TYPES OF COMPANIES

QUESTION 1

A and B incorporated their old business Shoes R Us into Shoes R Us Ltd. They incorporated the Articles of Association. They employed 10 people and placed a restriction on the right to transfer shares. They then held a general meeting and a vote was taken to alter the articles, allowing the free transfer of shares. C who owns 51% of the shares has decided to sell those shares to a rival company. A and B refuses to allow C to sell his shares as they fear the rival company will gain control of Shoes R Us Ltd.Advise all the parties.

QUESTION 2

Kwong and Shum Partners was formed in Hong Kong several years ago to produce highly sophisticated global and regional maps for sale at the retail level. After working together for some time, Kwong and Shumdecided to move their business to Sydney. Whilst in Sydney, they registered Kwong and Shum Ltd. However, Kwong and Shum have recently decided to move back to Hong Kong and to set up a store selling maps near Causeway Bay, Hong Kong.

Having learnt that Kwong and Shum had returned to Hong Kong, a number of angry creditors in Hong Kong have phoned in, claiming that outstanding debts still remain from Kwong and Shum Partners and demanding payment. The debts include a $1,000,000 Mercedes Benz purchased fraudulently by Shum in breach of the partnership agreement. At the time, the agreement stated that: No partner is to enter into any purchase involving more than $500,000 without the consent of both partners. As a result, Kwong is now claiming that he should not be liable for the Mercedes Benz. Ignoring the many phone calls from angry creditors, Kwong and Shum have rented an empty store near Causeway Bay. They ordered some basic furniture including desks and have addeda new coat of paint on the walls in order to make the store look fresh and inviting. They decided to give out free samples and to have order forms ready in case their customers wanted to place orders.

For three months, Kwong and Shum have been giving out free mapsas publicity for their business. However,market conditions have not been favourable, and the company has not attracted many customers in Hong Kong. To make matters worse, the Registrar has declared Kwong and Shum Ltd.a non-Hong Kong company as per the requirements in the Companies Ordinance. As a result, Kwong and Shum are now required to submit numerous costly and time-sensitive documents to the Registrar including company accounts. In conjunction with their obligations in Sydney, these subsequent requirements threaten their financial safety further. Both Kwong and Shum deny that they are carrying on business in Hong Kong.

Advise Kwong and Shum,with reference to case law and legislation, where appropriate. If you need additional facts, state what they are, and explain how they are relevant.

CORPORATE CONSTITUTION THE CONTRACTUAL EFFECT AND ALTERATION OF ARTICLES

QUESTION 1

ABC Ltd. was a company importing luxury cars. Mr. Chiu, after seeing the companys accounts at the Companies Registry, decided to invest some money in the company. He had noticed that the companys objects stated that the company had been registered for that purpose and would remain so. Further, the capital in the company far outweighed the operating costs. Mr. Chiu decided to invest $1,000,000. Six (6) months later, Mr. Chiu checked his investment and was advised that ABC Ltd. was now importing furniture. As Mr. Chiu had never been notified of the change, he was furious.

Advise Mr. Chiu.

QUESTION 2

Mr. Lee was employed as an accountant and company secretary for 10 years under the articles of association and was not to be removed at any stage unless he was found to have acted with gross dishonesty. At the time of employment, Mr. Lee was not a shareholder. However, after 2 years, he decided to purchase shares. After a general meeting, the existing members voted under an ordinary resolution to remove all the existing directors. The new directors who were appointed then proceeded to dismiss Mr. Lee after only 5 years service owing him $1,000,000. He wishes to sue for a breach of the articles of association. He also seeks damages and a reinstatement of his position.

Advise Mr. Lee with reference to case law and legislation.

QUESTION 3

ABC Ltd. consisted of 3 holders of ordinary shares, A, who owned 20% of the shares, B who owned 29% of the shares, and C who owned 51% of the shares. C was concerned at the way both A & B had been voting. The articles were altered by special resolution stating that the articles could in future be altered by ordinary resolution. Later on, C, still concerned with A & Bs holdings, altered the articles to vary A & Bs shares to those of redeemable shares. C then sought to reduce capital by purchasing back A & Bs shares. A & B have no wish to sell their shares. Advise A & B with reference to case law and legislation.

