Summary of key changes
Codifying directors’ duty of care, skill and diligence – the duty of care, skill and diligence expected of directors has been clarified and codified in the new Companies Ordinance. A mixed subjective and objective test has been set as the statutory standard for directors’ duties consistent with other overseas common law jurisdictions.
Under the new regime, a director’s conduct will be measured against the standard 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 (the objective test) and (ii) the general knowledge, skill and experience that the director has (the subjective test).
The Hong Kong case law on directors’ duties is currently uncertain due to a lack of clear case law and so the statutory regime provides welcome clarity for directors.
Widening liability of responsible officers – under the new Companies Ordinance, the scope of persons that can face punishment for breach of the legislation is being widened. Currently, an “officer who is in default” may be liable and this catches officers or shadow directors who “knowingly or wilfully” authorise or permit the default, refusal or contravention of the Ordinance. The new regime penalises “responsible persons”, meaning officers or shadow directors who authorise or permit, or participate in, the contravention or failure. The need for knowledge or wilful conduct on the part of the officer has been removed and thus extends the scope to cover reckless acts and omissions. This change is intended to strengthen the enforcement regime and lowers the threshold for prosecutions.
Extending directors’ indemnification – the new Companies Ordinance allows companies to indemnify directors against liability incurred by the director to a third party if certain conditions are met. This statutory change provides a helpful clarification to the current common law position which is unclear as to the extent to a director’s right to be indemnified in such circumstances. Any indemnification must not cover certain liabilities and costs, including criminal fines, regulatory penalties and costs of defending criminal or civil proceedings where a director is convicted or judgement is given against the director.
In addition, the new Companies Ordinance also tweaks the provisions permitting a company to take out insurance for directors to permit cover to be taken out for directors of associated companies.
Amending the regime prohibiting loans to directors – as with the current regime, the new Companies Ordinance contains a general prohibition on companies making loans or similar transactions to directors and their connected persons. The new regime expands the categories of persons connected with directors of public companies (and private companies which are subsidiaries of public companies) caught by the prohibition, to include wider family members such as adult children, parents and other connected persons.
The new Companies Ordinance does, however, expand the exemption permitting members to approve loans to directors of all companies, which is currently only available to private companies. Approval must be obtained from disinterested members, which is essentially a new concept as the existing Companies Ordinance does not restrict members from voting on transactions in which they have an interest save in certain limited circumstances (such as on the purchase of a company of its own shares). Other exemptions have also been modified and two new exceptions added (relating to (i) de minimus loans below 5% of net assets or called–up share capital and (ii) funds to meet expenditure incurred in defending proceedings or regulatory actions).
Criminal sanctions have also been removed for breach of the provisions prohibiting loans to directors, with civil penalties continuing to apply.
Expanding prohibition on payments for loss of office – the existing Companies Ordinance prohibits companies from making payments to directors or former directors for loss of office or as retirement payments without shareholder approval. Under the new regime, this prohibition is extended to catch payments made to other persons, including entities connected with the director, or where the benefit is for the director. It also covers payments made to directors and former directors of a company’s holding company.
Long term contracts to be approved by members – a new requirement is being introduced in the new Companies Ordinance requiring shareholder approval for any contract of employment with a director which exceeds or may exceed three years.
Additional disclosures of directors’ interests required – the scope of the disclosure required by directors with an interest in contracts with the company is being extended. Under the new Companies Ordinance, disclosure is required in relation to “transactions” and “arrangements” in addition to the current requirement for disclosure in respect of “contracts”. For public companies, it is also extended to cover the interests of entities connected with the director, save where the director is not aware of such interest. The scope of the required disclosure is extended to include the nature and extent of the director’s interest (beyond the current requirement just to disclose the nature).