31 March 2010
Ms Sandy Chan
Companies Bill Team
Financial Services and the Treasury Bureau
15/F, Queensway Government Offices
66 Queensway
Hong Kong
Dear Ms Chan,
The Draft Companies Bill First Phase Consultation
The Hong Kong General Chamber of Commerce (Chamber) is pleasedto offer its considered opinion on the first phase consultation for the Companies Ordinance rewriting exercise. For the most part, we have no objection to the proposals contained in the document, although there are two places where we do not agree.
On matters such as directors’ residential addresses and HKID card numbers, we believe anacceptable solution should be easily devised by the Bills Team. We are encouraged by the steps taken to deal with issues related to electronic filing and rectification of company names.
However, we do wish to comment on two major areas discussed in the captioned consultation document, namely the “headcount test” and the codification of directors’ duty of care.
“Headcount Test”
The Chamber supports abolition of the “headcount test”.
The “headcount test” fundamentally goes against the “1-share-1-vote” principle, which runs throughout Hong Kong’s legal framework. It has been argued that the test has a misplaced concern with registered owners of shares rather than underlying ownership. In reality a very large proportion of shares in listed companies are held by nominees and custodians. Many unrelated beneficial owners of shares hold their shares through a single nominee and are counted as one member for the purposes of the test. The “headcount test” therefore cannot truthfully reflect the decisions of beneficial owners using the depository and effectively disenfranchises them.
The test has long drawn criticism that it gives a disproportionate voting weight to small shareholders. On the other hand, the test can also attract attempts of manipulation by share splitting.
In spite of these problems with the test, some argue that it should be kept in order to protect minority shareholders’ interests. But it should be highlighted that the Securities and Futures Commission’s Takeovers Code (Rule 2.10(b)) already provides safeguard for minority shareholders by requiring that the number of votes cast against a proposed scheme of arrangement shall not be more than 10% of the voting rights attached to all disinterested shares. Thus, the argument that the “headcount test” should be preserved in order to protect minority shareholders’ interests is unsound.
Codifying Directors’ Duty of Care
The Chamber’s views on codifying directors’ duty of care, as expressed in our letter to the Government on 11 July 2008, do not carry an implication that we agree with a wholesale substitution of case law by codification. We are of the view that the common law principles should be preserved in order to maintain clarity. Indeed we have come to the conclusion that it would be better for this area of the law to be left to the courts, allowing it to evolve on a case by case basis and in response to actual situations.
In the UK, while statutory duties have replaced the corresponding common law rules and equitable principles from which the former were derived, these duties are required to be interpreted in the same way as common law rules and equitable principles. In other words, the courts should interpret and develop directors’ duties in the way that reflects the nature of rules and principles they replace. The British government considered it important that the connections with other areas of law (such as trusts and agency) should not be lost so that company law might continue to reflect developments elsewhere. Although new uncertainties might arise out of this new regime, it is apparent that the intention of the UK Government is not a complete departure from the existing common law rules and principles.
In Australia and Singapore, the statutory duties have effect in addition to the existing common law and equitable principles and therefore the common law rules and codifying statute can be used together to develop the law. Again, some new uncertainties might arise with the co-existence of two regimes, but it is apparent that these two jurisdictions did not prefer a clean break from the old case law.
In contrast Hong Kong proposes a wholesale replacement of common law rules. The statutory duties are drafted in general and broad terms. It will give rise to more uncertainties when there is no precedent from which reference may be drawn. Although Hong Kong does not have a clear common law authority on directors’ duty of care, there is a rich body of English and Commonwealth case law for reference.
Last but not least, codification and the proposed mixed subjective/objective test, and the wholesale replacement of common law rules will likely deter many people from accepting appointments as company directors, and drive away many existing directors. This will go against the Government’s objective of enhancing corporate governance.
In summary, we are of the view that codification of the duty of care in broad terms will not add to the certainty of the law, and codification co-existing with common law will give rise to new uncertainties. It seems to us that the best approach is to allow the common law to develop so as to allow the necessary flexibility to respond to the constantly evolving expectations of directors’ duty of care.
I trust these comments will assist you in your work.
Sincerely,
Alex Fong
CEO
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