Shareholder activism has changed corporate governance around the world in the past decade. Conventional wisdom holds that shareholder activism is only effective in firms with dispersed ownership; there has been much less discussion on whether and how activism would work in firms with controlling shareholders. This article fills this gap by investigating whether and how legal mechanisms influence strategy planning and activism outcomes based on hand-collected data regarding activists’ initiatives against firms with concentrated ownership in Hong Kong from 2003 to 2017. This article finds that cases using formal legal mechanisms appear to have had a higher success rate. Among the legal tools available, minority veto rights are the most popular mechanism used by activists in Hong Kong, and are quite effective in leveraging their position in controlled firms. Furthermore, the availability of legal remedies and the ownership level of controlling shareholders are factors that influence activists’ strategies. Most activist initiatives against controlled firms involve corporate governance disputes where activists can rely on legal protection to enhance their bargaining position. On the other hand, activists tend not to make their demands public, and they also avoid exercising legal rights when controlling shareholders control the majority of the shares.
Assistant Professor, City University of Hong Kong, School of Law; JSD, Stanford Law School. I thank the two anonymous reviewers, Desmond Ang, Yun-chien Chang, Kai-ping Chang, David Donald, Jesse Fried, Han-Wei Ho, Dan Klerman, Lin Lin, Dan W Puchniak, Petrina Tan, Brian Tang, Hans Tjio, and other participants at the Symposium on Hedge Funds and Alternative Investment Funds in Hong Kong and Singapore for their valuable comments. The author is also grateful for research funding provided by the Research Grants Council of the Hong Kong Special Administrative Region, China, Project No CityU11606017. I thank Kathleen Poon and Shanyun Xiao for research assistance. All errors are mine alone.
1. See generally Hill, Jennifer G and Thomas, Randall S, Research Handbook on Shareholder Power (Edward Elgar 2015) ; Arye Bebchuk, Lucian, ‘The Case for Increasing Shareholder Power’ (2005) 118 Harvard Law Review 833 ; Arye Bebchuk, Lucian, ‘Letting Shareholders Set the Rules’ (2006) 119 Harvard Law Review 1784 ; Nolan, RC, ‘The Continuing Evolution of Shareholder Governance’ (2006) 65 Cambridge Law Journal 92 .
2. The new directive adopts changes in respect of remuneration of directors; identification of shareholders; facilitation of exercise of shareholders rights; transmission of information; transparency for institutional investors, asset managers, and proxy advisors; and related party transactions. European Council, ‘Shareholders’ Rights in EU Companies: Council Formal Adoption’ (Press Release, European Council, 3 April 2017) <www.consilium.europa.eu/en/press/press-releases/2017/04/03/shareholder-rights-eu-companies/> accessed 28 February 2019. For a criticism of the new regulation and policy recommendation, see Alessio M Pacces, ‘Hedge Fund Activism and the Revision of the Shareholder Rights Directive’ (2017) European Corporate Governance Institute (ECGI) Law Working Paper 353/2017 <https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2953992> accessed 28 February 2019; Hossein Nabilou and Alessio M Pacces, ‘The Hedge Fund Regulation Dilemma: Direct vs. Indirect Regulation’ (2015) 6 William & Mary Business Law Review 183.
3. For example, the Shareholder Rights Project at Harvard Law School has worked with institutional investors since 2012 to provide shareholder proposals to S&P 500 and Fortune 500 companies to de-stagger boards. The percentage of S&P 500 companies with classified boards decreased drastically from 45% in 2004 to 7% in 2014. See Harvard Law School Program on Institutional Investors, ‘Declassifications’ (Shareholder Rights Project) <www.srp.law.harvard.edu/declassifications.shtml> accessed 1 February 2019; Spencer Stuart, ‘Spencer Stuart Board Index’ (2014), 7 <www.spencerstuart.com/~/media/pdf%20files/research%20and%20insight%20pdfs/ssbi2014web14nov2014.pdf> accessed 1 February 2019.
4. The classic statement on ‘voice’ and ‘exit’ is from Hirschman, Albert O, Exit, Voice, and Loyalty: Responses to Decline in Firms, Organizations, and States (Harvard University Press 1970) . See also Donald, David C, ‘Shareholder Voice and Its Opponents’ (2005) 5 Journal of Corporate Law Studies 305 .
5. Listokin, Yair, ‘If You Give Shareholders Power, Do They Use It? An Empirical Analysis’ (2010) 166 Journal of Institutional and Theoretical Economics 38 .
6. Hedge funds, as the term suggests, originally engaged in hedging risk by adopting the classical long-short equities model to make profits. Today, hedge funds have developed various investment strategies to make above-market returns for their clients. While most funds stay with the traditional long-short model, some aggressively influence corporations to change their capital structure, business plans, or corporate governance designs. See Kahan, Marcel and Rock, Edward B, ‘Hedge Funds in Corporate Governance and Corporate Control’ (2007) 155 University of Pennsylvania Law Review 1021 , 1028–1042; Schneider, Marguerite and Ryan, Lori V, ‘A Review of Hedge Funds and Their Investor Activism: Do They Help or Hurt Other Equity Investors?’ (2011) 15 Journal of Management & Governance 349, 366 ; Coffee, John C Jr and Palia, Darius, ‘The Wolf at the Door: The Impact of Hedge Fund Activism on Corporate Governance’ (2016) 1 Annals of Corporate Governance 1 , 11–16; Strine, Leo E, ‘Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System’ (2017) 126 Yale Law Journal 1866, 1870 .
