NEWS
Mar-25-2009 Hong Kong plans to introduce the new Companies Bill
In response to requirements of investors and in order to modernise Hong Kong’s company law, the Hong Kong government decided to rewrite the Companies Ordinance (“CO”). In March 2007, the Financial Services and the Treasury Bureau published a consultation paper in order to obtain feedback from the public on proposed changes to the accounting and auditing provisions of the Companies Ordinance.
The final proposals will be incorporated into the White Bill for further public consultation around mid-2009. It is planned to introduce the Companies Bill into the Legislative Council, tentatively, in the third quarter of 2010.
Key Features
The key features on the proposed changes to the Companies Ordinance cover:
- Company Names
- Directors Duties
- Corporate Directorship
- Registration of Charges
- Share Capital
- The Capital Maintenance Regime
- Statutory Amalgamation Procedure
Company Names
Issues:
Complaints have been made from owners of trademarks or trade names regarding other companies using similar company names and posing themselves as representatives of the owners of such trademarks or trade names when contracting business (“Shadow Company”).
Under the current law, an owner of a trade mark or trade name may apply to the court for an order to direct the “shadow company” to change its name. However the registrar cannot enforce this even if the said court order is presented to the Companies Registry (“CR”). The Registrar is only empowered under Section 22 of the CO to direct a company to change its name within 12 months if it sounds too like an existing company listed on the Companies Register.
Suggestions:
Amend the CO to empower the CR to act on a court order directing a company to change its name within a specified period. If the said company fails to comply with this order, the CR would automatically substitute its infringing name with its registration number.
Grant the Registrar power to reject the registration of a company name which is the same as an existing infringing name currently under a court order.
Provide the registrar with power to change the company name to that of its registered number if a company does not comply with a direction to change its name under section 22 of the CO.
Not recommended:
Empowering the registrar to strike off a company should it not comply with a direction to change its name. Striking off may adversely affect the interests of third parties, namely creditors.
Director’s Duties
Issues:
Should the director’s duties be codified?
The general duties of Directors in Hong Kong are mainly found in case law. It is classified into two main categories – Fiduciary Duties and Duty of Care & Skill. Case law on the subject is often complex and inaccessible to the public. Codification can improve clarity and certainty for company management and its members.
Arguments against having codification include the loss of flexibility.
Suggestions:
After considering the recent developments in both the UK and Singapore as to the codification of Directors Duties, the CR are inviting the public to put forward their views on whether the directors general duties should be codified to make them more accessible to the public, and further if the UK approach should be taken.
Corporate Directorship
Issues:
The Corporate Director delegate might change from time to time, making it very difficult to know who was responsible for the conduct of the business of a company. The delegate of a corporate director is not personally a director of that company therefore his duties are not owed to the company and it would be difficult to attach liability to him for acts or omissions prejudicial to the company.
Suggestions:
It is suggested that in the interest of Corporate Governance, corporate directorship should be prohibited, subject to a grace period of two years. It is suggested that it would also help address the concern of the Financial Action Task Force (“FATF”) over the lack of transparency and arrangements whereby a vehicle could be used for money laundering and terrorist financing.
Recent developments:
In 2002, the Government consulted a number of professional bodies and stakeholders on the proposal to abolish corporate directorship. Over half supported the proposal on the grounds that it would enhance accountability, transparency and corporate governance. But there were also concerns that the proposal would:
- drive away many private companies
- implicate the ability to incorporate companies quickly
- jeopardise the flexibility provided by corporate directorship in the management of companies set up purely for asset holding purposes.
The UK had historically considered abolishing corporate directorship due to the difficulty in ascertaining who was controlling the company however it was concerned that a complete ban might harm those companies which made use of the flexibilities for entirely legitimate reasons.
Taking these factors into consideration, in 2006 the UK CA was amended to state that every company must have at least one director who is a natural person so that someone may if necessary be held accountable for the company’s actions.
Registration of Charges
Suggestions:
List of registrable charges be updated to include charges on aircrafts and interests in them. Also deleting or amending certain duplicated or obsolete items, such as requirement to register charges of securing the issue of debentures and references to bills of sale.
Propose that the instrument of charge be made available in full on the public register and also shorten the registration period from five weeks to 21 days. Reduces the time in which the charge is invisible to third parties.
Also consider if there is requirement to introduce and administrative procedure for late registration to replace applying to the court.
Share Capital
Issues:
Rules relating to share capital are thought to be complex, ill-targeted for their intended purpose and present unnecessary difficulties to businesses and investors. The fixed face value does not serve the original purpose of protecting creditors and shareholders and it can be misleading to the extent that creditors are led to believe that it provides some protection.
The fact that the current law states the share must have a par value does not provide any indication of the real value of shares and therefore shareholders do not have any comfort in this.
