The Court of Appeal in East Asia Satellite Television (Holdings) Ltd v New Cotai, LLC & Others [2011] 4 HKC 115 held that the right of a shareholder of a parent company to bring an action for wrongs done to its subsidiary was governed by the law of the place of incorporation of the subsidiary company in question.

Facts

The Plaintiff (“P”) entered into a joint venture with the 1st defendant (“D1”) to develop a hotel, retail and entertainment complex site in Macau. The 4th defendant (“D4”) co-owned by the 2nd Defendant (“D2”) (4%) and the 3rd Defendant (“D3”) (96%) was the grantee of the site. D3 was wholly owned by D2.P entered into a share purchase agreement (“SPA”) to sell 40% of its shares in D2 to D1. The development of the complex site in Macau required modification of the land grant and the same was provided in the SPA.However no land grant modification had been obtained. The Plaintiff alleged that a breach of SPA by D1 had led to D1 not paying in accordance with its payment obligations which would be triggered by the gazetting of a land grant modification and a diminution of the enterprise value of the joint venture project. Reyes J of the Court of First Instance struck out part of P’s claims. The Plaintiff appealed to the Court of Appeal and one of the claims to the appeal related to derivative actions brought by P on behalf of D2 – D4 against D1 and the directors of D1 in respect of the loss of enterprise value of the joint venture project.

Multiple derivative actions

The general principle in company law is that only a company has the standing to sue in cases of wrongs done to the company itself.One important exception is that in Hong Kong a shareholder can commence an action on behalf of the company if a wrong has been done to the company by persons in control thereof. This is commonly known as a “derivative action”.

The Court of Final Appeal in Waddington Ltd v Chan Chun Hoo [2009] 4 HKC 381 held that the shareholder of a company could bring a claim on behalf of a subsidiary of the company. This was referred to by the Court as a “multiple derivative action” because it involved an action on behalf of both the holding company and the subsidiary company.

The Court of Appeal in the present case agreed with the observations of Lawrence Collins J in Konamaneni v Rolls Royce Industrial Power (India) Ltd [2002] 1 WLR 1269 that the law of the place of incorporation governed whether a derivative action was available.

P commenced multiple derivative actions on behalf of D3 and D4 against D1 and the directors of D1. D3 is a company incorporated in the British Virgin Islands. D4 is a company incorporated in Macau. Applying the principle in Konamaneni v Rolls Royce Industrial Power (India) Ltd, P’s claims on behalf of D3 and D4 were struck out because both the law in British Virgin Islands and Macau do not recognize a “multiple derivative action”.

Comments

If a subsidiary company is incorporated in a jurisdiction where the law does not recognise a multiple derivative action, the shareholders of the parent company cannot sue on behalf of the subsidiary for wrongs done to its subsidiary.