Shareholder activist strategiesStrategies
What common strategies do activist shareholders use to pursue their objectives?
The common strategies adopted by activists may be divided into three non-mutually exclusive categories, namely, informal strategies, voting strategies and legal strategies.
Informal strategies comprise private engagement, public announcement, open letters or publications, and website campaign, with private engagement being the most common and preferred form. Preliminarily, activists will enter into a private dialogue and attend meetings with the company management to pursue their objectives and press for a change. Thereafter, activists may write to other shareholders detailing their proposals and persuade them to vote in favour of the proposals or resolution in private.
If private negotiations break down, activists may resort to public intervention. The activists may make a public announcement and publish an open letter stating their demands to draw the public’s attention and exert pressure on the controlling shareholders. H Partners Management LLC wrote a public letter to HKET seeking support from other shareholders to vote in favour of its proposal for distributing special dividends. The letter was published in various newspapers on 11 July 2011. Publications are also another tactic adopted by shareholder activists such as BlackRock. BlackRock published ‘Corporate governance and proxy voting guidelines for Hong Kong securities’ in January 2019, in which it details its engagement approach, its expectation of the company improving its corporate governance, and voting policies.
Shareholder activists will also institute website campaigns and publish their demands against the company, such as:
- David Webb’s demands against various listed corporations (https://webb-site.com/);
- Elliott’s demand against BEA (https://fairdealforbea.com/); and
- Argyle Asset’s open letters to CMB (https://unlockvaluecmb.com/author/brianlwh/).
Nevertheless, shareholder activists generally would not resort to website campaigns or public announcements unless there was sufficient evidence to substantiate a reasonably articulable suspicion.
Besides informal strategies, shareholder activists will also avail of the voting rights accorded to them under the Listing Rules and the Takeovers Code. For instance, Cheung Kong, a shareholder holding 38.87 per cent stake in Power Asset, proposed to merge with Power Asset. In this, 49.23 per cent of the independent minority shareholders exercised their veto right and successfully opposed the proposed merger.
If the activists do not receive a positive response after utilising the informal strategies, they may escalate their engagement activity and employ legal tactics, for instance, applying for an inspection order and an injunction order to exert pressure on the company and the management. Pursuant to section 740 of the Companies Ordinance, a shareholder holding at least 2.5 per cent of the voting rights at the general meeting or five shareholders collectively may apply to the court for an order inspecting any record or document of the company. The court shall satisfy itself that the inspection is for a proper purpose and in good faith before granting an inspection order. Nevertheless, an inspection order may be an essential but not effective legal strategy as shown in Elliott’s campaign against the private placement proposed by BEA. Elliott applied for an inspection order for documents relating to the private placement. Within one month of the application for an inspection order and before the grant of the order, the private placement was approved. Nevertheless, Elliott launched an action against the Bank of East Asia upon inspecting and obtaining the documents relating to the private placement. As at the time of writing, the litigation between Elliott and the Bank of East Asia is still ongoing.
An injunction order, as compared to an inspection order, would be a more effective and preferable legal tactic in the eyes of activists. Passport instituted a campaign against the private placement by eSun Holdings Ltd (eSun) and applied for an ex parte injunction order to prohibit eSun from proceeding with the private placement. The application succeeded and the proposed placement agreement was eventually terminated.
Besides interim legal measures, activists may also commence legal proceedings against the company, such as an unfair prejudice claim, shareholder derivative actions, and a winding-up petition. Interim measures aside, Passport and Elliott also filed an unfair prejudice claim with a view to terminating the placement agreement and releasing the shareholders from the obligation under the private placement agreement respectively.
Under section 724(1) of the Companies Ordinance, a shareholder of the company, including a non-Hong Kong company, may also bring an unfair prejudice action if 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 one or more members. Another basis for a shareholder to bring the action is an actual or proposed act or omission of the company that is or would be prejudicial.
According to Mr Justice Fuad in Re Taiwa Land Investment Co Ltd  HKLR297, ‘unfairly prejudicial’ means the conduct departing from accepted standards of fair play which amounts to unfair discrimination against the minority. The conduct complained of must be both unfair and prejudicial.
Examples of unfair prejudicial conduct include:
- breach of the Companies Ordinance (such as failure to obtain members’ approval for non-pro rata allotment of shares: Re a Co (No. 005134 of 1986), ex p Harries  BCLC 383);
- breach of the Listing Rules (for instance, the minority shareholders’ effort in blocking the resolution to amend the articles of association of a listed company when the provisions therein contravened the Listing Rules: Luck Continent Ltd v Cheng Chee Tock Theodore  4 HKLRD 181);
- breach of shareholders’ agreement (Re Bondwood Development Ltd  1 HKLR 200);
- breach of fiduciary duties (such as misappropriation of company assets: Re Tai Lap Investment Co Ltd  1 HKLRD 384); and
- long-term policy of not paying dividends or paying low dividends without commercial reasons (Choi Chi Wai v Cheng Ka Shing  HKEC 850).
