Company Law Outlines PDF

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Lecture notes about the Company Law course...

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Seminar 1 Company and Other Forms of Business Associations 公司及其他商业组织的各种形态

Areas/Topics of Concern •

What is the Separate Legal Entity Doctrine? The doctrine of separate legal entity is the main reason why companies are being incorporated. Separate legal entity means that a company really exists, can sue or be sued in its own name, holds its own property and is liable of the debts it incurred. The Doctrine of Separate Legal Entity was first applied in the case of Salomon v Salomon & co. Ltd.

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What do you understand by the Concept of Limited Liability? Limited liability is a type of legal structure for an organization where a corporate loss will not exceed the amount invested in a partnership or limited liability company (LLC). In other words, investors' and owners' private assets are not at risk if the company fails.

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How does the law deal with the relationship between the various organs in a company? The organs are identified as the General Meeting (shareholders), and the Board of Directors, while the officers are identified as the directors, secretary, auditor, legal adviser. The company’s organs take the key critical resolutions cum decisions that sway the company for better or worse. And these resolutions cum decision are implemented through corporate management or governance by the officers of the company. As legal personality, the company has a separate existence from the founders. Yet it is operated by human beings. The company functions through its Memorandum and Articles of Association, which can be altered through resolution passed by the majority of the company members at the General Meeting. Similarly, the company’s performance is also regulated by other statutory law. Most of the company’s officers are appointed by the Board of Directors. However, this is subject to confirmation at the General Meeting. Consequently, as a going concern/business, the company is prosperous when there is a healthy relationship between the organs, and officers, and particularly between the General Meeting (Shareholders), and the Board of Directors. Though the General Meeting works by the resolutions passed by the majority members, yet there are exceptions to this when the court enforces an individual member(s) action against the majority’s

decisions. This is an exception to the rule in Foss V Harbottle. The aim is to check fraud and ultra vires activities in the company. To be valid, an officer’s acts shall be done in good faith, diligently, and with care; and the company shall hold the officer liable for such acts. Essentially, the common law held the view that company’s officers owed their services to the company only, and not individual shareholders. However, this position has been rejected by the modern company practice and knowledge. Hence, the roles of the contemporary company officers have been enlarged to embrace serving the company which employees them, the individual shareholders under relevant circumstances, as well as the generality of the public that benefits or is affected by the activities of the company. •

How

does

the

law

deal

with

the

relationship

between

companies and third parties (outsiders)? •

Importance of the various Types of Companies and the Concept of Related Companies

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The Constitution of a company (including the Ultra Vires Doctrine, and the legal effect of the Constitution) When a constitution is adopted and registered, it binds the company and the members as if it was a contract under seal. A company may sue a member and a member may sue the company to enforce or restrain breaches of the constitution or the Company Ordinance. Under the old Companies Ordinance (Cap. 32) (“the old Ordinance”), a company formed in Hong Kong is required to have a Memorandum of Association and Articles of Association. Under the new Companies Ordinance (“the new CO”), a company incorporated in Hong Kong is only required to have Articles of Association. The Memorandum of Association is abolished under the new CO and information which was required to be contained in the Memorandum of Association under the old Ordinance are set out in the Articles of Association. The abolition of the Ultra Vires in Doctrine in HK - before the 1997 review, a HK company may only enter into transactions to the extent that is permitted by its objects as specified in this company’s memorandum of association (the “Memorandum”). Any action conducted not in accordance with these objects will be regarded as ultra vires (i.e., beyond the powers of the company) and any contracts that are ultra vires are void and cannot be ratified by the company. The idea of the ultra vires rule was to protect shareholders against changing the company’s business nature without consent. However, in practice, the rule is easily circumvented by providing a very long and wide-encompassing objects

clause. Further, when ultra vires rule did apply, the result is often regarded to be too harsh on third party. Thus based on these considerations, the ultra vires rule was abolished in the 1997 revision. However, the requirement for having Memorandum remained although a company had no longer been limited by its objects clause in the Memorandum. 

Company Contracts (including Pre and Post Incorporation Contracts) Promotion and pre-incorporation contracts: - promotion of the company: - duties of a promoter -

pre-incorporation contracts: - agreements to the contrary, binding

the company After incorporation, the company may ratify the contract to the same extent as if: (a) the company had already been incorporated when the contract was entered into; and (b) the contract had been entered into on the company’s behalf by an agent acting without the company’s authority (section 122(3)). 

