Hong Kong Company Law

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Hong Kong Company Law

• Choi Ka Hei s00110302
• Kailunglam s00110311

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Context

• the rights of pre-emption and impact on a
  minority shareholder.
• the benefits and problems associated with raising
  capital with debenture and share

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Background of pre-emption right

• Does not exist in Companies Ordinance
• Provided in Table A
• Fits the requirement of Companies Ordinance S29
  (1)(a), which said private company have to
  restricts the right to transfer its shares

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Pre-emption right

• Any member who wish to sell their shares must
  first offer them for sales to the existing
  members of the company
• Prohibits the transfer of shares to a non-member,
  as long as a member willing to buy is found at a
  fair price to be determined in the memorandum of
  association
• Provide a companys shareholders with protection
  from wealth transfer and erosion of control.
• Governs the relationship between shareholders of
  record

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Lyle and Scott Ltd v Scotts Trustee (1959)

• It was held that the shareholders who wish to
  accept a outside offers had to be complied to the
  pre-emption clause first

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Waiver Mechanism

• May include in the pre-emption rights
• Shareholders have no wish to assume the shares of
  a transferor and do not object of the proposed
  transferee.

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Typical pre-emption mechanism

• A written notice detailing the shares sale and
  the price
• Notify all members
• Offers taken by director and shares sold
  transferred to the offerors
• Circulate details to shareholders of other class
  if any shares left
• Seek no-member as potential purchaser if shares
  remained unwanted

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Impact on minority shareholders

• They cant sell their shares to outside investor
  to generate more profit back from investment
• Majority shareholder bargaining power increase

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Question 3 Raising capital by debenture

• Borrowing from long-term finance
• Benefits
• Control of the company will not surrender,
  because the debenture holder dont have any
  voting right.
• The interest of debenture is tax-deductive
• Debenture can be redeemed when company has
  surplus fund
• Dont need to create a vast number of small
  nomination debentures

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• Problems
• Common people cant buy debentures, the market is
  small
• Debenture holder will demand a higher rate of
  return
• Creditors less inclined to deal with funding
  sourced primarily from third parties
• Failure to pay debts may trigger winding up

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Raising capital by ordinary share

• the issue of share to new investors
• Benefits
• The company dont need to be publicly registered
  in order to issue shares
• It can attract more investor in a larger market
  if its publicly registered
• The fund generated can be kept indefinitely
• No payment on the fund is required except
  dividend payment

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• Problems
• The dividend payment is not tax-deductive
• The control of the company could surrender as
  shareholder has voting right
• The more shareholder control, the less profit
  made to owners
• If its public company, it must meet certain
  legal standard upon registration

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Share issued at premium

• The shares are issued at premium when shares are
  issued at an amount more than face value of the
  shares
• If shares are issued at premium, it usually means
  they have good income generating capacity and
  reputation in the market.
• The general public are willing to offer more than
  par value to purchase the shares..
• Its a capital profit and will show credit
  balance, liability side in statement of financial
  position.

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Henry Head Co. Ltd v. Ropner Holdings (1952)

• Confirmed that the law required the shares to be
  recorded at their fair value, and a share premium
  account to then be created in which the excess of
  fair value over nominal value would be accrued

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Issue at discount on shares

• The company cannot issue shares below their
  nominal value when shareholder has no liability
  to pay the differences. Exception is allowed
  under Companies Ordinance s.50 in the following
  condition
• resolution passed in GM, authorized by High Court
• The company is entitled to commence business at
  least one year earlier
• Share must be issued within one month after court
  approval
• The 46(2) of the Companies Ordinance prohibits
  the payment of discounts out of shares and
  capital fund.

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Ooregum Gold Mining Co of India v Roper (1892)

• It was held that it was beyond the power of the
  company to issue shares at discount
• Holder were liable to pay the full nominal amount
  of the share

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Issue discount on debenture

• Provided that the issue is not a device to issue
  share at discount by converting debentures to
  shares.
• The Companies Ordinance s.80(8) Amount of
  discount must be included in the particulars of
  the registered when a company secured a charge to
  secure the issue of debentures in the statement
  of financial position.

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Reference

• http//www.gov.hk/files/file13422.pdf