Kistefos, which holds 14.4 per cent of Pacific Challenge, claimed that one proposed $170 million deal was nothing more than 'an attempt by Chiang to siphon away the cash assets of the company for her own benefit'. A subsequent share placement's sole intention was allegedly to dilute Kistefos' stake. The Norwegian fund also alleged that the sale of Pacific Challenge's core brokerage business was at an undervalued price.

Ms Chiang, who sold out of Pacific Challenge in August 2002, denied the claims.

In late 2001, a Bermudan court ruled that Kistefos had a prima facie case and dismissed Ms Chiang's attempt to have it struck out. Judge Philip Starr then concluded: 'I find that there are elements of each individual transaction which, though considered individually might be regarded as merely bad management or business inefficiency, when considered as part of a chain of events which occurred within a reasonably short period, could support a conclusion that a series of transactions were being carried out by Pacific in order to cause unfair prejudice to a minority, namely Kistefos.'

His conclusions did not raise the possibility that any of the transactions were sound commercial decisions. Kistefos' lawsuit demonstrated that, in addition to having a strong prima facie case, deep pockets are needed. Pacific Challenge spent about $10 million in legal fees, according to figures in its annual reports. Presumably Kistefos' costs were similar.

The case also highlighted the limited scope of Hong Kong's regulators, who seemed unable or unwilling to take action.

'I would not advise international investors and fund managers to invest here as the standards of corporate governance are questionable and the regulatory system appears to be flawed,' Kistefos chief executive Erling Thiis said in March 2002. 'Regrettably I have experienced Hong Kong as a Banana Republic.'

Since the case started, new regulations aimed at improving shareholder protection have been introduced. Yet similar events could easily happen today.

The first deal cited by Kistefos was the sale of Pacific Challenge's core brokerage at 1.3 times annual net earnings. This was much lower than the 3.99 times obtained by Pacific Challenge on its flotation.

The brokerage was bought by a firm controlled by Chinese Estates Holdings' Thomas Lau Luen-hung, who also owned 9.84 per cent of Pacific Challenge. This was not revealed at the time because the stake was below the then disclosure threshold of 10 per cent. Under today's 5 per cent standard, Mr Lau's stake would be public knowledge. But other aspects of the deal would most probably be unaffected.

The next transaction was the proposed purchase of a firm called Cents.com at the generous price of $170 million when its net asset value was only $5.9 million. Ms Chiang stood to benefit from the deal personally as she held 60 per cent of Cents.com, which had been incorporated only four months earlier. Kistefos, which held 26.12 per cent of Pacific Challenge at the time, successfully led a shareholder revolt to vote down the deal.

Such revolts are rare in Hong Kong as independent shareholders usually hold smaller stakes than Kistefos, making it difficult to organise them into one bloc. The revolt also showed the importance of poll voting - one share, one vote. Kistefos demanded such a vote at the shareholder meeting to discuss the Cents.com deal.

In 2000, most votes on connected transactions such as that of Cents.com were conducted on a one shareholder, one vote basis. This system was open to abuse as management shareholders could allocate shares to friends and employees who could be counted on to vote the right way. Today, all connected transactions have to be put to independent shareholders in a poll vote.

Shortly after the failed Cents. com deal, Pacific Challenge placed new shares to two independent people worth almost 20 per cent of the firm's stock. The placement raised only $31 million for general working capital when Pacific Challenge had cash reserves of $277 million. It also diluted Kistefos' stake to 21.78 per cent and one of the placees, Pau Kwok-ping, was an executive director of the Chiangs' family company, Chen Hsong Holdings.

Mr Pau also was - and still is - managing director of Eco-Tek Holdings, which Ms Chiang chairs. Despite this, he was deemed an independent under the listing rules. The placement shows how the general mandate, which allows new shares worth 20 per cent of existing stock to be issued in one tranche, could be used by management to dilute the influence of shareholders with whom they are at odds.

Slashing the permitted size of the general mandate would lead more companies to use rights issues, giving shareholders the chance to raise their stakes to prevent dilution. So far, Hong Kong's regulators have refused to do this.

In September 2000, Kistefos representatives attended Pacific Challenge's annual general meeting to protest against the firm's general mandate.

However, the meeting was conducted in Cantonese, which Kistefos' representatives could not understand. Despite Hong Kong's position as an international financial centre, there are no provisions to ensure meetings are held in a language shareholders know or for translations to be provided.