WANG PENGYING v. NG WING FAI AND OTHERS

CACV 16 & 17/2020
(Heard together)
[2021] HKCA 100

CACV 16/2020

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 16 OF 2020

(ON APPEAL FROM HCA NO 1479 OF 2018)

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AND

CACV 17/2020

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 17 OF 2020

(ON APPEAL FROM HCA NO 1619 OF 2018)

________________________

________________________

(Heard together)

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J U D G M E N T

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Hon Kwan VP:

1.  These two appeals are against the orders of Coleman J in two common law derivative actions commenced by Madam Wang Pengying (“the plaintiff”), a shareholder of Convoy Global Holdings Limited (“Convoy Global”). By his judgment on 17 December 2019 (“the Judgment”), the judge ordered that the amended statement of claim in each action to be struck out and the two actions be dismissed, as the plaintiff has not established on the evidence a prima facie case either that the directors who are sued in these actions, Ng Wing Fai (“Ng”) and Yap E Hock (“Yap”), are wrongdoers in control, or that there has been a fraud practised by them against the companies concerned, being Convoy Global and two of its wholly owned subsidiaries, Forthwise International Limited (“Forthwise International”) and Convoy Finance Limited (“Convoy Finance”).

Background

2.  Unless otherwise stated, the background matters are taken largely from the Judgment and the amended statement of claim in HCA 2922/2017^[1], which was brought by Convoy Global and two of its subsidiaries against 39 defendants including a number of its directors and shareholders.  For present purpose, the matters related below do not appear to be in controversy between the parties to these proceedings.

(1) General background

3.  Convoy Global was incorporated in the Cayman Islands and is listed on the Main Board of Stock Exchange of Hong Kong.  It is part of a corporate group engaged in the business of financial planning, insurance brokerage, asset management and moneylending in Hong Kong, Macau and China.

4.  Since 2013, Cho Kwai Chee Roy (“Roy Cho”) gradually acquired ownership and control over Convoy Global by appointing his associates, nominees and/or agents to occupy various key positions in the company.

5.  In or around 2014, Roy Cho and/or his associates induced potential investors to invest in Convoy Global, including as a major investor the family of Tsai Ming Hsing (“the Tsai Family”) of Fubon Financial Holdings Limited in Taiwan through their corporate vehicles. Following a series of negotiations between Roy Cho, his associates and the Tsai Family, a capital-raising exercise for Convoy Global took place in around October 2015 in which, inter alia, alleged independent placees would participate.

6.  The alleged independent placees, who were allotted around 48% of the shares in Convoy Global, were each (1)persons or companies held by, associated with, and/or connected to listed companies in the ‘Enigma Network’, a network of 50 listed companies with overlapping ownership as exposed by the stock market activist David Webb in his report “The Enigma Network — 50 Stocks Not to Own” dated 15 May 2017, which were subject to the control, influence and/or interest of Roy Cho; and/or (2)persons or companies closely associated with Roy Cho, subject to the control, influence and/or interest of him personally.

7.  Unbeknownst to all public investors at the time, the October 2015 placing was the key step of a sophisticated scheme whereby the Tsai Family was induced to pay proper consideration to invest in Convoy Global and acquire the single largest shareholding in it (29.98%) and meanwhile Roy Cho would secretly retain full control over Convoy Global, through a hidden controlling shareholding in the company nominally held by the network of the alleged independent placees, evading all shareholder and regulatory supervision and oversight.

8.  Following the publication of the Webb report, the Securities and Futures Commission (“SFC”) raided several of the offices of Convoy Global in June 2017.  Within about six months of the Webb report, the SFC suspended trading on five companies in the Enigma Network.  On 7 and 8 December 2017, the Independent Commission Against Corruption (“ICAC”) arrested several officers of Convoy Global including three executive directors Quincy Wong Lee Man (also chairman of the company), Rosetta Fong Sut Sam (also the vice chairman) and Christie Chan Lai Yee (also its chief financial officer).  The ICAC also attempted to arrest Roy Cho, but he had left Hong Kong.  Roy Cho was arrested when he returned subsequently.

9.  Notwithstanding the exposure in the Webb report, the actions taken by the SFC and the uncertainties and turmoil surrounding Convoy Global, there were substantial acquisitions of its shares in the open market in the latter part of 2017, but with relatively little fluctuations in the price of the company’s shares.

10.  In July and August 2017, Kwok Hiu Kwan bought shares amounting to 29.91% of the issued share capital of Convoy Global.  He ceased to acquire shares in the company as he approached the 30% threshold for a mandatory general offer under the Takeover Code. From mid-August to October 2017, Chen Pei Xiong purchased shares amounting to 7.47% of the issued share capital.  From early to mid‑October 2017, the plaintiff purchased shares which amounted to 2.3% of the issued share capital.

11.  The father of Kwok Hiu Kwan controls a listed company Kaisa Group Holdings Ltd. Kwok Hiu Kwan, who was in his twenties, worked in the securities industry since he left university three years ago and ran a company which had the “Kaisa” name.  Chen Pei Xiong was a former member of the senior management of the Kaisa Group.  The total price for Kwok Hiu Kwan’s acquisition of the shares in Convoy Global, which came up to $889 million odd, was fully funded by an unsecured loan provided by Francis Choi Chee Ming, purportedly repayable only on demand with no fixed repayment date.  Francis Choi is the long-time business partner and funder of Roy Cho, and Kwok Hiu Kwan’s father has significant business and personal connections with Roy Cho and Francis Choi.

12.  HCA 2922/2017 was commenced by Convoy Global and two subsidiaries on 18 December 2017 under the reconstituted board of directors.  It was alleged in that action that Kwok Hiu Kwan and Chen Pei Xiong had posed as bona fide purchasers and the shares they acquired were a large part of the shares allotted to the alleged independent placees who transferred those shares to Kwok and Chen, directly or indirectly, in order to mask and white-wash the wrongful nature of the initial allotment and subscription, and that this was a scheme to facilitate Roy Cho cashing out part of his interest and passing control of the company to Francis Choi. Convoy Global sought inter alia a declaration that the wrongfully allotted shares to the alleged independent placees are void.

13.  As for the shares acquired by the plaintiff, there is no evidence of the source of funding for her acquisition.  She acquired her shares through the same securities firm as Chen Pei Xiong.  She is a legal representative of a company in the PRC.  She has denied that she is associated with Kwok Hiu Kwan, Chen Pei Xiong or the Kaisa Group.

14.  On 30 October 2017, Kwok Hiu Kwan requisitioned an EGM to change the constitution of the board of directors of Convoy Global except for Quincy Wong, Rosetta Fong and an independent non-executive director (“INED”) Peter Ma Yiu Ho.  Two days before the EGM was scheduled to be held on 29 December 2017, a petition was issued by a shareholder of Convoy Global, one Madam Zhu Xiao Yan, in HCMP 2773/2017 against 33 defendants including Kwok and Chen Pei Xiong.  Madam Zhu held a small number of shares in the company and she had the same residential address in Hong Kong as Ng.  Her complaints in the petition substantially overlapped with those in HCA 2922/2017.  She sought as against Kwok and Chen that they be restrained from exercising their voting rights and dealing in the shares they held in Convoy Global. 

