Hong Kong Rewrites its Companies Ordinance (Chapter 32 of the Laws of Hong Kong) to enhance corporate governance, ensure better regulation, facilitate business and modernize its company law
THE NEW COMPANIES ORDINANCE
On July 12, 2012, the Companies Bill was passed by the Hong Kong Legislative Council.
The new Companies Ordinance, which consists of more than 900 sections and 10 schedules, aims to achieve four main objectives, namely, to enhance corporate governance, ensure better regulation, facilitate business and modernize the law.
MAJOR INITIATIVES IN THE NEW COMPANIES ORDINANCE
Highlights of some of the major initiatives in the new Companies Ordinance1 are set out as follows:
- Measures for Enhancing Corporate Governance
Restricting Corporate Directorship in Private Companies
- The new Companies Ordinance requires every private company incorporated in Hong Kong to have at least one director who is a natural person. This restriction of appointment of corporate directors is aimed at enhancing transparency and accountability. A grace period of six months from the commencement date of the new Companies Ordinance will be given for Hong Kong incorporated companies to comply with the new requirement.
Replacing the Headcount Test
- Under the current Companies Ordinance, a “headcount test” is adopted for privatizations and schemes of arrangement of companies incorporated in Hong Kong whereby approval of a majority in number representing three-fourths in value of the creditors or members (as the case may be), present and voting either in person or by proxy at the relevant meeting, is required. In the new Companies Ordinance, the “headcount test” for privatizations and specified schemes of arrangement is replaced by a “not more than 10% disinterested voting” requirement. The court is given a new discretion to dispense with the “headcount test” in cases where it is retained for members’ schemes.
Clarifying Directors’ Duty of Care, Skill and Diligence
- The standard for directors’ duty of care, skill and diligence is clarified with a view to providing clear guidance to directors of Hong Kong companies. A mixed objective and subjective test is introduced.
Strengthening Auditors’ Powers
- An auditor is empowered to require a wider range of persons, including the officers of a Hong Kong incorporated company and its Hong Kong incorporated subsidiary undertakings and any person holding or accountable for such company or such subsidiary undertakings’ accounting records, to provide information or explanation reasonably required for the performance of the auditor’s duties. Any such person who fails to provide the requested information or explanation to the company’s auditor will commit a criminal offence.
Fostering Shareholder Protection
- Under the current Companies Ordinance, any member of a company incorporated in Hong Kong can apply to the court in the form of a petition for a remedy (such as injunctive relief, buy-out, or appointment of a receiver or manager) on the ground that the affairs of such company are being or have been conducted in a manner which is unfairly prejudicial to the interests of the members generally or of some part of the members (including himself). The scope of the unfair prejudice remedy is extended in the new Companies Ordinance to cover “proposed acts and omissions”, such that a member may bring an action for unfair prejudice even if the act or omission that would be prejudicial to the interests of members is not yet effected.
- More effective rules are introduced to deal with directors’ conflicts of interests, including expanding the requirement for seeking shareholders’ approval to cover directors’ employment contracts which exceed three years.
Enhancing Shareholder Engagement in the Decision-Making Process
- The new Companies Ordinance reduces the threshold requirement for members of a Hong Kong incorporated company to demand a poll from 10% to 5% of the total voting rights.
- Measures for Ensuring Better Regulation
Strengthening the Enforcement Regime and Criminal Liability for Auditors
- The new Companies Ordinance strengthens the enforcement regime in relation to the liabilities of officers of companies (including companies incorporated in Hong Kong and registered non-Hong Kong companies) for such companies’ contravention of provisions in the Companies Ordinance, including lowering the threshold for prosecuting a breach or contravention and extending it to cover reckless acts through a new definition of “responsible person”.
A new offence in relation to inaccurate auditor’s reports is introduced. Auditors of Hong Kong incorporated companies will commit an offence if they knowingly or recklessly cause any of the following important statements to be omitted from the auditor’s report:
- A statement that the financial statements are not in agreement with the accounting records in any material respect.
- A statement that the auditor fails to obtain all the information or explanation that, to the best of the auditor’s knowledge and belief, are necessary and material for the purpose of the audit.
Increasing Powers of the Registrar of Companies
- The new Companies Ordinance provides new powers for the Registrar of Companies (the “Registrar”) to obtain documents or information to ascertain whether any conduct that could constitute an offence in relation to the provision of false or misleading statement to the Registrar has taken place.
- The Registrar is empowered to compound specified offences to optimize the use of judicial resources. Compoundable offences are generally confined to straightforward, minor regulatory offences committed by companies that are punishable by a fine.
- Measures for Facilitating Business
Facilitating Simplified Reporting
- The new Companies Ordinance allows Hong Kong incorporated companies that meet specified size criteria to prepare simplified financial statements and directors’ reports. Larger private Hong Kong incorporated companies that do not meet the specified size criteria will also be entitled to prepare simplified financial statements and directors’ reports if their sizes do not exceed a higher threshold provided that members holding 75% of the voting rights so resolve and no member objects.
- Hong Kong incorporated companies are allowed to dispense with Annual General Meetings by unanimous shareholders’ consent.
- An alternative court-free procedure for Hong Kong incorporated companies to reduce their share capital is introduced based on a solvency test.
- All types of Hong Kong incorporated companies (rather than just private companies, as in the current Companies Ordinance) are allowed to purchase their own shares out of capital, subject to a solvency test and a special resolution by independent shareholders.
- All types of Hong Kong incorporated companies (whether listed or unlisted) are allowed to provide financial assistance to another party for the purpose of acquiring its own shares or the shares of its holding company, subject to a solvency test.
Facilitating Business Operations
- Under the new Companies Ordinance, the use of a common seal by a Hong Kong incorporated company is optional and the requirement for a Hong Kong incorporated company to have an official seal for use abroad is relaxed.
- A general meeting of a Hong Kong incorporated company is permitted to be held at more than one location using electronic technology.
- The new Companies Ordinance sets out the rules governing communications to and by Hong Kong incorporated companies in electronic form.
- Measures for Modernizing the Law
Abolishing Par Value for Shares
- The new Companies Ordinance adopts a mandatory system of no-par for all Hong Kong incorporated companies with a share capital and retires the par value of shares, in line with international trends and to provide Hong Kong incorporated companies with more flexibility in structuring their share capital.
Removing the Power to Issue Share Warrants
- The power of Hong Kong incorporated companies to issue share warrants to bearers is removed.
WATCH THIS SPACE
The new Companies Ordinance is expected to commence operation in 2014. Meanwhile, over ten regulations will have to be made to facilitate implementation of the new Ordinance.
A dedicated thematic section on the “New Companies Ordinance” has been set up on the website of the Companies Registry at www.cr.gov.hk to provide information and updates on the implementation of the new Companies Ordinance. The full version of the new Companies Ordinance will be uploaded upon its publication in the Gazette in mid August. It is expected that the Companies Registry will continue to issue briefing materials and guidelines on the new Ordinance, and organize seminars and briefing sessions before its implementation.