Principles of relevant Hong Kong Law & the Companies Ordinance
Transcript of 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