Introduction

As noted in earlier updates this year,(1) Section 740 of the Companies Ordinance (and the equivalent provision under the previous legislation) can be a powerful tool in assisting shareholders to obtain inspection of a company's documents. The courts have generally shown a willingness to assist, particularly where a reasonable case of possible financial impropriety by management or directors has been made out. Since the last update two further cases – Fung Chuen v Sandmartin International Holdings Ltd(2) and Huinong Delta Investments Limited v CCCC Financial Ltd(3) – have emerged, demonstrating the continued use of Section 740 by shareholders to obtain inspection of corporate documents. While these cases demonstrate that the courts are generally willing to assist shareholders in appropriate cases, the courts will often rein in applications either by limiting the scope of the inspection or imposing conditions to the order granted.

Background

By way of recap, Section 740 of the ordinance (previously, Section 152FA of the previous Companies Ordinance, Cap 32) codifies a shareholder's right to inspect a company's records. 'Records' is widely defined and includes company books, deeds, agreements, vouchers and receipts.

Under Section 740, the courts may make an order authorising a person to inspect a record or document if satisfied that:

  • the application is made in good faith; and
  • the inspection is for a proper purpose.

Even where the courts are satisfied that this two-limb test has been met, they retain a wide discretion in determining whether to allow inspection and, if so, with respect to what range of documents.

Recent decisions

Fung Chuen v Sandmartin International Holdings Ltd

The applicant sought to inspect two categories of document relating to certain of the company's loans and investments overseas.

The applicant's case was that, based on the available evidence, there was a genuine and reasonable need to investigate these transactions because certain financial dealings were allegedly suspicious. Evidence had also apparently emerged that some of the alleged transactions might be connected party transactions.

The company opposed the application on the grounds of alleged bad faith, improper purpose and that the scope of the request was too wide, amounting to a "fishing expedition".

The court considered that the applicant had made out a reasonable case for investigating the transactions and had acted out of a genuine and legitimate concern to protect his interests as a shareholder of the company. While the court permitted inspection of the majority of requested documents, it disallowed inspection of documents provided to the company's auditors and valuers on the basis that this did not serve the applicant's intended purpose.

Huinong Delta Investments Ltd v CCCC Financial Ltd

The applicants were minority shareholders and sought an order to inspect seven categories of document, including board and shareholders' resolutions, books, accounts and vouchers of the company, alongside transaction documents allegedly relating to a director's decision to dispose of the company's shareholding in another valuable company.

The applicants' case was that, based on the available evidence, there was corporate wrongdoing within the company.

The company opposed the application – of interest is the suggestion that the documents requested would be used to injure the company in a material way or that the inspection would be detrimental to the interests of the company.

The court considered that the applicants were acting in good faith and that the inspection was for a proper purpose. While the court permitted inspection of the requested documents (except those that were not in the possession, custody or control of the company), it granted the order subject to a condition that documents obtained were not provided to third parties (save for professional advisers) until final judgment was given in other proceedings.

Comment

These recent cases confirm a general willingness on the part of the courts in Hong Kong to permit qualifying shareholders inspection of company documents where a reasonable case for an investigation into a company's dealings has been made out. Thus far, coming within the requirements of Section 740 has generally not proved too demanding.

That said, while Section 740 is a powerful tool, the courts do not permit unjustified wide-ranging shareholders' requests for inspection of company documents and they have shown themselves adept at limiting the scope of the requests or imposing certain conditions in order to allay specific concerns of the company. Section 740 is not a tool to investigate all the affairs of a company or to challenge how a company is managed day to day.

It is expected that cases concerning Section 740 will continue to flourish and shareholders will utilise such applications as a means of enhancing corporate governance and to protect their legitimate financial interests.(4)

This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.

For further information on this topic please contact Amy Chung or David Smyth at RPC by telephone (+852 2216 7000) or email (amy.chung@rpc.com.hk or david.smyth@rpc.com.hk). The RPC website can be accessed at www.rpc.co.uk.

Endnotes

(1) For further details please see "Shareholder access to company records and documents" and "Note to shareholders: avoid 'fishing'".

(2) HCMP 1044/2017, October 17 2017. At the time of writing, a decision on a summons for a stay of execution is due to be handed down on or around December 15 2017.

(3) HCMP 3194/2016, November 8 2017.

(4) It would be interesting to research how many applications are issued but settled before a substantive hearing.