7. Hill, Jennifer, ‘Good Activist/Bad Activist: The Rise of International Stewardship Codes’ (2018) 41 Seattle University Law Review 497 .
8. Part of the reason is that US data is more widely available because the US mandates the disclosure of investments over 5% and the purpose of any investment in SEC Schedule 13D filings. See Becht, Marco and others, ‘Returns to Hedge Fund Activism: An International Study’ (2017) 30 Review of Financial Studies 2933, 2941 .
9. Cheffins, Brian R and Armour, John, ‘The Past, Present, And Future Of Shareholder Activism By Hedge Funds’ (2011) 37 Journal of Corporation Law 51 , 68–69 (‘dispersed stock ownership therefore is typically a necessary precondition for an influence-based intervention’); Katelouzou, Dionysia, ‘Worldwide Hedge Fund Activism: Dimensions and Legal Determinants’ (2015) 17 University of Pennsylvania Journal of Business Law 789 , 799–800 (‘A dispersed ownership structure is more appealing to activist hedge funds at the entry stage of an activist campaign, whereas the existence of controlling blocks in the target company constitutes a “structural” barrier to shareholder activism by activist hedge funds if the controlling shareholders are unwilling to support the activist campaign’).
10. Even for hedge fund activism outside the US, most target firms have a dispersed ownership structure. See Katelouzou, Dionysia, ‘Myths and Realities of Hedge Fund Activism: Some Empirical Evidence’ (2013) 7 Virginia Law & Business Review 459, 508 .
11. Lin, Yu-Hsin, ‘Controlling Controlling-Minority Shareholders: Corporate Governance and Leveraged Corporate Control’  Columbia Business Law Review 453, 504–510 .
12. John Adebiyi, ‘Recent Shareholder Activism in Asia Could Signal Changing Attitudes’ (Skadden’s Insights, January 2016) <www.skadden.com/insights/publications/2016/01/recent-shareholder-activism-in-asia-could-signal-c> accessed 28 February 2019.
13. Paolo Frediani, ‘Activist Investing in Asia’ (Activist Insight Limited 2017) 5 (on file with author).
14. ibid 15.
15. Dan W Puchniak and Masafumi Nakahigashi, ‘The Enigma of Hostile Takeovers in Japan: Bidder Beware’ (2018) 15 Berkeley Business Law Journal 4, 15.
16. Donald, David C, A Financial Centre for Two Empires: Hong Kong’s Corporate, Securities and Tax Laws in Its Transition from Britain to China (CUP 2014) 123–165 .
17. Scholars have cast doubt on the effectiveness of this principle to incentivize shareholder activism in Hong Kong because of concentrated ownership and weak private enforcement; eg Ho, John KS, ‘Bringing Responsible Ownership to the Financial Market of Hong Kong: How Effective Could It Be?’ (2016) 16 Journal of Corporate Law Studies 437, 446–448 .
18. See eg Coffee and Palia (n 6); Bratton, William W and Wachter, Michael L, ‘The Case Against Shareholder Empowerment’ (2010) 158 University of Pennsylvania Law Review 653, 657–660 ; Kay, John, ‘The Kay Review of UK Equity Markets and Long-Term Decision Making, Final Report’ (Department of Business, Innovation & Skills, United Kingdom Government 2012) 9–11; Martin Lipton, ‘Bite the Apple; Poison the Apple; Paralyze the Company; Wreck the Economy’ (Harvard Law School Forum on Corporate Governance and Financial Regulation, 26 February 2013) <https://corpgov.law.harvard.edu/2013/02/26/bite-the-apple-poison-the-apple-paralyze-the-company-wreck-the-economy/> accessed 28 February 2019.
19. Arye Bebchuk, Lucian, Brav, Alon and Jiang, Wei, ‘The Long-Term Effects of Hedge Funds Activism’ (2015) 115 Columbia Law Review 1085 .
20. Frank Ming Kei Wong, ‘Shareholder Engagement and Activism Under the Radar: Empirical Evidence From Hong Kong (2003–15) – Rethinking Disclosure of Interests Regime’ (Hong Kong Shareholder Engagement and Activism Conference, Hong Kong, June 2017) <https://ssrn.com/abstract=2725318> accessed 28 February 2019.
21. See Puchniak, Dan W, ‘Multiple Faces of Shareholder Power in Asia: Complexity Revealed’ in Jennifer G Hill and Randall S Thomas (eds), Research Handbook on Shareholder Power (Edward Elgar 2015) 513–514 ; Puchniak, Dan W and Kim, Kon-Sik, ‘Varieties of Independent Directors in Asia: A Taxonomy’ in Dan W Puchniak, Harald Baum and Luke Nottage (eds), Independent Directors in Asia: A Historical, Contextual, and Comparative Approach (CUP 2017) 102–117 .
