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THE PROTECTION OF MINORITY SHAREHOLDERS

Caroline Hague
Lecturer, Department of Professional Legal Education, University of Hong Kong

Introduction The governance of companies as set out in the Companies Ordinance and generally under common law principles is based on the principle of majority rule. It is however recognised that as a corollary of this there must be some protection for minority shareholders. Under the Companies Ordinance1 it is s 168A which perhaps offers the most protection to minority shareholders, not least because of the wide range of remedies available under this section. This lecture will review the provisions of s 168A and various Hong Kong and English cases which interpret the section. The grounds for an application are the same in the legislation of both Hong Kong and England, that 'the affairs of the company are being or have been conducted in a manner unfairly prejudicial to the interests of the members generally or of some part of the members' which would include the petitioner. 2 Reference will also be made to the powers of the Securities Commission in Hong Kong under s 37 of the Securities and Futures Commission Ordinance ('SFCO'), where there are equivalent provisions for an application by the Securities Commission in respect of listed companies. In deciding cases of unfair prejudice in relation to the conduct of a company's affairs the behaviour of the directors can be crucial; if they have acted for proper purposes, bona fide in the best interests of the company, it will be difficult to attack what they have done. But what is meant by the company's best interests? Do we consider the company as a separate legal entity, or do we consider the shareholder's interests? If there are different classes of shareholders how does one reconcile their competing interests? These problems relate to a director's fiduciary duty
1 2

Companies Ordinance. All references to sections in this lecture are unless otherwise stipulated references to sections of the Companies Ordinance. The equivalent provision in England and Wales is s 459 of the Companies Act 1985.

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to act in the best interests of the company, but what about directors breaching their duties of skill and care in relation to the management of the company? The courts have been understandably reluctant to interfere in business decisions; some recent cases, however, have indicated that mismanagement may provide grounds for a petition. Who can apply Any member of a company can bring proceedings under s 168 A and must apply to the court by way of petition. In addition to company members, the Financial Secretary may make an application under s 168A where s 147(2)(b) is applicable. Section 147(2)(b) relates to proceedings being taken under s 168 A in respect of a company liable to be wound up, where on the investigation of a company's affairs under s 142 or 143, an inspector's report under s 146, or information obtained under ss 152A or 152B it appears that a company's business has been conducted in an unfairly prejudicial manner. The Financial Secretary can appoint one or more inspectors to investigate a company's affairs under ss 142 and 143: (i) on the application of one tenth of the members; (ii) if the court so orders; or (iii) if there are circumstances indicating fraud, misfeasance, misconduct, oppression, or failure to give members reasonable information in relation to the company's affairs. Under ss 152A and B orders can be made for the production of documents and the entry and search of premises.The Financial Secretary can apply under s 168A either instead of, or in addition to, presenting a petition for winding up under the just and equitable rule under s 177 (1)(f) if it is thought expedient to do so in the public interest. It is interesting to note the powers of the Securities and Futures Commission under the provisions of s 37A SFCO. The Commission has wide powers under s 29 A SFCO to require the production of documents, where it appears that the affairs of a listed company are being carried on fraudulently, unlawfully, or in a manner oppressive to any part of the members. It can also apply under s 36 SFCO for a warrant to search for, seize, and remove any documents for the purposes of the investigation. If it appears from such information 'that the affairs of a listed company are being or have been conducted in a manner unfairly prejudicial to the interests of its members generally or of some part of the members' then

