The common strategies adopted by the activists may be divided into three non-mutually exclusive categories, namely informal strategies, voting strategies and legal strategies.
Informal strategies comprise private engagement, public announcement, open letters or publications, and website campaign, with private engagement being the most common and preferred form. Preliminarily, activists will enter into a private dialogue and attend meetings with the company management to pursue their objectives and press for a change. Thereafter, activists may write to other shareholders detailing their proposals and persuade them to vote in favour of the proposals or resolution in private.
In the case of private negotiation break-down, activists may resort to public intervention. The activists may make a public announcement and publish an open letter stating their demand in order to draw the public’s attention and exert pressure on the controlling shareholders. H Partners Management LLC wrote a public letter to HKET seeking support from other shareholders to vote in favour of its proposal for distributing special dividends. The letter was published in various newspapers on 11 July 2011. Publications are also another tactic adopted by shareholder activists such as BlackRock. BlackRock published ‘Corporate governance and proxy voting guidelines for Hong Kong securities’ in January 2019, in which it details its engagement approach, its expectation of the company improving its corporate governance, and voting policies.
Shareholders activists will also institute website campaign and publish their demands against the company, such as:-
- David Webb’s demands against various listed corporations (https://webb-site.com/);
- Elliott’s demand against BEA (https://fairdealforbea.com/); and
- Argyle Asset’s open letters to CMB (https://unlockvaluecmb.com/author/brianlwh/).
Nevertheless, shareholder activists generally would not resort to website campaigns or public announcements unless there is sufficient evidence to substantiate a reasonably articulable suspicion.
Besides informal strategies, shareholder activists will also avail the voting rights accorded to them under the Listing Rules and the Takeovers Code. For instance, Cheung Kong, a shareholder holding 38.87 per cent stake in Power Asset, proposed to merge with Power Asset. However, 49.23 per cent of the independent minority shareholders exercised their veto right and successfully opposed the proposed merger.
If the activists do not receive a positive response after utilising the informal strategies, they may escalate their engagement activity and employ legal tactics, for instance, applying for an inspection order and an injunction order to exert pressure on the company and the management. Pursuant to section 740 of the Companies Ordinance, a shareholder holding at least 2.5 per cent of the voting rights at the general meeting or five shareholders collectively may apply to the court for an order inspecting any record or document of the company. The court shall satisfy itself that the inspection is for a proper purpose and in good faith before granting an inspection order. Nevertheless, an inspection order may be an essential but not effective legal strategy as shown in the Elliott’s campaign against the private placement proposed by BEA. Elliott applied for an inspection order for documents relating to the private placement. Within one month after the application for an inspection order and before the grant of such order, the private placement was approved. Nevertheless, Elliott launched an action against the BEA upon inspecting and obtaining the documents relating to the private placement. As of the publication date, the litigation between Elliott and the BEA is still ongoing.
An injunction order, as compared with an inspection order, would be a more effective and preferable legal tactics in the eyes of activists. Passport instituted a campaign against the private placement by eSun and applied for an ex parte injunction order to prohibit eSun from proceeding with the private placement. The application succeeded and the proposed placement agreement was eventually terminated.
Besides interim legal measures, activists may also commence legal proceedings against the company, such as an unfair prejudice claim, shareholder derivative actions (see question 10) and a winding-up petition. Interim measures aside, Passport and Elliott also filed an unfair prejudice claim with a view to terminating the placement agreement and releasing the shareholders from the obligation under the private placement agreement respectively.
Under section 724(1) of the Companies Ordinance, a shareholder of the company, including a non-Hong Kong company, may also bring an unfair prejudice action if the affairs of the company are being or have been conducted in a manner that is unfairly prejudicial to the interest of the members in general or one or more members. Another basis for a shareholder to bring the action is an actual or proposed act or omission of the company that is or would be prejudicial.
According to the Honourable Mr Justice Fuad in Re Taiwa Land Investment Co Ltd  HKLR297, ‘unfairly prejudicial’ means the conduct departing from accepted standards of fair play that amounts to unfair discrimination against the minority. The conduct complained of must be both unfair and prejudicial.
