The Protection of Minority Share Hole Der

THE PROTECTION OF MINORITY SHAREHOLDERS

Caroline HagueLecturer, Department of Professional Legal Education,

University of Hong Kong

Introduction

The governance of companies as set out in the Companies Ordinanceand generally under common law principles is based on the principle ofmajority rule. It is however recognised that as a corollary of this theremust be some protection for minority shareholders. Under the Compa-nies Ordinance1 it is s 168A which perhaps offers the most protection tominority shareholders, not least because of the wide range of remediesavailable under this section.

This lecture will review the provisions of s 168A and various HongKong and English cases which interpret the section. The grounds for anapplication are the same in the legislation of both Hong Kong andEngland, that 'the affairs of the company are being or have beenconducted in a manner unfairly prejudicial to the interests of themembers generally or of some part of the members' which would includethe petitioner.2 Reference will also be made to the powers of theSecurities Commission in Hong Kong under s 37 of the Securities andFutures Commission Ordinance ('SFCO'), where there are equivalentprovisions for an application by the Securities Commission in respect oflisted companies.

In deciding cases of unfair prejudice in relation to the conduct of acompany's affairs the behaviour of the directors can be crucial; if theyhave acted for proper purposes, bona fide in the best interests of thecompany, it will be difficult to attack what they have done. But what ismeant by the company's best interests? Do we consider the company asa separate legal entity, or do we consider the shareholder's interests? Ifthere are different classes of shareholders how does one reconcile theircompeting interests? These problems relate to a director's fiduciary duty

1 Companies Ordinance. All references to sections in this lecture are unless otherwisestipulated references to sections of the Companies Ordinance.

2 The equivalent provision in England and Wales is s 459 of the Companies Act 1985.

The protection of minority shareholders 119

to act in the best interests of the company, but what about directorsbreaching their duties of skill and care in relation to the management ofthe company? The courts have been understandably reluctant to inter-fere in business decisions; some recent cases, however, have indicatedthat mismanagement may provide grounds for a petition.

Who can apply

Any member of a company can bring proceedings under s 168 A and mustapply to the court by way of petition. In addition to company members,the Financial Secretary may make an application under s 168A wheres 147(2)(b) is applicable. Section 147(2)(b) relates to proceedings beingtaken under s 168 A in respect of a company liable to be wound up, whereon the investigation of a company's affairs under s 142 or 143, aninspector's report under s 146, or information obtained under ss 152A or152B it appears that a company's business has been conducted in anunfairly prejudicial manner. The Financial Secretary can appoint one ormore 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 soorders; or (iii) if there are circumstances indicating fraud, misfeasance,misconduct, oppression, or failure to give members reasonable informa-tion in relation to the company's affairs. Under ss 152A and B orders canbe made for the production of documents and the entry and search ofpremises.The Financial Secretary can apply under s 168A either insteadof, or in addition to, presenting a petition for winding up under the justand equitable rule under s 177 (1)(f) if it is thought expedient to do so inthe public interest.

It is interesting to note the powers of the Securities and FuturesCommission under the provisions of s 37A SFCO. The Commission haswide 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 onfraudulently, unlawfully, or in a manner oppressive to any part of themembers. 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 companyare being or have been conducted in a manner unfairly prejudicial to theinterests of its members generally or of some part of the members' then

120 Law Lectures for Practitioners 1997

the Securities Commission can petition the High Court under s 37ASFCO. The remedies available under this section are the same as thoseunder the Companies Ordinance.

