This month the Companies Registry concludes its series of articles introducing the major changes brought in by the new Companies Ordinance. In this final article in the series, Ada Chung, Registrar of Companies, and Phyllis McKenna, Deputy Principal Solicitor, HKSAR Government, look in more detail at two major initiatives of the new law, namely, the abolition of the memorandum of association and the abolition of the par value of shares.
One of the major policy objectives behind the new Companies Ordinance (Cap 622) (NCO) is to modernise the law. With this objective in mind, the requirement for companies to have a memorandum of association as a constitutional document and the par value of shares of all local companies have been abolished since the commencement of the NCO on 3 March 2014.
1. Abolition of the memorandum of association
Under section 67 of the NCO, any one or more persons may form a company by signing the articles of association of the company intended to be formed and delivering to the Registrar of Companies for registration a copy of the articles in the same form as those signed by the founder members together with a completed incorporation form. The agreement by the founder members to form a company and take up membership of the company to be formed, previously contained in the memorandum of association, are now contained in the articles.
Since the abolition of the ultra vires rule in 1997 pursuant to the Companies (Amendment) Ordinance 1997, for most companies an objects clause has become less significant, with all companies having the capacity and the rights, powers and privileges of a natural person. Furthermore, as most of the conditions of the memorandum of association could be amended, the need for the memorandum as a separate constitutional document has diminished and the memorandum is therefore abolished for all companies under the NCO.
Mandatory articles of association
Companies to be incorporated under the NCO are required to have certain mandatory articles of association and these are set out in sections 81 to 85 of the NCO. For the most part, these mandatory articles are the conditions that have been contained in the memorandum of association of companies incorporated under the old Companies Ordinance (Cap 32). These mandatory articles deal with, for example, the company name (section 81) and details of the liabilities or contributions of the members (sections 83 and 84). For companies incorporating under the NCO, they are required to have as one of their mandatory articles a statement of their capital and initial shareholdings as required to be contained in their incorporation forms. This requirement applies only to companies to be incorporated under the NCO which require such a statement to be contained in their incorporation form, and it is not necessary for companies incorporated under the old law to amend their articles to include such a provision (section 85(1)).
Model articles of association
As well as the mandatory articles of association which a company is required to have, a company may choose to adopt all or any of the provisions of the model articles of association prescribed for the type of company to which it belongs (section 79). These model articles are prescribed in Schedules 1 to 3 of the Companies (Model Articles) Notice (Cap 622H). Three sets of model articles are prescribed by the Notice for public companies limited by shares, private companies limited by shares and companies limited by guarantee.
As previously, the model articles prescribed for the type of company to which the company belongs form part of the articles of the company if the company does not register any other articles. Even if the company does register bespoke articles prescribing regulations for the company, the model articles will still apply insofar as they are not excluded or modified by the bespoke articles (section 80).
Under the NCO, incorporation is very easy. If a company wishes to adopt the model articles in full, they need only submit for registration with the Registrar of Companies a completed incorporation form and their mandatory articles. The model articles prescribed for that type of company will apply by default.
Companies may still choose to include objects in their articles (section 82(2)). However, there is no need to do so unless the company intends to seek a licence to dispense with the use of the word ‘limited’ or the Chinese characters ‘ 有限公司’ in its name (section 82(1)).
The articles of a company with a share capital may also state the maximum number of shares that the company may issue (section 85(2)).
Companies incorporated under the old Companies Ordinance
A condition that immediately before the commencement of the NCO was contained (and was in force) in the memorandum of association of companies incorporated under the old Companies Ordinance (existing companies) is for all purposes regarded as a provision of that company’s articles, except any such condition stating the authorised share capital or the par value of shares, which are regarded as deleted for all purposes (section 98).
The deeming provisions set out in the NCO should be sufficient to ensure that existing companies comply with the requirements of the NCO and there is nothing which they are required to do immediately to comply with the new requirements under the NCO. If companies so wish, however, this may be an opportune time for them to consider their constitutional documents to see if they want to make any amendments, for example, to benefit from some of the initiatives of the NCO. These initiatives include, among others, dispensing with annual general meetings for one-member companies and, in other cases, where unanimous shareholders’ consent has been obtained; capitalisation of profits under the no par regime and a new courtfree procedure for reduction of capital.
It is also noteworthy that the articles of existing companies remain unaltered except insofar as a provision of the NCO has overridden them. In this regard, the Companies Registry has compiled a list of the provisions of the NCO which override provisions of articles of association. Please visit the Registry’s website (at www.cr.gov.hk/en/companies_ ordinance/docs/articles_made_void-e. pdf) for details.
