Monday, 13 June 2011

Hong Kong: fiduciary obligation to consider shareholder interests in context of share issue

The High Court (Court of First Instance) gave judgment last week in Passport Special Opportunities Master Fund, LP v Esun Holdings Ltd (action number 2722 of 2008): see here or here (Word). This is a very interesting decision concerning the duties of directors in which the trial judge recognised the existence of a fiduciary obligation to have regard to the interests of shareholders when exercising the power to issue shares. To quote from the judgment (at paras. [147], [150] and [152]):

...although I was initially attracted by [the] submission that it would be inappropriate for a court to interfere with the decision of directors in relation to commercial questions such as whether or not, and how, funds should be raised for the company concerned once it is established that the power was exercised in good faith for proper purposes, and was not tainted by an improper primary motivation, I have come to the conclusion that there is an obligation of a fiduciary nature imposed upon directors, when deciding whether or not, and in what manner, to embark on an issue of new shares, to have regard to the interests of shareholders, and to exercise the power (if it is decided to do so) in a way that is fair as between different groups of shareholders ...

... While I accept that the court should not set itself up as a tribunal to which disgruntled litigants can appeal against the commercial decisions of the board of directors, I do not think that this excludes the possibility that the court can and should, in an appropriate case, inquire into the manner in which the decision was reached. If it can be established that the decision was reached with no consideration at all for a clearly relevant factor, it is not immediately apparent why it should not be subject to challenge ...

... I do not think that this involves a contravention of the principle that the court should not substitute its own judgment for the business judgment of the directors. If it is shown that the directors have taken account of the relevant factors, and have not acted for improper purposes, the weight that they choose to assign to the various factors which they properly take into account is a matter for them, and not something with which the court should concern itself".

Note: the Companies Bill is currently before the Bills Committee in the Legislative Council: see here. The Bill includes a partial codification of directors' duties (notably the standard of skill, care and diligence). Support for a more comprehensive codification of directors' general duties was not forthcoming at the consultation stage (see here, pp. 8 to 11, pdf).

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