The Common Law Derivative Action in Hong Kong

5576 Words Nov 26th, 2010 23 Pages
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THE CHINESE UNIVERSITY OF HONG KONG

School of Accountancy

ACY 3151 D– Company Law

Preserve The Common Law Derivative Action in Hong Kong

Presented to
Professor C.K. LOW

Submitted by

Tony BAI Dongyi; Ashley CHEN Xi; Ri REN Xinyu; Zoe ZHOU Beinan

30 April 2010

Abstract

This paper is a response to the First Phase Companies Ordinance Rewrite Consultation Paper Question 7 whether we should abolish the common law derivative action (the CDA) currently retained by sec. 168BC (4) in the amended Companies Ordinance (2004).

This paper firstly briefly introduces the current co-existence of the common law derivative action and the statutory derivative action (the SDA) and figure out potential problems which lead us to think about
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Because the company is a separate legal entity, if something wrong is done to the company, only the company itself can sue and that is the so called Proper Plaintiff Rule.

The effect of this rule is to eliminate vexatious litigation by troublesome minority shareholders. However, the rule was also criticized by many researchers. If the directors of the company do something wrong, they will of course not have the incentive to make the company bring law suits against themselves. Therefore the minority shareholders cannot have the rights to get the wrongdoers to pay remedies to the company and it is to some extent unfair.

Due to this reason, later, four exceptions to the rule were established to try to solve this problem. It is held that the Proper Plaintiff Rule will not apply if the relevant transaction • λ is ultra vires or illegal; • λ requires the sanction of a special majority; • λ infringes the personal rights of a shareholder; or • λ amounts to a fraud on the minority.

1.3 The Common Law Derivative Action

The exceptions to the Proper Plaintiff Rule in Foss v Harbottle allow the minority shareholders under some limited conditions to sue on behalf of the company. The common law derivative action (the CDA) is applied based on these exceptions. There are two basic requirements for applying the CDA: • The alleged wrong or breach of duty cannot be ratified by a simple majority of the members; • The alleged wrongdoers are in control of the company,