What are the qualifying criteria for companies to prepare simplified financial statements and reports under the new Companies Ordinance? Under what circumstances may an AGM be dispensed with? These are some of the many questions posed by attendees at a recent HKICS ECPD seminar on the new Companies Ordinance. Karen Ho and Phyllis McKenna, Deputy Principal Solicitors at the Companies Registry, supply answers to these and other practical questions raised at the seminar.
Abolition of memorandum of association
Following the abolition of the memorandum of association, mandatory articles are required to be included in the articles of association. Section 85 of the new Companies Ordinance (CO) requires that the articles of a company with a share capital must state certain information on capital and initial shareholding to be contained in the company’s incorporation form. Is it necessary for companies incorporated under the existing CO (Cap 32) to amend their articles to include this information?
‘No, this requirement applies only to companies which are required to include such information in their incorporation form, which will be companies incorporating under the new CO only and not existing companies. There is no requirement for existing companies to set out in their articles of association the details and information required by section 85 of the new CO.’
Are the ‘model articles’ set out in the Companies (Model Articles) Notice (Cap 622H) applicable to companies incorporated before the commencement of the new CO? What will be the position of Table A and Table C in the First Schedule to the existing CO after commencement of the new CO?
‘The model articles as set out in Schedule 1 to 3 of the Companies (Model Articles) Notice (Cap 622H) are only applicable to companies who incorporate under the new CO and who choose to adopt all or any of the provisions of the model articles prescribed for the type of company to which they belong. This choice can be made expressly but the model articles prescribed for that type of company will apply by default if no other regulations for the company are filed on incorporation, and even where other regulations are so filed, the model articles prescribed for that type of company will apply insofar as they are not modified or excluded by the regulations so filed. A company is still free to create its own bespoke regulations/ articles if it does not want the relevant model articles to apply.
For existing companies who have adopted Table A or Table C at the date of their incorporation, their articles will remain unchanged except for any article which has been overridden by a specific statutory provision of the new CO. Please see the Companies Registry website for details of specific provisions which may override provisions in the existing articles. The statutory provision will override any provision in the articles which is inconsistent.
If an existing company wants to modify its articles for any reason, it will be required to follow the appropriate legal procedures, which for the most part involves the passing of a special resolution. Companies should obtain their own legal advice in this regard and if they so wish, in amending their articles they may take reference from the provisions of the model articles, but they need not do so.
There is no obligation for existing companies to amend their articles to include the model articles prescribed for the type of company to which they belong.’
Abolition of par value
The new CO adopts a mandatory system of no par for all local companies having a share capital and retires the concept of par value for all shares. Are there any documents that are required to be delivered to the Registrar of Companies for registration on commencement of the new CO to report the share capital position of the company immediately before the commencement?
‘No. The updated share capital position of the company will be reported in the next annual return to be filed by the company, provided that there is no change in the share capital position before then.
When there are changes in the share capital, for example an allotment of shares or a permitted alteration of share capital, a return or notice in a specified form must be delivered to the Registrar of Companies for registration. A “statement of capital”, which is a snapshot of a company’s latest share capital, must be included in the notice or return. The relevant specified forms, for example, Return of Allotment (Form NSC1), include a statement of capital. The filing of the statement of capital ensures disclosure of up-to-date share capital information.’
Under the no par regime, can a company issue shares at different value? If yes, does it mean that different rights will be attached to shares with different value?
‘A company can issue new shares at different issue prices. The abolition of par will remove the par value of the shares but does not affect the issue price of the shares. The issue price is a commercial bargain between the company (which issues the share) and an investor (who subscribes for the share and becomes a shareholder).
All shares issued, before, on and after the commencement of the new CO will have no par value. The law will deem all shares issued before the abolition to have no par value (section 135 of the new CO). The other rights attached to a share are not affected.’
What will be the position as regards the permitted use of share premium with the migration to a mandatory no par regime for all companies under the new CO? Can a company allocate the amount in its share premium account to existing shareholders or eliminate its accumulated loss by reduction of share premium account? ‘
The permitted uses of share premium are set out in section 48B of the existing CO, for example, to pay up shares which are issued as bonus shares. While the concept of “share premium” will be abolished under the new CO, these permitted uses of share premium existing on the date of commencement of the new CO will be preserved (section 38 of Schedule 11 to the New CO). Allocating the amount in the share premium account to existing shareholders or reducing the amount in the account for elimination of accumulated loss are not permitted uses of share premium.’
With the abolition of share premium, what will happen to the rule on permissible capital payments?
‘The rules relating to “permissible capital payment”, which are set out in section 49I of the existing CO, are premised on a par value regime. As the new CO adopts a mandatory no par regime, the current rules relating to “permissible capital payment” cannot operate. Under the new CO, buy-backs out of the capital will be governed by the rules and requirements in sections 258 to 266.
