Topic 4

Management and administration of a company (II):

Shareholders and company meetings

4.1 The proper plaintiff principle (the rule in Foss v Harbottle)

Question 1

Andrew, Brenda and Cameron are the shareholders of Miracle Ltd. Andrew and
Brenda each hold 30% of the shares of the company, while Cameron holds 40%.
Brenda and Cameron are the only two directors of the company.

Miracle Ltd invests in commercial properties. The company owns a number of

commercial properties both in Kowloon and on Hong Kong Island.

In April, Cameron took a one-week vacation overseas. While on vacation, a friend of

Cameron asked Cameron whether he was interested in acquiring some commercial
properties in the New Territories for investment.

In July, Cameron established a new company, Cameron Enterprises Ltd (“CEL”), in

which he held a controlling interest. CEL purchased the commercial properties in
the New Territories.

Andrew and Brenda were not aware of these events until October.

Andrew and Brenda were upset that CEL acquired the properties without Cameron
having first discussed the potential investments with them.

Consequently, Andrew and Brenda commenced legal proceedings in the name of

Miracle Ltd against both Cameron and CEL. No board meeting or general meeting
of Miracle Ltd was held authorising the commencement of the legal proceedings.

Andrew and Brenda now come to you for advice.

The following provisions are contained in the articles of association of Miracle Ltd:

“Subject to the Ordinance and these articles, the business and affairs of the
company are managed by the directors, who may exercise all the powers of the
company.

The members may, by special resolution, direct the directors to take, or refrain from
taking, specified action.”

Topic 4 Questions Page 1

Required:

Are the proceedings commenced by Andrew and Brenda validly commenced against
Cameron and CEL? Explain your answer.

(Adapted from PC-Law Exam, Dec 2013, Q1b)

Topic 4 Questions Page 2

4.2 Shareholders’ rights and remedies (I): Derivative actions

Question 2

Outline and explain the statutory requirements for the commencement of a derivative
action under the Companies Ordinance.

(Adapted from PC-Law Exam, Jun 2013, Q5)

Topic 4 Questions Page 3

Question 3

Agnes, Bob and Chris are the three directors and shareholders of X Ltd, with each
holding the same number of shares in the company. Recently, a board resolution
was passed (with Agnes dissenting) for X Ltd to enter into certain transactions.

Agnes comes to you for advice. She believes that Bob and Chris have breached
their fiduciary duties as directors in relation to those transactions. Agnes wishes to
recover compensation for X Ltd’s losses as a result of the alleged breaches of
duties.

Required:

Advise Agnes whether she can commence a derivative action under the Companies
Ordinance against Bob and Chris in relation to the alleged breaches of fiduciary
duties. Explain your answer.

(Adapted from PC-Law Exam, Dec 2009, Q3)

Topic 4 Questions Page 4

Question 4

Fan invited two business acquaintances, Pak and Lam, to invest in a restaurant
business which he wished to establish in Hong Kong. Pak and Lam agreed. A
company, Vision Developments Ltd, was incorporated in 2009 with share capital of
$20 million for that purpose. The parties also established a wholly-owned subsidiary
of Vision Developments Ltd to run a chain of bars in Kowloon.

Fan was issued with 60% of the shares in Vision Developments Ltd, while Pak and
Lam were each issued with 35% and 5% of the shares respectively for their capital
contributions. Fan ad Pak were appointed as directors of both Vision Developments
Ltd and its subsidiary. Fan was also appointed as managing director of both
companies. Pak was appointed to the boards of both companies in the capacity of a
non-executive director.

In the months after the two companies were incorporated, some progress made on
the establishment of the businesses. The progress was slow. Fan asked on a
number of occasions for Pak and Lam to contribute sizable loans to the two
companies. Pak and Lam initially provided the loans, but they later became
suspicious when they saw little progress being made in the setting up of the
proposed restaurants and bars.

Pak and Lam sought meetings with Fan. They requested Fan to provide receipts
and records of the outgoings of both companies. Fan failed to provide satisfactory
documentation.

Subsequently, there was a burglary at Pak’s personal offices, and she found that the
items stolen included the receipts evidencing her payment of her capital
contributions to Vision Developments Ltd.

Pak and Lam reported to the police their suspicions of fraud and theft by Fan. The
police raided the offices of Fan and discovered documents confirming those
suspicions. There was evidence that significant funds of both Vision Developments
Ltd and its subsidiary were transferred to entities controlled by Fan for no benefit to
the two companies.

Pak and Lam now comes to you for advice as to the legal implications of the above
matters. In particular, they wish to seek advice as to how they can remove Fan’s
control over the two companies, and how they can recover the funds that had been
improperly paid out of the companies. Additionally, they would like to know whether
they can wind up the companies in order to recover their investments if they do not
wish to continue with the business venture.

