SHAREHOLDERS

RIGHTS AND
REMEDIES
Shareholders rights

■ Vote (the doctrine of majority rule)

■ Dividends (if declared)
■ Return of capital (if authorized)
■ Participate in management (if elect to board)
■ Instruct directors (cannot. remove director? possible)
■ Access information (limited)
Minority Shareholders Remedies

■ Common law derivative remedies

■ Statutory remedies
Part 14 of the Companies Ordinance (Cap.622)
1. Remedies for ‘Unfair Prejudice’: section 722-727
2. Statutory Derivative Actions: Part 14 Div 4 section 731-738

Derivative actions: an action that is initiated by an individual on behalf of the company.

Why do we need minority shareholders remedies?

 The proper plaintiff rule and
the rule against reflective loss
Foss v Harbottle (1843) 2 Hare 461, 67
ER 189
Fact:
Foss is one of the minority shareholders in the company.
He, with another minority shareholder, commenced a litigation against the director of
the company.
They claimed that there was a misapplication of assets of the company. (Purchasing
property with over-valuation.)
The issue was whether the minority shareholders were entitled to sue against directors.
Held: The shareholders were not entitled to sue. If the company suffered from the
transaction, only the company could sue. (The proper plaintiff rule)
Prudential Assurance Co Ltd v Newman
Industries Ltd [1982] Ch. 204
Fact:
The two directors advised the acquisition of another company's assets.
The two directors had no control over the general meeting.
It was later discovered that the acquisition was overvalued, and the two directors
provided misleading information to the board and general meeting.
A minority shareholder (3.2% of issued ordinary shares) sued the two directors for both
derivative and personal actions.
Issue:
Would the personal action be allowed in this case?
Prudential Assurance Co Ltd v Newman
Industries Ltd [1982] Ch. 204
“But what he cannot do is to recover damages merely because the company in which he
is interested has suffered damage. He cannot recover a sum equal to the diminution in
the market value of his shares, or equal to the likely diminution in dividend, because
such a "loss" is merely a reflection of the loss suffered by the company. The shareholder
does not suffer any personal loss. His only "loss" is through the company, in the
diminution in the value of the net assets of the company, in which he has (say) a 3 per
cent. shareholding. The plaintiff's shares are merely a right of participation in the
company on the terms of the articles of association. The shares themselves. his right of
participation, are not directly affected by the wrongdoing. The plaintiff still holds all the
shares as his own absolutely unencumbered property. The deceit practised upon the
plaintiff does not affect the shares; it merely enables the defendant to rob the
company.” (p.223) (the rule against reflective loss)
LANDUNE INTERNATIONAL LTD v CHEUNG
CHUNG LEUNG [2006] 1 HKLRD 39
Fact:
A person is a director for both a parent company and its subsidiary
The parent and subsidiary claimed against the person for fraud
The grounds was that the person induced the subsidiary to purchase shares with misleading
information.
The purchased shares were later found to be worthless.
The parent company provided a shareholder loan to the subsidiary for the purchase of
shares.
Issue:
Whether the parent company could claim in this case.
LANDUNE INTERNATIONAL LTD v CHEUNG
CHUNG LEUNG [2006] 1 HKLRD 39
“What is important is that the Company's loss would be made good if the Subsidiary
recovers from the defendants. In the present case, the Subsidiary is actively pursuing
the defendants in the High Court action. Mr. Shum confirms that the Subsidiary remains
in the Company's control and that it has no other creditors. It follows that if the
Subsidiary recovers damages from the defendants, the Company could call in its
shareholder's loans and it would suffer no other loss. The rule against reflective loss
therefore clearly applies - in my view, with greater force in this case than in many others
because of the features that I have just discussed (cf Gardner v Parker [2004] 2 BCLC
554 at sub-paragraph 75). In the present case, it is plain that the Company has
suffered no personal loss separate or distinct from the Subsidiary's loss.” (para 30)
Common law remedies
Daniels v Daniels [1978] Ch 406

Fact:
The minority shareholders sued the two majority shareholders.
The two majority shareholders were also the directors.
The reason was that the company was ordered by the directors to sell a piece of land at
a very low price to one of the directors, who later sold the land for profit.

