Proposed Hong Kong class action scheme could improve corporate governance
By Phil Taylor
There is debate over whether the changes will affect the popularity of Hong Kong as a fundraising venue
Hong Kong’s Law Reform Commission (LRC – the ‘Commission’) has proposed changes to the territory’s civil litigation framework to allow class actions in some areas. Published at the end of May, it comes in the wake of a number of reported cases of fraud and accounting failures at well-known institutions, as well as significant losses sustained by investors after the collapse of Lehman Brothers, and moves by the securities regulator to impose civil and criminal liability on sponsors of an IPO listing.
Although the proposal to introduce class actions covers only product liability and consumer fraud cases, it indicates a number of other areas of law for which class actions would be suitable including insurance, real estate, employment and securities. According to an LRC press release, the Commission ‘believes that the introduction of a comprehensive regime for class action would enhance access to justice and would provide an efficient, well-defined and workable mechanism’.
Paul Mitchard QC, head of the Asian litigation and arbitration group at Skadden Arps Slate Meagher & Flom, said the establishment of a comprehensive class action system in Hong Kong would mean corporations would need to pay more attention to individual investors, and this could lead those engaged in questionable business practices to think twice before seeking access to Hong Kong’s markets.
‘The proposed class action regime, if and when eventually extended to securities claims, would send a message that companies cannot and should not ignore investors whose interests may be prejudiced by such conduct.'
Paul Mitchard QC
Skadden Arps Slate Meagher & Flom
‘The proposed class action regime, if and when eventually extended to securities claims, would send a message that companies cannot and should not ignore investors whose interests may be prejudiced by such conduct,’ he told IBA Global Insight.
Allowing class actions for securities cases would increase the risk of being sued after a listing. However, Mitchard did not feel that this would have an unduly adverse effect on the popularity of Hong Kong as a fundraising venue. The inclusion of a built-in filter in the proposed rules (requiring any claim to meet threshold criteria such as a sufficient number of claimants, a preliminary showing of merit, and commonality of issues) should prevent unsuitable or meritless claims being certified as a class, he explained.
‘A class action regime such as this is not intended to turn away corporations eyeing the city as a place to raise funds, but rather to deter wrongdoing,’ said Mitchard. ‘It is an incentive for market participants to improve their disclosure and corporate governance practices. In turn, this will build investor confidence and will ultimately benefit those raising capital here by allowing them access to a less sceptical market.’
At present, the only way in which a multi-party action can be brought in Hong Kong is under a much-criticised High Court rule on representative proceedings which effectively requires all members of the class to show identical issues of fact and law.
‘It is not surprising that overcoming this initial hurdle to multi-party proceedings is difficult to achieve. The proposed new system would relax those requirements and would provide access to justice to multiple plaintiffs having similar claims with limited resources,’ said Mitchard.
Full details of the proposals are available on the LRC’s website at www.hkreform.gov.hk/en/publications/rclassactions.htm
Phil Taylor is a UK-based freelance writer and editor. He can be contacted at email@example.com