22. See generally Lim, Ernest, ‘Controlling Shareholders and Fiduciary Duties in Asia’ (2018) 18 Journal of Corporate Law Studies 113, 146–147 ; Varotill, Umakanth and Yee Wan, Wai, ‘Concluding Observations and the Future of Comparative Takeover Regulation’ in Umakanth Varottil and Wai Yee Wan (eds), Comparative Takeover Regulation: Global and Asian Perspectives (CUP 2017) 474–475 ; Puchniak, Dan W, ‘The Complexity of Derivative Actions in Asia: An Inconvenient Truth’ in Dan W Puchniak, Harald Baum and Michael Ewing-Chow (eds), The Derivative Action in Asia: A Comparative and Functional Approach (CUP 2012) 124–127 .
23. Scholars have also pointed out the costs of having institutional investors and hedge funds voting for individual investors; they have called such costs ‘principal costs’, as opposed to the common focus of ‘agency costs’. See generally Goshen, Zohar and Squire, Richard, ‘Principal Costs: A New Theory for Corporate Law and Governance’ (2017) 117 Columbia Law Review 767 .
24. Kastiel, Kobi, ‘Against All Odds: Hedge Fund Activism in Controlled Companies’  Columbia Business Law Review 60 ; Belcredi, Massimo and Enriques, Luca, ‘Institutional Investor Activism in a Context of Concentrated Ownership and High Private Benefits of Control: the Case of Italy’ in Jennifer G Hill and Randall S Thomas (eds), Research Handbook on Shareholder Power (Edward Elgar 2015) ; Nili, Yaron, ‘Missing the Forest for the Trees: A New Approach to Shareholder Activism’ (2014) 4 Harvard Business Law Review 157 ; Tilman H Drerup, ‘Long-Term Effects of Hedge Fund Activism in Germany’ (2014) <http://ssrn.com/abstract=1718365> accessed 28 February 2019; Assaf Hamdani and Yishay Yafeh, ‘Institutional Investors as Minority Shareholders’ (2013) 17 Review of Finance 691; Matteo Erede, ‘Governing Corporations with Concentrated Ownership Structure: An Empirical Analysis of Hedge Fund Activism in Italy and Germany, and Its Evolution’ (2013) 10 European Commercial & Financial Law Review 328; Chao Xi, ‘Institutional Shareholder Activism in China: Law and Practice’ (2006) 17 International Company and Commercial Law Review 251.
25. Seretakis, Alexandros, ‘Hedge Fund Activism Coming to Europe: Lessons from the American Experience’ (2014) 8 Brooklyn Journal of Corporate Finance & Commercial Law 438, 440–442 ; Seretakis, Alexandros, ‘Taming the Locusts; Embattled Hedge Funds in the EU’ (2013) 10 New York University Journal of Business Law 115 (discussing the changes in EU regulations aiming to control the rise of hedge fund activism in Europe); Adebiyi (n 12); Choi, Woon-Youl and Hoon Cho, Sung, ‘Shareholder Activism in Korea: An Analysis of PSPD’s Activities’ (2003) 11 Pacific-Basin Finance Journal 349, 363 .
26. Scholars have revealed the limitations of these empirical studies. See eg Pacces, Alessio M, ‘Exit, Voice and Loyalty from the Perspective of Hedge Funds Activism in Corporate Governance’ (2016) 9 Erasmus Law Review 199 . For research studies on the financial impact of shareholder activism, see eg Brav, Alon and others, ‘Hedge Fund Activism, Corporate Governance, and Firm Performance’ (2008) 63 Journal of Finance 1729 ; Brav, Alon, Jiang, Wei and Kim, Hyunseob, ‘The Real Effects of Hedge Fund Activism: Productivity, Asset Allocation, and Labor Outcomes’ (2015) 28 The Review of Financial Studies 2723 ; Coffee and Palia (n 6); Strine (n 6); Becht, Brav and Jiang (n 8); Bebchuk, Brav and Jiang (n 19); Wong (n 20); Yu Ting Forester Wong, ‘Wolves at the Door: A Closer Look at Hedge Fund Activism’ (Columbia Business School Research Paper No 16-11, 2016) <https://ssrn.com/abstract=2721413> accessed 1 February 2019.
27. Becht and others (n 8) 2941.
28. Adebiyi (n 12).
29. Claessens, Stijn, Djankov, Simeon and Lang, Larry HP, ‘The Separation of Ownership and Control in East Asian Corporations’ (2000) 58 Journal of Financial Economics 81, 102–103 ; Keong Low, Chee, ‘A Road Map for Corporate Governance in East Asia’ (2004) 25 Northwestern Journal International Law & Business 165, 204 ; David Webb, ‘HAMS – Representing Minority Shareholders’ (Webb-site.com, 1 July 2001) <https://webb-site.com/articles/hams.asp> accessed 27 February 2019.
