BUSINESS
ASSOCIATIONS
(TUTORIAL)
PANGYUE CHENG
FACULTY OF LAW
THE UNIVERSITY OF HONG KONG
T5
MEMBERS
QUESTION 1
The Company’s general meeting is three members. The Company currently has 100 issued
shares. Belinda owns 55 shares, Nick owns 35 shares and Freddie owns 10 shares.
Nick just received a notice for a general meeting of the Company to be held at the Company’s
registered office in 7-days’ time on the following matters:
1) amending the articles of association to change the quorum for members’ meeting to two members;
2) authorising the Board to allot and issue 200 shares to Belinda, 150 shares to Freddie and 50 shares
to Susan; and
3) changing the Company’s name to “Belinda Investment Limited”.
Nick does not like the proposed resolutions and now consults you on the following matters:
a) What is/are required in order for the above items to be approved at the general meeting?
b) Any impact that the above proposed allotment may have on Nick’s position in the Company?
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QUESTION 1
1. What is/are required in order for the above items to be approved at the general
meeting?
(1) Notice requirements
What is the minimum notice required for a general meeting under the CO?
For a general meeting (other than an annual general meeting) to be validly held, at least 14
days’ notice to members and directors is required (s571(1)(b)(i) and s574 CO),
Is it possible to hold a valid meeting on shorter notice?
The meeting could only be called by shorter notice if a majority in number of the members
who have the right to vote at the meeting and who hold at least 95% of the total voting
rights agree (s571(3)(b)CO).
Do they satisfy the ‘majority in number’ requirement?
In this case, the other shareholders who together only hold 65% of the total voting rights 4
would not have been able to shorten the notice to 7 days.
QUESTION 1
(2) Quorum requirement
On the facts, can quorum be satisfied without Nick?
The quorum for members’ meeting is three members, so the general meeting could not be
held without Nick’s presence.
(3) Voting requirement
What are the approval thresholds for a) amending the articles; b) authorising the board to allot shares;
and c) changing the Company’s name?
Amending the articles to change the quorum requirements for members’ meeting: special
resolution (i.e. a majority of at least 75%, s564 CO) (s88(2)CO).
Authorising the Board to allot shares on non-pro rata basis: ordinary resolution (i.e. a simple
majority, s563(1) CO) (ss140-141 CO)
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Changing the Company’s name: special resolution (s107 CO)
QUESTION 1
(4) Voting methods
What are the methods of voting?
By hands: one person one vote (default method)
On a poll: one share one vote (on demand only)
Assuming Nick attends the meeting, on a show of hands, would Belinda and Freddie be able to pass the
proposed resolutions??
Belinda and Freddie will be able to pass ordinary resolution (s563(2)CO) but not the special
resolution (s564(2)CO).
If a poll is demanded, would the outcome change?
The results will be the same (s563(3) and s564(3)CO) 6
QUESTION 1
2. Any impact that the above proposed allotment may have on Nick’s position in
the Company?
(1) Impact of proposed allotment
What happens to Nick’s shareholding after the allotment?
After the allotment, is Nick still needed for quorum?
Can Nick still block special resolutions?
The shareholding of Nick will be diluted to 7% whereas the respective shareholdings of
Belinda, Freddie and Susan will be increased to 51%, 32% and 10%.
With the Company having 4 members after the allotment, Nick’s presence will no longer be
essential for meeting the quorum requirement, and he will no longer be able to block the
passing of special resolutions. 7
QUESTION 2
Belinda transferred 5 shares to Susan and all members are given 14-days’ notice for
another general meeting to be held at the Company’s registered office to approve
resolutions 2) and 3) only as set out in Question 1.
Nick will not be in Hong Kong on the date of the meeting as he has a scheduled
business trip outside Hong Kong. He would like to know:
a) What can be done if he still wants to attend the general meeting himself?
b) What if he will be unavailable at the time of the meeting?
c) Whether he can block the resolutions from being passed?
d) Assuming that your answer to c) is in the negative, is it better if he just makes
a stance by not attending the general meeting as he is against approving the agenda
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items?
QUESTION 2
1. What can be done if he still wants to attend the general meeting himself?
Nick can request the Company to hold the meeting using virtual meeting technology
(ss583A & 584 CO and Model Article 38).
