Pre-litigation tools and procedure in M&A litigation

Shareholder vote

What impact does a shareholder vote have on M&A litigation in your jurisdiction?

Under the Companies Ordinance, a special resolution (a resolution that is passed by a majority of at least 75 per cent of the shareholders who attend and vote, in person or by proxy, (section 564(1)) is required for important matters such as, but not limited to:

  • alteration of the articles of association (section 88(2)(3)of the Companies Ordinance);
  • change of the company’s name (section 107(1)of the Companies Ordinance);
  • reduction of a company’s share capital (section 215(1)of the Companies Ordinance);
  • an unlisted company buying back its shares (section 244(1)(2) of the Companies Ordinance); and
  • pay out of a company’s capital in respect of the redemption or buy-back of shares (section 258(1)of the Companies Ordinance).

Furthermore, under section 473 of the Companies Ordinance, shareholders may vote to ratify conduct by a director involving negligence, default, breach of duty or breach of trust in relation to the company.

However, pursuant to section 734 of the Companies Ordinance, this does not prevent a shareholder bringing a derivative action in relation to the ratified conduct, and when considering the derivative action, the court will take into account:

  • whether the members were acting for proper purposes, having regard to the company’s interests, when they approved or ratified the conduct;
  • to what extent those members were connected with the conduct when they approved or ratified the conduct; and
  • how well informed about the conduct those members were when they decided whether to approve or ratify the conduct.
Insurance

What role does directors’ and officers’ insurance play in shareholder litigation arising from M&A transactions?

Under section 468(4) of the Companies Ordinance, a company is permitted to take out insurance for its directors for:

  • any liability to any person attaching to the director in connection with any negligence, default, breach of duty or breach of trust (except for fraud) in relation to the company or associated company (as the case may be); or
  • any liability incurred by the director in defending any proceedings (whether civil or criminal) taken against the director for any negligence, default, breach of duty or breach of trust (including fraud) in relation to the company or associated company (as the case may be).
Burden of proof

Who has the burden of proof in an M&A litigation - the shareholders or the board members and officers? Does the burden ever shift?

It depends on who brings the litigation and what remedy is sought. If directors commence the litigation on behalf of the company, the directors have the burden to prove the company’s claim. If the shareholders bring a derivative action on behalf of the company or bring a claim for infringement of their personal rights, the shareholders have the burden of proof.

Pre-litigation tools

Are there pre-litigation tools that enable shareholders to investigate potential claims against board members or executives?

Yes. For example, under section 740 of the Companies Ordinance, upon application to the court by members representing at least 2.5 per cent of the voting rights of all the members who are entitled to vote at the company’s general meeting or at least five members of the company, the court may make an order to authorise a person to inspect any record or document of the company if the court satisfies that the application is made in good faith and the inspection is for a proper purpose.

However, according to section 741 of the Companies Ordinance, the authorised person is not allowed to disclose the information obtained to anyone that is not the applicant, without the company’s prior written consent, unless stated otherwise by section 741 (3) of the Companies Ordinance (eg, for the purpose of criminal proceedings or for any other requirement under the law).

Under section 41 of the High Court Ordinance and Order 24, Rule 7A of the Rules of the High Court, a shareholder may apply for a pre-action disclosure order against board members or executives of the company, if the shareholder can prove that: (i) the shareholder is likely to be a party to subsequent proceedings; (ii) the person against whom the order is sought is likely to be a party to subsequent proceedings; and (iii) such person is likely to have or to have had in his or her possession, custody or power any relevant documents.

Forum

Are there jurisdictional or other rules limiting where shareholders can bring M&A litigation?

No.

Expedited proceedings and discovery

Does your jurisdiction permit expedited proceedings and discovery in M&A litigation? What are the most common discovery issues that arise?

A court may expedite proceedings to resolve certain issues quickly, and particularly in the context where an injunction is granted to delay closing, in the same way as it would with any type of civil claim.

Common discovery issues arise in relation to access to the transactional documents and due diligence as to the parties to the transactions and relevant third parties.