30. Claessens, Djankov and Lang (n 29) 92.
31. Amra Balic, ‘Corporate Governance in Hong Kong’ (The Legislative Council Commission, 22 January 2002) <www.legco.gov.hk/yr01-02/english/panels/fa/papers/fa0724cb1-2513-1e.pdf> accessed 28 February 2019.
32. McCahery, Joseph A, Sautner, Zacharias and Starks, Laura T, ‘Behind the Scenes: The Corporate Governance Preferences of Institutional Investors’ (2016) 71 Journal of Finance 2905, 2907 .
33. Webb (n 29).
34. Morck, Randall and Steier, Lloyd, ‘The Global History of Corporate Governance: An Introduction’ in Randall Morck (ed), A History of Corporate Governance around the World: Family Business Groups to Professional Managers (University of Chicago Press 2006) 1 .
35. Kahan and Rock (n 6) 1048–57; Gilson, Ronald J and Gordon, Jeffery N, ‘The Agency Costs of Agency Capitalism: Activist Investors and the Revaluation of Governance Rights’ (2013) 113 Columbia Law Review 863, 889–890 ; Arye Bebchuk, Lucian, Cohen, Alma and Hirst, Scott, ‘The Agency Problems of Institutional Investors’ (2017) Journal of Economic Perspectives 11, 13 ; Pacces (n 2) 7–8.
36. Gilson and Gordon (n 35) 886–88.
37. Ami de Chapeaurouge, ‘Against all Odds: Activist Strategies in Controlled or Blockholder-Influenced Companies in Hong Kong’ (Hong Kong Lawyer, June 2017), <www.hk-lawyer.org/content/against-all-odds-activist-strategies-controlled-or-blockholder-influenced-companies-hong> accessed 28 February 2019.
38. ‘Who’s Next? Asia Investor Activism Set to Grow after BlackRock Public Campaign’ (Legal Business Online, 9 March 2016) <www.legalbusinessonline.com/news/whos-next-asia-investor-activism-set-grow-after-blackrock-public-campaign/71814> accessed 28 February 2019.
39. Webb (n 29); Ho (n 17).
40. SFC, ‘Consultation Paper on the Principles of Responsible Ownership’ (SFC, 2 March 2015) <www.sfc.hk/edistributionWeb/gateway/EN/consultation/doc?refNo=15CP2> accessed 28 February 2019.
41. SFC, ‘Principles of Responsible Ownership’ (SFC, 7 March 2016) <www.sfc.hk/web/EN/rules-and-standards/principles-of-responsible-ownership.htm> accessed 28 February 2019.
42. SFC, ‘Consultation Paper on the Principles of Responsible Ownership’ (n 40) .
43. The government was said to be the impetus behind institutional shareholder activism in the UK. See Chiu, Iris HY, The Foundations and Anatomy of Shareholder Activism (Hart Publishing 2010) 16, 19 .
44. ‘Who’s Next?’ (n 38).
45. ibid. However, scholars have expressed concern over conflicts of interest in the fund industry. Many fund managers are affiliated with banks that conduct business with the companies in which the funds invest; most fund managers depend on the management of companies for their information in markets with inadequate corporate disclosure. Furthermore, institutional investors may also pursue agendas that are in conflict with those of general public investors. See Roger M Barker and Iris HY Chiu, Corporate Governance and Investment Management: The Promises and Limitations of the New Financial Economy (Edward Elgar 2017); Stephen M Bainbridge, ‘Shareholder Activism and Institutional Investors’ (UCLA School of Law, Law & Economics Research Paper Series, Research Paper 05–20, 2005) 9 <http://ssrn.com/abstract=796227> accessed 28 February 2019.
46. Steven Davidoff Solomon, ‘An Activism-Shy BlackRock Throws a Surprise Punch’ New York Times (New York City, 5 April 2016) <www.nytimes.com/2016/04/06/business/dealbook/an-activism-shy-blackrock-throws-a-surprise-punch.html?mcubz=3> accessed 28 February 2019.
47. Enoch Yiu, ‘BlackRock Takes an Activist Stance on Voting Rights in Hong Kong to Foster Corporate Governance’ South China Morning Post (Hong Kong, 21 August 2016) <www.scmp.com/business/companies/ article/2006985/blackrock-takes-activist-stance-voting-rights-hong-kong-foster> accessed 28 February 2019.
48. ‘Activist Investor Elliot Management Takes on Hong Kong Tycoon’ Fortune (New York City, 8 April 2016) <http://fortune.com/2016/04/08/elliot-management-hong-kong-tycoon/> accessed 28 February 2019.
49. ‘Who’s Next?’ (n 38).
50. Harsha Basnayake, ‘Shareholder Activism in Asia—Can Asian Companies Thrive in this New Era?’ (THFJ, 2017) <https://thehedgefundjournal.com/shareholder-activism-in-asia/> accessed 28 February 2019.
51. McCahery, Sautner and Starks (n 32) 2906.
52. Polk, Davis & LLP, Wardwell, Getting the Deal Through – Shareholder Activism & Engagement 2017 (2nd edn, Law Business Research 2017) 77 .
