Hong Kong's New Companies Ordinance
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03 April, 2014
The new Companies Ordinance (CO) and its subsidiary legislation, which is intended to provide a modernized legal framework for the operation and incorporation of companies in Hong Kong, came into effect on March 3, 2014. This feature provides an introduction to the new law and outlines the major changes that will result from the reforms.
A comprehensive exercise to rewrite the CO was launched almost 10 years ago, in mid-2006. Following five rounds of public consultations and numerous discussions during a series of public forums and seminars over the years, the Companies Bill was finalized and introduced into the Legislative Council (LegCo) in January 2011. After 44 meetings lasting a total of over 120 hours and consideration of over 200 papers or submissions, the Bill was passed by LegCo on July 12, 2012.
According to the Government of the Hong Kong Special Administrative Region of China, the new CO seeks to achieve four main objectives: enhancing corporate governance; facilitating business; ensuring better regulation; and modernizing the law. However, the overriding aim of the new law is to strengthening Hong Kong's status as an international commercial and financial center.
The major initiatives within the new CO, which consists of 921 sections and 11 schedules, include measures to strengthen the accountability of directors and to clarify the directors' duty of care, skill and diligence with a view to providing clear guidance, while it also enhances shareholder engagement and protection in a company's decision-making process.
Public companies and the larger private companies (that do not qualify for simplified reporting) now need to prepare a more comprehensive directors' report, which includes an analytical and forward-looking "business review," although private companies are allowed to opt out by special resolution.
Auditors are empowered by the new CO to require a wider range of persons accountable for the company, or its subsidiary undertakings' accounting records, to provide information or explanation reasonably required for the performance of the auditor's duties.
Better regulation will be ensured by means of the accuracy of information on the public register, an improvement to the registration of charges scheme, and a strengthening of the enforcement regime through the Companies Registry. There will be easier reporting for small- and medium-sized enterprises, which will also be able to prepare simplified financial and directors' reports.
In addition, par value for shares is abolished and a mandatory system of no-par for all companies is instituted, with the objective of not inhibiting the raising of new capital or unnecessarily complicating a company's accounting regime. At the same time, the requirement for companies to have a memorandum of association is abolished, and only articles of association are required.
Conditions contained in the memorandum of existing companies are deemed to be provisions of their articles, except those relating to authorized share capital and par value, which are regarded as deleted under the new CO.
The power of companies to issue share warrants to bearers is revoked. It is considered that share warrants are undesirable from the perspective of anti-money laundering because of the lack of transparency in the recording of their ownership and the manner by which they are transferred.
To facilitate implementation of the new CO, 12 pieces of subsidiary legislation have been made to provide for the relevant technical and procedural matters. In parallel, the Companies Registry has enhanced its information system, carried out an overall review of its policies and procedures and specified new forms for the implementation of the new legislation.
Companies are reminded to comply with the requirements under the new CO, and use the appropriate new forms for the delivery of returns to the Registry.
The New Companies Ordinance â Major Initiatives
Measures for Enhancing Corporate Governance
Strengthening the Accountability of Directors
- Restricting the appointment of corporate directors by requiring every private company to have at least one natural person to act as director, to enhance transparency and accountability.
- Clarifying in the statute the directorsâ duty of care, skill and diligence with a view to providing clear guidance to directors.
Enhancing Shareholder Engagement in the Decision-Making Process
- Introducing a comprehensive set of rules for proposing and passing a written resolution.
- Requiring a company to bear the expenses of circulating membersâ statements relating to the business of, and proposed resolutions for, Annual General Meetings, if they are received in time to be sent with the notice of the meeting.
- Reducing the threshold requirement for members to demand a poll from 10% to 5% of the total voting rights.
Improving the Disclosure of Company Information
- Requiring public companies and the larger (i.e., those that do not qualify for simplified reporting) private companies and guarantee companies to prepare a more comprehensive directorsâ report which includes an analytical and forward-looking âbusiness reviewâ, whilst allowing private companies to opt out by special resolution. The business review will provide useful information for shareholders. In particular, the requirement to include information relating to environmental and employee matters that have a significant effect on the company is in line with international trends to promote corporate social responsibility.