Although s 37A SFCO was brought into effect in 1994, Rogers J hasconfirmed that it can be used in respect of the conduct of a company'saffairs which occurred prior to 1994. The case of Securities & FuturesCommission v Mandarin Resources Corporation Ltd and Chim Pui-chung3

('Mandarin Resources') under ss 37A and 454 SFCO is worth mentioningin this respect. In a preliminary decision delivered on 7 January 1997Mr Justice Rogers refused an application to strike out a petition pre-sented by the Securities and Futures Commission. The petition was onthe grounds that the affairs of Mandarin Resources had been conducted ina manner unfairly prejudicial to the interests of some of its shareholders,in particular the minority. Under the petition the Commission sought anorder to wind up Mandarin Resources on just and equitable grounds unders 45 of the SFCO and s 177( 1 )(f) of the Companies Ordinance. Thepetition under s 37A SFCO was opposed on the grounds that it wassought to give the section, which came into effect in 1994, retrospectiveeffect, as the proceedings related to conduct prior to 1994. This argumentwas rejected on the wording of s 37(1) which applies to the affairs of alisted company which 'have been conducted' in a particular way. It wastherefore clear that the legislature intended matters prior to 1994 to betaken into account. It was also noted that s 168A of the ordinance wasin almost identical terms and had been effective since 1978. No con-cluded view was reached but it was felt that arguments that conduct priorto 1994 should be disregarded were likely to fail so the petition would notbe struck out.

The majority of applications in respect of unfairly prejudicial con-duct will, however, be brought under s 168A by members of the companyconcerned 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 forwinding up on just and equitable grounds, relates to a company which can be wound up underthe Companies Ordinance and is not limited to registered persons, ie persons registeredunder the Securities or Commodities Trading Ordinance.


Remedies under s 168A and s 37A SFCO

Under s 168A and s 37A SFCO the court may make such orders as itthinks fit, whether to regulate the company's affairs or for the purchaseof shares of any member of the company. It can also appoint a receiverof the company's property.

In Mandarin Resources the Securities Commission sought to dis-qualify the second respondent as a director of that company. Rogers Jconfirmed that s 37A SFCO gives the court power to make such an orderand that this does not circumvent Part IVA of the ordinance, whoseprovisions were, he stated, intended to prohibit persons from beingdirectors of any company, whereas the petition in Mandarin Resourceswas in relation to one company only. He confirmed that the provisionsof s 37A(2) SFCO, which gives the court power to make any order itthinks fit to regulate the conduct of the company's affairs in the futureor otherwise, should be given a wide interpretation. Accordingly if itcould be shown that a director had mismanaged a company's affairs thendisqualification would be a natural step.5

In Mandarin Resources Rogers J also considered that the wording ofs 37A(2)(d) SFCO was broad enough for an order to be made for a personother than a member of the company or the company itself to purchaseshares of a company.6 In that case the second respondent had not beena shareholder in Mandarin Resources, but it was the petitioner's case thata majority shareholding in Mandarin Resources was held by nominees orby companies controlled by the second Respondent. The specific word-ing of s 37A(2)(d) SFCO did refer to purchases of shares by members ofthe company or by the company itself, but the section did enable thecourt 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 shareswill be of crucial importance. In Ronald Li-kai Chu v Deacon Te-ken Chiu7

5 Re Marmer Ltd [1959] 1 WLR 62 based on s 210 of the Companies Act 1948 was 'of somepersuasive authority on the breadth of the court's power under similar wording.'

6 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 Each-Ways limited [1994] 2 BCLC 420.

7 [1991] 2 HKLR 572.


the question of which shareholder should be ordered to sell shares andthe valuation of such shares was considered pursuant to an applicationunder s 168A. It was held that only in rare circumstances would themajority shareholder be compelled to sell. This follows the judgment ofHoffman ] in Re a Company (No 006834 of 1988) , ex p Kremer8 where hesaid: 'I think it must be very unusual for the court to order a majorityshareholder actively concerned in the management of the company tosell his shares to a minority shareholder when he is willing and able to buyout the minority at a fair price.'