The remedies for a successful unfair prejudice claim include:
- an order restraining the continuance of the unfair prejudicial conduct of the company (section 725(2)(a)(i) of the Companies Ordinance);
- an order regulating the conduct of the company’s affairs in future (section 725(2)(a)(iv)(A) of the Companies Ordinance);
- an order to purchase the shares of any member of the company by the company or another member of the company (sections 725(2)(a)(iv)(A) and 725(2)(a)(iv)(B) of the Companies Ordinance);
- an order to pay damages by the company or any other person (section 725(2)(b) of the Companies Ordinance);
- an appointment of receiver or manager (section 725(3) of the Companies Ordinance);
- an order for alteration of a company’s articles (Roberts v Walter Developments Pty Ltd (No.2) (1992) 10 ACLC 804); and
- any other orders the court thinks fit (section 725(2)(a)(iv)(D) of the Companies Ordinance).
Further, or in the alternative to an unfair prejudice claim, shareholders may also apply for a winding-up of a Hong Kong company on just and equitable grounds pursuant to section 177(1)(f) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Companies Ordinance (Winding up)). A winding-up order of foreign companies, including non-Hong Kong companies, on just and equitable grounds shall be sought under section 327(3)(c) of the Companies Ordinance (Winding Up). The Securities and Futures Commission (SFC) may also wind up a listed company under section 212 of the SFO to protect the company’s minority shareholders if it is in the public interest to do so, namely, the winding-up order is in line with the objectives and functions of the SFC as set out in sections 4 and 5 of the SFO. For instance, in Re China Metal Recycling (Holdings) Ltd  2 HKLRD 747, the respondent company, which had disseminated fraudulent information in its prospectus, was ordered to be wound up upon the SFC’s application in 2015.
Examples of just and equitable grounds include:
- mutual breakdown of trust and confidence (Re Yung Kee Holdings Ltd (2015) 18 HKCFAR 501, in which there is a breach of common understanding that two sons of the original controller of the company shall operate the company together); and
- frustration of the company’s objects (Re Mediavision Ltd  2 HKC 629, in which there is final and conclusive abandonment of the original business of the company).
Nevertheless, the winding-up application should not be made as a matter of course where there is also an unfair prejudice claim made by the shareholders (Re Sun Light Elastic Ltd  5 HKLRD 1). Shareholders must particularise why a winding-up order is an appropriate relief for the unfair prejudice claim.
The above case laws relating to unfair prejudice and winding-up on just and equitable grounds largely concern private limited companies. However, as a matter of general principle, they should be equally applicable to listed companies, the fact that a listed corporation may have a large number of shareholders involved and the fact that the corporation is also subject to the regulation of the HKEx may introduce a certain degree of uncertainty as to the extent to which these principles are applicable to listed corporations.
For instance, while a breach of the Companies Ordinance may be considered to be unfairly prejudicial conduct, a mere breach of the Listing Rules by a listed company would not automatically give rise to unfair prejudice (Re Astec (BSR) plc  2 BCLC 556). However, in the context of a listed company (as opposed to a private company), it was held that there was a common understanding among the shareholders that the company should maintain its listing status and, therefore, conduct jeopardising the listing status of the company could amount to unfair prejudice (Luck Continent Ltd v Cheng Chee Tock Theodore  4 HKLRD 181). Nonetheless, according to Re Blue Arrow Plc  3 BCC 618 (Ch), any breach of any informal understanding that is said to supplement a listed company’s articles of association is unlikely to be regarded as an unfair prejudice since the investing public is entitled to assume that the company’s articles are full and complete and there is no private agreement reached in relation to the articles.
Regardless of which strategies shareholder activists adopt, they will increase their stakes in the company simultaneously to exert further pressure on the investee companies. Should the campaign raised by the activists fail, they will usually sell their stake in the company to minimise loss.Processes and guidelines
What are the general processes and guidelines for shareholders’ proposals?
First, shareholders should identify the nature of their demand, namely whether they are demanding distribution of dividends, a change to board composition and governance structure, a change to the business model, or termination of a proposed transaction.
Second, shareholders should familiarise themselves with the requirements for convening a general meeting. Pursuant to section 566 of the Companies Ordinance, 5 per cent of the total voting rights of all members having a right to vote at general meetings could request the board of directors to hold a general meeting and that request could be made in hardcopy or electronic form. The content of the request shall specify the general nature of the business to be dealt with at the meeting and may include the text of a resolution intended to be moved at the meeting.