- Widening the ambit of the disclosure of material interests of directors in contracts of significance with the company to cover transactions and arrangements and to expand the coverage to include the material interests of entities connected with a director in the case of public companies.
Fostering Shareholder Protection
- Introducing more effective rules to deal with directorsâ conflicts of interests, including expanding the requirement for seeking shareholdersâ approval to cover directorsâ employment contracts which exceed three years.
- Requiring disinterested shareholdersâ approval in cases where shareholdersâ approval is required for transactions of public companies and their subsidiaries.
- Requiring the conduct of directors to be ratified by disinterested shareholdersâ approval to prevent conflicts of interest and possible abuse of power by interested majority shareholders in ratifying the unauthorised conduct of directors.
- Replacing the âheadcount testâ with a not more than 10% disinterested voting requirement for privatisations and specified schemes of arrangement, while giving the court a new discretion to dispense with the test (in cases where it is retained) for membersâ schemes.
- Extending the scope of the unfair prejudice remedy to cover âproposed acts and omissionsâ, so that a member may bring an action for unfair prejudice even if the act or omission that would be prejudicial to the interests of members is not yet effected.
Strengthening Auditorsâ Rights
- Empowering an auditor to require a wider range of persons, including the officers of a companyâs Hong Kong subsidiary undertakings and any person holding or accountable for the company or its subsidiary undertakingsâ accounting records, to provide information or explanation reasonably required for the performance of the auditorâs duties. The offence for failure to provide the information or explanation is extended to cover officers of the company and the wider range of persons.
Measures for Ensuring Better Regulation
Ensuring the Accuracy of Information on the Public Register
- Clarifying the powers of the Registrar of Companies (the Registrar) in relation to the registration of documents, such as specifying the requirements for the authentication of documents to be delivered to the Companies Registry (the Registry) and the manner of delivery, and withholding the registration of unsatisfactory documents pending further particulars.
- Clarifying the Registrarâs powers in relation to the keeping of the register, such as rectifying typographical or clerical errors, making annotations and requiring a company to resolve any inconsistency or provide updated information.
- Providing a statutory basis for applications to court for removing information from the register that is inaccurate, forged or derived from anything invalid, ineffective or done without the authority of the company.
- Requiring a company to deliver to the Registry a return, including a statement of capital, whenever there is a change to its capital structure, to ensure that the public register contains up-to-date information on a companyâs share capital structure.
- Requiring all guarantee companies to file annual returns with financial statements and introducing an escalating scale of annual registration fees for annual returns of guarantee companies to encourage timely compliance of statutory filing requirement.
Improving the Registration of Charges
- Revising the list of registrable charges, such as expressly providing that a charge on an aircraft or any share in an aircraft is registrable, and removing the requirement to register a charge for the purpose of securing an issue of debentures.
- Replacing the automatic acceleration of the repayment obligation with a choice given to the lender as to whether the secured amount is to become immediately payable when a charge is void due to non-compliance with the registration requirements.
- Requiring a certified copy of the charge instrument (in addition to the prescribed particulars of the charge) to be registered and available for public inspection, to provide more detailed information to those who search the register.
- Shortening the period for delivery to the Registrar of the charge instrument and the prescribed particulars from five weeks to one month, to reduce the period during which the charge is not visible on the register.
- Requiring written evidence of satisfaction/release of a charge to accompany a notification to the Registrar for registration of the satisfaction/release, thus making such documents available for public inspection.
Refining the Scheme for Deregistration of Companies
- Imposing three additional conditions for the deregistration of defunct companies, namely that the applicant must confirm that the company is not a party to any legal proceedings and that neither the company nor its subsidiary has any immovable property in Hong Kong, to minimise any potential abuse of the deregistration procedure.
Improving the Enforcement Regime
- Enhancing the investigatory powers of an inspector, for example, by requiring a person under investigation to preserve records or documents and to verify statements made by statutory declaration.
- Providing better safeguards to ensure the confidentiality of information obtained in investigations and enquiries and for the better protection of informers.
