Agreeing to be unfair: Can shareholders agree to oust the right to petition to wind up a company?

Establishing a new company can be nerve-racking. A well-drafted shareholders’ agreement ensures that everyone’s respective rights and obligations are clear, helping to minimise potential future disputes. But what are the limits of these agreements; can a shareholder agree that it will not present an “unfair prejudice” petition, and are future shareholders similarly bound?

Edmond Leung and Troy Greig explore the Hong Kong legal position.

Shareholders’ agreements generally

A shareholders’ agreement is a contract between the shareholders of a company, typically entered into at about the time of incorporation.

Shareholders’ agreements can cover a wide array of issues that can affect a company, such as: distribution of dividends, dilution of shares, board representation, matters requiring ordinary or special majority or unanimous vote, dispute resolution and more. [See: Reasons for a shareholders’ agreement – Tanner De Witt]

The benefits of having such an agreement in place cannot be overstated. Disputes between shareholders are a significant contributor to business failure. A well-drafted shareholders’ agreement can minimise the incidence of a dispute arising in the first place and prescribe how it should be resolved; this can only aid in the survivability of any business.

Can a shareholders’ agreement modify or even prevent the exercise of a statutory right?

Shareholders’ agreements tend to contain some form of dispute resolution clause. For the most part, these clauses are effective in providing mechanics to aid the parties in resolving disputes. For example, a dispute arising in relation to the interpretation of part of a shareholders’ agreement can stipulate that it be resolved by arbitration.

However, consider the situation whereby a shareholder complains that the affairs of the company are being conducted in a manner “unfairly prejudicial” to its interests (or members generally[1]). What if that shareholder signed a shareholders’ agreement containing a clause intended to modify or even prevent a shareholder from then raising such a dispute; would that clause be enforced by the Courts?

The answer is no (for the time being, at least)[2]. Members of a company have a statutory right to file a petition on the basis of “unfair prejudice” (section 724, Cap. 622), which cannot be ousted by contract (or even by the company’s articles of association). This right is not limited to “unfair prejudice” petitions. It includes a petition to wind up the company (section 177, Cap. 32),[3] and possibly an application for leave to commence a derivative action. An attempt to modify or prevent a member’s right to utilise statutory rights is against “public policy”.     

Moreover, a shareholders’ agreement is not binding on those not a party to it or upon new shareholders (who do not assent to it). In other words, a shareholders’ agreement cannot be imposed upon an incoming shareholder (irrespective of whether it contains a clause fettering the right to present a petition) unless the incoming shareholder agrees to this by entering into the shareholders’ agreement or a document (typically an accession deed) whereby the incoming shareholder accedes to the existing shareholders’ agreement.

What about excluding only some elements of “unfair prejudice”

A shareholders’ agreement can legitimately discriminate between shareholders regarding dividend policy, yet “little or no participation in profits” is one basis upon which an “unfair prejudice” petition may be founded. Would a petition filed in this instance be successful?

Not likely. Courts will be less inclined to find in a shareholder’s favour if the ground for complaint is one that was bargained away. It would seem odd that, on the one hand, the shareholder can, by contract, agree that it would not raise a complaint about the dividend policy, yet with the other, file a petition based on that very issue.

However, there are limits.

Terms seeking to allow directors to breach their fiduciary duties or to excuse harm caused to the company are likely to be unenforceable. While it may be permitted for shareholders to modify the operation of some fiduciary duties[4], it is likely not possible to contract out of, for example, the duty to act honestly. So too for terms which do not expressly but substantively modify or prevent a shareholder from exercising a statutory right (say by listing all grounds to bring an “unfair prejudice” petition).

Terms which merely place a limit upon a shareholder’s non-statutory rights, such as having a discriminatory dividend policy, are likely to be upheld.

Hong Kong has consistently retained a prized top 5 ranking in The World Bank’s “Doing Business” survey since its inception in 2008. The current survey sees Hong Kong ranked 3 out of 190 economies. Hong Kong has a robust and reliable judicial system which upholds many common law principles inherited from the United Kingdom.  

Edmond Leung and Troy Greig

If you would like to discuss any of the matters raised in this article, please contact:

Disclaimer: This publication is general in nature and is not intended to constitute legal advice. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.

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[1] A “member” is a person who agrees to be a member of the company and whose name is entered as such in the company’s register of members, but typically the term shareholder is used.

[2] See Re Asia Master Logistics Ltd [2020] 2 HKLRD 423 at [124-125].

[3] Re Greater Beijing Region Expressways Ltd [1999] 4 HKC 807; Joseph Ghossoub v Team Y&R Holdings Hong Kong Ltd [2017] HKEC 1532.

[4] Kelly v Cooper [1993] A.C. 205 cited with approval in Poon Ka Man Jason v Cheng Wai Tao [2015] HKEC 114 (Court of Appeal).