Reference no: EM131696451

Company Law - Hong Kong use common law system

David, who is an accountant, was asked to set up Hong Kong Ltd. (HKL) for manufacturing healthy foods and drinks business. Two weeks later, David purchased a factory for $8 million in his own name. David then prepared all the documents required for incorporation and sent to the Companies Registry. One day before HKML's certificate of incorporation was issued, David sold the factory to HKL for $14 million, which was $6 million above the market price of the factory.

HKL was finally incorporated on 7 Jan 2016. HKL has adopted a modified Model Articles (Appendix A). There were 5 shareholders in HKL, including, Eddie, Frankie, Ginna, Henry and Ian. Each of them owns 20% of HKL's issued shares. There were 3 directors in HKL, Alex, Benny and Calvin. Alex, who holds a master degree in corporate governance, is also the managing director of the company. Alex and Benny are David's younger brothers and they always follow David's instructions. After the sale, David asked his brothers, Alex and Benny, to ratify the sale in a board of directors' meeting while Calvin was abroad. Calvin did not know about the meeting as Alex and Benny did not serve any notice to call the board of directors' meeting. They simply ratified the sale in an informal meeting when they were having dinner with their family members, including David.

The business of HKL has not been very successful since its incorporation. Even worse, it was found that there were some restricted chemicals in HKL's healthy foods. Many customers, including Jenny, felt sick after eating HKL's healthy foods, and would like to sue HKL's shareholders and directors. Eddie found that HKL bought infected raw materials for their healthy foods from Herbs Ltd. at a much higher price than the market price. Eddie also found that Alex, Frankie, Ginna, Henry and Ian are the five directors and shareholders of Herbs Ltd.

Feeling increasing competition in the food industry, Alex decided to set up a fitness centre in Causeway Bay in order to run some aerobics courses. For that purpose, Alex signed a lease with Hong Kong Property Ltd. for 10 years (Appendix B). Alex also contracted with some aerobics trainers in order to run those aerobic courses.

Eddie is very unhappy with the above incidents and would like to discuss the issue with other shareholders in the first annual general meeting of the company (AGM). The notice for the AGM was posted on the website of the company at 9:00am on 2nd October 2017 (Monday) and also sent to all shareholders on the same day by registered post (Appendix C). However, due to a mistake of Lily, the company secretary of the company, the notice to Ian was wrongly typed and did not reach Ian.

As Henry was not available to attend the meeting, he appointed his wife, Katie, to attend the meeting on his behalf. The company received the proxy form for the appointment at 5:00 pm on 27th October 2017 (Friday).

On 30th October 2017 (Monday), in a meeting which Alex, Eddie, Ginna and Katie attended, Eddie complained about the above incidents and proposed to sue Alex for breach of directors' duties. Alex, Ginna and Kaite just ignored Eddie and passed an ordinary resolution to ratify Alex's alleged breach of director's duties. After the meeting, Alex immediately allotted 1 million shares to himself in order to dilute Eddie's shareholding to less than 5%.

After the meeting, Eddie decided to sell all his shares to his best friend, Jayden. However, Alex claimed that existing members should have pre-emption right and refused to approve the transfer without giving any reason.

Advise Eddie as to any legal issue that might arise in all of the above incidents.

Attachment:- Appendix.rar