15.  The chairman of Convoy Global, Johnny Chen, presided at the EGM on 29 December 2017.  He decided to disqualify the shares of Kwok Hiu Kwan from voting.  Kwok issued proceedings in HCMP 41/2018 in January 2018 against Johnny Chen and Convoy Global seeking a declaration that Johnny Chen’s decision to disqualify his shares from voting was void.  After a trial in March 2019, Kwok’s action was dismissed by Harris J and reasons were handed down on 4 March 2020 ([2020] 3 HKC 403)^[2]. Harris J did not have to decide whether or not Kwok is the beneficial owner of the shares he held or whether he acquired those shares as part of an improper conspiracy as alleged by Convoy Global in HCA 2922/2017.  The issue before him was whether Johnny Chen’s decision was made in bad faith and this was held not to be made out.

(2) Changes in the composition of the board of directors

16.  As described by Mr Anson Wong, SC, who appeared for the plaintiff in these appeals^[3], Convoy Global is “indisputably embroiled in a board fight of epic proportions”.

17.  On 15 September 2015, Ng was appointed an executive director of Convoy Global.  He became the Group President of the Convoy Group.  It was Ng who introduced the opportunity of acquiring a large shareholding in Convoy Global to the Tsai Family.  He asserted that he was recommended to the board for appointment as executive director by a nomination committee chaired by Quincy Wong, and although he had served as managing director of Fubon Financial Holdings Limited, he left this position in 2006 and had not been employed by the Tsai Family or any Fubon entity since then.  He denied that he was appointed to the board as an associate or nominee of the Tsai Family.

18.  Prior to the joint operation of the ICAC and the SFC in December 2017, the board of directors was made up of six executive directors (Quincy Wong, Rosetta Fong, Christie Chan, Roy Cho, Byron Tan Ye Kai and Ng), one non-executive director (John Wang Hong-chiun) and two INEDs (Peter Ma and Patrick Pun Tit Shan).

19.  Following the arrest of three executive directors on 7 and 8 December 2017, on 8 and 9 December Convoy Global announced the appointment of three new INEDs (Francine Fu Kwong Wing Ting, Martin Pak Wai Keung and Joseph Yan Tat Wah) and three new executive directors (Johnny Chen, Yap and Eva Ip Yee Kwan); that Quincy Wong, Rosetta Fong and Christie Chan were suspended; and that Johnny Chen was the interim chairman.  Johnny Chen was appointed the chairman on 21 December 2017.

20.  On 29 December 2017, a non-executive director (Chen Shih‑pin) was appointed.  Chen Shih-pin had held various positions at Fubon Life Insurance Co Ltd in Taiwan since 1995.  He was nominated by the Tsai Family.

21.  On 9 January 2018, Byron Tan tendered his resignation as an executive director.

22.  On 15 January 2018, further appointments were made of two new executive directors (Almond Wong Suet Fai and Henry Shin Kin Man) and one new INED (Huan Guocang). 

23.  On 1 February 2018, Eva Ip and John Wang tendered their resignation as executive directors.  Peter Ma tendered his resignation as INED on 6 July 2018. On 20 August 2018, the board of directors resolved to remove Roy Cho as executive director.  On 24 October 2018, Huan Guocang and Almond Wong tendered their resignation as INED and executive director.

24.  The composition of the board of directors in October 2018 was made up of these directors as follows: four executive directors (Ng, Yap, Johnny Chen, Henry Shin), one non-executive director (Chen Shih-pin), four INEDs (Patrick Pun, Martin Pak, Joseph Yan, Francine Fu) and three suspended directors (Quincy Wong, Rosetta Fong and Christie Chan).

(3) The claims in HCA 1479/2018 and HCA 1619/2018

25.  The plaintiff issued the writ in HCA 1479/2018 on 27 June 2018 and the writ in HCA 1619/2018 on 11 July 2018 on behalf of herself and all other shareholders in the relevant companies.

26.  Ng was sued as the 1^st defendant in HCA 1479/2018.  The claim in this action relates to the fact that between 4 February 2016 and 12 October 2016, Forthwise International advanced four loans in the aggregate sum of $90 million (“the Forthwise loans”), unsecured and interest free, to Forthwise Ltd, a newly incorporated company with a nominal capital of $10,000 in the business of Hi-Fi dealership, which had no relevance to the main business of Convoy Global.  The loan agreements were executed by Ng for Forthwise International.  It was further agreed on 12 October 2016 that the Forthwise loans would be converted into 46% of the issued share capital of Forthwise Ltd on or before 31 December 2018, on demand by Forthwise International.  A personal guarantee dated 10 March 2017 for the loans was subsequently provided by the director of Forthwise Ltd, Tang Chung Yen Tom^[4], on 10 March 2017.

27.  Ng and Yap were sued as the 1^st and 2^nd defendants in HCA 1619/2018. The claim in this action relates to the fact that on or about 22 January 2016, Convoy Finance agreed to purchase from Yehchen Holdings Ltd (“Yehchen”) the entire shareholding of Maxthree Ltd (“Maxthree” and “the Maxthree share transaction”). Maxthree owned the entire issued share capital of Artley Finance (HK) Limited (“Artley”) and Artley owned the entire issued share capital of Hong Kong Credit Corporation Limited (“HKCC”).  The consideration was $24,630,000 and this was later increased to $36,420,000.  It was stated in the interim report of Convoy Global that this was part of the strategy of expanding the money lending business of the group.  Maxthree did not have a money lender’s licence at the time (Artley and HKCC did not obtain a money lender’s licence until May 2016), the consideration appeared to be grossly over-valued compared to the turnover, profit and net asset value as disclosed in the books of account of Maxthree (goodwill alone in the acquisition was valued at over $17 million) and it was paid to Yap (a director of Artley and HKCC) and not the vendor Yehchen.

28.  It is the plaintiff’s case that Ng had breached his director’s fiduciary duties owed to the two subsidiaries, Forthwise International and Convoy Finance, by causing them to enter into the two impugned transactions which were clearly not bona fide in the best interests of these companies, and that Yap was a knowing recipient or dishonest assistor in the Maxthree share transaction.

29.  On 18 December 2018, Ng and Yap issued the summonses to strike out the common law derivative actions on the basis that the plaintiff has no locus standi to bring or continue the actions and/or has failed to plead and prove an arguable case of wrongdoer in control and/or actual fraud by or personal benefit to Ng and Yap.

