In brief
Whilst the Court is, in general, slow to interfere with the internal management of a company, it is empowered to grant the appropriate remedies in certain circumstances including declaratory and injunctive reliefs under the common law and the Companies Ordinance (CO). A recent case has demonstrated that the Court is not hesitant to exercise such power in order to safeguard shareholders’ rights and scrutinize directors’ conduct.
In this case, the Court held that the decisions made by the defendant directors’ (“Defendant Directors“) of a listed company in Hong Kong (“Listco“) to postpone an extraordinary general meeting (EGM) for considering certain proposed resolutions including to reconstitute the board (i.e., removing and appointing directors) were voidable as they were made for improper purposes and in breach of fiduciary duties.
Key Takeaways
- The Court reaffirmed the well-established principles that the powers conferred by the Articles of Association on the directors are fiduciary powers and must be exercised for proper purposes, and that such powers cannot be exercised for self-interest. Directors also owe the company the fiduciary duties of utmost good faith and to act in the best interests of the company.
- If a director makes a decision for improper purposes, and in breach of fiduciary duties, the registered shareholders may seek an order that the decision be voidable and obtain the injunctive reliefs under sections 728 to 730 of the CO in order to preserve their rights.
- In appropriate cases, a director in breach of fiduciary duties would be ordered to bear the costs of the plaintiff shareholders, and the directors would not be able to use the company’s resources to fund their defence. It is therefore important for the directors to be vigilant on every decision-making to ensure that they have complied with their fiduciary duties owed to the company.
In more detail
In this recent case, a group of shareholders (“Requisitionists“), including the Plaintiff, who were dissatisfied with the management and corporate governance of the Listco lodged a requisition pursuant to the Articles of Association (“Articles“) for an EGM for the shareholders to consider certain proposed resolutions to, inter alia, reconstitute the board of directors (i.e., remove the then existing directors and appoint new directors).
Although the Listco issued a circular to convene the EGM in accordance with the Articles, the board of directors subsequently made several decisions to postpone the EGM and eventually postponed it sine die (i.e., indefinitely) (“Board’s Decisions“). The Defendant Directors alleged that the Listco had to investigate into the source of funds of the Requisitionists and hence, the legality of the Requisitionists’ shareholdings. According to the relevant announcement made by the Listco, there were allegedly grounds to suggest that the Requisitionists (who were believed to be residents of Mainland China) might have violated the foreign exchange control regulations in Mainland China (which were denied). As a result, the Defendant Directors postponed the EGM indefinitely pending the investigation.
In response, the Plaintiff commenced legal proceedings by way of an Originating Summons against the Defendant Directors and sought, inter alia, (i) a declaration that the Board’s Decisions were made for improper purposes and/or in breach of fiduciary duties; (ii) a mandatory injunction requiring the Defendant Directors and the Listco to resume the EGM within 14 days; and (iii) a prohibitory injunction restraining the Defendant Directors and the Listco from delaying, adjourning or otherwise interfering with the EGM.
At the first hearing, the Court granted an expedited timetable for the substantive hearing of the Originating Summons upon the undertaking from the 13 out of the 14 Defendants Directors (with one Defendant Director not opposing the application) that (i) they will bear their own costs in opposing the Originating Summons and will bear any adverse costs which the Court may order against them in the event that they fail in their defence; and (ii) they will not proceed with the proposed corporate action which has the effect of diluting the Plaintiff’s shareholding pending the determination of the Originating Summons.
Subsequent to the first hearing, the other eight out of the 14 Defendant Directors confirmed not to oppose the proceedings, with the remaining five Defendant Directors continued to oppose.
Given the expedited timetable, the Originating Summons was heard and determined within two months.
In considering the Plaintiff’s application, the Court reaffirmed that the powers conferred by the Articles on the directors are fiduciary powers which must be exercised for proper purposes and cannot be exercised for self-interest. Directors also owe the company the fiduciary duties of utmost good faith, and to act in the best interests of the company.
In this case, the Court held that the Board’s Decisions were made for improper purposes and in breach of fiduciary duties for the following reasons:
- The alleged violation of foreign exchange control regulations was wholly irrelevant, as according to the PRC legal opinion, the proper governing law on the legal effect of acquisition of shares and ownership of shares is the governing law of the contract, which is Hong Kong law. Under Hong Kong law, this is not a reason affecting the entitlement to the relevant shares.
- The Board’s Decisions were made for the improper purposes of entrenching their position in the Listco and depriving the shareholders of the opportunity to consider and pass the proposed resolutions to remove the then existing directors and appoint new directors in their place. Hence, the Board’s Decisions were voidable.
- The Plaintiff acquired the subject shares eight years ago. The shareholding has been recognized and disclosed in the Listco’s announcements and annual reports. In other words, the status of the Plaintiff as a shareholder for the past eight years had never been challenged until she issued the requisition notice.
- Further, the Board’s Decisions were in breach of the Articles and also prejudiced the Plaintiff’s interests as a member to legitimately request for an EGM.
- Based on the above, the Court granted the declarations and injunctions as sought.
Taking into account the circumstances and interests of the Listco, the Court further ordered that the Defendant Directors should be personally liable for the costs of the Plaintiff, and that they are not entitled to recover from the Listco any costs incurred or to be paid by them.
