High Court upholds shareholders' rights to requisition company EGM

The Hong Kong High Court has rejected an attempt by the board of a company to prevent an extraordinary general meeting requisitioned by disgruntled shareholders seeking to replace a number of board members.

In China Investment Fund Company Ltd v Guang Sheng Investment Group Ltd and Ors, the High Court refused the application by China Investment Fund Company Ltd (CIF) for injunctive relief and found no basis to prevent the democratic processes of the company from taking their course. The full text of the decision can be found here.

This decision serves as a useful reminder that courts will generally not intervene to prevent shareholders from freely exercising their rights. The only circumstances in which the courts will intervene are in instances of fraud, minority oppression or extreme irrationality.

Facts

Prior to the requisitioning of CIF's board, a series of events transpired relating to the alleged misappropriation of a bill of exchange belonging to the company.

The bill of exchange, with a face value of RMB 30 million (and an expected value of RMB 25.5 million at maturity) was purchased by a subsidiary of CIF for around RMB 24 million.  Mr Yao Yuan, a director of CIF, recommended the investment and acted as intermediary on the sale.  In October 2015, CIF sought to make an early redemption of the bill. Acting on arrangements made by Mr Yao, the company secretary exchanged the bill for three bills of exchange each with a face value of RMB 10 million, with the same drawer, bank and beneficiary.  Several members of CIF's board then became concerned about the authenticity of the replacement bills.  Upon confronting Mr Yuan, he confessed to taking the money obtained from the original RMB 30 million bill.  On 16 December 2015, the board of CIF reported the incident to the police, suspended Mr Yuan and two directors related to him, and commenced an internal investigation.

As a result of these events, the defendants, a group of CIF shareholders, requisitioned the board to call an extraordinary general meeting (EGM) for the purposes of considering 12 ordinary resolutions that collectively would:

1. remove three executive directors;
2. remove all four non-executive directors;
3. remove all directors that had been appointed between the date of the requisition and the EGM; and
4. appoint replacement executive and non-executive directors.

Thereafter, CIF brought an action seeking a declaration that none of the proposed resolutions were valid or could be moved at any general meeting, and took out a summons for an interlocutory injunction to prevent the EGM and the resolutions from being moved.

Decision

The Court refused the application for an interim injunction, as it was not satisfied that CIF had sufficiently good prospects of success in its action.

As a starting point, the Court noted that, the injunction would effectively dispose of the entire action. If an injunction were granted preventing the defendants' proposed EGM until the trial of the action, as there would be no trial prior to the next AGM, the EGM would be rendered purely academic. Accordingly, the Court proceeded on the basis that it was appropriate to apply a higher standard than the usual 'serious issues to be tried' standard to the determination of the injunction application.

The Court observed that members are not fiduciaries of a company; and that members, in the exercise of their voting rights, do not need to act in accordance with any fiduciary obligations.

Accordingly, the operative principle which the Court had to consider is that there should be:

"[S]eldom interfer[ence] with the way in which resolutions are to be proposed by members or are to be voted upon by them at properly convened general meetings." 

Exceptions to this general rule include where a proposed course of conduct would be unfairly prejudicial to, the interests of certain members or where the proposed conduct would breach a shareholders agreement. However, no exceptional circumstances were present in this case.

The applicant sought to argue that the EGM would interfere with preparations for the AGM and that it would hinder the investigations of a committee set up by the board to investigate the incident. The Court found that, as a matter of principle and fact, these were not legitimate reasons to prevent the requisitioned EGM. In particular, the Court relied on the following reasons:

1. as a matter of principle, "operational inconvenience" is not a ground for preventing a shareholder action;
2. the defendants were not seeking the removal of all the existing directors;
3. by their motions the defendants merely proposed resolutions.  As the Court observed:

"the very point of an EGM is to see whether they have the support of the majority of the members.  It is the members who own shares in the Company, and they are generally the most appropriate persons to decide what is best for themselves"; and 

4. in any event and notwithstanding the above, as a matter of fact the defendants only held about 5.9% of CIF, and accordingly could not dictate the outcome of the EGM.

The cases relied upon by CIF in support of its case for injunctive relief were all extreme cases in which a majority of shareholders were practicing a fraud on the minority shareholders or which would result in the destruction of economic value of other shareholders' shares for no rational reason. These cases were illustrative of circumstances in which a court would intervene, and made patently clear why the proposed injunction should be refused.

Take away points

In short, the courts have adopted an unsympathetic attitude to a company seeking to restrict or prevent a shareholder from exercising their rights. Rather, the courts have consistently interpreted shareholder rights broadly.  Unless a company can demonstrate exceptional circumstances such as fraud, minority shareholder oppression or extreme irrationality, the courts will respect the democratic processes in favour of shareholders provided for at law and in the relevant company instruments.  This decision should provide comfort to Hong Kong based shareholders seeking to exercise their right to call a general meeting and, where necessary, attempt to bypass or replace the board of directors.

For further information please contact Gareth Thomas, Dominic Geiser, Priya Aswani or your usual Herbert Smith Freehills contact.