30.  In support of the strike out applications, apart from filing affirmations by Ng and Yap, a number of other directors of Convoy Global made affirmations in which they asserted that they had exercised independent judgment as regards the affairs of the company at all material times.  The plaintiff served interrogatories concerning these assertions, targeting the process and circumstances of the alleged exercise of independent judgment.  Ng and Yap applied for the withdrawal of interrogatories.  On 16 September 2019, Coleman J ordered the interrogatories to be withdrawn as he termed the request for interrogatories “a backdoor attempt at cross-examination” and did not think they were necessary for saving costs or for the fair disposal of the strike out applications^[5].

31.  After the interrogatories were turned down, on 18 October 2019, the plaintiff amended the statement of claim in each action.  The amendments relate primarily to further allegations why it is said that Ng was and remained in de facto control over the board of directors of Convoy Global, by pleading a conspiracy of the other directors, who allegedly did not exercise independent judgment or act independently as regards the affairs of the company.

The burden and threshold requirements

32.  It is incumbent on the plaintiff to show that the proposed claims in the derivative actions fall within an exception to the rule in Foss v Harbottle (1843) 2 Hare 461.  The relevant exception here is the “fraud on the minority” exception.

33.  The threshold requirements to be met by a plaintiff in bringing a common law derivative action are clear.  “Substantively, such an action is only permitted where it can prima facie be shown that there exists a viable cause of action or equitable claim vested in the company which, if made good, would establish a fraud on the minority; as well as control of the company by the alleged wrongdoers such as to enable them to stifle any proposed action against themselves.” (Waddington Ltd v Chan Chun Hoo (2008) 11 HKCFAR 370 at §13)

34.  The judge had set out comprehensively in the Judgment what a plaintiff must establish where there is challenge to his standing to bring a common law derivative action.  These parts of the Judgment are not disputed on appeal and they read as follows:

“16. It is therefore necessary for a plaintiff to plead (a) that there is a viable cause of action vested in the company, and (b) that the cause of action if made good would establish a fraud on the minority, and (c) that the wrongdoers are in control of the company, and that they have prevented an action being brought in the name of the company, and that the plaintiff could not by reason of the defendants’ opposition obtain the name of the company to issue proceedings.

17. The Waddington case, at §14 and §§17-20, makes it clear that a challenge to the plaintiff’s standing generally takes the form of an application to strike out the claim or to have the court determine as a preliminary issue that the plaintiff has no standing to sue on the company’s behalf. By either procedural route, it is the prima facie test which is applied, in what has been described as a “halfway house for this very special type of case”^[6], where the legal issues are sufficiently well defined for the parties to be able to argue them.

18. The burden of proving wrongdoer in control remains with the plaintiff, even where the defendant seeks to strike out a derivative action on the ground of lack of standing: see, for example, Melvin Waxman v Li Fei Yu (unreported, HCA 1973/2012, 23 August 2013, To J) at §23. To achieve the standard of showing a prima facie case, the party which bears the burden of proof has to adduce sufficient evidence to satisfy the court that there are reasonable grounds for believing that his case or the issue in question is well-founded, so that it becomes one fit for the tribunal of fact to adjudicate upon it.

19. The burden of proving a prima facie case is not met simply by raising a disputed issue of fact.  But how the burden is discharged will depend upon the circumstances of the case.  If the issues in question are adequately pleaded and not contradicted by evidence filed by the parties, then the pleading alone would be sufficient proof of the prima facie case.  But even if contrary evidence has been filed by the defendant, the courts are not required to conduct a trial by affidavit, nor necessarily to call the makers of the affidavit for cross‑examination.  The courts are capable of and well experienced in making provisional findings of fact on affidavit evidence in such interlocutory proceedings by testing the plaintiff’s case against documentary evidence, incontrovertible evidence, or evidence which is not in dispute.  The court can determine against the backdrop of such contrary evidence whether the plaintiff’s evidence has passed the threshold so as to make the issue or the case fit for determination by the tribunal of fact. Hence, in an appropriate case, the court may be satisfied on the basis of the pleaded case that the prima facie test is met, irrespective whether contrary evidence has been filed by the defendant: see, for example, Melvin Waxman at §§23-26, which I referred to in my earlier decision on interrogatories in this case [2019] HKCFI 2430 at §§13-14.”

The judge’s holdings and these appeals

35.  The judge ordered the claims to be struck out as he is not satisfied that the plaintiff has established a prima facie case either that (a) Ng and Yap are wrongdoers in control of Convoy Global, and hence Forthwise International and Convoy Finance, or that (b) there has been a fraud practised by Ng and Yap against Convoy Global, and hence Forthwise International and Convoy Finance.

36.  For the requirement of wrongdoer in control, out of the nine directors who made up the board as re-constituted in December 2017 and 2018, it was noted the plaintiff has only pleaded that Yap and Johnny Chen are accustomed to follow or act in accordance with Ng’s instructions (though there is the conspiracy allegation in the latest amendments in October 2019)^[7]. With the exception of Ng and Patrick Pun, who was appointed part way through the Forthwise loans, none of the re-constituted board members had been appointed at the time of the two impugned transactions.  The judge opined in those circumstances, it is not as if those other directors would have any incentive for ‘self-protection’^[8].

37.  As to control at shareholder level, it is the plaintiff’s own case that the controlling shareholders are not Ng but the Tsai Family.  The judge did not think Ng’s purported status as an associate or nominee of the Tsai Family would assist, as no allegation has been made as to why the Tsai Family would wish to vote their shares to insulate Ng from legal action^[9].

38.  In respect of the fraud on the minority requirement, the judge followed the line of English authorities affirmed by its Court of Appeal in Harris v Microfusion 2003-2 LLP & Ors [2017] 1 BCLC 305 and he held that mere negligence or even gross negligence without fraud or personal benefit to the alleged wrongdoer is not sufficient^[10]. Further, he did not think there is any basis for suggesting fraud, dishonesty or personal benefit. There is no plea that the impugned transactions were self-dealing transactions and no real evidence of substance to rebut Ng’s denial of receipt of any personal benefit^[11].

39.  For the plaintiff to succeed in these appeals, she would need to establish that the judge had erred in both of the holdings regarding wrongdoer in control and fraud on the minority.  If she is successful in her challenge on only one of the holdings, the appeals fall to be dismissed.

Wrongdoer in control

40.  No issue was taken as to the way the judge summarised the legal principles in this respect.  The key issue is whether the company is being improperly prevented from bringing proceedings, as prevention of the prosecution of an action by “an appropriate independent organ” will not amount to improper prevention^[12]. What is required to be shown is “effective as opposed to legal control” of a company’s activities^[13].

41.  Mr Wong further emphasised that in considering this key issue, the court would not adopt a dogmatic approach, but would take a practical view of the matter and that control embraces de facto and de jure control.  Mr Maurellet, SC, who appeared for Ng and Yap in these appeals^[14], did not argue otherwise.

