For the protection of minority interests in Hong Kong, member(s) of the company may avail themselves to remedies for any wrongdoing or breaches of the Companies Ordinance (Cap 622) (“CO”) by filing a petition for unfair prejudice under the CO and the Hong Kong Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32).
Pursuant to section 724(1)(a), a member/members of the company may present a petition to the Court if the company’s affairs have been conducted in a manner unfairly prejudicial to the interests of the members generally or of one or more members, including the member(s) making the petition. Under section 724(1)(b), the Court may exercise its powers to give relief if an actual or proposed act or omission of the company (including one done by or made on behalf of the company) is or would be prejudicial.
The Court may make any order that it thinks fit for giving relief under a petition presented under section 724(1)(a). For example, under section 725(2)(a), the Court may impose the following remedies :-
(1) Order restraining the continuance of the conduct;
(2) Order that proceedings that the Court thinks fit be brought in the company’s name;
(3) Appointing a receiver or manager for the company’s property or business;
(4) Any other order that the Court thinks fit, whether for regulating the conduct of the company’s affairs in future, for the purchase of shares of any member of the company by another member of the same company, for the purchase of shares of any member by the company and the reduction accordingly of the company’s capital, or for any other purpose;
(5) An order that requires the company or any other person to pay any damages plus interest to a member of the company whose interests have been unfairly prejudiced by the conduct of the company’s affairs or by the act or omission (section 725(2)(b)); and
(6) Order for alteration of the company’s articles (section 726).
It should be noted that the CO does not define what constitutes unfair prejudice conduct. In order for unfair prejudice to be established, under common law, both elements i.e. unfairness and prejudice, have to be established.
Therefore the starting point is, with regard to the facts and context of the case, whether the exercise of power or right in question would involve a breach of those terms subject to established equitable constraints stemming from agreement or understanding between the parties (by words or by conduct) on how they would do business together. Once unfair prejudice is proven, the Court has a wide discretion with regard to the relief to be granted. However, the Court must act on a principled basis in granting such relief while unfairness should be approached as a flexible concept.
Prayers for a Buyout Order
It is common to seek an unfair prejudice petition as a second prayer for a winding-up order on the just and equitable ground. Increasingly, unfair prejudice petitions also include an order for buyout as an alternative prayer.
This is in accordance with recent comments in the Court where orders for winding-up have been refused if the prayer for winding up cannot be substantiated and no evidence is shown as to the inability of a respondent to buyout the shares if the orders are made. For example, in Re Sun Light Elastic Ltd (2013) 5 HKLRD 1, Justice Harris struck out the prayer for a winding-up order as the Court considered that there was no explanation in the petition for the inclusion of a winding-up order.
In the case of Re Yung Kee Holdings Ltd, the Court of Final Appeal ordered a winding-up of the Company but the order was stayed for 28 days to give the parties an opportunity to agree on the terms by which the petitioner’s shares may be purchased. If no such agreement is reached before the expiration of the period, the winding-up order will take effect automatically.
Valuation of Minority Interests for Court-ordered Buyouts
As mentioned above, one of the remedies that the Court may order on a successful unfair prejudice petition is the purchase of shares. The Court has a wide discretion in determining the valuation methodology according to what the Court thinks is fair and equitable and what is most likely to remedy the unfair prejudice suffered. In most cases where a buyout order has been made, the parties may be directed to engage independent experts to assist in the valuation process which can be both complicated and costly. The Court may provide directions to the expert as to how to deal with the matters.
Among the methods that the Court/expert may consider, some include valuation based on the earnings, profits or cash flow of the entity concerned. Each methodology may not be equally suitable in all circumstances and it is possible to reach a different valuation based on the same information. The Court may also make other adjustments to the valuation in order to achieve a fair result based on the factual situation of each case which seek to put the petitioner back in the position that he/she would have been in but for the unfair prejudicial conduct. For example in Chow Sau Hei v Ho Keung Yuen  HKEC 669, the Court was of the view that a discounted approach should apply if the Court were to find for the petitioner and order a buyout, “on account of the parties’ unequal contributions towards the purchase price of the companies”.
(A) Valuation date will affect value of the Shares / Buyout
The date of the valuation is generally the date of the order for the purchase of shares but this is subject to the Court’s discretion (e.g. date of the petition, date prior to the petition or date of the order). In Re Hang Sang Engineering Factory Ltd (unrep., HCCW 456/2005 (2007) HKEC 2073, the Court considered the applicable valuation date of the shares in dispute whether (1) a later date as close as possible to the actual sale date of the shares or (2) an earlier date, being the date on which the conduct of the majority unfairly prejudiced the petitioner’s rights occurred. The Court ultimately decided based on the delay of the petitioner’s own conduct to bring his claim and ordered that the petitioner “should therefore not be given any perceived advantage of having the [shares] valued at a date earlier than the date of the order”.
In other examples such as Re KR Hardy Estates Ltd (2014) EWHC 4001 (Ch), the valuation date was held to be the date when the business was diverted from the company. In Maxtop International Investments Ltd (2014) HCCW 661/2006, Deputy Judge Stewart Wong SC of the Hong Kong Court of First Instance held that “the valuation date was a matter of discretion, the overriding requirement being what was fair to the parties on the particular facts”.
(B) Reasonable Buyout Offer
If a petitioner receives an offer to purchase his/her shares at a valuation, the petitioner should carefully consider the offer made as the Court has in the past refused to order a winding up where the petitioner had acted unreasonably in refusing an offer to purchase shares (such as in Re A Company (No.002567 of 1982)  1 WLR 927). In O’Neill v Phillips (1999) 1 WLR 1092, the Court established the following five elements that constitute a “reasonable offer”:-
(1) The offer must be to purchase the shares at a fair value, representing an equivalent proportion of the total issued share capital without a discount for being a minority holding. However, this does not apply to all cases. There may be circumstances in which it will be fair to offer a discounted value;
(2) If the parties cannot agree on valuation, a competent expert should be appointed to determine the value;
(3) The offer of valuation determined by the expert need not be elaborated;
(4) Both parties have the right to make submissions to the expert and should have similar access to information about the company in relation to the value of the shares; and
(5) The offer should include costs of petitioner.
As a matter of litigation strategy, respondent(s) in an unfair prejudice petition may also consider obtaining valuation of the shares in dispute early in the proceedings, so as to make a settlement offer to the petitioner. This may help to focus the parties on the issues in dispute and an early settlement to save and avoid further costs that will be incurred.
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