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)

Teaching Notes:

 Proper plaintiff principle (Foss v Harbottle) --> company is the proper plaintiff
in respect of wrongs done to the company
 Directors owe their duties to the company --> for breach of directors’ duties, it
is for the company to sue
 Management power (including the power to sue) is vested in BOD --> here,
no BOD authorisation to sue (Theres no board meeting as mentioned in the
case)
 Alternatively, shareholders can direct the BOD by special resolution --> here,
no special resolution
 Therefore, the proceeding commenced by A and B is not valid (2 ways of
suing dou mo happen)

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 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)

Teaching Notes:
 A member can commence derivative on behalf of the company where there
has been a misconduct
 It is necessary for the member to apply for leave (permission) of the court
 The court may grant leave if ALL of the following requirements are satisfied:
o On the face of the application, it appears to be in the interest of the
company that leave be granted --> not a high burden
o There is a serious question to be tried and the company has not itself
brought the proceedings --> a relatively low threshold  to show a
probability that the company will succeed
o The member has served a written notice to the company of his
intention to apply for leave
 The court can still grant leave even if the company has ratified (approved) the
wrongdoing
 Refer to the suggested answers as study text

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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)

Teaching Notes:
 See previous question for the law on derivative action
 In this question, the key point is whether it is in the interest of the company to
sue Bob and Chris
o If Agnes’ dispute with Bob and Chris only involves a difference in
opinion on the commercial merits of the transaction --> may be not in
the interests of the company to sue
o If there is a breach of directors’ duties by Bob and Chris (as alleged by
Agnes) --> may be in the interests of the company to sue

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)

Teaching Notes:
a)

 Directors owe their duties to the company --> breach of directors’ duties -->
proper plaintiff is the company
 However, Pak and Lam can bring a derivative action to recover on behalf of
Vision Developments if the requirements are met:
o On the face of the application, it appears to be in the interest of the
company that leave be granted
o There is a serious question to be tried and the company has not itself
brought the proceedings
o The member has served a written notice to the company of his
intention to apply for leave

b)

 The law allows derivative actions on behalf of a company’s subsidiary

Topic 4 Questions Page 6

 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)

Teaching Notes:
 Unfair prejudice
o Tong’s wife may seek a remedy for unfair prejudice under Cap.622
ss.724-725
o Unfair prejudice --> both prejudice and unfairness must be established
o Mere fact of not declaring a dividend is not unfair prejudice; however,
not paying dividends + diverting profits through excessive remuneration
can amount to unfair prejudice
o Here, it is likely that unfair prejudice can be established
o Remedy --> court may order other members or the company to buy-out
Tong’s shares
 Winding up on just and equitable grounds
o Alternatively, Tong’s wife may seek winding up on just and equitable
grounds under Cap.32 s.177(1)(f) if there is a breakdown in the
relationship of trust and confidence (Ebrahimi v Westbourne Galleries)
o However, winding up is a remedy of last resort --> court may decline
winding up if another remedy under s.725 (such as buy-out remedy) is
appropriate
o Here, buy-out remedy would be appropriate --> unlikely for the court to
order winding up on just and equitable grounds

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)

Teaching Notes:
 Unfair prejudice
o Yeung and Zhao may seek a remedy for unfair prejudice under
Cap.622 ss.724-725
o Unfair prejudice --> both prejudice and unfairness must be established
o Where a company was formed on the basis of mutual trust and
confidence between members and there was an agreement or
understanding between members that they would be entitled to
participate in the management of the company --> then exclusion from
management can constitute unfair prejudicial conduct
o Here, it is possible that unfair prejudice can be established
o Remedy --> any order the Court thinks fit
 Reinstate Yeung and Zhao as directors? Unlikely
 Tung or the company to buy-out Yeung and Zhao’s shares?
Likely
 Winding up on just and equitable grounds
o Alternatively, Tong’s wife may seek winding up on just and equitable
grounds under Cap.32 s.177(1)(f) if there is a breakdown in the
relationship of trust and confidence (Ebrahimi v Westbourne Galleries)
o However, winding up is a remedy of last resort --> court may decline
winding up if another remedy under s.725 (such as buy-out remedy) is
appropriate
o But, if company is already insolvent --> maybe winding up is
appropriate

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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)

Teaching Notes:
 Refer to the suggested answers as study text
 Part (a): Ignore the remedy of appointing a receiver/manager
 Part (b): Ignore s.179 and s.177(1)(b)

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4.2 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)

Teaching Notes:
 Refer to the suggested answers as study text

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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)

Teaching Notes:
 Refer to the suggested answers as study text

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)

Teaching Notes:
 Refer to the suggested answers as study text

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)

Teaching Notes:
 Shareholders may remove a director by ordinary resolution (s.462)
 Necessary for Chui to call a general meeting (so that can pass the ordinary
resolution)
o It is important to know in what capacity (BOD or shareholder) was the
meeting called (see below) (要 depends on 用 meh 身份 open meeting)
 Chui has 60% of the votes, so as long as a valid general meeting can be held,
he will have sufficient votes to pass the ordinary resolution
 Quorum = 2, unless the articles provide otherwise (s.585(3))
 Assume quorum is 2, Wong can prevent the meeting from being held
 If Model Articles (private companies) applies, Chui can rely on Reg 42 to deal
with the problem (Director 身份 open-> quorum not enough -> adjourned ->
next week same time then can constitute quorum)
o But, if the meeting was requested by Chui in the capacity of a
shareholder, Reg 42 cannot help Chui (meeting will be dissolved)
 Otherwise, it will be necessary to Chui to apply for a court-ordered meeting
under s.570
o Is it impracticable to hold a meeting? Yes, if minority members
deliberate absent to frustrate the holding of a meeting (Wong won’t
come anyways) --> seems satisfied here
o Remember, the court will not order a meeting to break a shareholding
deadlock
o Here, Chui has 60%, so it is likely that the court will order a meeting
with quorum = 1

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)

Teaching Notes:
 Irregularity principle --> a member cannot complaint of a mere informality or
irregularity where the intention of the meeting is clear
 Here, if the court declared the meeting invalid --> the company can hold a
general meeting again --> this time, the members may demand a poll properly
--> same result as before
 So, it is unlikely that the court will intervene

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