Principles of relevant Hong Kong Law & the Companies Ordinance

FINANCIAL LAW AND FINANCIAL LAW AND REGULATIONSREGULATIONS

WEEK 4

Principles of relevant Hong Kong Law & the Companies Ordinance

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The study of law is called Jurisprudence

The word is derived from the Latin language and is commonly accepted to mean the philosophy of law

In turn the word Philosophy originated from the Greek word for “Love of Wisdom”

It incorporates a critical and systematic approach to obtaining a deep understanding of a body of knowledge using logical argument and reasoning

What is Law?

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Sources of Law

Natural law theory: asserts that human rights derive from and are a part of nature itself

Consequently the role of government is to create / enact laws which correspond as closely as possible to these hidden laws using the power of reason

An unjust law, therefore, is no law at all because one cannot ignore important considerations such as moral philosophy, religion, human reasoning and conscience

Aristotle, Plato, Socrates…

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Sources of Law

Legal Positivism theory: means that the law is something that is “Posited” or, in other words, validly made in accordance with socially accepted rules

There is no connection between law and morality

Therefore, the source of law is entirely contained in the rules made by government bodies and the law courts

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Major Legal Systems

Common Law derived in England and is based on ancient customs and practice

It is created and refined by the interpretation of judges each time a case is heard

Court decisions become a part of the law through the creation of precedent

Prevalent in Anglo Saxon jurisdictions, UK, USA, Canada, Australia, New Zealand, Malaysia, Brunei, Singapore, Hong Kong

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Major Legal Systems

Code (Civil) Law attempts to exhaustively cover a complete system of laws through a process of codification of rules: 1,2,3,4,5,6,…..

Judges establish rules derived from those codes

Concept dates back to ancient Babylon, the Roman Empire and Tang Dynasty (624 AD) with modern origins in France, Germany and Switzerland

Japanese (German) code introduced by Qing Dynasty and later Republic of China. Still used in Taiwan

Used in Continental Europe, Japan, South Korea and Macau. Also Quebec in Canada and Louisiana in the USA

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Major Legal Systems

The Mainland uses a mixture of civil law and socialist law

Little development between 1954 and 1978 in the Mainland

Change of policy in 1979 after the end of Cultural Revolution led to significant developments albeit rather slowly and incrementally

Sometimes criticised for being incoherent with poor enforcement and weak courts and lack of judicial independence

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Major Legal Systems

Islamic Law (Sharia) is the world’s most widely used body of religious law

Sharia means the way or path to the water source. It is more a system rather than a set of laws

Current attempts to make London and Hong Kong global Islamic finance centres

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Hong Kong Legal System

Original sources prior to 1997:

Common Law based on its long usage and precedent

Law of Equity developed in England in the 14th century as subjects petitioned the King for justice unavailable at common law.

King delegated the petitions to the Chancellor (Church Official) who dispensed fair and just (equitable) remedies.

Examples are trusts, injunctions, specific performance, equitable rescission of contracts and rectification

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Hong Kong Legal System

Mercantile and Commercial Law which developed in Europe during the Middle Ages to support and promote trade between merchants

Evolved as a system of custom and best practice

It was very successful and was incorporated into various

national laws including England

Examples include the Sales of Goods Ordinance, the Bills of Exchange Ordinance, Bills of Lading, Airway Bills, Letters of Credit

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Hong Kong Legal System

Primary legislation refers to the laws passed by the HKSAR Chief Executive (formerly Governor) with the advice of the Legislative Council (Legco)

Subsidiary (delegated) legislation is made by a process of delegation by Legco to another body

The delegation takes places under an existing ordinance

Example – The Securities and Futures Commission (SFC) has extensive powers to make rules under the Securities and Futures Ordinance (SFO)

The Hong Kong judiciary is independent

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The Basic Law - HKSAR

1 July 1997 replaced the Letters Patent and the Royal Instructions

Acts as a form of mini-constitution. Domestic Mainland legislation based on the international Sino-British Joint Declaration of 1984

Mainland socialism would not be extended to Hong Kong

All existing laws (including clan law) would be maintained except any that would contravene the Basic Law

The right to private property ownership was confirmed

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System Divisions

Generally speaking law divides into two main branches:

Criminal law deals with serious offences which are deemed to offend against the public at large and which are punishable by fines and or imprisonment: i.e. murder, assault, theft, as defined by law,…

Civil law (not to be confused with code law systems) provides remedies for individuals or businesses that have suffered some wrong by the actions of another person or persons

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Criminal Law

Defines offences against the community at large

Defines how persons committing crimes may be investigated, charged, brought to trial (at a criminal court) and punished

Cases are brought by the State on behalf of the people

Because offenders are subject to punishment charges must be proven “beyond all reasonable doubt”. Innocent until proven guilty

Certain actions may also result in civil law claims

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Civil Law divides into several divisions