The basis of valuation can however be contentious, as it was in thiscase, where the petitioner wanted the redevelopment potential of a siteto be taken into account. The respondents had offered to buy out thepetitioner's shares and had conceded that: (i) an independent valuershould be appointed; (ii) there should be no discount to reflect theminority shareholding; and (iii) the valuation should be based on theoriginal percentage shareholdings. The contentious point howeverremained the basis of the valuation and the redevelopment potential ofthe land. It was suggested that this could be left to a skilled valuer todetermine. In XYZ Ltd (No 004377 of 1986)9 Hoffman J had emphasisedthe importance of following the procedure agreed by the parties as setdown in the articles for the valuation of shares and said that he did notconsider that 'in the normal case of the breakdown of a corporate quasi-partnership there should ordinarily be any "legitimate expectation" thata member wishing to have his shares purchased should be entitled to havethem valued by the court rather than the auditors pursuant to thearticles.' In the Hong Kong case Barnett J, perhaps reflecting theimportance of redevelopment potential in Hong Kong, noted that sharevaluation could be very subjective.He stated:

Different valuers often arrive at staggeringly different valuationsdepending upon their basis of valuation, perhaps an earnings basis,perhaps a net assets basis, and the factors which they have taken intoaccount in coming to their conclusions. If there is not to be anagreement as to the basis for valuation and for a detailed 'speaking

8 [1989] BCLC 365, 367.9 [1986] 2 BCC 99, 520.


valuation.' in my judgment the petitioner is entitled to the protec-tion of this court.10

Unfairly prejudicial conduct

The main Hong Kong case in relation to s 168A and the interpretationof the words 'unfairly prejudicial' remains Re Taiwa Land Investment CoLtd.11 In that case the petitioner was both a minority shareholder and adirector. The petitioner alleged that when the company was originallyestablished it was agreed that it would be developed with borrowedmoney and out of accumulated income, and that new shares would notbe issued. The parties subsequently disagreed over the development of asite which had been purchased by the company on its incorporation, thedevelopment of which would have required a considerable capitalcontribution by the parties. It was alleged that this was outside theparties' original agreement, on which the petitioner placed great reli-ance, and unfairly prejudicial to the petitioner. In his judgment Fuad Jfollowed the South African case of Donaldson Investments v Anglo-Transvaal Collieries12 in which Preiss J, while emphasising that the factsof each case on unfair prejudice must be examined, stated:

that the applicants must establish that the majority shareholders areusing their greater voting power in a manner which does not enablethe minority to enjoy a fair participation in the affairs of a company.The emphasis is on the unfairness of the conduct complained of, itmust be conduct which departs from the accepted standards of fairplay, or which amounts to an unfair discrimination against theminority.13

On this basis Fuad J found therefore that 'elements of both unfairnessand prejudice must co-exist for the section to come into play.'14 He alsoemphasised that there must be an objective examination of all the factsand circumstances of the case, including the type of company and the

10 [1991] 2 HKLR 572,579.11 [1981] HKLR 297.12 [1979] 3 SA 713.13 Ibid, p 722.14 Note 10 above, p 305.

relationship between the parties. Fuad J referred to the speech of LordWilberforce in Ebrahimi v Westbourne Galleries15 where Lord Wilberforce,before illustrating when equitable considerations would have to be takeninto account, said: 'Certainly the fact that a company is a small one, ora private company, is not enough. There are very many of these wherethe association is a purely commercial one, of which it can be said thatthe basis of association is adequately and exhaustively laid down in thearticles.' The importance of the original contractual agreements be-tween parties, as set out in the company's articles, will be reviewed laterin respect of some more recent cases.

In Taiwa Land Fuad J found the following facts relevant to theapplication:

• The company was a small domestic one, where there were only fourdirectors

• Participation in the company was based on personal relationshipsand mutual trust and confidence

• The petitioner was locked-in' to the company as it would be difficultfor him to dispose of his shares in a small private company. This wasbefore the amendment to s 49 which may make share disposal easierif the company itself is in a position to buy back its own shares, andthe parties are willing to use this as a way of resolving a shareholdersdispute. The question of share valuation will however be problem-atical, and this issue in itself may prompt an application unders 168A16

Fuad J went on to say that in these circumstances the departure fromany understanding between the parties when the company was estab-lished could be 'unfairly prejudicial.' He therefore upheld the generalprinciples of Ebrahimi as being applicable to s 168A, although on the factshe found that no such basic understanding had ever existed. The petitionwas therefore unsuccessful.