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the Securities Commission can petition the High Court under s 37A SFCO. The remedies available under this section are the same as those under the Companies Ordinance. Although s 37A SFCO was brought into effect in 1994, Rogers J has confirmed that it can be used in respect of the conduct of a company's affairs which occurred prior to 1994. The case of Securities & Futures Commission v Mandarin Resources Corporation Ltd and Chim Pui-chung3 ('Mandarin Resources') under ss 37A and 454 SFCO is worth mentioning in this respect. In a preliminary decision delivered on 7 January 1997 Mr Justice Rogers refused an application to strike out a petition presented by the Securities and Futures Commission. The petition was on the grounds that the affairs of Mandarin Resources had been conducted in a manner unfairly prejudicial to the interests of some of its shareholders, in particular the minority. Under the petition the Commission sought an order to wind up Mandarin Resources on just and equitable grounds under s 45 of the SFCO and s 177( 1 )(f) of the Companies Ordinance. The petition under s 37A SFCO was opposed on the grounds that it was sought to give the section, which came into effect in 1994, retrospective effect, as the proceedings related to conduct prior to 1994. This argument was rejected on the wording of s 37(1) which applies to the affairs of a listed company which 'have been conducted' in a particular way. It was therefore clear that the legislature intended matters prior to 1994 to be taken into account. It was also noted that s 168A of the ordinance was in almost identical terms and had been effective since 1978. No concluded view was reached but it was felt that arguments that conduct prior to 1994 should be disregarded were likely to fail so the petition would not be struck out. The majority of applications in respect of unfairly prejudicial conduct will, however, be brought under s 168A by members of the company concerned in relation to family-owned companies.

HCt, CWU No 348 of l996.


Rogers J confirmed that s 45 SFCO, under which the Commission can present a petition for winding up on just and equitable grounds, relates to a company which can be wound up under the Companies Ordinance and is not limited to registered persons, ie persons registered under the Securities or Commodities Trading Ordinance.

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Remedies under s 168A and s 37A SFCO Under s 168A and s 37A SFCO the court may make such orders as it thinks fit, whether to regulate the company's affairs or for the purchase of shares of any member of the company. It can also appoint a receiver of the company's property. In Mandarin Resources the Securities Commission sought to disqualify the second respondent as a director of that company. Rogers J confirmed that s 37A SFCO gives the court power to make such an order and that this does not circumvent Part IVA of the ordinance, whose provisions were, he stated, intended to prohibit persons from being directors of any company, whereas the petition in Mandarin Resources was in relation to one company only. He confirmed that the provisions of s 37A(2) SFCO, which gives the court power to make any order it thinks fit to regulate the conduct of the company's affairs in the future or otherwise, should be given a wide interpretation. Accordingly if it could be shown that a director had mismanaged a company's affairs then disqualification would be a natural step.5 In Mandarin Resources Rogers J also considered that the wording of s 37A(2)(d) SFCO was broad enough for an order to be made for a person other than a member of the company or the company itself to purchase shares of a company.6 In that case the second respondent had not been a shareholder in Mandarin Resources, but it was the petitioner's case that a majority shareholding in Mandarin Resources was held by nominees or by companies controlled by the second Respondent. The specific wording of s 37A(2)(d) SFCO did refer to purchases of shares by members of the company or by the company itself, but the section did enable the court to 'make any other order it thinks fit.'
Valuation of shares

In any order in respect of the sale of shares, the valuation of such shares will be of crucial importance. In Ronald Li-kai Chu v Deacon Te-ken Chiu7
5 6

ReMarmerLtd[1959] 1 WLR 62 based on s 210 of the Companies Act 1948 was 'of some persuasive authority on the breadth of the court's power under similar wording.' Rogers ] cited as authority the decision of Hoffman ] in Re a Company (No 005287 of 1985) [1986] 1 WLR 281, which appeared to be followed by Lindsay J in Re Little Olympian EachWays limited [1994] 2 BCLC 420.

[1991] 2 HKLR 572.

