Minority Shareholders Protection Provisions

Many Hong Kong companies, including many listed companies, originate from family business and controlled by small group of people with strong family relation (Cheung, 2000). If the law is inefficient to protect minority shareholders, it is possible for controlling shareholders to abuse company assets by using sophisticated corporate structure to the detriment of minority shareholders. Generally, statutory law and common law construct minority shareholders protection legal system in Hong Kong. This paper will focus on statutory law protection.

The Company Ordinance has provided certain safeguards to ensure majority power is not abused (Stott, 2011). This paper will first discuss Section 168A and Part IVAA which regulates statutory derivative action, to identify inefficiencies and then give suggestions respectively. Discussion The Foss v Harbottle (1843) case has consolidated the concept of majority shareholder rule in the company administration. The two significant influences of this case are that it demonstrated the concept of judicial non-interference in the company management, and the proper plaintiff is the company (Nwafor, 2011).

The minority could only seek redress from statutory protection or common law protection by carrying out stringent procedures. The following sections will mainly discuss and analyze Section 168A and Part IVAA (ss 168BA-BK). . Section 168A According to s. 168A, any member could apply to the court for order under s. 168A if affairs are being or have been conducted unfairly prejudicial to one or more members (Company Ordinance). The unfairness and prejudice should coexist as supported by case Re Taiwa Land Investment Co Ltd (1981).

However, there is a debate about the scope of unfairness and prejudice. The concepts of these words are not defined in Ordinance or judicially. It seems it was made ‘deliberately imprecise’ since the court is unwilling to constrain its flexibility (Weber, 2003). Though several guidelines and rules, elaborated in detail below, have been established, legal procedure inefficiency still exists. Neil LJ has set up four guidelines to the ‘correct approach’ to the concept of ‘unfairly prejudicial’.

First, Lord Wilberforce in Ebrahimi stressed such words should be flexibly used but should be tempered to Lord Hoffman’s appeal to control the scope of the definition. Second, the conduct should relate to conduct of which company the petitioner is a member. Third, conduct should be both unfair and prejudicial. Fourth, ‘unfairly’ covers legitimate expectations (Talbot, 2008). In the case O’Neil v Philips (1999), Lord Hoffman radically reduced the scope of unfairly prejudicial conduct and clarified the scope of equitable constrains (Talbot, 2008).

These guidelines generally grant courts’ more discretion to maneuver in the circumstances of each case. Consequently, plaintiffs have to raise as many allegations of misconduct as possible for the court to review to bolster chance of success following these guidelines and rules. This may make pleadings lengthy and claims may involve extensive evidences, increasing processing costs and inefficiency.

To solve such problem, Hong Kong may imitate the UK’s relevant methodology since Hong Kong CO.section 168A modeled the UK Companies Act 1985 section. 459. The English Law Commission has published Shareholder Remedies 2011 to promote effective case management to reduce litigation cost and Hong Kong may also need to consider similar methods to strengthen its judicial case management. The court may also need to examine the feasibility of increasing this provision certainty for the implementation purpose. The court may need to find the trade off point between certainty and flexibility. Part IVAA (ss 168BA-BK)

Part IVAA has established legal procedures for minority shareholders to get a leave to bring an action (proceedings), or intervene in any proceedings, in the case of misfeasance, meaning fraud, negligence, and default in compliance with any enactment or rule of law or breach of duty (Stott, 2011). This statutory section was added into Company Ordinance in 2004 then came into effect in July 2005, and such new statutory regime has changed previous common law derivative action position in two important respects.

First, the grant of leave could only be given if the court is satisfied “there is a serious question to be tried” (s 168BC (3)(b)) and a “more stringent” prima facie test is fulfilled (Riberiro PJ). Second, under common law, the plaintiff should prove the case falls within one of exceptions to the rule of Foss v Harbottle, while statutory scheme has jettisoned it, lightening plaintiff’s burden and empowering shareholders to seek relief for any wrong done to company.

Though 168BC(5) regulates that the court should dismiss an application when the applicant has already commenced a common law claim, there are still duplications in the two systems. The parallel position of derivative actions in common law and statutory provisions was previously maintained because many companies are incorporated outside Hong Kong, but controlled by Hong Kong citizens and the removal of common law may derive such shareholders of a remedy (Aitken, 2009). Lord Millet NPJ’s lordship indicates that such question is not governed by Hong Kong law but by the statutory or common law of overseas jurisdictions.

The question of leave to proceed is a procedural matter which should be governed according to the usual conflict principles by the lex fori. (Aitken, 2009) Besides that, as statutory provisions have extended to both Hong Kong company member and non-Hong Kong company, which establishes a place of business in Hong Kong and registers under Part XI member, the dual relief is supererogatory and may result possible confusion and complication (Ribeiro PJ), supported by Lord Millet NPJ. Hence, Hong Kong may need to consider proper measures to reduce duplications. Conclusion

In case of proving undefined unfairness and prejudice, petitioners have to put as many evidences as possible to bolster success chance. Under such circumstance, it may increase litigation costs and lengthen pleading times, causing inefficiency. The court may address the inefficiency problem by adopting more advanced case management system to save litigation costs, find trade off point between legal certainty and court discretion, and set up proper guidelines. The newly added statutory section has modernized derivative action but its parallel position with common law related provisions needs wary examination.

The dual relief system may cause unnecessary confusion and complication reducing implementation efficiency as indicated by Lord Millett NPJ’s lordship. There is also a minor concern over this section that this section gives law certainty but the court may have less discretion to disallow any actions in a proper condition, for instance, if the director breaches the duty but it will not in the best interest of the company to bring out actions. Given these, a further reform may need in this area with caution.