In December, 2005, the Hong Kong government announced a major overhaul of the territory's Companies Ordinance, in what promises to be the most substantial law reform exercise in its history.

Secretary for Financial Services and the Treasury, Professor K C Chan, announced in mid-January 2011 that, having been gazetted on Janaury 14, 2011, the Companies Bill was due for its first Legislative Council for its first reading on January 26.

Professor Chan said: "The Companies Bill is an important piece of legislation for fostering Hong Kong's status as a major international business and financial centre. The gazetting of the bill marks a major milestone in our work to modernize company law."

"The Companies Bill aims to achieve four main objectives, namely, enhancing corporate governance, ensuring better regulation, facilitating business and modernizing the law," he added. "Rewriting the Companies Ordinance (CO) allows us to leverage the developments regarding company law in other comparable jurisdictions and enhance our competitiveness.

The government expects that the Bill will be enacted during the 2010/11 legislative session.

The rewrite of the CO started in mid-2006, and three public consultations were conducted to gauge views on a number of complex subjects. In the course of the rewrite exercise, the Financial Services and the Treasury Bureau benefited from the advice of the Standing Committee on Company Law Reform as well as four advisory groups and a joint government/Hong Kong Institute of Certified Public Accountants working group, which was set up to advise on specific areas of the rewrite.

Some of the measures introduced by the Bill to enhance corporate governance include: improving the accountability of directors so as to enhance transparency and accountability, and clarifying the directors’ duty of care, skill and diligence; emphasizing shareholder engagement in the decision-making process; improving the disclosure of company information; and strengthening auditors’ rights.

In addition, better regulation will be ensured by means of the accuracy of information on the public register, an improvement to the registration of charges scheme, and a strengthening of the enforcement regime through the Registrar. There will be easier reporting for small- and medium-sized enterprises (SMEs), while SMEs will also be able to prepare simplified financial and directors’ reports.

Background to the Companies Ordinance Reforms

Based on British law dating back to the 19th century, the ordinance has until now been amended on a piecemeal basis, and it is a widely held belief that Hong Kong's company laws have become outmoded compared to other financial jurisdictions. According to former Companies Registrar Gordon Jones, the only way in which future corporate governance reforms will be possible will be through a complete re-write of the laws.

"We've got to the stage where we really can't tackle the remaining [corporate governance] items in piecemeal reform," Mr Jones stated.

Hong Kong has previously reviewed the companies statute, but a report released in 1997 offered only general principles for reform, rather than comprehensive nuts and bolts proposals.

Developments in 2007/08

In December 2008, the Standing Committee on Company Law Reform (SCCLR) published its 2007-08 annual report. During the reporting period, the SCCLR continued to focus its work on the rewrite of the Companies Ordinance and considered the recommendations of four dedicated advisory groups established to advise on specific topics of the rewrite. The major topics considered by the SCCLR included the following:

• the guiding principles for the rewrite;
• incorporation of companies;
• share capital and debentures;
• directors and officers;
• company administration and procedures;
• charges;
• arrangements, reconstructions and takeovers;
• inspection and investigation of companies;
• functions of the Registrar of Companies; and
• offences and punishment.

As part of the Administration's efforts to engage the public in the rewrite exercise, a series of public consultations on a number of complex issues of the ordinance have been launched since 2007.

"We completed the first topical consultation on the accounting and auditing provisions of the Companies Ordinance in the second quarter of 2007 and published the consultation conclusions in March 2008. The second public consultation on company names, directors' duties, corporate directorship and registration of charges was completed in June and we plan to publish the consultation conclusions soon within December. The third and last consultation on share capital, the capital maintenance regime and statutory amalgamation procedure ended in September and we aim to publish the consultation conclusions by early 2009," a spokesman said.

The SCCLR was formed in 1984 to advise the Financial Secretary on necessary amendments to the ordinance and other relevant legislation, in order to ensure that such legislation continues to meet the needs of the business community. The membership of the SCCLR is drawn from a wide spectrum of sectors, including lawyers, accountants, company secretaries, businessmen, academics and representatives of government departments and regulatory bodies.