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the question of which shareholder should be ordered to sell shares and the valuation of such shares was considered pursuant to an application under s 168A. It was held that only in rare circumstances would the majority shareholder be compelled to sell. This follows the judgment of Hoffman ] in Re a Company (No 006834 of 1988) , ex p Kremer8 where he said: 'I think it must be very unusual for the court to order a majority shareholder actively concerned in the management of the company to sell his shares to a minority shareholder when he is willing and able to buy out the minority at a fair price.' The basis of valuation can however be contentious, as it was in this case, where the petitioner wanted the redevelopment potential of a site to be taken into account. The respondents had offered to buy out the petitioner's shares and had conceded that: (i) an independent valuer should be appointed; (ii) there should be no discount to reflect the minority shareholding; and (iii) the valuation should be based on the original percentage shareholdings. The contentious point however remained the basis of the valuation and the redevelopment potential of the land. It was suggested that this could be left to a skilled valuer to determine. In XYZ Ltd (No 004377 of 1986)9 Hoffman J had emphasised the importance of following the procedure agreed by the parties as set down in the articles for the valuation of shares and said that he did not consider that 'in the normal case of the breakdown of a corporate quasipartnership there should ordinarily be any "legitimate expectation" that a member wishing to have his shares purchased should be entitled to have them valued by the court rather than the auditors pursuant to the articles.' In the Hong Kong case Barnett J, perhaps reflecting the importance of redevelopment potential in Hong Kong, noted that share valuation could be very subjective. He stated: Different valuers often arrive at staggeringly different valuations depending upon their basis of valuation, perhaps an earnings basis, perhaps a net assets basis, and the factors which they have taken into account in coming to their conclusions. If there is not to be an agreement as to the basis for valuation and for a detailed 'speaking
8 9

[1989] BCLC 365, 367. [1986] 2 BCC 99, 520.

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valuation.' in my judgment the petitioner is entitled to the protection of this court.10 Unfairly prejudicial conduct The main Hong Kong case in relation to s 168A and the interpretation of the words 'unfairly prejudicial' remains Re Taiwa Land Investment Co Ltd.11 In that case the petitioner was both a minority shareholder and a director. The petitioner alleged that when the company was originally established it was agreed that it would be developed with borrowed money and out of accumulated income, and that new shares would not be issued. The parties subsequently disagreed over the development of a site which had been purchased by the company on its incorporation, the development of which would have required a considerable capital contribution by the parties. It was alleged that this was outside the parties' original agreement, on which the petitioner placed great reliance, and unfairly prejudicial to the petitioner. In his judgment Fuad J followed the South African case of Donaldson Investments v AngloTransvaal Collieries12 in which Preiss J, while emphasising that the facts of each case on unfair prejudice must be examined, stated: that the applicants must establish that the majority shareholders are using their greater voting power in a manner which does not enable the minority to enjoy a fair participation in the affairs of a company. The emphasis is on the unfairness of the conduct complained of, it must be conduct which departs from the accepted standards of fair play, or which amounts to an unfair discrimination against the minority.13 On this basis Fuad J found therefore that 'elements of both unfairness and prejudice must co-exist for the section to come into play.'14 He also emphasised that there must be an objective examination of all the facts and circumstances of the case, including the type of company and the
10 11 12 13 14

[1991] 2 HKLR 572,579. [1981] HKLR 297. [1979] 3 SA 713. Ibid, p 722. Note 10 above, p 305.

relationship between the parties. Fuad J referred to the speech of Lord Wilberforce in Ebrahimi v Westbourne Galleries15 where Lord Wilberforce, before illustrating when equitable considerations would have to be taken into account, said: 'Certainly the fact that a company is a small one, or a private company, is not enough. There are very many of these where the association is a purely commercial one, of which it can be said that the basis of association is adequately and exhaustively laid down in the articles.' The importance of the original contractual agreements between parties, as set out in the company's articles, will be reviewed later in respect of some more recent cases. In Taiwa Land Fuad J found the following facts relevant to the application: The company was a small domestic one, where there were only four directors Participation in the company was based on personal relationships and mutual trust and confidence The petitioner was locked-in' to the company as it would be difficult for him to dispose of his shares in a small private company. This was before the amendment to s 49 which may make share disposal easier if the company itself is in a position to buy back its own shares, and the parties are willing to use this as a way of resolving a shareholders dispute. The question of share valuation will however be problematical, and this issue in itself may prompt an application under s 168A16

Fuad J went on to say that in these circumstances the departure from any understanding between the parties when the company was established could be 'unfairly prejudicial.' He therefore upheld the general principles of Ebrahimi as being applicable to s 168A, although on the facts he found that no such basic understanding had ever existed. The petition was therefore unsuccessful. In Re Usine Ltd, 17 another Hong Kong case under s 168A, Rogers J emphasised that both words unfair and prejudice must be given their full
15 16

[1973] AC 360, 379. See Ronald Li-kai Chu v Deacon Te-ken Chiu (note 7 above). 17 Rel Usine Ltd, HCt,CWU No l04 of l990.

