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The Financial Services and the Treasury Bureau (FSTB) and the Securities and Futures Commission (SFC) released a paper today (May 27) for a two-month consultation on the proposal to empower the SFC to initiate derivative actions.

The proposal stems from a recommendation made by the Standing Committee on Company Law Reform (SCCLR), as part of its Phase I Review of Corporate Governance. If the proposal is implemented, the SFC would be empowered to initiate, without court approval, a derivative action against wrongdoers in relation to a listed company on grounds including fraud, negligence, default in relation to any legislation and breach of any fiduciary or statutory duty, where the company is unwilling or unable to do so. Under the proposal, the SFC would only be empowered to exercise such statutory right where it is in the public interest and in the interest of the company concerned to do so.

A spokesman for the FSTB noted that the proposal is only one of the many recommendations made by the SCCLR to improve corporate governance in Hong Kong.

"In light of the far reaching implications of the SCCLR recommendation on the SFC and the market, it is important to set out the proposed concepts in detail in a consultation paper for the public to comment. We shall consider the public comments carefully against the overall picture of the measures to enhance corporate governance," the spokesman said.

"The Government keeps an open mind on the proposal and will carefully analyze the public views before deciding the way forward," he said.

Arguments for and against, including whether it would be appropriate for a regulator to expend investing public's money on private commercial disputes, and other information relevant to, the consideration of implementing the SCCLR recommendation at this stage are presented in the consultation paper. Public views are also sought on the funding aspects if the proposal is to be implemented, as well as other aspects of how such a power might be implemented.

An SFC spokesman said, "The consultation deals with complex and important issues. The SFC looks forward to receiving the views on the various options set out in the paper."

Besides the proposal to empower the SFC to initiate derivative actions, the SCCLR also recommended under its Phase I Review of Corporate Governance other measures to enhance minority shareholders' remedies which include providing a similar statutory right for shareholders to initiate derivative actions, and enhancing existing remedies for shareholders to seek damages for themselves under the Companies Ordinance. The relevant legislative amendments will be introduced into the Legislative Council by July 2003.

In addition, the consultation paper also refers readers to developments in protecting minority shareholders that have taken place after the SCCLR completed its Phase I Review of Corporate Governance, including notably the reforms introduced under the Securities and Futures Ordinance since April 1 to empower the SFC to seek remedies for individual shareholders in relation to a wider range of misconduct, and to allow the investors a private right of civil action which may assist them in seeking damages for loss suffered as a result of market misconduct.

The consultation paper is available on the websites of the FSTB (www.info.gov.hk/fstb) and of the SFC (www.hksfc.org.hk). Interested parties are invited to send their comments to the FSTB or the SFC by July 26, 2003.

Note:

A derivative action refers to civil proceedings brought by a minority of company members (shareholders) seeking a remedy for the company in respect of a wrong done to it. Any damages awarded by the Court would go to the company, instead of to the members initiating the derivative action.

End/Tuesday, May 27, 2003

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