42.  As mentioned earlier, the judge had considered wrongdoer control on board level and shareholder level.

43.  As for control on board level, Mr Wong attacked the finding that the plaintiff cannot establish a prima facie case that Ng and Yap are in control of the board of Convoy Global.  He submitted that the judge primarily focused on the qualifications and experience of board members (the professional credentials include the financial services industry, insurance and accounting and a number of them have served as INEDs of listed companies) and failed to consider the circumstances in which the directors of the re-constituted board came to be appointed.  He drew attention to Ng’s affirmation that new appointments were made on 8 and 9 December 2017 “in view of the ICAC arrests”^[15] and remarked that it is “rather inexplicable” that the remaining directors led by Ng managed to find candidates for appointment in a short space of time after the arrests were made, and the situation was “all the more mysterious” as the new appointments were made “in the midst of all uncertainties” and that new directors agreed to join “a ship as wobbly as [Convoy Global]” and to “take up a chalice as poisoned as [Convoy Global’s] at its darkest hour, without even agreeing to any emolument terms”.  Mr Wong criticised the affirmations of the new directors for failing to explain in any detail how they came to be appointed or the basis how each came to exercise independent judgment as asserted regarding the affairs of Convoy Global including the impugned transactions.

44.  The facts of the appointment of the new directors were pleaded by the plaintiff^[16] but the forensic points made on appeal about the circumstances of appointment of the new directors were not raised in the pleadings of the plaintiff, or in the affirmations she filed in opposition to the strike out applications.  Mr Maurellet made a valid point that Mr Wong should not be allowed to raise these forensic points on appeal (which are unsupported by evidence) about Ng allegedly dictating the re‑constitution of the board and the timing of the new appointments on 8 and 9 December 2017, as the defendants had no opportunity of answering these points by evidence.  The judge was well aware of the general circumstances of the new directors’ appointments and would appear to have taken them into account^[17].  The plaintiff has not adduced evidence to contradict Ng’s evidence that independent directors were appointed to reconstitute the board as part of the efforts of the company to strengthen its management and conduct investigations alongside the regulatory authorities^[18] or the evidence of the directors that they are not connected to Ng and none of them had any relationship with Ng outside of Convoy Global^[19].

45.  All the other points made by Mr Wong concerning the lack of an independent board were made before the judge by the plaintiff’s former counsel^[20] and were rejected for the reasons as summarised earlier.  There is no basis to interfere with the judge’s assessment of the totality of the evidence in this regard.

46.  Mr Wong repeated the complaint as to the common paragraph in the directors’ affirmations stating that they had exercised independent judgment but without explaining how they reached their judgment is a “hallmark of lack of independence”.  He contended that the impugned transactions were on their face plainly against the interest of the company and called for explanation.

47.  The judge has declined to allow interrogatories of the affirmations of the directors regarding the circumstances under which it was said that independent judgment was exercised by them.  This is because in the strike out applications, the plaintiff has assumed the burden of establishing wrongdoer in control and there should be no reversal of the burden.  The plaintiff must be taken to have pleaded all material facts she considered appropriate as enabling her to meet the burden.  The issue of wrongdoer in control would need to be determined by testing the plaintiff’s assertions against contrary evidence, and weighed in the usual way of an interlocutory application^[21]. The assertions pleaded by the plaintiff that Ng had and still has de facto control over the board in that the other directors did not exercise independent judgment^[22] are bare assertions of circular reasoning with no or no sufficient evidential basis for a proper inference to be drawn.

48.  As for control on shareholder level, Mr Wong contended that the judge should not make it an additional requirement that the Tsai Family would wish to vote their shares in a way to insulate Ng from legal action. Even if that would need to be satisfied, he submitted there are good reasons for the Tsai Family to insulate Ng from legal action as Ng had taken various steps to assist the Tsai Family to take control of Convoy Global by causing Johnny Chen to disqualify Kwok Hiu Kwan from voting at the EGM on 29 December 2017, by causing the company and its subsidiaries to bring proceedings in HCA 2922/2017, and by causing Madam Zhu Xiao Yan to present a petition with similar complaints in HCMP 2773/2017^[23].

49.  Shareholder control is alleged by the plaintiff to be exercised by the Tsai Family.  The derivative actions here are brought against Ng, not the Tsai Family.  It has not been alleged that Ng controls the Tsai Family, or that the Tsai Family were complicit in or had benefited from Ng’s alleged breaches of duty.  The judge is right to hold that the purported status of Ng as an associate or nominee of the Tsai Family does not assist, as there is no allegation that the Tsai Family would wish to vote their shares to insulate Ng from legal action.  The allegation that Ng had by various measures assisted the Tsai Family to take control of the company does not fill the lacuna.  Moreover, the allegation that Johnny Chen had disqualified Kwok Hiu Kwan from voting at the EGM on 29 December 2017 out of an improper motive to pursue Ng’s stratagem to entrench the board and ultimately to advance the Tsai Family’s interest was rejected by Harris J in HCMP 41/2018 after a trial^[24].

50.  For the above reasons, the plaintiff’s attack on the judge’s holding regarding wrongdoer in control must fail.  As she is unable to succeed on one of the two requirements for bringing these common law derivative actions, her appeals would fall to be dismissed.  It is not strictly necessary to consider the other requirement of fraud on the minority.  In light of the elaborate submissions made on the other requirement, I will deal with it for completeness but my views as set out below are strictly obiter.

Fraud on the minority

51.  Mr Wong’s attack on the judge’s holding on this issue is twofold. First, he submitted that the English Court of Appeal decision in Harris v Microfusion 2003-2 LLP & Ors followed by the judge is wrongly decided. Microfusion reaffirmed the principle that there can be no fraud on the minority short of (1) actual fraud in the sense of there being deliberate and dishonest breaches of duty; (2) an ultra vires act; or (3) personal benefit to the alleged wrongdoers.  Second, if the Microfusion case should be followed, and no personal benefit on the part of Ng can be shown, the plaintiff is able to show there is fraud on the minority on the basis there is a prima facie case of deliberate and dishonest breach of duty.

(1) If the Microfusion case is wrongly decided

52.  In the Microfusion case, McCombe LJ (with whose judgment Christopher Clarke LJ and Jackson LJ agreed) reviewed the relevant authorities.  He remarked at §32 that although they are all authorities at first instance (Daniels v Daniels [1978] Ch 406 (Templeman J); Estmanco (Kilner House) Ltd v Greater London Council [1982] 1 WLR 2 (Megarry V-C); Universal Project Management Services Ltd v Fort Gilkicker Ltd [2013] Ch 551 (Briggs J); Abouraya v Sigmund [2014] EWHC 277 (Ch) (David Richards J)), they are decisions of judges “with the deepest of knowledge of our company law” and he would not be inclined to depart from them except for very good reason.  He did not find any good reason to do so.  He concluded in §31 that the extent of the relevant exception to the rule in Foss v Harbottle is as stated by David Richards J in Abouraya v Sigmund.

