Shareholders' Agreements in Hong Kong

The question many people ask: what does a shareholders' agreement actually govern?

Most of what a shareholders' agreement does is not in the Companies Ordinance (Cap. 622) at all. The phrase "shareholders' agreement" — and its Chinese equivalent 「股東協議」 — appears nowhere in Cap. 622, in either language text. That is not pedantry. It is the single most useful thing to know before reading anything else about these agreements: pre-emption, tag-along, drag-along, deadlock clauses, reserved matters, leaver provisions are contract. They work because contract law makes them work, not because a statute says so.

The mirror image also matters. A separate set of things is fixed by the Ordinance: members' statutory rights, the majority needed to alter the articles, the power to remove a director, how much profit may lawfully be distributed, and what the Court may order. Those come from the Ordinance directly; no agreement is needed to create them, and drafting around them does not make company-level conduct lawful. (Whether parties can validly agree among themselves not to exercise a statutory right is a separate, common-law question on which this article makes no statement — see the appendix.)

So this article does one thing throughout: for each point, it says whether the point has a statutory anchor or is pure contract. The difference decides what you sue on, whom you sue, and where, on the day you need to enforce.

Starting with the correction that matters most: private company shares are not "freely transferable in principle"

Many introductions to shareholders' agreements say that Hong Kong private company shares are freely transferable in principle and that the agreement adds restrictions. That is the wrong way round.

Cap. 622 s. 11(1) defines what a private company is:

In other words, a restriction on transfer is not an optional overlay; it is one of the defining conditions of being a private company at all. A Hong Kong private limited company whose articles carry no transfer restriction does not satisfy s. 11(1)(a)(i). Note also the limb that gets left out of most summaries: s. 11(1)(a)(ii) caps membership at 50. Section 11(2) excludes two categories: "(a)a member who is an employee of the company; and(b)a person who was a member while being an employee of the company and who continues to be a member after ceasing to be such an employee." *Read limb (b) carefully: it reaches only a person who was a member while an employee.* Someone who buys in after their employment has ended is not excluded and does count towards the 50. Section 11(3) then treats joint holders as one member. For a company planning to keep admitting shareholders, that ceiling is real.

How far does the restriction go? First correct a common premise: the model articles are not something a company opts into. Section 80(1) provides that on incorporation of a limited company the model articles prescribed for that type of company and for the time being in force, "so far as applicable, form part of the company’s articles in the same manner, and to the same extent, as if those model articles had been registered as the company’s articles." Section 80(2): subsection (1) applies if the registered articles prescribe no regulations. Section 80(3): if they do prescribe regulations, subsection (1) applies "in so far as the articles do not exclude or modify the model articles." So the model articles are the default, and it takes registered articles to displace them — a company that never considered article 2(2) has article 2(2) anyway.

The set for a private company limited by shares is Companies (Model Articles) Notice (Cap. 622H) Schedule 2, and its article 2 is blunt:

Article 2(2) carries no conditions. The directors may refuse in their discretion, without having to fit the refusal into a category. Article 64 separately lists technical grounds for refusal (the instrument not lodged at the registered office or another place the directors have appointed, no share certificate — or other evidence the directors reasonably require — accompanying it, a transfer covering more than one class), but article 64(1) opens with the words "Without limiting article 2(2)" — the general discretion survives intact.

The Ordinance adds two further layers. Section 150(1): "A company must not register a transfer of shares in the company unless a proper instrument of transfer has been delivered to the company." Section 151(2) gives the company 2 months after the transfer is lodged either to register it or to send notice of refusal, and s. 151(4) gives it 28 days after a request to provide a statement of reasons or register the transfer (s. 151(3) allows either the transferee or the transferor to make that request). Neither period is advisory: s. 151(5) provides that if a company contravenes subsection (2) or (4), "the company, and every responsible person of the company, commit an offence, and each is liable to a fine at level 4", with a further $700 for each day a continuing offence continues.

Section 150 itself carries a gap that sets up the next point. Section 150(2): "Subsection (1) does not affect any power of a company to register as a member a person to whom the right to shares has been transmitted by operation of law." So a transmission by law — death, bankruptcy — can be registered without any instrument of transfer at all.

