Lowtax International Company Formation - Legislative Developments in Hong Kong and Singapore
By Lowtax Editorial
19 October, 2012
As with tax, there is something of a competition between key financial hubs and offshore jurisdictions to offer the best regulatory and legal platform from which international investors can target foreign markets, and this means that company legislation is a constantly evolving beast in many parts of the world.
In Asia, competition is particularly fierce between Hong Kong and Singapore as to who can claim the right to be the region’s top financial dog, and as part of this process both jurisdictions are currently steering though major reforms that will modernise their company laws.
Neither Hong Kong nor Singapore are ‘offshore’ in the traditional sense of the word, but both are low-tax jurisdictions and have as a consequence of maintaining a staunchly pro-business policy stance been very successful in attracting investment. There are already approaching 1 million companies in the Hong Kong’s Company Register – a quite remarkable figure considering that the SAR’s population is 7 million – and almost 7,000 foreign parent companies operating out of the city. Singapore’s figures aren’t quite so impressive, but there are still 250,000 ‘live’ companies registered in the city-state and, by virtue of a special tax incentive, Singapore is also a popular jurisdiction for the establishment of foreign headquarters.
However, neither jurisdiction has been able to attract the amount of business that they have done in the past simply by standing still. Hence the governments in both places view overhauling the legislative framework for incorporating companies as vital to securing their future success, and here we summarise the key changes that are taking place to both sets of company laws.
Hong Kong Companies Law Rewrite – A Brief History
The new Companies Bill was tabled by the government in January last year, but the rewrite of the Companies Ordinance (CO) started in mid-2006, and three public consultations were conducted to gauge views on a number of complex subjects.
In the course of the rewrite exercise, the Financial Services and the Treasury Bureau benefited from the advice of the Standing Committee on Company Law Reform as well as four advisory groups and a joint government/Hong Kong Institute of Certified Public Accountants working group, which was set up to advise on specific areas of the rewrite.
Hong Kong’s rewritten Companies Ordinance (CO) was gazetted on August 10, following the passage of the Companies Bill by the Legislative Council on July 12.
The comprehensive rewrite aims to achieve four main objectives - enhancing corporate governance, ensuring better regulation, facilitating business and modernising the law. It allows Hong Kong to leverage the developments of company law in other comparable jurisdictions, and further enhance its competitiveness and attractiveness as a major international business and financial centre.
Some of the measures introduced by the bill to enhance corporate governance include: improving the accountability of directors so as to enhance transparency and accountability, and clarifying directors’ duty of care, skill and diligence; emphasizing shareholder engagement in the decision-making process; improving the disclosure of company information; and strengthening auditors’ rights.
In addition, 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 Registrar. There will be easier reporting for small- and medium-sized enterprises, which will also be able to prepare simplified financial and directors’ reports. These new measures are set out in more detail below.
A government spokesman said: "The new CO, comprising 921 sections and 11 schedules, provides a modernised legal framework for the incorporation and operation of companies in Hong Kong. Its objectives are to enhance corporate governance, improve regulation, facilitate business and modernise the law with a view to strengthening Hong Kong's competitiveness as a corporate domicile and enhancing its status as a major international commercial and financial centre."
The new ordinance will commence operation on a date to be appointed by the Secretary for Financial Services and the Treasury. Before its commencement, the government will submit more than ten pieces of implementing subsidiary legislation to the legislature for vetting and enactment in 2013, and the new CO will start operation after their enactment, tentatively scheduled for 2014.
"We aim to consult relevant stakeholders on the proposed subsidiary legislation in the coming months," the government spokesman noted.
Hong Kong Companies Bill - Major Changes
The new Companies Ordinance introduces changes in the following areas:
- Restricts 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.
- Clarifies in the statute the directors’ duty of care, skill and diligence with a view to providing clear guidance to directors.
- Introduces a comprehensive set of rules for proposing and passing a written resolution.
- Requires a company to bear the expenses of circulating members’ 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.
- Reduces the threshold requirement for members to demand a poll from 10% to 5% of the total voting rights.
Disclosure of Information
- Requires public companies and the larger (i.e., companies that do not qualify for simplified reporting) private companies and guarantee companies to prepare a more comprehensive directors’ report which includes an analytical and forward-looking “business review”, 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.
- Introduces more effective rules to deal with directors’ conflicts of interests, including expanding the requirement for seeking shareholders’ approval to cover directors’ employment contracts which exceed three years.