Civil law is not primarily designed to punish

Rather it is designed to provide a party with the opportunity to address a wrong against him or her at a Court of Law (civil division)

Actions are brought by individuals typically for damages, compensation or an equitable remedy

The standard of proof is much less stringent “on the balance of probabilities”. How would a reasonable man interpret the issue and decide? No question of guilt

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Contract Law

Agreement between two or more persons creating obligations which are recognised by and enforceable under the law

There must be an offer, an acceptance, consideration and the intention to create a legal relationship

An act or forbearance or the promise thereof is the price for which the promise of the other is bought and a promise thus given is legally enforceable

The sale and purchase of financial product creates contracts between the parties

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Law of Agency

Agency is a fiduciary relationship created by express or implied contract or by law

In which one party may act on behalf of another (the principal) and bind that principal as long the authority to act is not exceeded

The agent is said to be a fiduciary - a person who owes another person duties of good faith, trust, confidence, honesty and care

A principal is liable for the acts of his or her agent

An employee may act as agent for an employer

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Law of Tort A tort is a civil wrong of which there are many types

Trespass against the person – assault and battery

Trespass against property – unlawful entry – interference

Nuisance

Deception

Negligence

Misrepresentation

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Employment Law Employment Ordinance

Factories and Industrial Undertakings Ordinance

Employees’ Compensation Ordinance

Occupational Safety and Health Ordinance

Under common law, employers must provide an employee with remuneration, indemnity for expenses, losses and liabilities incurred while performing duties and a safe working environment

Under common law, employees must demonstrate skills and competence, faithful service, obedience and confidentiality

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Other Divisions of Law

Law of Property

Inheritance Law

Family Law

Administrative Law

Constitutional Law

Law of Evidence

Immigration Law

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Hong Kong Court System

The Court of Final Appeal (Privy Council before 1997)

The High Court – Court of Appeal – hears appeals in all civil and criminal cases arising from proceedings of the Court of First Instance

The High Court – Court of First Instance – unlimited jurisdiction in respect of all civil and criminal cases

The District Courts – hear more serious cases criminal cases (excluding murder, manslaughter and rape) and civil cases up to HKD1M

The Magistrates’ Courts – deal with the least serious criminal cases

Decisions of higher Courts bind the lower Courts

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Hong Kong Forums

Administrative tribunals are sometimes created by Government to speed up the legal process which can be slow through the Courts

Tribunals require less strict levels of proof, are less formal and faster

The SFO contains provisions to set up Market Misconduct Tribunals and Securities and Futures Appeals Tribunals

Arbitration is a private forum for resolving disputes in which a neutral third party is tasked with making a decision which becomes binding on the parties

Generally efficient but the element of privacy can lead to the public interest not been served

Company Ordinance

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Companies Ordinance(CO) A company is an artificial legal person created by an act of

law. It has the power to contract, sue and be sued and own property

It can commit crimes and torts

It exists separately from its members (owners - shareholders)

A limited company’s liability is unlimited but that of the members is limited

It has perpetual succession. It can live forever

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Company Types

A private company is one which:

Restricts the right to transfer shares

May not have more than 50 members

May not offer shares or debentures (loan stock) to the public

A public company is one that is not a private company

A listed company is one whose stocks and or debentures are admitted to listing on a stock exchange. Public company

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Constitution

As a company does not possess the human ability to think and act for itself it requires a remedy:

The Memorandum indicates the purpose for which a company was formed (objects clause) and regulates its relationship with external third parties

The Articles of Association regulate the internal relationships of the company. Table A model articles are often adopted

The constitution forms a contract between the company and members and between the members themselves

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Share Capital

Share capital represents the funds invested by the members (shareholders) and by consequence their ownership

Ordinary shares are entitled to participate in distributable profits – receive ordinary dividends

But only after payment of any preference dividends and loan interest

In a winding-up holders of ordinary shares are the last to receive any payout

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Share Capital

Preference shares entitle the holder to receive dividends at a specified rate in priority to ordinary shareholders

In a winding-up situation they have priority over ordinary shareholders on return of capital

Less risk than ordinary shares but participation in profits is lower

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Debentures

A debenture is a document issued by a company as evidence of a loan

Holder is entitled to receive a fixed rate of interest – creditor

May be issued for a fixed term or for perpetuity

The holders ranks before shareholders in receiving interest

Debentures may be secured on a fixed or floating charge or;

They may be unsecured

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Corporate Governance

Is a set of processes, customs, policies, laws and institutions affecting the way a company is directed, administered or controlled

It includes the relationships among the many stakeholders involved such as:

Shareholders, bondholders, directors, management, employees, customers, suppliers, regulatory authorities, public

How can accountability be achieved ?