Directors must convene a general meeting within 21 days of receipt of the request and the meeting must take place within 28 days of the notice convening the meeting pursuant to section 567 of the Companies Ordinance. If the directors fail to do so, the members who requested the general meeting, or any of them representing more than half of the voting rights of all of them, may themselves convene a meeting at the company’s expense according to section 568(1) of the Companies Ordinance.
Annual general meetings (AGM) shall instead be convened by directors. In default, shareholders of the company may apply to the court for an order calling an AGM according to section 610(7) of the Companies Ordinance. Unlike extraordinary general meetings (EGM), there is no provision for a specified number of shareholders to requisition an AGM.
Third, notice of general meetings shall be sent by the company to its shareholders in hardcopy or electronic form. The length of notice for AGMs and EGMs are 21 clear days and 14 clear days respectively according to section 571 of the Companies Ordinance. Subject to the provisions in the articles of association, the length of notice is the same regardless of whether the resolutions to be passed in the AGM are ordinary or special.
If shareholders are unclear about the procedure to nominate a candidate for election as a director, they may refer to the procedures published by the subject Hong Kong-listed company on its website. The listed company will be in contravention of Rule 13.51D of the Listing Rule if it fails to do so.
Fourth, shareholders should satisfy the threshold required for passing their proposed resolution (namely ordinary resolution or special resolution), which is normally stated in the Companies Ordinance and the company’s articles. Each company is free to draft its own customised set of articles and set a different threshold for different resolutions. Assuming the investee company follows model articles of association for public companies limited by shares (the model articles), the following can only be resolved by a special resolution (namely a majority of at least 75 per cent):
- directions by the shareholders to take or refrain from doing certain acts (articles 3 and 4 of the model articles);
- reduction of share capital (section 226(1) of the Companies Ordinance); and
- alteration of object clause (section 89 of the Companies Ordinance).
On the contrary, some subjects can be resolved by an ordinary resolution (namely a majority of at least 50 per cent), such as the appointment of a director (article 23 of the model articles).
If the shareholders’ demands relate to distribution of dividends, regardless of interim or final, shareholders shall be bound by the maximum limit of the amount of dividends recommended by the directors according to article 91 of the model articles.
If the shareholders challenge certain transactions proposed by the company or the majority shareholders, they should identify whether the proposed transaction is subject to shareholders’ approval. Pursuant to the Listing Rules, certain transactions require approval from shareholders such as:
- connected transaction (Rules 14A.03 and 4A.36);
- major acquisition or disposal transaction (Rules 14.33(2); 14.40 and14.44);
- very substantial acquisition or disposal transaction (Rules 14.33(2), 14.44 and 14.49); and
- reverse takeovers (Rules 14.33(2),14.44 and 14.55).
Furthermore, certain transactions specifically required the approval of minority shareholders according to the Listing Rules, such as:
- right issues or open offers (Rules 7.19A(1) and 7.27A); and
- open offers (Rules 7.24A(1) and 7.27A).
According to Rules 2.15 and 14.33 of the Listing Rule, when a transaction or arrangement proposed by the listed company is subject to shareholders’ approval, shareholders having a material interest and close associates must abstain from voting.
May shareholders nominate directors for election to the board and use the company’s proxy or shareholder circular infrastructure, at the company’s expense, to do so?
Shareholders are entitled to nominate a candidate to stand for election as a director. Assuming the company adopts the model articles, shareholders may require a shareholder meeting to be convened or a resolution to appoint a director to be tabled at the meeting. If the director fails to convene a general meeting, a shareholder may do so at the company’s expense. Moreover, according to article 24(10) of the model articles, a shareholder shall send the company a notice of his or her intention to propose the person to be appointed as a director and that person shall also send the company a notice of his or her wish to be appointed at least seven days before the general meeting.
According to Rule 13.70 of the Listing Rules, if a notice is received from a shareholder’s proposal for nominating directors for election after the publication of the notice of meeting, the listed company shall publish an announcement or issue a supplementary circular, in which particulars of the proposed director shall be included.
Shareholders representing at least 2.5 per cent of the total voting rights or at least 50 members who have a right to vote at the general meetings are empowered to request for:
- circulation of the resolution proposed by them for the AGM at the company’s expense provided that such request is sent to the company not later than six weeks before the AGM or the time at which notice of that meeting is given (sections 615 and 616 of the Companies Ordinance); and
- circulation of statement relating to a matter mentioned in a proposed resolution and other business to be dealt with at the general meetings (sections 580 and 581 of the Companies Ordinance). The costs of circulation of the statement on extraordinary general meetings shall be governed by the company’s articles. In the absence of such provisions in the articles, the members who made the request for circulation shall bear the expenses (section 582 of the Companies Ordinance). On the contrary, the cost for the circulation of statement in relation to an AGM shall be borne by the company if the requests are received by the company in time so that the company could send a copy of the same together with the notice of the general meeting (section 582 of the Companies Ordinance).
