HKSI Licensing Examination Paper 1 (Regulation) — All Questions

Hong Kong's legal system is based principally on:

• a.Religious law
• b.Purely customary Chinese law
• c.The common law, preserved under the Basic Law after 1997✓
• d.The civil-law codified system of Mainland China

Under Article 8 of the Basic Law, the common law, rules of equity, ordinances and customary law previously in force are maintained. Hong Kong retains a common-law system separate from the Mainland's civil-law system.

Under Hong Kong company law, a document offering a company's shares to the public must generally:

• a.Be exempt from any content requirement if the company is private
• b.Be approved personally by the Financial Secretary
• c.Be registered as a prospectus complying with statutory content requirements✓
• d.Be published only in a single newspaper

A public offer of shares requires a registered prospectus meeting the statutory content and registration requirements under the Companies (Winding Up and Miscellaneous Provisions) Ordinance. A private company is prohibited by its constitution from offering shares to the public.

Which of the following is a source of law in Hong Kong?

• a.Legislation (Ordinances), the common law and rules of equity✓
• b.Decrees of a foreign monarch
• c.Only unwritten local custom
• d.The internal staff manuals of individual securities firms, which under the Basic Law rank equally with Ordinances passed by the Legislative Council

Hong Kong's sources of law include legislation (Ordinances and subsidiary legislation), the common law and rules of equity, the Basic Law, and applicable customary and international law. The common-law system was preserved under Article 8 of the Basic Law.

For a legally binding contract to exist under Hong Kong law, there must generally be:

• a.A written document in every case
• b.A payment of at least ten thousand Hong Kong dollars, this being the minimum monetary value below which the courts will not recognise any agreement as a contract
• c.Offer, acceptance, consideration and an intention to create legal relations✓
• d.Prior approval by the SFC

A binding contract at common law generally requires offer, acceptance, consideration and an intention to create legal relations (with capacity and legality). Many contracts need not be in writing, though some (e.g. certain land contracts) do.

A false statement of fact that induces another person to enter into a contract may amount to:

• a.A valid contractual term guaranteeing a profit
• b.An automatic criminal offence in every case
• c.A misrepresentation, potentially entitling the innocent party to rescind the contract and/or claim damages✓
• d.A harmless sales technique that Hong Kong contract law disregards entirely, provided the statement was made orally rather than being written down

A misrepresentation is a false statement of fact that induces the other party to contract. Depending on whether it is fraudulent, negligent or innocent, remedies may include rescission and/or damages. It is not automatically a crime.

An agent binds the principal to a contract with a third party where the agent acts within their:

• a.Complete absence of any authority whatsoever, since under Hong Kong agency law a principal is bound by literally every act any person purports to do in the principal's name
• b.Actual or apparent (ostensible) authority✓
• c.Personal interest
• d.Own name only, without reference to the principal

A principal is bound by acts of an agent done within the agent's actual authority (express or implied) or apparent (ostensible) authority. Without any authority, the principal is generally not bound unless it ratifies the act.

An agent owes the principal duties including:

• a.A duty to compete with the principal
• b.An unrestricted right to delegate the entire agency to any stranger and to retain personally any bribe or secret commission received from the third party
• c.Duties to act in good faith, avoid conflicts of interest, and account to the principal✓
• d.A duty to keep secret profits made from the agency

An agent owes fiduciary duties to the principal: to act in good faith and in the principal's interests, avoid unauthorised conflicts, not make secret profits or take bribes, and to account. These duties are central to the intermediary-client relationship.

Under the principle in Salomon v Salomon, an incorporated company is:

• a.Incapable of owning property in its own name
• b.Merely a convenient name for its shareholders, so that the company's debts are always, and automatically, the personal debts of each individual member
• c.Identical in law to its majority shareholder
• d.A separate legal person, distinct from its members and directors✓

The principle of separate legal personality (Salomon v Salomon) means a company is a legal person distinct from its members and directors. It can own property, contract, sue and be sued in its own name, and its debts are its own.

In a company limited by shares, a member's liability for the company's debts is generally limited to:

• a.Their entire personal wealth
• b.The company's total outstanding debts
• c.Any amount unpaid on their shares✓
• d.Whatever sum the company's creditors later choose to demand from the member personally, without any statutory ceiling on that amount

In a company limited by shares, a member's liability is limited to any amount remaining unpaid on the shares they hold. Once shares are fully paid, the member has no further liability for the company's debts.