53. Mallow, Matthew J and Sethi, Jasmin, ‘Engagement: The Missing Middle Approach in the Bebchuck-Strine Debate’ (2015) 12 New York University Journal of Law & Business 385 ; Davis Polk & Wardwell LLP (n 52) 6–67; F William McNabb III, ‘An Open Letter to Directors of Public Companies Worldwide’ (The Vanguard Group, 31 Aug 2017) <https://about.vanguard.com/investment-stewardship/governance-letter-to-companies.pdf> accessed 28 February 2019.
54. Mallow and Sethi (n 53) 392.
55. Lisa M Fairfax, ‘Mandating Board-Shareholder Engagement?’ (2013) University of Illinois Law Review 821; Bratton, William W, ‘Hedge Funds and Governance Targets’ (2007) 95 Georgetown Law Journal 1375, 1409 .
56. Mallow and Sethi (n 53) 392–94.
57. BlackRock currently publishes voting guidelines for Australia, Hong Kong, Japan, Asia (not Japan and Hong Kong), Latin America, Canada, New Zealand, Europe, the Middle East and Africa, and the US. In May 2016, BlackRock published guidance to Hong Kong public companies as to BlackRock’s voting policy and engagement agenda; see BlackRock, ‘Corporate Governance and Proxy Voting Guidelines for Hong Kong Securities’ (BlackRock, May 2016) 2 <www.blackrock.com/corporate/en-dk/literature/fact-sheet/blk-investment-stewardship-guidelines-hong-kong-june2016.pdf> accessed 28 February 2019.
58. Polk, Davis & LLP, Wardwell, Getting the Deal Through – Shareholder Activism & Engagement 2016 (Law Business Research 2016) 6 .
59. BlackRock, ‘Investment Stewardship Report: 2017 Voting and Engagement Report’ (BlackRock 15 July 2017) <www.blackrock.com/corporate/en-br/literature/publication/blk-2017-annual-voting-and-engagment-statistics-report.pdf> accessed 28 February 2019.
60. A controlling shareholder who holds over 50% of the voting power does not need to worry about minority board representation unless the cumulative voting method is adopted for director election. However, for those who do not have firm control over 50% of the voting rights, an activist director on the board can present a real threat.
61. See Part II.B.1.
62. Kastiel (n 24).
63. Becht and others (n 8).
64. ‘Wolf pack’ refers to a tactic that involves several hedge funds or other activist investors targeting one company, with one activist taking a leading role and the others following. Hedge fund activists have been adopting the ‘wolf pack’ tactic to promote and improve corporate governance at target firms, forcing incumbent panels to examine and improve current management structures. See Briggs, Thomas W, ‘Corporate Governance and the New Hedge Fund Activism: An Empirical Analysis’ (2007) 32 Journal of Corporation Law 681, 737 ; Anand, Anita and Mihalik, Andrew, ‘Coordination and Monitoring in Changes of Control: The Controversial Role of “Wolf Packs” in Capital Markets’ (2017) 54 Osgoode Hall Law Journal 377, 385–390 ; Alon Brav, Amil Dasgupta, and Richmond D Mathews, ‘Wolf Pack Activism’ (2018) Robert H Smith School Research Paper RHS 2529230; European Corporate Governance Institute (ECGI) Finance Working Paper 501/2017 <https://ssrn.com/abstract=2529230> accessed 28 February 2019.
65. Except when the articles specifically reserve board seats for minority nominations. See Kastiel (n 24) 90–95.
66. ibid 90–91.
67. ibid. The activist engagement with Comcast in 2008 serves as an example. Even though the Roberts family holds 33% of Comcast’s shares, the firm still agreed to pay a special dividend, eliminate a controversial benefit to its founder, and reduce bonuses for certain executives in response to activist engagement.
68. ibid 93–95.
69. ibid. Half chose this route simply because some dual-class firms specifically reserve board seats for minority shareholders.
70. Some scholars advocate mandatory cumulative voting for developing countries to ensure minority board representation in the presence of controlling shareholders. See Black, Bernard S and Kraakman, Reinier, ‘A Self-Enforcing Model of Corporate Law’ (1996) 109 Harvard Law Review 1911 .
71. China’s Company Act adopted cumulative voting as a menu option, and Taiwan’s Company Act mandates cumulative voting for all companies. See Lin, Yu-Hsin and Chang, Yun-Chien, ‘Does Mandating Cumulative Voting Weaken Controlling Shareholders? A Difference-in-Differences Approach’ (2017) 52 International Review of Law & Economics 111 .
72. Arye Bebchuk, Lucien, Coates IV, John C and Subramaniam, Guhan, ‘The Powerful Antitakeover Force of Staggered Boards: Theory, Evidence, and Policy’ (2002) 54 Stanford Law Review 887 ; Bebchuk, Lucien, Cohen, Alma and Ferrell, Allen, ‘What Matters in Corporate Governance?’ (2009) 22 Review of Financial Studies 783 .
73. Bhagat, Sanjay and Brickley, James A, ‘Cumulative Voting: The Value of Minority Shareholder Voting Rights’ (1984) 27 Journal of Law & Economics 339 .
