he application of section 168A of the Companies Ordinance (Cap. 32) (which is now replaced by Part 14 Division 2 of the new Companies Ordinance (Cap. 622) which came into force in early March 2014) is generally perceived to be an alternative remedy to winding up granted by the Court to minority shareholders who complain that the affairs of the company have been conducted in a manner unfairly prejudicial to their interests.

However, the decision of the Court of Appeal in Luck Continent Ltd v Cheng Chee Tock Theodore & Ors [2013] 5 HKC 442, demonstrates that this relief can not only be pursued by minority shareholders, but can also be open to majority shareholders as well. The Court of Appeal confirmed in this case that:-

"Section 168A itself has not limited its application to minority shareholder or small companies. Whether it is adaptable to deal with unfairness in large listed companies is one of the contentious issues in this appeal. In principle, the question should hinge on whether unfairness can be established as opposed to whether the company is a small company or a large listed company."

Background

In Luck Continent, the largest shareholder (holding 46.58% shareholding) of a Bermudan company listed on the Hong Kong Stock Exchange brought an unfair prejudice petition under section 168A of the Companies Ordinance against the minority shareholders and the Company on the basis that the minority shareholders' voting to defeat motions to amend a Bye-law of the Company (which conflicted with its Listing Rules) had resulted in the suspension of trading of the Company by the Stock Exchange. Mr. Justice Barma (as he then was) ruled in the Court of First Instance that there was unfair prejudice in the respondent shareholders voting to defeat the motions to amend the Bye-law in the Articles of Association of the Company and ordered that the Bye-law be amended. The respondent shareholders appealed the decision on the following grounds:-

  1. the basis on which the judge found unfair prejudice was different from the case pleaded in the petition and that the petitioner was required to plead the precise formulation of its case of unfair prejudice;
  2. the defeat of the motions to amend the Bye-law was not conduct of the affairs of the Company but a private matter to which the Company was only a "nominal party"; and
  3. the motions to amend the Bye-law could not be regarded as unfairly prejudicial conduct.

Ruling

The Court of Appeal dismissed the respondent shareholders' appeal and upheld the decision of Mr. Justice Barma in the lower Court.

In relation to the first two grounds of appeal, the Court of Appeal made the following points:-

  1. The Court of Appeal criticised the respondent shareholders' first ground of appeal and stated that the authorities did not decide that allegations in the petition had to contain the precise legal formulation or characterisation of the forensic analysis relied upon. The Court of Appeal ruled that once the factual allegations were pleaded and established (i.e. breach of the listing rules and suspension of trading caused by the blocking of the amendment to the Bye-law), it was a question of law whether they were sufficient to support a case for relief under section 168A.
  2. b. The Court of Appeal dismissed the respondent shareholders' second ground of appeal and ruled that the Company was not merely a nominal party to the statutory contract embodied in the Articles of Association: it was bound by such provisions as much as the shareholders, and in the event there was a contravention of an article, the Company was bound to take heed of it.

Unfair Prejudice

In relation to the final ground of appeal advanced by the respondent shareholders, the Court of Appeal made the following points:-

  1. Following the case in Re Astec (BSR) plc [1998] 2 BCLC 556, the Court of Appeal decided that although a mere breach of the Listing Rules by a public company could not automatically give rise to unfair prejudice, such a breach was a relevant circumstance to be taken into account, especially when it led to the suspension of trading of shares and the real complaint was about the failure to take remedial steps to procure the resumption of trading.
  2. The Court of Appeal referred to the test of unfairness set out in theNew Zealand case, Latimer Holdings Ltd v SEA Holdings NZ Ltd[2005] 2 NZLR 328:-

"For unfairness in this broad sense to be grounded, there must be a 'visible departure' from the standards of fair dealing, 'viewed in the light of the history and structure of the particular company, and the reasonable expectations of its members'."

  1. The Court of Appeal ruled that it was a common understanding of all the shareholders when they acquired the shares in the Company that the Company should maintain its listing status. The blocking of the amendment of the Bye-law would prevent the resumption of trading of shares and jeopardise the listing status of the Company. Accordingly, the Court of Appeal saw no difficulty in holding that the blocking of the amendment of the Bye-law was in breach of a fundamental understanding between the shareholders and this gave rise to grounds for equitable intervention by the court, ruling that Mr. Justice Barma was correct in finding that there was unfair prejudice in the present case.

The respondent shareholders have sought to appeal the decision of the Court of Appeal and were granted leave to appeal to the Court of Final Appeal on 27 January 2014. It will interesting to see what the Court of Final Appeal's decision will be and whether further light can be shed on the Court's application of section 168A of the Companies Ordinance.