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force. 'It is important to bear this in mind since clearly conduct could be one of these things and not the other.' Section 37A SFCO was used by the Securities Commission in Re Chesterfield Ltd.18 Orders to restrain one of the directors and its general manager from advising on or managing the business of Chesterfield or any of its subsidiaries were obtained. The two respondents did not contest the petition by the Commission. Rogers J in reviewing what constitutes unfairly prejudicial conduct stated that it: is conduct which results in harm to the members of the company or part of the membership in their capacity as members of the company, The harm is harm which could either have been avoided or ameliorated without harming the legitimate interests of others who were parties to the particular transaction. It covers a range of conduct. At one end of the scale is fraud at the other end of the scale the conduct can take the form of neglect or inaction on the part of those to whom the affairs of a company are entrusted. The question to be asked in such circumstances is whether the conduct concerned is that which can be expected from the managers of the company to whom those affairs have been entrusted. The directors of course cannot leave their duties to be performed by others. This raises the question of directors' inaction amounting to prejudicial conduct. This case did involve a public company, where a standard of competence is expected of directors commensurate with their position as directors of a listed company.19 The recent English case of Re Saul D Harrison & Sons plc 20 is recognised as the current leading authority on unfairly prejudicial conduct. Briefly the facts were that the shares of the company, a small family-owned enterprise whose main business was manufacturing and selling cleaning and wiping cloths, were divided into three classes and the petitioner owned non-voting shares. The petitioner's allegation was

18 19

20

ReChesterfieldLtd,HCt, MP No3504 of l994. See r 3.08 of the Rules Governing the Listing of Securities published by the Stock Exchange of Hong Kong Limited.

[1995]1 BCLC14.

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that the company's business was conducted in an unfairly prejudicial manner as she alleged it was no longer profitable and was kept going solely to preserve the salaries and fringe benefits of the directors. The petitioner wanted the company liquidated and for there to be a distribution of assets to the shareholders. ' Hoffman LJ stated that the words 'unfairly prejudicial' were deliberately imprecise. The former wording of the section had required proof of 'oppressive'behaviour which was too restrictive, Hoffman LJ noted that the words 'unfairly prejudicial' were chosen in drafting the legislation, as being equated in an earlier judgment of Lord Cooper to 'a visible departure from the standards of fair dealing and a violation of the conditions of fair play on which every shareholder who entrusts his money to a company is entitled to rely.'21 He confirmed that in deciding whether conduct has been unfairly prejudicial the court must apply an objective standard of fairness, and must keep in mind that 'fairness is being used in the context of a commercial relationship.'22 The relationship between the shareholders and each other and the company is governed by the contractual terms set out in the articles of association. Hoffman LJ noted that, as honouring agreements was probably the main factor in commercial fairness, the starting point in any application under the section must be whether the behaviour that the shareholder alleged to be unfairly prejudicial was in accordance with what the parties originally agreed as set out in the articles. This would often turn on whether the directors' fiduciary powers have been used in the interests of the company as a whole. 'If the board act for some ulterior purpose, they step outside the terms of the bargain between the shareholders and the company.'23 This emphasis on the importance of the articles of association echoes the earlier judgment of Lord Wilberforce in Ebrahimi.24 However although the articles are the starting point, conduct in breach of the articles will not necessarily entitle a shareholder to relief, for example trivial or technical breaches would not be grounds for an application. So there may be conduct which is technically unlawful under the articles which would not however be unfair. Conversely however there may be behaviour which is lawful but which is unfair.
21 22 23 24

Per Lord Cooper in Elder v Elder and Watson 1952 SC 49. Re Saul D Harrison [1995] 1 BCL 14, 17. Ibid, p 18. [1973] AC 360.

