This month CSj gives company secretaries a head-start in preparing for the new Companies Ordinance, gazetted last month, by highlighting the key areas where the new ordinance will impact company secretarial work in Hong Kong.
Implementation of the new Companies Ordinance came a step closer last month with the publication of the law’s finalised text on 10 August. This is not the end of the process, of course, enactment of the ordinance still awaits the passage of subsidiary legislation over the next year and is not expected until 2014.
The publication of the finalised ordinance, however, is a good opportunity for company secretaries to get a head-start in their preparations for the changes that the new ordinance will bring to their work – and changes there are aplenty. This article highlights the provisions of the new ordinance that will impact company secretarial practice and those affecting company secretaries as officers of the company.
Changes affecting company secretarial practice
Board support and advice
The new ordinance includes several provisions designed to strengthen the accountability of directors which will impact company secretaries’ board support and advisory functions. For example, directors’ duties of care, skill and diligence will be codified in the statute. While codification does not substantially change the expectations of directors’ duties of care, skill and diligence, it is designed to provide better guidance to directors.
There was some controversy over whether directors’ duties of care, skill and diligence should be subject to a ‘subjective’ in addition to an ‘objective’ test. The government opted for both subjective and objective tests. The ordinance states that a director will be required to exercise the care, skill and diligence that would be exercised by a reasonably diligent person with:
- the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company (the objective test), and
- the general knowledge, skill and experience that the director has (the subjective test).
Directors’ fiduciary duties remain uncodified and will continue to be defined by case law.
Other areas relating to directors which will impact company secretaries’ board support and advisory roles include:
- an expanded requirement for seeking shareholders’ approval to cover directors’ employment contracts which exceed three years
- tougher restrictions on companies making loans to directors (the restriction now covers a wider category of entities and individuals connected with the director)
- restrictions on the ability of a company to ratify an act or omission of a director which amounts to negligence, default, breach of duty or breach of trust (a company may ratify such conduct if disinterested members pass an ordinary resolution to this effect), and
- restrictions on the appointment of corporate directors (companies will need to ensure at least one director is a natural person).
There has been much interest among company secretaries in Hong Kong regarding the corporate reporting measures introduced by the new Companies Ordinance. This has mainly focused on the requirement for public companies and ‘larger’ private companies and guarantee companies to prepare a more comprehensive directors’ report which includes an analytical and forwardlooking ‘business review’. The business review must include information relating to environmental and employee matters that have a significant effect on the company.
However, the ordinance also includes new provisions designed to facilitate ‘small private companies’ to prepare simplified financial and directors’ reports. The following companies or groups can qualify for simplified reporting:
- A small private company or a small private group which satisfies two of the three conditions: I. total annual revenue of not more than HK$100 million II. total assets of not more than HK$100 million net, and III. no more than 100 employees.
- A large private company or a large private group which satisfies two of the three conditions:
- total annual revenue of not more than HK$200 million
- total assets of not more than HK$200 million, and
- no more than 100 employees.
However, in addition to the size criteria above, the company or group also has to get the approval of members holding at least 75% of the voting rights and no objecting member.
- A single private company (not being a member of a corporate group) with all of its members’ agreement in writing.
Some companies, including banking and insurance companies, cannot benefit from the above exemptions.
The new ordinance contains several provisions that will significantly alter the requirements for annual general meetings (AGMs). One of the primary goals of the Companies Ordinance rewrite exercise was to reduce, where possible, companies’ compliance burden. This is evident in a number of provisions relating to the AGM, for example enabling companies to:
- dispense with AGMs by unanimous shareholders’ consent, and
- hold general meetings at more than one location using electronic technology.
The new ordinance also brings greater clarity to the procedures necessary for passing written resolutions. Apart from the removal of directors and auditors, matters that require approval by a members’ resolution in general meeting could be approved by a written resolution (that is, removing the necessity for a meeting) under the old Companies Ordinance, but there were no statutory rules regarding the necessary procedures. The new ordinance now contains rules for proposing, passing and recording a written resolution. A written resolution requires agreement in writing by all eligible members of a company. Directors and members holding no less than 2.5% of the total voting rights of all members may propose a resolution to be passed as a written resolution.