74. Hong Kong Companies Ordinance 2014 (Cap 622) (Companies Ordinance).
75. Companies Ordinance, s 740(2). Hong Kong courts have adopted a ‘liberal interpretation of “proper purpose” with a view to advancing the protection of shareholder rights and interest and the maintenance of appropriate standards of corporate governance’. The burden of proof on the shareholder plaintiff is low; the plaintiff only needs to show that ‘there is a sufficiently reasonable ‘case for investigation’ as regards past or future wrongful or other undesirable conduct.’ The law also imposes restrictions on shareholder activists to avoid abuse of power. The court makes it clear that s 740 ‘is not an opportunity for shareholders to undermine entrenched company law principles and challenge the commercial decisions of the company’s management’. Wong Kar Gee Mimi v Hung Kin Sang Raymond  5 HKLRD 241 –,  (Court of First Instance) (citing Knightswood Nominees Pty Ltd v Sherwin Pastoral Company Limited (1989) 15 ACLR 151 (Supreme Court of Victoria)); Artan Investments Ltd v Bank of East Asia Ltd  HKEC 1055  (Court of First Instance).
76. Companies Ordinance, s 740(6).
77. Artan Investments Ltd v Bank of East Asia Ltd (n 75).
78. ibid , , .
79. ibid .
80. Passport Special Opportunities Master Fund LP v Esun Holdings Ltd  4 HKC 62  (Court of First Instance).
81. ibid , .
82. ibid .
83. ibid –.
84. Kastiel (n 24) 89.
87. Gilson, Ronald J, ‘Controlling Family Shareholders in Developing Countries: Anchoring Relational Exchange’ (2007) 60 Stanford Law Review 633, 636 .
88. ibid 643–44.
89. Donald, David C, A Financial Centre for Two Empires: Hong Kong’s Corporate, Securities and Tax Laws in Its Transition from Britain to China 55 (CUP 2014) ; He, Tina T, Li, Wilson XB and Tang, Gordon YN, ‘Dividends Behavior in State-versus Family-Controlled Firms: Evidence from Hong Kong’ (2011) 110 Journal of Business Ethics 97, 112 .
90. Companies Ordinance, ss 732–33, 724–25. For listed firms that are incorporated overseas, Hong Kong shareholders who wish to bring derivative actions in Hong Kong still need to meet the substantive requirement for derivative action under the law of the place of incorporation of the company. In Wong Ming Bun v Wang Ming Fan  1 HKLRD 1108, the Hong Kong Court of First Instance held that the ability to bring a derivative action in Hong Kong is a matter for the law of the place of incorporation of the company.
91. Donald, David C and Cheuk, Paul WH, ‘Hong Kong’s Public Enforcement Model of Investor Protection’ (2017) 4 Asian Journal of Law & Society 349, 369–372 .
92. Passport Special Opportunities Master Fund LP v Esun Holdings Ltd (n 80).
93. ibid .
94. ibid –.
95. ‘Elliott Commences Legal Proceedings Against the Bank of East Asia, Limited (“BEA”) and Certain of its Directors’ (Press Release, Elliott Management Corporation, 18 July 2016) <http://fairdealforbea.com/content/uploads/2016/07/18-July-2016-Press-Release-English.pdf> accessed 26 February 2019. The Court of First Instance dismissed the strike-out application alleging abuse of process on 13 July 2018. Elliott International LP v Bank of East Asia Ltd  HKCFI 1647 (Court of First Instance). For the latest update on the case’s progress, see ‘Legal Proceedings’ (Elliott Management Corporation) <https://fairdealforbea.com/legal-proceedings/> accessed 29 February 2019.
96. Cheung, Yan-Leung, Rau, P Raghavendra and Stouraitis, Aris, ‘Tunneling, Propping, and Expropriation: Evidence from Connected Party Transactions in Hong Kong’ (2006) 82 Journal of Financial Economics 343 ; Cheung, Yan-Leung and others, ‘Tunneling and Propping up: An Analysis of Related Party Transactions by Chinese Listed Companies’ (2009) 17 Pacific-Basin Finance Journal 372 .
97. Other key topics include succession planning of the board, board independence and structure, separation of the chairman and CEO roles, and director and executive compensation. See BlackRock, ‘Corporate Governance and Proxy Voting Guidelines for Hong Kong Securities’ (n 57).
98. Scholars recognize that minority veto rights are important for empowering minority shareholders in controlled firms. However, an empirical study on the voting behaviour of institutional investors of Israeli companies found that minority veto rights alone are not sufficient to improve corporate governance; policymakers should also pay attention to regulating conflicts of interest in the fund industry. See Hamdani and Yafeh (n 24) 692.
99. OECD, Related Party Transactions and Minority Shareholder Rights (OECD Publishing, 2012) 32 <www.oecd.org/daf/ca/50089215.pdf> accessed 28 February 2019. However, Hong Kong and India have relaxed the voting requirement for PRC SOEs and among Indian SOEs respectively; Dan W Puchniak and Umakanth Varottil, ‘Related Party Transactions in Commonwealth Asia: Complicating the Comparative Paradigm’ 16 Berkeley Business Law Journal (forthcoming); NUS Law Working Paper No 2019/01, February 2019, 28-29 <https://papers.ssrn.com/abstract=3332131> accessed 4 May 2019.
