Shareholder Liability

Shareholder Liability 1920 1080 Christopher Hooley
Reading Time: 4 minutes

Chris Hooley discusses the topic of shareholder liability: from the limitation of liability to shareholders’ obligations and the corporate veil. He also provides some practical examples and the background of the UK case of Prest v Petrodel (2013) and the 2016 Hong Kong case of CWG v MH.

SHOW NOTES

01:00 The Concept of Shareholder Liability
01:50 Shareholder Obligations
02:20 Advantages of Limited Liabilities
02:50 Corporate Veil
03:56 Practical Examples


TRANSCRIPT

0:09
Sitting here in the vast conurbation, which is Hong Kong’s business district, it’s very reassuring to remember that Hong Kong has Asia’s preeminent Stock Exchange, and Hong Kong is still the IPO capital of the world, more than 260 billion worth of dollars in capital being raised last year. equally importantly, certain us proposals all aimed at delisting PRC companies are very likely to see those same PRC companies being relisted in Hong Kong, more capital is being raised, more and more shares are being issued. This also means there are more and more shareholders both institutions and individuals, not only in Hong Kong, but obviously throughout the world. But how many of those shareholders have ever thought about the doctrine of shareholder liability? And what does that actually mean in practice?

1:03
Well, the basic concept of company law is that the only liability that a shareholder has to a company is the unpaid amount of his shares, his equity commitment to the company. In other words, the actual contractual debt owed by me as the shareholder of the company, if indeed there is a debt. This is the the limitation of liability which is seen in every Limited Liability Company. Clearly a very much more attractive proposition than the unlimited personal liability of a sole trader or of a partnership. This concept of limited liability is the crucial characteristic of the modern company, providing it with the important advantage of facilitating the raising of share capital and funds from investors.

1:52
One is also to understand that there are typically no positive obligations on shareholders in respect of the corporate governance matters. But there are limited remedies in the event that a board of directors is not exercising its powers properly and for the benefit of the actual company. A shareholder or owner is clearly a very distinct and separate person from a director who’s dealing with the day to day operations and management of particular company. Indeed, every commercial analysis will now emphasize the efficiency advantages of limited liability rules, which mean that passive shareholders are not subject to the actual operational risks of the business or the company. This ability to avoid risk encourages investment in very large enterprises, where ownership and control are separated. The diversification of investor share portfolios and enhanced liquidity for the shares of listed liability companies.

2:51
This also gives rise to the very very important legal concept of the corporate veil and the fact that this corporate veil surrounding limited liability companies can only be pierced or lifted in a very few exceptional situations. So in what situations can the corporate veil be lifted and when does a shareholder actually need to worry? Well, typically, these are situations relating to private, not public companies, and are typically situations where a shareholder also wears another hat, or where there’s actually a potential tort. A shareholder or owner is clearly a very distinct and separate person from a director who deals with the day to day operations and management of the company. The problems and difficulties typically arise when a shareholder, a person owning part of a company also wears another hat. Usually when that owner is also a director of the same company. In all such situations, one has to first identify if the person is acting as a director or as the shareholder that will then determine if he has acted beyond or in breach of his powers.

3:55
A practical situation would be a shareholder is involved in the management and operations of a company, even though he’s not actually a registered director. In such a case, the shareholder through his actions might be deemed to be a shadow director of the company with all the attendant duties and obligations, making him far more exposed than if he was merely a shareholder. A company in that situation might be a device to defraud shareholders, there might be concealment or evasion. The best way to describe this is through the recent UK case of Prest v Petrodel and the 2016 Hong Kong case of CWG v MH. In the Prest case, the husband in the family dispute, a placed assets and a limited liability company and the argument related to whether a company could be the alter ego of a party to the marriage. That case is also a reminder that judges in family law cases may try to look behind the company to take account of whether either party has access to wealth and assets if habitually enjoyed as an established way of life. Rest assured, a limited liability continues to be treated as a separate legal entity totally distinct from its shell. It is only in exceptional circumstances, that attempts are made to pierce or lift that corporate veil.

This video is for informational purposes only. Its contents do not constitute legal or professional advice.

Christopher Hooley

Christopher Hooley

Chris advises on a wide range of corporate commercial, corporate finance, mergers and acquisition, information technology matters, from strategising on tech driven start ups to drafting documentation required for complex cross border transactions.

All articles by : Christopher Hooley
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