PROMOTERS AND PRE-INCORPORATION CONTRACTS

QUESTION 1

Richard was interested in setting up a new company, Master Kitchens Ltd., specializing in importing and exporting kitchen appliances. He was certain that with his expertise and connections, the company would be a huge success. He entered into a contract with Golden Ovens Ltd. to purchase 100 ovens from them at $1.1 million. In the purchase agreement, Richard signed his name. Above the signature, there was a phrase stating, on behalf of Master Kitchens Ltd., which had not been incorporated on the date of signing.Two months after Richard signed the contract, the company Master Kitchens Ltd. was incorporated. However, Master Kitchens Ltd. refuses to honor the contract as it has found a new supplier who will sell ovens to it at half of the price. 1)Advise what legal action that Golden Ovens Ltd. can take. 2)Assuming that the sale went through with Golden Ovens Ltd. and Richard purchases the ovens at $1.1 million, and then sells these ovens to the company at $1.5 million without disclosure. What is the legal significance of this? What are the legal duties that Richard would have been breached?

CONTROL OF THE COMPANY

DIRECTORS AND DIRECTORS DUTIESMAJORITY RULE AND THE PROTECTION OF MINORITY SHAREHOLDERS

Question 1

To what extent does company law protect the power of directors to manage a company? Is this power subject to limitations? Explain what these limitations are.

In your answer, you may wish to critically analyze and compare the cases of Automatic Self-Cleansing Filter Syndicate Co. Ltd v. Cuninghameand Barron v Potter.

Question 2

Xanadu was the majority shareholder and one of four(4)directors of Spring Valley Ltd., a company specializing in the production and manufacture of refined canola oil. The company had adopted model articles relating to directors general authority, in accordance with sections78 to 80 of the Companies Ordinance(Cap. 622), as set out in Schedule 1 of the Companies (Model Articles) Notice.1The articles of the company further provided that the quorum at directors meeting was to be three(3). Recently, Xanadu, in his capacity as a director, proposed the diversification of the companys business through the acquisition of a large supermarket chain. To this end, he proposed a resolution by the board that:

the company major canola oil production plant be sold; and

the proceeds from the sale be used to hire staff and purchase inventory for the supermarket chain.

This proposal was adamantly opposed by Xanadus arch-nemesis Wendigo Chang, who was a fellow director on the board. Wendigo was also a minority shareholder in the company. In addition, Wendigo managed to persuade the other two directors to oppose the proposal at a board meeting. Enraged by this deadlock, Xanadu requisitioned a general meeting in his capacity as the majority shareholder. The shareholders at this meeting passed an extraordinary resolution requiring the board to authorize the proposed sale of the plant and the acquisition of the supermarket chain.

Wendigo Chang has come to you for legal advice. Advise Wendigo. In your answer, consider whether the resolution is binding on the board of directors. In addition, to what extent is the rule in Barron v Potterapplicable to these facts? Provide a critical analysis.

If additional information is required for you to advise Wendigo, state what this information is, and explain how it is significant.

SHARE CAPITAL, FINANCING, SECURITY AND WINDING UP

QUESTION 1

Jenny and Tony are the only directors and shareholders of Lucky Ltd., a Hong Kong incorporated private company limited by shares.

Tony has invented a new herbal medicine, which can prevent people from being affected by the HIV virus. Tony recently attended a trade fair held in Shenzhen. At the fair, he signed contracts with more than 20 companies on behalf of Lucky Ltd. to provide the herbal medicine. In order to produce a large quantity of the new medicine, Lucky Ltd. needs an additional HK$ 1 million.

Tony and Jenny have come to you for advice on the following questions:

1. What are the main methods available to Lucky Ltd. for obtaining HK$ 1 million?

2. If a bank is willing to give Lucky Ltd. a loan, what kind of security might Lucky Ltd. provide?

QUESTION 2

Billy and Lilly are the owners of two cafs in Central. Their businesses have been very successful over the last five years and therefore they plan to expand their businesses by opening more cafs. In order to raise sufficient money to expand their businesses and limit their future liabilities, they would like to form a private limited liability company. Advise Billy and Lilly on the following: (a) The methods to fund a private company and their characteristics; and (b) The ways of winding up if they plan to stop running the company or the company is unable to pay its debts.