There are no transitional arrangements as such, and all companies wishing to incorporate under the NCO need only submit an incorporation form and articles of association to the Companies Registry. The deeming provisions are effective for existing companies immediately upon commencement of the NCO. There is no conversion process necessary to take the benefit of the deeming provisions.
2. Abolition of the par value of shares
Section 135 of the NCO provides that shares in a company will have no nominal value, and section 135(2) makes it clear that this applies to both shares issued before the commencement of the NCO and shares issued thereafter. This initiative, commonly referred to as ‘retiring the concept of par’, is in line with international trends and has already formed part of the company law of other common law jurisdictions, such as Australia, New Zealand and Singapore.
Nominal value, or par value as it is otherwise known, is the minimum price at which a share having such value can be issued. Authorised share capital is closely connected with the concept of par value. It is the maximum amount of nominal share capital that a company may have. Historically, it was considered that par value and the statutory framework in which it operated was necessary for protecting shareholders against dilution of their rights, and creditors by virtue of their knowledge about the issued and authorised share capital of the company. However, it is now accepted that these historical reasons for requiring shares to have a nominal value are no longer valid. The authorised share capital can be altered by resolution of the company and creditors seldom rely upon the authorised share capital or par value of shares to any great extent when extending credit to the company.
There is essentially no difference between a share of no par and one having a par value as both represent a share, or fraction, of the equity of the company, but any share issued at par has a fixed face value. In many circumstances, shares are issued at prices exceeding the par value and the excess of the issue price over the par is designated as share premium. Under the old Companies Ordinance, there were restrictions on how a company could use the share premium which it received and how the share premium had to be accounted for. Under the old law, companies must also set out in their memorandum of association their authorised share capital and the par value of their shares.
Migration to no par
As a result of the migration to mandatory no par, relevant concepts such as ‘par value’, ‘share premium’ and ‘authorised capital’ are abolished as they serve no purpose. Upon commencement of the NCO, conditions in the memorandum of association of an existing company (meaning a company incorporated under the old Companies Ordinance) relating to authorised capital and par value are for all purposes regarded as deleted (section 98(4)).
The full proceeds of a share issue are credited to the share capital account under the new regime, thus an amount previously designated as share premium will now simply form part of the share capital. In other words, share capital will represent the total amount that the company actually receives from its shareholders as capital contribution, and the need for maintaining a separate share premium account will disappear.
Alteration of share capital
A company has greater flexibility in a no par regime to alter its share capital. Section 170 of the NCO provides that, for example, a company can capitalise profits without issuing new shares, where the amount of share capital will increase but the number of issued shares will remain unchanged; and allot and issue bonus shares without increasing its share capital, where the amount of share capital will remain unchanged but there will simply be more issued shares. Companies are able to consolidate and subdivide shares more easily by simply reducing or increasing the number of shares and there will be no effect on share capital. Bonus shares may still be issued in the absence of share premium, as in a no par environment shares can be issued without transferring an amount to the share capital account.
The new regime has become effective upon commencement of the NCO on 3 March 2014. There is no conversion process necessary for existing companies. The NCO does, however, contain transitional and deeming provisions relating to the migration to no par (sections 35 to 41 of Schedule 11 to the NCO).
In particular, there are deeming provisions which provide for the amalgamation of the existing share capital with the amount in the company’s share premium account and capital redemption reserve (section 37 of Schedule 11 to the NCO). The permitted uses of share premium under the old law have continued to apply to the amount standing to the credit of the share premium account upon the commencement of the NCO.
The transitional provisions also provide that contractual rights defined by reference to par value and related concepts will not be affected by the abolition of par. Whilst the provisions should save considerable work and expense for companies, this may be a good time for companies to review their documentation to see if any changes are desired to be made as a result of the migration to mandatory no par.
3. A new era
The commencement of the NCO in March 2014 marks the beginning of a new era in corporate regulation in Hong Kong. We believe that the changes brought about by the NCO will benefit all companies in Hong Kong, including their shareholders and directors, and reinforce Hong Kong’s competitiveness as a place to do business.
Comprehensive information about the NCO, which includes briefing materials, highlights of major changes and answers to frequently asked questions, are available at the ‘New Companies Ordinance’ section on the Companies Registry’s website at www.cr.gov.hk. A dedicated hotline (3142 2822) has also been set up since January 2014 for enquiries relating to the NCO.
Ada Chung, Registrar of Companies, and Phyllis McKenna, Deputy Principal Solicitor, HKSAR Government Ada Chung is a Fellow of the ICSA/ HKICS.
The two previous articles in this series were published in the March 2014 and April 2014 editions of CSj.
Copyright: Companies Registry