This week, the Court of First Instance handed down its decision in the first application under s.152FA of the Companies Ordinance (the "Ordinance") in Wong Kar Gee Mimi v Hung Kin Sang Raymond and Applied Development Holdings Limited (HCMP 1602/2010). This was an application by a shareholder to inspect the records of a listed company. Hogan Lovells acted for the applicant.
Section152FA was incorporated into the Ordinance through the Companies (Amendment) Ordinance 2004 and came into effect in July 2005. It essentially codifies and expands upon the common law right of a company's members to examine the company's records. The provision affords qualifying shareholders a statutory right of access to corporate information in order to protect their economic interests in the company.
Section 152FA provides that the court may make an order authorizing the applicant (or another on the applicant's behalf) to inspect any records of the specified corporation (s.152FA(1)). The court may only make an order under s.152FA(1) if the court is satisfied that (a) the application is made in good faith and (b) the inspection applied for is for a proper purpose (s.152FA(3)).
The court found in the applicant's favour and ordered production of some of the categories of documents sought. In coming to its decision the court considered the following questions of construction:
Do "good faith" and "proper purpose" constitute a single requirement?
The first question considered by the court was whether "good faith" and "proper purpose" created one single requirement. On this point, the court considered and rejected the Australian approach that the two requirements expressed a "composite notion"1. The court preferred the approach taken in the recent unreported case of Lehman & Co Management Limited v Effiscient Limited (HCCW 377/2010), that "good faith" and "proper purpose" required two separate and independent tests. "Good faith" requires a subjective test of whether the applicant believes his purpose in applying for an inspection order is proper. "Proper purpose" requires an objective test of whether the court believes the circumstances are such that the inspection is applied for a proper purpose.
What constitutes a "proper purpose"?
In considering what constitutes a "proper purpose", the court noted that a member's right to inspection of company documents flows from his proprietary interest in the company and that therefore, a purpose would be proper if it is relevant to the applicant's status as a stockholder or reasonably related to the interest of a member or stockholder. Diverging from the view expressed in Lehman & Co Management Limited v Effiscient Limited, the court held that a "proper purpose" should not be confined only to circumstances where the applicant has a specific or personal right which can only be protected through the inspection of company records. It was considered that a "proper purpose" may also be established where an applicant has a credible belief that there has been corporate mismanagement which adversely affects the company or where the member seeks to ascertain the fair market value of his shareholding.
However, the court noted that s.152FA is not without limits and that a balance needs to be struck in order to prevent encroachment on managerial decisions by members of the company or the opening of floodgates to frivolous applications by disgruntled shareholders. The court has the discretion whether to make an inspection order or not, and should ultimately consider whether there is a sufficient prospect of anything useful resulting from the grant of such an order. An inspection order should not be used as a fishing expedition and an applicant would need to establish a reasonable case for investigation. In addition, the burden of proof of establishing good faith and proper purpose rests entirely with the applicant.
Do company records include records of the company's subsidiaries?
Section 152FA permits inspection of any "records of the specified corporation". The question arose as to whether and to what extent the member of the company was entitled to inspect records of the company's subsidiaries.
The court held that under s.152FA documents which the subsidiary had provided to the company (whether to enable the company to comply with its obligations arising under statute, delegated legislation, Stock Exchange Rules or for other commercial reasons) constitute records of the company for the purposes of the section. However, s.152FA does not cover a subsidiary's documents if the parent company does not have a copy or is not obliged and able to obtain a copy from the subsidiary at the time the order is made.
Section 152FA affords shareholders a potentially powerful right to obtain access to a company's documents. The decision, however, highlights an important limitation of s.152FA in that it does not permit the member a right to inspect documents of subsidiaries that have not otherwise become records of the holding company. In view of the fact that most listed companies in Hong Kong operate their business through subsidiaries, the effectiveness of the section may be limited.