Hong Kong

Pàdraig Walsh of Clyde & Co examines the developing law in relation to shareholder access to company records and sets out some pitfalls that in-house counsel should be cognizant of.

Using or abusing the new law?
In the recent case of Re Applied Development Holdings Limited, HCMP 1602/2010 [2011] HKEC 1164, the Court of First Instance of Hong Kong has for the first time made an order granting a qualifying shareholder the right to inspect company records pursuant to section 152FA of the Companies Ordinance. As the case law develops it is likely that the courts in Hong Kong will be concerned to ensure that the section is not abused by opportunistic shareholders; section 152FA is not meant to be some sort of freedom of information provision. That said, more resourceful shareholders and their lawyers are likely to test the ambit of the law, particularly in order to obtain company records to support litigation against the company. Irrespective of how the law develops, it is going to create further demands on already busy in-house lawyers.

Key statutory provisions
Section 152FA was incorporated into the Companies Ordinance by the Companies (Amendment) Ordinance 2004 that came into force on 15 July 2005.

Section 152FA allows the court to make an order authorising a qualifying shareholder or other authorised person to inspect the records of a “specified corporation”.

“Records” for this purpose has a wide meaning and includes company books, accounts, deeds, writings
and documents.
A qualifying shareholder is a shareholder who comes within section 152FA(2), the criteria for which are not particularly onerous.

A specified corporation includes Hong Kong and non-Hong Kong companies and, therefore, covers companies listed on the Hong Kong Stock Exchange (many of which are incorporated overseas).

Before triggering the court’s general discretion, an applicant has to show that the application is “in good faith” and the inspection sought is “for a proper purpose”.

Good faith is a subjective test; namely, does the shareholder believe that the purpose of the application is in good faith. Proper purpose is an objective test and is a purpose that arises out of the applicant’s status as a shareholder. The purpose should relate to a shareholder’s rights and their legitimate economic interests as a shareholder.

Facts of the case
Applied Development Holdings Limited (the company) is a listed company in Hong Kong and developed out of an electronics equipment manufacturing business founded by the plaintiff shareholder (the applicant) and her husband in 1975. The applicant is a former Chairwoman and director of the company having been removed from those posts. Having ceased to be a director of the company, the applicant was unable to exercise her statutory or common law rights as a director to access company documents.

The applicant became concerned about alleged misapplication of the company’s assets. As a result, she commenced court proceedings under section 152FA (the application) seeking inspection of a wide range of company records relating to alleged unauthorised bonuses, payments, donations and commissions to certain individuals or entities.

The decision
In the main, the court allowed the application. While the backdrop to the case was apparently a bitter and acrimonious divorce between the applicant and a director of the company, the court accepted that the applicant was acting in good faith and for a proper purpose. Any other motivations that the applicant might have had were secondary to a desire to investigate legitimate concerns about the alleged misapplication of company assets.

The range of documents to which a shareholder can obtain access to pursuant to section 152FA is potentially wide, particularly where the misapplication of company assets is alleged. Relevant documents could include: contracts, management accounts, journal entries and ledgers, bank statements, payroll records (suitably redacted to account for any personal data), employer returns (suitably redacted), board minutes, minutes of general meetings, correspondence with and reports from the company’s accountants.

Such a potentially wide range of company records straddle various departments within a company. The role of in-house lawyers (together with the company’s external lawyers) and of staff responsible for a company’s document retention policies will be crucial in responding to a section 152FA application.

The increasing importance of the role of in-house lawyers is nothing new and has been a prevailing theme for many large companies. Section 152FA applications should be seen in the same light; a new take on an established theme of increased regulation, litigation risk and shareholder activism. Those in-house lawyers and companies that have learned the lessons of the last ten or so years (“post-Enron”) regarding document management and retention will be better placed to respond to a shareholder’s request for company records.

The scope of section 152FA is wide enough to include documents of a subsidiary that have come into a company’s possession in order to comply with obligations arising under statute, delegated legislation or stock exchange rules or which by reason of managerial control over a subsidiary are effectively a company’s records. Many companies in Hong Kong operate through subsidiaries and overseas businesses but their documents do not necessarily become those of a parent company.

Companies with a group structure already have to consider the degree of control that they exercise over subsidiaries, particularly given the regulatory environment and the extra-territorial reach of legislation relating to bribery and foreign corrupt practices. One can foresee the potential for tension as parent companies seek to exercise a degree of control over group companies but in doing so take possession of ever more company documents.

Warren Ganesh, Senior Consultant at Clyde & Co contributed to this article.


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