If shareholders are unclear about the procedure to nominate a candidate for election as a director, they may refer to the procedures published by the subject Hong Kong-listed company on its website. Rule 13.51D of the Listing Rule obliges all listed companies to publish the procedures.
May shareholders call a special shareholders’ meeting? What are the requirements? May shareholders act by written consent in lieu of a meeting?
In Hong Kong, special general meeting of the shareholders is also known as an extraordinary general meeting or special shareholders’ meeting. Regarding Hong Kong incorporated companies, 5 per cent of the total voting rights of all the members having a right to vote at the general meeting have a statutory right to request an extraordinary general meeting according to section 566 of the Companies Ordinance.Litigation
What are the main types of litigation shareholders in your jurisdiction may initiate against corporations and directors? May shareholders bring derivative actions on behalf of the corporation or class actions on behalf of all shareholders? Are there methods of obtaining access to company information?
The main types of litigation shareholders may institute against corporations and directors are statutory derivative actions and claims for unfair prejudice.
In Hong Kong, shareholders have a statutory right to bring a derivative action for and on behalf of a Hong Kong company, a non-Hong Kong company and an associated company of the company, in respect of misconduct committed against the corporation according to sections 731 and 732 of the Companies Ordinance. It is, however, not appropriate for an individual shareholder to take a derivative action if he or she has a personal grievance against the company and if the wrong complained of was not done to the company.
Misconduct is defined as ‘fraud, negligence, breach of duty, or default in compliance with any Ordinance or rule of law’ under section 731 of the Companies Ordinance. In Hong Kong, the usual reasons for bringing a derivative action are:
- a fraudulent, oppressive or ultra vires act (Anglo-Eastern (1985) Ltd v Karl Knutz  1 HKLR 322,  3 HKC 80, CA);
- acts not authorised by the company’s articles (section 116(3) of the Companies Ordinance);
- a criminal act (Cockburn v Newbridge Sanitary Steam Laundry Co Ltd and Llewellyn  1 IR 237);
- the majority of the votes being controlled by wrongdoers (Smith v Croft (No 2)  Ch 114,  3 All ER 909); and
- a resolution not being passed by the required threshold (Baillie v Oriental Telephone and Electric Co Ltd  1 Ch 503).
Prior to bringing a statutory derivative action, shareholders should first obtain leave from court and the court will consider the following factors stated in section 733 of the Companies Ordinance before making a decision:
- whether the proposed action appears to be in the company’s interests;
- whether there is a serious question to be tried and the company has not itself brought the proceedings;
- whether the member has served written notice on the company 14 days prior to the application for leave; and
- whether the plaintiff has already commenced any common law derivative action on the same subject matter.
Shareholders also have a common law right to bring a multiple derivative action on behalf of the corporation in respect of the wrongdoer’s fraudulent act according to Waddington Limited v Chan Chun Hoo Thomas and others (2008) 11 HKCFAR 370. While the statutory derivative action does not displace the right to bring a common law derivative action, two derivatives actions are mutually exclusive. The statutory derivative action is more prevalent.
The possible defences to derivative actions are, first, that the nature of the subject act is not ‘misconduct’ for the purposes of section 732 of the Companies Ordinance. Second, the company may also raise the plaintiff’s conduct as a defence if that conduct would make it inequitable for it to bring such an action. Third, the company may also rebut the derivative action on the ground that it is acting properly within its powers.
The remedies in statutory derivative actions are set out in sections 737(1)(2) of the Companies Ordinance, which include:
- an interim order pending the determination of the derivative action;
- an order directing the company or its officer to provide or not to provide information, or to do or not to do any act; and
- an order appointing an independent person to conduct an investigation and report to the court.
Shareholders cannot commence class actions on behalf of all shareholders since there is no class action regime in Hong Kong at this juncture. Nevertheless, the SFC indicated in the Consultation Conclusions on the Principles of Responsible Ownership published in March 2016 that it will consider the introduction of class action rights in the future and when appropriate.
Shareholders can gain access to company information online free of charge. Rule 13.90 of the Listing Rule requires the listed companies to publish their announcements and their up-to-date by-laws on the Exchange’s website (http://www3.hkexnews.hk/listedco/listconews/advancedsearch/search_active_main.aspx) and its own website.
In addition to the online public information, shareholders holding at least 2.5 per cent of the voting rights at the general meeting or five shareholders collectively are entitled to apply to the court to inspect any record or document of the company pursuant to section 740 of the Companies Ordinance. Moreover, under section 631 of the Companies Ordinance, shareholders may make a request for inspection of the Register of Members free of charge and for inspection of any other register, index, agreement, minutes or other documents that a company is required to keep, such as a register of charges, upon the payment of HK$50 as an inspection fee.