The new ordinance introduces a number of reforms which will impact company secretaries’ administrative functions. The concept of ‘par value’ for shares, for example, will be abolished. Under the old Companies Ordinance (Cap 32), the ‘par’ or ‘nominal’ value of a share was the minimum price at which the share could be issued. Upon the commencement of the new Companies Ordinance, there will be a mandatory migration to no par for all companies with a share capital. The existing share capital amount will be amalgamated with the share premium account and capital redemption reserve. There will be deeming provisions to ensure that contractual rights defined by reference to par value and related concepts will not be affected by the abolition of par.
The concept of the Memorandum of Association will also be abolished. This means that companies will be able to incorporate with the relevant incorporation form and a copy of the Articles of Association – there will be no need for a Memorandum. Existing memoranda will be deemed to be Articles of Association.
The new ordinance also introduces a number of reforms aimed at easing restrictions on share capital transactions. For example, all types of companies will be able to purchase their own shares out of capital, subject to a solvency test. Under the old Companies Ordinance this right was reserved for private companies.
The new ordinance also introduces an alternative court-free procedure for reducing capital based on a solvency test. It will also permit all types of companies (whether listed or unlisted) to provide financial assistance to another party for the purpose of acquiring the company’s own shares or the shares of its holding company, subject to a solvency test. Under the current Companies Ordinance, subject to certain specified exceptions, there is a broad prohibition on the giving of financial assistance to purchase the company’s own shares.
Changes relating to officers of the company
Several provisions of the new ordinance will have implications for company secretaries as officers of the company. Some of these will have a relatively minor impact, For example, company secretaries and directors will be able to state the company’s registered office (or another correspondence address) as their personal addresses in the register held by the Companies Registry or the company, rather than their home addresses.
Other provisions, however, may affect company secretaries’ personal liability. For example, the ordinance lowers the threshold for prosecuting an officer of the company for a breach of various administrative requirements, such as a failure to file returns and documents on time with the Companies Registry. Under the old Companies Ordinance, an officer was liable for an offence only if he/ she ‘knowingly and wilfully authorises or permits the default’. The new ordinance introduces the concept of a ‘responsible person’ who will be liable if he/ she ‘authorises or permits or participates in’ such breaches. The intention is not to prosecute for negligence, but the removal of ‘knowingly and wilfully’ significantly lowers the proof threshold.
The ordinance also empowers auditors to require a wider range of persons, including the officers of a company’s Hong Kong subsidiary undertakings, and any person holding or accountable for the company or its subsidiary undertakings’ accounting records, to provide information or explanation reasonably required for the performance of the auditor’s duties. The offence for failure to provide the information or explanation is extended to cover officers of the company and the wider range of persons.
The Companies Ordinance rewrite exercise was launched in 2006. Following five rounds of public consultations, the exercise produced the Companies Bill which was introduced into the Legislative Council in January 2011. The Bills Committee completed its scrutiny of the Bill in June 2012. On 12 July 2012, the Companies Bill was passed by the Legislative Council and the finalised text has now been published in the government Gazette. The new Companies Ordinance is expected to be implemented in 2014.
More information is available on the websites of the Financial Services and the Treasury Bureau (www.fstb.gov.hk/fsb) and the Companies Registry (www.cr.gov.hk)
SIDEBAR: Farewell Cap 32?
The new Companies Ordinance is not an ‘amendment’ ordinance. The reform process that began in 2000 when the Standing Committee on Company Law Reform (SCCLR) launched its Corporate Governance Review led to several ‘amendment’ ordinances in the years preceding the launch of the current Companies Ordinance rewrite exercise in 2006. The point was reached, however, where these piecemeal amendments were no longer enough – what was needed was a comprehensive rewrite.
The new Companies Ordinance does not just amend the old Companies Ordinance (cap 32) – it replaces it. The old ordinance will not cease to exist, however. It will be renamed the Companies (Winding Up and Miscellaneous Provisions) Ordinance and will become the repository for the two major areas excluded from new ordinance – the prospectus regime and the winding-up and insolvency provisions.
The future does not look good, however, for Cap 32. The Securities and Futures Commission plans to move the provisions relevant to the prospectus regime into the Securities and Futures Ordinance, and the government has said the winding-up and insolvency provisions will be subject to a separate corporate solvency and recovery law review exercise.