Hong Kong Company Directors' and Shareholders' Rights and Obligations

Rights and Obligations of Shareholders

Rights of shareholders:

1. They are entitled to dividend payment of the company when profits are made.

2. If the company is closed (i.e. wound up), they are entitled to the surplus of assets of the company after all the debts incurred by the company have been paid off.

Obligations of shareholders:

1. They subscribe to the shares of a company to ensure that the company can have a capital to run the business. As long as the shares are fully paid, that is the end of the shareholders' obligation to the company. However, if the shares are only partly paid at the time it was subscribed, the shareholders would have the liability to pay the balance when the company calls the shareholders to pay, or when the company is wound up.

2. They may have personal liability. A company must have at least two shareholders. If a company carries on business without having at least two shareholders and does so for more than six months, a person who is a shareholder of the company and knows that it is carrying on business with only one member is liable to pay the debts of the company incurred from the expiry of that 6 months period. The liability is joint and several with the company.

Rights and Obligations of Directors

Rights of Directors:

1. They are the management personnel of a company. The law gives directors freedom to exercise the powers given to them in accordance with the Articles of Association of the company.

Obligations of Directors:

1. They are responsible for the daily operation and management of the company.

2. The power to manage the company is granted to the directors as fiduciaries. The word "Fiduciary" refers to trust and honesty. They must act in the interests of the company and they must exercise their powers for the purpose for which they were given. For example, a director must not enter into a position which imposes conflicting duties to another person. Further, a director cannot make private profit from his position as director unless with the approval of the company.

3. If directors of a company are negligent in the conduct of the affairs of the company, then they will be liable to the company for the damage caused by their negligence.

4. There are provisions in the Companies Ordinance which place onerous duties on the directors. For example, if, when a company is wound up, it appears that its business has been carried on with intent to defraud creditors or others the court may decide that the persons (usually the directors) who were knowingly parties to the fraud shall be personally responsible for debts and other liabilities of the company.

5. If, when a company is wound up, it appears that any person has taken part in a company's formation or promotion, or any past or present officer (including directors), liquidator or receiver has misapplied, retained, become liable or accountable for any money or property of the company or he is guilty of any misfeasance or breach of duty in relation to the company the court may compel him to pay or restore the money or property to the company or to contribute to the assets by way of compensation.

In practice, for a small business, the shareholders will also act as the directors of the company. Nevertheless, there may be one or two shareholders who prefer to make investment but not actively involved in the management of the company. This is possible for a private limited company, as these shareholders' liability and therefore their risk in the company is only limited to their investment amount.

Relationship between Shareholders and Directors

It is true that the general powers of managing a company are usually vested in the board of directors. The directors may exercise all powers of the company not required by the ordinance or the articles to be exercised by the company in general meeting. If the directors act within the powers given to them by the articles of association. They are not bound to follow resolutions passed by the shareholders in general meeting.

However the shareholders can control the exercise of the powers vested by the articles in the directors by alteration of articles, removal of directors, or refusing to re-elect the directors concerned. For certain events, the approval of the shareholders in general meeting is required :

• Alteration of the company's memorandum and articles of association

• Alteration of the company's capital, e.g. increase or reduce the company's capital

• Appointment and removal of the auditors

• Removal of directors

• Payment to directors for loss of office and retirement

• Winding up

The approval will be given in the form of a resolution at the shareholders general meeting. There are three kinds of resolution :

Ordinary resolution - the proposed resolution is accepted by a simple majority (i.e. more than 50%) of those members present and entitled to vote at the general meeting. A period of not less than 14 days' notice has to be given to each member before the meeting. For example, an ordinary resolution is required for the increase of capital of the company.

Special resolution - the proposed resolution is accepted by not less than 75% of those members present and entitled to vote at the general meeting. A period of not less than 21 days' notice has to be given to each member before the meeting. For example, a special resolution is required for alteration of the company's Memorandum and Articles of Association.

Written resolution - the proposed resolution is approved and signed by all the members of the company. Such a written resolution will be regarded as a resolution duly passed at a general meeting and, where appropriate, as a special resolution.

For further information, please contact us or send email to info@bycpa.com.