Corporate (General)

Exercise 3

Directors’ Duties and Liabilities
(Answer & Tips)

Key Point Checklist

1. Format and Structure
□ Proper heading including "Private & Confidential/Privileged"
□ Clear identification of sender, recipient, date, and subject matter
□ Consistent paragraph numbering system
□ Professional formatting throughout
□ Logical flow between sections

2. Introduction
□ Identified client's specific situation/problem
□ Clearly stated scope of advice
□ Mentioned relevant background briefly
□ Avoided unnecessary details
□ Set out key issues to be addressed

3. Facts
□ Included all legally relevant facts
□ Presented chronologically/logically
□ Excluded irrelevant information
□ Distinguished between facts and assumptions
□ Identified any missing crucial information

4. Legal Analysis
□ Identified all relevant legal issues
□ Stated correct legal principles
□ Cited relevant statutory provisions
□ Used appropriate case law
□ Applied law to specific facts
□ Explained how/why law applies to facts
□ Addressed potential counter-arguments
□ Analyzed risks and implications

5. Practical Application
□ Provided clear, actionable advice
□ Recommendations flow from legal analysis
□ Considered practical implications
□ Addressed client's specific concerns
□ Offered specific solutions/steps

6. Writing Quality
□ Used clear, professional language
□ Avoided unnecessary legal jargon
□ Maintained consistent terminology
□ Used proper paragraph structure (not bullet points)
□ Proper grammar and punctuation
□ No spelling errors
□ Clear topic sentences
□ Proper transitions between paragraphs

7. Conclusion
□ Summarized key points clearly
□ Recommendations follow from analysis
□ Addressed main client concerns
□ No new information introduced

8. Legal Reasoning
□ Logical progression of arguments
□ Supported assertions with authority
□ Identified and analyzed key issues
□ Considered alternative viewpoints

9. Final Check
□ Reviewed for completeness
□ Checked all legal references
□ Verified all factual statements
□ Proofread for clarity
□ Ensured consistent formatting
□ Checked document is properly marked confidential
□ Verified all client details are correct

Model Answer

MEMORANDUM

PRIVATE AND CONFIDENTIAL

To: Mr. David Chan

From: [Name of partner]

Date: [Date]

Re: Directors' Duties and Recommended Actions - Tech Solutions Limited

1. INTRODUCTION

I refer to our meeting on [date], regarding the situation at Tech Solutions Limited (the "Company") involving potential misappropriation of intellectual property by a senior programmer. This memorandum addresses your legal obligations as a director and recommends specific courses of action.

2. FACTUAL BACKGROUND

From our discussion, we understand that:

The Company is developing proprietary payment processing software, representing a significant corporate asset and future revenue stream. During a recent board meeting, you learned that a senior programmer (the "Employee") has been developing similar software independently and plans to resign next month to launch a competing business. The Employee has also transferred substantial portions of the Company's source code to personal devices, purportedly for remote work purposes. Your fellow directors have expressed reluctance to take action due to concerns about potential investor reactions.

3. LEGAL ANALYSIS

3.1 Your Directors' Duties

As a director of the Company, you owe both statutory duties under the Companies Ordinance (Cap. 622) ("CO")and fiduciary duties under common law. In this situation, the most pertinent duties are:

(a) The duty to act in good faith in the company's best interests (Section 465(1) CO)

This fundamental duty requires you to take active steps to protect the Company's assets and intellectual property. The Hong Kong Court of Final Appeal in Passport Special Opportunities Master Fund SPC Ltd v eSun Holdings Ltd [2011] 4 HKC 62 emphasized that directors must act to protect corporate assets, even when such action might be commercially uncomfortable. Your knowledge of the Employee's activities triggers an obligation to act.

(b) The duty to exercise reasonable care, skill and diligence (Section 465(2) CO)

This requires you to exercise both:

  • The general knowledge, skill and experience reasonably expected of a director; and

  • The specific knowledge, skill and experience that you actually possess.

Given your technical background and understanding of the software's value, the standard of care expected of you in this situation is particularly high. The court in Re City Equitable Fire Insurance Co [1925] Ch 407 established that directors must exercise reasonable diligence in the protection of company assets, which clearly extends to intellectual property.

