Summary of Hong Kong Company Law Lecture 9 Derivative Action, Part A
Summary of "Hong Kong Company Law Lecture 9 Derivative Action, Part A"
This lecture continues the discussion on directors’ duties by focusing on the shareholder derivative action, which is the primary legal mechanism for enforcing directors’ duties in company law. The lecture covers the nature, challenges, and evolution of derivative actions in Hong Kong, comparing common law origins with statutory reforms.
Main Ideas and Concepts
- Context and Purpose of Derivative Action
- Directors’ duties are primarily enforced through shareholder derivative actions.
- derivative actions allow a single shareholder (minority member) to bring a lawsuit on behalf of the company against directors or others who have wronged the company.
- This is an exception to the majority rule principle in companies, which normally gives control to majority shareholders.
- Problem of Minority Control
- minority shareholders typically have limited power, but derivative actions empower them to initiate legal proceedings that can affect majority control and company management.
- This can lead to conflicts:
- minority shareholders with small stakes (e.g., 0.3%) could influence decisions affecting the majority (e.g., 85% shareholders).
- Minority control may distort company behavior and economic incentives, as small shareholders lack strong incentives to promote company success.
- Courts’ involvement in commercial decisions is problematic because judges lack business expertise and government interference in private affairs is undesirable.
- Risks and Abuse of derivative actions
- minority shareholders may misuse derivative actions for competitive advantage or to harass management.
- Disclosure of sensitive company information during litigation may aid competitors.
- The legal system uses filters to prevent abuse and only allow beneficial derivative actions.
- Historical Development
- Initially, derivative actions were rare and restricted under common law (19th century England).
- In Hong Kong, statutory reforms introduced in 2005 significantly increased the number of derivative actions by making the process more accessible.
- Hong Kong’s status as an international financial center emphasizes investor protection, making derivative actions more relevant.
- Legal Distinctions
- Personal action vs. Derivative action:
- Personal action: Shareholder sues for personal rights infringed.
- Derivative action: Shareholder sues on behalf of the company for wrongs done to the company.
- Reflective loss (loss in share value due to company damage) is not grounds for derivative action.
- The court’s focus is on protecting the company’s interests, not individual shareholders’ losses.
- Personal action vs. Derivative action:
- Key Case: Foss v Harbottle (mid-19th century)
- Established the principle that the company itself is the proper plaintiff in disputes.
- minority shareholders generally cannot sue for wrongs done to the company; only the board can act.
- Majority rule principle is maintained, allowing majority shareholders to ratify board actions, except in certain exceptions.
- Exceptions to Majority Rule and Derivative Action
- Several exceptions exist but are often limited or formalistic.
- Important exception: Fraud on the minority — when the board controlling the company acts fraudulently and will not correct its own misconduct.
- This exception justifies allowing minority shareholders to bring derivative actions.
- Lord Denning emphasized the practical need for derivative actions in cases where the wrongdoers control the company and cannot be expected to sue themselves.
Methodology / Key Points on Derivative Action
- Derivative Action Process:
- Shareholder identifies damage to the company caused by directors or controlling members.
- Shareholder seeks court permission to sue on behalf of the company.
- Court evaluates whether the action is justified (filters to prevent frivolous or abusive claims).
- If successful, court enforces remedies to protect the company and its members.
- Legal Filters / Limits:
- Action must be derivative, not personal.
- Reflective loss claims are excluded.
- Majority rule is respected unless exceptions apply.
- Fraud on the minority is the primary exception allowing derivative action.
- Statutory vs. Common Law derivative actions:
- Common law derivative actions are rarely used post-2003 in Hong Kong.
- Statutory derivative actions (introduced in 2005) are preferred due to clearer procedures and greater accessibility.
Speakers / Sources Featured
- Primary Lecturer: Unnamed professor delivering the lecture on Hong Kong Company Law.
- Historical Jurisprudence: Reference to Lord Denning (not a speaker, but cited authority).
- Key Case: Foss v Harbottle (historical case referenced).
- Hong Kong Companies Ordinance / Statutory Law: Referenced as legal framework for derivative actions post-2005.
Category
Educational