- Providing new powers for the Registrar to obtain documents or information to ascertain whether any conduct that would constitute an offence in relation to the provision of false or misleading statement to the Registrar has taken place.
- Strengthening the enforcement regime in relation to the liabilities of officers of companies for the companiesâ contravention of provisions in the new Ordinance, including lowering the threshold for prosecuting a breach or contravention and extending it to cover reckless acts through a new definition of âresponsible personâ.
- Introducing a new offence in relation to inaccurate auditorâs reports. The offence would be committed if the auditors in question knowingly or recklessly caused two important statements to be omitted from the auditorâs report.
- Empowering the Registrar to compound specified offences to optimise the use of judicial resources. Compoundable offences are generally confined to straightforward, minor regulatory offences committed by companies that are punishable by a fine.
Measures for Facilitating Business
- Allowing companies to dispense with Annual General Meetings by unanimous shareholdersâ consent.
- Introducing an alternative court-free procedure for reducing capital based on a solvency test.
- Allowing all types of companies (rather than just private companies, as in the current Companies Ordinance (Cap. 32)) to purchase their own shares out of capital, subject to a solvency test.
- Allowing all types of companies (whether listed or unlisted) to provide financial assistance to another party for the purpose of acquiring the companyâs own shares or the shares of its holding company, subject to a solvency test. Under the current Companies Ordinance, subject to certain specified exceptions, there is a broad prohibition on the giving of financial assistance to purchase the companyâs own shares.
- Introducing a new court-free statutory amalgamation procedure for wholly owned intra-group companies.
- Streamlining the procedures for the restoration of dissolved companies by court order.
- Introducing a new administrative restoration procedure for a company dissolved by the Registrar in straightforward cases, without the need for recourse to the court.
Facilitating Simplified Reporting
- Facilitating SMEs to prepare simplified financial and directorsâ reports along the following lines:
- a private company (with the exception of a bank/deposit-taking company, an insurance company or a stockbroker) will automatically qualify for simplified reporting if it qualifies as a âsmall private companyâ.
- the holding company of a group of companies that qualifies as a âgroup of small private companiesâ will also qualify for simplified reporting.
- a private company that is not a member of a corporate group may adopt simplified reporting with the agreement of all the members.
- Allowing small guarantee companies and groups of small guarantee companies, which have total annual revenue of not more than HKD25m, to qualify for simplified reporting.
- A private company or a group of private companies which is not qualified as a âsmall private companyâ or a âgroup of small private companiesâ respectively may prepare simplified reports if it meets a higher size criteria and if the members holding 75% of the voting rights so resolve and no member objects.
- Making the summary financial reporting provisions more user-friendly and extending their application to companies in general (rather than confining them to listed companies, as in the current Companies Ordinance).
Facilitating Business Operations
- Making the use of a common seal optional and relaxing the requirements for a company to have an official seal for use abroad.
- Permitting a general meeting to be held at more than one location using electronic technology.
- Setting out the rules governing communications to and by companies in electronic form.
Measures for Modernising the Law
Rewriting the Law in Simple and Plain Language
- Modernising the language and re-arranging the sequence of some of the provisions in a more logical and user-friendly order so as to make the new CO more readable and comprehensible.
Abolishing Par Value for Shares
- Adopting a mandatory system of no-par for all companies with a share capital as par value is an antiquated concept that may give rise to practical problems, such as inhibiting the raising of new capital and unnecessarily complicating the accounting regime.
Abolishing Memorandum of Association
- Abolishing the requirement for companies to have a memorandum of association and only articles of association are required. Conditions contained in the memorandum of existing companies will be deemed to be provisions of their articles, except those relating to authorized share capital and par value, which are regarded as deleted under the new CO.
Removing the Power to Issue Share Warrants
- Removing the power of companies to issue share warrants to bearers. Share warrants are rarely issued by companies nowadays and are undesirable from the perspective of anti-money laundering because of the lack of transparency in the recording of their ownership and the manner by which they are transferred.
Clarifying the Rules on Indemnification of Directors against Liabilities to Third Parties
Clarifying the rules on the indemnification of directors against liabilities to third parties in order to remove the uncertainties at common law.
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