3.2 Personal Liability Risk

Your position requires immediate action. Failure to address this situation could expose you to personal liability on several grounds:

(a) Breach of statutory duties under Section 465 CO, which could result in:

  • Personal liability for losses suffered by the Company

  • Disqualification proceedings under the Companies (Winding Up and Miscellaneous Provisions) Ordinance

  • Potential derivative actions by shareholders

The Hong Kong Court in Re Westmid Packing Services Ltd [1998] 2 All ER 124 held that directors who knowingly permitted misappropriation of company assets could be personally liable for resulting losses.

4. RECOMMENDED ACTIONS

Based on the above analysis, I strongly recommend the following immediate steps:

4.1 Immediate Board Action

  • Draft a formal letter to the board expressing your concerns and requesting an emergency board meeting. The letter should:

  • Detail the specific threats to company assets

  • Reference your statutory obligations

  • Request immediate preventive measures

  • Be sent by registered mail or email with delivery confirmation

  • Copy the Company Secretary

4.2 Protection of Company Assets

  • Recommend the board implement immediate protective measures:

  • Revoke the Employee's access to source code repositories

  • Conduct an IT audit of all code access and downloads

  • Secure all development environments

  • Engage forensic IT specialists to track data movements

  • Consider placing the Employee on garden leave

4.3 Legal Protection

  • The board should consider:

  • Issuing a cease and desist letter to the Employee

  • Reviewing employment agreements for non-compete clauses

  • Preparing for potential injunctive relief

  • Documenting all evidence of code downloads

  • Notifying relevant insurers

5. PROTECTING YOUR POSITION

To protect your personal position:

5.1 Documentation

Maintain detailed records of:

  • All communications regarding this issue

  • Your recommendations to the board

  • Any dissent from board decisions

  • Steps taken to protect company assets

5.2 Legal Notice

If the board remains inactive, consider serving a formal notice stating:

  • Your concerns about the breach of company assets

  • Your recommendations for action

  • Your dissent from any decision not to act

  • Reservation of your rights regarding personal liability

6. CONCLUSION

This situation requires immediate action to protect both the Company's interests and your position as director. The misappropriation of the Company's intellectual property presents serious risks that must be addressed. Your statutory and common law duties as a director require you to take active steps to protect the Company's assets. While board consensus is preferable, your personal obligations as a director may necessitate independent action if the board remains passive.

Given the serious nature of the potential breaches and your knowledge of them, I strongly recommend implementing the protective measures outlined above without delay. This will both safeguard the Company's interests and protect your position as director from potential personal liability.

Common Mistakes

Structure and Format Issues

  • Writing unfocused or overly broad introductions that don't identify the key issues

  • Including unnecessary background information not relevant to the legal analysis

  • Using bullet points instead of proper paragraph structure

  • Failing to use appropriate headings and subheadings for clear organization

  • Including administrative matters (like "next steps") in a formal legal memorandum

Content and Analysis Problems

  • Providing general legal principles without applying them to the specific facts

  • Offering overly simplistic "yes/no" answers without nuanced analysis

  • Citing cases without explaining their relevance to the current situation

  • Missing critical legal issues raised by the facts

  • Including irrelevant legal research that doesn't address the client's concerns

Language and Tone Issues

  • Using overly academic or theoretical language instead of practical advice

  • Including emotional or judgmental commentary

  • Writing in an informal or conversational style

  • Using uncertain language ("maybe," "possibly," "might") without proper context

  • Failing to maintain professional distance and objectivity

Professional Tips

Click here for a useful guide on director’s liabilities.

Initial Preparation

  • Carefully identify all legal issues raised by the facts:
    Start by reviewing the facts thoroughly to pinpoint all potential legal issues. Missing a key issue could result in incomplete advice and undermine the client’s trust. Consider both obvious and nuanced problems, such as breaches of duty or intellectual property theft.

  • Research thoroughly before starting to write:
    Conduct detailed research to ensure you fully understand the applicable laws and precedents. This prevents errors or oversights and strengthens the quality of your analysis.

  • Outline the structure before drafting and ask your senior to review the structure first if possible:
    A clear outline ensures your memorandum is logical and focused. Seeking senior approval for the structure ensures alignment with expectations and avoids unnecessary revisions later.

  • Consider the client's specific needs and level of legal knowledge:
    Tailor your language and level of detail to the client’s understanding. Avoid overwhelming a non-legal client with excessive technicalities, but ensure sufficient depth for informed decision-making.

Structure and Organization

  • Begin with a clear, concise introduction identifying the key issues:
    The introduction should briefly summarize the facts, identify the legal issues, and outline the memorandum’s structure. This helps the client immediately understand the scope and focus.

