Derivative actions versus unfair prejudice petitions

A shareholder may be harmed in two different ways. A director might divert company property, injuring the company itself. Or the company's affairs might be conducted so that a member is unfairly disadvantaged—for example, through exclusion from management in a closely held company. Hong Kong's Companies Ordinance (Cap. 622) provides different Part 14 remedies for these situations: statutory derivative actions and unfair prejudice petitions.

Derivative action: the company is the injured party

A derivative action allows an eligible member to seek permission to bring or intervene in proceedings on behalf of the company in respect of misconduct against the company. Part 14 includes a statutory derivative action for a company and an associated company. The underlying claim belongs to the company, even though a member is asking the court to pursue it. The remedy sought is therefore generally for the company's benefit, such as recovery of property or compensation.

The member does not simply take over the company's claim on demand. The statutory process involves applying for leave from the court, which considers the legal tests in the Ordinance, including whether the action is in the company's interests and whether the relevant person is acting in good faith. The company and relevant decision-makers may have an opportunity to respond. This screening helps distinguish a company claim worth pursuing from a disagreement with management that should be resolved through another route.

Unfair prejudice: a member's interests are unfairly harmed

Under section 724, a member may petition the court where the company's affairs are being or have been conducted in a manner unfairly prejudicial to members' interests, or where an actual or proposed act or omission would have that effect. The court can order relief under section 725, including regulating how the company's affairs are conducted, requiring or restraining an act, authorizing proceedings in the company's name, or requiring the purchase of a member's shares in appropriate circumstances.

The petition focuses on the conduct and its unfair effect on members' interests. The court's remedy can therefore address the member's position directly. A share purchase order, for example, can provide an exit where the relationship or governance problem cannot realistically be repaired. Relief is discretionary and depends on the facts; unfairness is not established merely because a member dislikes a lawful business decision.

Can the facts support both?

Sometimes the same events affect both the company and a member. A director's related-party transaction might reduce company assets and also be part of conduct that unfairly prejudices a minority member. The legal route depends on whose interest the claim protects, what remedy is needed, who has standing, and which statutory procedure applies. A member should not describe every company loss as a personal loss or assume that a derivative action automatically results in a buyout.

How to classify an exam question

1. Identify the immediate victim: the company, a member, or both.
2. Name the interest that has been harmed: company property or the member's interest in how affairs are conducted.
3. Match the remedy to the injury: company recovery points toward a derivative action; member-focused governance or exit relief points toward unfair prejudice.
4. Check who may apply and whether leave or a petition procedure is required.
5. Do not confuse either remedy with a personal claim for a debt or with a winding-up petition.

For HKSI, associate derivative actions with Part 14 sections 731–738 and unfair prejudice remedies with sections 724–726. The Companies Registry's explanatory materials describe the purpose of each route; the current consolidated Ordinance and procedural rules control actual proceedings.

A derivative action addresses a wrong done to the company, such as directors’ breach of duty that causes corporate loss. The member seeks leave to continue proceedings on the company’s behalf; the company is the real beneficiary of any recovery. An unfair-prejudice petition addresses conduct of the company’s affairs that unfairly harms members’ interests. The petitioner seeks relief tailored to that prejudice, which can include a purchase of shares or an order regulating the company’s affairs.

Permission and procedure are different

A statutory derivative action under Part 14 has a leave process. The court considers matters such as good faith, the company’s interests, and whether the cause of action should be pursued by the company. An unfair-prejudice application is a petition under the relevant Companies Ordinance provisions and requires proof of conduct and unfair prejudice. These are not interchangeable labels: a member should identify the claimant, the duty, the loss, and the order sought before selecting a route.

They can arise from the same facts, but not for the same reason

A controlling shareholder may divert a corporate opportunity, harming both the company and minority members. The company’s loss may support a derivative claim; exclusion from management or oppressive conduct may separately support an unfair-prejudice petition if the statutory test is met. A member should avoid double recovery and explain how the requested relief addresses each injury. The court can consider the overall circumstances and appropriate remedy.

Example and exam takeaway

Directors cause the company to pay an affiliate an excessive fee. The company’s balance sheet is harmed, suggesting a corporate cause of action. If the same directors also use control to exclude a member in a way that unfairly prejudices that member’s interests, an unfair-prejudice petition may be considered. For an exam, ask “who owns the cause of action?” and “whose interest is unfairly prejudiced?” before naming the remedy.