The Companies Registry of Hong Kong recently published its updated guidance on directors’ duties with eleven principles. By way of background, the responsibilities and liabilities of directors of Hong Kong are mainly derived from common law, with certain specific obligations imposed by statutes (the bulk of which are set out in the Companies Ordinance, Chapter 32 of the laws of Hong Kong (“Companies Ordinance’)) and the companies’ constitution.
The duties of directors can be broadly classified into two categories: fiduciary duties, and duties of skill and care. Although Hong Kong case law sets out and elaborates in detail on most of the salient principles under the two broad categories, but case law tends to be complex and inaccessible to the general public. As an attempt by the Government Companies Registry to provide a ready reference guide for those serving as directors, the Hong Kong Companies Registry first issued “The Non-statutory Guidelines on Directors’ Duties” in 2004 (“2004 Version”). The 2004 Version is now recently updated and retitled in July of this year as “A Guide on Directors’ Duties” (the “Guideline”). The Guideline summarizes salient principles of directors’ duties and is a good reminder for Hong Kong companies and directors to adhere to them in their everyday management of their Hong Kong companies. Extracts of the eleven principles of the Guideline are as follows :
Principle 1 - Duty to act in good faith for the benefit of the company as a whole. A director owes a duty to act in good faith in the interests of all of the company’s shareholders, present and future.
Principle 2 - Duty to use powers for a proper purpose for the benefit of shareholders as a whole. A director must exercise his powers for a proper purpose and the primary and substantial purpose of the exercise of a director’s powers must be for the benefit of the company.
Principle 3 - Duty not to delegate powers except with proper authorization and duty to exercise independent judgment. Except where authorized to do so by the company’s constitution (i.e. memorandum and articles of association) or any resolution, a director must not delegate any of his powers. He must also exercise independent judgment in relation to any exercise of his powers.
Principle 4 - Duty to exercise care, skill and diligence. A director must exercise care, skill and diligence that would be exercised by a reasonably diligent person with (i) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company; and (ii) the general knowledge, skill and experience that the director has.
Principle 5 - Duty to avoid conflicts between personal interests and interests of the company. A director must not allow personal interests to conflict with the interests of the company.
Principle 6 - Duty to enter into transactions in which the directors have an interest except in compliance with the requirements of the law. Where a director has a material interest in any transaction to which the company is, or may be, a party, he must not, in the performance of his functions as a director, authorize, procure or permit the company to enter into such transaction, until he has complied with requirements and duties imposed by the law. The law requires a director to disclose the nature of his interest in respect of such transaction. Under certain circumstances, the constitution of the company may also prescribe additional measures, such as approval of other directors or members in respect of the proposed transaction.
Principle 7 - Duty not to gain advantage from use of position as a director. A director must not use his position as a director to gain, directly or indirectly, an advantage for himself, or someone else, or which causes detriment to the company.
Principle 8 - Duty not to make unauthorized use of company’s property or information. Unless authorized by the company in general meeting, a director must not use the company’s property or information, or any opportunity that presents itself to the company, of which he becomes aware of as a director of the company.
Principle 9 - Duty not to accept personal benefit from third parties conferred because of position as a director. A director must not accept any benefit from a third party, which is conferred because of the powers he has as a director or by way of reward for any exercise of his powers as a director, unless the company has consented to it by ordinary resolution, or where the benefit is necessarily incidental to the proper performance of any of his functions as director.
Principle 10 - Duty to observe the company’s memorandum and articles of association and resolutions. A director must act in accordance with the company’s constitution as well as the resolutions that are made in accordance with the company’s constitution.
Principle 11 - Duty to keep proper books of account. A director must take all reasonable steps to ensure that proper books of account are kept so as to give a true and fair view of the state of affairs of the company and explain its transactions.
By comparison to the 2004 Version, the Guideline mainly updated Principle 4 to better reflect modern trend. In both versions, Principle 4 covers the duty to exercise care, skill and diligence. Under Hong Kong common law, the test for the standard of care, skill and diligence is a subjective one, i.e. such skill as may be reasonably be expected from a person of the particular director’s knowledge and experience . This subjective standard has been widely criticized as being “too lenient” by today’s modern standards. In the US, the standard for duty of care of a director, for most states that have adopted the Model Business Corporation Act, is an objective one, namely such degree of care that a person in a like position would reasonably believe appropriate under similar circumstances. The new Principle 4 now contains a twofold objective/subjective standard which is closer to the modern judicial stance taken towards the determination of the standard of care expected of directors. The objective test is the minimum standard. It can be adjusted upwards to reflect any special skill, knowledge and experience possessed by a particular director (to reflect the subjective test) but cannot be adjusted downwards to accommodate someone who is incapable of attaining the basic standard of what is reasonably expected of the reasonably diligent person carrying out the same function. The Hong Kong Government is currently considering to codify this twofold standard in the upcoming revisions to be made to the Companies Ordinance in order to replace the corresponding common law rules and provide consistent statutory guidance to directors.
The Guideline stresses that the eleven Principles are of equal importance and are by no means exhaustive of the duties of directors. All Hong Kong directors are encouraged to review the role and duties of their directorship in more detail under all applicable laws. Breach of directors duties may result in civil and/or criminal sanctions and may even lead to disqualification from acting as a director. Accordingly, we take this opportunity to remind clients and directors of Hong Kong companies to refer to the full text of the Guideline and other relevant Hong Kong publications such as the “Guidelines for Directors” issued by the Hong Kong Institute of Directors and the “Code on Corporate Governance Practices” issued by the Hong Kong Exchanges and Clearing Limited.