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The Hong Kong Companies Ordinance – An International Statute?

22 December, 2011

 

Hong Kong operates on a system of statute based law, the common law and equity. Before the handover on 1 July 1997 Hong Kong operated a legal system which was to all real intent and purpose, an image of that in England and Wales (albeit with some local peculiarities, such as laws relating to concubines). The court of final appeal, pre-handover, was the Privy Council in London.
 
However, since 1 July 1997, Hong Kong has become an independent jurisdiction. It has a mini constitution. It continues to operate on the basis of its own statues, common law and equity. There has been a significant change, however, in its ability to draw legal analogies from other common law jurisdictions. This is particularly relevant in the context of case precedent. However, as this article discusses, it is also relevant in the context of statutory provisions.
 
Hong Kong’s Companies Ordinance (Chapter 32) is a classic example of a commonwealth developed local statute, modelled on the England and Wales original. Interestingly, however, in more recent years, the Ordinance has been amended, in some commentators’ opinions, rather haphazardly. It is intended to completely rewrite the Companies Ordinance and indeed earlier this year the Companies Bill was gazetted and introduced into the Legislative Council for its first reading. It is interesting that the Secretary for Financial Services and the Treasury in a press release on the day the Companies Bill was gazetted said:
 
“Rewriting the Companies Ordinance (CO) allows us to leverage the developments regarding company law in other comparable jurisdictions and enhance our competitiveness”.
 
The focus of this article is on one section of the current Companies Ordinance, Section 152FA. This section provides statutory rights to shareholders of companies which statutory rights do not exist in England and Wales. It is therefore a departure from the legal system in England and Wales. Section 152FA is modelled on Section 247A of the Australian Corporations Act 2001. It also bears comparison with Section 178 of the New Zealand Companies Act 1993, and Section 254 of the Companies (New South Wales) Code.
 
Section 152FA was introduced into the Companies Ordinance in Hong Kong in July 2005. It enables a minority shareholder or group of minority shareholders to make an application to the Court for an order to inspect any records of the company of which they are shareholders: the right to inspect, being both on the part of the shareholder and authorised persons of the shareholder (not necessarily the shareholders themselves).
 
The Court can only make an order for inspection if it is satisfied that the application for the order is made in good faith and the inspection applied for is for a proper purpose.
 
So the section exists in order to grant shareholders “generous access to corporate information in order to protect their interests in the company.” (per Harris J in Wong v Hung and Applied Development Holdings Limited (HCMP 1602/2010)).
 
The question of what is good faith or a proper purpose has been determined, it seems, as two separate and independent tests.
 
According to Harris J, this is;
 
…a subjective and an objective test: the applicant must first establish that he believes his purpose in applying for an inspection order is proper (i.e. that he is acting in good faith) and secondly, the court must believe the circumstances are such that the inspection applied for is for a proper purpose.
 
The Court found that the requirement of good faith “merely requires that the applicant himself acts “honestly” with a purpose that he himself believes to be proper“.
 
In terms of proper purpose, the explanation that Mr. Justice Harris gave was that although a shareholder does not have a proprietary interest in the assets of the company itself, he has an economic interest in the company and:
 
…can reasonably expect to be able to protect this interest and Section 152FA facilitates this by providing the member with access to corporate information, which might not otherwise be available to him.”
 
As Mr. Justice Harris put it, Section 152FA affords shareholders an often overlooked yet powerful right by which to expose wrongful conduct in relation to the company’s affairs. He said:
 
Where shareholders and directors are at loggerheads, the right of access to corporate information is particularly important: in these circumstances, even if a member suspects that something is amiss, for example an egregious breach of fiduciary duty, he will be unable to protect his economic interest and financial investment within the company (through, for instance, a derivative action) unless he is able to obtain sufficient information.
 
By enacting Section 152FA, the legislature provided an important new procedure for the protection of shareholder rights and interests and the community more general interest in the maintenance of good corporate governance“.
 
As Mr. Justice Harris found, where a member seeks to protect his economic interests in the company, he should, prima facie, satisfy the “proper purpose” requirement.
 
This approach, however, of Mr. Justice Harris is slightly at odds with an earlier decision by Deputy Judge Coleman S.C., who observed that the Court would only exercise its discretion to grant an inspection order in “exceptional and rare cases“.
 
Deputy Judge Coleman S.C. appears to have found that the proper purpose criteria would only normally be satisfied where the applicant has a specific or personal right which can only be protected through the inspection of the relevant records of the company. With this, Mr. Justice Harris disagreed.
 
The Annotated Ordinances of Hong Kong give some examples from relevant court cases in Australia and say that the following purposes have been regarded as “proper purposes“:
 
a) a determination of the value of shares;
 
b) an investigation as to whether legal proceedings may be appropriate to challenge certain transactions which have adversely affected shareholders’ investment in the company; and
 
c) a decision whether or not a shareholder’s rights in respect of a company may or ought to be exercised.
 
On the other hand, improper purposes have been found to be:
 
a) the ascertainment of whether a company is solvent;
 
b) assistance in the preparation of a take-over bid for a company; and
 
c) assistance in challenging directors in their daily management of a company.
 
Pulling all of these strings together, what we now have is a developing area of jurisprudence dealing with a section which has, oddly, been on the statute books for five years before it was first engaged in a court room. We have noted at least four cases in the Courts this year dealing with the section. So, it appears to be a weapon that shareholders and their litigation lawyers are making more use of.
 

It is undoubtedly a useful tool in shareholders’ and litigators’ armoury in order to procure information, which might not otherwise be made available to a shareholder, which may give rise to an ability to establish, for example, a derivative action which otherwise would never be brought. 

 

 

For further information, please contact:

 

Robert Clark, Deacons

robert.clark@deacons.com.hk

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