53.  The scope of “fraud” for the purpose of the “fraud on the minority exception” to the rule in Foss v Harbottle has been considered in many cases.  The nineteenth century cases reviewed by Templeman J in Daniels v Daniels proceeded on the basis that the exception applied only to cases of actual fraud in the sense of deliberate and dishonest breach of duty and acts of ultra vires.  Two cases in the early twentieth century (Alexander v Automatic Telephone Co [1900] 2 Ch 56; Cook v Deeks [1916] 1 AC 554) permitted derivative actions to be brought where allegations of fraud were rejected but the directors exercised their power in a manner which conferred personal benefits on themselves at the expense of the company and other shareholders.

54.  After a full review of the cases including the later decisions, Templeman J summarised the scope of the exception in this way (at 413H to 414E):

“The authorities which deal with simple fraud on the one hand and gross negligence on the other do not cover the situation which arises where, without fraud, the directors and majority shareholders are guilty of a breach of duty which they owe to the company, and that breach not only harms the company but benefits the directors. In that case it seems to me that different considerations apply. If minority shareholders can sue if there is a fraud, I see no reason why they cannot sue where the action of the majority and the directors, though without fraud, confers some benefit on those directors and majority shareholders themselves. It would seem to me quite monstrous – particularly as fraud is so hard to plead and difficult to prove – if the confines of the exception to Foss v Harbottle, 2 Hare 461, were drawn so narrowly that directors could make a profit out of their negligence. … The principle which may be gleaned from Alexander v Automatic Telephone Co [1900] 2 Ch 56 (directors benefiting themselves), from Cook v Deeks [1916] 1 AC 554 (directors diverting business in their own favour) and from dicta in Pavlides v Jensen [1956] 2 Ch 565 (directors appropriating assets of the company) is that a minority shareholder who has no other remedy may sue where directors use their powers, intentionally or unintentionally, fraudulently or negligently, in a manner which benefits themselves at the expense of the company.”

55.  In Abouraya v Sigmund, David Richards J undertook another analysis of the cases up to date and arrived at this conclusion in §25:

“It follows, on the authorities as they stand, that financial or other loss to the shareholders, albeit normally of a reflective character, is essential to give a Claimant shareholder sufficient interest in the proceedings to make the shareholder an appropriate Claimant on behalf of the company, whether he is a member of that company or of its holding company. Equally, the authorities require that, in the absence of actual fraud or an ultra vires act, the wrongdoers should themselves have benefited from the wrongdoing. The significance of this requirement is that their breach of duty cannot be ratified by a majority vote which depends on the votes of the wrongdoers. It is essential to the exception to the rule in Foss v Harbottle that the alleged wrongdoing is incapable of lawful ratification: see Smith v Croft (No 2) [1988] Ch 114.”

56.  This is echoed in Microfusion at §33:

“Essentially, people are free to join as members of corporate entities upon whatever terms they choose, formulated in articles of association, partnership deeds for LLPs or shareholders’ agreements. They are bound by such arrangements and if majority rule is provided for, the minority is bound by the wishes of the majority. The majority can choose to excuse breaches of duty by directors, provided that the majority have not used their voting powers to confer benefits upon themselves in breach of duty and are not using the self-same powers to prevent the company from recovering the loss caused to it, in effect expropriating the minority in the process. The constraints imposed by equity make an exception to the rule in Foss v Harbottle in cases where the controlling members are precluded from ratifying the relevant breach by exercise of their majority votes. Thus, the ‘fraud on the minority’ exception prevents directors from improperly benefitting themselves at the expense of the company.”

57.  Among Mr Wong’s reasons for contending that Microfusion (which accepted the correctness of the analysis of Templeman J) is wrongly decided is his contention that the review conducted in Daniels v Daniels was “simply for the purpose of establishing that common law fraud is not required to sustain a derivative action” and it was not necessary for Templeman J to consider “the further question as to scope of whether other breaches which would be sufficient”. I do not think Daniels v Daniels should be read so restrictively.  What is more important is the correctness of the analysis undertaken by the court.

58.  Mr Wong also took issue with the statement in Abouraya v Sigmund as reaffirmed in Microfusion it is essential to the exception to the rule in Foss v Harbottle that the alleged wrongdoing is incapable of lawful ratification.  He submitted it is problematic to resort to ratifiability as justification for restricting the exception to the fraud on the minority rule. He criticised the concept of ratifiability as “too wide” and “notoriously uncertain”.  He prayed in aid Gower’ Principles of Modern Company Law (10^th ed) at §16-124, in which the learned authors discussed which breaches are non-ratifiable as a question “which has bedevilled the common law” and expressed the view that “A satisfactory answer, consistent with common sense and with the decided cases, is difficult (and perhaps impossible) to provide.”^[25]

59.  He submitted that the narrow approach in Microfusion should not be followed, and cited Minority Shareholders Law, Practice and Procedure by Victor Joffe QC et al (6^th ed) at §2.18, in which the view was expressed that a breach of fiduciary duty should not be equated with mere negligence for this purpose and that the imposition of a requirement that the wrongdoer should have benefited personally as well as that the company must have suffered loss runs counter to the purposive reasoning that a wrong should not be left without a remedy.

60.  The question is whether the scope of the exception to Foss v Harbottle, as affirmed in Microfusion after a review of the relevant authorities, should be expanded.

61.  From time to time, there have been unsuccessful attempts to expand the scope of the exception to “any breach of duty” (Daniels v Daniels at 409B) and “where the proposed claim involves an allegation of breach of fiduciary duty and/or an abuse/misuse of power” (Microfusion at §21).  These attempts were premised on the concept or touchstone of justice (Microfusion at §28).  Whilst the courts have acknowledged that justice is an important reason for the exception to the rule in Foss v Harbottle, they have rejected the concept of justice as a test, as it is not workable for “if the test were simply justice or injustice, this would mean different things to different men” and it is preferable to proceed by formulating individual exceptions to the rule (Estmanco at 10 H, 11B to C; followed in Microfusion at §28).  To put it in other words, the justification for the exceptions to the rule should not be confused with their boundaries (Microfusion at §30).

62.  I have had the benefit of reading in draft the judgment of Yuen JA, who formulated a different test as an exception to the rule in Foss v Harbottle, drawing on an article of Professor Worthington, “Corporate Governance: Remedying and Ratifying Directors’ Breaches” (2000) 116 LQR 638, which has not been cited by the parties.

63.  In essence, a dissenting minority of shareholders cannot pursue a derivative action in defiance of an effective and binding decision by a corporate organ.  The focus in this context is not on ratification (adopting or affirming an unauthorised or voidable transaction so as to make it binding on the company) but on exoneration (releasing a claim of the company against a wrongdoer for past breach so the company is bound by the decision not to sue).  If there is an effective company decision to release a claim, that should be the end of the matter.  Three issues are to be considered as to what constitutes an effective and binding corporate decision: (1) Does the company have the capacity to make the decision?  (2) Does the relevant corporate organ (often the general meeting) have the authority to make the decision?  (3) Has that authority been properly exercised?

