We have recently successfully resisted an application for setting aside an allotment of company shares of a family asset-holding vehicle (the “Company”) in HCMP 1408/2024.
By way of case background, upon the father’s direction and unanimous approval of surviving shareholders of the Company, shares were allotted to a family member as a new shareholder. One of the existing shareholders retracted his position 3 years after the event, accusing that the allotment was without consideration and against the Company's interests and hence liable to be set aside for it was an exercise of the Company’s powers for an improper purpose.
The Judgment, delivered by Deputy High Court Judge Gary C C Lam, contains a multifaceted analysis on the prevailing law of allotment of shares under the Companies Ordinance (Cap. 622) (“CO”) and the Articles of Association of the company (the “Articles”), particularly in a family context. For practitioners’ easy reference, the following is a nutshell summary of how each legal proposition is analyzed and rejected.
Allotment at a discount prohibited?
1. As the Judge put it, after CO has abolished the nominal or par value attached to shares, there cannot be any discount as such because there is no longer any reference value for considering whether or not an allotment is at a discount.
2. The Judge also rejected the Plaintiff’s submission that section 147 of the CO prohibits allotment at a discount generally.
3. Further, section 170 of CO allows bonus shares to be allotted with or without increasing share capital.
Bonus shares for existing shareholders only?
4. The Plaintiff alleged that bonus shares can only be allotted to existing shareholders. However, the Judge noted that there is nothing in CO which supports this proposition. Rather, bonus shares are frequently issued to employees who are not necessarily existing shareholders.
5. The Plaintiff then tried to rely on section 280 of CO which allegedly deals with bonus shares to employees. This was again rejected, as section 280 is an exemption from prohibition of financial assistance, while section 277(b) states that the prohibition does not apply to the allotment of bonus shares.
6. The Plaintiff also attempted to rely on various provisions in the Articles. Upon a detailed review, none of the provisions take effect to alter the position that the allotment of shares at nil considerable is permissible so long as all existing shareholders and directors agree.
Resolutions Binding
7. The starting point is that the Plaintiff, as both director and shareholder of the Company, signed the relevant resolutions approving the allotment. This is reinforced by contemporaneously recorded conversations.
8. When a person signs a document purporting to have legal effect, he is held to the document even not knowing the contents and terms, and is estopped from denying his approval of the resolutions.
9. The Plaintiff accused that the late father i.e. one of the then existing shareholders and directors was mentally incapable of signing the resolutions. This was rejected as the evidence relied on by the Plaintiff could bring the Plaintiff nowhere in discharging his evidential burden.
10. The Plaintiff also accused that the resolutions were invalid as one of the existing shareholders i.e. the mother had passed away. As the evidence unveils, all the beneficiaries of the mother’s estate assented to the resolutions, hence the Duomatic principle applies. Alternatively, the irregularity principle applies as the surviving shareholders who gave approval accounted for 75% of the shareholding.
Nil Consideration = Improper?
11. As peripheral arguments, the Plaintiff tried to invalidate the resolutions saying it was approved after the allotment of shares, and without a physical meeting.
12. These bring the Plaintiff to his last key allegation, that is, the allotment of shares at nil consideration would be to destroy the pre-existing shareholding proportions by making our client the majority shareholder, hence for an improper purpose.
13. In a family context, the best interest of the Company is determined by the family. In this regard, the Judge finds our client’s evidence overwhelming, that the late Father had the final say and all existing shareholders consented to the allotment. Even in a pure commercial context, if all shareholders agree to have their shareholdings altered, the Court would not invalidate the resolution.
As illustrated above, this is a classic situation where the retracting shareholder desperately exhausted all possible excuses, which are held unsustainable.
We assisted our client and witnesses to put forward evidence spanning decades on how decisions were made within the family and the Company, how the allotment was in line with the family's interests especially the intent of the late father. Leveraging from our experience in shareholder and board disputes in both commercial and family contexts, we also worked closely with Counsel team in formulating legal submissions against the Plaintiff's legal propositions. These efforts bear fruit as the Judge dismissed the application and rejected all legal and factual arguments raised by the Plaintiff. The father’s wish was upheld; the family’s decision remained intact.
This case was led by our Senior Partner Mr. Peter Sit, assisted by Partner Mr. Mathew Liu, Senior Associate Ms. Theresa Law and Associate Ms. Shirley Yu.
Please refer to the full judgment at https://legalref.judiciary.hk/lrs/common/search/search_result_detail_frame.jsp?DIS=168899&QS=%2B&TP=JU.
