The University of Hong Kong

Raising Capital

Week 3

Company Law
 The University of Hong Kong

objectives

• share capital (Stott chapter 5)

• raising capital (Stott chapter 6)

2018 Company Law 2

 The University of Hong Kong

speaking the same language

• debt
• bonds
• debentures (unsecured long-term debt securities)
• notes (“medium-term” debt securities)

• equity (shares)
• voting rights
• economic rights (dividends, leftovers)
• share classes

2018 Company Law 3

 The University of Hong Kong

quick review: a share?

• chattel (personal property)
• economic rights
• Borland’s Trustee v Steel Bros & Co Ltd (1901) (page 90)
• shareholder’s interest in a company as measured by a sum of money
• limit of liability
• economic interest: dividends
• residual interest (leftovers)
• voting rights

2018 Company Law 4

 The University of Hong Kong

share capital
• authorized share capital
• maximum number of shares allowed for issue
• may be in articles of association
• issued share capital
• total number of shares issued
• total number of shares issued + unissued = ?
• paid up share capital
• amount paid (issue price) by shareholders
• which is most important when assessing a company’s finances?
• statement of capital

2018 Company Law 5

 The University of Hong Kong

alteration of share capital

• resolution required
• increase in share capital
• conversion of shares into larger/smaller number of shares
• cancel shares orphan/forfeited shares
• redenomination of share capital
• Companies Registry notification (one month)

• unlimited companies re-registering as limited

• special resolution
• must disclose company’s share capital information before and after re-
registration
• if wound-up within 3 years, too bad

2018 Company Law 6

 The University of Hong Kong

consideration for shares

• cash
• non-cash consideration
• property
• services
• how do you value non-cash consideration?
• Re Wragg Ltd (1897) (page 91)
• not illusory or based on fraud then court will usually not inquire into
value of consideration
• partly paid shares (uncalled capital)

2018 Company Law 7

 The University of Hong Kong

allotment vs. issued

• allotment
• basically company allocating shares to a person
• allotting shares is different than issuing shares
• “The term ‘issue’ means something distinct from allotment and imports
that some further act has been done whereby the title of the allottee
has become complete.” National Westminster Bank plc v Inland
Revenue Commission (1994) (page 92)
• directors may allot shares if given pre-approval via resolution
• approval period cannot be longer than 12 months after approval given
• return of allotment
• exception: Tsao Chin Lan v. Tin Ka Kung and others (1995) (page 93)

2018 Company Law 8

 The University of Hong Kong

share classes
• preference/preferred shares
• preferred dividend generally cumulative
• participating vs. non-participating (fixed-rate)
• Will v United Lankat Plantations Co (1914) (page 97)
• voting
• repayment priority
• Scottish Insurance Corp Ltd v Wilson and Clyde Coal Co Ltd (1949) (page 98)
• ordinary/common shares
• redeemable shares
• why?
• non-voting shares
2018 Company Law 9
 The University of Hong Kong

variation of share class rights

• making changes, either:
• as stated in articles of association; or
• consent of the shareholders in that class
• written consent (minimum 75% of total voting rights of holders of shares in the class); or
• special resolution passed by holders of shares in the class
• notifications
• written notice to each holder of shares in the class (14 days after variation made)
• Companies Registry (one month after variation takes effect)
• dispute
• 10% of the total voting rights of the holders of shares in the class
• go to Court within 28 days after the date on which variation is made
• cannot unfairly prejudice shareholders of the class represented

2018 Company Law 10

 The University of Hong Kong

examples: variation of share class rights

• example 1
• Company X has issued 100 shares of a particular class of shares
• each share is held by one person (i.e., 100 investors)
• X wants to make changes to the rights of this particular share class
• articles of association are silent on the procedure so X seeks written consent of impacted shareholders
• the first 75 shareholders contacted agree to changes and X receives their written consent
• X sends notification to all investors of changes
• 10 of the investors not contacted disagree and go to court within 28 days of change
• example 2
• assume everything as above except X has only 2 shareholders that own the 100 shares
• majority shareholder owns 75 and minority shareholder owns 25
• any changes?
• example 3
• majority shareholder owns 95 and minority shareholder owns 5
• any changes?

2018 Company Law 11

 The University of Hong Kong

raising capital $$$

• Amy’s company, Wedding Planning Limited (“Wedding”) is
growing and she needs to raise capital to fund future expansion.

What are her options?

• some initial questions to consider

• equity vs. debt?
• non-public vs. public?
• timing?

