Unfair prejudice petitions are a means for minority shareholders to seek redress against a shareholder said to be in control of the company, on the basis that the latter has caused the company’s affairs to be conducted in a manner that is unfairly prejudicial to their interests as minority shareholders. Since such petitions do not involve claims against the company itself, the company is just a nominal party and should not ordinarily participate or expend its funds in a partisan way in those proceedings.
Recently, this position was reiterated in the case of Glory Sky Asia Limited & Ors v Koo Kam Pui & Anor  HKCFI 1849 in which the Court of First Instance stated that the Court’s starting point is a “rebuttable distaste” for a company’s participation in unfair prejudice proceedings and “initial scepticism” as to its necessity or expediency. In considering whether the Company’s participation and expenditure is proper, the test is whether it is “necessary” or “expedient in the interests of the company as a whole“. The onus would be on the company to satisfy the Court with evidence of the necessity or expedience and is no doubt a heavy one.
In this case, the company concerned (the “Company“) sought to participate in an unfair prejudice petition on the basis that the Petitioners made certain allegations against the Company, including that the Company failed to (i) reinstate the Petitioners’ directorships, (ii) provide access to documents required for the Petitioners to jointly manage the Company, and (iii) provide audited accounts and reports, all in breach of the Company’s constitutional documents and shareholders’ agreement.
The Court held that the Company had not discharged the heavy onus of showing its past or future participation and expenditure in the petition was necessary or expedient in the interests of the Company as a whole, citing the following reasons:
- The Court disagreed that there were freestanding allegations of wrongdoing made against the Company, noting that the reality of the position was that the complaints of the Petitioners were first and foremost against the single largest shareholder of the Company (i.e. the 1st Respondent in this case), which had resulted in the corollary decisions and acts of the Company.
- Importantly, it was also not demonstrated on the evidence in what ways the Company had a separate and independent position from the single largest shareholder so as to justify its active participation in the proceedings.
- In particular, although there were other shareholders holding over 60% of the total shareholding, they had not come forward to state on oath that they had taken the independent and considered view that it was necessary or expedient for the Company to defend the proceedings by actively participating in the Petition and their reasons for taking that view.
- The fact that there was an alternative claim for a buy-out Order against the Company (as is usual in unfair prejudice petitions) and/or other relief sought against it, could not justify the Company’s active participation in the proceedings.
This decision confirms that unfair prejudice petitions are first and foremost a fight between shareholders of a company and any intended active participation by the company must satisfy the test of its participation being “necessary” or “expedient in the interests of the company as a whole”. Companies should also not lose sight that a company’s funds should generally be spent to promote the interests of the company as a whole, and not for partisan support of such disputes or proceedings.
For more information, please contact Gareth Thomas, Partner, Rachael Shek, Partner, Jojo Fan, Partner, Jody Luk, Senior Associate, or your usual Herbert Smith Freehills contact.