Rewriting Hong Kong’s companies law
Gordon Jones FCIS FCS, former Registrar of Companies, gives CSj a behind-the-scenes account of the most ambitious and complex law reform process in Hong Kong’s recent history – the Companies Ordinance rewrite.
Thanks for giving us this interview, what are your feelings now that the new Companies Ordinance has been implemented?
‘An enormous sense of relief and great personal satisfaction because, as you know, I was very heavily involved in the rewrite exercise from the beginning. There is also a rather nice symmetry to the fact that it has been implemented in 2014 because the Ermanno Pascutto consultancy study of the Companies Ordinance, which was the genesis of the rewrite exercise, was commissioned in 1994. So it has been exactly 20 years between the time when a rewrite was first suggested and the implementation of the new Companies Ordinance. The current rewrite exercise was launched in 2006 and has taken eight years, but there was a very considerable amount of reform work before that over the previous 12 years which should be acknowledged.’
Do you think Hong Kong’s law reform process is too slow – particularly in contrast to the speed with which Mainland China has brought in legislative reforms?
‘The Mainland can implement reform quickly because they have a very authoritarian government which can push things through very quickly. This is why, in a number of corporate governance areas, the Mainland is more advanced than Hong Kong. But, at the end of the day, I think it is better to consult the market and the public who will be affected by the proposed reforms before trying to push the legislation through the legislature. If the market and the public are not happy with what is being proposed, you are going to have a problem on your hands.
We were criticised on a number of occasions on the basis that the reform process was taking far too long – this was a constant refrain whenever I attended LegCo bills committee meetings on Company Ordinance amendments – but you need to break the 20 years down into various component parts to get the process into perspective.
Ermanno Pascutto’s study lasted for about three years from 1994 to 1997. When his report came out, many of the recommendations were not widely welcomed. As a result, the Standing Committee on Company Law Reform initiated its own review exercise from 1997 to 2000 which provided the blueprint for a series of major companies amendment bills in 2002 and 2003.
The government grouped the Standing Committee’s proposals into four phases. The first of these comprised a number of stand-alone and largely unrelated amendments which could be incorporated in an amendment bill and dealt with fairly quickly. The second phase concerned corporate governance reforms. The third phase concerned other major reforms such as the issue of par value and the investigation and punishment provisions which would require further research and consultation. Finally, the fourth phase included structural reforms to the whole ordinance including a rewrite.
We covered the first phase reform in the Companies (Amendment) Ordinance 2003. The second phase amendments were subsumed by the government’s own corporate governance review which was launched in 2000. Many of the reforms which came out of that review, such as strengthening shareholders’ remedies, were the subject of the Companies (Amendment) Ordinance 2004.
In 2002, the government and the then Hong Kong Society of Accountants (HKSA) established a Joint Working Group to review the accounting and auditing requirements of the Companies Ordinance which subsumed the recommendations on financial reporting that had emerged from the Corporate Governance Review and the work of the HKSA’s working party, which was reviewing the 10th Schedule of the Companies Ordinance.
Parallel with all these developments in Hong Kong, the UK was having a major review of its own Companies Act which, in many ways, provided the basis for Hong Kong’s Companies Ordinance. In view of this, it was considered that it made sense to capitalise on those efforts wherever appropriate. That is not to say that we should blindly copy what the UK did, but that it would not be very sensible to reinvent the wheel. So the decision was taken in the course of 2005 that we should have a major rewrite of the Companies Ordinance which would, of course, sweep up all the other recommendations of the Standing Committee’s review.’
You mention the fact that the UK Companies Act was a model for Hong Kong’s Companies Ordinance – was PRC companies law also looked at as a potential model?
‘It would have been inappropriate for us to adopt Chinese company law since it comes from a very different judicial tradition. China’s company law is based on German civil law which is very unlike British common law since it sets out broad principles which are interpreted by the courts. The common law is far more detailed as it draws on centuries of case law. Having said this, we did keep an eye, of course, on what was happening on the Mainland, and they are ahead of us in several areas of corporate governance, at least on paper.’
Can we turn to your own involvement in the Companies Ordinance rewrite?
‘I became Registrar of Companies in 1993, so I was involved in the whole review process from its genesis in the Pascutto report through to the rewrite exercise itself.
One of the things that the Pascutto report highlighted was the fact that, for such a major reform to proceed, you need to have a dedicated team in place. As the Standing Committee comprised very busy professionals meeting once a month, it was in no position to undertake a reform of that size.
I was closely involved in the discussions with the Financial Services and Treasury Bureau (FSTB) in the course of 2005 and 2006 on drawing up the modus operandi of the Companies Ordinance rewrite exercise. I drew up the master-plan for the rewrite covering issues such as how we were going to undertake the rewrite, the staff and accommodation resources required, the formation of advisory groups and many other practical aspects such as the expansion of the professional legal literature in the Companies Registry’s law library.
