The Common Law Derivative Action in Hong Kong

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School of Accountancy

ACY 3151 D– Company Law

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


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 whether we should abolish the CDA.

The main part of this paper discusses five arguable aspects from both the con sides and the pro sides of whether abolishing the CDA. This paper discusses the CCASS system which disables many shareholders to use the SDA; the rights of minority shareholders of offshore companies who cannot use the SDA; the international context regarding the CDA in many other common law jurisdictions; the potential confusions and complications with and without the co-existence and some pitfalls of the CDA which are minor and can be ignored.

On the discussion of the above five aspects, the authors find that the CDA overrides the SDA in respect of each issue at the current time in Hong Kong, therefore this paper reaches a conclusion that Hong Kong should preserve the CDA at the current stage.

Upon the disagreement of the abolishment of the CDA, the authors also provide some further recommendations to help improve the current situations regarding the co-existence of the CDA and the SDA.



Table of Contents3

1. Introduction5
1.1 The Facts of Foss v Harbottle Case5
1.2 The Rules of Foss v Harbottle Case5
1.3 The Common Law Derivative Action6
1.4 The Drawbacks of the Common Law Derivative Action7
1.5 Introduction of SDA into Companies Ordinance7
1.6 Problems of the Co-existence of the CDA and the SDA8

2. Five Aspects Regarding the Co-existence of CDA and SDA9 2.1 The CCASS System9
2.2 Members of Offshore Companies11
2.3 The International Context of Derivative Action13
2.4 Confusions and Complications Arisen without CDA15
2.4.1 General Discussion16
2.4.2 The MDA May Not Continue to Work17
2.5 Other Drawbacks of the CDA Can be Ignored at the Current Stage18

3. Hong Kong Should Preserve the CDA19

4. Further Recommendations20
4.1 Slight Amend sec. 16820
4.1.1 Extend the Scope of Qualified Plaintiff of the SDA20 4.1.2 Only Keep the CDA for Shareholders of Offshore Companies20 4.2 Require Offshore Companies to Accept Hong Kong Statue20 4.3 Similar Legal System in the Region20

5. Conclusions22


1. Introduction

Before we discuss whether we should abolish or preserve the common law derivative action in Hong Kong, we would like to briefly introduce the background of the leading case (Foss v Harbottle) which established the principles of the common law derivative action as well as the pitfalls of it. Then we will mention the statutory derivative action which was the statutory regime introduced to deal with these pitfalls of the common law derivative action. At last we present the problems faced by the co-existence of these two derivative actions which lead to this paper’s main topic whether we should abolish or preserve the common law derivative action.

1.1 The Facts of Foss v Harbottle Case

Victorian Park Company was set up to develop parks and gardens. Harbottle was one of the eight promoters of this company. Foss was one shareholder, who brought a law suit alleging that the promoters sold a land to the company at a very high price. But Harbottle argued that Foss, the plaintiff, could not represent...
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