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Meetings

Opportunity for members (shareholders) to participate in the affairs of the company

A company is required to hold an Annual General Meeting (AGM)

Business includes presentation and approval of annual account, declaration of dividends, election of directors and appointment of auditors

Members can question directors and auditors

Other meetings are called Extraordinary General Meetings (EGMs)

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Resolutions

A resolution is a formal way of making and recording decisions at meetings

In many cases they can be passed by circular without the need for the members to actually join a meeting

An ordinary resolution refers to one passed by a simple majority of votes (> 50%)

A special resolution is one passed by at least 75% of members and is used for more important matters

21 days notice must be given to members. Copy must be lodged with Company Registrar within 15 days of it being passed

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Powers of Shareholders

Shareholder powers are generally exercisable at meetings by the casting of votes. They can cover a number of issues such as:

Changes to the company’s articles and name

Changes to the company’s share capital and major assets

Variation of share class rights

Appointment and removal of directors and auditors

Company restructurings and winding-up (petitions and voluntary)

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Shareholder Protection

Sometimes shareholders need protection

Provisions exist in the CO

Variation of class rights – holders of at least 10% of class may petition (request) the court to have the action cancelled if it is against their interests

An individual member may also petition the court if the affairs of the company are being conducted in a manner prejudicial to the members generally

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Minority Protection

Court will generally not interfere in internal matters. The is the principle of majority power but it cannot be abused. The CO provides additionally certain safeguards for minorities:

Certain issues require a special resolution

Court sanction is required if a decision directly affects creditors

Members with 5% paid up (voting) capital may requisition a meeting if directors fail to do so

100 members or 10% of ordinary shareholders may ask the Financial Secretary to appoint an investigator into company’s affairs

A member my petition a court to wind up the company

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Further Protection

In addition a court may intervene to allow an individual member or members to bring an action:

To enforce some personal rights (a personal action)

To enforce the rights of a group (a class action)

To bring a derivative action when the wrongdoers are in control and it is not possible to bring an action in the company’s name

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Directors and Officers

The CO defines a director as including a person who occupies the position of director, by whatever name her or she is called

Every public company must have at least two directors

Every private company must have at least one director

The directors must be appointed by the members acting in general meeting

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Directors and Officers

A shadow director is a person in accordance with whose directions or instructions the directors or a majority of them are accustomed to act

This provision prevents persons from escaping responsibility / liability for acting as a director

Professional advisors are excluded

A company officer includes a director, manager or company secretary

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Qualifications of Directors

They must be at least 18 years of age

They must have any shareholdings as required by the articles of association (qualification shares)

They must not be undischarged bankrupts

They must not be disqualified by courts order: conviction for indictable (serious) offence, persistent default under the CO, fraud or fraudulent trading or found to be unfit during insolvency

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Powers of Directors

The general powers to manage the business are vested in the directors

Directors are not bound by member resolutions. They may override shareholders

Members can only intervene in the company management if:

Directors are unwilling to act, or seek approval to act beyond their powers or act in breach of their fiduciary duties

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Duties of Directors

Directors owe a fiduciary duty to the company. They must:

Act bona fide (in good faith) for the benefit of the company

Exercise their powers for their proper purpose

Not allow any conflict of interest between their duties as directors and their personal interests

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Duties of Directors

They must also act with skill and care (reasonable man test):

Must exercise the skill that can be reasonably expected from a person of their knowledge and experience

Are not required to give continuous attention to the affairs of the company

Are justified in relying on a company officer to whom proper delegation of some duties has been made

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Liabilities of Directors

In general directors may incur liabilities due to:

Breaches of fiduciary duties

Failure to act with due care and skill

Breaches of statutory duties (law)

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Company Remedies

In the event of a breach of duty by a director a company may:

Obtain a injunction to stop such action

Avoid a contract entered into on behalf of the company if the directors failed to disclose a personal interest

All directors in breach will be jointly and severally (separately) liable to the company for damages

They must account for any wrongful profit made by dealing with the company’s property

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Relief for Directors

The majority of members in general meeting may, after full disclosure of the material facts, ratify a breach of duty by directors

A court may give relief to directors if they have, in causing the breach, been shown to have acted honestly and reasonably

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Financial Arrangements

If a director has a significant (material) interest in a contract or proposed contract with the company he must disclose it at the earliest board meeting as is practical

Remuneration of directors is determined by the company at general meeting

Executive directors can have a service contract

A company cannot directly or indirectly make loans to directors

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Audits and Investigations

Investigations may be ordered by the Financial Secretary or the company may itself carry out a private investigation

The FS is required to appoint inspectors if a court declares that an investigation should be carried out and for other reasons

All present and past officers and agents of the company – bankers, solicitors and auditors have a duty to assist the inspector

A court can enforce the duty to assist

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Liquidations of Companies

A liquidation terminates the life of a company

Assets are sold off and the proceeds are distributed in accordance with law

Shareholders are only entitled to receive whatever remains once all other parties have been paid

A Liquidation may be compulsory or voluntary