The new Companies Ordinance (NCO) will come into effect on 3 March 2014. Among its initiatives are new procedures and requirements for reporting and share capital transactions and a number of other miscellaneous improvements. Corporate managers, company secretaries and in-house counsel should be aware of these new rules which will apply to all Hong Kong companies when the NCO comes into effect.

The stated objectives of the NCO are to enhance corporate governance, ensure better regulation, facilitate business and modernise the law.

The interplay between these overarching objectives and the reforms brought about by the NCO becomes readily apparent on a review of the initiatives introduced in Parts 4, 5, 9, 12 and 15 of the NCO. This alert summarises some of the key new procedures and requirements in these parts. Where useful, we have referenced the position under the existing Companies Ordinance and the relevant statutory response to elucidate and contextualise these new reforms.

Abolition of Par Value

A simple, but sensible change introduced by the NCO is the abolition of the antiquated concept of par value for shares in Hong Kong companies. As a result, the concept of share premiums will similarly be abolished and share premium accounts will be amalgamated into existing share capital accounts. These changes will bring Hong Kong into line with the position in many other common law jurisdictions.

Companies should review and consider amending any existing contracts and other documents which refer to par value. It is not strictly necessary to amend any references to par value in companies’ articles of association as any express or implied reference to par value in these documents will be deemed to be deleted by the NCO. However, companies that do include such references in their articles may wish to remove those references to avoid future confusion.

Simplified Reporting

The NCO introduces a new reporting regime for Hong Kong companies. This new regime draws a distinction between small and medium-size enterprises (“SMEs”) and public and other large companies, and imposes different reporting obligations on those two groups. Specifically, reporting will generally be simplified for SMEs, whereas larger companies will be subject to more onerous reporting requirements. These changes sensibly recognise that a uniform compliance standard for all companies, irrespective of size, is inappropriate.

Reporting is simplified for SMEs under the NCO through exemptions from certain reporting requirements (e.g. no requirement for financial statements to give a “true and fair view”, the ability to exclude subsidiary undertakings from consolidated financial statements and no requirement for auditors to express a “true and fair view” opinion on financial statements) and the mandatory application of relevant accounting standards (SME-FRS and FRF).

The key new reporting requirement imposed on public and other large companies will be the annual obligation to prepare an analytical and forward-looking “business review”. This document is aimed at giving shareholders more useful information about the company and its business and operations. The prescribed content of the “business review” includes information regarding principal risks and uncertainties facing the company, important events and future developments, an analysis of key performance indicators, and other information relating to environmental, employment, supplier and other significant matters concerning the company’s business. SMEs will be exempt from this requirement and public or other large companies can pass a resolution to be exempt from this requirement.

In addition, the NCO permits summary financial reporting by all companies (other than those qualified for simplified reporting), rather than just listed companies, as is the case under the existing Companies Ordinance.

Company Administration and Procedure

A suite of new reforms will be introduced by the NCO to simplify and, in some instances, enhance the administration and procedures of Hong Kong companies.

In recognition of the fact that a great number of Hong Kong companies effect their internal corporate approvals by way of written resolution, the NCO also introduces a new clearly prescribed procedure for proposing, passing and recording written resolutions of members which will require approval of all members entitled to vote on the resolution. This reform does not affect the common law doctrine of unanimous consent.

Many of the other changes in this area effect simplifications to the procedural requirements of company meetings. These changes address some of the practical realities facing modern Hong Kong companies and the principal changes include a reduction of the threshold requirement for members to demand a poll (from 10% of total voting rights to 5%), clarification of the rights and obligations of proxies, enhancing the right to appoint proxies and expressly permitting general meetings to be held using video or teleconferencing technology.

Relatedly, the NCO will also empower companies to dispense with the requirement to hold annual general meetings (“AGMs”) altogether if approved by a written resolution or a resolution at a general meeting of members, provided that the relevant financial statements and reports are sent to members and relevant statutory filings made. Under the NCO, single member companies will automatically be exempt from a requirement to hold an AGM.

Given that AGMs may now be dispensed with, the current requirement under the existing Companies Ordinance for the annual returns of public companies and companies limited by guarantee to be filed within 42 days of a company’s AGM (or each calendar year) will also be abolished. Instead, these companies will be required to file annual returns in respect of every financial year. Annual returns of listed companies must also include particulars relating to members who hold 5% or more of the issued shares. Under the NCO, private companies will continue to be required to prepare an annual return within 42 days after the anniversary of the date of their incorporation.

Transactions Relating to Share Capital

A number of new statutory processes for effecting reductions of capital, share buy-backs and financial assistance will be introduced under the NCO and this marks a significant improvement on, and simplification from, the current requirements.

Each of these processes is aimed at facilitating business in Hong Kong by streamlining the administrative steps involved in effecting share capital transactions to make the overall process faster, cheaper and, helpfully, less reliant on the courts. Simplifications to the processes are largely achieved through the introduction of a consistent “solvency test”, under which the relevant company’s ability to service its debts is tested on both a balance sheet basis immediately after the relevant share capital transaction and on a 12 month forward looking cash flow basis thereafter (except in relation to companies which will be wound up within that period, in which case a longer period applies but the company must be able to repay all debts within that period). Sensibly, this approach reflects the idea that the principal concern underlying transactions affecting share capital is whether or not those transactions will adversely affect the relevant company’s solvency and its ability to service its debts.

