Introduction
It is not uncommon for the articles of association of private companies to impose different hurdles on transfer of their shares. In the recent case of Kwong Siu Kuen v Joris (International) Limited and others, HCMP2420/2012 (judgment dated 22 April 2013), the court was invited to rule on the board of directors’ right to refuse registration of a transfer of shares for such transfer did not comply with the pre-emption right provisions stated in the articles of association of the company.

Background
There were four shareholders in Joris (International) Limited (“Joris”), a private company, until in July 2007 when the Applicant’s husband (“Deceased”), now passed away, who transferred his shareholding to Mr. Yu King Yeung, the 2nd Respondent in this current application (“Mr. Yu”), to hold the same on trust for the Deceased.

The Deceased passed away in August 2007. Letters of Administration were granted to the Applicant in June 2008 by which she became the sole administratrix of the estate of the Deceased. In September 2010, Mr. Yu executed an instrument of transfer to transfer the shares so held on trust (“Trust Shares”) to the Applicant. In February 2011, the Applicant lodged the transfer with Joris and  it refused to register the transfer in December 2011.

The Pre-emption Clause
Articles 25 of the articles of association of Joris (“Articles”) requires every member of the company proposing to transfer any shares of Joris to give written notice to Joris expressing such intention to transfer (“Transfer Notice”), which should also specify the terms of the intended transfer. Upon being served with such Transfer Notice, Joris would have twenty-eight days to locate an existing member of it who is willing to purchase those shares. If any existing member is willing to purchase those shares at a fair market value then they would be given a pre-emption right to purchase the same.

Submissions

Respondents’ Submission
The Respondents’ submission was simple. They contend that the Applicant by instructing Mr. Yu to transfer the Trust Shares to herself did not make any Transfer Notice, was in breach of the Pre-emption Clause, and hence the board of directors should rightfully be entitled to refuse registration of such transfer.

Applicant’s Submission
The Applicant relied upon the English case of Safeguard Industrial Investments Ltd v National Westminster Bank Ltd & Anr [1982] 1 WLR 589 to make a distinction between voluntary transfers and involuntary transfers. The Applicant’s counsel submitted that, in the current case the transfer from Mr. Yu as a trustee to the Applicant as (the administratrix of) a beneficiary is an involuntary one because Mr. Yu was duty bound under the trust arrangement to do so. The Applicant submitted that the effect of Article 25 should only apply to voluntary transfers and not be extended to involuntary transfers.

Decision
The Court first pointed out that the terms of Article 25 are clear and a transfer of shares from a trustee to a beneficiary of the trust is caught by this provision. It then disposed of the Applicant’s argument very quickly. The Court commented that the distinction between voluntary and involuntary transfers in the Safeguard Industrial case was only made because the articles of association in concern was drafted in a particular way that only impose the restriction on voluntary transfers. Although the Safeguard Industrial case and the current case both concern pre-emption clauses, they are drafted in a completely different way that interpretation of the former should not be directly applicable in the latter. As the Articles did not provide for such requirement of voluntariness, the Court ruled that the transfer of the Trust Shares is caught by Article 25.

Further Discussions
The Court after disposing the Applicant’s argument took the opportunity to comment on the restrictions on transfers of shares as provided in the Articles. The Court noted that concerning a transfer of Joris’s shares there are two restrictions, the first one being the pre-emption right clause as contained in Article 25, and the second one being the board of directors’ unfettered discretion to refuse registration of shares as contained in Article 22.

Company’s Right to Refuse to Register Transfer
The articles of association of a company is usually with a clause to empower its board of directors with a discretion to refuse registration of transfer (see also Article 24 of the Table A standard Articles as contained in the First Scheduled to the Companies Ordinance, Cap.32). Although there is requirement that this discretion must be exercised bona fide for the benefit of the company, this remains the discretion of the board of directors.

Uplifting the Company’s Right of Refusal to Register Transfer
That said, the Court also noted that the abovementioned right of Joris to refuse to register the transfer was uplifted in this case by way of Article 24. Article 24 states that “…in the case of a deceased shareholder the Directors shall have no right to refuse the registration of a transfer to a person or persons entitled under the will or intestacy of the deceased”. However, the Court ruled that this provision only removes the effect of Article 22 regarding the right to refuse registration of a transfer, but does not remove the pre-emption right pursuant to Article 25. In the circumstances the transfer would still be caught by the Pre-emption Clause.

Conclusion
The Kwong Siu Kuen case is only an illustration on how the articles of association of a private company can impose restrictions on transfer of the company’s shares. Before a transfer is made, shareholders should always check if there is any pre-emption clause in the company’s articles, and whether the board would exercise its discretion to refuse to register the transfer. These clauses on one hand may be effective tools of private companies to screen out undesirable outsiders, but on the other hand may be hurdles that an insider needs to get over before realizing his shares.

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.