Simon Says: Free Shares, a Trap or a Windfall?
Published04/26/2017 by Simon Choi
This is the ninth in a weekly series of legal advice provided in a short and entertaining story format.
This week's areas of Interest: Company, Contract, Corporate Law
This week's keywords: Contract or Corporate Law, Shareholder’s Rights, Registered Capital, Joint Liability
Free Shares, a Trap or a Windfall?
Jack and Jill are the founders of a coffee shop, Starsucks. Jack owns 40% of the shares, while Jill holds the other 60%. The registered capital of the company was 1 million, but Jack and Jill only paid a hundred thousand as they obviously didn’t have that amount at that time.
Starsucks was a major success, and they opened 10 new stores in the course of only 5 years. Jack suddenly came up with a new idea. He wanted to expand the company further and make more money. Indonesian coffee was a rather new concept, and Jack knew that his customers would love it, so he decided to introduce it to his shops and see how well it did.
It was Kopi Luwak, which is Indonesian for civet coffee, can cost up to £51 a cup and is often substituted for cheaper beans.It is created by feeding the coffee cherries to the Asian carnivore, which is also known as a toddy cat. They digest the soft fruit and then excrete the hard bean inside.Now this isn’t your regular cheap coffee.The coffee beans are plucked from civet excretions.
Well, things didn’t go that well for this new product. Jack got scammed and the coffee beans he was given were picked from the feces of actual cats, the flurry ones you have at home. Knowing they had messed up, Jill suggested that they abandon ship. But they didn’t want to carry an enormous amount of debt with them. It was time to find a scapegoat.
They declared to their general manager, Ken and his assistant Ben that they wanted to retire and go travelling, and gave them all their shares. Ken and Ben were so happy to receive the shares, thinking that their 5 years of loyalty had paid off. Little did they know that their expensive coffee was actually a knockoff.
One month later, it was time to actually serve Kopi Luwak. Ken had also signed a contract with a 5 star hotel to be their supplier of coffee beans. The poor customers got a horrible shock when they found out that the Civet Coffee was made from actual cat excretions, and Starsucks got sued for 1 million.
Prof Simon Says:
By transferring their shares over to Ken and Ben, Jack and Jill are no longer responsible for anything that happens in the company. They successfully pulled it off.
Ken and Ben are responsible for paying that 1 million, because the amount of registered capital in the books is 1 million. Not only did they waste 5 years of their life, they are now suddenly indebted with 1 million.
There is no such thing as free lunch in the world. If someone suddenly offers you free shares, ask a lawyer to check it for you before accepting such windfall.
For more about this or to contact Professor Simon Choi at www.acmeardent.com, firstname.lastname@example.org, +86 13823677853 or by WeChat: simonhkchoi.
"This article was originally written in Chinese by Mr Huanyu Li and rewritten into English by Simon Choi."
About the Author: Professor Simon Choi
Prof Simon Choi, solicitor and linguist, is an international lawyer, qualified to practise law in England & Wales and in Hong Kong, China. Simon graduated from law schools of the Peking University, the University of London and the University of Hong Kong respectively, with an in-depth knowledge of Chinese laws and common laws and with more than 20 years experience in China practice and international trade, investment, finance, merger & acquisition. He is an adjunct professor of laws at the Zhongnan University of Economics and Law. Simon is the founding partner of Acme Ardent and can be reached at email@example.com or +86 13823677853.
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