As a fundamental principle of company law, with limited exceptions, the Court would not interfere with the internal management of a company.  The recent legal battle between Walter Kwok Ping-sheung and his two brothers provides a vivid illustration of this principle.

Kwok Ping Sheung Walter v Sun Hung Kai Properties Limited and Others (HCA 857/2008)

The family rift between Walter Kwok Ping-sheung, Chairman and Chief Executive of Sun Hung Kai Properties Limited (the “Company”), and his two brothers, Raymond Kwok Ping-Luen and Thomas Kwok Ping-Kwong, has escalated into a legal battle.This was started by a High Court action lodged by Walter Kwok against the company and 16 directors including his brothers for an injunction to prohibit the board from considering and deciding whether he should be removed, on the ground the directors would exercise their voting power improperly or for improper motives.

Violation of Agreement?

Walter Kwok alleged that there was an agreement between the directors of the Company and himself that he would take leave of absence and would be reinstated to his posts after three months, provided that he fulfilled certain criteria, including procuring at least two medical opinions showing he was fit to return.He argued that the directors violated the agreement by attempting to remove him from his positions permanently.

In the High Court, Kwan J rejected this argument, as the alleged agreement by proper construction did not provide that the Company shall not use its constitutional powers conferred by its Articles of Association to remove Walter Kwok from his posts.Any agreement to this effect would be unenforceable against the Company as this is seeking to circumvent the statutory requirement for any alteration of the Articles of Association to be by special resolution.

Directors Acting with Improper Motives?

Walter Kwok alleged that his two brothers had sought to oust him from his positions as a result of the repeated express disagreements with his attempts at improving corporate governance, implementing measures to enhance accountability and transparency.He also contended that the directors would act with “improper motives” to remove him, alleging that his brothers had orchestrated a psychiatrist’s diagnosis that he was suffering from bipolar affective disorder, which formed the basis for his removal.

Kwan J dismissed the argument for having no evidential basis.No matter what dispute might be between Walter Kwok and his brothers, there was insufficient evidence to infer that the directors would act against the Company’s interest.Kwan J saw no reason to question their good faith and assume they would not carry out their duties conscientiously.

Principle of Internal Management

Kwan J made it clear that she would not rule on whether Walter Kwok was a fit and proper person to remain as Chairman and Chief Executive of the Company.This is a matter of internal management of the Company, for which the board of the Company has undoubted discretion to exercise.The court should not fetter the power of the Company’s directors to make internal management decisions.

Reiterating the case law principles, Kwan J explained that any complaint about internal management should be brought by the company, not by a shareholder.Also, as a general rule the Court will not interfere where the complaint concerns a matter of internal management which is done with the approval of the majority of the shareholders or is capable of being confirmed by the majority.However, this rule does not extend to a case where the act is unfair and oppressive as against the minority shareholders or where the directors have acted in abuse of their powers, e.g. diminution of the shareholders’ voting power by an allotment of shares.Kwan J, not being concerned with the exceptions to the rule, decided that the Court must leave the board to decide on its internal management.

On the balance of convenience consideration, Kwan J considered that the Company would suffer substantial injury and could not be adequately compensated by an award of damages should the injunction sought was granted.Accordingly, Kwan J dismissed the application.Walter Kwok then appealed against Kwan J’s decision to the Court of Appeal.

The Court of Appeal Decision

Refusing to grant a temporary injunction pending an appeal, the Court of Appeal reiterated the principle that the court would not intervene with the internal management of a company.Rogers VP commented,

“I have considered in this judgment the Articles of the company and they make it perfectly clear that the choice of chairman and the choice of the executive directors is a matter for the board.In those circumstances, I have the gravest of doubts as to whether this court would ever grant any injunctions, whether after a final trial or otherwise, that are sought in this case.”

Thus, it is clear that without clear evidence of oppression of minority or other improper conduct of the board, it would be extremely difficult to invite the Court to interfere with the internal management of companies.