The key proposal was to set up a Companies Bill Team, comprising 14 administrative officers and lawyers, drawn from the FSTB, Companies Registry and Department of Justice, most of whom would be accommodated in the Companies Registry. The team would be formed through the redeployment of existing posts and the creation of new posts. In the event, we had some difficulties persuading LegCo’s Finance Committee of the need for some of the new directorate-level posts but were able to overcome these objections.
The Companies Bill Team was headed by John Leung Chi-Yan [who was Deputy Secretary of the FSTB at the time]. Its remit was to prepare policy papers covering a very wide spectrum of issues in the Companies Ordinance, in particular looking at reforms in the UK, Singapore and Australia, but also in the US, Canada and other jurisdictions as appropriate. After analysing the policy and legal aspects of all these issues, the papers made recommendations on possible options for amending the Companies Ordinance which were then considered by the relevant advisory group.
We decided to form four advisory groups, each tasked with looking at specific areas of companies law. These new advisory groups were in addition to the existing Joint Working Group which was reviewing the accounting and auditing provisions of the Companies Ordinance.
The philosophy behind setting up the advisory groups was to ensure there would be the widest possible representation of different sectors and as diverse a spectrum of views as possible in the discussions. I was a member of each of the advisory groups and the Joint Working Group.
After the advisory groups had decided which policy recommendations should be adopted, their recommendations went to the Standing Committee for approval. Consequently, by the end of this process, we had a fairly good idea of how the new Companies Ordinance would look. These policy recommendations formed the basis for detailed drafting instructions which were then sent to the Law Draftsman’s Office in the Department of Justice for drafting the Companies Bill.’
Are you happy with the new companies law which has emerged from this process – do you think the reforms it introduces go far enough?
‘I believe that what we have now is a great improvement on the old Companies Ordinance in terms of structure and content. As regards the structure, we did not consider the prospectus and insolvency provisions as the former will be transferred at some stage to the Securities and Futures Ordinance while the latter will be subject to a separate review. For the time being, these provisions, along with several other parts which do not form part of ‘core’ company law and, in practice, are largely administered by the Official Receiver’s Office, remain in the old Companies Ordinance. Looking into the future, as the law governing insolvency is very different from that governing live companies, I would be opposed to reincorporating the insolvency provisions back into the new Companies Ordinance at a later date once they have been reformed. They should be the subject of a separate statutory vehicle.
However, there are quite a few areas where we could and should have gone further. We codified directors’ duties of care and skill, but I don’t see that there would have been a problem with enacting directors’ core fiduciary duties into statutory law. However, the government consulted the public on this in 2008 and, given the diversity of views expressed, the feeling in the FSTB was that it would not be appropriate to codify them.
The UK enacted a new statutory duty for directors in the Companies Act 2006 to promote the success of the company for the benefit of the shareholders as a whole under the ‘enlightened shareholder principle’. This is a completely new fiduciary duty and a potentially very controversial area of law as it means that directors have to take account of a very wide spectrum of stakeholder interests. Subsequent to the government’s public consultation on codifying directors’ duties, the published consultation conclusions stated that about half of the respondents agreed with the proposal to codify directors’ duties with the exception of the new duty to promote the company’s success, although a ‘slightly larger’ number disagreed.
Unfortunately, the controversial new duty may have, arguably, played a role in influencing the final decision not to codify the other fiduciary duties. I don’t see that there would have been a problem with enacting directors’ core fiduciary duties, like avoiding conflicts of interest and acting in the best interests of the company, into statute law as they have been settled law for a very long time as the result of well-established common law cases. Furthermore, if the formulation in the Companies Act 2006 had been adopted, these statutory duties would be interpreted and applied in the same way as the equivalent common law rules and equitable principles which they replaced. This is an area where the government could and should have shown a greater degree of firmness and direction.
From the corporate governance angle, other significant omissions from the new Companies Ordinance include the statutory disclosure of individual directors’ remuneration and provisions regarding members’ approval of directors’ substantial property transactions and giving shareholders the ability to inspect directors’ service contracts, although these had been endorsed by the Joint Working Group, the relevant advisory group and the Standing Committee. The latter two provisons were deleted at a very late stage in the proceedings after the new Companies Bill had been published in the government Gazette, but the reasons for this eleventh hour volte-face are not known.’
One of the reforms which has been generating a lot of interest has been the requirement for larger companies to include a ‘business review’ in their annual reports – could you say a few words about that?