Topic 4 Questions Page 5

Required:

(a) What action can Pak and Lam take under the Companies Ordinance to recover,
on behalf of Vision Developments Ltd, the funds improperly paid out of that
company by Fan? Explain your answer.

(b) Can a similar action be brought on behalf of the subsidiary of Vision

Developments Ltd to recover the funds improperly paid out of the subsidiary by
Fan?

(Adapted from PC-Law Exam, Sept 2010, Q1c)

Topic 4 Questions Page 6

4.3 Shareholders’ rights and remedies (II): Personal actions
(unfair prejudice remedy; just and equitable winding up)

Question 5

ABC Ltd is a private company. Tong, Xu and Yeung were the three directors of the
company. They and each of their wives were the shareholders of the company (all
holding an equal number of shares).

The company had a long-standing policy of not paying dividends, but the profits of
the company were effectively distributed to Tong, Xu and Yeung (and indirectly to
their wives respectively) by way of payments of high levels of directors’ fees.

Recently, Tong passed away. Tong’s wife requested that Xu and Yeung
recommend a declaration of dividends since directors’ fees were no longer paid to
Tong after his death. Xu and Yeung refused.

In these circumstances, Tong’s wife now wishes to exit from the company.
However, there is no willing buyer to her shares.

Required:

Advise Tong’s wife as to how she can exit from the company. Explain your answer.

(Adapted from PC-Law Exam, Jun 2014, Q5)

Topic 4 Questions Page 7

Question 6

Tung, Yeung and Zhao were previously partners in a partnership engaged in the
business of importing European food and wine into Hong Kong. On 1 March 2008,
they incorporated a private company, Universal Imports Ltd (“the company”), to take
over that business. Tung, Yeung and Zhao are three directors of the company.
They are also the only shareholders. Tung holds 60% of the shares, and Yeung and
Zhao hold 20% of the shares each.

By 1 June 2012, there was a falling out between Tung and the other two directors
(Yeung and Zhao). At a general meeting of the company held that month, Tung
caused resolutions to be passed removing Yeung and Zhao as directors.

Yeung and Zhao have come to you for advice. They allege that they were wrongfully
removed from office as there was an agreement between themselves and Tung, at
the time when the company was formed, that they would all be entitled to participate
in management.

Required:

Do Yeung and Zhao have any remedy in relation to their removal from office as
directors? Explain your answer.

(Adapted from PC-Law Exam, Jun 2013, Q1a)

Topic 4 Questions Page 8

Question 7

Same as Question 4 above.

Required:

(a) What action can Pak and Lam take under the Companies Ordinance to restrain
Fan from exercising management or other control over:

(i) Vision Developments Ltd? Explain your answer.

(ii) the subsidiary of Vision Developments Ltd? Explain your answer.

(b) Are there any grounds for Pak and Lam to seek to wind up either or both Vision
Developments Ltd and its subsidiary? Explain your answer.

(Adapted from PC-Law Exam, Sept 2010, Q1b&e)

Topic 4 Questions Page 9

4.4 Company meetings

Question 8

Under the Companies Ordinance, what powers do the shareholders have to seek the
convening of a general meeting?

(Adapted from PC-Law Exam, Jun 2011, Q3)

Topic 4 Questions Page 10

Question 9

Outline the requirements in the Companies Ordinance in respect of notices of

general meetings of the company.

(Adapted from PC-Law Exam, Dec 2013, Q6)

Topic 4 Questions Page 11

Question 10

Explain how the members of a company can pass a resolution under the Companies
Ordinance without holding a general meeting.

(Adapted from PC-Law Exam, Jun 2014, Q7)

Topic 4 Questions Page 12

Question 11

Chui and Wong are the only two directors and shareholders of ABC Ltd. Chui holds
60% of the shares and Wong holds 40%. Recently there have been disputes
between Chui and Wong. Chui wishes to remove Wong from the board, but
suspects that Wong will not attend any meeting convened for that purpose.

Required:

Advise Chui on how a general meeting can be properly held if Wong refuses to
attend.

(Adapted from PC-Law Exam, Jun 2013, Q4)

Topic 4 Questions Page 13

Question 12

The members of a company have passed a resolution at a general meeting on a

poll. The poll was called prior to the meeting. This contravened Regulation 60 of
Table A, which applied to the company.

(Regulation 60 provides that a resolution put to vote of the meeting shall be decided
on a show of hands unless a poll is demanded before or on the declaration of the
result of the show of hands. Regulation 60 does not provide for a poll to be called
before the holding of the meeting.)

Required:

Can a member who had voted against the resolution seek an order from the court
declaring the resolution to be invalid because of the contravention of the articles?
Explain your answer.

(Adapted from PC-Law Exam, Jun 2011, Q4)

Topic 4 Questions Page 14