LAWS0009 Foundations of Company Law

(26 July 2023 is reserved for class make-up in case there is any cancellation of classes due to bad weather or other unexpected factors.)

Associate Professor
Faculty of Law
The Chinese University of Hong Kong

The following topics will be the focus on Companies and the Law I.

Introduction business association forms

Sole proprietors (traders), partnerships and limited partnerships. Companies: the nature of the company and types of companies. The advantages of incorporation: partnerships and companies contrasted.

The Company as independent entity

The role of the Companies Registry and the registration process. The articles of association: the objects clause and the ultra vires doctrine. Abolition of the ultra vires doctrine. Limited liability and piercing the corporate veil. The articles of association. Its function and contractual effect. What the articles mean for the nature of company law. Strategic drafting of the articles. Altering the memorandum and articles.

Contracts with the company, pre-incorporation and post-incorporation

Pre-incorporation contracts between promoters and third parties. When is the company bound by a contract entered into before it exists? The effect of the former ultra vires doctrine on contracts. General agency principles and company law. Actual authority and ostensible authority. Indoor management rule and the constructive notice doctrine. Effect of restrictions in the articles and the constructive notice doctrine.

The board of directors and management

The powers of directors. Appointment and removal of directors. Shadow directors. Directors’ remuneration. Executive and non­executive directors. Disqualification of directors.

Directors’ duties of care and fiduciary duty

The common law duty to exercise reasonable care, skill and diligence. Two levels: company and director related elements. Business judgment and risk taking. Remedies for breach of the duty of care. Members’ ratification. Disqualification of directors. The common law fiduciary duty of a director to act bona fide in the best interests of the company, to exercise power for a proper purpose, to avoid conflicts of interest, not to profit from the office, and not to take corporate opportunities. Conflicts of interest. Remedies for breach of directors’ duties. Members’ ratification of breach. Disqualification of directors.

Shareholders’ derivative actions

At common law: the rule in Foss v Harbottle and its exceptions. The no reflective loss principle. Difficulties with the common law actions. The statutory derivative action: scope, proper plaintiff, leave requirement, and ratification. Co-existence of the statutory and common law derivative actions. The interrelationship between the unfair prejudice remedy and the derivative action Unfair prejudice and just and equitable winding up.

• Incorporate a company,
• Understand company constitutional documents,
• Advise directors on how to represent the company in contractual dealings,
• Finance a company by allotting shares,
• Advise directors and officers regarding their duty of care and fiduciary duty,
• Advise shareholders on how to sue directors for breach of such duties.

Lo, Stefan & Qu, Charles, Law of Companies in Hong Kong (Sweet & Maxell, 3rd ed. 2018).

Vanessa Stott, Hong Kong Company Law (Pearson, 14th ed. 2015).

Additional reference texts:

Brewer, John, The Law and Practice of Hong Kong Private Companies (Sweet & Maxwell, 3rd ed. 2017).

Butterw011hs HK Company Law Handbook (Lexisnexis Butterworths 20th ed. 2018). Cheang, Low Siew & Wong, William, Company Law Powers and Accountability (LexisNexis Butterworths, 3rd ed. 2018).

Cheung, Rita, Company Law and Shareholders’ Rights (LexisNexis Butterworths 2010).

Davies, Paul, Gower and Davies Principles of Modern Company Law ( I 0th ed. Sweet & Maxwell, 2016).