Shareholder Inspection of Corporate Documents

For a jurisdiction that is apparently at times a bit light on “shareholder activism”, you would not know it judging from court applications by qualifying shareholders for inspection of corporate records or documents pursuant to s. 740 of the Companies Ordinance (Cap. 622).

For six or so years this provision and its equivalent under the now repealed s. 152FA of the Companies Ordinance (Cap. 32) have been used by qualifying shareholders to obtain inspection of corporate records. The previous section came into force in July 2005 but was not put to use until 2011. The general principles applied by the courts are essentially the same for s. 740 as they were for s. 152FA. 

Besides demonstrating that an application is made in good faith and that the inspection is for a proper purpose, an applicant must persuade the court to exercise its discretion both with regard to the grant of the application and the range of documents sought.

In practice this threshold has not proved difficult to overcome. Indeed, it is a good start if an aggrieved shareholder can “prick the conscience” of the court. The case law, while fact specific, supports the following points with respect to applications pursuant to s. 740:

  • an applicant needs to have sufficient evidence that there is a reasonable case for an investigation into the company’s affairs with respect to specified transactions (and the more specific the better). The transactions should prejudice the applicant’s legitimate rights as a shareholder;
  • the fact that an applicant is motivated by other reasons (and matters may be acrimonious between a shareholder and the company) is no bar to relief;
  • the courts are adept at knocking back “fishing expeditions” or reining in applications that seek too wide a range of documents. For example, an applicant cannot obtain access to all corporate documents since a company was incorporated and the purpose of s. 740 is not to permit a shareholder to challenge routine managerial decisions. That said, the range of documents which a shareholder can obtain is potentially wide and “record” and “document” have a statutory meaning;
  • the fact that an applicant seeks access to corporate records to assist with preparations for possible claims against a company is not a bar to relief, provided the application otherwise comes within s. 740. Indeed, applications pursuant to s. 740 are often a precursor to other litigation. If necessary, the courts can attach conditions to the use of documents inspected while allowing an applicant to share them with his or her professional advisers;
  • a shareholder’s right to access corporate documents is distinct from a director’s right, although it may be the case that an aggrieved shareholder is an ousted director;
  • the general principles apply as much to private companies as they do to listed ones;
  • an order made pursuant to s. 740 does not authorize a person to inspect any record or document containing information that is subject to legal professional privilege (s. 742). Personal data privacy concerns usually take second place to litigation and, if needs be, the courts can permit redaction of irrelevant information (s. 60B of the Personal Data (Privacy) Ordinance (Cap. 486)).

Section 152FA has been described as a “powerful right”. Applications pursuant to s. 740 assumed a higher profile in 2017 and this looks likely to continue into 2018. 

 

 

Jurisdictions: 

Senior Consultant, RPC