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Hoffman LJ noted that on occasions the articles may not completely reflect the original agreements among the shareholders. He observed that this was one of the points made by Lord Wilberforce in Ebrahimi25 as forming the basis of a petition for winding up a company on just and equitable grounds. Lord Wilberforce stated: The words ['just and equitable'] are a recognition of the fact that a limited company is more than a mere judicial entity, with a personality in law of its own: that there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals, with rights, expectations and obligations inter se which are not necessarily submerged in the company structure.26 It may therefore be that the personal relationship between a shareholder and the controllers of a company would mean that in some circumstances it would be unfair for the majority shareholders or the directors to use certain powers contained in the articles. There may be certain unwritten understandings between the parties, such as being allowed to take part in managing the company and receiving salary rather than dividends. These unwritten understandings could also be extended for the benefit of relatives of original joint venture parties. In Re Leeds United Holdings plc27 it was confirmed that such understandings or 'legitimate expectations' must relate to the conduct of the affairs of the company and that an expectation that shares in the company will not be sold without the consent of some or all of the other shareholders would not fall within the court's jurisdiction under s 459. In deciding whether it is appropriate to allow such equitable considerations to prevail, Hoffman LJ again referred to the judgment of Lord Wilberforce in Ebrahimi where Lord Wilberforce noted that agreement between the parties could be confined to that set out in the articles of association and that 'the superimposition of equitable considerations requires something more.'28 Hoffman LJ confirmed that in the absence of 'something more' 'the very minimum required to make out a case of

25 Ibid. 26

Ibid, P 379. 27 [1996] 2 BCLC 545,559.

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unfairness, is that the powers of management have been used for an unlawful purpose or the articles otherwise infringed.'29 In the same case Neil L] also reviewed the need to take into account both a petitioner's legal rights and any equitable considerations which may arise from understandings between the parties concerned. He noted that the words 'unfairly prejudicial' are general words which should be applied flexibly to meet the circumstances of the particular case; however he also referred to an earlier judgment of Hoffman J in Re a Company (No 007623 of 1984) which stated that 'the very width of the jurisdiction means that unless carefully controlled it can become a means of oppression.'30 Arden J in the 1996 case of Re BSB Holdings plc 31 reviewed the judgment in Re Saul D Harmon and confirmed that it was now the leading authority on unfair prejudice, but noted particularly: the point was mentioned though not elaborated in Re Saul D Harrison but 'It is important that the legitimate and proper workings of business and the investment of capital should not be inhibited by for example unfounded threats of action under s 459';32 however the wording of s 459 is 'wide and general and, save where the circumstances are governed by the judgments in Re Saul D Harrison, the categories of unfair prejudice are not closed.'33

In Re Saul D Harrison Neil LJ went on to note the crucial role played by the directors to whom the shareholders have entrusted management of the company. The directors must therefore: exercise their powers in the interests of the company as a whole. In order to establish unfairness it is clearly not enough to show that some managerial decision may have prejudiced the petitioner's interest. A shareholder on joining a company will be deemed to have accepted the risk that in the wider interests of the company decisions may be taken which will prejudice his own interests.... Though it
28 29 30 31 32 31

1973] AC 360,379. 1995] 1 BCLC 14, 20. 1986] BCLC 362,367. 1996] 1 BCLC 155. Ibid, p 241. Ibid, p 243.

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is open to the court to find that serious mismanagement of a company's business constitutes conduct that is unfairly prejudicial to the interests of the shareholders the court will normally be very reluctant to accept that managerial decisions can amount to unfairly prejudicial conduct... .34 A shareholder can legitimately complain however if the directors exceed the powers vested in them or exercise their powers for some illegitimate or ulterior purpose.35 The role of the directors Directors are required to act in the best interests of the company. What is meant by this phrase? Generally the interests of the company are identified with those of the shareholders, unless the company is insolvent, or perhaps of doubtful solvency, when the interests of the creditors should be taken into account.36 But if there are different groups of shareholders, how do the directors decide between various competing interests? The BSBH case reviewed this point in the context of a petition in respect of unfairly prejudicial conduct. Briefly, a consortium of shareholders agreed to provide finance to BSBH by way of equity investment, loans, and guarantees. The provision of the funds was carried out in three separate rounds. One member of the consortium London Merchant Securities plc (LMS) alleged that round 3 of the financing was conducted in a manner unfairly prejudicial to its interests. LMS alleged inter alia that the directors of BSBH had acted in breach of their fiduciary duties in acting: (1) without proper regard to the company's own best interests and (2) with the purpose of benefiting their appointers. LMS had not been entitled to nominate a director of BSBH although after round 2 of the financing it was entitled to be notified of board meetings and to appoint an observer to attend board meetings on its behalf. Arden J went on to review the extent of directors' fiduciary duties. The basic duty is for directors to act bona fide in what they consider the company's best interests and not for any collateral purpose. The leading authority on collateral purpose is Howard Smith Ltd v Ampol Petroleum
34 35

