Introduction

The Companies (Amendment) Ordinance 2004 in Hong Kong ("Amendment Ordinance") was enacted in July 2004 to improve the prospectus regime for facilitating market development (Schedule 1), modernize the registration regime for oversea companies (Schedule 2) and enhance the corporate governance regime by strengthening remedies for shareholders (Schedule 3). Schedule 3 has just come into effect on 15 July 2005.

Major amendments

1. Statutory Derivative Actions

Previously, if an individual shareholder initiated litigation in the company’s name, the defendant could move to strike out the name of the company unless the action was duly authorized by the company. New sections 168BA to 168BK provide that a member has a statutory right to bring proceedings on behalf of the specified corporation or to intervene in proceedings to which the specified corporation is a party if :-

  1. the cause of action or right to continue, discontinue or defend the proceedings is vested in the specified corporation and relief is sought on behalf of the specified corporation;

  2. the bringing of proceedings is in respect of misfeasance committed against the specified corporation (misfeasance means fraud, negligence, default in compliance with any enactment or rule of law or breach of duty);

  3. the specified corporation fails to bring proceedings or diligently continue, discontinue or defend the proceedings;

  4. leave is granted by the court to bring or intervene in such proceedings.

The court may grant leave if it is satisfied that –

  1. it appears to be prima facie in the interest of the specified corporation to grant leave;

  2. there is a serious question to be tried and the specified corporation has not itself brought the proceedings (if the application is for leave to bring proceedings);

  3. the specified corporation has not diligently continued, discontinued or defended the proceedings (if the application is for leave to intervene in proceedings); and

  4. unless dispensed with by the court, 14 days’ written notice has been served on the specified corporation.

The court is also empowered to grant orders as to the costs incurred by a member bringing a derivative action. This new statutory right to bring a derivative action does not affect a member’s right to bring an action on behalf of the specified corporation under common law which is much more restrictive. Under common law, the derivative action is an equitable remedy and subject to the doctrine of "clean hands". In general, a shareholder seeking to sue derivatively must act bona fide for the benefit of the company and not in order to further an ulterior purpose. Moreover the derivative action must be a last resort, and so a shareholder will not be permitted to use it where there is an alternative action available which would provide an adequate remedy for the wrongs in question e.g. where the company is in liquidation or could easily be put into liquidation.

2. Members’ Rights to Inspect Company Records

New sections 152FA to 152FE give members a right of inspection of a specified corporation’s records. The court may, on application, make an order to inspect any records of a specified corporation, if the application is made in good faith and for a proper purpose by :-

  1. any number of members representing not less than 2.5% of the total voting rights;

  2. any number of members holding shares in the specified corporation on which an aggregate sum of not less than HK$100,000 has been paid up; or

  3. not less than 5 members

3. Unfair Prejudice Remedies

Existing section 168A relating to alternative remedies to winding up where a member has been unfairly prejudiced is now amended. This now provides that :-

  1. the court may award damages and interest to any members where it is found that their interests have been unfairly prejudiced;

  2. a past member may commence action for unfair prejudice if the unfairly prejudicial conduct complained of arose when he was a member of the specified corporation;

  3. in respect of any unfair prejudice claim by past members, the court may only award damages;

  4. the damages that may be ordered by the court do not entitle any member of a specified corporation to recover by way of damages any loss that is solely reflective of the loss suffered by the specified corporation which only the specified corporation is entitled to recover under the common law.

4. Injunction Orders

An affected person or the Financial Secretary, may under the new section 350B(1), apply to court for an injunction restraining any person from engaging in conduct which contravenes the Companies Ordinance or is a breach of fiduciary or other duties owed to a company. The court may also order any person to do any act or thing.

5. What is a "specified corporation"?

A "specified corporation" means "a company or a non-Hong Kong company". The term "non-Hong Kong company" is a new term to replace the existing "oversea company" in the Companies Ordinance.

Conclusion

All the above amendments are made with a view to modernizing company law in Hong Kong in line with the global trend of improving corporate governance and transparency. It is expected that with the implementation of these amendments, the number of minority shareholders’ class actions will increase.

Experienced lawyers in our Corporate Commercial and Litigation Departments advise on a wide range of company law issues and shareholders’ rights as well as mergers and acquisitions and corporate finance transactions for both Hong Kong listed companies and multi-national corporations. Please contact us if you have any queries relating to the above or require a copy of the Amended Ordinance.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.