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When would the Court interfere with the proceedings of a company’s general meetings?

2019-12-01

Introduction

A Court is generally slow to interfere with the operation of any companies unless there are reasons for it to do so. In WHC Limited t/a Wine High Club & Ors v Hong Kong Wine Chamber of Commerce Limited & Anor (unreported, HCMP758/2019, 24 October 2019), a group of members argued that the annual general meeting (“AGM”) was conducted in an irregular way, and therefore resorted to the Court for invalidation of the resolutions passed in the AGM. While having maintained its stance of low interference, the Court also made certain remarks and directions to facilitate smooth operations of companies.


Factual background

The affairs of a limited by guarantee company (the “Company”), the 1st Defendant of the present case, are managed by its Executive Committee, and all of them are elected at the AGM of the Company. At the meeting of the Executive Committee on 14 January 2019, it was resolved, among other things, that the AGM would be held on 18 February 2019, during which a new Executive Committee would be elected and that a Sub-Committee was set up to prepare for the AGM. The Sub-Committee resolved in its meeting on 30 January 2019 that new membership of the Company would be open for application from 14 January 2019  to 11 February 2019. During the said period, a total of 77 new membership applications plus subscription fees had been received. The names of the new members were entered into the Register of Members on 11 February 2019.

On 18 February 2019, a group of members (the Plaintiffs”) determined the members who were eligible for voting at the AGM based on the voting rights report provided by the accountants and the proxy report made by the solicitors. On the other hand, the chairman of the AGM, Mr Ho, adopted a different list of members as he disagreed with the list by the Plaintiffs. Mr Ho’s list contained persons allegedly not eligible to vote and excluded persons who were allegedly eligible to vote. The disagreement between the lists resulted in 30 persons who were in personal attendance at the AGM, together with 86 attending by proxy, to leave the AGM in protest before the resolutions were passed.

The Plaintiffs argued that Mr Ho used his powers unreasonably and unlawfully by adopting an inaccurate list of members and challenged the validity of resolutions relating to the appointment of 15 new members as passed in the AGM. Contrarily, Mr Ho argued that the 77 new members entered into the Register of Members after the last Executive Committee meeting on 14 January 2019 could not have been approved by the Executive Committee as required by the Articles of Association, and therefore they were not eligible to vote at the AGM.


Analysis of the dispute

Chairman’s exercise of power at a general meeting

Under the Common Law, the Chairman of the general meeting must exercise his power reasonably with a view to facilitate the purpose for which the power exists, and in this case, to facilitate voting such that the will of the majority members who are eligible to vote and who voted, would be readily ascertained. A chairman’s decision made in bad faith would be declared invalid if, on the facts which he knew or ought to have known, he failed to take into account all the relevant factors, took into account irrelevant factors, or reached a conclusion which no reasonable chairman, properly directing himself as to his duties, could have reached.

In the present case, the Plaintiffs challenged that (i) Mr Ho’s decision to use his own list of members at the AGM was made in bad faith; and (ii) but for Mr Ho’s unreasonable insistence on using his own list, certain eligible members would have voted instead of leaving the AGM, which might or would likely have changed the outcome. These arguments were however rejected by the Court for the following reasons:

In respect of (i), the Court held that while Mr Ho’s list may contain members who are not eligible to vote, the Members did not put forward that any member who voted was not eligible to do so when the vote was taken. It is possible that members who were not eligible to vote had attended the AGM but did not vote. The Court further found that the list as adopted by the Plaintiffs was inaccurate. If that list was used at the AGM, there would be eligible members who would have been disenfranchised. Therefore, the Court did not accept that Mr Ho’s use of a different list amounted to bad faith.

In respect of (ii), the Court held that it is open to any member to be present or absent for all or part of any AGM, and to choose to vote or not to vote on any resolution put to the AGM. Each of the members who left and thus failed to vote must be taken to have chosen to have left and chosen not to have voted. Therefore, it cannot realistically be said that Mr Ho made any member leave the AGM without having the chance to vote.

Who is a member of the Company?

The establishment of membership of a company is derived from section 112 of the Companies Ordinance (Cap. 622) which provides that any person who agrees to become a member of a company and whose name is entered, as a member, in the company’s register of members is a member of the company. In the absence of a proper and reliable register of members, the burden is on the applicant to satisfy the Court that the requirements for admission as a member under the articles are complied with. The Court will take into account primary facts established by direct evidence as well as facts supported by such inference as it considers might properly be drawn.

In the present case, according to Articles 7 and 8 of the Articles of Association of the Company, a person who applies for membership of the Company shall (i) make the application in writing to the Executive Committee, which is a group of members who manage the affairs of the Company; and (ii) pay an admission fee. However, a practice developed whereby applications for new membership were not formally considered and approved but simply noted by the Executive Committee in the meetings. Furthermore, there was a mismatch between the minutes and agenda of the Executive Committee meetings and the Register of Members.

The Court held that since the developed practice did not comply with the Articles of Association, it is difficult to draw a legitimate distinction between prior members and new members. Also, the Court opined that strict compliance with the Articles of Association is required. Furthermore, given that the existing members of the Company have been admitted as members, they can hardly complain about being prejudiced by the procedure by which they were admitted as members. Therefore, the Court found that the exclusion of new members as suggested by Mr Ho was unreasonable and the matter justified the Court’s interference.


Conclusion

In light of the above, the Court set aside the result of the Executive Committee election at the AGM and directed a new general meeting to be called within the next 60 days. The Court also directed that the Company should start from now ensure that any future members will be admitted only in strict accordance with the terms of the Articles of Association, and draw a line between existing members admitted under the previous practice and new members. The Company was ordered to make it clear to its members and potential new members how membership admission will be conducted and elect the Executive Committee by reference to a clear membership and voting eligibility.

The decision of the case reinforced the principle that the Court would interfere with the operation of a company only when there are justifiable reasons and on a limited basis. Members of a company should consider joining together in promoting the overall objects by way of consensus, which on occasions will require compromise, before going to the Court.




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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.

Published by ONC Lawyers © 2019


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