The New Companies Ordinance

Companies are no longer required to have a common seal

Under the NCO, Hong Kong companies will no longer be required to have a common seal.  If a company chooses to adopt a seal, then, as in the past, the seal must be a metallic seal with the company’s name engraved in legible form and it should be applied in accordance with the company’s Articles of Association.

When the NCO comes into effect, a company may simply execute a document by having it signed by the sole director (in the case of a company with only one director) or by two directors or one director and the company secretary (in the case of a company with more than one director).  A company may execute documents this way even if it does have a common seal and this will have the same effect as executing a document under the company’s common seal.

Where a Hong Kong company executes a document this way without a company seal then purchasers in good faith for valuable consideration will be entitled to rely on that execution as being valid execution by the company.

Consequences for the execution of deeds

The NCO provides that a document signed by a company without using a seal and in accordance with the new execution arrangements described above and expressed to be executed by the relevant company “has effect as if the document had been executed under the company’s common seal”.  This principle will apply to deeds and means that the requirement for a deed to be sealed will be satisfied if it is executed this way.

The NCO also codifies the common law principle that delivery of a deed is presumed when a deed is executed.  “Delivery” here does not mean physical delivery, but it is an acknowledgment by the maker of the deed that the deed is binding on it.

Execution by a foreign corporation in Hong Kong which has no seal

Unfortunately, whether the formality requirements in execution of a deed is governed by the place of incorporation of the corporation or by the governing law of the document in question (or whether either would suffice) remains unclear and the NCO does not clarify this issue or prescribe any formalities for deed execution by foreign companies.

Best Practice Tip

As a matter of best practice we recommend that when you are dealing with execution by foreign corporations you should ensure that the execution meets the requirements of each of the following:

  • the place of incorporation of the foreign company;
  • the governing law of the contract; and
  • the place of execution of the document.

Therefore, if the place of incorporation of the foreign corporation executing a deed requires deeds to be sealed with the common seal, the common seal should be used.

Entering into contracts that are contrary to the company’s objects

Under the NCO a company is no longer required to state its objects in its constituent documents.  However, a Hong Kong company whose objects are stated in its constituent documents is not permitted to act beyond these stated objects.  Nevertheless, an act by a Hong Kong company is not invalidated merely because it has contravened its objects clause.

A shareholder of the company has the right to restrain the company from acting contrary to the objects clause through seeking an injunction.  However, such proceedings may be brought only if issued before the company has entered into such contract.  

Under the NCO a person dealing with the company in good faith will be entitled to enforce a contract which is contrary to the company’s objects clause.  In this way it is said that the objects clause affects the exercise of capacity, but not the legal capacity itself.  The NCO also provides that a person dealing with a company is presumed to have acted in good faith. Interestingly, unlike the presumptions available in relation to execution of documents discussed above, this presumption does not require them to be a purchaser for valuable consideration. 

The Mercury case1: execution of documents at a virtual signing or closing

The reality of doing business globally often means that arranging a traditional signing meeting with all parties physically present can be logistically difficult, especially for transactions with multiple signatories in different locations.  A practice has evolved in several jurisdictions of signing signature pages in advance of finalising the terms of an agreement and then affixing the signed pages to the final form of the document once it is finalised.  This is a common practice in Hong Kong and the PRC.  The Mercury case  has raised doubts over the effectiveness of this practice and stimulated much debate on the proper way to achieve a virtual signing or closing.

The case raised doubts on whether signing signature pages which are separated from the whole document and then attached to the remainder of the complete document constitutes valid execution.  In the Mercury case it was held that attaching signature pages from an earlier version of a deed to a materially changed final version of a deed is not an effective execution of that deed. 

This caused considerable concern about the process of arranging the signature and execution of legal documents where the parties are not physically present in the same location and execution documents are exchanged electronically.  The two main concerns raised by the case were:

  • Should parties insist upon physical signing meetings? and if not,
  • In the case of a delivery by email, should the signatories print and return the entire document, or simply the signature page?

Importantly, the Mercury case dealt specifically with the execution of deeds.  

Best Practice Tips

As a result, many firms have adopted the following approach:

  • When signing deeds (and contracts required to be in writing such as guarantees), each party should print the document in full and sign the complete document.  The entire signed document should be returned as a pdf (by email) or a fax and also in hard copy to the lawyers arranging the closing; and
  • When the documents to be signed are simple contracts, as agreed between the parties, each party can print the entire document, or simply the signature page, and sign the signature page.  As agreed with the other parties, either the entire document, or the signature page alone should then be returned as a pdf (by email) or a fax and also in hard copy.

We recommended following this approach.  However, where time is of the essence, a party can return the signature page as a separate pdf (by email) or fax, but the entire document should also be returned with the original signature page attached as soon as possible thereafter.

We also recommend putting in place powers of attorney as early as possible if it is likely that there will be signatories in different locations.  Deeds which require registration with registries such as the Hong Kong Companies Registry must have original or ‘wet ink’ signatures from all parties and powers of attorney may enable this where the exchange of electronic counterparts may not, or may delay the registration.

Conclusion

While the NCO has served to bring Hong Kong law into line with other jurisdictions in a number of areas relating to the execution of documents, there are still aspects of the law which are unclear and it remains to be seen how companies choose to interpret the law. To ensure best practice and to minimize risk, the execution of documents in complicated, international transaction scenarios should be considered early and you should seek advice from Hong Kong and local counsel as relevant.