2. What if he will be unavailable at the time of the meeting?
If he is not available at the time of the meeting, he may appoint a proxy to attend on
his behalf (s596 CO).
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QUESTION 2
[Link] he can block the resolutions from being passed?
What is the shareholding structure after the share transfer?
Belinda-50%; Nick-35%; Freddie-10%; Susan-5%
Can the quorum requirement be satisfied if Nick does not attend the meeting?
With Susan becoming a member, the quorum requirement could be satisfied even if Nick
does not attend the meeting.
On a show of hands, can Nick block the resolutions? Would the result change if a poll is demanded?
Nick or his proxy would not be able to block any of the resolutions on a vote by a show of
hands (s588(1) CO)
But will be able to block special resolutions (such as changing the Company’s name) on a
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vote by poll (s588(3) CO).
QUESTION 2
4. is it better if he just makes a stance by not attending the general meeting as
he is against approving the agenda items?
If Nick knows the resolutions will pass, is there still any value in attending the meeting?
In practice, it is advisable for Nick to attend the general meeting even if the
resolutions will eventually get passed. This allows him to place on record his
objections and reasons for the objections. This record can be useful for possible legal
actions in the future, e.g., a derivative action, an unfair prejudice petition, or a petition
for winding up on just and equitable ground.
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QUESTION 3
Nick decided to attend the general meeting. At the general meeting, Belinda and Susan did not
seek ratification for their actions in the Acquisition.
As regards the items proposed at the general meeting of the Company:
Allotment of shares to Belinda, Freddie and Susan - Nick objected to the allotment as his
shareholding in the Company would get diluted. The resolution was passed with Nick voting
against it.
Change of company name to “Belinda Investment Limited” - Nick objected to this proposal
on the basis that the Company has been in investment business for a substantial period of
time and there is now considerable goodwill associated with the name “Real Investment
Limited”. The resolution was defeated with Nick voting against it.
However, after the share allotment, the resolution for changing the Company’s name was
reintroduced at another general meeting and was passed there with Nick again voting against it.
Nick now seeks your advice on his rights. If there are facts which may be relevant to your 12
advice, state what they are and how they may affect your advice.
QUESTION 3
1. Potential wrongs
The acquisition
Allotment of shares
Changing the Company’s name
2. Possible actions
Statutory derivative action
Unfair prejudice petition
Seeking declaratory order for change of name
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QUESTION 3
1. Potential wrongs
In relation to the acquisition, what have they breached?
They are liable for breaching the various directors’ duties.
Do Belinda and Freddie commit any wrong by voting in favour of the share allotment?
Generally, a member’s vote is a proprietary right, and a member has the right to vote as he wishes.
Do Belinda and Freddie commit any wrong by voting to change the company’s name? Any limitations on their
voting rights?
Even though a member’s vote is a proprietary right and a member has the right to vote as he wishes,
the majority vote to bind the minority is not unconstrained by law. The cases dealing with alteration of
articles (e.g. Allen v Gold Reefs of West Africa Ltd) show that the majority vote can be subject to the
limitation that it be exercised bona fide for the benefit of the company as a whole (subjective test)
where the company’s interest is involved.
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It is not clear, however, whether this principle can be applied to change of company’s name under s107
CO.
QUESTION 3
2. Possible actions
(1) Statutory derivative action (s732 CO)
Can Nick bring statutory derivative action against Belinda and Susan?
The above breaches of directors’ duties fall within the meaning of ‘misconduct’ (ss731 & 732).
Nick may take out statutory derivative action to claim against Belinda and Susan for the
Company.
What must he obtain before bringing the action?
Leave of the court must first be obtained.
What must Nick show to obtain leave of the court?
Appears to be in the company’s interests
A serious question to be tried
Company has not commenced proceedings or has not diligently continued, discontinued or
defended proceedings
Nick has served a written notice of intention to bring derivative action and setting out the 15
reasons for the intention
QUESTION 3
2. Possible actions
(1) Statutory derivative action (s732 CO)—Leave of court
Which criterion does the court usually consider first when deciding whether to grant leave?
a serious question to be tried (in most cases the court would expect that this is the
criterion to be examined first since if this criterion cannot be satisfied it will normally follow
that it is not in the interest of the company to commence proceedings (Re Li Chung Shing
Tong (Holdings) Ltd)).
