SHAREHOLDERS' RIGHTS (PART II)-THE NEW STATUTORY REGIME FOR DERIVATIVE ACTIONS

This is a new creation of the Companies (Amendment) Ordinance 2004 which came into effect on 15 July 2005.

The New Companies Ordinance provides that shareholders of certain corporation or its related company have the right to apply to the Court to bring proceedings on behalf of the company in respect of "misfeasance" committed against the company.

These new provisions are only available to members of specified corporation.  "Members" mean present members (but excluding former members) of the Company, (Section 168BC of the Companies Ordinance).  "Specified corporation" has been broadly defined to include both Hong Kong and non-Hong Kong companies for the purposes of statutory derivative action (Sections 2(1) of the Companies Ordinance).  "Misfeasance" is defined by the ordinance as fraud, negligence, default in compliance with any legislation or breach of duty.

Scope of the new provisions

The scope of the statutory derivative action is much widen than the common law derivative action as mentioned in Part I of this article.  This is an attempt to overcome the obscurity and complexity of the common law model, for example :-

1. For statutory derivative action, there is no requirement to prove "fraud and control".
2. The mere allegation of negligence by the directors is now sufficient.  There is no requirement to allege bad faith and benefits to the directors.

"Statutory Leave" Requirement

Under the new provisions, the Court may, on the application of a member of a specified corporation or its related company, allow statutory derivative action if it is satisfied that :-

1. It appears to be prima facie in the interests of the specified corporation to allow to a statutory derivative action.  This criteria is said to be satisfied if the member can show that there is "an arguable case"[1].
2. As a further precondition to allow statutory derivation action, the alleged misconduct must be the product of a serious question to be tried and the company has not itself brought the proceedings.  The Court[2] has held that the serious question to be tried criterion "has a relatively low threshold" and this could be satisfied by establishing that there is "an arguable case".
3. The company has not diligently continued, discontinued or defended those proceedings (if the application is for leave to intervene in the proceedings).  Again the Court seems to hold that a very low threshold to this requirement.
4. The shareholder has to serve a 14 days' written notice on the company setting out his intention to apply to the Court and the reasons for his intention to apply for permission to commence statutory derivative action.

Albert Lam

March 2013