The University of Hong Kong

Liability, Promotion, & Company Formation

Week 2

Company Law
 The University of Hong Kong

week 2 objectives
• week 1 recap
• questions and follow-up
• tutorials
• participation

• liability

• promotion (Stott chapter 2)

• non-Hong Kong companies (Stott chapter 3)

• the Companies Registry (Stott chapter 4)

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liability-what is it?

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business forms & liability?

• sole proprietorship
• unincorporated association
• partnership
• company
• private (limit on transfer, number of members)
• public
• listed
• closely-held
• registered non-Hong Kong company

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partnerships
• examples?
• Partnership Ordinance (Cap 38) & Limited Partnerships Ordinance
(Cap 37)
• disadvantages?
• partners are jointly and severally liable for partnership debts
• maybe difficult to arrange financing
• indefinite duration is not automatic
• advantages?
• autonomy
• confidentiality
• culture
• minimal cost and time maintenance
• attitude toward risk

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what is a company?
• a legally created entity (a legal fiction) that generally:
1. formal creation per law
• via Companies Ordinance (Cap 622)
• via specific resolution (e.g., Kowloon-Canton Railway Corporation (Cap 372))
2. legal personality (i.e., entity distinct from its owners/shareholders)
• “artificial person”, “body corporate”
3. limited liability of owners
4. separation of ownership and control
• shareholders, directors, managers, employees principal-agent issues?
5. indefinite duration
• choose to dissolve, forced to dissolve, or acquired
6. freely transferable ownership interests

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A company: why important, who is interested?

• consumers
• distributors/sales channels
• employees
• entrepreneurs
• government
• employment
• security
• taxes
• investors: creditors
• investors: shareholders
Apple possible in a non-corporate form? • retirees
• supply chain
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liability applied
• Whose liability is unlimited? limited?
• Types of liability
• limited by shares
• liability limited to price paid for shares (share capital) or balance if not paid yet
• limited by guarantee (non-profit entities)
• no share capital, liability is up to amount guaranteed by members
• without limited liability (i.e., unlimited liability  partnership-like)
• personal liability to pay compensation
• employees/directors don’t do bad things or you pay (e.g., share subscriptions)
• personal liability imposed on members (special situations)
• knowingly conducting business to defraud
• dormant company
• signing incorrectly drafted documents
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private company limited by shares

• Hong Kong private company (page 15)
• ≤ 50 members

• cannot invite public to subscribe to shares

• restriction on a member’s right to transfer shares

• director’s discretion
• pre-emption

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liability: let’s consider a taxi

you want to start a taxi empire but right now you have
enough money for one taxi. how might you own it?

you have done well and now have enough for five taxis.
how might you own them?

impact on liability?

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corporate veil
• corporate veil: generally courts will not look at why the company
was formed, or see who is in control, or the relationship amongst its
members

• courts will, however, “raise” or “pierce” the corporate veil for

reasons of:
• justice/fairness: Ebrahimi v Westbourne Galleries (1973) (page 10)
• to prevent fraud: Gilford Motor Co v Horne (1933) (page 11); HKSAR v
Leung (1999) (page 12)
• public policy

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when can the corporate veil be pierced?

• fraud, wrongdoing, justice/fairness, or evading an existing legal obligation
• fraud: HKSAR v Leung Yat Ming (page 12)
• fairness: Ebrahimi v Westbourne Galleries Ltd (page 10)
• existing legal obligation: Gilford Motor Co Ltd v Horne (page 11)
• “alter ego”-no legal separation between company and its owners
• controlling shareholder is same as the company
• acts so the company avoids claims against it
• company is agent of parent corporation—difficult to distinguish
• don’t commingle funds, don’t use company assets without following procedure, keep
proper records
• group structure operates as a single entity
• difference between legal and economic entity?
• Adams v Cape Industries plc (page 13)
• family disputes
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Salomon vs. Salomon Co. Ltd. (1897)

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tip
• what’s the difference between the below when signing a
document (e.g., a loan agreement)?
1. Great HKU Student Company Limited