In Re Usine Ltd,17 another Hong Kong case under s 168A, Rogers Jemphasised that both words unfair and prejudice must be given their full

15 [1973] AC 360, 379.16 See Ronald Li-kai Chu v Deacon Te-ken Chiu (note 7 above).17 Rel Usine Ltd, HCt,CWU No l04 of l990.


force. 'It is important to bear this in mind since clearly conduct could beone of these things and not the other.'

Section 37A SFCO was used by the Securities Commission in ReChesterfield Ltd.18 Orders to restrain one of the directors and its generalmanager from advising on or managing the business of Chesterfield orany of its subsidiaries were obtained. The two respondents did notcontest the petition by the Commission. Rogers J in reviewing whatconstitutes unfairly prejudicial conduct stated that it:

is conduct which results in harm to the members of the company orpart of the membership in their capacity as members of the company,The harm is harm which could either have been avoided or amelio-rated without harming the legitimate interests of others who wereparties to the particular transaction.

It covers a range of conduct. At one end of the scale is fraud — atthe other end of the scale the conduct can take the form of neglector inaction on the part of those to whom the affairs of a company areentrusted. The question to be asked in such circumstances is whetherthe conduct concerned is that which can be expected from themanagers of the company to whom those affairs have been entrusted.The directors of course cannot leave their duties to be performed byothers.

This raises the question of directors' inaction amounting to prejudi-cial conduct. This case did involve a public company, where a standardof competence is expected of directors commensurate with their positionas directors of a listed company.19

The recent English case of Re Saul D Harrison & Sons plc20 isrecognised as the current leading authority on unfairly prejudicialconduct. Briefly the facts were that the shares of the company, a smallfamily-owned enterprise whose main business was manufacturing andselling cleaning and wiping cloths, were divided into three classes andthe petitioner owned non-voting shares. The petitioner's allegation was

18 Re Chesterfield Ltd, HCt, MP No3504 of l994.19 See r 3.08 of the Rules Governing the Listing of Securities published by the Stock Exchange

of Hong Kong Limited.20 [1995]1 BCLC14.


that the company's business was conducted in an unfairly prejudicialmanner as she alleged it was no longer profitable and was kept goingsolely to preserve the salaries and fringe benefits of the directors. Thepetitioner wanted the company liquidated and for there to be a distribu-tion of assets to the shareholders.

' Hoffman LJ stated that the words 'unfairly prejudicial' were deliber-ately imprecise. The former wording of the section had required proof of'oppressive'behaviour which was too restrictive, Hoffman LJ noted thatthe words 'unfairly prejudicial' were chosen in drafting the legislation, asbeing equated in an earlier judgment of Lord Cooper to 'a visibledeparture from the standards of fair dealing and a violation of theconditions of fair play on which every shareholder who entrusts hismoney to a company is entitled to rely.'21 He confirmed that in decidingwhether conduct has been unfairly prejudicial the court must apply anobjective standard of fairness, and must keep in mind that 'fairness isbeing used in the context of a commercial relationship.'22 The relation-ship between the shareholders and each other and the company isgoverned by the contractual terms set out in the articles of association.Hoffman LJ noted that, as honouring agreements was probably the mainfactor in commercial fairness, the starting point in any application underthe section must be whether the behaviour that the shareholder allegedto be unfairly prejudicial was in accordance with what the partiesoriginally agreed as set out in the articles. This would often turn onwhether the directors' fiduciary powers have been used in the interestsof the company as a whole. 'If the board act for some ulterior purpose,they step outside the terms of the bargain between the shareholders andthe company.'23 This emphasis on the importance of the articles ofassociation echoes the earlier judgment of Lord Wilberforce in Ebrahimi.24

However although the articles are the starting point, conduct inbreach of the articles will not necessarily entitle a shareholder to relief,for example trivial or technical breaches would not be grounds for anapplication. So there may be conduct which is technically unlawfulunder the articles which would not however be unfair. Converselyhowever there may be behaviour which is lawful but which is unfair.

21 Per Lord Cooper in Elder v Elder and Watson 1952 SC 49.22 Re Saul D Harrison [1995] 1 BCL 14, 17.23 Ibid, p 18.24 [1973] AC 360.


