Discussing Inherent Powers of General Meeting and Jurisdiction of Share-holders Agreement with discussion on Directors and their types after Hong Kong Company Formation

We shall discuss here the powers; general meetings have and what they can play against abuse of power on the part of director(s). After that we would like to through some light on powers; shareholders have along with definition of the director(s) in company setup in Hong Kong and their categorisation with respect of appointment and function. However, here we will be explaining about appointment one, while the second type will be discussed in coming articles.

Powers and Jurisdiction of General Meeting

General meeting has the power to ratify any defective step board of directors took, any act of directors that is counted as violation of their powers and jurisdiction, any negligence on the part of directors owed to their fiduciary duties to the company setup in Hong Kong. All these powers and what others, that is awarded to general meeting through company’s articles, can be exercised through the ordinary resolution.

Irvine’s case presented of the situation, where directors were found to be involved in exercise, beyond their allocated powers as per the company’s articles. Through this mal-practice they obtained loan from the Union Bank of Australia which were found to be the violation of Reg.50 of company’s article, this regulation limits the director’s power to borrow but not the company’s power to borrow. Privy council held in this case that: This act could have been ratified with the consent of, majority of the general meeting.

Cotton LJ in Grant’s case held that: ratification of any power to the director, which has not been authorised to be exercised by the director, will be considered as Alteration of articles. While, in case ratification is done to approve the contract, director has went in, will not be an Alteration of article. For the former, special resolution is required, while for the latter, ordinary resolution can serve the purpose.

Company (general meeting) is authorised to ratify any act of the director, which is found to be breach of duties on his or her part. For instance, if the director’s power to allot shares is exercised in violation of his fiduciary duties owed to the company, company can mark this transaction void, provided share were not issued upon voting.

Buckley J communicated in Hogg’s case that: members would have no right to complain if approval of general meeting was sought before exercising of power by the directors.

Directors and allottees questioned basis on which general meeting ratified allotment as the abuse of power, their basis were:

  • Company has the power to issue capital.
  • As other limitations are imposed on exercise of power, same limitation applies to director’s power of allotment.
  • Inherent power of the company related to issuance of capital, does not have any limitation.
  • General Meeting can permit to exercise company’s inherent power, where such exercise should be subjected to ordinary resolution.
  •  Company cannot dictate directors regarding exercising their power via Ordinary resolution.
  • General meeting’s ratification of allotment power is effective where board exercised this power as abuse.

Powers and Limitations of the Shareholders

There is the principle called Duomatic Principle, which bounds company to the unanimous consent of the shareholders. Buckley J held in Re Horsley:

“Company is bound by a matter which intra vires the company through unanimous consent of its members.” Following are the doctrinal basis as per the identification of Grantham:

  • Waiver Theory: This theory says that, if shareholders meet together and agreed on cure of procedural irregularity within the company, they can validate company’s operations.
  • Equitable Estoppel Theory: As per this theory asserting member is prevented from asserting invalidity.
  • Lifting of Corporate Veil: this theory considers unanimous decision of members as the act of company rather than regarding that specific act to be of company’s organ.

These theories are being explained below:

Equitable Estoppel Theory:

This theory does not determine the circumstances where this theory be applied in legal proceedings. Practices provided for the circumstances where this theory was applied to prevent the party which is not even asserting. Estoppel theory is believed to be uncertain on part of determination of proper scope of doctrine of unanimous consent of members. There is the need to establish that where all members are wiling to dispense with the requirement of the meeting and use their voting rights. There law should also protect their right of unanimous decision rather than going after the thing, which serves no useful purpose in the scenario.

Waiver Theory:

Waiver theory is particularly understood on the ground that, it is to provide waiver to the procedural irregularities. Apart from this, waiver theory tends to deal with the situations where substantive requirements for the meetings are to be waived. In the episode of members unanimous act corporate organs (directors and general meeting) to entitled to dispense with the need of resolution.

It is the matter of discussion that which theory be correct in rationalising the doctrine of unanimous consent? General view reports of taking waiver theory for the issues related to division of power between board and general meeting, while for Lifting of corporate veil be reserved to be used in the circumstances where members acted beyond their jurisdiction, towards the matters which were reserved to be taken in account by the board.

No case law is reported pursuant to the waiver and equitable estoppel theory, however lifting of corporate veil has some judicial support, as evident in Rolled Steel Products Ltd, Slade J held that:

“If any act is ratified by the unanimous consent of the member and is of corporate nature, then as per general principle, it will be a binding”.

