Our ref : 23/51/WKC/269
31 October 2001

The Hon Justice Rogers JA
Chairman
Standing Committee on Company Law Reform
Queensway Government Offiices
15th Floor, 66 Queensway
Hong Kong

 

Dear Justice Rogers

Corporate Governance Review – Comments on the Consultation Paper

I would like to thank you sincerely for kindly attending the Roundtable luncheon on 15 October on the Corporate Governance Review. We have compiled the comments from the Roundtable discussion and would like to summarise them as follows.

General Points

  1. Good corporate governance ensures long term growth and competitiveness for companies, and helps attract foreign investment to Hong Kong. We support a strengthened legal regime for corporate governance. It will supplement the day-to-day regulation by the Stock Exchange by providing the latter with legal backing.
  2. Having said that, Corporate governance is about enhancement of shareholder value. It is a matter of mindset, and cannot be fully covered by law. The Companies Ordinance must be complemented by a promotional programme to educate company directors about their legal obligations, and help them differentiate between public and private transactions.

Directors and Shareholders

  1. On enforcement of rights of disadvantaged minority shareholders, some form of summary redress should be found before resort to expensive litigation through the Courts.
  2. On interest of directors or controlling shareholders, we agree that when directors have an interest in the transaction of the company, he should not vote on it, even if that has been allowed by the company’s Articles of Association. This restriction on directors voting should be applicable wherever a director may have some beneficial interest or could be using the corporate veil to hide some personal interest; thus it should apply also to connected interests such as that of spouse and children.
  3. The same should also apply to controlling shareholders. Where a controlling shareholder has an interest in a company transaction, the connected transaction must be disclosed and be subject to independent shareholder approval.
  4. The timing of the shareholder approval should be considered carefully. It would be inconvenient for a company to convene a general meeting whenever there is some connected transactions to deal with. One way is for the connected transactions to have to be reported and approved at subsequent AGM or EGM and if voted down, the company has to take action or could be subject to derivative action taken against it. On the other hand, problems should be dealt with upfront rather than after the damage has been done, so there is a strong case for a general meeting to be mandated to be held on important matters affecting shareholder interests. There is a need to devise something workable and prevent abuse.
  5. One special case in relation to the above is that of dismissal of directors. One does not normally wait for shareholder approval to dismiss somebody, so the endorsement has to be sought at the subsequent general meeting. Also, unanimous approval should not be required lest one single shareholder should have power of veto; instead a majority vote should do. As a general rule, directors should not be involved in the discussion on the setting of remuneration of his own dismissal.
  6. This principle of shareholder approval on connected transactions should extend to directors of unlisted private companies.

Other Issues

  1. In the case of alleged fraud, negligence or breach of duties, shareholders should be able to take action (such as recourse in court) without undergoing prior test of proof as doing so would be costly and the process cumbersome, given that the court is already chosen as arbiter.
  2. We do not support the filing of financial statement by private companies for inspection by the public. Such enforced transparency will add to the cost of the companies, especially SMEs, without serving any useful purpose. In any case, the information will be outdated by the time the information is filed.
  3. The development of a corporate governance regime is a continuing exercise. In the next stage of consultation, we suggest that it would be helpful if the three sub committees under the Standing Committee could meet the public on their reasoning and thinking for coming up with the respective proposals.

I hope you will find these views useful. We shall be happy to continue to be involved in the discussion and deliberations as the Review proceeds to its next stage.

Yours sincerely

 

Dr W K Chan
Secretary General