Hoffman LJ noted that on occasions the articles may not completelyreflect the original agreements among the shareholders. He observedthat 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 andequitable grounds. Lord Wilberforce stated:

The words ['just and equitable'] are a recognition of the fact that alimited company is more than a mere judicial entity, with a person-ality in law of its own: that there is room in company law forrecognition of the fact that behind it, or amongst it, there areindividuals, with rights, expectations and obligations inter se whichare not necessarily submerged in the company structure.26

It may therefore be that the personal relationship between a share-holder and the controllers of a company would mean that in somecircumstances it would be unfair for the majority shareholders or thedirectors to use certain powers contained in the articles. There may becertain unwritten understandings between the parties, such as beingallowed to take part in managing the company and receiving salaryrather than dividends. These unwritten understandings could also beextended for the benefit of relatives of original joint venture parties. InRe Leeds United Holdings plc27 it was confirmed that such understandingsor 'legitimate expectations' must relate to the conduct of the affairs of thecompany and that an expectation that shares in the company will not besold without the consent of some or all of the other shareholders wouldnot fall within the court's jurisdiction under s 459.

In deciding whether it is appropriate to allow such equitable consid-erations to prevail, Hoffman LJ again referred to the judgment of LordWilberforce in Ebrahimi where Lord Wilberforce noted that agreementbetween the parties could be confined to that set out in the articles ofassociation and that 'the superimposition of equitable considerationsrequires something more.'28 Hoffman LJ confirmed that in the absenceof 'something more' 'the very minimum required to make out a case of

25 Ibid.26 Ibid, P 379.27 [1996] 2 BCLC 545,559.


unfairness, is that the powers of management have been used for anunlawful purpose or the articles otherwise infringed.'29

In the same case Neil L] also reviewed the need to take into accountboth a petitioner's legal rights and any equitable considerations whichmay arise from understandings between the parties concerned. He notedthat the words 'unfairly prejudicial' are general words which should beapplied flexibly to meet the circumstances of the particular case; how-ever 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 jurisdictionmeans that unless carefully controlled it can become a means of oppres-sion.'30 Arden J in the 1996 case of Re BSB Holdings plc31 reviewed thejudgment in Re Saul D Harmon and confirmed that it was now theleading authority on unfair prejudice, but noted particularly:

• the point was mentioned though not elaborated in Re Saul DHarrison but 'It is important that the legitimate and proper workingsof business and the investment of capital should not be inhibited byfor example unfounded threats of action under s 459';32 however

• the wording of s 459 is 'wide and general and, save where thecircumstances 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 playedby the directors to whom the shareholders have entrusted managementof the company. The directors must therefore:

exercise their powers in the interests of the company as a whole. Inorder to establish unfairness it is clearly not enough to show thatsome managerial decision may have prejudiced the petitioner'sinterest. A shareholder on joining a company will be deemed to haveaccepted the risk that in the wider interests of the company decisionsmay be taken which will prejudice his own interests.... Though it

28 1973] AC 360,379.29 1995] 1 BCLC 14, 20.30 1986] BCLC 362,367.31 1996] 1 BCLC 155.32 Ibid, p 241.31 Ibid, p 243.


is open to the court to find that serious mismanagement of acompany's business constitutes conduct that is unfairly prejudicial tothe interests of the shareholders the court will normally be veryreluctant to accept that managerial decisions can amount to unfairlyprejudicial conduct... .34 A shareholder can legitimately complainhowever if the directors exceed the powers vested in them or exercisetheir 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. Whatis meant by this phrase? Generally the interests of the company areidentified with those of the shareholders, unless the company is insol-vent, or perhaps of doubtful solvency, when the interests of the creditorsshould be taken into account.36 But if there are different groups ofshareholders, how do the directors decide between various competinginterests? The BSBH case reviewed this point in the context of a petitionin respect of unfairly prejudicial conduct. Briefly, a consortium ofshareholders agreed to provide finance to BSBH by way of equityinvestment, loans, and guarantees. The provision of the funds wascarried out in three separate rounds. One member of the consortiumLondon Merchant Securities plc (LMS) alleged that round 3 of thefinancing was conducted in a manner unfairly prejudicial to its interests.LMS alleged inter alia that the directors of BSBH had acted in breach oftheir fiduciary duties in acting: (1) without proper regard to the compa-ny's own best interests and (2) with the purpose of benefiting theirappointers. LMS had not been entitled to nominate a director of BSBHalthough after round 2 of the financing it was entitled to be notified ofboard meetings and to appoint an observer to attend board meetings onits 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 thecompany's best interests and not for any collateral purpose. The leadingauthority on collateral purpose is Howard Smith Ltd v Ampol Petroleum