What are the qualifying criteria for companies to prepare simplified financial statements and directors’ reports?
‘Under the new CO, private companies (except certain companies specifically excluded) and guarantee companies may prepare simplified financial statements and directors’ reports if the following qualifying criteria are met.
1. Small private companies/ holding companies of a group of small private companies qualify if any two of the following conditions are satisfied in a financial year:
- total revenue/ aggregate total revenue does not exceed $100 million
- total assets/ aggregate total assets do not exceed $100 million, and
- employees/ aggregate employees do not exceed 100.
No particular requirement relating to the ownership of the shares of a private company is imposed for the purpose of simplified reporting. A private company that is a subsidiary or a member of a group of companies of which a listed company is a member can adopt simplified reporting if it meets the qualifying criteria.
2. Larger eligible private companies/ holding companies of a group of larger eligible private companies qualify if they have 75% approval from members and no member objects six months before the end of the financial year, and any two of the following conditions are satisfied:
- total revenue/ aggregate total revenue does not exceed $200 million
- total assets/ aggregate total assets do not exceed HK$200 million, and
- employees/ aggregate employees do not exceed 100
3. Small guarantee companies/ holding companies of a group of small guarantee companies qualify if total revenue/ aggregate total revenue does not exceed $25 million in a financial year.
For a holding company of a group of small guarantee companies to qualify for simplified reporting, all companies within the group, including the holding company and each of its subsidiaries must qualify as a small guarantee company. The same principle applies to other groups. Accordingly, a holding company that is a small guarantee company having a small private company as its subsidiary does not qualify for simplified reporting as the holding company of a group of small guarantee companies.
The exemption under section 141D of Cap 32 is retained so that a private company (not having any subsidiary and not being a subsidiary of another company) with unanimous members’ written agreement may opt for simplified reporting with respect to a financial year.’
Are companies falling within the reporting exemption required to have their financial statements audited? ‘Yes. All companies are required to have their financial statements audited except for dormant companies. The reporting exemptions are in respect of specified requirements relating to the preparation of financial statements and directors’ reports which include:
- subsidiary undertakings may be excluded from consolidated financial statements in accordance with applicable accounting standards
- no requirement to disclose auditor’s remuneration in financial statements
- no requirement for financial statements to give a “true and fair view”
- no requirement to disclose in the notes to financial statements the material interests of directors in transactions, arrangements or contracts of significance • no need to include the following information in the directors’ report:
- business review
- arrangements to enable directors to acquire benefits by the acquisition of shares or debentures
- directors’ reasons for resignation or refusal to stand for re-election
material interests of directors in transactions, arrangements or contracts of significance entered into by a specified undertaking of a company
- no requirement for auditor to express a “true and fair view” opinion on financial statements.
Annual general meeting
When must a company hold its annual general meeting (AGM) under the new CO?
‘Under the new CO, a company must, in respect of each financial year, hold its AGM within the following period:
- in the case of a company limited by guarantee or a private company that is not a subsidiary of a public company, nine months after the end of its accounting reference period, and
- in the case of any other company, six months after the end of its accounting reference period.
The accounting reference period is the period by reference to which the financial year is to be determined. If the accounting reference period is the first accounting reference period of the company and is longer than 12 months, the company must hold its AGM within the following period:
- in the case of a company limited by guarantee or a private company that is not a subsidiary of a public company:
- nine months after the anniversary of the company’s incorporation, or
- three months after the end of that accounting reference period,
whichever is the later; and
- in the case of any other company:
- six months after the anniversary of the company’s incorporation, or
- three months after the end of that accounting reference period, whichever is the later.
As explained above, the requirement is to hold an AGM within six or nine months after the end of the financial year. As the accounting reference period may be more than 12 months in the first financial year or in any subsequent financial years due to extension of the accounting reference period by alteration of the accounting reference date, it is possible that an AGM will not be held in a particular calendar year in such case.’
Under what circumstances may an AGM be dispensed with?
‘AGMs may be dispensed with if the company passes a written resolution or a resolution at a general meeting by all members to that effect. The financial statements and reports that would otherwise be required to be laid before an AGM will need to be sent to the members.
A company is also not required to hold an AGM in respect of a financial year if:
- everything that is required to be done at the meeting is done by a written resolution and copies of the documents required to be laid or produced at the meeting have been provided to the members on or before the circulation date of the written resolution,
- the number of members falls to one at the time required for holding an AGM, or • it is a dormant company.
Karen Ho and Phyllis McKenna Deputy Principal Solicitors Companies Registry
More information on the new Companies Ordinance is available on the Companies Registry website: www.cr.gov.hk.