Issue:
Were the minority shareholders entitled to sue against the majority shareholders? Foss
v Harbottle applied?
Daniels v Daniels [1978] Ch 406

Held:
“The exceptions are four in number, and only one of which is of possible application in the
present case. The first exception is that a shareholder can sue in respect of some attack on
his individual rights as a shareholder; secondly, he can sue if the company, for example, is
purporting to do by ordinary resolution that which its own constitution requires to be done by
special resolution; thirdly, if the company has done or proposes to do something which is
ultra vires; and fourthly, if there is fraud and there is no other remedy. There must be a
minority who are prevented from remedying the fraud or taking any proceedings because of
the protection given to the fraudulent shareholders or directors by virtue of their majority.” (p.
408, TEMPLEMAN J.)
“The principle…… is that that a minority shareholder who has no other remedy may sue
where directors use their powers, intentionally or unintentionally, fraudulently or negligently,
in a manner which benefits themselves at the expense of the company.” (p.414, TEMPLEMAN
J.)
The four exceptions

1. Violation of individual rights of shareholder

Pender v Lushington (1877) LR 6 Ch D 70
In this case, AOA stated 10 shares = 1 vote
P passed shares to the others and voted for him
The director, L, banned the votes of the others
Held: L violated the individual right of P
The four exceptions

2. Required special resolution but only ordinary resolution is passed

3. The doctrine of ultra vires
Acting outside the capacity of the company
Unlawful conduct
4. Fraud
Re Hong Kong Sailing Federation
[2010] 1 HKLRD 801
Fact:
The Plaintiff, who was the member of the Federation, called for an extraordinary general
meeting.
The purpose of EGM was to discuss the resolutions about re-establishing a new committee
and to add it into AOA as a standing committee. (and also to reinstate the localization policy)
The defendant proposed a counter resolution, which was to end the matters that were raised
by the Plaintiff.
Before the EGM, a voting was conducted and majority of members voted against the
resolutions of the Plaintiff and supported the defendant’s resolution.
The plaintiff argued that there was a procedural irregularity and sough declarations that the
results were null and void.
Re Hong Kong Sailing Federation
[2010] 1 HKLRD 801
Judgment:
“In the present case, as I have found, the requisitionists had been given a reasonable
opportunity to present their arguments and objectives in moving the resolutions. There
was no infringement of any personal right in that regard. The wishes of the majority, as
reflected in the votes cast by poll paper, were very clear. Notwithstanding any irregularity
in the use of the poll paper, the majority could ratify the irregularity by an ordinary
resolution. In this situation, the irregularity principle should be applied. There would be
little point in declaring the resolutions invalid where "the ultimate end … is only that a
meeting has to be called, and then ultimately the majority gets its wishes" (MacDougall
v Gardiner at p.25, per Mellish LJ).” (Kwan JA para 50)
Remedies for Unfair Prejudice to
Members’ Interests
Section 724 of the Companies
Ordinance
(1)The Court may exercise the power under section 725(1)(a) and (2) if, on a petition by
a member of a company, it considers that—
(a)the company’s affairs are being or have been conducted in a manner unfairly
prejudicial to the interests of the members generally or of one or more members
(including the member); or
