Q1 Gilbert is the managing director of LCD Limited ("LCD").

Gilbert is principally responsible for the development of LCD's business which includes liquid crystal display market, in which Gilbert is particularly knowledgeable. In December 2008, Gilbert on behalf of LCD, has discussions with a Malaysian company called Good Faith Limited ("Good Faith") for contracts regarding the development of liquid crystal display market in Malaysia. In February 2009, Gilbert tenders his resignation and leaves LCD at the end of May 2009. In June 2009, Gilbert, together with his friends, sets up their own company, Friends Limited ("Friends"). In August 2009, Friends enters into contracts with Good faith whereby Friends will supply crystal display equipment to Good Faith. Advise LCD. Question 1 In general the responsibilities and liabilities of directors derive from various sources, including the constitution of the company, case law and statute law. At present, the general duties of directors in Hong Kong are mainly found in case law. They can be classified into two broad categories, namely fiduciary duties and duties of care and skill. Some common law jurisdictions such as the UK, Australia and Singapore have codified some of the fiduciary duties and the duties of care and skill in statute law. If a person does not comply with his duties as a director he may be liable to civil or criminal proceedings and may be disqualified from acting as a director. The general principles of directors duties The fiduciary duties of directors, which are generally based on equitable principles, mainly include: Principle 1: Duty to act in good faith for the benefit of the company as a whole A director of a company must act in good faith in the best interests of the company. This means that a director owes a duty to act in the interests of all its shareholders, present and future. In carrying out this duty, a director must (as far as practicable) have regard to the need to achieve outcomes that are fair as between its members.

Principle 2: Duty to use powers for a proper purpose for the benefit of members as a whole A director of a company must exercise his powers for a proper purpose. This means that he must not exercise his powers for purposes that are different fro purposes for which they were conferred. The primary and substantial purpose of the exercise of a directors powers must be for the benefit of the company. If the primary motive is found to be for some other reasons (e.g. to benefit one or more directors and to gain control of the company), then the effects of his exercise of his power may be set aside. This duty can be breached even if he has acted in good faith. Principle 3: Duty not to delegate powers except with proper authorization and duty to exercise independent judgement Except where authorized to do so by the companys memorandum and articles of association (the constitution) or any resolution, a director of a company must not delegate any of his powers. He must exercise independent judgement in relation to any exercise of his powers. Principle 4: Duty to exercise care, skill and diligence A director of a company must exercise the care, skill and diligence that would be exercised by a reasonable person with the knowledge, skill and experience reasonable expected of a director in his position. In determining whether he has fulfilled this duty, the court will also consider whether he has exercised the care, skill and diligence that would be exercised by a reasonable person with any additional knowledge, skill and experience which he has. Principle 5: Duty to avoid conflicts between personal interests and interests of the company A director of a company must not allow personal interests to conflict with the interests of the company. Principle 6: Duty not to enter into transactions in which the directors have an interest except in compliance with the requirements of the law A director of a company has certain duties where he has a material interest in any transaction to which the company is, or may be, a party. Until he has complied with these duties, he must not, in the performance of this function as a director, authorize, procure or permit the company to enter into a transaction. Furthermore, he must not enter into a transaction with the company, unless he has complied with the requirements of the law.

The law requires a director to disclose the nature of his interest in respect of such transactions. Under certain circumstances the constitution may prescribe procedures to secure the approval of directors or members in respect of proposed transactions. A director must disclose the relevant interest to the extent required. Where applicable, he must secure the requisite approval of other directors or members. Principle 7: Duty not to gain advantage from use of position as a director A director of a company must not use his position as a director to gain (directly or indirectly) an advantage for himself. Or someone else, or which cause detriment to the company. Principle 8: Duty not to make unauthorized use of companys property or information A director of a company must not use the companys property or information, or any opportunity that presents itself to the company, of which he becomes aware as a director of the company. This is except where the use of benefit has been disclosed to the company in general meeting and the company has consented to it. Principle 9: Duty not to accept personal benefit from third parties conferred because of position as a director A director or former director of a company must not accept any benefit from a third party, which is conferred because of the powers he has as director or by way of reward for any exercise of his powers as a director. This is unless the company itself confers the benefit, or the company has consented to it by ordinary resolution or where the benefit is necessarily incidental to the proper performance of any of his functions as director. Principle 10: Duty to observe the companys memorandum and articles of association and resolutions A director of a company must act in accordance with the companys constitution. He must also comply with resolutions that are made in accordance with the companys constitution. Principle 11: Duty to keep proper books of account A director of a company musk take all reasonable steps to ensure that proper books of account are kept so as to give a true and fair view of the state of affairs of the company and explain its transactions. To avoid breaching the fraudulent trading provisions in section 275 of the Companies Ordinance (Cap. 32), a director must not allow the company to incur further credit knowing that there is no reasonable prospect of avoiding insolvency.

In this case, Gilbert sets up his company with his friends in June 2009 which is after his resignation in February 2009 and leaves LCD Limited (the Company) at the end of May 2009. He already completed his fiduciary duties in the Company. However, the Company may need to refer to the Companys memorandum and articles of association and resolutions for checking that whether they have mentioned that the director could not sets up a company between 1 or 2 months after they resigned from the Company or any condition between the Company and the director. For example, whether he agreed in writing to not solicit customers of the company when he left employment (please refer to the case law Gilford Motor Co. Ltd. V Horne (1933)). The Company may also need to check the director agreement to confirm whether there is any other condition once the director resigned from the Company. If the Company found that there is any other condition between the director, the Company can sue the director in breach his contract. Otherwise, the Company needs to consider their internal control for the future. The company should provide the all directors to read these guidelines which are also readily accessible on the websites of the Companies Registry, the Hong Kong Stock Exchange, the Securities and Futures Commission, the Official Receivers office and the Hong Kong Monetary Authority. Hard copies are also available at their offices. Companies should give a copy of these guidelines to new directors irrespective of whether they organize induction training for directors. In addition, directors are also encouraged to refer to more detailed reviews of the role and duties of directors in law.