Examples of unfair prejudicial conduct include:
- a breach of the Companies Ordinance (such as failure to obtain members’ approval for non-pro rata allotment of shares: Re a company (No. 005134 of 1986), ex p Harries  BCLC 383);
- a breach of the Listing Rules (for instance, the minority shareholders’ effort in blocking the resolution to amend the articles of association of a listed company when the provisions therein contravened the Listing Rules: Luck Continent Ltd v Cheng Chee Tock Theodore  4 HKLRD 181);
- a breach of shareholders agreement (Re Bondwood Development Ltd  1 HKLR 200);
- a breach of fiduciary duties (such as misappropriation of company assets: Re Tai Lap Investment Co Ltd  1 HKLRD 384); and
- a long-term policy of not paying dividends, or paying low dividends without commercial reasons (Choi Chi Wai v Cheng Ka Shing  HKEC 850).
The remedies for a successful unfair prejudice claim include:
- an order restraining the continuance of the unfair prejudicial conduct of the company (section 725(2)(a)(i) of the Companies Ordinance);
- an order regulating the conduct of the company’s affairs in future (section 725(2)(a)(iv)(A) of the Companies Ordinance);
- an order to purchase the shares of any member of the company by the company or another member of the company (sections 725(2)(a)(iv)(A) and 725(2)(a)(iv)(B) of the Companies Ordinance);
- an order to pay damages by the company or any other person (section 725(2)(b) of the Companies Ordinance);
- appointment of receiver or manager (section 725(3) of the Companies Ordinance);
- an order for alteration of a company’s articles (Roberts v Walter Developments Pty Ltd (No.2) (1992) 10 ACLC 804); and
- any other orders the court thinks fit (section 725(2)(a)(iv)(D) of the Companies Ordinance).
Further, or in the alternative, to an unfair prejudice claim, shareholders may also apply for a winding-up of a Hong Kong company on just and equitable grounds pursuant to section 177(1)(f) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Companies Ordinance (Winding up)). A winding-up order of foreign companies, including non-Hong Kong companies, on just and equitable grounds shall be sought under section 327(3)(c) of the Companies Ordinance (Winding up). The SFC may also wind up a listed company under section 212 of the SFO to protect the company’s minority shareholders if it is in the public interest to do so; namely, the winding-up order is in line with the objectives and functions of the SFC as set out in sections 4 and 5 of the SFO. For instance, in Re China Metal Recycling (Holdings) Ltd  2 HKLRD 747, the respondent company, which had disseminated fraudulent information in its prospectus, was ordered to be wound up upon the SFC’s application in 2015.
Examples of just and equitable grounds include:
- the mutual breakdown of trust and confidence (Re Yung Kee Holdings Ltd (2015) 18 HKCFAR 501, in which there is a breach of common understanding that two sons of the original controller of the company shall operate the company together); and
- frustration of the company’s objects (Re Mediavision Ltd  2 HKC 629, in which there is final and conclusive abandonment of the original business of the company).
Nevertheless, it should be noted that the winding-up application shall not be made as a matter of course where there is also an unfair prejudice claim made by the shareholders (Re Sun Light Elastic Ltd  5 HKLRD 1). Shareholders must specify why a winding-up order is an appropriate relief for the unfair prejudice claim.
It is also worth noting that the above case laws relating to unfair prejudice and winding up on just and equitable grounds largely concern private limited companies. Although, as a matter of general principle, they shall be equally applicable to listed companies, the fact that a listed corporation may have a large number of shareholders involved and the fact that the corporation is also subject to the regulation of the HKEx may introduce a certain degree of uncertainty as to the extent to which these principles are applicable to listed corporations.
For instance, while a breach of the Companies Ordinance may be considered as an unfairly prejudicial conduct, a mere breach of the Listing Rules by a listed company would not automatically give rise to unfair prejudice (Re Astec (BSR) plc  2 BCLC 556). However, in the context of a listed company (as opposed to a private company), it was held that there was a common understanding among the shareholders that the company should maintain its listing status and therefore, actions jeopardising the listing status of the company could amount to unfair prejudice (Luck Continent Ltd v Cheng Chee Tock Theodore  4 HKLRD 181). Nonetheless, according to Re Blue Arrow plc  3 BCC 618 (Ch), any breach of any informal understanding that is said to supplement a listed company’s articles of association is unlikely to be regarded as an unfair prejudice since the investing public is entitled to assume that the company’s articles are full and complete and there is no private agreement reached in relation to the articles.
Regardless of which strategies shareholder activists have adopted, they will increase their stakes in the company simultaneously to exert further pressure on the investee companies. Should the campaign raised by the activists fail, they will usually sell its stake in the company in order to minimise its loss.
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