos. 94 and 116, Fuk Wing Street and their future development owning 1/3 of the company’s shares and assets).” (translations)
Clause 1 of the Written Agreement provides :-
“投資港幣六佰萬元…其中港幣 $1,000,000元作為給 [Kung and Tse] 收購(福榮街#94及#116號) 的資本…, 另外港幣$5,000,000元作為開新鋪投資金額”
“$6 million would be invested…$1 million of which would be for acquisition of the assets of [Kung and Tse] in Nos. 94 and 116, Fuk Wing Street…, and the other $5 million for the investment of new shops” (translations)
Clause 2 provides for the time for payments by Chan at different stages. Clause 5 provides that Kung and Tse would each get a monthly salary of HK$30,000, with an increase of HK$5,000 for each new shop opened.
The parties in reliance of the Investment Agreement proceeded to develop and expand the Business from 2010 to 2019. The Business also uses the trademark, which included the Trade Name and 2 slogans “酸到留口水,辣到留眼淚” (the “Trade Mark”) and the Trade Mark was at all material times registered in the name of Kung.
On 13 May 2010, Sour and Spicy Noodle Co Ltd, the 2nd Defendant (“SS Noodle”), was incorporated to take over the assets and operation of the Business. The shares of SS Noodle were allotted as follows : 9 shares to Kung, 9 shares to Tse, 2 shares to Mr Chan Wing Ping (“Chan WP”) and 10 shares to Lin who held the shares as nominee for Chan.
After incorporation of SS Noodle, the Business continued to expand with new shops added. A company was also set up to run a hot pot business. In 2011, the Business started to operate a franchise business, granting franchises to various franchisees to run noodle shops using the Trade Name and the Trade Mark (the “Franchisees Businesses”).
In or about 2016, there were discussions amongst various investors of the Business and the Franchisees Businesses for the whole business (the “Whole Business”) to be “floated” in the stock market. A Share Distribution Contract and other agreements were signed with the investors, but the Written Agreement between Kung and Chan was kept unchanged.
In late 2019, the relationship between Kung and Chan broke down, and action was commenced by the Kung Party against the Chan party for infringement of the Trade Mark for its use in the operation of the Whole Business and the defence and counterclaim were filed by the Chan party for inter alia declarations that they are the beneficial owner of the Trade Mark etc.
The main issues involved in the present case were : Who is the beneficial owner of the Trade Mark, the Trade Name and the Goodwill of the Business ? Were these assigned to the Business when the parties made the Investment Agreement in late 2009 ?
However in order to decide on the main issues, the Court first had to decide whether the terms of the Investment Agreement were contained in the Written Agreement or the Written Agreement was merely minutes of a meeting as the documentation for the investment was poor. It was not even clear what was the true nature of the Investment Agreement : whether it was simply an Investment Agreement whereby Kung and Tse were selling one third of the interest of the physical assets of the Business to Chan, or whether it was an Agreement whereby Chan acquired the Business whilst allotting one third of the interest each to Kung and Tse. The Court found after hearing oral evidence from both parties that the Investment Agreement was made partly orally and partly contained in the Written Agreement and that the parties’ intention was to include the transfer of the Trademark, the Trade Name and Goodwill of the Business in the Investment Agreement.
Substantial litigation time and cost could have been avoided if the acquisition of the Business at substantial consideration was at the outset made with proper due diligence and legal documentation. This is necessary even if the parties are known to each other and the Seller would retain some interest in the business going forward.
Due diligence would allow the Purchaser to confirm pertinent information about the Seller and the target business, such as intellectual property, contracts, finances, employment, customers and potential liabilities. Having this information would allow the parties to properly negotiate the terms of the acquisition and make a binding legal agreement that will provide certainty to the Purchaser and Seller. Any risk associated with the deal could be covered by the terms of a sale and purchase agreement e.g. warranties, indemnities, disclosures etc. In the above case, the parties should have also entered into a Shareholders’ Agreement to govern the ongoing control, management and finances of the Business. In case of any disagreement, the terms of the Shareholders’ Agreement would assist to resolve them and if a buyout is required, it could also be proceeded with less detriment to the business.
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