(b)an actual or proposed act or omission of the company (including one done or made
on behalf of the company) is or would be so prejudicial.
Section 725 of the Companies
Ordinance
(2)Without limiting subsection (1), the Court—
(a)may make any or all of the following orders—
(i)an order—
(A)restraining the continuance of the conduct of the company’s affairs in the manner
mentioned in section 724(1)(a) or (2)(a);
(B) restraining the doing of the act mentioned in section 724(1)(b) or (2)(b); or
(C)requiring the doing of an act that, as mentioned in section 724(1)(b) or (2)(b), the
company has omitted, or has proposed to omit, to do;
(ii)an order that proceedings that the Court thinks fit be brought in the company’s name
against any person, and on any terms, that the Court so orders;
Section 725 of the Companies
Ordinance
(iii)an order appointing a receiver or manager of either or both of the following—
(A)the company’s property, or any part of the property;
(B)the company’s business, or any part of the business;
(iv)any other order that the Court thinks fit, whether—
(A) for regulating the conduct of the company’s affairs in future;
(B) for the purchase of the shares of any member of the company by another member of the company;
(C)for the purchase of the shares of any member of the company by the company and the reduction
accordingly of the company’s capital; or
(D) for any other purpose; and
(b)may order the company or any other person to pay any damages, and any interest on those damages, that
the Court thinks fit to a member of the company whose interests have been unfairly prejudiced by the conduct
of the company’s affairs or by the act or omission.
Re Taiwa Land Investment Co Ltd
[1981] HKLR 297
Fact:
This is an action brought under s.168A (the predecessor of ss.724 and 725)
The petitioner was the director and minority shareholder. (31,500/105,000 shares)
Basic understanding: The company would be developed by borrowed money and out of its
accumulated income and not by the issue of new shares.
The basic understanding was breached and new shares were issued for further
development. (1,700,000 shares)
Issue: Unfairly prejudicial?
Held: The breach of basic understanding might be unfairly prejudicial. However, the minority
shareholder failed to prove the existence of the basic understanding.
Question: How can the basic understanding be established?
Re Taiwa Land Investment Co Ltd
[1981] HKLR 297
“There is no statutory guidance to the meaning of "unfairly prejudicial" in s.168A and so
the expression must be applied in its ordinary sense. The Shorter Oxford English
Dictionary tells us, if we need to look up the word "unfair", that it means "not fair or
equitable; unjust". "Prejudice" is defined as "injury, detriment, or damage, caused to a
person by judgment or action in which his rights are disregarded; hence, injury to a
person or thing likely to be the consequence of some action" and generally "injury,
damage or loss." The verb is defined thus: "to affect injuriously or unfavourably; to injure
or impair the validity of (a right, claim, statement etc.)." The definition given of
"prejudicial" is "causing prejudice; detrimental, damaging (to rights, interests etc.).”
[p.304]
TSENG YUEH LEE v METROBILT
ENTERPRISE LTD [1994] 2 HKC 684
Fact:
Irene owned 41% of Joint ventures shares
The company needed money and the board proposed to issue shares at face value.
As a result, Irene’s shares were diluted.
The company knew that Irene was not capable to buy the new shares.
Issue:
whether the issuance of new shares was unfairly prejudicial to Irene’s interest.
Re Texgar [2002] 1 HKLRD 687

