September 05 2017
As noted in an earlier update this year, the High Court of Hong Kong has a wide discretion to grant shareholders access to company documents, pursuant to Section 740 of the Companies Ordinance (Cap 622).(1) The court has been astute in assisting shareholders to protect their legitimate interests by allowing access to company documents while, at the same time, preventing them from launching so-called 'fishing' expeditions. What may amount to fishing, in this context, was recently considered by the court in Wong Sau Man Samuel v Wong Kan Po Wilson.(2)
The eldest son (the plaintiff applicant) of the first defendant (the father) sought to exercise his right as (among other things) a shareholder, under Section 740 of the Companies Ordinance, to inspect what essentially appears to have been all of the documents of the company in question since its incorporation in 1992. The company appears to have been a holding company for various property investments – not an uncommon feature of some family life in Hong Kong.
Prior to a stroke suffered by the father in 2012, the applicant and his family appear to have relied significantly on the financial assistance of the first defendant. Indeed, the applicant appears to have received significant financial assistance from his father and to have had (at times) quite an expensive lifestyle. The relationship between the father and eldest son may (at times) have taken turns for the worse – apparently, with the father cutting off some financial assistance around April 2015.
The applicant, who had also been a director of the company, appears not to have been re-elected as a director at the company's annual general meeting held on December 31 2015. Although no longer a director, he continued to be a shareholder of 17% of the company's shares alongside his father, two younger brothers and two cousins. It appears that the applicant did not pay for his shareholding.
It is against this backdrop that the application for inspection of company documents arose. The applicant sought certain company accounting documents, in his capacity as an (ex)director, and other wide-ranging categories of company documents in his capacity as a shareholder.(3)
Before deciding whether to exercise its discretion to make an order permitting inspection of the company's documents, the court considered whether the application was made in good faith and whether, on the facts, the inspection sought was for a proper purpose.
The court noted that the scope of the application appeared to be very wide. The applicant's stated purpose for obtaining access to the company's documents was apparently to carry out a thorough (forensic type) investigation of the company's affairs. However, whatever the applicant's motives, the court determined that this was not a proper purpose under Section 740. The application was more in the nature of a fishing expedition.
The court considered that Section 740 of the Companies Ordinance should not be used by shareholders to trawl through all of a company's corporate records in order to satisfy themselves that a company was being managed properly. It was also inappropriate (for example) for a shareholder to use Section 740 to fish for evidence to support potential claims they may have against a company or its directors.
In short, the applicant appears to have had difficulty in demonstrating how access to such a wide range of documents would be relevant to specific concerns he had in relation to the company's affairs. He was unable to establish a proper purpose.
The court also took into account the fact that the applicant had been a director of the company up until December 31 2015, but he never appears to have exercised his right as a director to inspect the company's documents.
In light of these findings, the court dismissed the application.
Although, the right of a qualifying shareholder to inspect company records or documents can be a powerful tool, this case serves as a useful reminder that the High Court is alive to wide-ranging requests that may be tantamount to fishing expeditions.
While Section 740 of the Companies Ordinance (together with the equivalent provision under the previous legislation) has generated quite a lot of case law in Hong Kong in the last 10 or so years and is a useful tool for shareholders to enhance corporate governance, an applicant still has to come within well-established legal principles to succeed with an application. Besides the twofold test of 'good faith' and 'proper purpose', the court retains a wide residual discretion in such matters. In this case, the applicant was unable to establish a proper purpose – therefore, the court did not really need to consider the exercise of its discretion.
As with most applications for production of documents in civil proceedings, the more particularity with the description of the documents and the explanation of their relevance, the better.
Put simply, it also helps with an application pursuant to Section 740 of the Companies Ordinance if a shareholder can tap into the conscience of the court. In this case, it appears the applicant may have struggled in that endeavour. Perhaps, for now, the last word might quote from the judgment:
"Section 740 is not supposed to be deployed by shareholders to go through every single piece of corporate record of a company so as to satisfy himself that the company is being managed properly. Equally, it must not be used as an instrument by shareholders to fish for evidence to support whatever case he or she might have against the company and/or its directors. This cannot be a proper purpose under section 740. Yet, this is the stated purpose of the plaintiff."(4)
For further information on this topic please contact Jessica Wong or Warren Ganesh at RPC by telephone (+852 2216 7000) or email (email@example.com or firstname.lastname@example.org). The RPC website can be accessed at www.rpc.co.uk.
(1) For further details please see "Shareholder access to company records and documents".
(3) Sections 374 ("Where accounting records to be kept") and 740 ("Court may order inspection of records or documents") of the Companies Ordinance (Cap 622). Section 740 was previously Section 152FA of the Companies Ordinance (Cap 32).
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