Major Rewrite of Hong Kong Companies Legislation

On 12 July 2012, the Hong Kong Legislative Council passed the much awaited new Companies Ordinance that substantially and comprehensively overhauls the old Ordinance. This is a significant milestone given that the last major reform of the Companies legislation was more than 2 decades ago.

The new Ordinance will enhance corporate governance, ensure better regulation, facilitate business operations and provide a modern and up to date legal infrastructure for the incorporation and operation of companies in Hong Kong.

The Ordinance is expected to come into effect in the year 2014, after a number of subsidiary legislations have been passed and the Companies Registry has revised its forms and upgraded its systems. We set out below some of the more notable reforms introduced in the new Ordinance :-

1. No par value and authorized share capital

There will be a migration to a mandatory no-par value system for all companies with a share capital. Par value is an antiquated concept that may give rise to practical problems, such as inhibiting the raising of new capital and unnecessarily complicating the accounting regime. Relevant concepts such as nominal value, share premium and the requirement of authorized share capital are also abolished.

2. Memorandum of association abolished

There will only be one constitutional document of the company, namely, the articles of association. With the abolition of the doctrine of ultra vires in relation to corporate capacity, there is no need for the memorandum of association. The objects and limited liability clauses in the memorandum of association of existing companies will be deemed to be the provisions of the articles. New models of articles for different types of companies will be introduced to replace Table A and other Tables in the old Ordinance.

3. Codification of director’s duty of care, skill and diligence

The directors?duty of care, skill and diligence have been codified with a view to provide clear guidance to directors. Under the new Ordinance, a director must exercise care, skill and diligence that would be exercised by a reasonably diligent person based on his own general knowledge, skill and experience (subjective test) as well as the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions performed by the director in relation to the company (objective test). This new standard replaces the common law rules and equitable principles and shall also apply to shadow directors.

4. Court-free procedure for reduction of capital

The new Ordinance introduces an alternative court-free procedure for reducing capital based on a solvency test which is faster and cheaper. The procedure may be utilized by all companies. The procedure requires a solvency statement signed by all directors of the company in support of the reduction, members?approval by special resolution, notice in the gazette and registration of the solvency statement in the Companies Registry. The procedure is subject to the right of a non-approving member or creditor to apply to the court for cancellation of the resolution.

5. Purchase of own shares/financial Assistance

Under the new regime, all companies (not just private companies) may fund the buy-back of the company’s shares out of capital, subject to the solvency requirement. The requirements are similar to the court-free procedure for reduction of capital. The rules for a company providing financial assistance for purchase of its own shares have also been relaxed. All types of companies (listed or unlisted) may now provide financial assistance for the acquisition of their shares subject to the solvency test and requisite board of directors resolution and/or approval of the members.

6. Replacement of head count test in a scheme of arrangement

The requirement under the old Ordinance for approval by a majority in number of members present and voting (headcount test) for a members?scheme of arrangement relating to a takeover offer or general offer to buy back shares has been removed. Such schemes may instead be approved by members holding at least 75% of the voting rights of the members present and voting at the meeting provided that the votes cast against the scheme do not exceed 10% of the total voting rights attached to all disinterested shares in the company.