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Dispute Resolution Law Alert - November 2017
Submitted by // K Bowers, Partner / Solicitor Advocate
11 November 2017


DON'T BE GREEDY! 

Update on Shareholder's Inspection of Company Documents

Introduction 

In two recent cases, the Court of First Instance considered applications for inspection of company documents under s. 740 of the Companies Ordinance ("CO"). In the first case of Wong Sau Man, Samuel v Wong Kan Po, Wilson and Others1 , the application was rejected on the grounds that it was a fishing exercise. However, in the second case of Fung Chuen v Sandmartin International Holdings Ltd2 , the application was allowed. The contrasting outcomes of the two cases provide a useful update on the Court's approach to s. 740 of the CO. 

Shareholder's right under s. 740 of the Ordinance 

Under s. 740(1) of the CO, the Court has the power to order production of company documents on an application by a shareholder in a company. However, under s. 740(2) of the CO, the Court must be satisfied that that the requirements of "good faith" and "proper purpose" have been met before it will allow an order for inspection. Although the terms "good faith" and "proper purpose" are not defined in the CO, a body of case law has developed in Hong Kong since the leading cases of Wong Kar Gee Mimi v Hung Kin Sang Raymond3 and Re Lehman Brown Ltd4 which clarifies the scope of the two-limb test under s. 740(2).

Case 1: Wong Sau Man, Samuel v Wong Kan Po, Wilson and Others

Background 

This case concerned a dispute between a father and his son over financial assistance provided by the father. The company in this dispute was acquired by the father in 1992 as a corporate vehicle to hold various property assets. From 1992, the father held 46% of the shares in the company and the son held 17%. During the dispute, the father made an offer to acquire the son's shares, but the offer was rejected. In April 2015, the son initiated proceedings under s. 740 to inspect books and records of the company. 

Consideration of Good Faith and Proper Purpose 

In considering the requirements of "good faith" and "proper purpose", the Court followed the approach set down in the leading cases of Wong Kar Gee Mimi and Re Lehman Ltd. The following principles were held to be relevant:-
 

(1) the valuation or assessment of an applicant's shareholding should not constitute a "proper purpose" if the applicant does not have a legal right to have his/her shares bought out by the defendant or other parties5 . In this case, the company was a private company and the father had withdrawn all offers when the application was taken out. The son had no legal right for his shares to be bought out by his father or other parties; 

(2) s. 740 is not an opportunity for shareholders to undermine entrenched company law principles to challenge the commercial decisions of the company’s management6 . In this case, the purported reason for inspecting company documents was to conduct a "forensic investigation" into the affairs of the company, which the Court viewed as interference with the management of the company; and 

(3) if the purpose behind obtaining company documents is to investigate alleged misconduct, there must be cogent evidence to support a reasonable case for investigation, taking into account any explanations offered by the defendant7 . In this case, whilst the son raised concerns over the rental income generated by properties owned by the company and a lack of available detail about loan transactions entered into by the company, the Court accepted that the company had provided reasonable explanations for these transactions. 

The Court criticised the wide scope of documents requested by the son, which encompassed almost all the company documents since 1992. Additionally, the son failed sufficiently to link the requested documents to the alleged mismanagement. This, in the Court's view, "strongly suggests a case of a fishing expedition" and showed a lack of "proper purpose" for inspecting the company's documents.

Taking into account the above circumstances of the case and the relevant principles, the Court held that the son had failed to show that the application had been made in "good faith" and for a "proper purpose". Accordingly, the application was dismissed. 

Case 2: Fung Chuen v Sandmartin International Holdings Ltd 

Background 

This case concerned a dispute over company loans to two corporate debtors in Nepal and investments made by the defendant company in a company incorporated in Dubai. The applicant shareholder in this case alleged that these loans and investments were dubious and/or constituted connected transactions and that consequently, he was applying for leave to inspect the company's documents to further investigate these transactions. 


Consideration of Good Faith and Proper Purpose


In considering the requirements of "good faith" and "proper purpose", the Court in this case also followed the two-limb test as established in Wong Kar Gee Mimi and Re Lehman Ltd (as applied in Veron International Ltd v RCG Holdings Ltd8). The relevant points from this case included that:-

(1) hostility on the part of the applicant does not of itself negate "proper purpose", provided that the application is made in "good faith" and that the primary or dominant purpose is proper; and 

(2) an order for inspection can be made where a shareholder reasonably takes the view that a transaction could adversely affect his/her investment and he/she seeks to investigate the transaction for the purpose of determining what action he/she should take. The fact that the applicant may have other means of obtaining the information elsewhere does not mean that he/she cannot satisfy the two requirements. 

Applying these principles, the Court held that despite the alleged hostility towards the management of the company, investigating suspected wrongdoing by the management provided a "proper purpose" under s. 740. The Court also held that the applicant had fulfilled the requirement of "good faith" as he had "acted out of a genuine and legitimate concern to protect his interests as a shareholder of the company". Accordingly, the application was allowed. 


Comment

The different results of these two recent cases highlight the importance of limiting the scope of an application under s. 740. The Wong Sau Man case shows that where the scope of the document request is too broad, the Court is likely to view the application as a fishing exercise and reject the application completely. In contrast, where the scope of the document request is limited and specific to a particular purpose (such as in the Fung Chuen case), the Court is more likely to grant an order for inspection. 

These differing results confirm that a shareholder's right to inspect company documents under s. 740 of the CO remains a limited one, and that the Court will not allow inspection in the absence of "good faith" and "proper purpose".


1 [2017] HKCU 2052
2 [2017] HKCU 2618
3 [2011] 5 HKLRD 241
4 [2011] 5 HKLRD 668 (a case conducted by HWB's Kevin Bowers)
5 Leung Chung Pun v Masterwise International Ltd [2016] HKCU 848
6 Wong Kar Gee Mimi v Hung Kin Sang Raymond (supra)
7 Re Bank of East Asia Ltd [2015] 4 HKC 137
8 [2013] 3 HKLRD 657
 

 

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