‘Yes, this was one of the things which I was really pushing very hard for. There were members of the Standing Committee who felt that it was a bridge too far, but I pointed out that all major commercial jurisdictions were enacting corporate social responsibility disclosures in their company law. I argued that we had to make a similar move in Hong Kong or we would be left very badly behind. So I’m very glad we’ve got that on the statute books.’
How much influence do you think the new Companies Ordinance will actually have – particularly since the majority of our listed companies are incorporated overseas?
‘Over 80 percent of Hong Kong’s listed companies are not subject to the Hong Kong Companies Ordinance and are regulated primarily through the listing rules. However, we should bear in mind that the listing rules repeat very large parts of the Companies Ordinance with which all listed companies are expected to comply. The problem arises because the listing rules are not a statutory document so there are no sanctions. This is why the whole issue of statutory backing is so important and at the moment, as you know, the only listing rules that have statutory backing are those on the disclosure of pricesensitive information.
The previous recommendations in 2005, that were at that time widely welcomed by the market, to extend statutory backing to financial disclosure and directors’ connected transactions as well as price-sensitive information, seem to have vanished into a black hole. There was a significant delay of five years between the recommendations in 2005 and the very watered-down proposals in 2011 which limited statutory backing to the disclosure of pricesensitive information.
However, we should bear in mind that listed companies comprise a very small proportion of the companies incorporated in Hong Kong. The new Companies Ordinance will apply to private companies, guarantee companies, unlisted public companies and about 20 percent of the listed companies. Moreover, as the new provisions in the new Companies Ordinance will be repeated, where appropriate, in the listing rules, all listed companies, irrespective of their domicile, will have to follow these provisions such as those on financial reporting. There will, however, be an issue if a non-Hong Kong incorporated listed company fails to comply with one of these provisions.’
How do you think companies law and regulation will change in the years ahead?
‘We are in a very globalised commercial environment and there will inevitably be increasing pressure for company laws to converge. Ultimately, of course, there cannot be complete convergence because the economic, regulatory and social conditions in each jurisdiction are different, but in areas such as financial reporting, audit regulation, corporate social responsibility and sustainability reporting, it is desirable and should be possible to achieve a high degree of convergence between developed jurisdictions.’
Look out for our interview with the current Registrar of Companies Ada Chung in next month’s journal.
A 20-year history
1994 – The Hong Kong government commissions a consultancy study to conduct a comprehensive review of the Companies Ordinance.
1997 – The consultants deliver their Consultancy Report of the Review of the Hong Kong Companies Ordinance.
2000 – The Standing Committee on Company Law Reform publishes its report on the Consultancy Report of the Review of the Hong Kong Companies Ordinance. The government commissions the Standing Committee to undertake a wideranging Corporate Governance Review.
2001 – The Standing Committee publishes a consultation paper on proposals made in phase one of its Corporate Governance Review.
2002 – The Joint Working Group is formed by the government and the then Hong Kong Society of Accountants to look at the accounting and auditing provisions of the Companies Ordinance.
2003 – The Standing Committee publishes a consultation paper on proposals made in phase two of its Corporate Governance Review. LegCo passes the Companies (Amendment) Bill 2002.
2004 – LegCo passes the Companies (Amendment) Bill 2003.
2006 – The Companies Ordinance rewrite is launched. The Companies Bill Team and Advisory Groups 1–4 are established.
2010 – The draft Companies Bill is submitted for public consultation.
2011 – The Companies Bill is introduced into LegCo.
2012 – LegCo passes the Companies Bill.
2014 – The new Companies Ordinance is implemented.
The advisory groups
- Advisory Group 1, chaired by David Stannard, looked at the provisions relating to arrangements, takeovers and mergers; share capital and debentures; distribution of profits and assets; and registration of charges.
- Advisory Group 2, chaired by Mike Scales, looked at the provisions relating to beneficial shareholders’ rights; electronic communications; shareholder voting and proxies; registration provisions and the powers of the Registrar of Companies; company formation and the re-registration of companies; deregistration and striking-off; company names; company administration and meetings; and table A and other tables.
- Advisory Group 3, chaired by Patrick Wong, looked at the provisions relating to directors’ duties, directors’ conflicts of interest, directors’ and auditors’ liabilities, indemnities and insurance, directors’ residential addresses; shadow directors; and the appointment of, and miscellaneous provisions regarding, directors and secretaries.
- Advisory Group 4, chaired by Godfrey Lam, looked at the provisions relating to inspections, investigations, offences and punishments.
- The Joint Working Group, chaired by Roger Best, looked at the accounting and auditing provisions.
A full list of the members of these advisory groups, together with members of the Standing Committee on Company Law Reform (current and for the period of the Companies Ordinance rewrite), is available on the Companies Registry website: www.cr.gov.hk (see ‘New Companies Ordinance/ Publications and Press Releases/ Books and Papers/ Annex 1’).