See Re Elgindata Ltd [1991] BCLC 959, 993. Re Saul D Harrison [ 1995] 1 BCLC 14,31. See Kinsela v Russell Kinsela Pty ltd (1986) 4 ACLC 215.

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Ltd37 where shares were allotted to try and promote a proposed takeover. Arden J referred to the summary of that decision by Harman J in Re a Company (No 00370 of 1987), ex p Glossop,38 where he stated: It is, in my judgment, vital to remember that actions of boards of directors cannot simply be justified by invoking the incantation 'a decision taken bona fide in the interests of the company.' The decision of the Privy Council in Howard Smith Ltd v Ampol Petroleum. Ltd [1974] 1 All ER 1126, clearly establishes that a decision can be attacked in the courts and upset notwithstanding (a) that directors were not influenced by any 'corrupt' motive, by which I mean any motive of personal gain as by obtaining increased remuneration or retaining office, and (b) that directors honestly believed that their decision was in the best interests of the company as they saw its interests. Lord Wilberforce's observations, delivering the advice of the Board, acquit the directors of corrupt motive; he asserts the primacy of the board's judgment; but he goes on to assert that there remains a test, applicable to all exercises of power given for fiduciary purposes, that the power was not to be exercised for any 'byemotives.' When we talk of the directors acting in the best interests of the company, we must acknowledge that in certain circumstances this cannot mean the interests of the company as a separate legal entity. This was noted in the Australian case of Mills v Mills39 in the context of a bonus issues of shares which would have affected the voting power of different classes of shares. There it was a question of the interests of different classes of shareholders rather than the interests of the company. Directors' duties to different groups of shareholders who hold the same class of shares was considered in Mutual Life Insurance Co of New York v Rank Organisation Ltd.40 The company, Rank, gave the shareholders, except North American nationals or residents, a right to subscribe for new shares. The North American shareholders were excluded to avoid the need to register with the Securities and Exchange Commission in the
37 38 39

[1974] 1 All ER 1126. [1988] BCLC 570,577. (1938) 60 CLR150,164.

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US and its equivalent in Canada, as the directors felt that such registration was not in the interests of the company. The excluded shareholders claimed that they were entitled to the same treatment as all other shareholders, Goulding J noted that the directors, as well as exercising their powers in good faith in the interests of the company, must also exercise such powers fairly between different shareholders. In deciding that the directors had acted fairly in excluding the North American shareholders he stated: in my view the equality of individual shareholders in point of right, does not always require an identity of treatment.... Such exclusion did not in any way affect the existence of a shareholder's shares nor the rights attached to them ... no shareholder in Rank, while its articles of association retain their present form, has any right to expect that his fractional interest in the company will remain forever constant.41 In reviewing this decision in BSBH Arden J concluded that, if there was a conflict between the interests of the members and the interests of the company, then the interests of the company must prevail. She concluded that in approving the round 3 financing arrangements the directors had acted bona fide in: the test interests of BSBH as a legal entity,... However... where a proposed act of the company will have not only an effect on the company itself, but also an effect on the interest of some of the shareholders, their duty to act in the best interests of the company requires them also within limits to act fairly as between different groups of shareholders... the duty .,. required them to address their minds to the question whether the proposals had different effects on different groups of shareholders and, if they did, whether this was authorised by contractual arrangements between the parties or was justified in the particular circumstances by the overriding need to act in the interests of the company. In Mutual Life Insurance Co of New

40 [1985]BCLC11. 41 Mutual Life Insurance Co of New York v Rank Organisation Ltd [1985J BCLC 11, 24.