There is also one provision that is easy to miss: the Ordinance is not wholly silent on pre-emption — but the pre-emption it protects is the pre-emption in the articles. Section 160 is headed "Pre-emption rights in relation to transmission by law". Subsection (1) applies where "a company’s articles give a member or class of members of the company a right of pre-emption or right to purchase shares in the company on the occurrence of an event that constitutes a transmission of the right to the shares by operation of law" — death, bankruptcy and the like. Subsection (2) then provides that registration of the transmittee as a member "is subject to the right of pre-emption or right to purchase shares contained in the articles and that right may be enforced against the person." The transmittee never signed anything, so a pre-emption clause in the agreement does not reach them; one in the articles does. That is the clearest reason for putting a pre-emption regime in both documents.

What this means for the reader: your shares are not, in law, an asset you can simply sell. A willing buyer does not get you a completed transfer. So the real work of a pre-emption clause is not "adding a restriction" — it is converting the directors' unstructured discretion into a procedure the parties agreed in advance and can predict.

The articles and the shareholders' agreement: how they differ

"A shareholders' agreement never has to be filed" is not a safe sentence. Section 622(1) lists resolutions and agreements that must be registered, including:

Section 622(2) requires a copy to be delivered to the Registrar for registration within 15 days after it is made; s. 622(3) requires the company to ensure that a copy of the resolution, agreement or order of the Court that is for the time being in force is included in or annexed to every copy of the articles issued afterwards; s. 622(7) makes contravention of subsection (2) an offence, punishable by a fine at level 3 with a further $300 for each day of a continuing offence; and s. 622(6) deals with an agreement not made in writing (a written memorandum of its terms takes the place of a copy). Subsection (4) takes an existing company whose articles were never registered outside subsection (3), and s. 622(5) gives the members of such a company a free-copy right instead (see item 10 below); s. 622(8) makes contravention of subsection (3) or (5) an offence at level 3.

Limb (b) of the same subsection is worth noting too, although it catches only a resolution and not an agreement: "a resolution agreed to by all the members of a company that, if not so agreed to, would not have been effective for its purpose unless passed as a special resolution". Shareholders' agreements routinely carry unanimous written member consents alongside them; where such a consent is doing work that would otherwise require a special resolution, limb (b) is the one that bites.

Put plainly: an agreement that merely regulates commercial arrangements between a few individual shareholders will not usually fall within s. 622(1)(c) or (d); an agreement that in substance settles the rights of a class of shares, or binds all the members of a class, may. That is a question about the drafting of the particular document, not about what it is called.

What a shareholders' agreement cannot change, however it is drafted

Every item below has a specific provision behind it.

1. The power to remove a director is fixed by statute. Section 462(1):

Read what the override actually reaches. Section 462(1) overrides two things and only two: the company's articles, and "any agreement between it and the director". A service contract between the company and the director guaranteeing them the full term does not stop a removal resolution. But a covenant between shareholders — that they will not vote in favour of removing someone — is not within those words at all. Whether such a covenant is valid as a matter of contract law, and what follows from breaching it, is a common-law question on which this article makes no statement (see appendix items 1 and 2). The distinction matters: the Ordinance can make the company-level resolution effective without saying anything about the shareholders' voting promises to each other.

Reading the whole section adds four more points.

• Section 462(2) is an exception, and it is a private-company exception — which is the only kind of company this article is about: "Subsection (1) does not, if the company is a private company, authorize the removal of a director who has held office for life since 31 August 1984." So "removable no matter what" is not accurate as an unqualified statement; the section carves out a narrow, closing class.
• There is a 28-day step first. Section 462(4): "Special notice is required of a resolution—(a)to remove a director; or(b)to appoint somebody in place of a director so removed at the meeting at which the director is removed." Section 578(1) sets what that means: "If by any provision of this Ordinance special notice is required to be given of a resolution, the resolution is not effective unless notice of the intention to move it has been given to the company at least 28 days before the meeting at which it is moved." Section 578(2)–(3) then require the company to notify its members. But the 28 days is not an unqualified precondition: s. 578(4) provides that if a meeting is called for a date 28 days or less after the notice has been given, the notice is to be regarded as having been properly given, though not given within the time required. A removal is not a show of hands on the day, but a notice period shorter than 28 days will not necessarily invalidate the resolution.
• What actually defeats weighted-vote entrenchment is s. 462(7), and it operates on the articles. On a resolution to remove a director before the end of the term, "no share may, on a poll, carry a greater number of votes than it would carry in relation to the generality of matters to be voted on at a general meeting of the company." Section 462(8) explains how that phrase is read for a share carrying special voting rights on some matters but not others.
• Section 462(9) preserves any compensation or damages payable for termination of the appointment — removable does not mean free to remove.