Fact:
There were two shareholders in this case. They were also the directors of the company.
Shareholder A held 400,000 shares and Shareholder B held 600,000 shares.
The profits of the company were equally shared between the two shareholders.
Shareholder A sued against Shareholder B as Shareholder B directed business to other
companies that were set up by him under the same trade name. There was also an
misapplication of assets from the company to the companies of the Shareholder B.
Issue:
Whether the conduct of siphoning off business and misapplication of assets constitute
unfair prejudice.
RE YUNG KEE HOLDINGS LTD - [2015] 6
HKC 644
A minority shareholders (45%) and a majority shareholder (55%) were the only directors of a
BVI company.
This company had a restaurant in Hong Kong with some other properties.
Later, the son of majority shareholder joined the board of directors.
The minority shareholder pleaded unfair prejudice as the common understanding was to co-
run the business between the shareholders, but the minority shareholder was excluded from
the board.
Two issues:
1) whether there was a jurisdiction to claim relief under section 168A (Cap 32, Now 724 of
Cap 622)
2) whether there was a jurisdiction to wind up under section 327(3)(c) of Cap 32
Section 722 of the Companies
Ordinance
Section 722. Interpretation
(1) In this Part—
company(公司) includes a non-Hong Kong company.
(2) In this Part, a reference to a company’s articles, in the case of a company not having articles, is to
be read as the instrument constituting or defining the constitution of the company.
Section 2 Interpretation
non-Hong Kong company ( 非 香 港 公 司 ) means a company incorporated outside Hong Kong that—
(a)establishes a place of business in Hong Kong on or after the commencement date of Part 16; or
(b)has established a place of business in Hong Kong before that commencement date and continues to
have a place of business in Hong Kong at that commencement date;
RE YUNG KEE HOLDINGS LTD - [2015] 6
HKC 644
Place of business
"In our view 'place of business' connotes a place where or from which the company
either carries on or possibly intends to carry on business. While 'business' is not
confined to commercial transactions or transactions which create legal obligations,
there is no reason to suppose that it covers purely internal organisational changes in
the governance of the company itself. The notion that it does, seems to follow from a
belief that a company must have a place of business somewhere, but (leaving aside the
share transfer and registration office) there is nothing in fact or law which requires a
company which does not carry on business at all to have a place of business, and there
is nothing strange in finding that such a company has not established one anywhere.”
[para 13]
RE YUNG KEE HOLDINGS LTD - [2015] 6
HKC 644
Place of business
“We also accept the judge’s statement that the word 'establish' indicates that some
degree of regularity and permanence of location is required. The petitioner asserted
that the Company had established a place of business either on the 5th or 8th floor of
Yung Kee Building, but the evidence of this was exiguous in the extreme. There was no
evidence that the Company had or needed an office in the building or kept its books
and records there; it kept no accounts and its register of members was kept in the BVI
with a copy kept by the Company’s agent at its own office elsewhere in Hong Kong. The
Company did not keep a share transfer or share registration office in Hong Kong. It held
no board or general meetings prior to April 2009, and since then there were only 8
resolutions of the Company or its directors, which were all concerned with internal
matters such as the payment of dividends or changes to the composition of the board.”
[15]
RE YUNG KEE HOLDINGS LTD - [2015] 6
HKC 644
Section 327 Winding up of unregistered companies (Cap 32)
(1) Subject to the provisions of this Part, any unregistered company may be wound up under
this Ordinance, and all the provisions of this Ordinance with respect to winding up shall apply
to an unregistered company, with the exceptions and additions mentioned in this section.
(2) No unregistered company shall be wound up voluntarily under this Ordinance.
(3) The circumstances in which an unregistered company may be wound up are as follows—
(a)if the company is dissolved, or has ceased to carry on business, or is carrying on
business only for the purpose of winding up its affairs;
(b) if the company is unable to pay its debts;
(c) if the court is of opinion that it is just and equitable that the company should be wound
up.
RE YUNG KEE HOLDINGS LTD - [2015]
6 HKC 644
Section 326 Meaning of unregistered companies (Cap 32)
(1)For the purposes of this Part, unregistered company (非註冊公司) includes any partnership, whether
limited or not, any association and any company with the following exceptions— (Amended 3 of 1997 s.
48)
(a)a company registered under the Companies Ordinance 1865 (1 of 1865), or under the Companies
Ordinance 1911 (58 of 1911), or under the pre-amended Ordinance, or under the Companies
Ordinance (Cap. 622);
(b) a partnership, association or company which consists of less than 8 members and is not formed or
established outside Hong Kong; (Amended 23 of 1998 s. 2)
(c)a partnership registered in Hong Kong under the Limited Partnerships Ordinance (Cap. 37).
(Amended 6 of 1984 s. 259)
(2)For the avoidance of doubt, it is declared that in subsection (1), unregistered company includes a
registered non-Hong Kong company. (Replaced 30 of 2004 s. 2.)
RE YUNG KEE HOLDINGS LTD - [2015] 6
HKC 644
Connection
“The question in the present case is whether a foreign company, all of whose shareholders
and directors live in Hong Kong, and which is the ultimate holding company of a group of
indirectly held subsidiaries which carry on business in Hong Kong, has a sufficient
connection with Hong Kong to justify the Hong Kong court in exercising its jurisdiction to
wind it up at the suit of one of the shareholders. But the answer is the same as
in Waddington and for much the same reason. The shareholder who brings a petition to wind
up a company does so in order to realise his investment, and if the company is a holding
company then his purpose is to realise the value of its underlying assets, whether they
belong to its direct or indirect subsidiaries. Giving effect to the close connection between a
holding company and the assets of its direct and indirectly held subsidiaries does not entail
identifying the one with the other or treating the businesses and assets of the group as if
they belonged to the holding company. It merely reflects the nature of the dispute and the
purpose for which the proceedings are brought.” [38]
STATUTORY DERIVATIVE ACTIONS
STATUTORY DERIVATIVE ACTIONS

