Shareholders in Hong Kong
The Burden of Proof
Interestingly, Anthony Chan J in particular noted that “the alleged ulterior motive…very difficult to understand in the context of a public company. Anyone who wants to have more shares in C to enhance his voting right can buy from the market. By the same token, P can easily counteract the increase in shareholding…by acquiring more shares from the market.”
In other words, it may be very difficult to prove the existence of an ulterior motive where a listed company uses a share placement scheme to increase general voting power.
Under the common law, a plaintiff who seeks to bring a derivative action must establish a prima facie case that the company is entitled to the relief claimed and that the action falls within an applicable exception to what is known as the rule in Foss v Harbottle (namely that the majority shareholders should be able to bind a company) where there is a fraud on the minority.
The Court also explained that in addition to fraud on minority, a plaintiff has to plead and show that the wrongdoers are themselves in control of the company such as to enable them to stifle any proposed action against themselves.
Counsel for D1-D6 argued that “control by the wrongdoer” must embrace control of the majority shareholding as well as the board of directors, on the basis that without the former, the control of the board could be changed. The Court disagreed stating that, for example, in the case of a public company, it is possible to control the outcome of a shareholder’s meeting without controlling the majority shareholding because of lack of attendance by some of the shareholders.
The Court did not agree that there was any fraud on the minority here, on the basis that the substance of P’s case was of negligence on the part of D1-D6. There was no evidence which suggested that the defendants has profited from the alleged negligent act particularly that C was in need of funds to continue its business operations. The Court accordingly dismissed the application as there was not sufficient evidence to suggest that a derivative action was appropriate in the circumstances.
Publication Date: 8th January 2014
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