Directors – Definition, Classification and Qualifications and Disqualifications. Definition: Shareholders and company directors are in charge of running a company. The role of a director is to oversee the management and accounts of the business. They have to find out if the company is making any mistakes; if so, they have to rectify it. They are also to keep a check on the preparation of reports. The company director also has to participate in the board of directors’ meetings to help it reach a collective decision. Company directors are appointed by the shareholders so that they can manage the daily affairs of the company. The members of the board of directors are also delegated certain powers. Classification:  de facto and de jure directors 事实董事和法律董事  shadow directors 影子董事  executive and non-executive directors 执行董事和非执行董事  

alternate directors 候补董事 nominee directors 提名董事

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reserve directors 储备董事 managing directors 总经理/常务董事 Shadow Director - Under the Companies Ordinance, a shadow director is a person in accordance with whose directions or instructions the

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directors or a majority of the directors of the company are accustomed to act. This can include a parent company or a controlling shareholder whose instructions have always been followed by its subsidiary. However, a person is not considered a shadow director based on the

fact that he/she has, in his/her professional capacity, given advice that the directors or the majority of the directors of the company have complied with. These directors do not have any official title but still influence the decisions of the board of directors. De Facto Director: They are not officially appointed as the director but act as directors in place of other directors. De facto directors possess the same responsibilities and liabilities as official directors do. Qualification: Age - A director must be at least 18 years old. There is no upper limit on the age of a director. Nationality - There is no nationality restriction placed on directors. Corporate directors - A private company can have a corporate director if the company is not a member of a listed group and provided that the company has at least one other director who is a natural person. Gender - There is no restriction on the gender of directors. Shares - The director does not have to be a shareholder. Disqualification: An undischarged bankrupt cannot act as a director. Additionally, any person who has been disqualified from acting as a director must not act as a director. Further, the company's articles of association may stipulate additional eligibility requirements for being a director. For example, Regulation 25 of the Schedule 2 Model Articles and Regulation 90 of the Table A Articles (which were set out in Schedule 1 to the predecessor of the current Companies Ordinance and could be adopted by companies incorporated under the predecessor Ordinance) stipulate that a person ceases to be a director if he or she becomes mentally incapacitated or becomes of unsound mind, respectively. In addition, a director who fails to comply with these directors' duties may be liable to civil or criminal proceedings and may be disqualified from acting as a director. Number: A private company must have at least one director while a public company (whether listed on the SEHK or not) and a company limited by guarantee must have at least two directors. A company listed on the SEHK must have at least three independent non-executive directors, at least one of whom must possess appropriate professional qualifications, or accounting or related financial management expertise.

The

independent

non-executive

directors

must

also

represent at least one-third of its board. A director should normally be a natural person. However, a private company may have a body corporate as its director if the company is not a member of a listed group and provided that the company has at least one other director who is a natural person. In any event, a private company must have at least one director who is a natural person. There is no statutory limit on the maximum number of directors, but a company can, in its articles of association, place a limit on the maximum number of directors. A Hong

Kong company can also impose a minimum number of directors under its articles of association, unless this is below the minimum statutory requirement (see above). 

Directors Duties and Obligations (1) Fiduciary Duty and (2) – Duty of Skill, Care and Diligence Fiduciary duties are derived from common law and remain uncodified. Fiduciary duties include the duties to:  Act in good faith in the interests of the company.  Exercise powers for a proper purpose.  Avoid conflicts between personal interests and interests of the 

company. Not to make secret profits.

The Companies Ordinance codifies directors' duty of care, skill and diligence. It sets out a mixed objective and subjective test for the standard in carrying out a director's duty to exercise reasonable care, skill and diligence. Therefore, in deciding whether a director has breached the duty, both the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions of the director of the company (the objective limb) and the general knowledge, skill and experience of that particular director (the subjective limb) must be considered. This standard also applies to a shadow director. Any articles or contractual entitlements that exclude the director's liability for negligence, breach of duty or breach of trust are void. 

Division of Power Between the Board and the General Meeting The board of directors bears the ultimate responsibility for the management and operations of the company. Directors can exercise all the powers of a company except any power reserved to the shareholders, under the Companies Ordinance, by resolution of the shareholders or by the company's articles of association. The board can establish board committees to deal with specific matters of the company, delegate certain of its powers to the company's senior management and/or appoint a managing director or a CEO who will be responsible for the day-to-day management of the company's business. Directors must present the financial statements, directors' report and auditor's report at the annual general meeting of the company. The directors are collectively and individually responsible for the management of the company and can exercise all the powers of the company for that purpose, subject to matters that are reserved to the general meeting by the Companies Ordinance, the company's articles of association, shareholders' resolutions and, in relation to listed companies, the Listing Rules. Shareholders may from time to time pass

resolutions at a company general meeting to restrict directors' powers as they think fit. 

