Hong Kong Court considers requirements for shareholders commencing statutory derivative actions against companies

Under section 733 of the Companies Ordinance (Cap. 622) ("Ordinance"), a member of a company may bring proceedings if misconduct has been committed against the company (also known as a statutory derivative action ("SDA"), a statutory exception to the "proper plaintiff" rule).  In the recent judgment of Chen Pei Xiong v Convoy Global Holdings Ltd and Forthwise International Ltd [2024] HKCFI 1568, the Hong Kong Court considered the requirements for granting leave to commence an SDA under the Ordinance, and examined technical issues such as standing and jurisdiction.  This decision provides guidance on SDAs in the context of foreign-incorporated companies.

Background

The Plaintiff ("Mr Chen") was a beneficial owner of shares in the 1^st Defendant ("Convoy"), a company incorporated in the Cayman Islands.  The 2^nd Defendant ("Forthwise") was an indirectly wholly-owned subsidiary of Convoy, incorporated in the BVI. 

Mr Chen, on behalf of Forthwise, applied to the Court for leave to commence an SDA against Mr Ng, a director of Forthwise and an executive director of Convoy.  The claims against Mr Ng relate to his alleged misconduct of extending four loans totalling HK$90 million to Forthwise Limited ("Borrower").  Mr Chen argued that Mr Ng, by entering into the loans, breached his fiduciary duty to act in the best interests of Forthwise, not least because (i) the loans were allegedly not arm's length transactions, (ii) they were unsecured, interest-free and repayable on demand, and (iii) there was no evidence of any due diligence conducted in respect of the Borrower. 

Discussion

The Court dismissed Mr Chen's application on the basis that he lacked standing under the Ordinance to bring an SDA against Forthwise.  Although this point alone was enough to defeat Mr Chen's application, the Court still closely examined other issues, one of them being jurisdiction, which we will discuss in the following.

The shareholder's standing

Under the Ordinance, "members" of a company are allowed to bring an SDA against the company, and "members" are defined as those who are registered on the company's register of members.  It was undisputed that Mr Chen had only a beneficial interest in his shares in Convoy and was not on the register of members.  The Court therefore held that Mr Chen did not have the relevant standing to bring an SDA on behalf of Forthwise.  Mr Chen tried to argue that a member not yet registered could still commence an SDA, so long as they could satisfy the Court subsequently that they have become a registered member by the time leave was granted.  There was no evidence, however, that Mr Chen had taken any proactive or timely steps to become registered.

Mr Chen's standing was further challenged by the defendants on the basis that he did not obtain leave from the BVI Court (i.e. the Court of the place of incorporation).  Although it was not necessary for the Court, in this case, to apply BVI law to determine the issue of standing (because the fact that Mr Chen was not a registered member was enough to defeat his application), some noteworthy points were made:

• It is well-established that the ability to bring a derivative action in Hong Kong is partly governed by the law of the place of incorporation (lex incorporationis).  A person must first demonstrate that he has complied with the requirements of the place of incorporation before commencing an SDA.
• Whether a shareholder can bring an SDA in the name and on behalf of the company is a matter of substantive law and governed by the law of the place of incorporation, though it is also necessary to comply with Hong Kong procedural requirements for bringing such an action (Wong Ming Bun v Wang Min Fan [2014] 1 HKLRD 1108).
• The Court expressed the view that were it necessary to make a determination, it would tend to take the view that the absence of obtaining any leave from the BVI Court would have been problematic for the Plaintiff establishing standing.  

The jurisdiction requirement

The SDA regime under the Ordinance applies to both Hong Kong and non-Hong Kong companies i.e. companies incorporated outside Hong Kong which establish a "place of business" in Hong Kong. 

The Court was persuaded that Forthwise did, in fact, establish a place of business in Hong Kong within the meaning of the Ordinance based on the following reasons:

• A broad common sense approach should be adopted when interpreting "place of business".  For example, the premise need not be owned or rented by the company but should be a place from which the company carries on business.
• Although the business activities of Forthwise at its Hong Kong address were limited to one course of business, there is no reason to assume that only one transaction means there is no "place of business".
• It was sufficient that the long form loan agreements expressly stated that the business reflected by those agreements was negotiated and completed at Forthwise's Hong Kong address.  Although Mr Ng gave evidence that the negotiations and signing of those agreements had taken place at various other locations, the Court found the content of the signed agreements more reliable, not least because they were entered into for audit purposes.

Comment

This decision highlights the importance of reviewing all of the requisite elements, including standing, jurisdiction and the merits of the allegations, before bringing an SDA against a company in order to avoid wasted time and costs. 

Although the meaning of “a place of business” in Hong Kong under the Ordinance is construed widely by the Court, shareholders who intend to commence an SDA on behalf of a foreign company must ensure that their standing as a member is satisfied and that the requirements under the laws of the place of incorporation (such as obtaining leave from the foreign court first, if such a procedural requirement exists) are met. 

For more information, please contact Jojo Fan, Partner, Gareth Thomas, Partner, Rachael Shek, Partner, Jody Luk, Senior Associate, Sara Troughton, Professional Support Lawyer or your usual Herbert Smith Freehills contact.