Jurisdiction - Hong Kong
Reports and Analysis
Hong Kong – Changes To The Share Capital Regime.

27 May, 2014

 

 

Part 4 of the new Companies Ordinance (Cap 622) sets out fundamental concepts of the share capital regime applicable to companies incorporated in Hong Kong. It consolidates concepts set out in Parts I and II of the old Companies Ordinance (Cap 32). In this Practice Note written by Samantha Thompson, Partner at Linklaters, we examine the key changes.

 

No Par Value 


Section 5(4) of the old Companies Ordinance (Cap 32) (old CO) required the share capital of a Hong Kong incorporated company to be divided into shares of fixed amounts. Section 135 of the new Companies Ordinance (Cap 622) (new CO) imposes a mandatory no par system for all Hong Kong incorporated companies with a share capital. This will automatically apply to these companies when new CO becomes effective, irrespective of when the company was incorporated. 


Commentary

 

  • This change has the effect of abolishing concepts such as nominal value, share premium, capital redemption reserve and the requirement for authorised capital. 

 

  • When a company issues shares, directors can determine (without reference to a minimum value) their issue price and, subject to limited exceptions, the company’s share capital will be increased by an amount equal to the consideration paid for the new shares. 

 

  • The concepts of group reconstruction relief and merger relief have been amended to reflect the fact that par value is no longer relevant. Group reconstruction relief is relevant when a company issues shares to another group company for a transfer to it of non-cash assets. In this context, a ‘group’ comprises a holding company and its wholly owned subsidiaries. Under old CO, s 48D, the issuing company’s share capital will be increased by the nominal value of the new shares and the ‘minimum premium value’, being the lower o fmarket value and book value of the non-cash assets less the nominal value of the new shares. Under new CO, s 195, the issuing company’s share capital will be increased by one amount called the ‘net base value’, being the lower of market value and book value of the non-cash assets (new CO, ss 195, 196). Merger relief is relevant when a company issues shares in consideration for acquiring at least 90% of the shares of another company. Under old CO, s 48C, the issuing company’s share capital will be increased by the nominal value of the new shares, and any consideration in excess of the nominal value will not be recorded as share premium. Under new CO, s 196, the issuing company’s share capital will be increased by an amount equal to the value of the subscribed capital of the target company attributable to the shares being acquired. 

 

  • Abolition of par value, together with the 1997 abolition of the doctrine of ultra vires in relation to corporate capacity and the consequential lower significance of the objects clause, means that the need for a memorandum is diminished. As such, new CO removes the requirement for Hong Kong incorporated companies to have a memorandum. 

 

  • Transitional provisions are included in new CO relating to the migration from shares having minimum to no par value. The provisions are intended to ensure contractual rights are not affected by the abolition of par value and the amalgamation of a company’s existing share capital amount without reference to separate share premium, capital redemption and other reserves (new CO, Sch 11, ss 35–41).
 

Shareholders’ Consent Required For Grant Of Rights To Subscribe For, Or To Convert Securities Into, Shares 


Under old CO, s 57B, subject to certain exceptions such as an offer made pro rata to existing shareholders, directors are prohibited from allotting shares without prior approval of the company in general meeting. No shareholder approval is required for the grant of any rights to subscribe for, or to convert any security into, shares. 


Under new CO, s 140, the existing prohibition and exceptions are retained. In addition, the prohibition is extended to the grant of any rights to subscribe for, or to convert any security into, shares. A new exception is expressly provided: directors can allot shares via a pro rata bonus issue without prior approval of the company

 

Commentary

 

  • The government explained this amendment as an enhancement of the protection of minority shareholders against dilution, ie the timing for seeking shareholder approval has now been brought forward to when such rights are granted. 

 

  • For Hong Kong incorporated companies that are listed on the Hong Kong Stock Exchange, new CO should be read in conjunction with the Hong Kong Listing Rules. 
 

Updating Companies Registry With A Statement Of Capital Each Time A Change To A Company’s Share Capital Occurs 


Under old CO, a return has to be filed with Companies Registry within one month of any allotment of shares or other changes to a company’s share capital. However, these make no reference to the company’s overall share capital position following the change. Accordingly, a picture of the company’s capital structure can only be ascertained by searching a number of documents filed with Companies Registry (old CO, ss 45, 54). 


Under new CO, ss 142 and 171, the requirement to file a return within one month is retained. In addition, a statement of capital must be included, setting out, in respect of the company as a whole and each class of its shares, the number of issued shares, the amounts paid up, the total amount of its issued share capital and, for each class of shares, details of any rights attaching to the shares (new CO, ss 142, 171, 201). 


Commentary

 

  • This change should make it easier for the public to verify the share capital position of a company. However, since a return (and the statement of capital) can be filed within one month after the relevant change, the public register still cannot be relied upon as an up-to-date source. 
 

Altering A Company’s Share Capital 


Under old CO, s 53, a company may alter its share capital by ordinary resolution in the following ways:

 

  • increase share capital by issuing new shares
  • consolidate or divide shares
  • convert paid-up shares into stock
  • sub-divide shares
  • cancel shares
 

Under new CO, ss 170 and 172, these are retained (save for conversion of shares into stock). In addition, a limited company may:

 

  • increase share capital without issuing new shares if funds or other assets for the increase are provided by members 
  • capitalise its profits, with or without issuing new shares
  • allot and issue bonus shares with or without increasing its share capital and 
  • re-denominate its share capital from one currency to another
 

Commentary

 

  • These changes are intended to simplify the share capital regime and support the no par system.
 

Clarifying And Simplifying Requirements Relating To Class Rights 


Under old CO, the procedural requirements to vary special rights attaching to any class of shares depend on whether they are contained in the articles, contract or terms of issue, or in the memorandum of the company. Special rights not included in the memorandum may be varied by written consent of holders of ¾ of issued shares of that class, or by a special resolution passed at a general meeting of holders of the total voting rights of the shares in that class. If the special rights are provided in the memorandum, how they can be varied depends on whether any provision for their variation is included in the memorandum or articles. Where such provisions are included, members representing at least 10% of the total voting rights of the shares in that class may apply to the court to block the variation on the basis that it would unfairly prejudice them (old CO, ss 63A, 64). 


Under new CO, the procedural requirements to vary special rights no longer depend on where the rights are set out. If the articles provide such procedures, then those prevail. If the articles are silent, then class rights may be varied by the written consent of holders of ¾ of issued shares of that class, or by a special resolution passed at a general meeting of holders of issued shares of that class. In all cases, members representing at least 10% of issued shares of that class may apply to the court to block the variation on the basis that it would unfairly prejudice them (new CO, ss 177, 178, 180, 182, 185–192). 


Commentary

 

  • This change supports the new CO position of no longer requiring a memorandum. 
  • It is also a welcomed clarification and simplification of the procedures for varying class rights, while at the same time providing a degree of minority shareholder protection.
 

Other Minor Amendments 


New CO also makes other minor amendments in relation to share capital, including:

 

  • Where a company has refused to register a transfer of shares, the transferor or the transferee may request a statement of reasons for the refusal, and the company must within 28 days give its reasons (new CO, s 151). 
  • If a company’s articles give its members a right of pre-emption or right to purchase shares on the occurrence of an event that constitutes a transmission of the right to shares by operation of law, then the pre-emption or right to purchase will continue to apply in priority to the transmission of the right to shares by operation of law (new CO, s 160).

 

This article was supplied by Lexis Practical Guidance.

 

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