Minority Protection  Enforcement of Duties and Members’ Remedies  Remedies for Abuse of Control  Remedies for Maladministration of the Company Any shareholder can bring a derivative action for misconduct committed against the company. Misconduct is defined as fraud, negligence, default in complying with any statutory provision or rule of law, or breach of duty. There is a statutory remedy for any shareholder who complains that the affairs of the company have been conducted in a manner unfairly prejudicial to the interests of the shareholders generally or of one or more shareholders. That shareholder may apply to the court by petition and the court has power to:  Make an order to restrain the commission of the act or the 

continuation of the conduct. Make an order that proceedings be brought in the name of the

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company. Appoint a receiver or manager of the whole or part of a company's

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property or business. Make orders for regulating the conduct of the company's affairs in

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the future, or for the purchase of the shares of any shareholder by other shareholders or by the company itself. Award damages and interest to any shareholders where it is found

that their interests have been unfairly prejudiced. A shareholder can also apply to the court for an injunction against an individual or a director for any breach of the Companies Ordinance, a breach of the director's fiduciary duties, or a breach of the company's articles of association. Shareholders need not have any minimum shareholding to be entitled to the above rights and remedies. The court may also make an order to allow the shareholders to inspect a company's records or documents (under the circumstances referred to in Question 12) on application of either:  Members representing at least 2.5% of the voting rights of all the members having a right to vote at the company's general 

meetings at the date of application. At least five members of the company.

Sources of Company Law • Statutory Law – Ordinances • Companies Ordinance (Cap 622)

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Companies (Winding Up and Miscellaneous) Ordinance

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(Cap 32) The Articles of Association or the Constitution of a company The Shareholders’ Agreements and Other Contracts

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Common Law – Reported Cases

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The Relationship and Hierarchy of these Sources  Mandatory Rules v Facilitative Rules  Statutory v Common Law  CO and CWUO v Articles of Association 

Articles v Shareholders’ Agreements

Forms of Business Associations and Legal Consequences  Sole Trader/Sole Proprietorship  Both the company and the owner are considered as the one unity.

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Therefore, the owner is legally responsible for all the liabilities and debts. Simplest form which a business can take.

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Still need to be registered under the Business Registration

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Ordinance Cap 310 (with certain exemptions). Not subject to any form of regulation, provided the business being

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conducted is legal. The liability of a sole trader is unlimited since the business is seen

as an extension of his own legal persona. Partnerships If a partnership registers with the Hong Kong Registrar of Companies, it takes the form of a limited partnership as defined in the Hong Kong Limited Partnership Ordinance. Until it has registered, it will not have the status of a limited partnership and the law applicable to general partnerships will apply.  General Partnership: A general partnership requires that each partner in the company is held responsible for the debts and liabilities of the business. Each partner can also be held responsible for the actions of another partner that are taken on 

behalf of or in service of the business. Limited Partnership: A Limited Partnership has both general and limited partners. General partners have unlimited liability for the business debts and are involved in the decision-making process of the business. The limited partners’ liability is restricted to the amount of their contribution to the capital of the partnership.

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Limited partners are not able to be involved in the decision making process of the business. Companies

Sources of Law for Other Business Associations  Registration of Business Ordinance (Cap 310)  Partnership Ordinance (Cap 38)  Limited Partnership Ordinance (Cap 37)  Limited Partnership Fund Ordinance (Cap 637) 

Legal Practitioners (Amendment) Ordinance 2012

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Partnership Contracts (if any) Agency Law

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Reported Cases

General Partnership  Defined in section 3(1) of the PO (Cap 38) as “relation which subsists

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between persons carrying on a business in common with a view of profit”. Legally speaking, no need for a written partnership agreement. Intention

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is important. Not a separate legal entity. Every partner is personally liable, and liability is unlimited. (the use of

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firm name is only for purposes of procedural convenience). Collectively known as a firm, and the name under which their business is

carried on is called the firm-name (section 6);  The use of firm name is only for purposes of procedural convenience.  Every partner is an agent of the firm and his other partners for the 

purpose of the business of the partnership (section 7). On the nature of liability – see ss 11 – 14 of the PO.

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Each partners owes duties and obligations to the other partners – see ss

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30 – 32 of the PO. The partnership comes to an end every time a new partner is admitted or a partner leaves or dies.

Common Contentious Issues regarding General Partnership  Whether a Partnership Exists  Principle of Holding Out A person intentionally represents himself as a partner of the company or the firm and acts on their name by making the party believe about his

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status in the firm, and the person cannot deny his liability to the third party afterward his actions are proved. Agency Principle Rights and Duties of Partners Inter Se( 彼 此 之 间 ) – including Partnership Property

Keith Spicer Ltd v Mansell Facts:

B and M agreed to form a company to carry on a restaurant business. B ordered goods for the restaurant and had them delivered to M’s premises. The business was never established. B was bankrupt. The suppliers (TP) sued M for payment for the goods on the basis that M should be liable as a partner of B. M obviously argued that there was no partnership. Issue: Was there an intention to carry out a partnership business and thus a partnership? Held: There was no partnership as there had not been any intention on the part of the parties to carry on business as partners. Their intention was to create a company, and what was done were simply acts preparatory to the ...