When Can Directors Refuse To Register Share Transfers?

06/02/2020

by Padraig Walsh at Tanner DeWitt

The board of directors must approve the transfer of shares in a Hong Kong company. What if the board of directors refuses to approve? Can that decision be challenged? 

Pádraig Walsh from the Corporate Commercial practice group of Tanner De Witt reviews some of the guiding principles.

The key principles are:

  1. The board of directors is entitled to refuse to register a transfer of shares. The directors must exercise that right for the best interests of the company.
  2. If the board of directors decides to refuse, then the board must send a notice of refusal to both the transferor and transferee within two months after the transfer is lodged with the company. The transferor or transferee may request a statement of reasons for the refusal. Then, the board must provide a statement of reasons within 28 days, or approve that the transfer be registered within that period.
  3. A company’s Articles of Association may also contain other provisions in respect of the board’s rights and procedures for registration of share transfers.

The common grounds for challenging a board of directors’ decision to refuse to register are either on a procedural ground, or by alleging the board of directors did not act for a proper corporate purpose or in the best interests of the company. The transferor or transferee is able to challenge the board’s decision by filing an application to Court. The Court may order the company to register the transfer if it is satisfied that the application is well-founded.

There has been a series of interesting cases in Hong Kong testing the basis on which the Courts will support refusal to register on the basis of allegations in respect of the conduct or character of the transferee. Generally, the Court has been reluctant to interfere with the directors’ exercise of discretion, and the applicant would bear the burden of proving that the board’s decision is not in good faith. However, a registration may be set aside if the directors are fraudulently induced to register a transfer by concealment of a material fact or material misrepresentation.

Here are some brief summaries to give you a flavour of the cases:

Hero Rich International Ltd v Benefun International Holdings Ltd & Ors [2010] 2 HKC 231: The directors refused to register the transfer mainly based on a third party allegation of deception and impropriety in respect of how the transferor acquired the transferred shares in the first place. The Court allowed the transferor’s application and ordered the company to register the transfer of shares. The board of directors did not provide sufficient evidence to support the allegations of deception and impropriety. A complaint by a third party without further evidence or support did not provide a basis for the company to stop the transferor selling the shares.

Cheng Chien Kuo v New Resources Holdings Ltd [2017] HKCU 1558: The directors refused to register the transfer of shares because of public allegations and reports in respect of the transferee’s bad character and other reasons. The board’s reasons of refusal included that the transferee and his nominee were suspected to be connected with criminal activity in Taiwan and the transfer involved issues of usury. The transferee challenged the board’s decision by saying that the board was not bona fide and that the reasons provided were not genuine. The Court found the transferee didn’t substantiate its claim of bad faith on part of the board, but there were reports in the public domain in respect of the transferee’s reputation. The Court did not reverse the directors’ decision, and the share transfer was not registered.

Re Redford International Ltd [2016] 2 HKLRD 27: The directors of the company refused to sign any resolution to approve the registration of the transfer. No notice of refusal to register the transfer was given. Here, the Court ordered registration of the transfer. The right to refuse to register a transfer must be actively exercised by a resolution of the board. Refusal will not be implied from silence or failure to act. So, there was no valid refusal by the board to register the transfer of shares.

Ngan Kwing Sun v Top Well Industrial Ltd [2019] HKCFI 3096: The directors claimed that transferor didn’t have beneficial ownership of the shares. The decision of the directors to refuse to register the share transfer was defective as there was not the required minimum number of directors present. The Court found that the Articles required the company to treat the registered owner of any shares as the absolute owner; beneficial ownership was not a concern of the company. Also, the decision of the directors was invalid. So, the Court ordered registration of the transfer.

Our key recommendations to directors who are considering to refuse registration of a share transfer are:

  1. Follow the procedural requirements for the meeting of the board of directors to approve that decision, notifying the refusal and (if required) explaining the reasons.
  2. Do not take a decision to refuse to register a share transfer unless the directors have considered carefully the reasons for the refusal, and have sufficient information and evidence to support that the decision is in the best interests of the company.
  3. Be prepared to be challenged!

This article does not constitute legal advice.

The opinions expressed in the column above represent the author’s own.

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Padraig Walsh is a Partner at Tanner DeWitt specialising in Corporate & Commercial, Financial Services Regulation, Notarial Services. Thank you for reading. Find out more about what I do here

 

 

This article is provided for general information only. It does not contain legal advice, is not intended to provide legal advice, and none of its content should be relied upon as legal advice. You should not act or refrain from acting on any content in this article without seeking appropriate legal or other professional advice on your particular circumstances.

 

READ MORE: Are You Infringing on Hong Kong’s PDPO?

 

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