2. The same applies to the auditor. Section 419(1): "A company may by an ordinary resolution passed at a general meeting remove a person from the office of auditor despite—(a)any agreement between the person and the company; or(b)anything in the company’s articles." Note the same limitation: the agreement overridden is one between the person and the company, not one among shareholders. Section 419(2) imposes the same procedural condition — "Special notice is required for an ordinary resolution proposed for the purposes of subsection (1)" — with the same 28 days under s. 578(1), and s. 419(3) requires the company to send a copy of the notice to the person proposed to be removed. This section carries a filing duty and offence that the director-removal side does not: s. 419(4) provides that "if an ordinary resolution for the removal is passed, the company must deliver a notice in the specified form of that fact to the Registrar for registration within 15 days beginning on the date on which it is passed", and s. 419(5) provides that "if a company contravenes subsection (4), the company, and every responsible person of the company, commit an offence, and each is liable to a fine at level 3 and, in the case of a continuing offence, to a further fine of $300 for each day during which the offence continues."

3. Neither can be done by written resolution. Section 548(1) allows written resolutions in place of a general meeting, but s. 548(6) carves out two cases: "(a)a resolution removing an auditor before the end of the auditor’s term of office; or(b)a resolution removing a director before the end of the director’s term of office."

4. A dividend covenant has a profits ceiling. Section 297(1): "A company may only make a distribution out of profits available for distribution." Section 297(2) defines that figure: "its accumulated, realized profits, so far as not previously utilized by distribution or capitalization, less its accumulated, realized losses, so far as not previously written off in a reduction or reorganization of capital." Both of the qualifying clauses are load-bearing — for a company that has distributed before, or has reorganised its capital, the figure is a running balance and not this year's profit. A promise to distribute "at least X% each year" cannot make a distribution lawful in a year with no distributable profits.

5. A buy-back has a funding restriction. Section 257(1) requires the shares to be paid for on redemption or buy-back; s. 257(2) permits payment "(a)out of the company’s distributable profits;(b)out of the proceeds of a fresh issue of shares made for the purpose of the redemption or buy-back; or(c)out of capital in accordance with this Subdivision" — the Subdivision meant being Subdivision 6 (Payment for Share Redemptions and Buy-backs) of Division 4 of Part 5 — and it opens with "Subject to subsections (3) and (4)". An exit route that depends on the company buying your shares back is not simply a drafting choice.

6. Varying class rights has its own gate. Section 180(1) allows class rights to be varied only in accordance with the articles' variation provisions, or (where there are none) with consent given under the section. Section 180(3) sets that consent at "written consent of holders representing at least 75% of the total voting rights of holders of shares in the class", or a special resolution at a separate general meeting of the class. Section 180(5) adds that amending the variation provision itself counts as a variation of the rights.

Section 180(2) speaks directly to where an agreement sits, in the statute's own example:

So an agreement may add restrictions. It cannot subtract the s. 180 threshold.

And clearing the threshold is not the end of it — there is a minority route afterwards. Section 182(1): where the rights attached to shares in a class are varied, "holders representing at least 10% of the total voting rights of holders of shares in the class may apply to the Court to have the variation disallowed". Section 182(2): "An application must be made within 28 days after the date on which the variation is made." Section 182(5) lets the Court disallow the variation "if it is satisfied that the variation would unfairly prejudice the members represented by the applicant", and s. 182(6) requires it to confirm the variation if it is not so satisfied. Section 182(1A) closes the route where the variation was made with the written consent of all holders in the class, or a unanimous resolution of them. So a holder of 10% of a class's voting rights who loses the 75% vote still has a 28-day window at the Court. The route runs alongside the unfair-prejudice remedy rather than instead of it: s. 182(7) provides that the section does not affect a member's right to petition under s. 724 or the Court's powers under s. 725, and s. 180(6) provides that "Nothing in this section affects the Court’s powers under sections 673, 675 and 725."

That 28-day window carries one more consequence: until it closes, a variation lacking full consent has not taken effect at all. Section 180(4): "A variation takes effect—(a)if the consent for the variation is full consent—at the time specified in subsection (4B); or(b)if the consent for the variation is not full consent—at the time specified in subsection (4C)." Section 180(4C) sets that time at: "(a)if no application is made under section 182 for the variation to be disallowed—the end of the period within which applications may be made under that section; or(b)if an application is made under that section for the variation to be disallowed—(i)the time when the application is withdrawn or finally determined; or(ii)(if there is more than one application) the time when the last of the applications is withdrawn or finally determined." So a variation that lacks full or unanimous class consent has no legal effect until the s. 182 challenge window has run its course, or any application made under it has been withdrawn or finally determined.

