New Companies Ordinance – 10 Key Changes
The new Companies Ordinance (“New CO”) will come into effect on 3 March 2014 (“Commencement Date”).
This article provides a summary of 10 key changes that members/directors of companies in Hong Kong should be aware of.
1. Abolition of Memorandum of Association
The New CO abolishes the requirement to have a Memorandum of Association which typically contains a company’s objects clause and authorised share capital. Under the New CO, a company is only required to have Articles of Association which will contain the information traditionally required to be in the Memorandum of Association.
For existing companies, certain conditions contained in their Memorandum of Association will be deemed to be regarded as provisions of its Articles of Association whilst certain other conditions will be deemed to be deleted (such as authorised share capital, as this concept will no longer apply after the Commencement Date – see below).
2. Abolition of par value
The New CO adopts a mandatory system of no par value (or nominal value) for shares, meaning companies will have greater flexibility in structuring their share capital.
As a result of the abolition of par value for shares, the concept of authorised capital no longer applies, and the amount of authorised capital stated in a company’s Memorandum of Association will be deemed to be deleted. Further, from the Commencement Date, amounts in the share premium account and in the capital redemption reserve will become part of the company’s share capital. Nevertheless, current law relating to the use of share premium will still apply in respect of amounts in share premium accounts before the Commencement Date.
3. Corporate directors
Presently, private companies that are not members of a group containing a listed company may appoint corporate directors. Under the New CO, corporate directors for private companies are still permitted. However, every private company must have at least one director who is a natural person – i.e. a non-corporate director.
Private companies registered under the current Companies Ordinance will have a grace period of 6 months from the Commencement Date to appoint at least one natural person as a director, should this not already be the case.
The restriction on corporate directorships for public companies, companies limited by guarantee and private companies which are members of a group of which a listed company is a member remains in place.
4. Directors’ duty of care, skill and diligence
Presently, directors’ duties are mainly found in case law. The New CO codifies directors’ duty of care, skill and diligence.
It sets out a mix of an objective and a subjective test for directors’ duties of care, skill and diligence. For the objective test, the standard expected of a director is that of a person with general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions of the director, and for the subjective test, the standard expected is that of a person with the general knowledge, skill and experience that the director actually has.
Therefore, if a director is appointed because such person has some special knowledge, skill or experience, that director will need to meet a higher standard of care than a director without such special knowledge, skill or experience.
5. Directors service contracts, loans to directors and payments for loss of office
Under the New CO, a company must obtain the prior written approval of the shareholders (in the prescribed manner) before entering into a service contract with a director with a term longer than 3 years. If the service contract is entered into without obtaining the approval in the prescribed manner, the provision of the service contract granting the term of more than 3 years will be void.
The New CO prohibits companies from making loans to directors, or directors of holding companies, or to Hong Kong incorporated companies controlled by the same directors. This is extended to include non-Hong Kong companies controlled by the same directors. As with the present law, this prohibition is subject to certain exceptions and the New CO introduces 2 new exceptions to the prohibition on loans and similar transactions being (1) if the aggregate value of the transaction does not exceed 5% of the value of the company’s net assets or 5% of the called up share capital, and (2) where the transaction is to give to the directors funds to meet expenditure incurred in defending proceedings, investigations or regulatory actions relating to the company.
Presently, a company is not permitted to make a payment to a director for loss of office unless the payment is approved by shareholders. The New CO extends this prohibition to payments to entities connected with the director, payments to a person at the direction of or for the benefit of the director or his entity, and payments by a company to a director of the holding company.
6. Disclosure of interests by directors
Under present law, directors are required to disclose interests in “contracts” with the company. The New CO extends this to cover also “transactions” and “arrangements” in which the director may have interests. The nature and extent of the directors’ interests must be disclosed.
7. General Meetings and dispensation with Annual General Meeting
The New CO provides that, with unanimous shareholders’ approval, the holding of Annual General Meetings (“AGMs”) may be dispensed with. Further, single member companies are exempt from having to hold AGMs.
Where the shareholders have resolved to dispense with the holding of AGMs, no future AGM is required unless a member gives notice to the company requesting one in a financial year. Further, a resolution dispensing with the holding of an AGM may be revoked by way of an ordinary resolution
In addition, the New CO now provides that general meetings may be held in 2 or more places using technology which enables the members who are not together to listen, speak and vote at the meeting.
8. Members’ written resolution
The New CO sets out a certain procedure for the proposing of and passing of written resolutions. Generally, under the New CO, a member or director may propose a resolution by way of a written resolution. The company must circulate the resolution to all members if the request is from a director or from members representing not less than 5% (or lower as specified in the articles of association) of the voting rights of all members entitled to vote on the matter.
9. Common Seal and execution of documents
The New CO abolishes the need for a company seal but the adoption of a common seal will be optional. If a common seal is adopted, it must be, as presently, metallic with the company’s name engraved on it, and affixed in accordance with the company’s Articles of Association.
Further, the New CO provides that documents may be executed by a company (1) affixing its common seal in accordance with the company’s Articles of Association, (2) for companies with one director, by that director signing on the company’s behalf, and (3) for companies with more than one director, by 2 directors or a director and the company secretary signing on the company’s behalf.
10. Responsible Persons
The range of persons who could be liable for breach of the New CO is widened. Under the present law, “officers who are in default” may be liable. This means any officer (in relation to a body corporate, includes a director, manager or secretary) of the company or any shadow director of the company who “knowingly and wilfully” authorises or permits the default, refusal or contravention.
The New CO replaces this with “responsible persons”, which means officers or shadow directors who authorise or permit or participate in the contravention or failure. The requirement for knowledge or wilful conduct is removed. Also, where a company has a corporate officer, that corporate officer’s own officers and shadow directors may also be responsible persons.