28 August, 2012
The new Companies Ordinance (“Ordinance“) passed on 12 July 2012 is expected to become effective in 2014, whereupon:
- a) provisions about insolvency and winding up in the current Companies Ordinance (“Current CO“) will be retained but retitled as the “Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32)”;
- b) the prospectus regime under the Current CO will be moved into the Securities and Futures Ordinance (Cap. 577); and
- c) all other provisions under the Current CO will be repealed.
The Ordinance will bring various changes including those below.
1. No memorandum of association
- Current provisions in a company’s memorandum of association will be regarded as part of the company’s articles.
2. No par value
- Par value has been abolished.
- Existing balances in the share premium account and capital redemption reserve will become part of the company’s share capital.
3. No authorised share capital
- Authorised share capital has been abolished, but the articles may limit the maximum number of shares that can be issued.
4. Redenomination of capital
- Subject to its articles, members may resolve to redenominate the share capital into shares of different currencies.
5. Transfer of shares
- Reasons must be given by the board if requested by a transferor or transferee if it does not approve a transfer of shares.
6. Issuance of warrants and convertibles etc
- Issuance of warrants, options and convertibles will require a mandate from members in the same way as shares.
7. Debenture holders’ register and meetings
- Provisions concerning a register of debenture holders have been refined, and debenture holders holding 10% or more of such debentures may, subject to the trust deed, apply to court to hold a meeting to give directions to trustees.
Documents under Seal
8. Common seal
- Common seal is optional.
- A company may execute documents signed by the sole director or, where it has 2 or more directors, by 2 directors or a director and the company secretary, and such documents shall have effect as if executed under seal.
Protection to third parties
9. Indoor Management Rule
- A statutory indoor management rule is introduced for persons dealing in good faith with a company. Good faith is presumed (unless rebutted), and a person is not regarded as acting in bad faith by reason only of his knowledge that the directors have exceeded their powers under the articles or any company resolutions or any shareholders agreement.
- Transactions which bind the company because of the statutory indoor management rule are voidable at the instance of the company if they involve “insiders” (i.e. a director of the company or its holding company or their connected entities). The company’s rescission right will be lost in certain circumstances, including as against a purchaser in good faith and for value without actual notice of the directors exceeding their powers, or where the company is indemnified for any loss or damage resulting from the transaction, or where the transaction is affirmed by the company.
10. Directors’ duty
- A director must exercise reasonable care, skill and diligence (“standard of care”) based on both an objective and a subjective test.
- Under the objective test, the standard of care must meet the standard of what would be exercised by a reasonably diligent person with the general knowledge, skill and experience reasonably expected of a person carrying out the functions of that director.
- Under the subjective test, the standard of care must meet the standard of what would be exercised by a reasonably diligent person with the general knowledge, skill and experience of that director.
- The duty as codified above will replace that at common law, but the civil consequences of breach remain unchanged.
- Other heads of fiduciary duties remain governed by common law.
11. Directors’ conflicts of interests
- 3 classes of transactions involving a director (or a connected entity) require members’ approval:
- loan transactions;
- payments for loss of office;
- long-term service contracts.
- Regarding class 1, loans in contravention of the prohibition are no longer criminal. The prohibition has been extended so that a wider category of persons are regarded as connected with a director. The exceptions have been refined with some extensions, and they include:
- loans approved by disinterested members in the prescribed manner (and this exception is now available to all companies including private companies within a listed group);
- de minis loans which, in aggregate, do not exceed 5% of the company’s net assets;
- loans to meet expenses on company business;
- loans to enable a director to defend proceedings involving the director on account of his office;
- home loans to a director to acquire his/her principal residence;
- certain leases of goods or lands;
- intra-group loan transactions.
- Special provisions are made to regulate private companies which are part of a listed group.
- Regarding class 2, this has been extended to deal with certain previous loopholes and the exceptions include where the payment:
- is to discharge existing legal obligations;
- represents damages owing to the director;
- is in settlement of claims regarding employment termination;
- is by way of pension for past services.
- Regarding class 3, members’ approval is required for any service contract exceeding a guaranteed term of three years.
- In addition to the above, directors must declare interests in respect of any transaction or arrangement, and not just in respect of their interests in contracts. They are required to disclose not only the “nature” but also the “extent” of their interests. Such requirements apply to shadow directors as well.
12. Ratification by members
- Disinterested members may resolve to ratify the conduct of a director involving negligence, default, breach of duty or breach of trust in relation to the company.
- Votes from interested members (being the director whose conduct is being ratified, or his/her connected entities and a trustee holding the shares for that director or entities) shall be disregarded. If there are no disinterested members, ratification will require all members.