100. Jesse M Fried, Ehud Kamar and Yishay Yafeh, ‘The Effect of Minority Veto Rights on Controller Tunneling’ (2018) European Corporate Governance Institute (ECGI) - Law Working Paper 385/2018 <https://ssrn.com/abstract=3119426> accessed 28 February 2019.
101. SEHK, Main Board Listing Rules, Chapter 14A <www.hkex.com.hk/eng/rulesreg/listrules/mbrules/documents/chapter_14a.pdf> accessed 28 February 2019.
102. ibid r 14A.39–14A.45.
103. ibid r 2.15.
104. ibid r 2.16.
105. Barker, Roger and Chiu, Iris H-Y, ‘Protecting Minority Shareholders in Blockholder-Controlled Companies: Evaluating the UK’s Enhanced Listing Regime in Comparison with Investor Protection Regimes in New York and Hong Kong’ (2015) 10 Capital Markets Law Journal 98, 129 .
106. Cheung, Rau and Stouraitis, ‘Tunneling, Propping, and Expropriation’ (n 96) 357.
107. HLD and HIL, ‘Joint Announcement’ (HKEXnews, 2 October 2007) <www.hkexnews.hk/listedco/listconews/SEHK/2007/1003/LTN20071003004.pdf> accessed 28 February 2019.
108. HKEXnews, ‘Disclosure of Interests: Elliott Capital Advisors LP’ (HKEXnews) <http://sdinotice.hkex.com.hk/filing/di/NSNoticePersonList.aspx?sa2=np&scpid=1864858&sa1=pl&scsd=03%2f10%2f2003&sced=03%2f10%2f2008&pn=elliott&src=MAIN&lang=EN&> accessed 28 February 2019.
109. HIL, ‘Announcement’ (HKEXnews, 7 November 2007) <www.hkexnews.hk/listedco/listconews/SEHK/2007/1107/LTN20071107301.pdf> accessed 28 February 2019.
110. HIL, ‘Announcement: Poll Results of Extraordinary General Meeting Held on 7 December 2007’ (HKEXnews, 7 December 2007) <www.hkexnews.hk/listedco/listconews/SEHK/2007/1207/LTN20071207258.pdf> accessed 28 February 2019.
111. The Codes on Takeovers and Mergers and Share Buy-backs (Takeovers Code), r 2.10.
112. CKI and Power Assets, ‘Notices, Announcements & Circulars’ (Power Assets, 20 October 2015) <www.powerassets.com/en/InvestorRelations/InvestorRelations_GLNCS/Documents/E2_Scheme%20Doc.pdf> accessed 28 February 2019.
113. Eric Ng, ‘Tough Decision For Minority Shareholders of Li Ka-Shing-Controlled CKI and Power Assets’ South China Morning Post (Hong Kong, 22 November 2015) <www.scmp.com/business/companies/article/ 1880801/tough-decision-minority-shareholders-li-ka-shing-controlled-cki> accessed 29 February 2019.
114. Takeovers Code; Companies Ordinance, s 674.
115. Timmy Sung, ‘Minority Shareholders Block Power Assets Buy-Out’ (RTHK.hk, 24 November 2015) <http://gbcode.rthk.org.hk/TuniS/news.rthk.hk/rthk/en/component/k2/1225674-20151124.htm> accessed 29 February 2019.
116. SEHK, Main Board Listing Rules, r 14A.36.
117. ibid r 6.12(1).
118. ibid r 7.19(6)(a), 7.24(5)(a).
119. ibid r 7.19(7), 7.24(6).
120. ibid r 13.36(4)(a).
121. ibid r 14.06(3), (4), (5), 14.33.
122. ibid r 14.06(6), 14.55.
123. ibid r 14.90(2).
124. ibid Practice Note 15, para 3(e)(2).
125. David Webb has been identified as an individual shareholder activist who initiated several public demands against Hong Kong-listed companies. He maintains a website, Webb-site.com, to publicize all his demands, but very few are effective. See Wong (n 20) 68. Webb has also engaged in lobbying activities to improve corporate governance related legislation and regulations. However, for the purpose of this study, we did not include Webb’s actions in our sample.
126. See eg Kahan and Rock (n 6); Schneider and Ryan (n 6); Coffee and Palia (n 6); Strine (n 6); Cheffins and Armour (n 9); Katelouzou, ‘Worldwide Hedge Fund Activism’ (n 9); Katelouzou, ‘Myths and Realities of Hedge Fund Activism’, (n 10); Bebchuk, Brav and Jiang (n 19).
127. HKEXnews, ‘Shareholding Disclosures: Disclosure of Interests’ (HKEXnews) <www2.hkexnews.hk/Shareholding-Disclosures/Disclosure-of-Interests> accessed 28 February 2019.