- Requires disinterested shareholders’ approval in cases where shareholders’ approval is required for transactions of public companies and their subsidiaries.
- Requires the conduct of directors to be ratified by disinterested shareholders’ approval to prevent conflicts of interest and possible abuse of power by interested majority shareholders in ratifying the unauthorised conduct of directors.
- Replaces the “headcount test” 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 members’ schemes.
- Extends the scope of the unfair prejudice remedy to cover “proposed acts and omissions”, 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.
- Empowers an auditor to require a wider range of persons, including the officers of a company’s Hong Kong subsidiary undertakings and any person holding or 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. The offence for failure to provide the information or explanation is extended to cover officers of the company and the wider range of persons.
Accuracy of Information
- Clarifies 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.
- Clarifies the Registrar’s 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.
- Provides 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.
- Requires 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 company’s share capital structure.
Registration of Charges
- Revises 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.
- Replaces 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.
- Requires 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.
- Shortens 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.
- Requires 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.
Deregistration of Companies
- Imposes 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.
- Enhances 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.
- Provides better safeguards to ensure the confidentiality of information obtained in investigations and enquiries and for the better protection of informers.
- Provides 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.
- Strengthens the enforcement regime in relation to the liabilities of officers of companies for the companies’ 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 responsible person.
- Introduces a new offence in relation to inaccurate auditor's reports. The offence would be committed if the auditors in question knowingly or recklessly caused two important statements to be omitted from the auditor’s report.
- Empowers 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.
- Allows companies to dispense with Annual General Meetings by unanimous shareholders’ consent.
- Introducing an alternative court-free procedure for reducing capital based on a solvency test.
- Allows 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.
- Allows all types of companies (whether listed or unlisted) to provide financial assistance to another party for the purpose of acquiring the company’s 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 company’s own shares.
- Introduces a new court-free statutory amalgamation procedure for wholly owned intra-group companies.
- Streamlines the procedures for the restoration of dissolved companies by court order.
- Introduces a new administrative restoration procedure for a company dissolved by the Registrar in straightforward cases, without the need for recourse to the court.
Facilitates SMEs to prepare simplified financial and directors’ 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 small private company”.
- the holding company of a group of companies that qualifies as a “group of small private companies” 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.
- Allows small guarantee companies and groups of small guarantee companies, which have a total annual revenue of not more than SGD25m, to qualify for simplified reporting.
- A private company or a group of private companies which is not qualified as a “small private company” or a “group of small private companies” 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.
- Makes 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).
- Makes the use of a common seal optional and relaxing the requirements for a company to have an official seal for use abroad.
- Permits a general meeting to be held at more than one location using electronic technology.
- Sets out the rules governing communications to and by companies in electronic form.
Modernising the Law
- Adopts 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.
- Removes 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.
- Introduces new provisions for withholding directors’ residential addresses and full identity card/passport numbers of individuals from public inspection in order to foster the protection of personal data.
- Clarifies the rules on the indemnification of directors against liabilities to third parties in order to remove the uncertainties at common law.
Singapore Companies Act Review – An Overview
Like Hong Kong, changes to the Companies Act aim to maintain Singapore’s competitiveness as a business hub, reduce regulatory burden for companies and improve the corporate governance landscape. And also like Hong Kong, this is a major legislative exercise, representing the most substantial change to Singapore’s companies law since it was enacted in 1967.
The Ministry of Finance (MOF) has completed its review of changes to the Companies Act in September. From June to October 2011, the MOF had invited public feedback on the final report of the Steering Committee (SC), which it set up in October 2007 to review the Companies Act and which submitted its final report to the Minister for Finance in April last year.
Following the public consultation, the MOF has accepted 192 and modified 17 recommendations of the SC, with eight recommendations not being accepted at the moment.
The wide ranging changes are expected to bring benefits to various stakeholder groups such as companies, small-and-medium enterprises (SMEs), retail investors and company directors. For example, companies will be allowed to issue non-voting shares and shares carrying multiple votes, if their Articles allow it and subject to certain safeguards. This will give companies greater flexibility in raising capital, and meet different investor preferences.
However, it is recognized that a dual class share structure may give rise to issues pertaining to entrenchment of control for public listed companies, and the Singapore Exchange will, in consultation with Monetary Authority of Singapore, have to evaluate carefully if it should be permitted for listed companies, and whether listed companies should be allowed to issue non-voting shares and shares with multiple votes.
