It’s not a legal requirement, so why do lawyers insist you need a solid Shareholders’ Agreement?

Delphine Tse, Senior Associate at ELLALAN, gets straight to the point in this episode of our Let’s Chat Legal series of video podcasts.

Transcript:
“In this video, I am going to share with you the 3 main reasons to have a shareholder agreement as soon as you have more than one shareholder and even before your business commences operation.

This is the case even where the company has already had in place the Articles of Association – which is the document that outlines the constitution and governance of the company such as how a valid shareholders’ meeting should be convened.

The most compelling reason to have a Shareholder Agreement is that the articles of association are simply not good enough.

More often than not, founders adopt the model articles that are easily available, which in fact, may not be adequate in addressing a couple of issues that tend to attract problems down the road such as – not having provisions that restrict transfers of shares or not having provisions that address the issue of deadlock, in particular, where there is a 50/50 shareholding in the company.

A Shareholder Agreement would therefore be a more appropriate document to separately deal with these kinds of issues – and to provide mechanisms to resolve such disputes.

The second reason for having a Shareholder Agreement is confidentiality. This is because, the Shareholder Agreement is a private document and does not have to be filed with the company registry as opposed to the Articles and Associations, which can be viewed by anyone.

Finally – confidentiality and non-compete obligations must be imposed on the shareholders, especially on the investors. It is not uncommon for investors to have stakes in a couple of companies within the same industries.

To prevent these investors from sharing confidential information with your competitors, confidentiality and non-compete clauses are vital!

We regularly handle disputes where companies complain that certain shareholders/directors are diverting businesses or sharing confidential information for their own benefits, and these companies regret not having a Shareholder Agreement in place.

So, take home message – make sure you have a properly drafted shareholder agreement in place if there are more than one shareholders in your company.

If you have any questions about this topic, please do not hesitate to contact us. For more information about us, pls visit our firm’s website www.ellalan.com or follow us on Linkedln.

Thank you for watching and see you again in our next video.”

We’re often asked “is a non-compete clause enforceable?”
And the answer comes down to 5 key principles.

James Choi, Senior Associate at ELLALAN, gets straight to the point in this episode of Let’s Chat Legal, a Zegal series of video podcasts.

Transcript:

“In this video, I am going to talk to you about the enforceability of non-compete clauses in Hong Kong.

A non-compete clause is commonly used to restrain a party from competing with a business during and after the termination of a contractual relationship.

Non-compete clauses can be commonly found in employment agreements, distributorship agreements or business purchase agreements.

The main rationale of a non-compete clause is to protect the business’ legitimate interest, such as business connections and trade secrets, from being harmed by parties that have worked closely with the business, such as senior employees or key business partners.

The common question we get from client is that “is a non-compete clause enforceable”?

The short answer is yes,

PROVIDED THAT the clause is reasonably and clearly drafted.

So, what makes a non-compete clause reasonable?

To answer this, we have to consider 5 factors:

1. The business must be able to show REAL risk that the other party can do significant harm to the business.Therefore, it is more likely that a non-compete clause is enforceable against a senior employee or key business partner, as opposed to a junior staff or minority investor;

2. It is important to consider the length of the restrained period, it is important that the restrained period does not impose an over burdensome restriction on the relevant party;
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3. The scope of restrained activities:
   It is important that the scope is specific, such as not joining a direct competitor, or not selling a specific type of product, and it must not be unreasonably wide;
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4. The restrained territory:
   It can be a district like central, or a 500 metres radius of a store, or even the whole of Hong Kong;
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5. Whether the party is adequately compensated for the imposed restrictions.
   While compensation is not compulsory, usually, the bigger the compensation, the more it justifies a wider restriction.

All in all, there is no hard and fast rule when judging on the reasonableness of a non-compete clause.

The rule of thumb is that there must be a balance between the risk and damage that the business may suffer if the party joins a competing practise, AND the hardship that the party may suffer from the restriction.

Of course, if you are in doubt, always seek independent legal advice.

Lastly, in addition to non-compete clause, it is also common for businesses to add other clauses to protect their interest, such as:

• a Non-Solicitation Clause to prevent the party from poaching your staffs or clients; and
• a Confidentiality Clause to prevent the party from disclosing or using your business’ trade secrets and confidential information.

If you have any questions about this topic, please do not hesitate to contact us.

For more information about us, please visit our firm’s website www.ellalan.com or follow us on Linkedln.

Thank you for watching and see you again in our next video.”