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Question 1
Business in Hong Kong on Private Limited Company basis is one of the best choices one can make. It is possible that Kingston would benefit most by having a Limited Company in Hong Kong than he would regret. However, there are both advantages and disadvantages of doing that just as much as there are those associated with non-Hong Kong Company. All these are discussed in the sections below together with other aspects of this paper.
A. Advise to Kingston
i. Advantages of a Limited Company in Hong Kong
1. Limited Liability
When the company is a Private Limited Company, the shareholders have no liability over outstanding debts of the company especially form their personal assets. The limited liability factor makes the Shares Company the best in this case because the shareholders will have secured personal assets. In the event that the company runs into debts, all the personal assets are secured and cannot be used to settle the debts meaning that each share is safe. As an individual, it is important to note that you are at liberty to remove all your shares from the company and go and you would not be liable for any debts accruing in the company (Cooper & Burrell, 1988). As a foreign investor, that could be a good starting point because it will help you understand the Hong Kong business environment first as you invest in shares.
2. Shareholders are protected
The limited liability concept that is mentioned in the first point ensures that all the shareholders are adequately protected. The financial liabilities that the company has will only affect the shareholders to a particular level and that only means that the investors or the shareholders can invest with confidence. Therefore, when you choose this kind of company, you will have investors who can confidently invest without the fear that their shares will be lost along the company if it runs bankrupt. Every shareholder wants to invest where they know that their investment is safe. For the reason, the advantage that this point comes with to them is overwhelming and would encourage them to keep investing, thereby will help the company to grow.
3. Easier to raise capital
As an investor in a foreign country or location, it is important to have funds. The share company comes with the advantage of ease of raising funds. You will have the capacity and possibility of issuing shares to new investors who can provide the funds that you will need to do business in Hong Kong. The capacity for the company to raise its own funds is in the ability to attract investors within a short period of time. The investors will have confidence to buy the shares because of the protection that they are assured of, meaning that they can easily offer funds.
4. There is an easier transfer of ownership and perpetual succession
This is an important advantage for the company. In case of an eventuality where you either die or are unable to run the company, it will still exist and run on its own because the transfer or succession is easy. It is easy to sell the shares and even transfer them to another name in case there is that need as compared to sole proprietorships or partnerships.
5. Attractive tax regime
Taxes are very critical in business. It is important that you find out what tax regime exists in the country or locality where you want to do business. The HK tax policy is one that favours Share Companies because the tax is only pegged on profits that the business makes during the operations in Hong Kong. This means that the company will be safe in case there are other profits that it can make outside Hong Kong.
6. Fast incorporation process
The registration and setting up of such a company takes a short period of time. As compared to other companies, the private limited company only needs some hours to be incorporated and that also means that it is cheaper compared to its counterparts. The advantage that this comes with is in the cost and time and there are no complex processes that could eventually tire you in the process of incorporation.
7. Business name protection
Such a company enjoys the advantage of the protection of its business name. Any company that is registered after your company would not have an identical name as yours and this protects the company identity and activities. Business can ride on other company’s names especially because of the brand the former has created on the market.
8. Credibility
Run the business independent of the parent company in Spain for own contracts, property, etc; confidential information of the parent company including financial information doesn’t need to be disclosed.
It is advisable that you win the trust of your customers when you are in business. A private limited company gives you the credibility that you badly need, especially as a foreign investor, than if you were to run a partnership or a proprietorship. It would therefore be advisable to go for a private limited company in Hong Kong because of the advantages it comes with.
The Disadvantages of Private Limited Companies
1. Annual audit
However, this is a requirement for all companies in Hong Kong and therefore means that it is something you will be doing just like all other investors or companies. Depending on how big or small the company will be, you can do simplified accounts for auditing.
