John and Kevin have been good friends since high school. On graduation, John and Kevin decide to establish their own business. They set up a company, known as Genius Limited, to develop mobile apps for corporate customers. It is a private company limited by shares. There is pre-emptive right in the articles of association.
John holds 70% of the shares in the company and Kelvin holds the remaining 30% of the shares.
One year has passed. The business is successful, but Kelvin plans to change job. He gets an offer from an international social network company. If he accepts the offer, he will be required to quit Genius Limited and sell his shares in it. Hence, he intends to sell his shares in Genius Limited to his friend, David, for HK$700,000 in order to realise his investment.
John, however, does not want to share the business with a stranger. If the shares will be sold, he wishes that his brother Leo buy them.
However, as a fresh graduate, Leo cannot afford to buy Kelvin’s shares in Genius Limited. Hence, John proposes that Kelvin sells the shares to John himself first. Genius Limited will pay Kelvin HK$700,000 first. Later when John is entitled to dividends from Genius Limited as a shareholder, he will use the dividends as a setoff against the sum of HK$700,000. At that time he will transfer the 30% shares to Leo free of charge.
Please answer the following questions:
a. Genius Limited is a private company limited by shares. What is the difference between a private company limited by shares and a public company? (6 marks)
b. John proposes that Genius Limited pay Kelvin HK$700,000 first. In what circumstances will John’s proposal be considered illegal if it is carried out? (25 marks)
c. What is the meaning of ‘pre-emptive right’ mentioned in the question above? Both John and David want to get Kelvin’s shares. John argues that in view of the dispute, he should get the shares because he is the majority shareholder. Do you think John should have a prior right over David? (12 marks)
d. Do you think Kelvin can sell his shares to David even though John objects? What document will you read before you answer this question? (7 marks)
Question 2 (50 marks)
Franklin and George are partners in the business of property redevelopment. They operate their business through F&G Limited, a company incorporated in Hong Kong. As a result of the property boom in recent years, F&G has been making huge profits. As the business is capital-intensive, F&G has reserved a large proportion of its profits as capital reserve for future redevelopment. Nevertheless, due to a recent economic downturn, F&G is finding it increasingly difficult to maintain its business. Franklin intends to reduce the capital for reparation to the shareholders.
Answer the following questions
a. George asks whether repurchase of a company’s own shares is against the law. Please answer his question with reference to the relevant legislation and explain to him the reason behind the legislation. (25 marks)
b. Advise George by outlining the procedures if F&G wants to reduce its capital. (25 marks)