In contrast to the existing Companies Ordinance, this new solvency test applies uniformly to reductions of capital, buy-backs and financial assistance. This solvency test is also backed by procedural requirements under the NCO for “solvency statements” to be given by all (in relation to share buy-backs and reductions of capital) or some (in relation to financial assistance transactions) of the relevant company’s directors in connection with these transactions. In giving a solvency statement the directors declare that they have formed the opinion that the company satisfies the solvency test in relation to the transaction concerned. In forming their opinion, each director must inquire into the company’s state of affairs and prospects and take into account contingent and prospective liabilities of the company. Financial and criminal penalties apply if these statements are made without a reasonable basis.

Under the NCO, it is no longer a requirement for auditors’ reports to be prepared in connection with all solvency statements, saving time and costs, although we expect that many directors may still require these to be provided before being willing to give a solvency statement, so as to satisfy themselves that there is a reasonable basis to make the statement.

  1. New alternative procedure for reductions of capital

Under the existing Companies Ordinance, reductions of share capital are only permitted with court approval, except where the sole purpose of the reduction is to re-designate nominal values of shares to a lower amount. Due to the requirement to involve the courts, this process usually involves considerable time and expense and has resulted in Hong Kong companies largely avoiding capital reductions.  In order to address this perceived problem, the NCO will introduce a new court-free procedure, based on the solvency test. This will be an alternative to the existing court approval process option which will remain. However, we expect that companies will prefer this new court-free option as it will be faster and cheaper than the existing process.  Under this alternative procedure, all directors must sign a solvency statement and a series of public notices and statutory forms must be published or filed with the Registrar of Companies (as applicable). A special resolution of members will also be required (as is the case under the existing Companies Ordinance) and a 5 week objection period must pass during which creditors or non-approving members of the company may challenge the resolution by making an application to the court. This diminished reliance on the courts should enable capital reductions to proceed in a significantly more cost and time efficient manner. Assuming all required documents have been prepared and no creditor/shareholder objections are received, it will be possible for capital reductions to be completed in approximately 5 weeks.

  1. Share buy-backs 

The general position under the existing Companies Ordinance is that companies can only fund a buy-back of their own shares from distributable profits or using the proceeds of a fresh issue of shares. However, there is an exception for private companies to fund a buy-back out of capital, provided they pass a solvency test.  The NCO expands the class of companies permitted to fund a buy-back out of capital to include all companies (except for listed companies conducting on-market buy-backs), provided they pass the solvency test.  Under the NCO, an auditors’ report is no longer required to be prepared for share buy-backs funded out of capital for unlisted companies and the buy-back does not need to be expressly authorised by the company’s constitutional documents (although it may be prohibited by the company’s articles).  The requirements and procedures are similar to the new court free-procedure for reductions of capital detailed above.

  1. Financial assistance 

Under the existing Companies Ordinance, the exemptions to the prohibition on financial assistance are fairly complex and, in some cases, unclear. The NCO will not change the basic prohibition around companies giving financial assistance to acquire their own share capital. However, the NCO now allows all types of companies (listed or unlisted) to provide financial assistance, subject to the giving of a solvency statement and one of the following the prescribed procedures:

financial assistance of up to 5% of shareholders’ funds;

  • financial assistance approved by written resolution of all shareholders; or
  • financial assistance approved by ordinary resolution of shareholders, provided that notice is given to all shareholders.

The NCO clarifies that financial assistance given in contravention of the NCO will not be rendered void. However, contravention of the prohibition on financial assistance remains a criminal and civil offence under the NCO.

Under the existing Companies Ordinance there was some uncertainty and debate as to whether the financial assistance provisions were intended to apply to Hong Kong companies providing financial assistance to an offshore parent. Significantly, the NCO clarifies that the restrictions on financial assistance do not apply in this situation.

The cumbersome ‘whitewash’ exemption under the existing Companies Ordinance will be abolished under the NCO. However, the other exemptions to financial assistance under the existing Companies Ordinance will generally be retained.

Amalgamations

In line with measures introduced to facilitate business in relation to share capital transactions covered above, the NCO will also introduce a new simplified, cheaper, court-free procedure for the amalgamation of Hong Kong companies; that is, the legal combination of two or more separate companies (including their businesses, property and liabilities) into a single merged company.

Only Hong Kong wholly owned subsidiaries with share capital of the same corporate group are eligible to undertake this procedure. Additionally, the amalgamation must be approved by members of each amalgamating company, directors voting in favour of the amalgamation must each sign a solvency statement, creditors must not be prejudiced by the amalgamation, secured creditors must be notified in writing, public notices published and statutory forms lodged.

Shareholders, creditors or other persons to whom an amalgamating company is under an obligation may object to the court before the amalgamation becomes effective.