Hong Kong – Unfairly Prejudiced? Don’t Get Personal.

In Primekings Holding Limited v Anthony King [2021] EWCA Civ 1943, Lord Justice Snowden struck out paragraphs of the petitioners’ claim that did not comply with this requirement.

A protracted dispute

The case centered on a long-running shareholders’ dispute regarding Kings Solutions Group Limited, a holding company for a group of operating companies which provided security and fire services to domestic and commercial customers.

Among the matters in dispute was a put option granted to Anthony King (one of the petitioners), entitling him to acquire shares three years after the completion of a transaction involving an equity purchase and a capital investment.

The minority shareholders alleged that the majority shareholders had entered into a conspiracy to pressurize them into abandoning a misrepresentation claim they had launched shortly after the transaction completed, and to acquire their shares at an undervalue. The petitioners claimed that but for the alleged conspiracy, they would have won the misrepresentation claim and would not have incurred liability for an interim costs order.

The disputed paragraphs of the claim all related to conduct of the appellants in respect of the costs order, the put option, and the pursuit of costs against the petitioners in respect of the misrepresentation claim.

The appellants applied to strike out the allegations on the basis that even as pleaded, the allegations could not amount to conduct of the affairs of the company for the purposes of section 994(1)(a) Companies Act 2006.

Unfair prejudice basics

Snowden J said that the basic requirements for a petition under the section were summarized by Floyd LJ in Loveridge v Loveridge [2020] EWCA Civ 1104 and include:

• The acts or omissions complained of must consist of the conduct of the affairs of the company.
• The conduct of the affairs must have caused prejudice to the interests of the petitioner as a shareholder.
• The prejudice must be unfair.

However, in this and in many other cases stretching back to the “early days of the unfair prejudice jurisdiction”, the court noted there had:

“been a clear tendency for petitions and pleadings … to seek to raise myriad grievances and complaints of diverse forms of misconduct against the respondents to the petition.”

Noting that the practice was particularly prevalent in petitions involving quasi-partnerships, Snowden J noted that “such wide-ranging allegations are often then said to require extensive disclosure and a lengthy trial”, unduly taxing the resources of the parties and the court.

The “potential breadth of [section 994] has been limited and kept within manageable bounds by the express statutory requirement that the acts complained of must either (i) be an act or omission of the company, or (ii) be conduct of the company’s affairs rather than acts done in the conduct of a shareholder’s personal affairs.”

Snowden J reminded petitioners that satisfaction of the requirements should not be overlooked or minimized; something the court found had not been achieved in the extensive points of claim which ran to 69 pages.

The Hong Kong position

Hong Kong has long been a popular forum for complex and emotionally-charged shareholder disputes, with cross-petitions increasingly present. Often, due to the nature of many Hong Kong incorporated businesses, these disputes cause or are caused by a breakdown of family or other close personal relationships.

However, the Hong Kong court has adopted a similar approach to the English Court of Appeal, and paints a clear picture of how and on what basis shareholder unfair prejudice claims should be brought.

Section 724(1) Companies Ordinance Cap 622 provides that:

“The Court may exercise the power under section 725(1)(a) and (2) if, on a petition by a member of a company, it considers that:

1. The company’s affairs are being or have been conducted in a manner unfairly prejudicial to the interests of the members generally or of one or more members (including the member); or
2. An actual or proposed act or omission of the company (including one done or made on behalf of the company) is or would be so prejudicial.”

In Leung Yuet Keung v Harbour Front Ltd [2020] HKCFI 1912 – a similar strike-out application – Deputy Judge Jat Sew Tong SC remarked that “the conduct complained of must be …the act or conduct of the company, as opposed to act or conduct of the shareholder in his private capacity”.

The court looked at whether the “private acts” of a shareholder could be covered by section 724, “if those acts translate into acts or omissions of the company or the conduct of its affairs.” Simply because the conduct of a shareholder has a “causal effect” on what the company does or does not do, the shareholder’s conduct does not necessarily amount to the “affairs of a company.

Jat Sew Tong DJ gave the example of a creditor serving a statutory demand against a company which could cause the company to take certain responsive actions.

“It would be difficult, one may perhaps even say absurd, to suggest that the creditor is thereby “conducting” the affairs of the company simply because what he does leads the company to react in a certain way.”

Minority shareholders will often feel aggrieved by a wide range of issues when trust and confidence breaks down in the management of a company – particularly in the family context.

Primekings and Leung Yuet Keung serve as reminders that the complaints listed in the petition must be kept concise and within sensible boundaries for the court to entertain the application.

As ever, when it comes to shareholder disputes that involve a family or other personal relationship element, there is a fine line between pursuing retribution for personal grievance and proper actionable unfair prejudice actions. The skill is in identifying and treading that line.