Companies and the Law I Tutorial 04

Question One
You are assisting your client to set up a new private company with liability limited by shares under
the Companies Ordinance (Cap 622). The draft version of the articles of association to be adopted by
the new company is attached for reference.
Your client would like to seek your advice on the following matters:
(a) To reduce the pressure on the cashflow position of the founding members, they are only required
to pay 50% of the share price upon incorporation, and only required to pay the remaining
amounts when called upon to do so by the directors.
(b) For fast decision-making, whether it is possible to set the quorum for the board meeting to one.
(c) To retain control of the company, whether a director can be appointed for life.

Advise your client on the above matters based on the attached articles of association and the
Companies Ordinance (Cap 622).
Companies and the Law I Tutorial 04

Question Two
Rapid Communications Limited (RCL) is a Hong Kong incorporated company that sells
telecommunication equipment to businesses. RCL adopted the model articles for private companies
limited by shares with the following additional clauses:
Art 22A The company should appoint directors with professional knowledge and substantial
experience to manage the company.
Art 22B (1) Professional knowledge for the purpose of article 22A refers to a professional
qualification in accounting, business, finance or law, or a relevant master’s degree
in accounting, business, finance or law.
(2) Substantial experience for the purpose of article 22A refers to 5 or more
years of experience in a senior management position of a company of
comparable size.
Art 22C Directors who have served a term of three years or more will be allocated share
options to purchase the company shares at a price determined by the board of
directors and approved by the shareholders in general meeting.
Peter is the managing director of the company. He would like to invite John to be a director of the
company as another director will retire at the end of the year. However, as John do not have a
professional qualification or a master’s degree, Peter proposed to amend Article 22B(1) as follows:
Art 22B (1) Professional knowledge for the purpose of article 22A may include a professional
qualification in accounting, business finance or law, or a relevant master’s degree
in accounting, business, finance or law.
Larry, a minority shareholder, disagreed with the proposed amendments to Article 22B, but did not
have enough votes to prevent the passing of the resolution.
Tim, who has been a director of the company for 3 years, enquired about the share option which he
should receive pursuant to Article 22C. However, Peter informed Tim that Article 22C was only added
to the articles two years ago, when they thought the market was recovering. Due to the continued
economic downturn, business was slow in the past year, and the board of directors have decided to
freeze salaries and to stop all forms of bonus payments, including stock options.

(a) Advise Larry on whether he can prevent the implementation of the amended Art 22B under
company law.
(b) Advise Tim on whether he can claim against the company for the stock options pursuant to
Article 22C under company law.

Refer to relevant legal authorities to support your answer.

Companies and the Law I Tutorial 04

Question Three
Swift Delivery Limited (SDL) is a courier company incorporated in Hong Kong which adopted the
model articles for private companies limited by shares. 70% of SDL shares are held by Emerging
Logistics Limited (ELL), the parent company of SDL.
Tiffany is the managing director of SDL and also on the board of directors of ELL. She proposed the
following addition to the articles of SDL:

Art 63A If holders of 80% or more of the company’s issued shares have agreed to contribute
additional capital into the company, the remaining shareholders must either make
the same contribution in proportion to their shareholdings or sell their shares at a
pre-determined price as approved by the board of directors.

Art 63B The pre-determined price for the purpose of Article 63A should be based on an
independent valuation report to be submitted to the board for consideration.

The proposed amendment was passed by a special resolution. It was subsequently decided that an
additional contribution was required from shareholders. Holders of 80% of the company’s issued
shares (including ELL) agreed to make the contribution, and therefore, pursuant to Article 63A,
a letter was sent to the remaining shareholders requiring them to sell their shares to ELL.
The pre-determined price of HK$2.50 per share was approved by the board of directors based on an
independent valuation report which valued the company shares at $2.00 per share.

Advise whether the minority shareholders can challenge the additional articles (Art 63A and
Art 63B) under company law.