Q2 Divide and Conquer Ltd. ("DCL") is a private company limited by shares and was incorporated from an existing partnership three years ago. It has four shareholders, A, B, C and D. They were originally partners. DCL has adopted Table A as its articles of association. A, B and C are directors but D is not. B complains of the following matters: i) exclusion of B by A and C from participation in the company's affairs by failure to give B notice of board meetings; ii) A and C by the negligent conduct of the affairs of DCL have caused the value of his shares to drop; iii) A, C and D have refused to purchase B's shares at a reasonable price; iv) a refusal by A and C to register a transfer of B's shares to a person outside the company. v) A, C and D intended to remove B from office as a director. Discuss the remedies that may be available to B. Question 2 Directors and board meetings Responsibility for the overall management of a Hong Kong company typically rests with its board of directors. Generally, the board authorizes the actions of the company through board resolutions passed at board meetings or, if authorsied by the articles, by written resolution signed by all the directors or a stated proportion of them. There is no Hong Kong requirement that board meetings be held in Hong Kong or at any specific intervals. Normally, reasonable notice of meetings must be given to each directors, but the articles of association can modify this general obligation. The board of directors may delegate its powers to certain persons. A certain degree of delegation is, so far as third parties dealing with the company are concerned, normally implied in the case of managing directors and senior employees of the company. Where a private company only has on director and that director takes a decision that may be taken at a meeting of directors, the decision shall be evidenced by a resolution in writing or a written record of the decision which must be delivered to the company within 7 days of the decision having been made.

Risks and Liabilities of Directors Where a director is in breach of his duties and the breach has not been disclosed to and ratified by the company, an action may be brought for one or more of the following remedies: Rescission: where the directors have failed to disclose their personal interest in a contract which they have entered into on behalf of the company, that contract may be avoided at the option of the company; Damages: all directors found to have acted negligently or in breach of their duties are jointly and severally liable in damages to the Company; Account of profits: the misapplication of the companys property renders the directors liable to account to the company in equity on the same basis as governs a misapplication of trust funds by trustees; Fines: where the company is in breach of the company ordinance (for example, by failing to file annual returns, failing to file special resolutions of shareholders. Failing to produce annual financial statements and audited accounts, failing to hold annual general meetings of shareholders, then the Company and each director/ secretary could be subject to a default and daily fine); and Personal liabilities in certain cases: there are provisions in the Companies ordinance which place onerous duties on the directors. For example, if, when a company is wound up, it appears that its business has been carried on with intent to defraud creditors or others the court may decide that the persons (usually the directors) who were knowingly parties to the fraud shall be personally responsible for debts and other liabilities of the company. Removal of a director A director may normally be removed by an ordinary resolution of the company even where there is an agreement, or there is a provision in the memorandum or articles of association, to the contrary. The removal of a director under this statutory power entails certain procedures designed to allow the director to make representations against the proposed removal. The articles of association may also expressly provide for the removal of directors in other ways. Removal of a director contrary to an agreement with the company may give rise to claim by the director against the company.

Transfer and Transmission of Shares According to the Company Ordinance Sec 69 Notice of refusal to register transfer 1 If a company refuses to register a transfer of any shares or debentures, the company shall, within 2 months after the date on which the transfer was lodged with the company, send to the transferor and the transferee notice of the refusal. 1A Where a company refuses to register any person as a member in respect of shares which have been transmitted to him by operation of law, that person shall be entitled to call on the company to furnish a statement of the reasons for the refusal, and, if the company fails to furnish such statement within a period of 28 days after the request therefore, the company shall, on the expiration of that period, register the transfer forthwith: Provided that nothing in this subsection shall affect the rights of any member under the articles whereby he is entitled to any rights of preemption over, or rights of purchasing the shares in question. 1B Where a company refuses to register a transfer of any shares, the transferee may apply to the court to have the transfer registered by the company; and the court may, if it is satisfied that the application is well founded, disallow the refusal and order that the transfer be registered forthwith by the company. 2 (Amended by 7 of 1990) If default is made in complying with this section or any order made thereunder, the company and every officer of the company who is in default shall be liable to a fine and, for continued default, to a daily default fine. In this case, the director B of the Divide and Conquer Ltd can sue to the other director A, C and D under they are failed to inform director B the board meeting. And they did not implement their director responsibilities which lead to their shares value to drop. The court may not take any action and we can see the following: Under the rule in Foss V Harbottle (1842) z Hre 461: - Facts: A shareholder (Foss) sued the directors of the company on the grounds that the directors had cheated the company by selling land to it at the exorbitant price - results; the court dismissed the action and that the company should deal with the matters through general meeting rather than court proceedings - Principles illustrated 1 An action by a single shareholder on behalf of the company is ineffective. 2 As the company is a legal person, it should be the proper plaintiff 3 To prevent multiplicity of actions brought by different members 4 If the court order could be overturned by the majority of members, litigation is a waste of time.