34 See Re Elgindata Ltd [1991] BCLC 959, 993.35 Re Saul D Harrison [ 1995] 1 BCLC 14,31.* See Kinsela v Russell Kinsela Pty ltd (1986) 4 ACLC 215.


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 aCompany (No 00370 of 1987), ex p Glossop,38 where he stated:

It is, in my judgment, vital to remember that actions of boards ofdirectors cannot simply be justified by invoking the incantation 'adecision taken bona fide in the interests of the company.' Thedecision of the Privy Council in Howard Smith Ltd v Ampol Petroleum.Ltd [1974] 1 All ER 1126, clearly establishes that a decision can beattacked in the courts and upset notwithstanding (a) that directorswere not influenced by any 'corrupt' motive, by which I mean anymotive of personal gain as by obtaining increased remuneration orretaining office, and (b) that directors honestly believed that theirdecision was in the best interests of the company as they saw itsinterests. Lord Wilberforce's observations, delivering the advice ofthe Board, acquit the directors of corrupt motive; he asserts theprimacy of the board's judgment; but he goes on to assert that thereremains a test, applicable to all exercises of power given for fiduciarypurposes, that the power was not to be exercised for any 'bye-motives.'

When we talk of the directors acting in the best interests of thecompany, we must acknowledge that in certain circumstances thiscannot mean the interests of the company as a separate legal entity. Thiswas noted in the Australian case of Mills v Mills39 in the context of a bonusissues of shares which would have affected the voting power of differentclasses of shares. There it was a question of the interests of differentclasses of shareholders rather than the interests of the company.

Directors' duties to different groups of shareholders who hold thesame class of shares was considered in Mutual Life Insurance Co of NewYork v Rank Organisation Ltd.40 The company, Rank, gave the sharehold-ers, except North American nationals or residents, a right to subscribe fornew shares. The North American shareholders were excluded to avoidthe need to register with the Securities and Exchange Commission in the

37 [1974] 1 All ER 1126.38 [1988] BCLC 570,577.39 (1938) 60 CLR150,164.


US and its equivalent in Canada, as the directors felt that such registra-tion was not in the interests of the company. The excluded shareholdersclaimed that they were entitled to the same treatment as all othershareholders, Goulding J noted that the directors, as well as exercisingtheir powers in good faith in the interests of the company, must alsoexercise such powers fairly between different shareholders. In decidingthat the directors had acted fairly in excluding the North Americanshareholders he stated:

in my view the equality of individual shareholders in point of right,does not always require an identity of treatment.... Such exclusiondid not in any way affect the existence of a shareholder's shares northe rights attached to them ... no shareholder in Rank, while itsarticles of association retain their present form, has any right toexpect that his fractional interest in the company will remainforever constant.41

In reviewing this decision in BSBH Arden J concluded that, if therewas a conflict between the interests of the members and the interests ofthe company, then the interests of the company must prevail. Sheconcluded that in approving the round 3 financing arrangements thedirectors had acted bona fide in:

the test interests of BSBH as a legal entity,... However... where aproposed act of the company will have not only an effect on thecompany itself, but also an effect on the interest of some of theshareholders, their duty to act in the best interests of the companyrequires them also within limits to act fairly as between differentgroups of shareholders... the duty .,. required them to address theirminds to the question whether the proposals had different effects ondifferent groups of shareholders and, if they did, whether this wasauthorised by contractual arrangements between the parties or wasjustified in the particular circumstances by the overriding need to actin 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.


