Directors Dispute | Board Control

board control

Directors Dispute
Fight for Board Control

We have received an increasing number of enquiries in relation to unauthorized applications of company’s assets and disputes among shareholders.  One of the many tactics used by a party to try to get an edge is to gain control over the board of directors of the company.  As with all corporate actions, procedures and steps should be followed.  The High Court of Hong Kong in Lohas Holding Ltd v Registrar of Companies [2022] HKCFI 3358 reiterated that proper procedures should be followed and “irregularity principle” can only be used to cure procedural defect.

Background

This case involves Notice of Change of Company Secretary and Director (Appointment/Cessation) (Form ND2A) filed with Hong Kong Companies Registry (“CR”) in respect of the appointment of a director of Lohas Holding Limited (the “Company”).

It was contended that at a general meeting of the shareholders of the Company, the shareholders discussed the proposed appointment (the “Proposed Appointment”) of an individual to serve as a director (the “Proposed Director”) of the Company.  Subsequently, a Notice of Change of Company Secretary and Director (Appointment/Cessation) (Form ND2A) was filed by the Proposed Director with the Hong Kong Companies Registry stating the appointment of the Proposed Director (the “Director Filed ND2A”).  Shortly afterwards, the Company filed an amended Notice of Change of Company Secretary and Director (Appointment/Cessation) (Form ND2A) with the Companies Registry (the “Company Filed ND2A”) stating that the information contained in the Director Filed ND2A was incorrect.

The Company made an application under section 42 of the Companies Ordinance to the High Court of Hong Kong for an order to remove or rectify the Director Filed ND2A.  On the other hand, the Proposed Director sought an order to remove or rectify the Company Filed ND2A.  Subject to, among others, sections 42(1) and 42(4) of the Companies Ordinance, the Court may by order direct the Registrar of Companies to rectify any information on the Companies Register or to remove any information from it if the information is invalid or ineffective; without the company’s authority; or the information is factually inaccurate or derives from anything that is factually inaccurate or forged.

The Proposed Director contended that (i) an acknowledgement letter was circulated to the shareholders of the Company stating, among others, the shareholders resolved the appointment of the Proposed Director at the general meeting; (ii) draft minutes of the general meeting were circulated to the shareholders which stated, among others, the shareholders resolved the appointment of the Proposed Director; and (iii) an audio recording of the general meeting which shown that the Proposed Appointment was as part of the discussion in relation to the resignation and appointment of other individuals as directors of the Company.

In addition, the Proposed Director submitted that the ‘irregularity principle’ would be applicable to cure the defect in the Proposed Appointment.

The Court, however, held that the evidence submitted by the Proposed Director was not sufficient to prove that there were discussions or votes taken place in relation to the Proposed Appointment at the general meeting.  Moreover, the ‘irregularity principle’ would not be applicable as the Proposed Appointment was not a mere procedural irregularity but a substantive defect as no valid notice of the general meeting in relation to the Proposed Appointment was given to the shareholders of the Company; and a majority of the shareholders of the Company indicated that they would not support a resolution to the Proposed Appointment.

The Court further held that the information contained in the Director Filed ND2A was incorrect, and the continued existence of the Director Filed ND2A would confuse third parties dealing with the Company and cause material damage to the Company.  Accordingly, the Court held that the Director Filed ND2A be removed from the Companies Registry.  The Court further held that the Company Filed ND2A be also removed from the Companies Registry as the purpose of the form was to inform the public of the dispute over the Proposed Appointment; and it would no longer be necessary following the removal of the Director Filed ND2A.

Observations

Proper steps and procedures should be observed and followed before initiating any corporate actions.  Even an absence of a valid notice could render substantive defect to a simple corporate action.

For more information, please contact the authors of this update:

Alfred Leung, partner (alfredleung@hkytl.com)

Eunice Leung, trainee solicitor (euniceleung@hkytl.com)