Most real estate developers and investors will own properties or their portfolios through a mixture of Hong Kong companies, BVI companies and perhaps companies incorporated in other jurisdictions. Accordingly, it is important in the administration of your portfolios to take note of the new Companies Ordinance in Hong Kong which will commence operation on 3 March 2014 (new CO). The new CO will bring in a number of changes. How does it affect your Hong Kong companies? What actions do you need to take now? We highlight below four questions that are likely to be asked.

  1. I wish to set up a Hong Kong private company as a special purpose/joint venture vehicle. How should I do it differently?

Constitutional Documents

  • The previous template Memorandum and Articles of Association should no longer be used. Under the new CO, only the Articles of Association are required (ss.75-77, new CO).
  • The new CO has prescribed a set of Model Articles that you can use, or, as in the past you can tailor make a set of Articles of Association for your companies (ss.78-80, new CO).

Share Capital

  • Under the new CO, the shares of a private company will not have any par value, i.e., there will not be a face value attached to the shares (s.135, new CO).
  • This means that companies are no longer restricted from issuing shares at a price lower than their par value.

Director

  • At least one director must be a natural person (s.457, new CO). Listed companies and their respective subsidiaries, as under the existing law, are not allowed to appoint corporate directors (s.456, new CO).

Common Seal

  • The keeping and use of a common seal becomes optional (s.124, new CO). A deed can be executed without affixing the common seal.
  • The new CO provides that a company may execute a document as a deed by:- (a) affixing its common seal (if adopted) in accordance with its Articles; or (b) signing the document by any two directors or any one director plus the company secretary or if the company has only one director, by that director; or (c) by a person appointed under a duly executed power of attorney (ss128-129, new CO).
  • The requirement that deeds (as opposed to simple contracts) required execution with a common seal often causes practical difficulties. We recommend that newly incorporated companies do not adopt  a common seal. However, this will mean that if there is more than one director then two directors will need to execute documents under seal.

This can be avoided by appointing one director under a power of attorney to execute documents under seal by the company (however the power of attorney itself would need to be signed by two directors).

  1. Do we need to take any action in respect of our existing Hong Kong private companies?

There may not be any immediate action that you must take before 3 March. However, you should start considering the following:-

  1. APPOINTMENT OF A NATURAL PERSON AS A DIRECTOR

If your private company has only one corporate director (i.e., a company entity is named as its sole director), you should appoint a natural person as a director. The grace period is six months (s. 89, Schedule 11, new CO).

  1. MEMORANDUM AND ARTICLES OF ASSOCIATION

It is not mandatory that you amend the Memorandum and Articles of Association because there are various deeming provisions in the new CO which deal with the necessary changes required to be consistent with the new CO. For example:

  • Any provision in the Memorandum of Association prior to the commencement of the new CO will be deemed to be a provision of the Articles of Association; and
  • The amount of the authorised capital will be deemed to be deleted (s.98, new CO).

However, we do suggest that you consider amending the Articles as follows:-

Dispensing with the Annual General Meetings

  • The new CO gives an option to dispense with the AGMs simply by passing a shareholders resolution (s.613, new CO).
  • However if your existing Articles contain express provisions on when and how the company should hold the AGMs, these provisions need to be amended/deleted before you can choose to dispense with the AGMs.

Common Seal & Execution of Documents

  • If you wish to dispense with the common seal or set out any particular manner for execution of documents, you should make these changes in the Articles.

Other Procedural Matters

  • The new CO also makes some changes to the procedures for proposing and passing members’ written resolutions, the notice period for general meetings (generally ss.548-616, new CO), etc. You may wish to amend the Articles to align with the new requirements to remove any doubt as to what procedures the company should follow and also ensure that the Articles do not mislead you into following incorrect procedures.

Best practice is to amend the Articles so that they are consistent with the new CO.

  1. FINANCIAL STATEMENTS AND OTHER REPORTING DOCUMENTS

The new CO may affect your reporting obligations. It brings in the following key changes:

Accounting Reference Period

  • ARP is a new concept which is relevant to the timing of AGMs, the laying/sending of financial reports and the filing of annual returns (generally ss.368-371, new CO).

Simplified Reporting

  • The new CO broadens the exemption on small private companies to prepare simplified accounts and financing reports based on the SME Financial Reporting Framework and Standard (generally ss. 359-366, new CO).
  • Whether a company is qualified for this exemption will depend on its group’s annual revenues, assets  and number of employees.

Business Review

  • Public companies (listed or unlisted) and private companies (other than those qualified for simplified reporting or a wholly owned subsidiary of another company are generally required to prepare an analytical business review as part of the annual directors’ report. Private companies can however choose to opt out of this requirement by passing a special resolution within the prescribed timeframe (s.388, new CO).
  1. REVIEW OF RELEVANT CONTRACTS & INTERNAL POLICIES

You should consider whether the new CO affects any of your existing contracts or internal policies and procedures, especially any shareholders’ agreement and policy on declaration of directors’ interest (see Q. 3 below).

  1. I am a director of several Hong Kong companies. What should I watch out for under the new CO?

The new CO probably does not significantly change your daily management of the companies. However, you should be aware of the following:-

Directors’ Duties

  • The standard of care a director must exercise has been codified under the new CO. In deciding whether a director has fulfilled his duties of care, skill and diligence, his conduct will be considered based on:
  1. his own general knowledge, skill and experience (a subjective test); and
  2. the general knowledge, skill and experience that a person in that position is expected to have (an objective test) (s.465-466, new CO).
  • The usual fiduciary duties of a director remain unchanged and are defined by case law.

Declaration of Interest

The scope of interest which a director must declare is technically widened. A director is required to disclose interested “transactions” and “arrangements” in addition to “contracts”, and the “nature and extent” (rather than just the “nature”) of his interest (ss.536-542, new CO).

Loan to Directors

The new CO has changed the rules on restrictions on companies to make loans to directors, both in respect of public and private companies. These new detailed provisions should be reviewed if a loan to a director (or persons connected to a director) is proposed (Part 11, Division 2, new CO).

Service Contract

The approval of the members in a prescribed manner is required for any guaranteed term of employment of a director for longer than three years (ss.530-535, new CO).

Ratification of Conduct

Any act or omission of a director amounting to negligence, default, breach of duty or breach of trust may only be ratified by an ordinary resolution of the disinterested members (s.473, new CO).

  1. I have considered reducing the share capital of a company to allow for payment of dividends but have given up this idea because court approval is required under the existing law. Has the new CO changed this?

Yes. The new CO introduces an alternative process for capital reduction without the need to go through the court procedures (ss.215-225, new CO). The new process generally requires (a) signing of a solvency statement by the directors; (b) passing of a members’ special resolution; (c) publication of notices in the Government Gazette and newspapers; and (d) filing of relevant forms with the Companies Registry.

Any creditor or non-approving member may apply to the court for an order to cancel the special resolution within the prescribed time frame.

The new CO will bring in other changes such as the application of the solvency test for giving financial assistance for acquisition of the company’s own shares, and the concept of the “responsible person”. Please refer to the following articles for the summaries of major changes introduced by the new CO for:-