Legco Passes Watered-Down Companies Ordinance

by Mary Swire, for LawAndTax-News.com, Hong Kong

13 July 2004

Hong Kong's Legislative Council (Legco) on Friday passed a new Companies Ordinance designed to improve corporate governance, albeit in a significantly watered-down form.

In its original incarnation, the legislation would have allowed shareholders to bring lawsuits against company directors and major shareholders on behalf of the firm, often referred to as 'derivative' actions. However, the amended version of the Ordinance stipulates that judicial approval must be sought before such an action can be launched.

The bill was reportedly revised following lobbying from business groups, which argued that passing the bill without the judicial approval requirement could lead to an increase in frivolous cases being brought against companies.

However, some observers have argued that the revision of the legislation has created a significant obstacle for investors seeking to protect themselves. Speaking to the South China Morning Post on the matter at the weekend, Frontier lawmaker, Emily Lau suggested that:

"We have to question whether this watered-down derivative action mechanism would really help enhance investor protection."

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