York v Rank Organisation Ltd the directors were not in breach of theirduty to act fairly when after proper investigation they decided thatit was in the interests of the company to proceed to make a rightsissue to some only of the holders of ordinary shares. The law does notrequire the interests of the company to be sacrificed in the particularinterests 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 prejudicialconduct when the point at issue has been the alleged mismanagement ofthe company's affairs. The general rule is that the court will not interferein commercial decisions made by the directors. As Warne J in ReElgindata Ltd43 observed, although in cases of serious mismanagement itwould be open to the courts to make a finding of unfairly prejudicialconduct 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 themanagement turning out to be poor.' He did however observe that ifmajority shareholders insisted on a demonstrably incompetent familymember being charged with management of a company's business thatmight amount to unfairly prejudicial conduct.

Arden J referred to this judgment in Re Macro (Ipswich) Ltd44 and alsoto the New Zealand case of Thomas v HW Thomas, Ltd45 which empha-sised the importance of balancing the conflicting interests of differentgroup members of a company. In Re Macro (Ipswich) Ltd the majorityshareholder and sole director of two companies, a Mr Thompson,managed the property business of the two companies through his ownfirm Thompsons. On the facts of the case Arden J was satisfied that thecompanies were prejudiced by various failures of Thompsons, includingfailure to have a planned management programme, to supervise repairs,to inspect properties, charging excessive management charges andsecretarial salaries, and maintaining money on Thompsons' client ac-count 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.


All of these matters are within the responsibility of Thompsons asthe companies' managing agent but they are attributable to the lackof effective supervision by Mr Thompson on behalf of the compa-nies. It is this conduct of the companies' affairs by Mr Thompsonwhich, in my judgment, is prejudicial in the respects I have men-tioned. As the conduct is prejudicial in a financial sense to thecompanies, it must also be prejudicial to the interests of the plaintiffsas holders of its shares.46

This was not therefore just a question of the quality of managementbeing poor, but of specific acts of mismanagement which Mr Thompsonfailed to prevent or rectify, some of which were repeated over many years.

Arden J noted the lack of an independent director on the board inthe context of the Cadbury Report, which she acknowledged wasdirected at listed companies, but pointed towards the 'desirability ofhaving a truly independent board'47 in all cases where there are minorityshareholders. The inability of Mr Thompson to act independently of hisposition as majority shareholder and sole proprietor of Thompsons wasfound to be unfairly prejudicial to the interests of the minority share-holder.

In the Hong Kong case of Re Forecast Nominees Ltd48 there was anaction to strike out a petition under s 168A on the grounds that there wasno reasonable cause of action and it was an abuse of process, because fairand reasonable offers had been made by the respondent to purchase thepetitioner'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 prac-tices. She noted the decisions of the English courts that generally thecourts, due to lack of business expertise, are reluctant 'to accept thatmanagerial decisions could amount to unfairly prejudicial conduct.' Thecourt would need 'clear evidence that the value of the company wasadversely affected' to make such a finding. However, referring to the BSBHoldings decision she confirmed that the categories of unfairly prejudi-

[1994] 2 BCLC 400,404.Ibid, p 407.In re s J168A of the Companies Ordinance and Forecast Nominees Ltd, HCt, MP No 1537 of 1996.


cial conduct were not closed. Self-enriching practices which fell short ofmisappropriation could constitute misconduct. The diversion of corpo-rate opportunities from the company at the expense of a shareholdercould amount to unfair prejudice.

Conclusion

It would appear that more cases are now being brought in Hong Kongunder s 168A. Certainly in England there was an explosion of cases underthe equivalent legislation, which perhaps, as in Re Saul B Harrison, hasled the court to come back to emphasise the importance of the originalcontractual relationship between the parties and the need for 'somethingmore,' to provide the basis for a valid case. In connection with this, theimportance of the actions of directors in breach of fiduciary duties or inbreach of duties of care and skill may be crucial.

The Protection of Minority Share Hole Der

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