Is the ‘serious question to be tried’ threshold high? Does the court conduct a detailed merits assessment
at this stage? Does Nick need to prove that the claim will probably succeed? (Re F&S Express Ltd; Re Li
Chung Shing Tong (Holdings) Ltd)
Relatively low threshold
Merits normally not delved into
A probability case will succeed
No need to weigh prospects of failure against prospects of success unless prospects of 16
success are slim
QUESTION 3
2. Possible actions
(1) Statutory derivative action (s732 CO)—Leave of court
Even if a serious question to be tried is established, what else must Nick show to obtain leave?
appears to be in the company’s interest (to be examined as a separate matter even if
there is a serious question to be tried)
When deciding whether it is in the company’s interests to grant leave, how deeply will the court
examine the claim? (Re F&S Express Ltd; Re Li Chung Shing Tong (Holdings) Ltd)
Relatively low threshold
if an arguable case can be shown to subsist
does not require a cost-benefit analysis
courts should not enter into merits of the claims where there are serious dispute 17
QUESTION 3
2. Possible actions
(1) Statutory derivative action (s732 CO)—Leave of court
What factors does the court consider whether it is in the company’s interests? (Lo & Qu, para.
10.063 from Swansson v R. A. Pratt Properties Pty Ltd. (2002) 42 ACSR 313)
whether company has suffered significant losses but economic loss is not critical
character of the company, e.g., small family company
effect of litigation on the company’s business
ability of defendant to satisfy a court judgment
likely litigation costs
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QUESTION 3
(2) Unfair prejudice petition (s724 CO)
What must Nick prove to establish unfair prejudice? Is conduct that is merely prejudicial sufficient?
‘Unfairness’ and ‘prejudice’ must co-exist.
Conduct which is intrinsically prejudicial to the interests of a shareholder without also being
unfair will not be enough. (Re Taiwa Land case).
Can conduct be lawful but still amount to unfair prejudice?
Even if the conduct is not unlawful, it may still amount to unfair prejudice if the court finds
that there are equitable considerations which make it unfair for to those conducting the
affairs of the company to rely on their strict legal powers (O’Neill v Philips)
Must the petitioner come with clean hands?
On the other hand, while there is no requirement that the petitioner must come with clean
hands, his conduct may be taken into account by the court for determining whether there is19
unfair prejudice (Grace v Biagioli).
QUESTION 3
(2) Unfair prejudice petition (s724 CO)
Can Nick establish unfair prejudice arising from (i) the acquisition and (ii) the share allotment?
Acquisition
Even though the Acquisition affects the interest of all the members, could it be argued that Nick was
unfairly prejudiced as the majority shareholder (i.e. Belinda) may obtain benefits via her Partnership’s
relationship with Sweet Bakery after the Acquisition?
Seeking damages for loss suffered by the Company in an unfair prejudice action could be an
abuse of process (Kung v Kou (or Re Chime Corp).
Any damages that Nick may be awarded under the unfair prejudice petition is subject to
reflective loss principle (Prudential Assurance v Newman Industries Ltd (No.2); Landune
International Ltd v Cheung Chung Leung). 20
QUESTION 3
(2) Unfair prejudice petition (s724 CO)
The allotment of a significant shares to the other shareholders to the
exclusion of Nick
What impact does the allotment have on Nick’s interests?
Nick was not offered to take up any shares and will, therefore, receive less dividends
and lose a significant say in the decision-making process at shareholders’ level.
What remedies can the court grant in an unfair prejudice petition?
Court has the power to make a wide range of orders under s725 CO (e.g. granting
damages, restraining the conduct, making a buy-out order etc.). 21
QUESTION 3
(3) Seeking declaratory order for change of name
Can Nick seek a declaratory order that the resolution to change the company’s name is invalid?
The majority shareholders’ right to vote may be subject to the limitation that it must
be exercised bona fide for the benefit of the company as a whole (subjective test),
where only the company’s interests are involved.
If this principle applies here, and if what Nick alleges regarding the company’s
goodwill is true, Nick may seek a declaratory order that the resolution is invalid.
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