A private company under the Companies Ordinance (Cap 622) is one whose articles:

• a.Impose no restrictions of any kind on share transfers, membership or public offers, these being the defining features that distinguish a private company from a public one
• b.Restrict the right to transfer shares, limit the number of members to 50, and prohibit invitations to the public to subscribe for its shares✓
• c.Allow unlimited members and free public offers of shares
• d.Require it to list on HKEX

Under the Companies Ordinance (Cap 622), a private company is defined by articles that restrict share transfers, limit members to 50 (excluding employees), and prohibit invitations to the public to subscribe for its shares or debentures.

A company comes into legal existence in Hong Kong when:

• a.It first opens a bank account and receives its initial deposit of share capital, regardless of whether any documents have been registered with the Companies Registry
• b.The SFC grants it a licence
• c.The Companies Registry issues a certificate of incorporation following registration of the required documents✓
• d.Its founders shake hands on the venture

A company is incorporated, and becomes a body corporate with separate legal personality, when the Companies Registry issues its certificate of incorporation after the required incorporation documents (including the articles) are registered.

Under the Companies Ordinance (Cap 622), a company's constitution consists of:

• a.A memorandum and articles, both still mandatory as separate documents
• b.The articles of association, the memorandum of association having been abolished for companies formed under the Ordinance✓
• c.An oral understanding among the founders that need not be recorded in any registered document, since the Ordinance dispensed with the requirement for a written constitution altogether
• d.A prospectus

The Companies Ordinance (Cap 622) abolished the memorandum of association for companies formed under it. The company's constitution is now contained in its articles of association, which must be registered.

A significant change introduced by the Companies Ordinance (Cap 622) was the adoption of:

• a.A mandatory 'no-par-value' regime, so that shares no longer have a nominal or par value✓
• b.A fixed par value of HK$1 for all shares
• c.Compulsory bearer shares
• d.A rule that every company must issue its shares at exactly the same price as every other Hong Kong company, so that share prices across the market are standardised

The Companies Ordinance (Cap 622) introduced a mandatory no-par-value regime for shares. Shares of Hong Kong companies no longer have a nominal or par value, and concepts such as share premium were correspondingly reformed.

A director of a Hong Kong company owes duties including:

• a.No duties at all, once appointed
• b.A duty to accept any bribe offered to them
• c.Fiduciary duties to act in good faith in the company's interests and for proper purposes, and a duty of reasonable care, skill and diligence✓
• d.A duty to act only in their own personal interest

Directors owe fiduciary duties (to act in good faith in the company's interests, for proper purposes, and to avoid conflicts and secret profits) and a duty of care, skill and diligence, the latter codified in section 465 of the Companies Ordinance.

The Companies Ordinance duty of care, skill and diligence (section 465) is measured by:

• a.A purely subjective test only
• b.Whatever the director personally feels is fair
• c.The single lowest standard of competence found anywhere among the company's directors, which is then applied uniformly to excuse the conduct of the entire board
• d.Both an objective standard (that of a reasonably diligent person) and a subjective standard reflecting the director's own knowledge, skill and experience✓

Section 465 sets a mixed standard: the care, skill and diligence expected of a reasonably diligent person with both the general knowledge and experience reasonably expected (objective) and the actual knowledge, skill and experience the director has (subjective).

Every Hong Kong company must have a company secretary who:

• a.Must be a Hong Kong resident individual, or a body corporate with a registered office or place of business in Hong Kong✓
• b.Must also be the company's sole director
• c.May be a non-resident individual with no Hong Kong connection
• d.Need not exist at all, because the Companies Ordinance treats the appointment of a company secretary as purely optional for private companies of every size

Under the Companies Ordinance, every company must appoint a company secretary who, if an individual, must ordinarily reside in Hong Kong, or if a body corporate, must have its registered office or a place of business in Hong Kong. A sole director of a private company cannot also be its secretary.

Under the Companies Ordinance, a private company must have:

• a.At least one director who is a natural person✓
• b.No directors at all
• c.Only corporate directors
• d.A minimum of five directors, each of whom must personally hold at least ten per cent of the company's issued share capital before they can be validly appointed

The Companies Ordinance requires every private company to have at least one director who is a natural person, ensuring that ultimate human responsibility for the company's management can always be identified.

A Hong Kong company must maintain:

• a.No fixed address of any kind
• b.A registered office located in whichever jurisdiction offers the company the lowest tax rate at any given time, which it may relocate abroad without informing the Companies Registry
• c.An office only outside Hong Kong
• d.A registered office in Hong Kong to which communications and notices may be sent✓

Every Hong Kong company must have a registered office in Hong Kong to which communications and notices may be addressed, and must notify the Companies Registry of the address and any change to it.