64.  The issue in (3) is a form of equitable restriction, which requires discretionary powers to be exercised bona fide and for proper purposes.  Hence, a decision taken by the corporate organ not to sue will not be effective to bind the company unless it is taken bona fide and for proper purposes.  The essence of this equitable restriction on the voting power of the general meeting means that shareholders may vote in their own interests except where to do so would be to use their voting power for a purpose that is outside the scope of the power granted to them.  What counts as a proper purpose depends on the context and the particular issue at stake.  Where a general meeting resolution on a litigation decision is carried only by counting the votes of those who can be shown or deemed to have abused their power, those votes would not be effective and the purported exoneration would not bind the company.

65.  I am inclined to agree with Yuen JA, who has analysed the legal issue in detail, that the true test for excluding the rule in Foss v Harbottle is the lawfulness of the majority vote releasing the defaulting director from liability.  This seems to me to be a workable solution and the analysis has the backing of fundamental principles which underpin the corporate constitution and the concept of corporate personality.  It would also integrate the general law rules on exoneration with the company law principles of majority rule.

66.  As the above view is obiter and the parties have not addressed us on this, it would not be appropriate to discuss further whether the plaintiff would have satisfied the above test on the evidence before this court.  Besides, it should not be assumed that neither party would have any further evidence to adduce if the above test should be applied.

(2) If there is a prima facie case of deliberate and dishonest breach of duty

67.  Mr Wong’s alternative position (on the premise that Microfusion should be followed) is that the plaintiff is able to show a prima facie case of deliberate and dishonest breach of duty.

68.  He pointed out it is pleaded that Ng did not act bona fide and in the best interests of the companies in question^[26] and that breach of the duty to act bona fide involves a question of honesty.  He cited Re HLC Environmental Projects Ltd [2014] BCC 337 in which John Randall QC, sitting as a deputy High Court judge, granted the liquidators’ application in misfeasance proceedings for breach of director’s duties and had this to say about the duty to act bona fide in the best interests of the company:

“91. It is common ground that [the duties] are subjective ones, in the sense explained by Jonathan Parker J (as he then was) in Re Regentcrest Plc v Cohen [2001] BCC 494 at [120]:

“The duty imposed on directors to act bona fide in the interests of the company is a subjective one (see Palmer’s Company Law (Sweet & Maxwell) para 8.508). The question is not whether, viewed objectively by the court, the particular act or omission which is challenged was in fact in the interests of the company; still less is the question whether the court, had it been in the position of the director at the relevant time, might have acted differently.  Rather, the question is whether the director honestly believed that his act or omission was in the interests of the company.  The issue is as to the director’s state of mind.  No doubt, where it is clear that the act or omission under challenge resulted in substantial detriment to the company, the director will have a harder task persuading the court that he honestly believed it to be in the company’s interest; but that does not detract from the subjective nature of the test.”

92. However, this general principle of subjectivity is subject to three qualifications of potential relevance in this case:

(a) Where the duty extends to consideration of the interests of creditors, their interests must be considered as “paramount” when taken into account in the directors’ exercise of discretion …

(b) … the subjective test only applies where there is evidence of actual consideration of the best interests of the company. Where there is no such evidence, the proper test is objective, namely whether an intelligent and honest man in the position of a director of the company concerned could, in the circumstances, have reasonably believed that the transaction was for the benefit of the company (Charterbridge Corp Ltd v Lloyds Bank Ltd [1970] Ch 62 at 74E-F, (obiter), per Pennycuick J; Extrasure Travel Insurances Ltd v Scattergood [2003] 1 BCLC 598 at [138] per Mr Jonathan Crow).

(c) Building on (b), I consider it also follows that where a very material interest, such as that of a large creditor (in a company of doubtful solvency, where creditors’ interests must be taken into account), is unreasonably (i.e. without objective justification) overlooked and not taken into account, the objective test must equally be applied. Failing to take into account a material factor is something which goes to the validity of the directors’ decision-making process.  This is not the court substituting its own judgment on the relevant facts (with the inevitable element of hindsight) for that of the directors made at the time; rather it is the court making an (objective) judgment taking into account all the relevant facts known or which ought to have been known at the time, the directors not having made such a judgment in the first place. …”

69.  In §138 of Extrasure Travel Insurances Ltd v Scattergood cited in the above extract, Mr Jonathan Crow, sitting as a deputy High Court judge, put it in this manner:

“If the defendants failed to give any actual consideration to the question whether the transfer was in Extrasure’s interests, then the next question (according to the obiter remarks of Pennycuick J in Charterbridge Corp Ltd v Lloyds Bank Ltd [1970] 1 Ch 62) is whether a reasonable director in their position could have thought that the transfer was in its interests.”

70.  Mr Wong relied on §92(b) of Re HLC Environmental Projects Ltd for the proposition that although the test of honesty is generally subjective, if the director refuses to provide evidence, honesty will be measured objectively.  He repeated the plaintiff’s contention before the judge that the impugned transactions did not make commercial sense and were grossly disadvantageous to the companies concerned and as Ng refused to give explanation on the transactions, applying the objective test there is a prima facie case that Ng was guilty of “deliberate and dishonest breach of duty”, which constitutes a fraud on the minority.

71.  In Re HLC Environmental Projects Ltd, the subjective test was not applied.  Whilst the court accepted that the general principle of subjectivity applied to directors’ consideration of the interests of creditors as well as to their consideration of the interests of the company, that had no application in that case as it simply did not occur to the director at the time of the impugned payments that a contingent creditor was a creditor at all and the court had found to the contrary on the facts (§93).

72.  For the objective test to apply, the question is whether, on the available evidence, Ng failed to give any actual consideration if the impugned transactions were in the interests of the companies at the time they were entered into.  The fact that Ng chose not to give an explanation on the transactions does not mean on the available evidence there is no indication of actual consideration of the interests of the companies.  After all, as submitted by Mr Maurellet, the impugned transactions boiled down to a complaint that they were grossly disadvantageous to the companies concerned and the target companies of the Maxthree share transaction were acquired at an overvalue.  In each case, the subsidiaries of Convoy Global received consideration for the impugned transactions, being the right to acquire an equity interest in another company^[27]. It is not as if the interests acquired by the relevant subsidiaries were of no value.

73.  An allegation that a sale was not bona fide and was entered into as a result of “deliberate and dishonest breach of duty” is a very serious allegation.  In Kwok Hiu Kwan v Convoy Global Holdings Ltd & Ors [2018] HKCFI 1729, Harris J refused to grant an interlocutory injunction on the application of Kwok Hiu Kwan to restrain the reconstituted board of Convoy Global from disposing of the shares of First Credit Finance Group Ltd (owned by an indirect wholly owned subsidiary of Convoy Global) pursuant to a share sale and purchase agreement with a third party purchaser.  For the purpose of showing there is a serious issue to be tried that the directors were in breach of their fiduciary duty to act bona fide in the best interests of the company, Harris J considered the case of Kwok, which was based on inference, and heeded the disciplined approach in drawing inferences of fraud or serious misconduct only where such inferences are compelling (at §§14 to 17)^[28].  He concluded that the matters relied on by Kwok fell well short of establishing that the transaction was not a genuine arm’s length transaction and it is not sufficient to justify the grant of an interlocutory injunction to demonstrate that the board was negligent in agreeing to sell at a price less than half of the fair value according to the preliminary view of a valuation obtained by Kwok (at §§19, 20).