2018 Company Law 12

 The University of Hong Kong

capital raising instruments

• questions: equity vs. debt?, non-public vs. public?, timing?
• non-public
• rights issue (Inkel, Jervois)
• letter of rights to existing holders to further invest on a pro-rata basis
• renounceable or non-renounceable
• private placement (Apex, CB)
• public
• listing or floated (“going public”)
• options vs. warrants

2018 Company Law 13

 The University of Hong Kong

prospectus (ABC, Core)

• a prospectus is any kind of document that is:
• offering any shares or debentures of a company to the public for
subscription or purchase; or
• calculated to invite offers by the public to subscribe or purchase shares
or debentures
• includes financial, business, and legal information necessary for
investors to evaluation an investment in the company
• e.g., material contracts (last 2 years before date prospectus issued)
• prospectus registration (SFC, HKSE)
• statement in lieu of prospectus
2018 Company Law 14
 The University of Hong Kong

listed companies (IPO)

• Hong Kong Stock Exchange
• Main Board
• Growth Enterprise Market (GEM)
• Main Board Listing: a few thoughts
• three financial years worth of activity
• satisfy one of the three tests
1. profit test: HKD 20 million in the most recent year, HKD 30 million in preceding two
years, and a market capitalization of at least HKD 200 million when listed;
2. market capitalization test: HKD 4 billion when listed and at least HKD 500 million
revenue for most recent audited financial year; or
3. market capitalization/revenue/cash flow test: HKD 2 billion when listed, at least
HKD 500 million revenue for most recent audited financial year, and positive cash
flow from operating activities of at least HKD 100 million in total for the preceding
three years
• generally at least 25% of issuers’ total issued share capital (minimum of HKD
50 million) held by the public
• appoint at least 3 independent non-executive directors
2018 Company Law 15
 The University of Hong Kong

Hong Kong IPO Process

2018 Company Law 16

 The University of Hong Kong

prospectus problems
(civil and/or criminal liability)
• advertising
• Securities and Futures Ordinance (cap 571)
• misstatements in prospectus (cap 32)
• Misrepresentation Ordinance (cap 284)
• tort

2018 Company Law 17

 The University of Hong Kong

prospectus problems
• advertising
• misstatements in prospectus (cap 32)
• untrue statement if it’s misleading in the form and context
• material omission is also an untrue statement
• on the hook?
• directors, promoters, and every person that has authorized the issue of the
prospectus (exemption for experts and regulators)
• defenses:
• without consent/knowledge
• withdrew consent (+public notice)
• reasonable grounds to believe the statement to be true
• relied on an expert
• immaterial

2018 Company Law 18

 The University of Hong Kong

Misrepresentation Ordinance (cap 284)

• misrepresentation (fraudulent, negligent, or innocent)
• must prove:
• 1) material false statement of fact; and
• 2) that the false statement induced him/her to subscribe.
• generally, statement of opinion is not a statement of fact but a statement
of intention may be considered a representation of fact if it can be proven
the intention never existed
• Edgington v Fitzmaurice (1885) (page 125)
• Smith New Court Securities Ltd v Scrimgeour Vickers Ltd (1992) (page 125)
• other examples
• R v Kylsant (1932) (page 126)
• Re Pacya Rubber and Produce Co Ltd (1914) (page 126)
• damages or rescission unless: contradictory action, time, restitution
impossible, liquidation
2018 Company Law 19
 The University of Hong Kong

tort
• deceit (fraud)
• false representation made: 1) knowingly, or 2) w/o belief in its truth, or 3)
recklessly, careless whether it be true or false, Derry v Peek (1889) (page
127)
• only applies to initial subscribers unless intention also existed for investors
purchasing on open market, Peek v Gurney (1873) (page 128)
• damages
• negligent misstatement (“reasonably foreseeable”)
• tort may arise if financial loss is caused by statement by a party that has a
duty of care to the other party
• Al-Nakib investments (Jersey) Ltd v Longcroft (1991) (page 129) compared
to Possfund Custodian Trustee Ltd v Diamond (1996) (page 130)

2018 Company Law 20

 The University of Hong Kong

prospectus problems
(civil and/or criminal liability)
• advertising
• Securities and Futures Ordinance (cap 571)
• misstatements in prospectus (cap 32)
• Misrepresentation Ordinance (cap 284)
• tort

2018 Company Law 21

 The University of Hong Kong

questions?

Company Law
 The University of Hong Kong

paths up the mountain

You are going out for a nice meal, do you

go for a steak or a nice buffet?

2018 Company Law 23

 The University of Hong Kong

Raising Capital

Week 3

Company Law