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York v Rank Organisation Ltd the directors were not in breach of their duty to act fairly when after proper investigation they decided that it was in the interests of the company to proceed to make a rights issue to some only of the holders of ordinary shares. The law does not require the interests of the company to be sacrificed in the particular interests of a group of shareholders.42 Directors' mismanagement breach of duty of care and skill There have not been many applications in respect of unfairly prejudicial conduct when the point at issue has been the alleged mismanagement of the company's affairs. The general rule is that the court will not interfere in commercial decisions made by the directors. As Warne J in Re Elgindata Ltd43 observed, although in cases of serious mismanagement it would be open to the courts to make a finding of unfairly prejudicial conduct but 'short of a breach by a director of his duty of skill and care ... there is prima facie no unfairness to a shareholder in the quality of the management turning out to be poor.' He did however observe that if majority shareholders insisted on a demonstrably incompetent family member being charged with management of a company's business that might amount to unfairly prejudicial conduct. Arden J referred to this judgment in Re Macro (Ipswich) Ltd44 and also to the New Zealand case of Thomas v HW Thomas, Ltd45 which emphasised the importance of balancing the conflicting interests of different group members of a company. In Re Macro (Ipswich) Ltd the majority shareholder and sole director of two companies, a Mr Thompson, managed the property business of the two companies through his own firm Thompsons. On the facts of the case Arden J was satisfied that the companies were prejudiced by various failures of Thompsons, including failure to have a planned management programme, to supervise repairs, to inspect properties, charging excessive management charges and secretarial salaries, and maintaining money on Thompsons' client account that was due to the companies. She went on to state:
42[1996]1BCLC155.251. 43[1991]BCLC959.994. 44[1994]2BCLC400. 45[1984]NZLR686.

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All of these matters are within the responsibility of Thompsons as the companies' managing agent but they are attributable to the lack of effective supervision by Mr Thompson on behalf of the companies. It is this conduct of the companies' affairs by Mr Thompson which, in my judgment, is prejudicial in the respects I have mentioned. As the conduct is prejudicial in a financial sense to the companies, it must also be prejudicial to the interests of the plaintiffs as holders of its shares.46 This was not therefore just a question of the quality of management being poor, but of specific acts of mismanagement which Mr Thompson failed to prevent or rectify, some of which were repeated over many years. Arden J noted the lack of an independent director on the board in the context of the Cadbury Report, which she acknowledged was directed at listed companies, but pointed towards the 'desirability of having a truly independent board'47 in all cases where there are minority shareholders. The inability of Mr Thompson to act independently of his position as majority shareholder and sole proprietor of Thompsons was found to be unfairly prejudicial to the interests of the minority shareholder. In the Hong Kong case of Re Forecast Nominees Ltd48 there was an action to strike out a petition under s 168A on the grounds that there was no reasonable cause of action and it was an abuse of process, because fair and reasonable offers had been made by the respondent to purchase the petitioner's shares. Le Pichon J considered the claims of the petitioner, which included her exclusion from participating in the management, and the respondents' alleged mismanagement and self-enriching practices. She noted the decisions of the English courts that generally the courts, due to lack of business expertise, are reluctant 'to accept that managerial decisions could amount to unfairly prejudicial conduct.' The court would need 'clear evidence that the value of the company was adversely affected' to make such a finding. However, referring to the BSB Holdings decision she confirmed that the categories of unfairly prejudi-

In re s J168A of the Companies Ordinance and Forecast Nominees Ltd, HCt, MP No 1537 of 1996.

[1994] 2 BCLC 400,404. Ibid, p 407.

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cial conduct were not closed. Self-enriching practices which fell short of misappropriation could constitute misconduct. The diversion of corporate opportunities from the company at the expense of a shareholder could amount to unfair prejudice. Conclusion It would appear that more cases are now being brought in Hong Kong under s 168A. Certainly in England there was an explosion of cases under the equivalent legislation, which perhaps, as in Re Saul B Harrison, has led the court to come back to emphasise the importance of the original contractual relationship between the parties and the need for 'something more,' to provide the basis for a valid case. In connection with this, the importance of the actions of directors in breach of fiduciary duties or in breach of duties of care and skill may be crucial.

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