74.  The submissions made by Mr Wong were in essence a repetition of those advanced before the judge by the plaintiff’s former counsel that the impugned transactions were highly suspicious and commercially unjustified.  The judge rejected the submission that an “irresistible inference” could be drawn and found no basis for suggesting fraud or dishonesty. I am inclined to agree with the judge’s assessment.  According to Mr Wong, the plaintiff’s derivative claims are not premised on negligence but on breach of fiduciary duty.  Fiduciary duties are not concerned with competence but with concepts of honesty and loyalty, although “crass incompetence” may provide evidence that the director did not honestly believe he was acting in the best interest of the company (Extrasure Travel Insurances Ltd v Scattergood at §§89, 90).  In my view, at most there may be a prima facie case for negligence, but not a prima facie case of deliberate and dishonest breach of duty. 

Conclusion

75.  For the above reasons, I would dismiss the two appeals brought by the plaintiff. There is no dispute that costs should follow the event. I would order the plaintiff to pay the costs of the 1^st defendant in CACV 16/2020 and of the 1^st and 2^nd defendants in CACV 17/2020, with a certificate for three counsel.

Hon Cheung JA:

76.  I respectfully agree with Kwan VP that the plaintiff’s appeal is to be dismissed on the basis that the plaintiff has failed to establish the issue of wrongdoer in control.  In the circumstances it is not necessary for me to express any view on the matters discussed by Kwan VP at [51]-[74] of her judgment and Yuen JA at [78]-[90] of her judgement.

Hon Yuen JA:

77.  I agree for the reasons set out in §§40 – 49 of Kwan VP’s judgment that the appeals should be dismissed as the plaintiff had failed to show on the evidence a prima facie case of “wrongdoer in control” which is one of the three threshold requirements for a Common Law derivative action, as set out in Waddington[29].

78.  A decision on the other threshold requirement of “fraud on the minority” is therefore not necessary in the present case, but I would like to add the following observations.

79.  The rule in Foss v Harbottle is well established but worth repeating:

“if a wrong is done to a company, then it is the company alone which can decide whether or not to sue in respect of that wrong: and that decision, like all company decisions, must be made by the appropriate body, either the directors or the company in general meeting, acting by a majority if necessary”[30].

80.1.  The basic rationale for that rule is that a company is a legal entity separate and distinct from its members, and when it suffers loss as a result of a wrong done to it, the cause of action (which is a legal chose in action) is part of the assets of the company[31]. Thus under the Common Law, the courts respect the freedom of a company as a “legal actor” to make its own decisions.  This is not confined to business decisions but includes “litigation decisions”, especially when they are related to business decisions which directors had made (or failed to make), which the courts are not qualified to judge.

80.2.  Even if there are substantial merits in the proposed litigation, there may be many good reasons, not related to the merits, why a company may not wish to commence legal proceedings against directors.  Some examples have been set out in Gower at §17.1.  As the learned editors summarized:

“the decision whether to initiate litigation in respect of an alleged breach of directors’ duty will not always be an easy one, and a negative decision is not necessarily a sign that the company is being too lax towards its directors”.

80.3.  There is also the risk that a minority shareholder seeking to sue on behalf of the company in a derivative action is being motivated by personal objectives: Gower, §17.5.  This is especially the case when a company has become a battleground for two competing camps of shareholders, the directors having been appointed on the votes of the majority camp. 

81.  The Common Law derivative action is a procedural device, the purpose of which is to provide the company with a means of redressing a wrong done to it by directors[32], when the company itself has been (or would be) unlawfully prevented by majority shareholders to sue for such redress.

82.1.  Therefore, when the issue is whether in a particular case there has been a “fraud on the minority” (which term has been more accurately revised by Professor Worthington[33] to “fraud on the company”), the test lies, in my view, not in the requirements of (a) loss to the company and (b) personal benefit to the wrongdoers (per Micofusion), but in whether the company (in general meeting, ex hypothesi by a majority)  can lawfully release the directors from that breach.

82.2.  Before discussing this test, it may be helpful to clarify two matters.  First, the release of directors by the company in general meeting has sometimes been referred to in the authorities as the company “ratifying” the directors’ breach.  In this context, the word “ratify” is not used in the narrow sense of bestowing vires. Rather, it means the company voting ex post facto to treat the directors as not having been in breach of duty when they performed the impugned act.  The (unsatisfactory) argument that some breaches are by nature “non-ratifiable” is analysed in Gower, §16-124, but that is not material to the discussion in this judgment.

82.3.  Secondly, when the authorities refer to “breach of duty”, it must be remembered that although directors are fiduciaries, not all of their obligations are fiduciary, so not all breaches of duty are breaches of fiduciary duty.

83.  It is well established that an actual fraud (i.e. a deliberate and dishonest act) by the directors perpetrated against the company is an exception to the rule in Foss v Harbottle.  One can obviously understand why that is so.  Majority shareholders cannot exercise their voting power to condone a fraudulent act (irrespective of who benefits). Incidentally however, it is interesting to note that this exception operates even though the directors themselves do not derive a personal benefit. 

84.  The more difficult question is, when the plaintiff does not allege actual fraud, but some other breach of duty, when does a “fraud on the company” occur so as to enable the device of the derivative action to be deployed to override the company voting by a majority to release the directors?

85.  In my view, as discussed below,

(a)  the “personal benefit to wrongdoers” requirement in Microfusion does not achieve the purpose of enabling a company to redress a wrong when it should be entitled under company law to choose to do so;

(b)  the true test is whether there has been (or would likely be) a misuse of the majority’s voting power to release the directors from their breach.  This was recognized by this court[34] in Anglo-Eastern (1985) Ltd v Karl Knutz[35].  Put another way, for the rule in Foss v Harbottle to be excluded, what must be considered is the lawfulness of the majority vote[36] releasing the directors from the breach, which lawfulness depends on the purpose for which the voting power is exercised (“the voting for proper purpose test”).  If the vote is not lawful, then the company has simply made no valid decision to release the directors.

86.1.  The first difficulty with Microfusion is the “personal benefit to wrongdoers” requirement.  In my view, this restriction is difficult to justify, because if this requirement is not met, even the most egregious breach of duty to the company cannot be brought to court.  In Pavlides v Jensen[37], the example was given in argument of the loss to the company that would be caused by “a set of amiable lunatics [who] obtained 51% of the shares of a company and deliberately but with the highest motives sold the company’s products at greatly below cost price”[38]. Along these lines, say the majority voted to release directors who had donated all the assets of a commercial trading company to charity.  That would clearly be contrary to the purpose of shareholders’ investment in the company, and yet as neither the directors nor the majority had enjoyed any personal benefit, the breach could not be brought to court by the minority shareholders who would have lost their entire investment.

