The Hong Kong Legislative Council passed the Companies Bill on July 12, 2012, a major milestone in a comprehensive exercise to rewrite and modernize the Companies Ordinance (Cap. 32) of Hong Kong. The new Companies Ordinance (the “New CO”) is not expected to be operative until 2014. The following is a summary of the major initiatives introduced in the New CO.
Abolition of Headcount Rule for Takeover Schemes
Under the existing regime, a scheme of arrangement requires approval of a majority in number (the “Headcount Rule”) representing at least 75% of the votes present at the meeting. In a takeover context, the Headcount Rule is open to abuse as most shares in Hong Kong listed companies are held in uncertificated form and are typically voted on by the nominee of the clearing system. For schemes of arrangements in a takeover context, the New CO will abolish the Headcount Rule but (tracking the requirement in the Hong Kong Code on Takeovers and Mergers and Share Repurchases) will require that not more than 10% of disinterested votes are cast against the resolution.
The New CO will codify a director’s duty of care, skill and diligence with a view to clarifying the legal position. A mixed objective/subjective standard will be adopted, requiring a director to exercise the care, skill and diligence that would be exercised by a reasonably diligent person with:
- 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
- the general knowledge, skill and experience that the director has (the subjective test).
Maintenance of Share Capital
Under the existing regime, a reduction of share capital requires a special resolution and a court order confirming the reduction. The New CO will introduce an alternative court-free procedure where the special resolution is supported by a solvency statement made by each director confirming the director’s opinion that the company will be cashflow solvent immediately after the transaction and for a period of 12 months thereafter.
The New CO will also allow companies (not just private companies, as is the case currently) to purchase shares out of capital, subject to meeting the solvency test described above.
Under the existing regime, subject to certain exceptions, companies are prohibited from giving financial assistance to third parties who are purchasing the company’s shares. Private companies may seek a “whitewash” approval by special resolution from shareholders to permit financial assistance. The New CO will allow companies (whether listed or unlisted) to provide financial assistance, subject to the satisfaction of the solvency test and either (a) board approval only, if the aggregate amount of the assistance does not exceed 5% of shareholders’ funds; (b) board approval and unanimous approval of shareholders; or (c) board approval and approval by ordinary resolution of shareholders, with notice given to shareholders of the assistance and subject to a right of dissenting shareholders representing 5% or more of the votes to petition the court for a restraining order. The outright abolition of the financial assistance restrictions for private companies was proposed, but not adopted, as it was considered premature until Hong Kong implemented measures to prohibit insolvent trading. If rules on insolvent trading are eventually adopted in Hong Kong, it is possible that the restrictions on financial assistance by private companies could be further relaxed.
Other important measures in the New CO include:
Enhancing Corporate Governance
- requiring every private company to have at least one natural person to act as a director;
- improving the procedures for written resolutions, including procedures for shareholders to propose resolutions;
- reducing the threshold requirement for members to demand a poll from 10% to 5% of voting rights;
- requiring public companies and larger private companies to prepare a more comprehensive directors’ report which includes an analytical and forward-looking business review;
- improving the procedures for dealing with directors’ conflicts of interests, including expanding the requirement to seek shareholders’ approval to cover service contracts which exceed three years, and requiring ratification of director conduct by disinterested shareholders only;
- requiring disinterested shareholders’ approval in cases where shareholders’ approval is required for transactions of public companies and their subsidiaries;
- extending the scope of unfair prejudice to cover “proposed acts and omissions” so that the remedy is potentially available before the act or omission occurs;
- empowering auditors to require a wider range of persons (such as officers of a company’s Hong Kong subsidiaries and any person holding or accountable for the group’s accounting records) to provide information and explanation required for the performance of the auditor’s duties and extending the offense of failing to provide the information or explanation to the auditors to cover such persons;
Ensuring Better Regulation
- introducing new secrecy rules which will make it an offense for persons involved in an investigation to disclose particulars of such investigation;
- strengthening the enforcement regime in relation to liabilities of officers for contravention of the New CO, including lowering the threshold to include reckless acts or omission, and introducing a new definition of “responsible persons” which includes officers, shadow directors and persons who authorize or permit or participate in the contravention or failure;
- allowing companies to dispense with annual general meetings by unanimous shareholder consent;
- introducing a new court-free statutory amalgamation procedure for wholly-owned group companies;
- facilitating simplified financial reporting by small and medium sized enterprises;
- allowing companies to execute deeds without the common seal, with the signature of two directors or a director and the secretary;
Modernizing the Law
- adopting a mandatory no-par value system for companies with share capital; and
- clarifying the rules on indemnification of directors against liabilities to third parties.