Learn?
The
ideal board structure appears to be one composed of both inside and outside
directors. Inside directors will bring their expertise and detailed knowledge
of the firm to the board meetings and outside directors will provide the
important monitoring function.57 However,
the independence and the qualifications of the outside directors are of
very significant.
Thus,
first, in order to ensure the independence of the directors, Hong Kong
must mandate the listed companies not to have members of the same family
making up more than half of the members of the boards.58 In this regard, Thailand can learn this requirement from Hong Kong.
Lastly,
according to a study from Gul and Leung, quality of independent non-executive
directors is more important in ensuring higher corporate disclosures than
the number of non-executive directors.59 As a result, both Hong Kong and Thailand should include the qualifications
of the independent non-executive directors in their Codes of Best Practices
in order to ensure the objectivity of the independent non-executive directors.
C.
Audit Committe
In
many countries including the US, UK, Canada, Australia, and Singapore,
audit committees are a feature of good corporate governance for listed
companies.60 It is mandatory in US, Canada
and Singapore but is voluntary in UK and Australia.61
Hong
Kong
Hong Kong has followed this international standard since May 1998.62 Similar to the UK and Australian approach, under the revised Guidelines
in the Hong Kong Code of Best Practices, audit committee requirements
in Hong Kong under the main board's Listing Rules are introduced as best
practices rather than as mandatory rules.63 The Code also expects all listed companies in the main board to report
in their interim and annual reports their compliance with the setting
up of audit committees or their reasons for any non-compliance therewith
for accounting periods commencing or after 1st January 1999.64 On the GEM board, however, audit committees are mandated because companies
listed there are typically without a track record of profitability due
to their emerging nature.65
In
addition, the Code of Best Practices recommend that members of an audit
committee should be appointed from among the non-executive directors and
a majority of them should be independent.66
Thailand
Unlike
Hong Kong approach, an audit committee in Thailand is compulsory. In January
1998, the SET notified listed companies that they would have to form audit
committees no later than December 1999, while newly listed companies would
require them from the start.67 Such audit
committees should comprise at least three directors, all of whom should
be independent and at least one must have expertise in accounting or finance.68
Learn?
One
way of improving corporate governance is by using audit committees. Their
function is to assist the management in providing an independent review
of the effectiveness of the financial reporting process and internal control
company. As a result, audit committees can promote transparency and acceptability.
The
Hong Kong requirement of the voluntary audit committees for all listed
companies is a small step in the right direction.69 However, in order to their full benefits, a further step toward compulsory
audit committees is necessary. In this regard, Hong Kong can learn from
Thailand by requiring audit committees as mandatory rules. Besides, in
order to make such audit committees well functioning, at least one of
its members should have expertise in accounting or finance.
D.
Shareholder Remedies
Hong
Kong
In
Hong Kong, even major institutional investors are often minority shareholders
with very little to say.70 However, even
with some limitations, interests of the minority shareholders are protected
in a number of ways.
(1)
Negative Control
Fundamental
matters i.e., the alteration of articles of association, reduction of
capital, appointment and removal of the company's auditors etc., requires
special resolution (which requires 75% of the votes) decided by shareholders
in the general meeting.71 This gives the
minority a certain degree of negative control if it can command 25% of
votes at the general meeting. However, other matters concerning the day-to-day
management are merely left to the board of directors.72
(2)
Securities Laws and Regulations
Matters
important to every investor are regulated by securities laws and regulations
such as the Listing Rules or Takeovers Codes. However, the present regulations
have some limitations and therefore are not satisfactory.73 For example, the stock exchange can suspend or withdraw a company's listing
in a consequences of breaching the Listing Rules, but it is unlikely to
be used because any suspension or withdrawal is also likely to harm the
minority shareholders interests the Listing Rules seek to protect.74 Therefore, the more practical and effective actions are to issue a private
reprimand, a public statement of criticism or a public censure and to
report the misconduct to the Securities and Futures Commission or other
regulatory authorities.75 Another limitation
is that, as the HKSE is now wholly owned by the new Hong Kong Exchanges
and Clearing, which is also listed on the stock exchange's main board.
This creates a conflict of interest in that the regulator is regulating
itself.76
(3)
Statutory and Common Law
Statutory
and common law give rights to shareholders to bring actions against the
wrongdoers. However, bringing legal action is not attractive to the shareholders,
even an institutional shareholder since it is costly and lengthy.77
(3.1)
Derivative Action
Where
the controlling shareholders who are the directors are in breach of their
duties as directors, it is only the companies can bring legal proceedings
against the wrongdoers.78 However, the controlling
shareholders are unlikely to sue themselves for wrongdoing. In this regard,
the minority shareholders may bring a derivative action on behalf of the
company but the related law is rigid, old fashioned, unclear and the procedure
is lengthy and costly.79
As
a result, it would be desirable to replace the old fashioned rule with
a statutory derivative. Thus, the Standing Committee, after having considered
the defects in the statutory derivative action adopted in Canada, New
Zealand and England, believe that there should be a statutory derivative
action in the New Ordinance and it should be made simple and accessible
to minority shareholders.80
(3.2)
Unfair Prejudice
Under
Hong Kong Companies Ordinances, section 168A, if the affairs of the company
are being, or have been, conducted in a manner unfairly prejudicial to
the interests of the members generally or individually, a shareholder
can petition the court for remedies. In determining whether there has
been unfair prejudice, the court considers not only the shareholder's
legal right but also his interests or legitimate expectations.