■ Targets ‘misconduct against company’

■ Leave of court required

The three requirements of SDA:

1) Prima facie in interest of the company
2) Serious question to be tried
3) Written notice served on company
Section 732 of the Companies
Ordinance
1)If misconduct is committed against a company, a member of the company or of an
associated company of the company may, with the leave of the Court granted under section
733, bring proceedings in respect of the misconduct before the court on behalf of the
company.
2)If, because of misconduct committed against the company, a company fails to bring
proceedings in respect of any matter, a member of the company or of an associated
company of the company may, with the leave of the Court granted under section 733, bring
proceedings in respect of the matter before the court on behalf of the company.
3)If, because of misconduct committed against the company, a company fails to diligently
continue, discontinue or defend proceedings, a member of the company or of an associated
company of the company may, with the leave of the Court granted under section 733,
intervene in the proceedings before the court for the purpose of continuing, discontinuing or
defending those proceedings on behalf of the company.
Re F&S Express Ltd [2005] 4 HKLRD 743

Fact:
3 shareholders in a company, each of them own 1/3 of shares
S1 claimed against S2 (also director) and S3 for failure to disclose interest over another
company, which is involved in a transaction of selling armoured trucks.
The price was claimed to be over-valued.
A notice was served to the company under section 168BD.

Issue:
whether statutory derivative action allowed in this case?
Re F&S Express Ltd [2005] 4 HKLRD
743
Prima facie in interest of the company
“Here, I am satisfied from the draft statement of claim and the complaints raised in the
letter of 30.September 2005, which had gone unanswered, there is disclosed an
arguable case and, on the face of it, it would be in the interests of the Company to
pursue the intended defendants to recover its loss and damage. It is not apparent that
the applicant can achieve recovery of the loss and damage of the Company without
court proceedings.” (para 19)
Re F&S Express Ltd [2005] 4 HKLRD
743
Serious question to be tried
“To ascertain if there is a serious question to be tried, the court "will not normally enter
into the merits of the proposed derivative action to any great degree", and the applicant
has "the same relatively low threshold to surmount as in the case of an application for
an interlocutory injunction" (Swansson v RA Pratt Properties Pty Ltd & Another (2002)
42 ACSR 313 at p.318 para.25). I hold that this requirement is also satisfied.” (para 21-
22)
Re Lucky Money Ltd [2006] HKEC 1379

Fact:
This is an application by minority shareholder under s.168BC for leave to intervene in
proceedings against company and to conduct defence on behalf of company.
A court case concerned a debt for $177 million to be paid by the Lucky Companies.
The Lucky companies did not defend the case.
A minority shareholder applied for a leave to defend the case.
Issue:
whether Statutory derivative action could be granted?
Re Li Chung Shing Tong (Holdings) Ltd
[2011] 5 HKC 531
Fact:
The "Po Chai Pills".
The company outsourced the production of the pill to a Guangdong factory.
Later the products were found to be contaminated and recalled by the Department of
Health
The minority shareholders sued against the director for breach of duty, loss and damage
to the company.
The minority shareholders also applied to appoint independent accountant to
investigate. A notice was served to the company under 168BD.
Re Li Chung Shing Tong (Holdings) Ltd
[2011] 5 HKC 531
Held:
“It seems to me that notwithstanding the commercial considerations in favour of
avoiding unnecessary litigation expenses and further damage to the Company’s
reputation, the fact remains that the case as advanced by the plaintiffs clearly discloses
serious questions to be tried. As I have already explained in my view the court should
not assume that because a serious question to be tried has been established it is in the
Company’s interest to pursue litigation, however, the stronger the case, the stronger
must be the presumption that it is prima facie in the interest of the company to pursue
the action. In the present case in my view there is strong case that one or other of the
putative defendants has breached a duty to the Company.” [45]
Re Luen Fat Paint Co Ltd [2010] HKEC 212

