Hong Kong Company
Law
Choi Ka Hei s00110302
Kailunglam s00110311
Context
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the rights of pre-emption and impact on a
minority shareholder.
the benefits and problems associated with
raising capital with debenture and share
Background of pre-emption right
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Does not exist in Companies Ordinance
Provided in Table A
Fits the requirement of Companies Ordinance S29 (1)(a), which said
private company have to “restricts the right to transfer its shares”
Pre-emption right
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Any member who wish to sell their shares must first offer them for sales to
the existing members of the company
Prohibits the transfer of shares to a non-member, as long as a member willing to
buy is found at a fair price to be determined in the memorandum of association
Provide a company’s shareholders with protection from wealth transfer and
erosion of control.
Governs the relationship between shareholders of record
Lyle and Scott Ltd v Scott’s Trustee (1959)
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It was held that the shareholders who
wish to accept a outside offers had to be
complied to the pre-emption clause first
Waiver Mechanism
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May include in the pre-emption rights
Shareholders have no wish to assume the
shares of a transferor and do not object of
the proposed transferee.
Typical pre-emption mechanism
1.
2.
3.
4.
5.
A written notice detailing the shares sale and the price
Notify all members
Offers taken by director and shares sold transferred to
the offerors
Circulate details to shareholders of other class if any
shares left
Seek no-member as potential purchaser if shares
remained unwanted
Impact on minority shareholders
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They can’t sell their shares to outside investor to
generate more profit back from investment
Majority shareholder bargaining power increase
Question 3 Raising capital by
debenture
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Borrowing from long-term finance
Benefits:
Control of the company will not surrender, because the debenture
holder don’t have any voting right.
The interest of debenture is tax-deductive
Debenture can be redeemed when company has surplus fund
Don’t need to create a vast number of small nomination debentures
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Problems:
Common people can’t buy debentures, the market is small
Debenture holder will demand a higher rate of return
Creditors less inclined to deal with funding sourced primarily from third
parties
Failure to pay debts may trigger winding up
Raising capital by ordinary share
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the issue of share to new investors
Benefits:
The company don’t need to be publicly registered in order to issue
shares
It can attract more investor in a larger market if it’s publicly
registered
The fund generated can be kept indefinitely
No payment on the fund is required except dividend payment
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Problems:
The dividend payment is not tax-deductive
The control of the company could surrender as shareholder has
voting right
The more shareholder control, the less profit made to owners
If it’s public company, it must meet certain legal standard upon
registration
Share issued at premium:
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The shares are issued at premium when shares are issued at an
amount more than face value of the shares
If shares are issued at premium, it usually means they have good
income generating capacity and reputation in the market.
The general public are willing to offer more than par value to
purchase the shares..
It’s a capital profit and will show credit balance, liability side in
statement of financial position.
Henry Head & Co. Ltd v. Ropner
Holdings (1952)
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Confirmed that the law required the shares to be
recorded at their fair value, and a share premium
account to then be created in which the excess of fair
value over nominal value would be accrued
Issue at discount on shares
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The company cannot issue shares below their nominal value when
shareholder has no liability to pay the differences. Exception is allowed
under Companies Ordinance s.50 in the following condition:
resolution passed in GM, authorized by High Court
The company is entitled to commence business at least one year earlier
Share must be issued within one month after court approval
The 46(2) of the Companies Ordinance prohibits the payment of discounts
out of shares and capital fund.
Ooregum Gold Mining Co of India v
Roper (1892)
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It was held that it was beyond the power
of the company to issue shares at discount
Holder were liable to pay the full nominal
amount of the share
Issue discount on debenture
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Provided that the issue is not a device to issue share at discount by
converting debentures to shares.
The Companies Ordinance s.80(8): Amount of discount must be included in
the particulars of the registered when a company secured a charge to
secure the issue of debentures; in the statement of financial position.
Reference
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http://www.gov.hk/files/file13422.pdf