In addition, the statutory duty to disclose conflict of interests in transactions, and shareholdings in the company and related corporations, will be extended from directors, also to CEOs. This is consistent with the approach adopted under the Securities and Futures Act.
A new small company concept will be introduced for determining the requirement for statutory audit, such that SMEs can look forward to lower compliance costs.
For retail investors, a multiple-proxies regime will be introduced to allow indirect investors and retirement fund investors to attend and vote at shareholders’ meetings. This will provide for more active participation at general meetings by the beneficial owners of the company, and help strengthen the culture of corporate governance.
Deputy Prime Minister and Minister for Finance, Tharman Shanmugaratnam, announcing the government’s decision on the SC’s recommendations, said: “In evaluating views on each of the 217 recommendations, the MOF has adopted a principled, but pragmatic approach. We have sought to ensure that we keep a competitive business environment, but one that preserves investors’ rights and interests where they really matter.”
Professor Walter Woon, Chairman of the SC, welcomed the government’s acceptance of almost all of the SC’s recommendation. “I believe that the changes introduced in this review will improve Singapore’s corporate regulatory framework and enhance our position as a business hub,” he said.
The accepted recommendations will be implemented through amendments to the Companies Act. MOF will seek public feedback on a draft amendment bill early next year.
Singapore Companies Act Review – Key Recommendations
The following information is an overview of the decisions made by the Ministry of Finance based on key recommendations by the Steering Committee for the Review of the Companies Act.
Liberalising Rules Governing Electronic Transmission
Companies will be allowed to specify in their constitutional documents the mode of electronic transmission to be used. Certain safeguards will also be imposed to set minimum standards on the use of electronic transmission.
Allowing Companies to Issue Shares with Multiple and Non-Voting Rights
Currently, private companies are allowed to issue shares with multiple and non-voting rights. There is a restriction on public companies doing so. This one-share-one-vote restriction will be removed for public companies. Safeguards will be imposed to protect the rights of existing shareholders and ensure that shareholders know the rights attached to any particular class of shares.
Extending Disclosure Requirements to CEOs
The statutory duty to disclose conflict of interests in transactions, and shareholdings in the company and related corporations will be extended from directors to CEOs. This is consistent with the approach adopted under the Securities and Futures Act.
Retaining the Exempt Private Company Regime
The concept of the EPC and the exemption from filing financial information for solvent EPCs will be retained. While the Standing Committee felt that greater transparency on the financial information of solvent EPCs could facilitate due diligence by persons dealing with them, the feedback received indicated that confidentiality afforded by the EPC regime is important to companies where their financial statements contained commercially-sensitive information which, if disclosed to the public, will be detrimental to the interests of the company.
Revised Small Company Audit Exemption Criteria
A new small company concept will be introduced for determining the requirement for statutory audit. A small company which is a private company that fulfils two of the following three criteria will be exempt from audit: total annual revenue of not more than SGD10m; total gross assets of not more than SGD10m; number of employees of not more than 50.
To provide certainty to companies, the criteria are consistent with those used in the Singapore Financial Reporting Standard for Small Entities. Existing safeguards will also be retained.
It is estimated that an additional 25,000 companies registered in Singapore will benefit from this provision.
Easing Compliance Costs for Small Companies
A dormant non-listed company which is not a subsidiary of a listed company will be exempt from the requirement to prepare accounts, subject to safeguards.
Multiple Proxies Regime for Indirect Investors
A multiple proxies regime will be introduced to give indirect investors and central provident fund (CPF) investors the same rights as direct investors in respect of attendance at shareholders’ meetings. Nominee companies and custodian banks will be allowed to appoint more than two proxies so that indirect investors can be appointed as proxies to participate in shareholders’ meetings. This regime will be extended to allow CPF investors who purchase shares through the CPF Investment Schemes or the Special Discounted Share Scheme to attend shareholders’ meetings. Each proxy will be given the right to vote on a show of hands, in addition to voting on a poll.
Protecting Directors’ Identity
Currently, Directors are required to reflect their residential addresses in ACRA’s (Accounting and Corporate Regulatory Authority) register. The revised Act will allow Directors to reflect alternate addresses. Safeguards will be in place to prevent abuse. This is designed to protect the privacy of directors.
It has been decided that the codification of directors’ duties in the same manner as the UK would be undesirable because this can result in a loss of flexibility.
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