Developments in 2009

In February 2009, the government released the third public consultation conclusions on the Companies Ordinance rewrite covering share capital, capital maintenance regime and statutory amalgamation procedure. A total of 40 submissions were received during the three-month consultation ending on September 30, 2008.

A spokesman for the Financial Services and the Treasury Bureau said: "After careful consideration in consultation with the Standing Committee on Company Law Reform (SCCLR) of all the public feedback, a number of recommendations are adopted. One of key recommendations is the migration from the current par value system to a mandatory no-par value share regime."

The spokesman added: "Under the existing regime, companies having a share capital are required to have a par or nominal value ascribed to their shares. Respondents generally agreed that the concept of par was no longer useful and might even be misleading. In addition to providing a statutory deeming provision to facilitate the migration to no par, we will allow a period of 24 months for companies to review their arrangements before migration," the spokesman said.

Another recommendation is to remove the requirement for authorised capital - i.e. the maximum amount a company is permitted to raise by issuing shares.

"This will simplify the process of raising capital by companies. Nevertheless, a company, if it so wishes, may specify the maximum number of shares it can issue in its Articles of Association," the spokesman said.

Other recommendations involve streamlining and rationalising some of the complex capital maintenance rules in the Companies Ordinance, including those on reduction of capital, purchase by a company of its own shares and financial assistance by a company to another party for the acquisition of its own shares, and introducing a court-free statutory amalgamation procedure for the amalgamation of wholly-owned intra-group companies.

The reforms aim at simplifying the law and reducing business costs while at the same time protecting the interests of creditors and minority shareholders.

Hong Kong’s government, releasing the conclusions of the first phase of consultation on the draft of the Companies Bill, has said that it is prepared to adopt a number of proposals regarding the issues highlighted for consultation.

In particular, it noted the divergent views on the abolition or retention of the headcount test used in company privatization or restructuring plans for approving a scheme of arrangement. On balance, it decided that there are merits in retaining the headcount test after considering the importance of protecting the interests of minority shareholders and small creditors.

However, it said, the court will retain the discretion to dispense with the test for members’ schemes in special circumstances, such as where there is evidence that parties opposing the scheme have unfairly influenced the result of the vote by share splitting.

With regard to another recommendation to restrict access to directors' residential addresses, and to the full identification numbers of directors and company secretaries kept at the public register of the Companies Registry, the government pointed to the rising concerns over the protection of personal privacy and information as reflected in the views of the majority of respondents.

It has therefore been agreed that those residential addresses and full identification numbers should not be automatically disclosed on the public register. Nevertheless, to strike a balance between protecting privacy and access to such information on bona fide grounds, it has also been agreed that certain organizations/persons, including public authorities, specified regulators, liquidators and provisional liquidators as well as those who have obtained a court order, can have access to those details.

Other accepted recommendations include subjecting private companies which are subsidiaries of a listed or public company to more stringent regulations, similar to public companies, for the purposes of the provisions on fair dealing by directors. This covers, for example, the prohibition on loans and credit transactions in favour of directors or directors of a holding company, or another company controlled by one or more of its directors.

In addition, the existing right for shareholders to take common law derivative action (CDA) on behalf of a company will be retained. Professional bodies supported the retention of CDA because it would provide necessary protection to shareholders in Hong Kong for obtaining remedies in relation to non-Hong Kong companies.

Developments in 2010

On October 25, 2010, the conclusions of the Second Phase Consultation on the Draft Companies Bill were released by the Financial Services & the Treasury Bureau. The government will require a solvency test and compliance with specified procedures for financial assistance to be given by a company to a third party for acquisition of its own shares.

This arrangement will be applicable to both private and public companies. Other proposals to be adopted include:

The government is also proposing to remove the option for large private companies to prepare simplified financial reports, even if they have members' approval.

Suggestions about the preparation of separate directors' remuneration reports for listed and unlisted companies incorporated in Hong Kong will not be adopted either, considering many respondents' reservations.

The Securities & Futures Commission and Hong Kong Exchanges & Clearing have been invited by the government to keep reviewing the compliance and effectiveness of the listing rules on disclosure of directors' remuneration.