Compared with ordinary shares, preference shares typically:

• a.Rank behind ordinary shares for dividends
• b.Carry a preferential (often fixed) dividend and priority over ordinary shares in a winding up, usually with limited voting rights✓
• c.Give the holder an absolute legal guarantee of a dividend every year and full repayment of capital ahead of all the company's secured and unsecured creditors on a winding up
• d.Always carry enhanced voting rights

Preference shares usually carry a preferential (often fixed) dividend and priority over ordinary shares as to dividends and return of capital in a winding up, typically with restricted voting rights. They still rank behind the company's creditors.

A charge created by a company over its assets to secure a debenture generally must be:

• a.Kept secret from the company's creditors
• b.Registered with the Companies Registry within the statutory period, or it may be void against a liquidator and creditors✓
• c.Approved by the SFC
• d.Registered only if the lender specifically asks, since an unregistered charge is fully effective against a later liquidator and all other creditors of the company in any event

Registrable charges created by a company must be registered with the Companies Registry within the statutory period (generally one month). Failure to register can render the charge void against a liquidator and the company's creditors.

Legal title to registered shares in a Hong Kong company generally passes when:

• a.The SFC records the transfer
• b.The buyer merely pays for the shares
• c.The buyer verbally agrees to purchase them, with no need for any instrument of transfer or any change to the company's register of members at all
• d.A proper instrument of transfer is executed and the transferee is entered in the register of members✓

For registered shares, legal title passes on execution of a proper instrument of transfer and registration of the transferee in the company's register of members. The register is the record of legal ownership of the shares.

Companies in Hong Kong are generally required to:

• a.Hold annual general meetings (unless dispensed with as permitted) and file annual returns with the Companies Registry✓
• b.Submit their accounts to the SFC for approval before those accounts may be shown to the company's own members at any general meeting
• c.File returns only in years in which they are profitable
• d.Never report to their members

Companies must generally hold an annual general meeting (subject to permitted dispensations, for example by written resolution or single-member companies) and file annual returns and financial statements as required under the Companies Ordinance.

A minority shareholder who is unfairly prejudiced by the way the company's affairs are conducted may:

• a.Do nothing, as the law provides no remedy
• b.Only sell the shares at whatever price is offered
• c.Petition the court for relief on the ground of unfair prejudice under the Companies Ordinance✓
• d.Automatically take personal control of the company's board and management, displacing the majority shareholders, simply by lodging a complaint with the Companies Registry

The Companies Ordinance provides a statutory unfair-prejudice remedy: a member may petition the court where the company's affairs are conducted in a manner unfairly prejudicial to members. The court has wide discretion, for example to order a buy-out of the minority's shares.

A company may be wound up:

• a.Compulsorily by order of the court, or voluntarily (by its members or its creditors)✓
• b.Exclusively by a unanimous resolution of every single creditor, employee and shareholder acting together, since no other route to winding up a company exists in Hong Kong law
• c.Only by the SFC
• d.Only if it is solvent

Winding up may be compulsory (by court order, for example where the company is insolvent or it is just and equitable) or voluntary (members' voluntary winding up where solvent, or creditors' voluntary winding up where insolvent).

In a winding up, the general order of distribution is that:

• a.Ordinary shareholders are paid first
• b.All claimants share equally regardless of their status
• c.Ordinary shareholders are paid in full before any creditor receives anything, on the principle that the owners of the company always have the strongest claim on its assets
• d.Secured creditors and preferential debts are paid ahead of unsecured creditors, with shareholders ranking last✓

On a winding up, secured creditors realise their security, then preferential debts and unsecured creditors are paid in the statutory order, and shareholders rank last, receiving only any surplus after all creditors have been satisfied.

A prospectus that contains an untrue statement may expose those responsible to:

• a.No consequences at all
• b.Only a reduction in the share price
• c.A purely internal reprimand from the company's own board, which under Hong Kong law is the only sanction available for misstatements in a prospectus offered to the public
• d.Civil liability to compensate investors and potential criminal liability under the prospectus provisions✓

Under the prospectus regime in the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32), those responsible for a prospectus containing an untrue statement may face civil liability to compensate investors and criminal liability, subject to statutory defences.

A key difference between a general partnership and an incorporated company is that:

• a.A company's members are always personally liable for all of its debts
• b.A partnership can freely issue shares to the public
• c.A partnership has separate legal personality distinct from its partners
• d.A company is a separate legal person with (usually) limited liability, whereas a general partnership is not separate from its partners, who bear unlimited personal liability✓

An incorporated company has separate legal personality and its members usually enjoy limited liability. A general partnership is not a separate legal person; the partners are personally and (as between themselves and third parties) jointly liable for the firm's debts without limit.