7. Share certificates and preference shares. Section 179(1) requires a share certificate issued by a company with different classes of shares to state prominently that the capital is divided into classes and to specify the voting rights attached to each class. Section 179(2)(a) requires the descriptive title of a non-voting class to include the words "non voting" or the Chinese characters 「無表決權」, and s. 179(2)(b) requires the company to "ensure that those words appear legibly on any share certificate issued by the company" — the label has to be on the certificate, not merely in the name of the class. Reading to the end changes the answer for the usual example: s. 179(3) provides that "Subsection (2) does not apply to shares that are described as preference shares or preferred shares." A non-voting preference share therefore needs no "non voting" label — but s. 179(1) still applies to it, and contravention of the section is an offence (s. 179(4), fine at level 4).

8. Members' statutory remedies come from the Ordinance, not from the agreement. (No provision says these remedies cannot be given up by contract; more than one provision in Cap. 622 overrides an agreement at all — s. 462(1) above overrides the articles and an agreement between the company and the director, and s. 419(1) likewise overrides the articles and an agreement between the company and the auditor — but neither reaches an agreement between shareholders. Whether parties can validly contract out of a petition right is a common-law question this article does not answer — see the appendix.)

• Unfair prejudice. Section 724(1): the Court may exercise the power under s. 725(1)(a) and (2) on a petition by a member where it considers that "the company’s affairs are being or have been conducted in a manner unfairly prejudicial to the interests of the members generally or of one or more members (including the member)" — s. 724(1)(b) separately covering an actual or proposed act or omission of the company. The section sets no shareholding threshold — a 1% holder has the same standing as a 49% holder. Section 725(2)(a)(iv)(B) expressly lists an order "for the purchase of the shares of any member of the company by another member of the company"; s. 725(2)(a)(iv)(C) allows an order that the company itself buy, reducing its capital accordingly.
• A past member is on a different route, with different relief. Section 724(3) allows a past member to petition about the period when they were a member — but it confines the Court to "the power under section 725(4)", and s. 725(4) is a power to "order the company or any other person to pay any damages, and any interest on those damages, that the Court thinks fit". The buy-out orders in s. 725(2)(a)(iv)(B) and (C) are therefore not available on a past member's petition. Selling out first and complaining afterwards is a materially weaker position. Section 725(5) then bars any member, "past or present", from recovering by way of damages "any loss that solely reflects the loss suffered by the company that only the company is entitled to recover under the common law".
• Derivative proceedings. Section 732(1) lets a member, with the leave of the Court, bring proceedings on the company's behalf in respect of "misconduct" — defined in s. 731 as "fraud, negligence, breach of duty, or default in compliance with any Ordinance or rule of law". The standing is wider than "a member of the company": each of ss. 732(1), (2) and (3) reads "a member of the company or of an associated company of the company", so a shareholder of an associated company in a group structure may also qualify. The leave test is in s. 733(1): the Court must be satisfied that on the face of the application it appears to be in the company's interests; for leave to bring proceedings, s. 733(1)(b)(i) requires that there is a serious question to be tried and the company has not itself brought proceedings, but for leave to intervene in proceedings already brought, s. 733(1)(b)(ii) applies a different test — that the company has not diligently continued, discontinued or defended the proceedings; and, under s. 733(1)(c), that the member has served written notice complying with subsection (4) — which requires the notice to state the applicant's intention and the reasons for it — with s. 733(3) further requiring that notice to be served at least 14 days beforehand (s. 733(5) allows the Court to dispense with service). Section 732(4) provides that the cause of action is vested in the company and relief must be sought on the company's behalf — any recovery goes to the company, not to you.
• Just and equitable winding up. Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) s. 177(1) lists the circumstances in which a company may be wound up by the court, including "(f)the court is of opinion that it is just and equitable that the company should be wound up."