Suggestions:
It is suggested that by introducing non-par value shares, this would create an environment of greater clarity and simplicity that would be desirable for the business community generally.
The CR is recommending that 12 months be allowed for companies to review their documents before migration to no-par.
Following the introduction of no-par value shares, there is no longer any need for separate accounting. It is proposed that a legislative deeming provision be provided to amalgamate the existing share capital amount with the share premium amount immediately before migration to no-par value shares.
Allow capitalisation of profits with or without an issue to shares. Also allow the issuance of bonus shares without the need to transfer an amount to the share capital account.
Continue and allow companies to consolidate and subdivide shares and to provide redeemable shares.
Recent developments:
Singapore adopted a mandatory system of no-par in January 2006 without any apparent difficulties.
The Capital Maintenance Regime
Issues:
Historically the doctrine was created principally to protect creditors and shareholders however the provisions have become less relevant nowadays as most companies only have a small issued share capital.
It is also considered that the capital maintenance rules are unduly complex.
Recent developments:
Many jurisdictions (UK, Australia & Singapore) have reformed their rules in recent years. Some have moved away from the regime to a general solvency test approach.
Suggestions:
It is being considered whether HK should adopt a general solvency test but not for all forms of distribution. Rather than adopting it across the board, there is possibility of streamlining and rationalising some of the complex rules.
No major change on the distribution of dividends is proposed. Possible options to consider would be to streamline or rationalise the rules on reduction of share capital, buy backs and financial assistance before deciding whether to incorporate them into the draft bill.
Reduction of share capital:
The CO only allows for reduction of share capital by court sanction apart from de-registration of nominal value shares to a lower amount.
Singapore and the UK recently introduced a court free process based on solvency as an alternative which is thought to be faster and cheaper. The UK has also retained the court sanction procedure in addition to the court free one. The court free process however is restricted to Private Companies. In Singapore it is available to both public and private subject to certain conditions being met.
Hong Kong is seeking public views on the need to introduce a court free procedure as an alternative to the court sanction procedure before taking a final view on the matter.
Purchase of own shares:
Under the CO, a company may, subject to certain requirements, purchase its own shares out of distributable profits or proceeds of a new issue of shares. Several steps have to be followed for a private company to buy-back shares out of its capital. Listed companies have additional requirements to follow. The rules on buy-backs in the CO are therefore considered fairly complex.
One option being considered is to extend the current solvency exception to public companies so that they can fund buy-backs from its capital if there are insufficient distributable profits or proceeds from a fresh issue, subject to satisfying solvency requirements.
Another option is to allow buy-backs regardless of the source of funds provided that the company satisfies any solvency requirement.
Financial Assistance
The CO imposes very broad prohibitions on a company (and its subsidiaries) giving financial assistance to a third party for the purpose of acquiring shares in the company. The rules on financial assistance and the exemptions available are thought to be very complex.
The UK CA has dispensed with the restriction against private companies providing financial assistance. It was of the view that protections found in the sphere of directors duties of fidelity and fairness and the use of powers for proper purposes with a duty of care, were adequate to protect creditors and members.
New Zealand allows financial assistance with a solvency declaration by all Directors and subject to additional conditions. It is likely that the New Zealand policy will be adopted, subject to public consultation and further development of the proposal.
Consideration is being taken for Hong Kong to modify the current solvency test by also including a balance sheet test. The existing solvency test is a cash flow test.
Statutory Amalgamation procedure
Issues:
The existing court sanctioned (section 166-167 of the CO) scheme of mergers and amalgamations are both complex and costly. In practice, the use of these sections to effect an amalgamation is rare.
Some common law jurisdictions (Singapore & New Zealand) have adopted a court-free statutory amalgamation procedure of corporate entities.
Under both Singapore & New Zealand models there are two forms of court-free amalgamation - One for intra-group companies and the other for merger of other companies.
The introduction of a court-free process would simplify the amalgamation process, thereby reducing costs. In particular, this is beneficial in instances when the proposed amalgamation is between a holding company and its subsidiary/ies or between a number of subsidiaries wholly owned by the same holding company.
Suggestions:
Hong Kong is proposing to introduce a court-free amalgamation regime along the lines of the Singaporean model with some modifications. There would be key elements for both short-form procedures (for companies within the same group) and long-form procedures (for other companies).
There would also be certain requirements to ensure the protection of shareholders and creditors, namely:
* The Directors of each of the companies concerned required to pass a resolution confirming that the amalgamation is in the best interest of the company and to make statements in relation to the solvency of both the amalgamating and amalgamated companies.
* Disclosure of all relevant matters to be made to all members and notification to creditors not less than 21 days before the general meeting to allow them sufficient time to consider the proposal.
* A remedial right of the members and creditors of the company to apply to the court for relief on the ground of being unfairly prejudiced.
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