When Apple started talking about distributing more than US$137 billion in cash to shareholders, it was big news for the company's minority shareholders. But after Apple began issuing a dividend to stockholders last year, some investors are still unhappy with the continued accumulation of Apple's cash pile.

Listed companies often keep cash within the company; it's a common scenario for the conservative management of businesses with a family-owned background. Likewise, it's also commonplace to find traded companies that do not declare a dividend notwithstanding when the company has been making a profit. Conventional theories and common sense in corporate governance tells us that this does not serve shareholders' best interests.

Protection of small and minority investors in listed companies is not a new concept. It re-emerges after every stock crash in Hong Kong. Some supposed reform always follows. The results are not apparent. People have a short memory. Economic recovery easily gives a false sense of security to regulators and legislators. Now, nearly five years have passed since the financial crisis in 2008 that led to the global recession. In Hong Kong we are hearing repeated warnings from the Monetary Authority that a large amount of foreign capital is in Hong Kong. This phenomenon is not new. In the past, it resulted in bubbles, both in the property and stock markets. Whether the capital or the bubble came first does not matter. What matters is that they will burst.

This time, analysts may argue it is different. However, a more conservative picture on the horizon should not be casually discounted. It seems undisputable that foreign capital influx is related to the monetary policies of the United States and the European Union. When the US and European economies revive, it is predictable that the monies will go. Bubbles will burst. Small investors, lacking the intelligence and information of the big investors, will lose out. And they will lose heavily.

We ought to accept that minority protection laws in Hong Kong are not as comprehensive as in the US stock markets. This is because, to some extent, the existing regime is a reflection of Hong Kong's social and business culture, and the territory's history more generally. There has been a widespread (and some say healthy) belief in the principle of caveat emptor. Let the buyer beware. That is the belief that investors are grown ups and should look after their own interests. No nanny is required, in the form of government regulation.

This prevailing attitude towards business culture has undoubtedly influenced the development and content of rules, regulations and legislation designed to protect smaller or minority shareholders. Despite the plethora of rules and regulations, whether in terms of legislation or governing rules of the regulators, there are fewer provisions designed to protect minority shareholders than would be found in most international markets.

In the case of Apple, the talk about distribution of dividends may be seen as a result of criticism from a substantial minority shareholder, Greenlight Capital; the hedge fund owns more than a million shares of Apple stock.

The cause of action in the case of Apple was rather unconventional. According to the complaint filed, the suit was brought in US District Court in Manhattan to try to prevent Apple from eliminating preferred stock from its charter. The suit contends that Apple had violated Securities and Exchange Commission rules prohibiting companies from "bundling" unrelated matters into a single proposal for a shareholder vote. Apparently, preferred stock is considered to be superior to dividends or share buybacks and Greenlight Capital had separately put forward a proposal for an issuance of Apple preferred stock with a perpetual 4 percent dividend. On the other hand, the media reported that Apple said removing the ability of the board to issue preferred stock at its discretion improves corporate governance, because future issuances would then require shareholder approval. The matter is now scheduled for an expedited hearing.

We do not want litigation in Hong Kong for the purpose of arousing interests in minority shareholder protection. Our reputation as an international financial center would inevitably diminish and it would be an excuse for more speculative hot money to withdraw. It's about time that regulators consider the extent to which minority protection may be further enhanced in the case of dividend distribution in Hong Kong.

The author is a barrister and chairman of the Hong Kong Bar's Special Committee on Planning and Policy.

(HK Edition 02/21/2013 page1)