- The common law regarding acts that cannot be ratified will remain unaffected.
13. Corporate directors
Subject to a 6-month grace period after the Ordinance becomes effective, a private company (not being a member of a listed group) must have at least one natural person to act as director.
14. Protection of directors’ personal data
- Directors may (subject to some exceptions) withhold their residential addresses and full identity card/passport numbers from public inspection.
Members’ Meetings and Resolutions
15. Written Resolutions
- The requirements regarding written resolutions have been refined with a statutory procedure prescribed for proposing, passing and recording such resolutions.
- A written resolution signed by all members (except for removal of directors or auditors before expiry of their term of office) has effect as if passed by the company in general meeting.
- Directors or any member of a company may propose a resolution to be passed by written resolution.
16. Special Resolutions
- The notice period has been shortened to 14 days.
17. Right to demand poll
- A poll may be demanded on any question (except the election of the chairperson of the meeting or any adjournment of the meeting) and can be made by:
- at least 5 members having the right to vote at the meeting;
- a member or members representing at least 5% of the total voting rights of all the members having the right to vote at the meeting (i.e. reduced from 10% under the Current CO); or
- by the chairperson of the meeting.
18. Dispensation with AGM
- A company may by unanimous shareholders’ consent dispense with the holding of an AGM and replace it by a written resolution, but documents required to be tabled must be provided to members on or before the written resolution.
- A one member company is not required to hold an AGM.
19. Electronic meetings
- Subject to the company’s articles, a company may hold a general meeting at two or more places using technology that enables them to exercise their right to speak and vote at the meeting.
Schemes and compulsory acquisitions
20. Abolition of headcount test
- In respect of members’ schemes involving a takeover offer or compulsory acquisition following a repurchase offer:
- the Court may sanction a scheme if (i) approved by at least 75% of the members present and voting at the meeting, and (ii) the votes cast against the scheme do not exceed 10% of all “disinterested shares” (this latter requirement represents a statutory enactment of the requirement in the Takeovers Code) (the “approval threshold”); and
- the head count test (which requires the scheme to be approved by a majority in number of the members present and voting at the meeting) will be abolished.
- In respect of other members’ schemes, the headcount test is retained but may be dispensed with by the court if the approval threshold is met.
- In respect of creditors’ scheme, the headcount test will be retained.
21. Costs incurred in opposing Schemes
- Provisions have been introduced to deal with the costs position of members who oppose a scheme.
- The court has power to award costs to a member who opposes a Scheme only if it is satisfied that the member has acted in good faith and has reasonable grounds to oppose.
- The court may award costs against such a member only if the member’s opposition is frivolous or vexatious.
22. Compulsory “squeeze-out” or “sell-out”
- These provisions have been refined and extended to repurchase offers.
- The previous problem of failing to reach the 90% acceptances threshold for companies with significant untraceable members has been addressed by giving a right to apply to court. The court may only sanction such rights to be exercised if the consideration offered is “fair and reasonable” and the 90% threshold would have been reached had such untraceable members accepted the offer.
Share Capital Transactions
23. Solvency test
- A uniform solvency test will be adopted to regulate:
- reduction of share capital without going to court,
- redemption or buy-back of shares out of capital, and
- financial assistance.
- Each director (save in the case of financial assistance which relate only to those directors voting in favour of it) is required to issue a solvency statement.
- The solvency statement will confirm, among other things, that the director has formed the opinion that:
- there is no ground on which the company could be found to be unable to pay its debts, and
- after taking into account all of its liabilities (including contingent and prospective liabilities), the company will be able to pay its debts as they fall due during the period of 12 months immediately thereafter.
24. Reduction/repurchase of share capital
- A company may reduce its share capital without going to court by a special resolution supported by a solvency statement.
- Any company (not just private companies as under the Current CO) may repurchase its shares out of capital, subject to a solvency statement. This does not apply to an on-market repurchase by listed companies.
25. Financial Assistance
- Prohibited financial assistance will no longer be described as “unlawful” and any contravention by itself will not affect the validity of the financial assistance and any contract or transaction connected with it.
- The prohibition on giving financial assistance will be relaxed and that applies to public (listed and unlisted) companies as well.
- The relaxation applies where:
- the solvency test is satisfied,
- the financial assistance is provided within the 12 month-period to which the solvency statement relates, and
- such assistance has been (i) approved by the board and does not exceed 5% in aggregate of the company’s paid-up share capital and reserves; or (ii) approved by the board and unanimously agreed by members; or (iii) approved by the board and supported by an ordinary resolution of members, subject to any restraining order obtained by members holding 10% shares/voting rights.