128. Wong (n 20) 18–19.
129. Wong did a similar search but limited his samples to those in which activists had more than 5% of the voting rights. Finally, Wong (n 20) identified 46 investments made by activist by the end of 2015. The current study differs from Wong’s in that it is focused on cases initiated by institutions and against controlled firms. In addition, Wong’s study focused on the financial impact, examining the changes in target firms’ abnormal returns, while this paper focuses on the role of legal institutions. See Wong (n 20) 18–19.
131. Hirschman (n 4) 82.
132. McCahery, Sautner and Starks (n 32) 2906.
133. Gilson (n 87).
134. Becht, Marco, Franks, Julian and Grant, Jeremy, ‘Hedge Fund Activism in Europe: Does Privacy Matter?’ in Jennifer G Hill and Randall S Thomas (eds), Research Handbook on Shareholder Power (Edward Elgar 2015) 116 .
135. Kastiel (n 24) 89–99; Belcredi and Enriques (n 24) 19–23; Erede (n 24) 365–368.
136. The SEHK has amended its listing rules to lift the ban on dual-class shares; the new rule took effect on 30 April 2018. See SEHK, ‘Amendments to the Main Board Listing Rules’ (SEHK, April 2018), <http://en-rules.hkex.com.hk/en/display/display_main.html?rbid=4476&element_id=5243> accessed 28 February 2019.
137. Companies (Model Articles) Notice (Cap 622H), Schedule 1 Model Articles for Public Companies Limited by Shares, s 23 (2018); Lin, Yu-Hsin and Chang, Yun-Chien, ‘An Empirical Study of Corporate Default Rules and Menus in China, Hong Kong and Taiwan’ (2018) 5 Journal of Empirical Legal Studies 875 .
138. Chan, Raymond Siu Yeung and Ho, John Kong Shan, ‘Should Listed Companies be Allowed to Adopt Dual-Class Share Structure in Hong Kong?’ (2014) 43 Common Law World Review 155, 177–179 ; Mezzanotte, Felix E, ‘The Unconvincing Rise of the Statutory Derivative Action in Hong Kong: Evidence from its First 10 years of Enforcement’ (2017) 17 Journal of Corporate Law Studies 469 .
139. Donald and Cheuk (n 91) 372–375.
140. OECD (n 99) 32.
141. Directive 2004/25/EC of the European Parliament and of the Council of 21 April 2004 on Takeover Bids  OJ L142/12, art 15.
142. Companies Ordinance, s 639(1) (‘If, in the case of a takeover offer that does not relate to shares of different classes, the offeror has, by virtue of acceptances of the offer, acquired, or contracted unconditionally to acquire, at least 90% in number of the shares to which the offer relates, the offeror may give notice to the holder of any other shares to which the offer relates that the offeror desires to acquire those shares’).
143. Takeovers Code.
144. Kahn v M & F Worldwide Corp (2014) 88 A3d 635, 645 (Delaware Supreme Court). However, whether ‘active’ shareholders do rely on the MoM approval requirement to block transactions in the US remains questionable. See Rock, Edward B, ‘MOM Approval in a World of Active Shareholders’ in Luca Enriques and Tobias Tröger (eds), The Law and Finance of Related Party Transactions (CUP, forthcoming) ; NYU Law and Economics Research Paper 18-02; European Corporate Governance Institute (ECGI) - Law Working Paper 389/2018 <https://ssrn.com/abstract=3122681> accessed 28 February 2019.
145. Puchniak and Kim (n 21) 120–21.
146. Bebchuk, Lucian A and Hamdani, Assaf, ‘Independent Directors and Controlling Shareholders’ (2017) 165 University of Pennsylvania Law Review 1271, 1295–1297 .
147. Financial Conduct Authority, Listing Rules (Listing Regime Enhancements) Instrument 2014, FCA 2014/33, 12.
148. ibid 19.
149. Bebchuk and Hamdani (n 146) 1290-1292.
150. Scholars have advocated enhancing the power of active shareholders as a way to constrain the power of controlling shareholders in dual-class share firms. See Lin (n 11) 504–510.
151. ibid 96.
152. Rock (n 144) 8; Jain, Suneela, Klingsberg, Ethan and Whoriskey, Neil, ‘Examining Data Points in Minority Buy-Outs: A Practitioners’ Report’ (2011) 36 Delaware Journal of Corporate Law 939, 950 .
153. Rock (n 144).
154. For example, Elliott either forced the controlling shareholders to increase the offer price or voted down the privatization proposal in the Henderson Investment Ltd, PCPD, and Guoco cases. See Appendix.
* Assistant Professor, City University of Hong Kong, School of Law; JSD, Stanford Law School. I thank the two anonymous reviewers, Desmond Ang, Yun-chien Chang, Kai-ping Chang, David Donald, Jesse Fried, Han-Wei Ho, Dan Klerman, Lin Lin, Dan W Puchniak, Petrina Tan, Brian Tang, Hans Tjio, and other participants at the Symposium on Hedge Funds and Alternative Investment Funds in Hong Kong and Singapore for their valuable comments. The author is also grateful for research funding provided by the Research Grants Council of the Hong Kong Special Administrative Region, China, Project No CityU11606017. I thank Kathleen Poon and Shanyun Xiao for research assistance. All errors are mine alone.
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