2. Public information
It is not possible to keep your identity private. T is a requirement that the directors and shareholders of your companies must be known and the Company Registry makes these details publicly available. Anyone who wants to find out about your company and its shareholders can have access to this information (Huxley & Bradshaw, 2013). The main disadvantage is that there are some shareholders who will not want that kind of publicity and that means they will not invest in your company. However, indirect shareholders are kept private and their identities and not reported to the Companies Registry. This is where the caveat is.
ii. Registering a Non. Hong Kong Company
A non-Hong Kong company that establishes a place of business in the Hong Kong SAR is required to be registered within one month of establishing that place of business. As a result, there is the need to understand the Hong Kong business environment and the laws that are regulating the environment before choosing to ho for this company.
You will be required to make application to the Companies Registry for the registration and accompany that with the constitution of the company. In case the company only has a charter, it would be required in the place of its constitution. Other important documents that would be required in case you choose this kind of company include the certificate of incorporation in the jurisdiction that the company was registered.
The advantages of this type of company include the following:
i. There will be an attractive tax regime
The company will not be liable to pay tax as local companies because it is originally registered in other jurisdictions other than Hong Kong. There is the advantage of being exempted from particular taxes and that can allow the company to grow without the worries of a bad tax regime.
ii. The workforce is available and highly productive
The company will have the advantage of available workforce. The fact that it is non-Hong Kong makes it attractive to the workforce, especially where it has better incentives than the local companies. This also means that the working conditions for the workforce are favourable.
iii. Stability in business
Hong Kong is generally a politically and economically city. However, having companies registered elsewhere else come and operate in the city means that they also enjoy the stability of the city and its social network and welfare. The business will enjoy the environment in HK without having the trouble to ensure that the company must be local based.
However, the disadvantages of this business include the following:
i. Close monitoring which means that there is no confidentiality and cannot independently own contracts
Non-HK companies are closely monitored because of the regulations in HK. It is important to indicate that this monitoring can sometimes scare investors aware, which could only mean that the company will not have the shareholders it requires to keep operating in HK.
ii. There are strict regulations on financial accounts
It is extremely difficult to open a bank account with a local bank when the business itself is not locally registered. Non-Hong Kong companies find it difficult to be cleared for business at the bank account opening level and it would be important to ensure that you understand all the requirements. Traditional banks do not easily approve accounts that are run by companies whose origins are not local. There are several requirements that the company directors and other executives are required to give and that only means wastage of time.
iii. High cost of living
Hong Kong is a generally expensive city. As a result, it could be expensive running a non-HK company because the standards of living would affect the company’s cost of operation. Starting with the employee incentives, the company might find the HK environment a little too expensive compared to the one it is used to.
iv. Slow adoption of technology in Hong Kong
Here, it is important to know that HK does not quickly adopt to technology as compared to other cities like New York or even Spain. If the company that you want to establish is mainly a tech company or largely depends on technology to operate, it would disadvantage you to note that HK does not quickly adopt to technology (Corbett, 1994).
iii. PQR Limited Company
A PQR Limited company comes with its advantages and disadvantages. The following are some of the advantages that such a company would have in case you choose to acquire it in Hong Kong:
i. Readily available business structures
Acquiring a company that is ready made and which is already in business means that you are taking over all its business structures and all that it had initially. As a result, you will not go through the trouble of establishing new structures because the company will have a system that is both working and has been in operation.
ii. A ready workforce
The company workforce is important. Every business requires employees who have the understanding of its culture and the social and even economic background. As a foreigner, you will need this understanding since the locals will have a better understanding of their cultures and how to respond to certain issues in the event they occur.
iii. It is easier to create economies of scale
Due to the set environment, such a company would be easy for you to have it change its ways of doing business. The costs of operation can be readjusted based on the business realities and as a new acquirer you have the capacity to adjust operations.
iv. Easy to broaden audience
The company market is not only tied in Hong Kong. It can also enjoy the Spanish market where you come on board with a host of other customer who may not necessarily be in HK. What this advantage brings is a wider market for the company.