  • State relevant facts chronologically and precisely:
    Present the facts in a logical order, emphasizing those directly related to the legal issues. Avoid unnecessary details that may distract from the analysis.

  • Organize analysis by issue, not by source of law:
    Address each legal issue separately for clarity. Grouping analysis by statutes and cases can confuse the client and obscure the practical advice.

  • Use clear headings that identify the specific issue being addressed:
    Headings such as "Director Duties Under Hong Kong Law" or "Intellectual Property Concerns" help the client navigate the document and focus on key points.

  • Ensure each paragraph flows logically to the next:
    Maintain a logical progression of ideas within and between paragraphs to ensure readability and coherence. Use transitions to link concepts smoothly.

Legal Analysis

  • Start each section with the relevant legal principle:
    Begin with a clear statement of the applicable law or principle (e.g., “Under Hong Kong law, directors owe fiduciary duties to the company”). This sets the foundation for your analysis.

  • Explain how the law applies to the specific facts:
    Apply the legal principles to the client’s situation step-by-step, showing how the facts interact with the law. Avoid generic statements.

  • Support analysis with relevant authority:
    Cite cases, statutes, or legal commentary to strengthen your reasoning. Ensure citations are accurate and clearly linked to the issue being discussed.

  • Address counter-arguments where appropriate:
    Acknowledge potential counterpoints or challenges to your conclusions and explain why they may not apply or how they can be mitigated.

  • Provide practical implications of the legal conclusions:
    Explain how the conclusions affect the client’s position, obligations, or risks. This ensures the advice is actionable and relevant to the client’s goals.

Writing Style

  • Use clear, precise language:
    Avoid vague or ambiguous phrases. Precision ensures that the advice is easy to understand and implement.

  • Write in active voice:
    Active voice is more direct and professional, improving readability and impact (e.g., “The director must act in the company’s best interests” rather than “It is required that the director act in the company’s best interests”).

  • Keep sentences concise but informative:
    Long-winded sentences reduce clarity. Break complex ideas into concise, focused sentences while retaining necessary detail.

  • Avoid legal jargon unless necessary:
    Use plain language whenever possible, reserving legal terminology for concepts that cannot be simplified without losing accuracy.

  • Use consistent terminology throughout:
    Define terms (e.g., "the Company," "the Programmer") early on and use them consistently to avoid confusion.

Practical Advice

  • Focus on actionable recommendations:
    Provide specific steps the client can take (e.g., issuing a cease-and-desist letter or conducting an internal investigation). Avoid abstract or theoretical advice.

  • Explain risks and consequences clearly:
    Highlight potential risks (e.g., reputational damage, litigation) and how the recommended actions mitigate those risks.

  • Prioritize practical solutions over theoretical discussion:
    Focus on what the client can realistically do to address the issue, rather than simply outlining the law or potential outcomes.

  • Consider commercial implications of legal advice:
    Ensure your advice aligns with the client’s business objectives, such as minimizing disruption to investor negotiations while protecting intellectual property.

  • Be specific about recommended actions:
    Avoid vague suggestions. Clearly outline what should be done, who should do it, and when (e.g., “The Company Secretary should initiate disciplinary proceedings within five working days”).

Quality Control

  • Review for logical flow and consistency:
    Ensure the memorandum flows logically and that all sections align with the overall analysis and conclusions.

  • Check all legal citations:
    Verify case names, statutory references, and commentary citations for accuracy. Do not rely on AI.

  • Ensure all client questions are addressed:
    Revisit the client’s concerns to confirm that every issue has been fully analyzed and answered.

  • Verify all factual statements:
    Double-check the accuracy of facts obtained from the client or other sources to avoid errors in your analysis.

  • Proofread carefully for clarity and accuracy:
    Check for grammatical errors, unclear wording, or formatting inconsistencies to ensure professional quality.

Professional Presentation

  • Use consistent formatting throughout:
    Maintain uniform headings, font sizes, spacing, and alignment to ensure a polished and professional appearance.

  • Include proper client reference details:
    Include the client’s name, the matter number, and any other identifying details at the top of the memorandum.

  • Date the memorandum:
    Include the date to establish the timing of the advice, which is critical for legal and administrative purposes.

  • Number pages and paragraphs for easy reference:
    Add page numbers and paragraph numbers so the client or colleagues can quickly refer to specific sections.