Hong Kong Company Law Choi Ka Hei s00110302 Kailunglam s00110311
Context 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 • 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 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) 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 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 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 • 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 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
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 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
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: 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) • 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 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) 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 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.