9. Members can force a meeting. Section 566(2): "The directors are required to call a general meeting if the company has received requests to do so from members of the company representing at least 5% of the total voting rights of all the members having a right to vote at general meetings." The threshold is 5% of total voting rights, given by the statute; no agreement is needed to create it. But reaching 5% is not enough on its own: s. 566(3)(a) requires the request to "state the general nature of the business" to be dealt with, and s. 566(5)(b) requires the request to "be authenticated by the person or persons making it." And there is a next step if the directors ignore it: s. 567(1) requires them to call the meeting within 21 days of becoming subject to the requirement, and s. 567(2) requires it to be held not more than 28 days after the date of the notice. Section 568(1) then provides that if the directors "do not do so in accordance with section 567, the members who requested the meeting, or any of them representing more than one half of the total voting rights of all of them, may themselves call a general meeting"; s. 568(3) gives 3 months; s. 568(6) makes the company reimburse the members' reasonable expenses; and s. 568(7) requires the company to retain that sum out of the defaulting directors' fees or remuneration.

10. Inspecting the company's own records, and receiving its accounts, are statutory rights too — and mostly free ones. Section 45, above, is about the Companies Register at the Registry, which costs a fee. Against the company itself a member has a whole separate set of rights, needing no petition, no threshold and no agreement:

• The register of members. Section 631(1): "A member of a company is entitled, on request made in the prescribed manner and without charge, to inspect the register of members of the company, and the index of members’ names, in accordance with regulations made under section 657" (ss. 631(2)–(3) put anyone else, and anyone wanting copies, on payment of a prescribed fee).
• Resolutions and the minutes of general meetings. Section 618(1) requires a company to keep records comprising "(a)copies of all resolutions of members passed otherwise than at general meetings; (b)minutes of all proceedings of general meetings", and s. 618(2) requires them to be kept "for at least 10 years from the date of the resolution, meeting or decision"; contravention is an offence at level 5 with a further $1,000 a day (s. 618(3)). Section 620(1) then gives a member the right, "on request made in the prescribed manner and without charge, to inspect, in accordance with regulations made under section 657, the records kept by the company under section 618", with copies on payment of a prescribed fee (s. 620(2)). The minutes of the meetings you were outvoted at are free to inspect.
• The registers of directors and of company secretaries. Sections 642(1) and 649(1) each give a member the same free inspection right, with anyone else paying under ss. 642(2) and 649(2).
• The register of charges. Section 355(1): a member or creditor is entitled, on request in the prescribed manner and without charge, to inspect the copies kept by the company under s. 351(1) and the register of charges kept under s. 352(1) — what the company has pledged is visible to its members.
• The financial statements. Section 429(1) requires the directors to lay a copy of the reporting documents before the company in annual general meeting (or another general meeting directed by the Court) within the period specified in s. 431, and s. 430(1) requires the company to "send a copy of the reporting documents for the financial year to every member at least 21 days before" that meeting — every member, not only those who ask for a copy. Section 430(2) carves out an exception: even if sent less than 21 days before the meeting, the copy is deemed to have been sent at least 21 days before "if so agreed by all members entitled to attend and vote at that meeting." Section 430(3) covers the case where no annual general meeting is required. Section 431(1)(a) sets that period, for a private company that is not at any time during the financial year a subsidiary of a public company (s. 431(3)), at the period of 9 months, or any longer period directed by the Court, after the end of the accounting reference period. That is the mainline rule; two exceptions compute the period differently. Under s. 431(1)(a)(ii), if that accounting reference period is the company's first accounting reference period and is longer than 12 months, whichever of the periods set out in subsection (4)(a) and (b) expires last applies instead; and under s. 431(2), if the accounting reference period by reference to which the financial year is determined is later shortened, the period specified for the purposes of section 429(1) and 430(3) is whichever of the following expires last — the period specified in subsection (1), or the period of 3 months after the date of the directors' resolution. The duty has teeth: a director who fails to take all reasonable steps to secure compliance with s. 429(1) commits an offence and is liable to a fine of $300,000 (s. 429(3)), rising to $300,000 and 12 months' imprisonment where the failure is wilful (s. 429(4)).
• A copy of a registered resolution or agreement. Following on from s. 622 above: where the company is an existing company whose articles were never registered under the Ordinance or a former Companies Ordinance, s. 622(5) requires it to "send a copy of the resolution, agreement or order of the Court that is for the time being in force to any member at that member’s request, without charge."

For the shareholder who has been frozen out of information, this set matters more than it looks: none of it has a shareholding threshold, none of it costs anything except copies, none of it needs a court, and it is where the material for any later s. 724 petition comes from.

