A New Companies Ordinance for Hong Kong – the corporate governance impact

Almost eight years since it was first launched, having been through five rounds of public consultation and nearly 150 years from the date the original Companies Ordinance was first enacted, a new Companies Ordinance (Chapter 622 of the Laws of Hong Kong) came into force in Hong Kong on 3 March 2014. A vast piece of legislation and representing a significant rewrite to its predecessor, the new Companies Ordinance has been tasked with four main objectives, of which enhancing the corporate governance framework for companies in Hong Kong is one (the others are: ensuring better regulation, facilitating business and modernising the law).

A number of measures have been introduced to help ensure the new Companies Ordinance achieves its corporate governance objective, including, among others, the following:

  • all companies, including private companies, must have at least one director who is a natural person;
  • a director’s duty to exercise reasonable care, skill and diligence has been put on a statutory footing; the other common law directors’ duties have not been codified;
  • the ambit of disclosure required by directors for material interests in contracts of significance with the company has been widened to cover transactions and arrangements, and the nature and extent of the interest must now be disclosed; 
  • the restrictions on loans, between a company and its directors or their connected persons, and other similar transactions, have been expanded to cover a wider category of persons connected with directors; 
  • there are more effective rules to deal with directors’ conflicts of interest (e.g. the requirement to seek shareholders’ approval for directors’ employment contracts exceeding three years has been expanded); 
  • with some exceptions, all companies are now required to prepare, as part of the directors’ report in their accounts, an analytical and forward looking business review of the company. This includes a requirement to include information relating to the environment and employee matters that have a significant effect on the company; and
  • auditors, whose rights to information under the previous Companies Ordinance were fairly restricted, have enhanced rights to obtain information or explanations from officers, those responsible for the accounts and subsidiaries of the company.

The Hong Kong Stock Exchange proposes changes to the Corporate Governance Code

On 20 June 2014, the Hong Kong Stock Exchange (the Exchange) launched a consultation on proposed changes to the Corporate Governance Code (the Code), with which Hong Kong listed companies must ‘comply or explain’ in their annual reports, in relation to internal controls.

It is the Exchange’s view that the internal controls section of the Code should be amended to place a greater emphasis on risk management, an approach which would be in line with the evolution of the corporate governance regimes in other securities markets in recent years and the increasing importance being placed on the management of risk by companies themselves since the global financial crisis. In fact, in making its proposals, the Exchange examined the internal control practices in a number of other jurisdictions, namely, the UK, Singapore, Australia, the US and Mainland China.

There are three main themes within the Exchange’s proposals:

  • to enhance the accountability of the Board and its committees, so that internal controls within a listed company are an integrated part of risk management – they should not be seen as a mere ‘box-ticking’ exercise;
  • to improve the transparency of company risk management structures and internal controls through the use of increased disclosure to shareholders (eg as part of the proposals, mandatory disclosures in the Code will require, among others, a listed company (i) to state how often its risk management and internal control systems are reviewed, the period covered and if there has been no review during any year, an explanation of why not; and (ii) to disclose the views or proposals put forward by the Audit Committee); and
  • to strengthen the oversight of the risk management and internal control systems within listed companies (eg it will become a Code Provision for listed companies to have an internal audit function).

The consultation period on the Exchange’s proposals ended on 31 August 2014. The Exchange has said that, after taking into account the responses to its proposals, it will work with the Securities and Futures Commission to develop its conclusions and proposed amendments to the Code – both of which we await. The Exchange is also consulting on the appropriate period of time for the implementation of the amendments it is proposing, but because of the importance of this topic generally, we would expect a swift implementation date to be chosen.