Even
though, however, the shareholder petitions under section 168A are more
useful than common law derivative action, its proceedings can also be
costly and lengthy. At present, the court will not make any order until
the full case is heard.81 The extremely
wide wording in section 168A allows the parties to allege unfair prejudicial
conduct going back over many years.82 As
a result, unfair prejudice cases can last weeks rather than days and cost
enormously.
(3.3)
The Just and Equitable Winding up
The
just and equitable winding up provision is under section 177(1)(f) of
the Hong Kong Companies Ordinance. It provides that a shareholder may
apply to the court to wind up the company on the ground that it is just
and equitable to do so. This remedy often applied to the case where one
member is removed from management and he or she cannot take out his stake
and go elsewhere.83 However, this remedy
is mainly for quasi-partnership companies.84 In public companies, there is a bar in that there is a market at which
the shareholders can sell, at a reasonable price, without the assistance
of the court.85
Part
4
_______________________________________________________________
(57)
Tricker, Robert., (1994)., note 40
(58)
Hong Kong Society of Accountants, Report of the Working Group on Corporate
Governance (December 1995) in CGSR.7/1000(ACa), note 45
(59)
Gul, F.A. and S. Leung, 2000. "CEO Dominance and Voluntary Corporate
Disclosure Strategies in Hong Kong Annual Reports", Working Paper,
City University of Hong Kong
(60)
Canham, Janine., and Chis Soutorn., 'Protecting shareholders of Hong Kong
companies', in Building Value in Asia, (Asia Law & Practice: 2000)
at 29
(61)
Corporate Governance, Class materials in Corporate Governance and Shareholder
Remedies, CGSR.9/1000(ACa), Faculty of Law, University of Hong Kong, 10
October 2000, at 7 [hereinafter CGSR.9/1000(ACa)]
(62)
Asian Corporate Governance Association, note 27, at 8
(63)
Ibid.
(64)
Ibid.
(65)
Ibid.
(66)
Code of Best Practice, Appendix 14, Corporate Governance, in CGSR.7/1000(ACa),
note 45
(67)
Asian Corporate Governance Association, note 27, at 39
(68)
Ibid.
(69)
Goo, Say., (2000). 'Minority shareholders in Hong Kong: a legal conundrum',
in Building Value in Asia, Asia Law & Practice, at 77
(70)
Ibid.
(71)
The Hong Kong Companies Ordinance, Section 116.
(72)
Goo, Say., 'Minority shareholders in Hong Kong: a legal conundrum', note
69, at 77
In some special cases, the minority shareholders
could be successful to use their shareholding to exercise negative control
through voting. In a case of Vickers Ballas, Ong Beng Seng and his family,
one of its minority shareholders who owns about 20% of Vickers Ballas
was opposed to the merger plan and thereby the voting was less than 75%
approval required.
In other cases, the challenges of the minority
shareholders are likely to be successful. For example, in a case of Jadine
empire, a US fund manager Brandes Investment Partners, which holds 8%
of Jardin Matheson Holdings and 2% of Jadine Strategic Holdings, proposed
six resolutions including a proposal to abolish the cross-shareholding
structure between the two companies. Even though the proposal was supported
from other minority shareholders, it was voting down by Keswick family,
the controlling family of the Jadine Empire.
(73)
Goo, Say., 'Minority shareholders in Hong Kong: a legal conundrum', note
69, at 77
(74)
Ibid., at 80
(75)
Ibid., at 80
(76)
Ibid., at 82
(77)
Ibid., at 77
(78)
Foss -v- Harbottle (1843) 2 Hare 461
(79)
Goo, Say., (1998). 'Minority shareholder protection in Hong Kong's owner-managed
companies' Company Secretary, May 1998, Volume 8 No.5, at 16
(80)
Company Law Reform Standing Committee Report 2000, (SC Report) Chapters
7, 8 and 9 in Corporate Governance, Class materials in Corporate Governance
and Shareholder Remedies, CGSR.10/1100(SG), Faculty of Law, University
of Hong Kong, 7 November 2000, at 84 [hereinafter CGSR.10/1100(SG)]
(81)
Goo, Say., (1998). 'Minority shareholder protection in Hong Kong's owner-managed
companies', note 79, at 17
(82)
Ibid.
(83)
CGSR.10/1100(SG), note 80, at 67
(84)
Ibid.
(85)
Ibid. |