New Hong Kong Company Law Ordinance – Taking Hong Kong’s competitiveness into a new era
A new Company Ordinance was first introduced in July 2012 which has effectively revamping the old company law enforced since the early 80s with an aim to maintain Hong Kong city’s status quo as one of the most attractive business and financial centre in the world.
After 2 years of ongoing debates and joint efforts by the Hong Kong Legislative Council and different business industries, a new Companies Ordinance has came into force on 3rd March this 2014 which aims to put in place a better and convenience to follow regulations to support small and medium size businesses. Thus, the new Ordinance is set to modernize the existing company law by amending a number of document requirements and regulatory compliances for the convenience of new entrepreneurs and business investors who are looking to form a company in Hong Kong.
Whether you are planning to form a new enterprise or already have a portfolios of Hong Kong companies, it is important to take a note on the changes bring by the new Ordinance and how does it affect your administration of the company(ies).
We highlight few key important changes which are likely to be asked:
- The previous template Memorandum and Articles of Association should no longer be used. Under the new CO, only the Articles of Association are required. The new Ordinance mirrors the company law framework operates in the UK which has prescribed a set of model Article of Association which companies can adopt or tailor made a bespoke company Article of Association.
- Under the new CO, the shares of a private company will not have any par value attached to the share and it may now issues company shares at a price lower than their par value
- Under the previous Ordinance, a corporation is allowed to be appointed to as the sole director in a private company. Under the new Ordinance, now at least one director must be a natural person. The law applicable to listed companies and their respective subsidiaries under the existing law remain unchanged and are not allowed to appoint corporate directors.
- If your existing private company only has one corporate director as the sole director of the company then a natural person must be appointed to the company board within 6 month grace period.
The Use of Common Seal
- The requirement that legal deeds are required to executed by affixing its common seal which are often considered as impractical. Under the new Ordinance, the use of a common seal becomes optional therefore a deed can be executed without affixing the common seal.
- Any existing companies wish to dispense with the common seal requirement or to set out any particular requirement in executing a legal deed under the new Ordinance then amendments must be made to the Company Article of Association to effect the changes.
Dispensing with the Annual General Meetings Requirement
- Private Companies now have an option under the new Ordinance to dispense with the AGMs simply by passing a shareholders resolution.
- Note that if your existing company Articles of Association contains any provisions on company to hold an AGM then these provisions must be amended before the company can opt to dispense with the AGMs requirement.
Simplified Reporting for Small Private Companies
- The new Ordinance broadens the exemption on small private companies to prepare simplified accounts and financing reports based on the SME Financial Reporting Framework and Standard if it is
- Whether a company is qualified for this exemption will depend on its group’s annual revenues, assets and number of employees.
- Generally, public companies and private companies (other than those qualified for simplified reporting or a wholly owned subsidiary company) are required to prepare a business review as part of the annual directors’ report. Under the new Ordinance now all private companies can opt out of this requirement by passing a special resolution (75% votes)
Overviews on Company Internal Contracts and Procedures
There are a number of amendments bring by the new Ordinance which should be noted as to how it affects any existing contracts or internal policies and procedures. We highlight below few important ones:
- When the New Company Ordinance was first came in force in 2012, the Legislative Council ruled out the idea to codify director’s duties (which is one of the principle company law form part of the UK Companies Act 2006) as it was considered as unnecessary due to the safeguards afford by the common law rules. However, under the new set of ordinance now provides that the standard of care a director must exercise has now been codified into statutory duties.
- In deciding whether a director has fulfilled his duties of care, skill and diligence, his conduct will be considered based on both the subjective and objective tests
(i). Subjective test – the director’s own general knowledge, skill and experience; and
(ii). Objective test – the general knowledge, skill and experience that a person in that position is expected to have
Loan to Directors
- Companies can make a loan to a director. The new Ordinance set out a more detailed provisions mirrored the UK Companies Act 2006 that the loan agreement should be reviewed if a loan to a director or to any connected person to a director (ie. Relatives and business partners etc.,)
- The approval of the company board and its members in a prescribed manner is required under the new ordinance for any guaranteed term of employment of a director for longer than three years.
- Any contract with a guaranteed term over three years without members’ prior approval is void unless members grant approval on the contract.
To thrive, the new changes introduced under the new Ordinance will help to enhance the accountability of directors and corporate governance and will certainly enlightened the shareholder value within the corporation.
It is also worth to note that the new ordinance will also benefit the general public as it empowers the Companies Registry’s in ensuring the public have access to accurate and updated information about companies.