LW4657/LW5657 Company Law II
A/Y 2022-23, Semester B
School of Law
City University of Hong Kong
Topic 2: Fundraising and Listing
Tutorials Questions
Week 4
4-1 Write down the statutory provisions pertaining to the exemptions below.
Exemptions 1:
Exclusions from the definition of ‘prospectus’ i.e. these offer
documents are not considered prospectuses (b) in definition of
‘’prospectus”+ Seventeenth Schedule
Small Offering
(≤ $5m)
Offers with min. consid.
(≥$0.5m)
Offers to no more than 50
persons
Professional investors
Qualifying persons
(ESOP)
Exemptions 2
Exemption from the prescribed requirements found in s. 38
Rights issue
Securities equiv. to currently listed
securities
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4-2 HP Bank marketed ‘Pixel notes’ under the exemption for debentures which are sold with
a minimum consideration of $500,000. Four months after purchasing the Pixel notes from HP
Bank, Loretta and Patrick are dissatisfied with their investment. They discover that the
disclosed information relating to the ‘Pixel notes’ were prepared under the accounting
standards of the British Virgin Islands; transactions with certain special purpose vehicles were
treated as off-balance sheet, and not accounted for in the same manner as under Hong Kong
accounting rules. There was no reconciliation of the disparate accounting treatment in the
information memorandum circulated to the investors in Pixel notes. They seek your advice
whether they have any rights to sue under the common law or under statute.
4-3 Pluto Ltd, an unlisted HK registered company, raised $800 million by an initial public
offer of its shares. Its prospectus states that uranium ore deposits have been found on circa
twenty square kilometres of land in Papua New Guinea (PNG) owned by the company.
Included in the prospectus is a report by Krakatoa Ltd, a company specialising in geological
surveys; the report states that the uranium ore found on Pluto Ltd’s land is up to several times
richer than average ores currently being extracted. Pluto Ltd sought more capital to exploit the
opportunities in PNG.
Three months after the completion of the IPO, the High Court in PNG delivered judgment
against Pluto Ltd in a lawsuit involving disputed title over 15 square kilometres of the land
where the uranium deposits are found. The lawsuit, which was on-going at the time of the IPO,
was not disclosed in the prospectus.
At the same time, an investigative report by the Asian Wall Street Journal cast doubt on the
accuracy of the experts’ report regarding the amount of uranium deposits.
As a result of these developments, the traded price of the shares fall to less than 20% of the
subscription price.
Yip obtained $50,000 worth of shares under the IPO. Upon learning of the developments, Yip
sold half the shares he acquired in the IPO at the market price.
Jiang was unsuccessful in applying for the shares in the IPO. However, he managed to acquire
$30,000 worth of shares at approximately the price offered in the IPO. His shares are now
worth only $6,000.
The HK Exchange has since suspended the trading in the shares of Pluto Ltd.
Yip and Jiang approach you to advise them on their rights.
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Week 5
5-1 Beauty Care Ltd (“BCL”) is a wholly-owned subsidiary of Wampow Ltd (“Wampow”).
In December 2014, BCL issued a further 3 billion shares to Wampow, which held 50 million
shares prior to the issue.
BCL manufactures and distributes skincare products for the Wampow group of companies. It
has been trading profitably for a number of years. Recently Wampow’s related companies in
Europe have unveiled a range of new products, and BCL proposes to do the same for the Asian
market in the near future.
BCL and Wampow wish to have BCL listed on the Hong Kong Stock Exchange; Wampow
intends to sell 49% of its shares in BCL to institutional investors and to the public.
They have approached your law firm for guidance and advice as it has a good reputation for
capital markets work. The senior partner has asked you to prepare a list of talking points for
the upcoming meeting with the clients.
5-2 Cement Ltd is a cement company listed on the Hong Kong Stock Exchange.
On 5 Jan, Wong, the managing director of Lampton (China) Ltd, a major construction company
operating on the mainland, contacted Poon, the managing director of Cement Ltd. Wong
wanted to explore whether Cement Ltd has the production capacity, transport facilities and cost
structure to make a competitive bid to supply a large portion of Lampton (China) Ltd’s cement
needs on a long term basis. Substantial negotiations followed over the next two weeks. Cement
Ltd’s problem is that while it has excess production capacity, it does not have adequate
transport arrangements for the mainland. After two weeks, the two managing directors
managed to reach agreement on the core terms of the deal: the price, tonnage, supply
arrangements and the key commercial terms. In-house lawyers for both parties have prepared
a draft agreement, which is now ready for review by external counsel on both sides. The draft
agreement contains a condition precedent that the transport arrangements must be reviewed to
the satisfaction of the Lampton (China) Ltd before the supply agreement is effective.
On 6 February, Kai, the business development manager of the division of Cement Ltd operating
in Sichuan Province, was brought in for questioning by the Public Security Bureau over
suspicions that the company has bribed local officials to secure land for its operations as well
as for supply deals with construction companies linked to these officials. The investigations
are on-going.
(a) Has any event triggered the disclosure obligation under Part XIVA of the Securities &
Futures Ordinance (Cap. 571)? Advise also on the possible consequences for failing to
comply with the disclosure obligation.
(b) Assume now that news of investigations in Sichuan has filtered into Hong Kong. The
investing community is abuzz with speculation over the matter. How should Cement
respond?
Professor Alexander Loke
January 2023
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