Hong Kong: Can A Shareholder Sue On Behalf Of A Company?

Last Updated: 29 September 2008
Article by Ludwig Ng

As a general rule, shareholders cannot sue for wrongs done to their company or complain of irregularities in the conduct of its internal affairs. However, minority shareholders are allowed under limited circumstances to sue on behalf of the company by way of derivative action. This article provides an introduction to derivative action.

What is Derivative Action?

A company, having a separate legal entity from its members, can sue or be sued on its own behalf. It was established in the historic decision in Foss v Harbottle (1843) that if a wrong has been inflicted on a company, the proper plaintiff is the company itself. However, very often, the persons who commit the misfeasance are the persons who are in control of the company, who are unlikely to allow the company to sue. A common law right is therefore reserved for shareholders to sue the wrongdoers on behalf of the company by way of derivative action under limited circumstances. This provides an important remedy for minority shareholders.

Statutory Derivative Action

In 2004, Hong Kong enacted the Companies (Amendment) Ordinance to provide for a statutory derivative action ("SDA"). New sections 168BA to 168BI were added to the Companies Ordinance (Cap. 32) (the "Ordinance"), under which a member of a specified corporation (a Hong Kong incorporated company or a non-Hong Kong company) has a statutory right to bring proceedings on behalf of the specified corporation or to intervene in proceedings to which the specified corporation is a party if:-

(a) the cause of action or right to continue, discontinue or defend the proceedings is vested in the specified corporation and relief is sought on behalf of the specified corporation;

(b) the bringing of proceedings is in respect of misfeasance committed against the specified corporation (misfeasance is defined under section 168BB(2) to include fraud, negligence, default in compliance with any enactment or rule of law or breach of duty);

(c) the specified corporation fails to bring proceedings or diligently continue, discontinue or defend the proceedings; and

(d) leave is granted by the Court to bring or intervene in such proceedings.

Conditions for Granting Leave

A preliminary hearing will be held for a determination of the standing of the applicant and the member who intends to bring a derivative claim has to show why he/ she should be so allowed. The Court may grant leave if the following conditions are fulfilled:

(a) it appears to be prima facie in the interest of the specified corporation that leave be granted to the applicant;

(b) there is a serious question to be tried and the specified corporation has not itself brought the proceedings (if the application is for leave to bring proceedings);

(c) the specified corporation has not diligently continued, discontinued or defended those proceedings (if the application is for leave to intervene in proceedings);

(d) unless dispensed with by the Court, a 14 days' written notice has been served on the specified corporation.

Relatively Low Threshold in the Leave Requirements

It was decided in Re F & S Express Ltd [2005] 4 HKLRD 743 that where the Court has to be satisfied the proposed action would appear to be in the interest of the company, what is sufficient at the stage of granting leave is that "an arguable case be shown to subsist". In addition, in order 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.

Derivative Action under the Common Law

The SDA does not affect any common law right of a member of a specified corporation to bring a derivative action on behalf of the specified corporation under the common law. However, It should be noted that under section 168BC(5) of the Ordinance, the same member cannot commence or intervene in the proceedings if a common law derivative action has been commenced or intervened in respect of the same cause or matter.

Costs of Proceedings

Minority shareholders in derivative actions often face the problem of costs by taking the risk of being liable for his own and the defendant's costs in the event of failure. Section 168BI of the Ordinance allows the Court to make a cost order requiring the specified corporation to indemnify out of its assets against the costs incurred or to be incurred by the member in making the application for leave or in bringing or intervening in the proceedings ("Indemnity Order"). The Court may only make such an order if it is satisfied that the member was acting in good faith and had reasonable grounds.

It has been observed that the Court has been reluctant in making a pre-emptive Indemnity Order for the costs incurred in the action. Before the court can make such an order, there must be evidence as to the company's ability to pay the costs of the proposed derivative action as at the time that leave is sought. Hence in Re Lucky Money Ltd and Others (HCMP505/2006), S Kwan J declined to grant an Indemnity Order for the costs to be incurred in the derivative action, as it did not appear to the Court that the companies concerned were in a position to meet any payment as to costs. Pending final resolution of the action, the Applicant also had to bear the costs of engaging the independent person appointed by the Court. Further in Re MyWay Ltd [2008] 3 HKLRD 614, Barma J refused to grant an Indemnity Order for all the costs the Applicant may incur in pursuing a legal action on the company's behalf on similar grounds.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Ludwig Ng
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert
Email Address
Company Name
Password
Confirm Password
Mondaq Topics -- Select your Interests
Accounting and Audit
Anti-trust/Competition Law
Consumer Protection
Corporate/Commercial Law
Criminal Law
Employment and HR
Energy and Natural Resources
Environment
Family and Matrimonial
Finance and Banking
Food, Drugs, Healthcare, Life Sciences
Government, Public Sector
Immigration
Insolvency/Bankruptcy, Re-structuring
Insurance
Intellectual Property
International Law
Law Practice Management
Litigation, Mediation & Arbitration
Media, Telecoms, IT, Entertainment
Privacy
Real Estate and Construction
Strategy
Tax
Transport
Wealth Management
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.