New Hong Kong Companies Ordinance: General Overview01 Nov 2013 | Newsletter/briefing
The new Companies Ordinance (the new CO) was passed by the Legislative Council on 12 July 2012 and will come into force on 3 March 2014. This alert highlights the key changes.
The new CO is the culmination of a lengthy rewrite, which began in mid-2006. The rewrite is being carried out in two phases.
The first phase is the introduction of the new CO. The new CO contains over 900 sections and 11 schedules. The new CO replaces the current Companies Ordinance (Cap. 32) except for those provisions relating to:
- winding up and insolvency
- the public offer/prospectus regime in relation to the offer of shares and debentures
The second phase is discussed at the end of this alert.
Some of the more significant changes under the new CO are listed below.
1. The common law duties of a director to exercise reasonable care, skill and diligence are codified and comprise an objective test and a subjective test. Remedies for breach continue to be determined according to existing case law.
2. The ability to have corporate directors is restricted. All companies must have at least one director who is a natural person (ie non-corporate director). All directors of public companies (and subsidiaries of listed companies) must be natural persons.
3. The prohibition on loans (broadly defined to include quasi-loans and credit transactions) to directors is extended to cover a wider category of persons who are regarded as connected with a director. New exemptions permit loans to directors in certain circumstances.
4. A director’s obligation to declare interests is extended to cover any 'transaction' or 'arrangement' which the director has entered or proposes to enter into, which is of significance to the company’s business and in which the director has a material interest. A director of a public company must disclose any material interest of his or her connected entities.
5. Disinterested shareholders’ approval is required to ratify director misconduct. If none of the shareholders are disinterested, director misconduct may be ratified (if permissible under common law principles) by a unanimous shareholder resolution.
Abolition of Memorandum
6. A company now has a single constitutional document - the articles of association. The concept of a memorandum of association is retired. An existing company’s memorandum is deemed to form part of its articles.
Capital and Solvency Test
7. A mandatory system of no-par value for shares is introduced - there is no longer a requirement for shares to have a par value or for a company to have authorized capital.
8. Companies within a group may amalgamate without the involvement of the court under a newly introduced statutory amalgamation procedure.
9. The headcount test for certain types of scheme of arrangement is removed.
10. In addition to the existing court-sanctioned process, a court-free process for capital reduction is introduced to simplify the procedures for reducing a company’s share capital.
11. The whitewash procedure has been removed and new exceptions to the financial assistance prohibition are included which apply to private and public companies. The contravention of the financial assistance prohibition no longer invalidates the financial assistance transaction.
12. A uniform solvency test is introduced for the statutory provisions governing:
- the provision of financial assistance on acquisition of a company’s own shares
- repurchase of a company’s own shares
- reduction of a company’s share capital via the court-free procedure
Shareholders and Meetings
13. The new CO permits companies, by passing a written resolution or a resolution at a general meeting with unanimous shareholders’ consent, to dispense with the requirement to hold annual general meetings.
14. The new CO sets out statutory rules on procedures for proposing and circulating written resolutions. If the procedures are not followed, the written resolution will not be effective.
15. The minimum notice period for annual general meetings remains at 21 days. The minimum notice period for all other general meetings is 14 days - for voting on ordinary as well as special resolutions.
Other important issues
16. The adoption and use of a common seal is now optional. Companies may sign a deed under hand instead of under seal.
17. Due execution by a company is deemed in favour of a purchaser in good faith for valuable consideration where the company has executed a document by:
- two directors
- any one director and the company secretary
18. The time period to file a registrable charge is shortened to one month. The list of registrable charges is updated. The full charge instrument will now be filed and accessible to the public.
19. The concept of an "officer in default" is replaced by the new concept of a "responsible person", which catches reckless (as well as wilful) acts or omissions of the responsible person. It will therefore be easier for actions to be brought against a company officer when companies fail to comply with their statutory filing and other requirements.
20. Terminology for financial statements has changed:
Old term/new term
- accounts - financial statements
- group accounts - Consolidated financial statements/consolidated statements
- balance sheet - statement of financial position
- profit and loss account - statement of comprehensive income
- books of account - accounting records
- n/a - reporting documents (being the financial statements, directors’ report and auditor’s report)
21. The requirements for financial statements are relaxed to enable more private companies to prepare "simplified accounts" based on the Small and Medium-sized Entity Financial Reporting Standard.
22. A company which does not qualify for production of "simplified accounts" must prepare an analytical and forward-looking business review of the company.
23. Every Hong Kong company falls into one of three categories:
- guarantee companies
- private companies
- public companies
The 'public company' category is a catch-all, for all companies other than private companies or guarantee companies. These three categories replace the previous categorisation of 'private' and 'non-private'.
WHAT REMAINS OF THE CURRENT CO?
For now, the provisions relating to the winding up and insolvency-related regime and the public offer/prospectus regime will remain in the current CO, which will be re-titled the Companies (Winding up and Miscellaneous Provisions) Ordinance. Some parts of Cap. 32 of the Laws of Hong Kong will therefore survive the coming into force of the new CO. This will be the focus of the second phase of the company law rewrite.
Separately, the Securities and Futures Commission is conducting a review of the public offer/prospectus regime. It is expected that the public offer/prospectus regime will eventually be transferred to the Securities and Futures Ordinance.
TOPIC-FOCUSED PRACTITIONER ALERTS TO BE RELEASED
Individual topic-focused practitioner alerts will be issued on a regular basis to describe in greater detail the changes brought about under the new CO.
For related publications, see also: New Hong Kong Companies Ordinance Tool Kit.
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