It is well established in the UK that directors owe fiduciary duties, however, insofar as the regulation and enforcement of specific CG standards are concerned, it is frequently the regulations of the FCA (including the UK CG Code issued by the FRC) that are the primary matter of interest, not fiduciary law. This reflects the development in the UK of a codified system of law, as discussed in Section 3.1.2 «Trends in regulating CG standards».
In contrast, a notable feature of CG regulation in the United States is the extent to which CG standards are established, developed and enforced under State law through the State courts, as discussed in Appendix III.7.1. This is less a result of specific standards being set down in legislation but rather is a consequence of the emphasis placed on the fiduciary duties of directors, together with a cultural preparedness in the United States to seek redress through the courts. The vast number of State (mainly Delaware) court cases play a significant role in establishing CG principles and how CG is understood and applied in the United States, particularly as regards director fiduciary duties. Because of the depth of that case law, CG in the United States imposes many specific obligations on boards in particular circumstances such that it is often the case that Delaware companies are subject to a much higher standards than the board of a Hong Kong listed issuer.
While directors in the United States are generally protected by the business judgment rule, where shareholders are dissatisfied with board decisions they may consider whether any cause of action arises as a result of a breach of fiduciary duty. For example, the highly influential Revlon case examined the role of the board in a hostile takeover scenario and narrowly construed its fiduciary obligations as requiring the board to maximize value for the shareholders in the short term, as opposed to the longer-term preservation of the company. However, subsequent cases have moved toward imposing on directors a more general obligation of good faith and exercising reasonable judgment that require the directors to achieve the best value for shareholders that is reasonably available. As noted in Section 3.7.3 «Enforcement agencies», this has resulted in considerable complexity of an ever-developing body of case law and a consequential difficulty of forecasting the attitude of the court. Because this can create commercial uncertainty, to that extent it also creates regulatory inefficiency.
Not only directors but also controlling shareholders may be regarded as owing fiduciary duties to other shareholders where they own a majority interest in the company or exercises some measure of de facto managerial control over the company's business affairs, including through the appointment of its agents to the board. In addition, where directors take actions that amount to a purposeful breach of the listing rules, or a breach of the SEC's disclosure obligations, shareholders may have rights for breach of fiduciary duties. Appendix III.7.2 has discussed both of these in the context of relevant state laws that focus on fiduciary law - the powers and duties of directors and other de facto controllers and the rights of shareholders to seek judicial relief for breaches of their duties. This broadly aligns with the position in Hong Kong as regards disclosure - the SFO allows both the SFC and individuals to bring an action for breach of the statutory disclosure requirements - and as regards the rights of individual shareholders more generally in respect of misfeasance and the fiduciary duties of directors - see further Appendices I.7 and III.7.
Hong Kong
While fiduciary law establishes the foundations of director liability, this is not a route under which directors are typically held to account. This is partly a result of the availability of codified causes of action in statute, particularly the SFO. For example, the SFC has successfully brought a number of cases against the directors of listed companies under the misfeasance and misconduct provisions of section 214 of the SFO, which are heavily reliant on the concept of fiduciary responsibility of directors. However, only the SFC is able to bring an action under section 214 - shareholders would instead need to undertake a derivative action under applicable law. A recent, and high profile, example of this is the action brought by Elliott, a hedge fund, and others against The Bank of East Asia under section 724 of the CO. That claim alleges the directors of the bank have breached their fiduciary duties when entering into certain arrangements without due regard to the interests of all shareholders. The case is particularly notable as it involves an American hedge fund bringing an action against directors comprising some of Hong Kong's most well known family names in a manner that is reminiscent of fiduciary actions brought in the United States. In addition, under section 732 of the CO shareholders can, with leave of the Hong Kong courts, bring unfair prejudice proceedings against directors in the name of the company by way of derivative action, including non¬Hong Kong incorporated listed issuers.
Discussion
It is of interest to note that a finding of the Kay Review (see Appendix II.2.1) was that the Law Commission should review the concept of fiduciary duty as applied to investments.
In 2003 the FSTB, following a recommendation of the SCCLR as part of its Review of Corporate Governance, consulted the market on giving the SFC a statutory right of derivative action but found limited support for the proposal and held it in abeyance. Possibly the most insightful of the responses was provided by the HKEX in its response, which noted that, although it has no objection to the SFC having such a power such a statutory remedy «may prove superfluous and/or less effective than SFC actions under section 214» and that «there are reasons to be optimistic about the potential efficacy of section 214.» At present there remains little active discussion in relation to the topic and it is suggested that is appropriate in view of the development of case law in relation to section 214, which has borne out its efficacy in bringing remedies to companies that ultimately benefit shareholders.
This consideration would appear to outweigh the complexities of changing primary legislation to provide the SFC with statutory derivative powers. Actions under section 214 have served as a proxy for fiduciary concerns, for example, dicta in the Styland (2012) case is based on defalcation, misfeasance and unfair prejudice.
Action through the courts, whether undertaken by the SFC or shareholders, sends clear signals to directors as to the standards expected of them. The drawback rests in the issue of regulatory efficiency as fiduciary cases may be more difficult to establish and will take longer to reach a conclusion. Moreover, one of the problems in relying on fiduciary law as applied by the courts is that it may be perceived as creating commercial uncertainty.
However, the SFC has numerous statutory obligations and considerations imposed on it in addition to its shareholder protection mandate that must be weighed into any decision to bring an action under section 214. For example, a decision to bring or not bring an action under section 214 could also be subject to considerations related to market integrity, the available resources of the SFC, or policy issues. These considerations may or may not align with the interests of a particular set of shareholders. Although the SFC should be praised on its engagement of section 214 and the consequent successes it has secured, it should also be recognized that the other matters it is required to take into consideration might lead to some plausible (from a shareholder's viewpoint) actions not being taken. The proposal made in Recommendation E4.8.2 «Establish an investor protection agency» would serve to address this potential conflict by creating an enforcement agency with a more singular and unconflicted mandate. What is also relevant to note in this regard is that if such an agency were created, its powers of investigation, if similar to those enjoyed by the SFC, would also benefit shareholders in that they exceed the powers of shareholders under the usual rules of discovery. Such an agency would also address the cultural tendency of shareholders in Hong Kong, discussed in Appendix I.1.1, to look to the regulator for solutions rather than undertake court action themselves. While the extent to which it is appropriate for a public agency to undertake what are effectively private causes of action may be regarded by some as moot, the establishment of the CFPB in the United States is a recognition of the need for public enforcement bodies to address socially important issues in the public financial sector. See also the discussion under Section 3.7.3 «Enforcement agencies».