However, the disadvantages of such a move will include the following:
i. The company runs the risk of being redundant
When you acquire a company that was initially troubled, it means that you are inheriting all its problems. If you do not find other ways of solving the problems, you would still become redundant just like the former owners.
ii. Clash of organisational cultures and values
As you acquire the company, note that you are bringing newer organisational cultures and values. These may be different form the ones already established and that could create a conflict in the company.
iii. Increase of the debt loadfrom Florence’s firm
Acquiring a ready company could lead to an increased debt load. This is both at a company level and at an investor or individual level. Note that you may need to find other funds to pay for the acquisition and that could be on top of the current debts that you have.
B. Global Fashions Holdings and The Companies Ordinance Cap. 622
It is highly unadvisable to use Global Fashions Holdings as the new name for PQR. Florence suggests the name because it is a name associated with the Global Fashions Group of companies, but that is against the regulations stipulated in the Companies Ordinance Cap. 622. The name is similar to an already existing company and goes against the regulations. Global Fashions Holdings was originally registered in 2015 and it is also dealing in women’s apparel. According to the Companies Ordinance as concerns names of companies, a company shall not registered under a name:
• which is the same as a name appearing in the Registrar’s index of company names;
• which is the same as that of a body corporate incorporated or established under an Ordinance;
• The use of which by the company would, in the opinion of the Chief Executive, constitute a criminal offence; or is offensive or otherwise contrary to the public interest.
The above indicate that Global Fashion Holdings would not be a suitable name and would not be accepted into the Companies Registry.
Question 2
a. Notifiable and Connected transactions
Part (a) – Transaction 1
Assets ratio = (900-60) X 40% / (6,600-250) X 100%
=336/6,350
=5.3%
Profits ratio = (334+66) X 40% / (709.75 + 140.25) X 100%
= 18.8%
Revenue ratio = 600 X 40% / 1,100 X 100%
= 240/1,100 X 100%
= 22%
Consideration ratio = 280 + 132/2,000 X 1.2
= 412/2,400 X 100%
= 17.16%
Equity capital ratio = 110/2,000 X 100%
= 5.5%
Conclusion: It is disclosable transaction and not a connected transaction. It is only required to make announcement to shareholders. No shareholder approval is required for the transaction. Therefore, it provides very little shareholder protection.
Transactiontwo has 11% as the assets ratio, 35.29% for profits ratio, 38.18% revenue ration, 22% or 20.85% consideration ratio. The equity capital ratio does not apply for this transaction. Therefore, this is a major transaction and not a connected transaction.
Notifiable transactions are those that, by virtue of their sizes, need particular disclosure to specific shareholders or their approval. In view of the two transactions that Canton entered into, it can be argued that they were notifiable transactions. While Canton has a financial advantage over bother MILAN and Rosedale, it is also true that there is a clear indication of vested interest. The 10% equity interest that the secretary holds is indicative of the need to notify the shareholders at Canton of the acquisition and sell that the company makes. The two agreements have an element of shrewdness and that means that there would be difficulty transacting openly. However, a closer consideration of the first transaction with Mayer indicates that Canton has both the equity edge and the independent acquisition edge.
The transaction between Canton and Mayer is worth HK$400,000,000. This amount is huge for a company that operates on profits that are less than 1 billion HK$ or with assets that are not more than HK$ 1 billion. However, Canton has well over 5 billion HK$. The notifiable transactions are those that would raise the interest of other people or other shareholders in the company. A transaction that is in the tune of 400,000,000 million Hong Kong Dollars is a big transaction and that would require the approval of the company directors or other stakeholders/shareholders.