Ipp J in Poliwka held that:

The absolute authority to bound the company is solely the one mentioned in company’s article, if the constitution allows members to have such power, then they may exercise this power.

After business registration Hong Kong, the court of first instance during the prosecution of case, ratified shareholders unanimous consent to issue shares to the existing member, whereas generally such power is vested to the board of directors.

Concept of a Director

As per the Black’s Law dictionary:

“Director is the person who is elected or appointed to bear the office of director to run and manage company’s affairs by exercising control over its officers”. However, this definition is found to be narrow, as Companies Ordinance and Common Law for business registration Hong Kong has the provision to call person a direction even if he or she neither elected nor appointed.

Types of directors with respect to appointment

This section will discuss the types of director(s) with appointment perspective for post Hong Kong company incorporation activities such as de-facto, de-jure and shadow directors, what are their credentials and what distinction do they have from each other.

De-jure Directors:

Those directors who are either appointed or elected to bear the office of director are categorised as De-jure directors.

As per the Section 2 of Cap.622 for Hong Kong company incorporation:

“Director is the person who occupies the position of director, by whatever name.”. This definition widens the definition of director and introduces to the director who are not appointed or elected to become eligible for this position.

De-facto­ Directors:

As the earlier stated definition under Section 2, “A person can still be a director, if he or she neither been elected nor been appointed, all such directors will be called as De-facto directors”.

Proceedings of Re Paycheck Services 3 Ltd entails credentials for the de-facto­ director where court agreed to the definition formulated by Millet J, he defines de facto director as:

“A person who assumes to be the director, is a de facto director. He or she claims and endorse himself as a director even if he is not been appointed nor elected. Examination of the circumstances is mandatory as to assess, do really he or she performs such a function which could only be performed by a director and he or she is not undertaking the functions or duties which could have been performed by a below managerial level person or employee, after affirmation of these credentials only then he or she can be regarded as de facto director(s)”.

Lord Collins put forward some tests to ascertain, a person to be de-facto director:

  • Subjected person is the only director, or they are others persons acting as director? The role of subjected person is equivalent or excessive than the other directors?
  • Does the company hold subjected person as its director and does he or she used this title?
  • Ascertaining all above circumstances, does the subjected person govern the corporate structure of the company?

The matter is of immense importance to make sure that person meets the above-mentioned criteria and satisfies the credentials to bear the office of director. There is also a major factor to consider that, subjected person must have a role in top-management’s decisions and outsiders perceives him or her as of company’s director. Having satisfied all these credentials, only then a subjected person could be regarded as de-facto director.

Circumstances in Deputy commissioner of taxation’s case reported, after resigning from the office, de-facto director was still carrying out duties as of a director such as dealing and negotiating with the creditors on behalf of company thus in capacity, Madgwick J held him to be liable for the unfair preference given to Australian taxation department.

Question arose that whether de-facto director can act as a ­de-jure director or vice versa? Lord Hope answered this in negative affirmation by saying that distinction must be maintained between the one who is appointed or elected and the one who hasn’t.

Shadow Director:

Classic definition regards, a person is a shadow director, if upon his or her instructions director or majority of directors act. Millet J in Re Hydrodan ltd provided the conditions to be met by the person, who is to be the shadow director:

  • Person instructed or directed other directors.
  • The directors acted upon on his or her directions.
  • The directors who were given the directions were, de-facto or de-jure directors.
  • They were familiar with their binding on to act upon instruction of shadow director.

Shadow directors are generally considered as puppet master, as what they direct or instruct, de-jure or de-facto directors are bound to act upon their instruction. This is the reason they are found to be different from de-jure and de-facto directors however overlap in their functions is expected. It is mandatory to have influence of shadow director on the company’s director be depicted over the period of time, not as influence over the company in single situation. This terminology is for the person who has influence over the company’s corporate affairs not necessarily in every matter.

Possibility exists where the parent company can be treated as the shadow director of its subsidiary or the child company and has the authority to direct, directors of its subsidiary and subsequently directors of the subsidiary are bound to or voluntarily accepts the directive role of parent’s director over their corporate affairs. One such example is the case of Standard Chartered Bank of Australia where parent company X holds 45% shares of child company Y. Justice Hodgson considered X to be the shadow director of Y. X imposed reporting requirements on the Y, controlled board of directors of Y, played a decisive role in settlement of matters and transactions of Y. Y’s board of directors simply acted upon the directions of the X and accepted the role of X in decision making process of Y.

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