On October 25, 2013, it was announced that Hong Kong’s new Companies Ordinance will come into effect on March 3, 2014. The new Ordinance represents the most comprehensive reform of the companies legislation in almost 80 years, the existing Ordinance having come into operation in 1933, with subsequent changes being made on a piecemeal basis over the years. These reforms have been a long time coming and are well and truly overdue. They are the result of work carried out by the Standing Committee on Company Law Reform formed in 1984 and follow a detailed public consultation process. Some of the proposals for change were met with a good deal of skepticism, for example the creation of new offences for auditors, and allowing the Companies Registry to withhold the personal details of directors from public inspection. Although many of the changes continue to recognize, with some modifications, the existing provisions of the current legislation, it is clear that new requirements made in several areas may require companies to consider or take steps to ensure compliance.
d. Enhance shareholder protection: the new Ordinance will (among others):
1) Require disinterested shareholders’ (i.e. neither the controlling shareholders nor their connected parties) approval for all transactions involving public companies and their subsidiaries that require shareholder approval;
2) Introduce more effective rules to deal with conflicts of interests, including an expansion of the requirement to obtain shareholders’ approval for directors’ contracts exceeding three years and a requirement of ratification by disinterested shareholders to prevent majority shareholders ratifying the unauthorized conduct of directors;
3) Replace the current “headcount test”1 for schemes of arrangement that involve a general offer or a takeover offer with the requirement that votes cast against the scheme do not exceed 10% of the voting rights attached to all disinterested shares. The test is retained for other schemes but the court is given a new discretion to dispense with the test for schemes proposed by members in special circumstances, e.g. where there is evidence that the result of the vote has been unfairly influenced by share splitting. There is no discretion to dispense with the test for creditors’ schemes; and
4) Extend the scope of the unfair prejudice remedy to cover “proposed acts and omissions”. This change removes the uncertainty existing under the current law where there is some doubt about a member’s entitlement to bring an action for unfair prejudice where a course of action that would be prejudicial to the interests of members is only at the proposal stage, or where there is only a threat to do or not do something. Also, a new set of rules relating to unfair prejudice petitions will be introduced via separate subsidiary legislation when the new reforms come into effect. The new rules will be separated and distinct from the current companies winding-up rules (which will remain unchanged).
e. Increase powers for auditors: auditors will have power to compel production of information or explanations reasonably required for the performance of the auditor’s duties.
f. Increase accountability of auditors: a new statutory offence will be introduced in respect of inaccurate auditor’s reports. An auditor who knowingly or recklessly fails to qualify his report where he is of the opinion that the financial statements of a company are not in line with its accounting records in a material respect, or has failed to obtain all information or explanation necessary and material for the purposes of the audit, will be liable to a fine.
2. Measures to ensure better regulations:
a. Ensure accuracy/completeness of documents held at the Companies Registry: the new Ordinance will contain requirements for the authentication of documents delivered to the Registry, the rectification of errors, a new statutory court procedure for the removal of information that is inaccurate, forged or derived from anything invalid, ineffective or done without authority of the company. It will also require companies to file a return, with a statement of capital, whenever there is a change of capital structure.
b. Streamline registration of charges: the new CO will revise the list of registrable charges, require certified copies of charges to be registered and available for public inspection, shorten the period for delivery to the Registrar of the charge instrument from five weeks to one month and require written evidence of the release of a charge.
c. Update procedure to deregister companies: three new conditions for the deregistration of dormant companies will be imposed, namely confirmation that the company is not a party to any legal proceedings, and that neither the company nor its subsidiaries (if any) own any immovable property in Hong Kong.
d. Tighten the enforcement regime: there will also be new powers enabling an inspector to obtain documents or information concerning breaches of the new Ordinance and also requiring a person under investigation to preserve records or documents, and to verify statements by statutory declaration.
3. Measures to facilitate business:
a. Streamline basic corporate procedures: the new legislation will allow companies to dispense with AGMs where there is unanimous shareholder consent, introduce an alternative court-free procedure for capital reductions, permit all companies to purchase their own shares out of capital (subject to a solvency test), permit all companies to provide financial assistance in take-over situations (subject to a solvency test), introduce a court-free statutory amalgamation procedure for wholly owned intra-group companies, and streamline the procedure to restore dissolved companies (again without a court order in straightforward cases). It also abolishes the requirement of a memorandum of association and provides new requirements for the articles of association.
b. Simplify reporting requirements: a more flexible reporting regime is introduced which allows SMEs (as well as guarantee companies) to prepare simplified financial and directors’ reports.
c. Streamline basic corporate operations: finally, the new Ordinance will relax the requirements for affixing a common seal, permit general meetings to be held in more than one location using electronic, and prescribe rules governing electronic communications to and by companies.
4. Measures to modernize the law:
a. Abolish par value for shares: a mandatory no-par regime will be adopted for all companies with a share capital.
b. Abolish power to issue share warrants: the power of companies to issue warrants to bearers will be removed.
c. Protect personal data: directors’ residential addresses and full ID/passport numbers of individuals will be withheld from public inspection.
d. Indemnification of Directors: the rules on the indemnification of directors against liabilities to third parties will be clarified. In particular, certain liabilities and costs will not be covered by the indemnity, such as criminal fines, penalties imposed by regulatory bodies, defence costs of criminal proceedings where the director is found guilty, and defence costs of civil proceedings brought against the director by or on behalf of the company or an associated company in which judgement is given against the director.
e. Security for Costs: the new legislation will extend the Court’s jurisdiction to order the payment of security for costs against companies incorporated both within and outside Hong Kong, subject to satisfactory evidence of impecuniosity.
The Existing Companies Ordinance
Despite its length, the new Companies Ordinance will not reform Hong Kong’s insolvency regime. Accordingly, when the new Ordinance comes into operation, the existing Ordinance will be retitled the "Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32)". The existing core provisions concerning the operation of companies will be repealed, except for the provisions relating to the winding-up and insolvency of companies and prospectuses.
What Needs to be Done
The upcoming series of publications by Sidley Austin will examine some of the more significant aspects of the changes which impact the rights, obligations and liabilities of corporations, directors, officers, auditors and other stakeholders. We will also discuss some practical steps that can be taken to ensure compliance with the new requirements.