86.2.  Along these lines, in Minority Shareholders, Law, Practice and Procedure[39], the learned authors expressed concern that the imposition of the “personal benefit to wrongdoers” requirement would stultify claims by the company for compensation from directors in breach of fiduciary duty, which “runs counter to the purposive reasoning underpinning Waddington Ltd v Chan Chun Hoo Thomas and Fort Gilkicker that a wrong should not be left without a remedy”.

86.3.  Another difficulty with the “personal benefit to wrongdoers” requirement is one of practice, as investigating who has received personal benefit can prove difficult.

86.4.  In contrast, the “voting for proper purpose test” simply examines whether there has been misuse or abuse of the voting power.  It provides a more meaningful rationale for the decision in Estmanco, where the council enjoyed no financial benefit from voting to let, rather than sell, the remaining units in the estate.  In Microfusion, McCombe LJ sought to explain Estmanco by saying that what the council gained was a “personal benefit, albeit political rather than financial”[40].  However, with respect, it is difficult to cast the council’s compliance with a new political policy as a “personal benefit” to itself. 

86.5.  The more meaningful explanation is that provided in Estmanco itself, where Megarry VC said (discussing Daniels v Daniels):

“Apart from the benefit to themselves at the company’s expense, the essence of the matter seems to be an abuse or misuse of power. ‘Fraud’ in the phrase ‘fraud on a minority’ seems to be being used as comprising not only fraud at common law but also as fraud in the wider equitable sense of that term, as in the equitable concept of a fraud on a power”[41] (Emphasis added).

And in relation to the situation in Estmanco,

“It seems to me that the sum total represents a fraud on the minority in the sense in which ‘fraud’ is used in that phrase, or alternatively represents such an abuse of power as to have the same effect.

...

No right of a shareholder to vote in his own selfish interests or to ignore the interests of the company entitle him with impunity to injure his voteless fellow shareholders by depriving the company of a cause of action and stultifying the purpose for which the company was formed”[42]. (Emphasis added).

87.1.  The “voting for proper purpose test” also has the benefit of preserving the principle that a company, as a legal actor, is entitled to make its own decisions, so long as the decision-making organ (be it the board of directors, or the company in general meeting) is acting lawfully under company law. 

87.2.  A lawful vote under company law is one where the voting power was exercised bona fide for the purpose for which it was given.  In exercising their voting powers, shareholders do not have to put the company’s interests before their own, and they may vote in accordance with their own view of what is in the interests of the company.  However, it would not be a proper exercise of that power if they voted in order to achieve ends outside the scope of the “social contract” between all shareholders[43].

87.3.  This is not to say that shareholders owe a fiduciary duty to the company, nor does it impugn their proprietary rights in their shares.  Rather, as a matter of company law, when voting in general meeting, they are acting as an organ of the company and must act bona fide and for proper purposes.  As the learned editors of Gower put it:

“Property and fiduciary obligation do not come into it. At a most basic level, the shareholders hold, and exercise, a power on behalf of the company. All such powers come with constraints requiring that they be exercised ‘in good faith and for proper purposes’, as it is typically put”[44]. (Emphasis added).

As Professor Worthington put it,

“... a general meeting resolution is - and is intended to be - binding on the company (and thus on dissenting shareholders). It follows that the shareholders’ power to vote is a power to bind dissenting (or silent) minorities, and so it inevitably comes with the equitable limitation that its exercise is only effective if it is bona fide and for proper purposes”[45].

87.4.  This principle, established in the last century in Allen v Gold Reefs of West Africa Ltd[46], was affirmed recently in the UK Supreme Court[47]:

“... in the case of non-charitable companies having a share capital, the share is a right of property which the member can in general vote as he pleases even if it is in his own personal interests rather [than] those of the company. There are, however, limitations on how a member may use his voting rights. For the purposes of this judgment, it is not necessary to go further on this than Briggs J (as he then was) did in Assenagon Asset Management SA v Irish Bank Resolution Corp Ltd (Formerly Anglo Irish Bank Corpn Ltd) [2012- EWHC 2090 (Ch) [2013] Bus LR 266, para 44:

‘44. The basis for the application of that principle in relation to powers conferred on majorities to bind minorities is traditionally described as arising from general principles of law and equity, and by way of implication. In Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656, 671 Lindley MR said this, in relation to a power conferred on the majority of shareholders to alter the articles of association:

‘Wide, however, as the language of section 50 is, the power conferred by it must, like all other powers, be exercised subject to those general principles of law and equity which are applicable to all powers conferred on majorities and enabling them to bind minorities. It must be exercised, not only in the manner required by law, but also bona fide for the benefit of the company as a whole, and it must not be exceeded. These conditions are always implied, and are seldom, if ever, expressed’.

In the same case Vaughan Williams LJ said, at p676:

‘I also take it to be clear that the alteration must be made in good faith; and I take it that an alteration in the articles which involved oppression of one shareholder would not be made in good faith’”.

88.  A plaintiff must therefore adduce evidence to the prima facie case standard that the vote by the company in general meeting (ex hypothesi by a majority) releasing the directors was not[48] a bona fide exercise of the shareholders’ voting power.  In this respect, it may reasonably be assumed that a director in breach of duty would, when voting as a shareholder, vote to exonerate himself, and hence his power to vote would not be exercised bona fide for the proper purpose.  Whether that could be ascribed to other shareholders forming the majority - who are not themselves in breach of duty - would depend on the facts, including whether there is any evidence that the shareholders had voted (or would vote) simply as the directors directed. 

89.1.  In conclusion, in my view “personal benefit to wrongdoers” is too restrictive a requirement for “fraud on the company”.  Rather, it is an important factor which informs the “voting for proper purpose test”[49] when, depending on the facts of the case, a vote to release the directors may or may not be regarded as having been[50] exercised bona fide and for the proper purpose of the company.

89.2.  Thus, when discussing when a vote is a “fraud on the minority”, Professor Worthington commented:

“This, is turn, simply means a use of power inimical to the purposes for which the power was granted. It is judged by whether the power is used to deliver benefits to individual voters which were not contemplated in grant of voting power: the power must only be used bona fide and in the interests of the company as a whole”[51].

89.3.  Finally, in this connection, it would be noted that the “voting for proper purpose test” is also recognised by the legislature in an identical context.  Section s.734 (3) Companies Ordinance Cap. 622 provides that the matters to which the court has regard, when considering whether to give leave to bring statutory derivative proceedings (when a company’s members have ratified the questioned conduct), include:

“whether the members were acting for proper purposes, having regard to the company’s interests, when they ... ratified the conduct”.

90.  For the above reasons, I would decline to adopt the Microfusion requirement of “personal benefit” in the consideration of the issue of “fraud on the minority”, although a decision on this issue is not necessary in light of our decision on the “wrongdoer in control” issue.