Since the new Companies Ordinance (Cap 622) came into effect on March 3 2014, there have been a handful of cases concerning shareholders' use of Section 740 of the ordinance to obtain inspection of a company's records or documents. The recent Court of First Instance decision in Wei Xing v Willwin Development (Asia) Co Ltd is a reminder of the statutory right of qualifying shareholders to seek access to a company's records or documents for the purpose of protecting their financial interests as shareholders.(1) The case confirms the general principles arising in connection with the statutory provision. It also demonstrates a general willingness on the part of the courts in Hong Kong to assist with the protection of shareholders' interests while, at the same time, preventing so-called 'fishing' expeditions.
A shareholder's right to inspect a company's records or documents is codified in Section 740 of the ordinance (previously Section 152FA of the old Companies Ordinance, Cap 32). 'Records' is widely defined and includes company books, deeds, agreements, vouchers and receipts.
An order for inspection under Section 740 is subject to the court's discretion; however, the court must first be satisfied that the following two-limb test is met:
- Good faith – can the shareholder demonstrate that the application is made in good faith?
- Proper purpose – does the court consider that the circumstances are such that the inspection sought is for a proper purpose (eg, to protect an applicant's rights or legitimate interests as a shareholder (as opposed to as a director))?
Traditionally, the courts in Hong Kong have been astute in reining in applications that have been too wide (eg, documents that contain irrelevant personal data that an applicant sought for tactical purposes).
Willwin Development (Asia) Co Ltd engaged in the business of selling test systems and equipment for electronic and computer hardware products and providing related technical services. The company was owned by two brothers whose relationship appears to have soured sometime in 2011.
The application for inspection of the company's records was made by one of the brothers, who owned 30% of the shareholding. The other brother (the second defendant, besides the company) owned the remaining 70% shareholding.
The applicant sought inspection of the following categories of document:
- minutes and resolutions of shareholders' meetings for financial year 2012 and reports of directors and financial statements of the company for financial years 2013 to 2016;
- documents relating to certain subcontracting charges allegedly debited to the company by certain intra-group companies for financial year 2010-2011; and
- documents relating to a purported loan to a director of the company (ie, the second defendant) for financial year 2011-2012.
The court allowed the application. It was satisfied that the application was in good faith and the inspection was for a proper purpose.
While the defendants suggested that the applicant had delayed in bringing the application, the court observed that delay did not necessarily demonstrate a lack of good faith. Further, once the primary purpose of the application was determined to be proper, as regards the applicant's status as a shareholder, it was no bar to relief that the applicant might be motivated by a secondary purpose (eg, hostility between the parties).
The application succeeded in respect of the following categories of document and for the following reasons.
Minutes and resolutions of shareholders' meetings and financial statements of company
This category of document was not opposed by the defendants. It was not in dispute that a failure to provide these documents to the shareholders of the company might be a potential breach of the ordinance.
Documents relating to certain subcontracting charges
The purported subcontracting charges were not only significant sums, but had apparently been paid to intra-group companies in which the second defendant appeared to have substantial shareholdings. In circumstances where intra-group transactions might be allegedly used to manipulate a company's profit and loss, there was a risk that any improper charges would affect a shareholder's economic interests in the company. It was therefore a proper subject for a shareholder to scrutinise.
The applicant also made reference to certain judgments of the Chinese courts, where the second defendant had allegedly been found to have misappropriated substantial funds in one of the intra-group companies. While the court considered that these judgments were inadmissible in Hong Kong as evidence of fact, they were admissible to support the applicant's contention that the application was made in good faith and that inspection was sought for a proper purpose.
Documents relating to purported loan to director
The value of the loan itself, which was stated to represent more than half of the total revenue of the company, appeared to be substantial. Further, no information was available to the applicant concerning the reasons for the director's loan or its negotiated terms. The court considered that such documents would assist the shareholder in seeking clarity on these points.
The court granted inspection only of certain company records and documents sought by the applicant. A wider range of documents was originally included in the application. Not untypically, the court narrowed the request as there was no evidence to suggest that the other documents sought were necessary at this stage.(2)
The statutory right afforded to qualifying shareholders to inspect any company record or document can be a powerful tool, particularly in assisting with potential claims.
This recent decision is important in reaffirming some of the established principles relating to the application of Section 740 of the ordinance. For example, the courts are concerned with the primary purpose of the application and, once found to be proper, an ulterior secondary motive is usually irrelevant. Even if an applicant can show good faith and proper purpose, the court still retains a wide discretion to narrow the scope of the records or documents that can be inspected. Evidence of financial impropriety by a company's management or directors will generally assist shareholders in seeking access to company records or documents.
The company has not yet filed an appeal. For now, Section 740 (as with the preceding statutory provision) is attracting significant attention in Hong Kong. It is, in effect, being used to support aggrieved shareholders' attempts to enhance corporate governance for listed and private companies (albeit on a case-by-case basis).
For further information on this topic please contact Amy Chung or Jonathan Cary at RPC by telephone (+852 2216 7000) or email ([email protected] or [email protected]). The RPC website can be accessed at www.rpc.co.uk.
(1) HCMP 1922/2016, April 13 2017. The shareholder(s) must (for example) hold at least 2.5% of the voting rights of the company or the application must be made by at least five shareholders.
(2) Having found that the application was initially framed too widely, the court took this into account in its provisional order concerning costs as between the parties (paragraph 28 of the judgment).