The protection of minority shareholders of a company in Hong Kong is ensured by certain safeguard mechanisms, provided by
- the Hong Kong Companies Ordinance (“CO”); and
- the Hong Kong Companies (Winding up and Miscellaneous Provisions) Ordinance (“CWuaMPO”).
The following article shall give a brief introduction to the safeguard measures:
- Special Resolutions
Minority shareholders are protected in all areas where a special resolution is required. A special resolution is a resolution that is passed by a majority of at least 75% of the shareholders who attend and vote (in person or by proxy - section 564(1) CO). It is required for important matters such as, but not limited to:
- Alteration of the articles of association, (section 88(2)(3) CO).
- Change of the company’s name (section 107(1) CO).
- Reduction of a company’s share capital (section 215(1) CO).
- An unlisted company buying back its shares (section 244(1)(2) CO).
- Pay out of a company’s capital in respect of the redemption or buy-back of shares (section 258(1) CO).
- Winding up of the company after a court order (section 177(1)(a) CWuaMPO).
- Voluntary winding up of the company (section 228(1)(b) CWuaMPO).
Certain formalities and timelines need to be observed when inviting to a general meeting of the shareholders at which a special resolution shall be passed, otherwise, the special resolution might be rendered invalid.
- Special Minority Rights
- If members of the company representing at least 5% of the total voting rights request to call a general meeting, the directors are obliged to call a general meeting within 21 days (sections 566(2), 567(1) CO) after having received the request. A meeting called upon the request of members must be held at a date not more than 28 days after the date of the notice convening the meeting has been given (section 567(2) CO). If the directors do not call the meeting in accordance with section 567 CO, the members who requested the meeting or any members representing more than 50% of the total voting rights may call a general meeting (section 568(1) CO) by themselves.
In the event that the company does not have any directors or if the directors are not capable to form a quorum, any two or more shareholders of the company representing at least 10% of the total voting rights of all the members who are entitled to vote at general meetings may call a general meeting themselves (section 569 CO).
- In the event of a successful takeover offer, the minority shareholders who did not accept the offer have the right to be bought out by the purchaser. The reasoning is that the purchaser has acquired or has unconditionally contracted to acquire the majority, but not all of the shares, and the minority shareholders did not accept the offer.
If the takeover offer does not relate to shares of different classes, the right to be bought out requires that, at any time before the end of the offer period, the offeror represents at least 90% of the company’s shares (section 700(1) CO).
If the offer relates to shares of different classes, the minority shareholders are entitled if, at any time before the end of the offer period, the shares in the company controlled by the offeror represent at least 90% of the shares of the respective class (section 700(2) CO).
A similar provision is made by section 718 CO for the case of a successful buy back. In case the repurchasing company has bought back, or agreed to buy back its shares, the holder of any shares to which the offer relates who has not accepted the offer before the end of that period may require that the company buys back its shares as well.
- Court Intervention
- An approval of the court is generally required where the decision of a company directly affects its creditors, such as
- a reduction of capital (sections 211 (b), 226 ff. CO); or
- the approval of a scheme of arrangement (section 673 (2) CO).
- In case of
- a reduction of the company’s share capital (section 220(1) CO); or
- a payment for a share redemption or buy-back of shares by the company out of the company’s capital (section 263(1) CO),
the dissenting members have the right to apply to the court to have a resolution cancelled, and the court might do so and set aside or amend the resolution as it thinks fit (sections 91(6)(a), 222(1), 265(1) CO).
- Apart from that, courts may order remedies following a petition of a member of a company if it considers that
- the affairs of the company are being or have been conducted in a manner that is unfairly prejudicial to the interest of the members in general or of one or more members (section 724(1)(a) CO); or an actual or proposed act or omission of the company is or would be prejudicial (section 724(1)(b) CO).
The court may make any order that it thinks fit (section 725(1)(a) CO). For example, the orders mentioned in section 725(2)(a) CO are:
- order restraining the continuance of the conduct;
- appointing a receiver or manager for the company’s property or business; or
- an order that obliges the company or any other person to pay any damages plus interest to a member of the company whose interests have been unfairly prejudiced (section 725(2)(b) CO).
The court may even alter the articles of association by an order as clarified by section 726 CO. However, the CO does not define what would constitute unfairly prejudicial conduct.
- In case that a responsible person of the company
- has engaged or is intending to engage in conduct that constituted, constitutes or would constitute a contravention of the Companies Ordinance (section 728(1)(a)(i) CO), or would be a breach of his fiduciary duties (section 728(1)(a)(iii)(4) CO); or
- has refused or is refusing to perform an act that the person is required by the Companies Ordinance to do (section 728(1)(b) CO),
the court may, on application of any member whose interests have been affected by the conduct or by the refusal or failure, grant an injunction (section 729(1)(a) CO), order the person to pay for damages (section 729(1)(b) CO) or declare any contract to be void or voidable (section 729(1)(c) CO).
- On application to the court by
- members that represent at least 2.5% of the voting rights of all the members who are entitled to vote at the company’s general meetings (section 740(6)(a) CO); or
- at least 5 members of the company (section 740(6)(b) CO),
the court may make an order to authorise a person to inspect any record or document of the company if it is satisfied that the application is made in good faith and the inspection is for a proper purpose (section 740(1)(2) CO).
The authorised person is not allowed to disclose the information obtained to a person who is not the applicant without the company’s prior written consent (section 741(2) CO), unless stated otherwise by section 741(3) CO (e.g. for the use in criminal proceedings, or any other requirement under the law).
- Finally members may bring proceedings on behalf of the company (derivative actions) if the company is engaged in misconduct. Misconduct is defined as fraud, negligence, breach of duty, or default in compliance with any Ordinance or rule of law.
The CO and CWuaMPO provide minority shareholders with a number of safeguarding mechanisms. Minority shareholders can, therefore, choose from a broad spectrum of mechanisms and derivative actions. They are well advised to familiarize themselves with these instruments so they are prepared to utilize them when needed.