Clause by clause: which have a statutory anchor and which do not

Deadlock: first read what your own articles say

"Two 50% shareholders means deadlock" is not necessarily true in a company on the model articles. Cap. 622H Schedule 2 article 43(2):

The board is the same. Article 14(1): "If the numbers of votes for and against a proposal are equal, the chairperson or other director chairing the directors’ meeting has a casting vote." Article 14(2) qualifies this: it does not apply if, in accordance with the articles, the chairperson or other director is not to be counted as participating in the decision-making process for quorum or voting purposes.

So the real question is not whether votes will tie — it is who chairs. And who chairs is not a matter of habit; it is article 40. Article 40(1): if the chairperson of the board is present and willing to preside, the meeting is presided over by them. Article 40(2): "The directors present at a general meeting must elect one of themselves to be the chairperson if—(a)there is no chairperson of the board of directors; (b)the chairperson is not present within 15 minutes after the time appointed for holding the meeting; (c)the chairperson is unwilling to act; or (d)the chairperson has given notice to the company of the intention not to attend the meeting." Article 40(3): "The members present at a general meeting must elect one of themselves to be the chairperson if—(a)no director is willing to act as chairperson; or (b)no director is present within 15 minutes after the time appointed for holding the meeting." In a company with two director-shareholders and no board chairperson, that election is itself a tie — so the casting vote may never be reached at all.

And the casting vote has a limited range. In a two-member company a show of hands is 1–1; the article 43(2) casting vote gives the chair one extra vote, but the article itself describes it as "a second or casting vote" — that is, one more vote cast by the same person, not a third member or proxy appearing from nowhere. Section 564(2) measures the 75% for a show of hands on the number of members voting in person plus the number of duly appointed proxies voting — a headcount, not a vote count: on the two-member facts the headcount is still 2, with 1 member in favour, which is 1 of 2, or 50%, not 2 of 3 or 66.7%. Section 564(3) measures it on a poll by total voting rights of those who vote. 50% is below 75%. So the chair's casting vote carries ordinary resolutions but cannot pass a special resolution — it cannot alter the articles and cannot sanction a class-rights variation. (Section 564(4)(a) adds that the notice must contain the text of the resolution and state the intention to propose it as a special resolution.)

The quorum rules also need reading in pairs. Article 39(1) sets the quorum for a general meeting at two members present in person or by proxy; article 39(1A), added in 2023, adds that "a person who attends a general meeting by using the virtual meeting technology specified in the notice of the meeting is to be regarded as being present while so attending" — attendance by the specified virtual technology counts towards the quorum, so staying away from the room is not by itself a boycott; and article 39(2) provides that if a quorum is absent no business other than appointing the chairperson may be transacted. But article 42(1) splits the consequence: if a quorum is not present within 30 minutes, the meeting must "(a)if called on the request of members—be dissolved; or(b)if not called on the request of members—be adjourned." And article 42(2) provides that if a quorum is again absent 30 minutes after the time appointed for the adjourned meeting, the members present in person or by proxy constitute a quorum. The effect of a boycott is therefore asymmetric: boycotting an ordinary meeting only delays it once, but boycotting a meeting requisitioned under s. 566 dissolves that meeting outright.

The deadlock mechanisms themselves — escalation, mediation, buy-or-sell / Texas shootout / Russian roulette — are entirely contractual, with no statutory basis. The Ordinance supplies only the exits: just and equitable winding up under Cap. 32 s. 177(1)(f), and the unfair-prejudice remedies in Cap. 622 ss. 724 and 725.

On arbitration, Arbitration Ordinance (Cap. 609) s. 20(1) gives article 8 of the UNCITRAL Model Law effect in Hong Kong:

Section 20(5) requires the court, if it refers the parties to arbitration, to stay the legal proceedings.

Subsection (1) is not the whole of s. 20, though. The subsection immediately after it deals with the case a shareholder-employee is most likely to be in. Where the dispute "involves a claim or other dispute that is within the jurisdiction of the Labour Tribunal established by section 3 (Establishment of tribunal) of the Labour Tribunal Ordinance (Cap. 25)", s. 20(2) provides that the court "may, if a party so requests, refer the parties to arbitration if it is satisfied that—(a)there is no sufficient reason why the parties should not be referred to arbitration in accordance with the arbitration agreement; and(b)the party requesting arbitration was ready and willing at the time the action was brought to do all things necessary for the proper conduct of the arbitration, and remains so." Referral is discretionary and conditional there, not the "shall … refer the parties to arbitration" of article 8. Section 20(3) makes subsection (1) subject to s. 15 of the Control of Exemption Clauses Ordinance (Cap. 71); s. 20(8) bars any appeal against a decision to refer, and s. 20(9) requires leave to appeal a refusal.

