Mr and Mrs Yeung are shareholders and directors of Japan Travel Limited, a compa

Question

Mr and Mrs Yeung are shareholders and directors of Japan Travel Limited, a company incorporated in Hong Kong. They are organizing sightseeing tours to Japan. The company adopts the Model Articles.

Required:

a Three years ago, in order to expand the business, Japan Travel Limited issued preference shares with a right to receive a fixed rate of dividend (e.g. 5% per annum) to their friend, Helen. Their business has been successful.

Last week, Mr and Mrs Yeung no longer wanted to give 5% dividend to Helen. They as directors resolved that the dividend of the preference shares be reduced from 5% to 3%.

Is it proper for Japan Travel Limited to reduce the rate of dividend of the preference shares from 5% to 3%? If so, what should be the proper procedure? If not, why not?

b Japan Travel Limited has been partnering with Car Rental Limited, a company owned by Ivan, a cousin of Mr Yeung, offering car rental service to customers in Hong Kong who want to rent cars for use in Japan. In order to better cooperate with each other, Ivan is considering investing in Japan Travel Limited by subscribing for some ordinary shares for HK$300,000. In order to finance the acquisition of the shares, Car Rental Limited intends to obtain a bank loan. The bank offers a loan on the condition that a corporate guarantee be given. In response to the bank’s request, Japan Travel Limited offers to provide a corporate guarantee in favour of the bank.

Is it proper for Japan Travel Limited to grant a corporate guarantee in favour of the bank to secure a loan to be granted by the bank to Car Rental Limited for acquisition of the shares in Japan Travel Limited? If so, what should be the proper procedure? If not, why not?

Explanation / Answer

Answer a :

Mr and Mrs Yeung no longer wanted to give 5% dividend to Helen. They as directors resolved that the dividend of the preference shares be reduced from 5% to 3%.

Yes, it is proper for Japan Travel Limited to reduce the rate of dividend of the preference shares from 5% to 3%. As the company’s shareholder may take the decision for the fixed dividend based on the review and approval of the shareholders and directors of the business.

But the process adapted was not appropriate - Mr. and Mrs Yelung as a director, took the decision to reduce the fixed dividend from 5% to 3% which is not right, because as a director, Mr. and Mrs. Yelung do not have right to revise the dividend of a shareholder.

Correct procedure :The correct procedure for the dividend change should be reviewd and discussed in the shareholder meeting and it should be approved by the shareholders in the shareholder meeting, then only the dividend can be reduced from 5% to 3%.

Answer b:

Yes, it is proper for Japan Travel Limited to grant a corporate guarantee in favor of the bank to secure a loan to be granted by the bank to Car Rental Limited for acquisition of the shares in Japan Travel Limited, because Japan Travel Limited can assure the bank, because the Car Rental Limited is going to invest in the Japan Travel Limited organization only, thus the investment will be made in the Japan Travel Limited organization only, thus Japan Travel Limited can provide the corporate guarantee for the Car Rental Limited for the loan.

Correct Procedure: The corporate guarantee decision should be carried out by the shareholder and board of director meeting, so that the decision is properly reviewed and approved and the buying is taken from all key shareholders and board of directors. Thus this will ensure that the decision is in favor of Japan Travel Limited.

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