--------------------------------------------------
Name: Awesome HKU student
Title: CEO

2. --------------------------------------------------
Name: Awesome HKU student

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starting a company: the promoter

• no formal definition in the Companies Ordinance (Cap 622)
• “one who undertakes to form a company with reference to a given
project, and to set it going, and who undertakes the necessary steps
to accomplish that purpose.” Twycross v Grant (1877) (page 20)
• one may also be considered a promoter if helping:
• arrange a director
• raise capital, prepare/issue a prospectus
• entering into preliminary contracts*
• generally not professional advisers (e.g., lawyers, accountants)
• determination if a person is a promoter is fact dependent

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but why a promoter?

• $$$

• example 1: promoter in action

• X has a good business idea but not enough money to execute the idea
• X uses his network to:
• raise capital
• find a team
• engage service providers
• X enters into preliminary contracts for future company

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a promoter’s duties
• fiduciary duty
• must act in principal’s best interest (principalfiduciary)
• highest standard of care
• no conflict of interest
• example 2: promoter in action
• X buys property for 100
• X sets-up company Y with others
• X sells property to Y for 150
• X pockets 50
• any problems?
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a promoter’s duties
• how does a promoter avoid a conflict of interest?
• no secret profits
• disclose (to company), disclose (to investors), disclose (to CR)

• company’s board must consent but if board is under influence of

the promoter, the promoter must obtain consent of the investors
that provided company with its initial share capital

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remedies for breach of fiduciary duties

options
• accounting to company for hidden profit
• rescission
• if, company can restore to promoter in substantially same condition; and
• unreasonable amount of time has not passed
• damages for breach of duty

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fiduciary duty: example

• In re Dole Food Co. Inc. Stockholder Litigation, in connection with a
take-private transaction with the controlling stockholder, the
Delaware Court of Chancery held in a post-trial opinion that the
President of the company and its controlling stockholder undermined
the sales process by depriving the special committee of the ability to
negotiate on a fully informed basis and the stockholders of the ability
to consider the merger on a fully informed basis. The court held that
the President and the controlling stockholder intentionally acted in
bad faith (with the President also engaging in fraud) and that they
were jointly and severally liable for damages of $148,190,590.
Because fiduciary breaches of this nature are not exculpable or
indemnifiable under Delaware law, the controlling stockholder and
the President are personally liable for the damages imposed.
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promoters & preliminary contracts

• promoter enters into preliminary contract on behalf of company
• any issues?
• the bad: Kelner v. Baxter (1866) (page 25)
• the good:
• novation
• implied contract: Howard v Patent Ivory Manufacturing Co (1888) (page 26)
• ratification
• as if the company had been incorporate when the contract was entered into; and
• contract entered into on the company’s behalf by an agent acting without the
company’s authority
• if no ratification, promoter can be personally liable

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The Companies Registry (“CR”)

• administer the Companies Ordinance (Cap 622) and similar
ordinances (e.g., the Limited Partnerships Ordinance (Cap 37))
• Companies Registrar must be available for public inspection at
all reasonable times to enable members of the public to make a
search for a fee
• registry/index function
• generally, a person’s usual residential address and
HKID/passport number are restricted w/certain exceptions
• immunity

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promotion  incorporation
• basic documentation:
• sign articles of the company
• complete Incorporation Form
• deliver company’s articles of association and Incorporation Form to
Companies Registry
• submission also triggers business registration with IRD
• lawful purpose
• R v Registrar of Companies, ex parte Attorney General (1991) (page 27)

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incorporation output
• constitutional documents
• memorandum of association (n/a)
• articles of association

• other core documents

• certificate of incorporation
• business registration certificate

• common seal (optional)

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articles of association
• are a company’s constitution that sets out the regulations for how
the company will be governed
• articles can be changed, usually via special resolution
• but must be “bona fide for the benefit of the company as a whole”
• once articles are registered they have the effect of a contract:
• between the company and its members: Ng Kin Kenneth v HKFA Ltd (1994)
(page 33)
• between its members: Rayfield v. Hands (1960) (page 33)
• relationship between a director’s contract and articles
• Re New British Iron Co, ex parte Beckwith (1898) (page 34)
• Kwok Ping Sheung Walter v Sun Hung Kai Properties Ltd (2009) (page 34)
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ultra vires & objects clause

• what does ultra vires mean?
• “beyond the powers”

• what is an objects clause?

