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The Hong Kong Companies Ordinance

Global Incorporation Guide [GIG] Editorial

January 22, 2015


Yet another record year for Hong Kong in terms of registrations of new companies by both local entrepreneurs and international investors has been attributed in large part to an overhaul of the territory's company law, which went into effect last year. This feature provides an overview of the changes brought about by the new Hong Kong Companies Ordinance.


Introduction – Hong Kong's Attractions

Hong Kong is not an offshore centre in the traditional sense of the word but rather a territory which offers a non-discriminatory low tax regime governed by the "territorial principle" under which only income arising in or derived from Hong Kong is taxable in the jurisdiction, making it the ideal location for a holding company. As such its attraction lies not in the tight secrecy and minimal corporate disclosure and administrative requirements which characterize a number of offshore common-law island jurisdictions but rather in low tax rates, generous tax deductible allowances, a policy of only taxing income sourced from within the jurisdiction and the complete absence of capital gains taxes, withholding taxes, interest taxes, sales tax & VAT.

The establishment of an office in Hong Kong does not of itself render a company liable to profits tax where that office is not generating profits from within the territory. Indeed Hong Kong has been a favourite choice for regional headquarters, for this reason.

Evidently, the rapid opening up of mainland China and Hong Kong's special relationship with the mainland have increased the attractions of Hong Kong as a regional base from which to operate.


An Entrepreneurial Beehive

Although Hong Kong's economic growth figures have not reached the heights seen in the years preceding the financial crisis, company formation statistics nevertheless attest to the popularity of the territory among local and foreign investors.

According to the Hong Kong Companies Registry, the number of local companies registered under the Hong Kong Companies Ordinance surpassed 1.2m for the first time in 2014, after year-on-year growth of 9.4 percent.

In March 2014, there was a jump in new registrations to a record monthly high of 30,463, ahead of the expiry of a waiver on business registration fees on April 1, 2014. The fee for a one-year certificate normally totals HKD2,250 (USD290), made up of a HKD2,000 fee and a HKD250 levy, but this fee had been waived for two years.

A record number of companies – almost 39,000 – were incorporated online through the e-Registry, an increase of 8.23 percent. 811 foreign companies were newly registered last year, an increase of almost four percent on 2013 levels. The total number of registered non-Hong Kong companies reached more than 9,600 by the end of 2014.

"The new CO, which commenced operation on March 3 last year, provides a modernized legal framework for the incorporation and operation of companies in Hong Kong and reinforces Hong Kong's role as an international financial and commercial center," said the Registrar of Companies, Ada Chung.

During the year, the Companies Registry conducted a comprehensive publicity program to promote public awareness of the major changes brought about by the new Ordinance, such as the abolition of the par value of shares and removal of the mandatory requirement of having a common seal.

"We handled over 60,000 inquiries on the new Ordinance from January to August, 2014, and have organized or participated in over 70 briefings or seminars to promote the new law," Chung added. "The transition has been very smooth. The various initiatives introduced by the new CO further simplify the procedures for starting a business, as well as enhance corporate governance in Hong Kong."


International Investors

Hong Kong also remains as popular as ever among foreign investors, and Invest Hong Kong, the territory's inward investment agency, assisted a record number of businesses to establish operations in 2014.

InvestHK's Director-General of Investment Promotion, Simon Galpin, said: "2014 was another record year for InvestHK in terms of completed projects. Despite ongoing challenges in the global economy, Hong Kong continues to attract overseas and Mainland investors because of its enduring advantages and emerging business opportunities."

The Department assisted 355 overseas and Mainland companies to set up or expand in Hong Kong last year, a year-on-year increase of 5.4 percent. It hopes to increase this number to 370 this year.

Foreign direct investment came from a record 47 economies in 2014. Mainland China continued to lead with a total of 75 projects, followed by the United States (44), the United Kingdom (32), Japan (28), and France (25). For the first time, InvestHK also helped companies from Bangladesh, Cyprus, Kuwait, Poland, Romania, and Tajikistan.

The number of companies with a parent overseas or in the Mainland that set up regional headquarters, regional offices, and local offices reached a record 7,585 in 2014.

In addition, InvestHK set up a dedicated team to assist startups in 2014. During the year, the Department assisted 62 founders and entrepreneurs to start their businesses in Hong Kong, or 17.5 percent of its total number of projects. According to a recent survey by InvestHK, there are already more than 1,000 start-ups operating out of 35 co-work locations in Hong Kong.

"In the year ahead, we will continue to identify investors from key sectors and markets. Our targets include companies ranging from entrepreneur-led ventures to multinationals that plan to set up or expand in our city," Galpin added. He confirmed that InvestHK will continue to reach out to potential clients in priority markets, including Mainland China and Association of Southeast Asian Nations (ASEAN) economies, and the Department will focus in particular on businesses engaged in financial technology, e-commerce, and maritime services.


The New Companies Ordinance: Introduction

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 Brief History of the Companies Ordinance

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.


Aims of the Companies Law

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 centre.


Summary

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 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 directors' duties 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 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.
  • 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 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.
  • 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 directors' conflicts of interests, including expanding the requirement for seeking shareholders' approval to cover directors?? employment contracts which exceed three years.
  • Requiring disinterested shareholders' approval in cases where shareholders' approval is required for transactions of public companies and their subsidiaries.
  • Requiring 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.
  • Replacing 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.
  • Extending 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 affected.

Strengthening Auditors Rights

  • Empowering 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.


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 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.
  • 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 company's 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 de-registration 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 company's 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.
  • Introducing 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.
  • 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

Streamlining Procedures

  • Allowing 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.
  • 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 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.
  • 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 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.
  • Allowing small guarantee companies and groups of small guarantee companies, which have total annual revenues 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 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.
  • 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.

 

Tags: Hong Kong | tax | business | interest | Invest | law | audit | court | China | accounting | holding company | legislation | entrepreneurs | investment | fees | offshore | compliance | regulation | enforcement | corporate governance | company formation

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