Directors of a company that sits within a wider corporate group might assume they are entitled to make decisions that serve the group’s interests as a whole, even where this means subordinating their own company’s interests to it. A recent Court’s decision shows how flawed that assumption can be.
In Re Cobo Asia Ltd [2026] HKCFI 2696, the Court found that two directors of a Hong Kong joint venture had breached their fiduciary duties by diverting the joint venture’s own business to a fellow group company, to the joint venture’s detriment. The Court ordered the majority shareholder to buy out the minority shareholder’s stake as a result.
Case facts
Cobo Asia Limited (the “Company”) was a joint venture owned as to 40% by Electronic Control Technology Limited (“ECT”), a Hong Kong company, and 60% by Cobo S.p.A. (“COBO”), an Italian company. The Company’s main asset was its wholly-owned Mainland subsidiary (the “PRC Co”), which sold products — including those it procured from COBO through the Company — to customers in Mainland China. In practice, the PRC Co would place an order with the Company, which would in turn place a matching order with COBO and ship the products to the PRC Co. The Company therefore earned a margin as the middleman in this supply chain.
The Company’s three-person board comprised one ECT appointee and two COBO appointees. In around October 2020, the two COBO appointees passed a board resolution to the effect that the PRC Co would deal with COBO directly for a category of products, cutting the Company out of that part of the supply chain — without telling or consulting the other director appointed by ECT beforehand. Their main justification among others was that this would lower the PRC Co’s costs, raise its margins and improve its competitiveness, thereby benefitting the Company.
As a result, the Company was bypassed entirely and lost all revenue from reselling those products — a gross profit of EUR303,503.47 in 2020 alone.
Legal issue
The key question was whether the two COBO appointees had breached their fiduciary duties to the Company by approving a resolution that benefited the PRC Co at the Company’s expense.
Legal principles
The parties put forward two competing tests. The majority camp — COBO, and the two COBO appointees — argued that a director does not breach his duty so long as an honest, reasonable director could have believed the transaction benefited the company — even without turning his mind to the company’s own interests at all.
ECT, on the other hand, argued that each group company is a separate legal entity with its own distinct interests and creditors. A director must act in that company’s interests alone, and cannot justify a decision simply because it serves the wider group.
Court’s ruling
The Court ruled in favour of ECT and held that directors may not subordinate the Company’s interests to those of the wider group. A director of a company should consult its interests alone when making board decisions.
Applying that standard, the Court found that the two COBO appointees had breached their duties. Neither director had considered whether the Company itself would benefit, nor did either weigh the Company’s loss against the PRC Co’s gain. Indeed, the Court found the true beneficiaries of the arrangement were COBO and the PRC Co, not the Company. Notably, the decision was taken without informing Liang, and the board minutes recorded no discussion of the Company’s own interests at all. This was unfairly prejudicial to the Company and, through it, to ECT.
As the remedy, the Court ordered COBO to buy out ECT’s 40% shareholding in the Company at fair market value.
Key Takeaways
This decision is a clear reminder to directors of group subsidiaries that their duties are owed to the company on whose board they serve, not to the wider group or to the parent company that appointed them.
For minority shareholders of joint ventures facing similar situations, an unfair prejudice petition remains a viable remedy, with a buy-out at fair value being a probable outcome.
Parties involved in shareholder disputes should seek legal advice at an early stage, before positions become entrenched and the dispute escalates. Early advice can assist parties in assessing their rights and considering strategic options to safeguard the same. It may also facilitate a timely commercial resolution, thereby avoiding the costs, disruption and reputational consequences of protracted legal proceedings.
For more details, feel free to reach out to:
Managing Partner: Mr. Ian Lo
Consultant: Ms. Crystal Cheung
