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Hong Kong – What You Need To Know About The New Companies Ordinance: Key Changes Affecting Transactions By Companies.

14 January, 2014

 

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

 

In this bulletin, we focus on the major changes which impact transactions by Hong Kong companies. We also highlight some recommended steps for Hong Kong companies to take in preparation for the commencement of the new Ordinance.

 

Summary Of Key Changes

 

Shareholders’ Approval Required For Grants Of Rights To Subscribe For Shares – under the new Companies Ordinance, shareholders’ approval will be required for the grant of rights to subscribe for, or to convert any security into, shares. Under the existing regime, options can be granted by directors without the need for shareholder approval, which is only required at the time when the underlying shares are issued. Under the new regime, the requirement for shareholders’ approval has been brought forward to the point of the grant of the right to subscribe.

 

Uniform Solvency Test Based On Cash Flow – the new Companies Ordinance sets out a new uniform solvency test based on cash flow which will apply to buy backs, financial assistance and the new court-free procedure for reduction of capital (discussed below) and standardises the approach. The test requires that:

 

  • immediately after the transaction, there will be no ground on which the company could be found to be unable to pay its debts; and
  • the company will be able to pay its debts as they become due during the 12 months following the transaction (or 12 months after the date of winding up if the company intends to commence winding up proceedings within 12 months of the transaction).

 

Directors will be required to make a solvency statement, enquiring into the state of affairs and prospects of the company and taking into account all the liabilities of the company. This must be signed by all directors for buy-backs and by a majority of directors for financial assistance.

 

No auditors report will be required under the new regime for share buy backs, although companies may still consider obtaining one to give extra comfort to the directors in making the solvency statement.

 

Court-Free Procedure For Capital Reduction – the current Companies Ordinance only permits capital reductions with court approval (save in limited circumstances). The new regime introduces a court-free procedure based on the above solvency test, aimed at providing a faster and cheaper option for companies.

 

In addition to the solvency statement signed by all directors (which must be filed with the Companies Registry), a special resolution of shareholders is required. Notices are also required to be published in the Gazette and newspapers. There is a five week period for any creditors to object to the court, after which the capital reduction can take effect by filing a specified return with the Companies Registry.

 

Three Procedures For Financial Assistance – under the new Companies Ordinance, all types of company are permitted to provide financial assistance subject to following one of three procedures, each requiring the directors to make a solvency statement (discussed above). The procedures are:

 

  1. For financial assistance not exceeding 5% of shareholders’ funds (being the paid up share capital and reserves of the company shown in the most recent audited financial statements): a directors’ resolution approving the financial assistance and the solvency statement.
  2. For financial assistance with the approval of all the members: a directors’ resolution approving the financial assistance, the solvency statement and a written resolution of all the shareholders.
  3. For financial assistance approved by ordinary resolution: a directors’ resolution approving the financial assistance (including that it is for the benefit of members of the company that are not receiving the assistance), the solvency statement and approval by members by ordinary resolution.

 

In each case, the new Companies Ordinance sets out timeframes during which the financial assistance can be given (essentially within 12 months of the approval, save for the third procedure where the assistance cannot be given within the first 28 days to provide for a right of objection by members during that period).

 

The current exemptions from the financial assistance regime are largely preserved in the new Companies Ordinance, save that the rules relating to financial assistance for employee share schemes have been relaxed. Under the new Companies Ordinance, all types of financial assistance given in good faith and in the interests of the company are permitted. This is distinct from the current regime which only exempts the provision of money for the purchase or subscription of shares.

 

New Court-Free Statutory Amalgamation Procedure – the new Companies Ordinance introduces a court-free regime for amalgamations. The regime only applies to amalgamations of wholly-owned intra-group companies but is, nonetheless, a welcome addition to the legislation that will be useful for intra-group reorganisations. The new procedure requires the board of each amalgamating company to make a statement confirming the assets of the amalgamating company are not subject to any floating charges (or where they are, that the chargee has consented to the amalgamation) and the solvency of the amalgamating company and the amalgamated company. Shareholders’ approval by special resolution is also required in respect of each company.

 

Abolition Of The Headcount Test – the new Companies Ordinance abolishes the headcount test for certain members’ schemes (namely takeovers by way of schemes and general offers for share buy backs). The headcount test in the current Companies Ordinance requires that a majority in number of members or creditors voting at the meeting approve the scheme (which is in addition to the share value test requiring such shareholders to represent 75% in value). It is considered that this test is open to manipulation through share splitting and is contrary to the principle of “one share, one vote”. Therefore, the headcount test is replaced under the new regime with a requirement that not more than 10% of the votes attaching to disinterested shares can vote against the proposal. Disinterested shares refers to shares held by non-interested parties (namely those not held by the offeror, its associates and nominees). The new test is modelled on the requirements in the Hong Kong Code on Takeovers and Mergers.

 

The court also has discretion to dispense with the headcount test for other members’ schemes which retain such a test in special circumstances.

 

What Do You Need To Do Now?

 

We would encourage Hong Kong companies to ensure directors and senior managers receive training on the new Ordinance and understand the new regime.

 

We would be happy to provide training to companies and their directors to assist with understanding the new regime. Please contact us for further information.

 

herbert smith Freehills

 

For further information, please contact:

 

Austin Sweeney, Partner, Herbert Smith Freehills

austin.sweeney@hsf.com

 

Tommy Tong, Partner, Herbert Smith Freehills

tommy.tong@hsf.com

 

Matt Emsley, Partner, Herbert Smith Freehills

matt.emsley@hsf.com

 

Gary Lock, Partner, Herbert Smith Freehills

gary.lock@hsf.com

 

Jason Sung, Partner, Herbert Smith Freehills

jason.sung@hsf.com

 

Herbert Smith Freehills Regulatory & Compliance Practice Profile in Hong Kong

 

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