Jurisdiction - Hong Kong
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Hong Kong – The New Companies Ordinance Series (1): Company Formation and Share Capital

13 December, 2013

 

Legal News & Analysis – Asia Pacific – Hong Kong –  Regulatory & Compliance

 

The new Companies Ordinance (“New Companies Ordinance“) will take effect on 3 March 2014. This alert, being the first of a series of updates on the New Companies Ordinance, covers major changes in relation to company formation, share capital and document execution.

 

 

Abolition Of Memorandum Of Association (“Memorandum”)

 

The Memorandum required under existing law will be abolished. The provisions of a company’s existing Memorandum (such as the object clause, if it has one) will be deemed to be provisions of the Articles of Association, except that any provision regarding the “authorised share capital” will be removed.

 

Articles Of Association (“Articles”)

 

The Articles will become the only constitutional document of a company. It must contain mandatory clauses such as members’ liabilities and contributions, and initial shareholdings. Certain concepts of existing companies (e.g. par value) will become redundant. While there is no legal requirement for existing companies to update their current articles, there are advantages of updating them in order to be able to enjoy certain benefits and new initiatives under the New Companies Ordinance.

 

New sets of Model Articles have also been prescribed under the New Companies Ordinance for different types of companies, which may be adopted in whole or in part.

 

Protection For Persons Dealing With A Company

 

A company’s powers will be limited by any limitation set out in its Articles. A shareholder may sue to restrain the company from acting in contravention of the limitation.

 

In favour of a person dealing with a company in good faith, the power of the directors to bind the company will be deemed to be free of the limitation. Good faith will be presumed (unless rebutted), and mere knowledge that an act is beyond the directors’ powers under the relevant documents is not bad faith. Further, outsiders are not obliged to inquire as to any limitations on the directors’ power and will no longer be regarded as having constructive notice of matters contained in the publicly registered Articles or resolutions. The common law “indoor management rule” is now codified and expanded in the New Companies Ordinance.

 

The protection however will not apply if the parties to the transaction include an “insider” (i.e. a director of the company or its holding company, or an entity connected with the director). That said, in such a case, the transaction can still be saved if it is affirmed by the company. The New Companies Ordinance suggests that the rights of a third party (not being an insider) to the transaction are not affected, but at the same time gives the Court a wide power to affirm, sever or set aside the transaction on any terms the court thinks fit. How this new power will be exercised, and whether the rights of third parties will be adversely affected, remain to be seen.

 

The protection is also not available where the company is a charitable organisation registered without “Limited” in its name, subject to certain exceptions.

 

Share Capital And No Par Value

 

The New Companies Ordinance adopts a mandatory system of no-par for all Hong Kong companies. This is in line with the international trend.

 

Under the existing law, shares issued by Hong Kong companies with a share capital must have a par value (also known as “nominal value“). Par value however is often criticized for failing to serve its original purpose of protecting creditors and shareholders, since the fixed face value rarely represents the real value of the shares in practice. Where a company issues shares at a price higher than its par value, the excess amount (known as “share premium“) is required to be put into a share premium account and is subject to special use restrictions. That has given rise to a complex accounting regime.

 

Under the New Companies Ordinance, the concept of par value will be abolished. All existing shares will be treated as if they had no par value. In other words, there will be no minimum price for issuance of shares. The related concept of “share premium” will also become redundant. Any amount in a company’s existing share premium account (and also capital redemption reserve) will become part of the company’s share capital. Further, there will no longer be any requirement for an “authorised share capital” (i.e., the maximum share capital that a company proposes to be registered), though a company may state the maximum number of shares that it may issue in its Articles.

 

Companies will have greater flexibility under the New Companies Ordinance in altering their share capital in the no-par environment. A company will be able to increase its share capital without allotment of new shares (provided that the funds or assets are from its members), capitalize its profits without issuing new shares, and issue bonus shares without transferring an amount to the share capital account. Though there is no nominal value, shares can still be effectively “consolidated” or “subdivided” by reducing or increasing the number of shares without changing the amount of share capital. Limited companies may also re-denominate the currency of its share capital by passing an ordinary resolution.