Fact:
Mother and son were the directors.
The son passed away and the other son became a new director.
The new director tried to sell a property of the company.
The shares of the deceased son were transferred to his family, and before the transfer
was completed, they commenced a SDA application and claimed that the sale of
property was underpriced. (is there an issue here?)
Eventually the transaction was cancelled, and there was no necessity to proceed the
case.
Issue: Who would pay the legal cost?
Re Luen Fat Paint Co Ltd [2010] HKEC 212

Good faith
"On the materials before this court, there is nothing to suggest that the Applicants were
not acting out of a legitimate concern for the good management of Luen Fat. As
explained below, they had a reasonable basis for asserting that the sale of the Shop was
conducted as a gross undervalue and this is supported by the report of the independent
surveyor appointed by the court. The purpose of the intended derivative action was to
protect the interest of Luen Fat. I find that the requirement of good faith was satisfied."
(para 29)
Re Luen Fat Paint Co Ltd [2010] HKEC 212

Reasonable ground
“Given my view as to the reasonableness of their concern about the sale and the report
of the independent surveyor, and the lack of reasonable response from those in control
of the management of Luen Fat to the letters from the solicitors for the widow and
daughters in early September regarding the sale, I hold that the Applicants did have
reasonable ground to lodge the Part IVAA application and continue with the same until
the settlement of the purchaser’s claim for return of deposit.“ (para 34)
Re Luen Fat Paint Co Ltd [2010] HKEC 212

Issue about making application before completion of transfer of shares

“It should be noted in neither case would there be any infringement of the principle that
a person who bring a derivative action must be a member of the company. In the
statutory context, Section 168BC(1) permits a member, with the leave of the court, to
bring proceedings on behalf of the company. So long as an applicant satisfied the court
that he or she has become member by the time when leave is granted, the derivative
action will be brought by a member.” (para 39)
Re Luen Fat Paint Co Ltd [2010] HKEC 212

Issue about who bear the cost

“The history of the matter shows clearly that Yung Lan and Lo Tak Lun were taking every
possible step to pre-empt the Applicants’ challenge to the sale. They did not offer any
explanation for the issue of the caveat by Luen Fat shortly after the signing of the
provisional agreement, the lack of response to the queries raised by the solicitors in
early September, the unreasonable refusal to register the Applicants as members
despite the limited grant. Instead, they instructed counsel to take an objection based on
locus and lack of damages suffered by Luen Fat. These submissions are rejected by this
court. I do not see any reason why they should not bear the costs consequence
personally.” (para 51)
Re My Way Ltd [2008] HKCU 629

Fact:
L was a 50% shareholder and director of the company
Company M operated online education systems for primary and secondary schools
Another company K approached the schools for the updates of websites
As a result, the company lost the clients
At the same time, another 50% director C, commenced a proceeding to wind up or buy out the shares.
L believed that C was the person behind company K. A litigation was commenced against C and
company K.
Issue:
Who should be responsible for the cost of the litigation?
Re My Way Ltd [2008] HKCU 629

About the cost

“Having regard to this, and having regard also to the fact that the Company does not
appear to have sufficient funds available to it to fund HCA 1924/2007 in its entirety, it
seems to me that it would not be appropriate at this stage to direct that the Company
should indemnify Mr Liu for all the costs that he might incur in pursuing the proceedings
on its behalf. Given the various permutations of the possible outcomes, both in relation
to liability and to the level of costs recoverable, I think that it would be preferable to
defer consideration of the question of whether, and if so, to what extent, the Company
should be required to indemnify Mr Liu in respect of any costs that he might incur until a
later stage in the proceedings, after the position on these matters has become clearer.”
(para 42)
Re Grand Field Group Holdings Ltd (CFI
2008) [2009] 3 HKC 81
Fact:
A couple established a company.
Listed in HK Stock Exchange and conducted property development through subsidiaries in Mainland China.
They held 22% of shares of the company.
The company was listed on the Hong Kong Stock Exchange and carried on, through its subsidiaries, property
development in Mainland China.
The couple resigned as director but remained as consultants.
The new director terminated the consultancy of the couple.
The coupled claimed that several transactions of the company may involve illegality.
Issue:
whether statutory derivative action allowed and who was liable for the cost?