However, the transaction with Rosedale is classified as a connected transaction because it is from a bigger company to a smaller company doing the sale. The amount of 300,000,000 Hong Kong Dollars which are coming to the account of Canton would not need the approval of the company shareholders at Canton. Besides, Rosedale is an independent party and it has the ability to buy the equities without notifying anyone or any other player. The independence that Rosedale has, which is similar to that which Mayer has, allows it to transact without consultation. However, in the case of Mayer, the consultation or approval is on the part of Canton since it is acquiring and not selling an equity.
b. Protection to shareholders
Shareholders have protection based on the transactions of the company. However, only Mayer and Rosedale are private and independent. That means that the shareholders in these companies are protected against any liabilities should their individual companies run into debts. The Rosedale transaction has the company acquiring equities from Canton, which means the company is spending on the transaction. The shareholders would be protected in the event the transaction leads to liabilities for the company. However, the total sales for each equity is expected to lead to profits for each shareholder and that means that they would share in the profits more than they would in the loss as a result of the transaction. On the other hand, the shareholders of Canton are not protected against the effects of the transactions. If the agreements lead to loss of money in terms of shares, each shareholder would be liable for the transaction. This is especially because the transaction was notifiable and they had to approve the acquisition. Once there is the notifiable aspect in the transaction, the shareholder protection is reduced and they have to be liable for the results of the transaction.
Canton’s audited financial statements for the year ended 31 March 2020 include, amongst other things, the group’s total assets of HK$5,000,000,000, a group turnover of HK$1,200,000,000, a group profit after taxation of HK$840,000,000, group taxation of HK$160,000,000, and a proposed dividend of HK$500,000,000. Canton’s issued share capital is HK$1,000,000,000 (i.e. 1,000,000,000 shares of HK$1.00 each). The average closing price of the Canton’s shares (i) before 20 September 2020 was HK$2.00 per share; (ii) before 10 October 2020 was HK$3.00 per share. The information herein indicates that Canton has more shareholders than its counterparts in both transactions. However, the value of each share indicates that the shareholders are not expressly protected since the company is not a private limited company. All the stakeholders in the company have the responsibility of accounting for the transactions since they are the direct beneficiaries or losers in the transactions (Huxley & Bradshaw, 2007). This is as opposed to the two independent companies which have no accounting authorities since they are independent parties. The independence could be understood to mean private limitation. The shareholders in both transactions have the benefit while in one type they risk liability thus protection is not fully assured. It is only on the private companies that their protection is assured, which is why they can buy equities worth 300,000,000 Hong Kong Dollars without having to worry about the repercussions.
Question 3
a. Candidates for appointment
The company has the liberty to appoint individuals to the executive and non-executive positions in the board. However, it is noted that there are candidates who are eligible for appointment while others are not. Here is the details of the individuals and their suitability or lack thereof.
i. Executive Directors
This position means that the individuals will have extra power over particular issues of the company. Executive directors are expected to offer express direction and whose decisions cannot be overruled.

Johnny Liunqualified due to the following reasons:
In order to ensure that there is equity and non-partisanship in the company, it would be unadvisable to select Johnny Li as an executive director. Li is the cousin of the director, Susan. This relation to the director disqualifies Mr. Li into the board of executive directors because it would amount to nepotism and conflict of interest. It makes the director compromised on some important issues since the executive director’s family affiliation would always be pointed as a key issue during board meetings. Besides, note that the company is a public company and not a private limited company (Rosen, 2018). As a public company, appointing relatives as executive directors would amount to conflicts within the company and that is something that would compromise the chances of the company to be listed as it intends to in about six months. Mr. Li is therefore not suitable to be an executive director in the company.

Rainbow Ng is a qualified individual due to the following reasons:
The 15 years of experience in retailing and the current occupation as a businessperson qualify him as an executive director. Rainbow has no established or mentioned affiliation or prior interest in the company and that means that his mind would be independent on important issues. As an executive director, there is the need to ensure that he has an independent mind so as to guide the company appropriately. The experience in retailing would place Rainbow at an advantage on matters retailing and his background in business also would provide the insights required for the running of the company. There is also the question of his integrity which has not been questioned, therefore, making him the best fit for appointment.

