Chapter 3: Derivative and Class actions
Article A: Derivative Action and Derivative Defense
194. (a) Any shareholder and any director of a company (in this Chapter “plaintiff”) may file a derivative action if the provisions of this Article prevail.
(b) Any person wishing to file a derivative action shall address the company in writing, demanding that it exhaust its rights by instituting an action (in this Chapter “a demand”).
(c) The demand shall be presented to the chairman of the board of directors of the company, and it shall set out in detail the facts giving rise to the cause of action and the reasons for its submission.
Preconditions for filing of claim
195. A company that receives a demand may proceed in one of the following ways:
(1) do any act or pass any resolution resulting in the dropping of the cause of action;
(2) reject the plaintiff’s demand, for reasons specified in its resolution;
(3) resolve to file a suit.
Response of company
196. The company shall inform the plaintiff of the way in which it proceeded under section 195 within forty-five days of the date of receipt of the demand, giving details of the action taken and the body that passed the resolution, including the names of those who participated in passing the resolution; where a participant or an
office holder in the company has a personal interest in the resolution, this shall be stated in the resolution and in the notice to the plaintiff.
Company’s response to plaintiff
197. A plaintiff may file a derivative action with the approval of the court, in accordance with the provisions of section 198, if one of the following applies:
(1) the act done or the resolution made under section 195(1) did not, in the plaintiff’s opinion, bring about the dropping of the cause of action;
(2) the company rejected the plaintiff’s demand as provided in section 195(2);
(3) the company gave notice to the plaintiff that it has resolved to file a suit, as provided in section 195(3), but no suit was filed within seventy-five days of the date of such notice;
(4) the company did not respond to the demand in accordance with section 196.
Right to file derivative action
198. (a) A derivative action requires the approval of the court, which shall approve it if convinced that the claim, and the conduct thereof, are prima facie in the best interests of the company and that the plaintiff is not acting with lack of good faith.
(b) The court may approve the filing of a derivative action filed before the dates laid down in sections 196 or 197 have elapsed if it is of the opinion that failure to file the claim on such date would cause it to become prescribed, and it may make the approval conditional upon the fulfillment of the conditions laid down in this article for filing a derivative action.
(c) In this article, “court” – a court having competence to hear the action.
Approval of derivative action
199. Where the court has approved a derivative action, it may:
(1) give instructions as to the manner and dates of payment of court fees, including the division of payment of the fee between the plaintiff and the company;
(2) order the company to pay the plaintiff such sums as it may prescribe to cover the plaintiff’s costs or to deposit a security for such payment;
(3) require the company or the plaintiff to deposit security to cover the defendant’s costs.
Fee and costs
200. Where the court has adjudicated on a derivative action, it may require the company to pay the plaintiff’s costs and it may require the plaintiff to pay costs incurred by the company, in whole or in part, taking into account the judgment and the other circumstances of the case.
201. Where the court rules in favor of the company, it may order the payment of a reward to the plaintiff taking into account, inter alia, the benefit derived by the company from filing the claim and from winning it.
202. A plaintiff shall not withdraw a derivative action, and shall not enter into an arrangement or settlement with the defendant, other than with the consent of the court; the application for such consent specify all details of the arrangement or settlement, including any payment offered to the plaintiff.
Arrangement or settlement
203. (a) Where a claim is filed against a company, the court may, at the request of a shareholder or director (in this Chapter “the derivative defendant”) allow such person to defend the claim on behalf of the company (hereinafter “the derivative defense”) provided that the court is convinced that the conduct of the derivative defense is for the benefit of the company, and that the derivative defendant is not acting with lack of good faith.
(b) The provisions of this Article regarding a derivative action shall apply, mutatis mutandis, to a derivative defense to the extent that provisions are not prescribed by the Minister.
204. A creditor of a company may file a derivative action on behalf of the company in respect of a prohibited distribution effected by the company, and the provisions of this Article shall apply thereto, mutatis mutandis.
Prohibited distribution of dividend
205. Neither a derivative action nor a derivative defense shall be filed on behalf of a company over which a liquidator has been appointed under Chapter 12 of the Companies Ordinance.
Company in liquidation
206. The Minister may prescribe provisions regarding derivative actions and derivative defenses, including the procedures for the approval thereof.