26. Statutory amalgamation
- Court approval will not be required for vertical amalgamation (a holding company and its wholly-owned subsidiaries) or horizontal amalgamation (involving wholly-owned subsidiaries of a company).
- The amalgamated companies will continue as one company.
- Any amalgamation must be approved by special resolution (on a poll) of members of the amalgamating companies, and for horizontal amalgamations, written resolutions may also be used.
- Directors of each amalgamating company are required to issue a solvency statement (see paragraph 23 above). Secured creditors need to be notified and directors have to certify, amongst other matters, that no creditors will be prejudiced by reason of the circumstances set out in the Ordinance.
27. Simplified financial and directors’ report for SMEs
- The following types of companies may prepare simplified financial and directors’ reports:
- a private company if it qualifies as a “small private company” (except bank/deposit-taking companies, insurance companies or stockbrokers);
- the holding company of a group of companies that qualifies as a “group of small private companies”;
- a private company that is not a member of a corporate group with the agreement of all its members;
- small guarantee companies and groups of small guarantee companies, which have a total annual revenue of not more than $25 million; and
- a private company or a group of private companies which is not qualified as a “small private company” or a “group of small private companies” but it meets a higher size threshold and 75% of its members so resolve with no member objecting.
- (Note: A private company is regarded as “small” if it satisfies any two of the following conditions: (a) total annual revenue of not more than HK$100 million; (b) total assets of not more than HK$100 million; and (c) no more than 100 employees.)
- Companies that prepare simplified financial reports will be exempted from the true and fair view requirement for financial statements.
28. Directors’ Report
- Public companies and larger private companies and guarantee companies (i.e. those that do not qualify for simplified reporting, see 27 above) to prepare a more comprehensive directors’ report, which will include an analytical and forward-looking “business review” containing information relating to environmental and employee matters that have a significant effect on the company.
Registration of Charges
29. Registration Period
- The period for registration of charges has been shortened from 5 weeks to 1 month after the creation of the charge or, for a charge created outside Hong Kong and comprising property situated outside Hong Kong, 1 month after the date on which a certified copy of the instrument creating or evidencing that charge could have been received in Hong Kong in due course of post.
30. Registrable charges
- The list of registrable charges has been modified.
- A charge for the purpose of securing any issue of debentures and shipowners’ lien on sub freights are no longer on the list of registrable charges.
- Charges on bank accounts are not registrable.
- Charges on aircrafts are registrable.
31. Documents available for public inspection
- A certified copy of the charge instrument, together with a statement of the prescribed particulars, shall be registered and be available for public inspection.
- Similarly, a notification in the specified form accompanied by a certified copy of the instrument evidencing the payment, satisfaction, release or cessation shall be delivered for registration.
32. Auditors’ rights to information
- An auditor may require a wider range of persons (including, e.g., the officers of a company’s Hong Kong subsidiary undertakings and any person holding or accountable for the company or its subsidiary undertakings’ accounting records) to provide information or explanation reasonably required for the performance of the auditor’s duties.
- The company must take all reasonable steps to obtain such information or explanation as soon as practicable.
- A person commits an offence if he makes a statement to an auditor that conveys or purports to convey any information or explanation that is misleading, false or deceptive in a material particular.
33. Offences relating to contents of auditor’s report
- If an auditor of a company fails to obtain all the information or explanations that, to the best of the auditor’s knowledge and belief, are necessary and material for the purpose of the audit, or if the auditor is of the opinion that the financial statements of the company are not in agreement with the accounting records in any material respect, the auditor must state such fact in the auditor’s report.
- Any omission to include such statements knowingly or recklessly in the auditor’s report will attract a criminal fine.
- Qualified privileges against defamation actions apply to statements made by auditors when performing their duties, absent malice.
34. Unfair prejudice
- The unfair prejudice remedy has been extended.
- It will be available where the prejudice relates to any “proposed act or omission” (as against actions already taken).
35. Derivative actions
- Provisions regarding a statutory derivative action (including a multiple derivative action) largely remain unchanged and they do not replace the right to take action under common law.
36. Responsible Person
- Company officers not previously liable for breaches by a company may now be liable because of the new provisions concerning “responsible person” being an officer or shadow director of the company who “knowingly”, “wilfully” or “recklessly” authorises or permits, participates in, or fails to take all reasonable steps to prevent, the contravention.
- The above applies to both Hong Kong and non-Hong Kong companies.
For further information, please contact:
Ronny Chow, Partner, Deacons