Marcus Chan has all the qualifications of a good executive director. However, it is important to note that a company should not carry unnecessary weight. Mr. Chan comes to the board with baggage that would slow down the company progress and even risk its reputation. With a 20 year experience, Mr. Chan is the most experienced of the three candidates and would offer valuable support to the company. However, he has a court scenario that places his integrity on the line. The fact that he received a court disqualification order just months ago means that there is something questionable in the way he does his work (Semler, 2009). They are these questions that the company does not want to start answering on his behalf, because they will come once he has been appointed into the said office. Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32). A court order (i.e. disqualification order) may be made under certain circumstances to disqualify a person from serving as a director for a specified period (ss. 168D – 168H).
ii. Independent Non-Executive Directors
The names of individuals who the company is considering to appoint as INEDs have little or no conflict attached to them. However, it is important to note that one major issue with this list is that it fails the gender balance requirement. It is even worse when one notices that there is only one female in both categories, the executive and non-executive categories. While it is important to consider the expertise of the individuals, it would not be true to assume that only men are experts in the said fields and therefore stand a higher chance as compared to women. The list of INEDs needs to be redone to have a female. In recommendation, there is no need of recycling Lawrence Lee who was once an executive director. While there is no specific regulation that bars him, it would only be fair to replace him with a female who has the capacity to play the same role as that which Mr. Lee would have played. Further, Denise Chan and Andy Law have an interest in the company since their law firm currently offers legal services. It would create a conflict of interest if they are selected into the said office (Willmott, 2013). It is however not particularly clear if Denise is female or male because that would change the scenario on the grounds of gender. Betty Kwok is however qualified because she has the expertise and is appointed on the ground of gender representation.
b. Roles and Functions of INEDs in a Hong Kong Listed Company
According to Rules 3.10 and 3.10A of Listing Rules, at least one of the INEDS must have professional qualifications, accounting or related financial management expertise and they have to represent at least a third of the Board of Directors (BOD). Key attributes needed include an independent perspective and they areapplied to special committee like remuneration and nomination.
INEDs are tasked with the role of offering independent judgement on issues that the board tackles. It is therefore important for the INEDs to attend board so as to examine and advice of strategy and execution which the company may not have an independent eye on. Issues of performance, resource allocation and distribution and important company appointments need the express direction of the INEDs especially in the event that a conflict of interest arises. The INED therefore have to be independent and without and direct association with company transactions, including not being an employee of the company whether on contractual terms or on permanency (Fleming & Sturdy, 2009).
Further, the listed companies in Hong Kong are expected to have committees in which INEDs would sit as members. The different committees that listed companies are expected to have include remuneration committees, appointment committees, welfare committees among other important committees. It is the work of INEDs to ensure that the company adheres to the Code on Corporate Governance Practices, which is the document that indicates what is expected of corporate entities in Hong Kong. As a publicly listed company, EIHL has the responsibility of ensuring that INEDs have the capacity and atmosphere to perform their roles and functions and there is no disruption of conflict of interest. Any interference from the executive would compromise the listing of the company and render the board ineligible to serve the company. As a result, all INEDs have to maintain professionalism while at the same time exhibiting independence in the manner in which they perform their roles and functions. All matters that require a specific stand, one that is devoid of conflict of interest, are the concerns of INEDs and they should ensure that they are not compromised in any way.

References
Cooper, R. and Burrell, G. (1988). Modernism, Postmodernism and Organizational Analysis: An Introduction. Organizational Studies. 9(1): 91-112
Corbett, J. M. (1994). Critical Cases in Organisational Behaviour. London: Macmillan Publishers
Fleming, P. and Sturdy, A. (2009). “Just Be Yourself!”: Towards neo-normative control in organisations. Employee Relations. 31(6).
Huxley, A. and Bradshaw, D. (2007). Brave New world. London: Vintage
Rosen, M. (2018). You asked for it: Christmas at the bosses’ expense. Journal of Management Studies. 25(5): 463-480
Semler, R. (2009). Maverick: the success story behind the world’s most unusual workplace. London: Arrow
Willmott, H. (2013). Strength is ignorance; slavery is freedom: Managing culture in modern organisations. Journal of Management Studies. 30(4): 515-552