 

The New Companies Ordinance contains transitional provisions to ensure that existing contractual rights defined by reference to par value and related concepts will not be affected by the abolition of par. That saves companies the trouble of amending documents executed before commencement of the New Companies Ordinance, but you may also wish to review your company’s documents and Articles for the change to no-par.

 

Shareholders’ Approval For The Grant Of Rights To Subscribe For Shares

 

Under the existing law, shareholders’ approval is required before directors may exercise the power to allot shares (except a pro-rata issue to existing members and an allotment to the founder members). The protection will be extended under the New Companies Ordinance so that shareholders’ approval will also be necessary before a company may grant rights to subscribe for, or convert any security into, shares. No further approval will be required when shares are allotted pursuant to any options granted.

 

Reasons For Refusal To Register A Transfer

 

Under the existing regime, directors of private companies are often given the discretion to refuse to register a transfer of shares. Where a transfer is refused, the company shall send a notice of refusal to the transferor and transferee within 2 months but it is not obliged to give any reason. Under the New Companies Ordinance, the transferor or transferee will have the right to request for the reason of refusal, and the company will have to provide a statement of reasons within 28 days. The new provision intends to enhance transparency in the exercise of the directors’ power.

 

Variation Of Class Rights

 

The provisions on variation of rights attached to shares in a class are clarified and the procedures simplified. Any class rights may be varied in accordance with the Articles of the company or with 75% consent or special resolution of shareholders of that class. The company will be required to notify all class members of any variation. Corresponding provisions are also provided for in the New Companies Ordinance for companies without a share capital for filling the current statutory lacuna.

 

Statement Of Capital

 

A company is required to deliver to the Companies Registry a statement of capital whenever there is a change to its capital (e.g. allotment of shares or reduction of share capital). The statement will show the most up-to-date information about the company’s issued capital. That enables the public to ascertain the capital structure of a company more easily.

 

Seal And Execution Of Deeds

 

Under the existing law, a company must have a metallic common seal and a deed needs to be executed by the company by affixing its seal. While the sealing formality serves a cautionary function, it seems to be merely cumbersome in practice.

 

Under the New Companies Ordinance, the keeping and use of common seal will become optional. Instead of affixing the seal, a company may also execute a deed by having the document signed on its behalf by the director (if it has only 1 director), or by 2 directors (or a director and the company secretary) (if it has 2 or more directors). The document needs to state that it is executed by the company as a deed. The simplified execution requirements will facilitate business operations.

 

Under the New Companies Ordinance, any company with a common seal may have an official seal for use outside Hong Kong. The current restrictive requirements (e.g. authorization under Articles) in relation to keeping official seals for use abroad will be removed.

 

Scope Of Documents Executed By Attorneys

 

The current Ordinance only recognizes the binding effect of deeds executed by a company’s attorney outside Hong Kong. The distinction between execution of deeds locally or overseas will be removed under the New Companies Ordinance. A company may authorise any person as its attorney to execute a deed or any other document on its behalf in Hong Kong or elsewhere. That gives greater flexibility to companies in terms of document execution.

 

Related Articles:

 

The New Companies Ordinance Series (2): Written Resolutions, General Meetings, Record Keeping, Accounting Reference Period And Prohibition Of Bearer Warrants.

 

The New Companies Ordinance Series (3): Directors.

 

The New Companies Ordinance Series (4): Reduction Of Capital, Share Buy-Back And Financial Assistance.

 

Deacons

 

For further information, please contact:

 

Machiuanna Chu, Partner, Deacons
machiuanna.chu@deacons.com.hk

 

Deacons Regulatory & Compliance Practice Profile in Hong Kong

 

Homegrown Regulatory & Compliance Law Firms in Hong Kong 

 

International Regulatory & Compliance Law Firms in Hong Kong 

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