• what is the relationship between ultra vires and objects clause?

• Articles of Association and Memorandum of Association?

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resolution
• a formal, written expression of an opinion, intention, or
decisions by an official body, assembly, company, etc…*
• a resolution is the manifestation of a board of directors
authority/power

* definition based partially on Black’s Law Dictionary (2001)

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when dealing with a company

• normal director can presume
• good faith
• constructive notice (n/a)
• indoor management rule: Royal British Bank v. Turquand (1856) (page 41)

• shady director (self-dealing)

• transaction is voidable at the company’s option if party is:
• director of company/holding company
• entity connected with director

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group companies
• holding companies-subsidiary companies
• hold co. controls composition of sub. co.’s board of directors
• hold co. controls more than half of the voting rights of sub. co.
• hold co. hold more than half of sub co.’s issued shared capital
(generally excluding preferred shares)

• associated company

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non-Hong Kong company (chapter 3)

• what is a non-Hong Kong company?
• a company incorporated outside Hong Kong that establishes a place of
business in Hong Kong
• Cap 622 company definition does not include non-Hong Kong company
• why non-Hong Kong companies?

• legal authority: Part 16 of Cap 622; Companies (Registered Non-

Hong Kong Companies Regulation) (Cap 622J)
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registering a non-Hong Kong company

• a company incorporated outside Hong Kong that establishes a place of
business in Hong Kong is required to register  becoming a “registered
non-Hong Kong company”
• what entails establishing a place of business?
• appointing an agent alone is not enough
• Re Yung Kee Holdings Ltd (2014) (page 56)
• establishing a place of business depends on factors like laid out in Adams v Cape
Industries plc (1990) (page 55)
• required to register within one month after establishing a place of
business in Hong Kong
• forms and documents (e.g., constitution/articles, certificate of incorporation, etc…)
• authorized representative: accept notice/service of process (p. 59)
• registration alone does not trigger Hong Kong profit tax obligations
• approximately 10,000 registered non-Hong Kong companies (2017)
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company names
• choosing a name
• can’t be taken
• can’t be the same as a company incorporated by ordinance
• can’t be a name that would constitute a criminal offense
• can’t violate trademark
• can’t be offensive or otherwise contrary to public interest
• prior approval required for names that might cause confusion
• government entity
• names that include words like “trust”, “chamber of commerce”, “tourist
association”, “levy”, etc…
• Association of Certified Public Accountants of Britain v Secretary of State for Trade
and Industry (1997) (page 77)
• a name that the Registrar has already directed a company to change
• limited? generally, yes, with certain exceptions
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enforcement
• “responsible person”: officer, director/shadow director(?) of a
company or non-Hong Kong company

• options
• fines
• imprisonment
• Court order

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what is the purpose of business?

A business corporation is organized and carried on primarily for the
profit of the stockholders. The powers of the directors are to be
employed for that end.
Dodge v. Ford Motor Co. (1919)
Among non-experts, conventional wisdom holds that corporate law
requires boards of directors to maximize shareholder wealth. This
common but mistaken belief is almost invariably supported by
reference to the Michigan Supreme Court's 1919 opinion in
Dodge v. Ford Motor Co. - Lynn Stout-

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what is the purpose of business? More than $$$?

Society is demanding that companies, both public and private, serve a
social purpose. To prosper over time, every company must not only
deliver financial performance, but also show how it makes a positive
contribution to society. Companies must benefit all of their
stakeholders, including shareholders, employees, customers, and the
communities in which they operate.

Larry Fink, BlackRock CEO

Annual Letter to CEOs 2018, A Sense of Purpose

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questions?

Company Law
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paths up the mountain

strait vs. straight

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Liability & Formation

Week 2

Company Law