Note, though: whether an unfair-prejudice petition or a winding-up petition can be arbitrated, and whether a court will refer such a petition, is a question of case law on which this article makes no statement (see the appendix).

The numbers, each traced to the provision that sets it

The two compulsory-acquisition provisions deserve a sentence more, because they are routinely mistaken for a statutory drag-along. Section 693(1):

That machinery presupposes a takeover offer as defined by s. 689, and the definition carries an exclusion that is easily dropped. Section 689(1)(a): the offer must be one "to acquire all the shares, or all the shares of any class, in the company, except those that, at the date of the offer, are held by the offeror" (s. 689(3) extends "held" to shares the offeror has contracted to acquire), with s. 689(1)(b) requiring the same terms. So the 90% is 90% of the shares to which the offer relates, not 90% of the company: an offeror already holding 70% needs 90% of the other 30%.

Nor is 90% an absolute line. Section 693(3) provides that where acceptances reach "less than 90% in number of the shares to which the offer relates, the offeror may apply to the Court for an order authorizing the offeror to give notice"; s. 693(5) sets the conditions (after reasonable enquiry the offeror cannot trace one or more holders; the 90% would have been reached had they accepted; the consideration is fair and reasonable); s. 693(6) requires the Court to be satisfied that making the order is just and equitable; and s. 693(7) then permits the notice. A contractual clause saying "70% of shareholders can drag the rest along" is still a different animal: the first is enforced as contract, the second under the Ordinance and only through that machinery. Section 700 runs the other way: under s. 700(1)(a) and (2)(a), the offeror must first have acquired, or contracted unconditionally to acquire, by virtue of acceptances of the offer, some but not all of the relevant shares, and where the shares controlled by the offeror reach 90% of the shares in the company (or, for an offer relating to different classes, 90% of the shares of that class — either way excluding treasury shares), a holder who has not accepted may require the offeror to buy them out — and the right is time-limited, exercisable under s. 700(3) only within 3 months after the later of the end of the offer period and the date of the s. 701 notice.

When to sign, and how

As early as possible — and the reasons are structural, not atmospheric.

• Altering the articles generally takes 75% (s. 88(2), subject to subsection (3) and any other provisions of the Ordinance; s. 564(1)), while most shareholders' agreements require unanimity of the parties to amend (a drafting choice, not a legal requirement). Early on, with few members and positions not yet hardened, the two documents can be aligned. Left until there is a disagreement, either threshold becomes a blocking tool for whoever holds it.
• The articles have to match the agreement. Take an agreement saying new shares need unanimous consent. The Ordinance already imposes a layer for allotments outside the s. 140(2) exemptions discussed above (pro-rata offers, bonus issues and the rest): under s. 140(1) the directors may not allot at all except in accordance with s. 141, which requires the company to give "approval in advance by resolution of the company". (Breaching that layer is an offence, but s. 140(6) provides that "Nothing in this section or section 141 affects the validity of an allotment or other transaction" — the allotment itself stands; s. 140(6) is not a route to unwind a completed one.) And model article 57(1) does not give the directors anything here — the power is the company's: "the company may issue shares with—(a)preferred, deferred or other special rights; or (b)any restrictions, whether in regard to dividend, voting, return of capital or otherwise, that the company may from time to time by ordinary resolution determine." (Article 57(3) gives the directors only the terms of redemption.) So the real divergence is not "the directors can issue shares on their own" — it is that the two documents set different thresholds: unanimity of the parties under the agreement, a company resolution (possibly an ordinary one) under the Ordinance and the articles. A party can lawfully help carry the company-level resolution and be in breach of the agreement at the same time.

What happens when the agreement and the articles conflict? No provision answers this, and this article will not pretend otherwise. What can be said is that s. 86(1) gives the articles effect as a contract under seal between the company and each member and between members, and the shareholders' agreement is a separate contract; which prevails between them, and whether a contract can validly restrict the company's exercise of a power the Ordinance confers, are general contract-law questions on which this article makes no statement (see the appendix). The practical answer is to stop the two documents conflicting, rather than to argue afterwards about which wins.