The bureau said it has carefully considered all the comments received and has also consulted the Standing Committee on Company Law Reform.

A total of 57 submissions were received during the three-month consultation ending August 6, 2010.

The following information describes existing Hong Kong company forms.

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Hong Kong Types Of Company

In Hong Kong businesses normally trade as either limited companies, limited partnerships or sole proprietorships. Being a common law jurisdiction the concept of a trust is readily understood and widely used. The tight secrecy, minimal corporate disclosure and loose administrative requirements which characterize some island offshore common law jurisdictions and make these territories attractive locations in which to base commercial operations have no counterpart in Hong Kong, whose company and trust law are virtually identical to their United Kingdom equivalents.

To found a business company in Hong Kong, it is necessary to register with the Business Registration Office of the Inland Revenue Department within one month of the commencement of business. The registration fee for a one-year certificate is normally HKD2,450 (made up of a HKD2,000 fee and a HKD450 levy), but a special concession was introduced in 2008 waiving the fee for business registration certificates with a commencement date in 2008-09. This waiver was reintroduced from August 1, 2009 for a further two-year period (ending July 31, 2011). Businesses who registered from April 1, 2009 until 31 July, 2009 had to pay the full HKD2,450 fee/levy.

In general the minimum capital requirements for a business corporation are very low or nonexistent and all legal business forms are open for foreign participation

Applications for incorporation should be made to the Companies Registry (13th - 14th floors, Queensway Government Offices, 66 Queensway, Hong Kong, tel: (852) 2867 2587). Normally, a Certificate of Incorporation of a company limited by shares will be issued in 4 working days. It is also possible to purchase a shelf company, i.e. an already incorporated private company, through an accounting or law firm or through a secretarial company. It costs about HKD6,400 (USD800) and takes only a few days. Further time is required (about 3-4 weeks) if the name of the shelf company is to be changed.

In January 2009, a new Receipt and Despatch Centre, operated by the Business Registration Office of the Hong Kong Inland Revenue Department, opened to provide a 'one-stop' service for company incorporation and business registration in the territory. The facility, which is located near the Companies Registry (CR) and was jointly opened by the Commissioner of Inland Revenue, Alice Lau, and the Registrar of Companies, Ada Chung, aims to make the procedure for business registration applications by a company much more convenient.

Commenting on the new centre, a government spokesman said: "With the opening of the new centre, a company can immediately submit an application for business registration after obtaining a Certificate of Incorporation from the CR. The company may collect its Business Registration Certificate at the centre the next working day or opt to receive it by post. Notifications of changes of business registration particulars can also be filed with the centre."

"The CR and the IRD have been exploring ways to streamline company incorporation and business registration procedures to enhance customer services. The opening of the centre is one of the initiatives."

With effect from February 21, 2011, Hong Kong’s Companies Registry and the Inland Revenue Department (IRD) jointly launched a new regime of one-stop company and business registration, together with a one-stop notification of change of company particulars.

Under the new regime, the Registry will process the simultaneous business registration applications and notify IRD of changes of the relevant company particulars.

A new electronic incorporation service and a 24-hour e-Registry portal, enabling companies be incorporated online, anywhere in the world, was launched in March 2011.

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Hong Kong Private Company Limited by Shares

Corporate entities are governed by the provisions of the Hong Kong Companies Ordinance 1984 which brought the territory's company law into line with United Kingdom company law. Their key features are as follows:

• The minimum number of subscribers and shareholders is two; if the number of shareholders falls to one, the remaining shareholder is personally responsible for the company debts;
  
• There is no minimum authorized or issued share capital requirement;
  
• Shares of no par value and bearer shares are not permitted;
  
• Shares can be issued at a premium or discount (if sanctioned by the court);
  
• A company may purchase its own shares out of distributable profits;
  
• Nominee shareholders, directors and secretary are permitted;
  
• The minimum number of directors is two; corporate directors are permitted (unless the company is a public company);
  
• The articles can provide that the directors' liability for the company be unlimited;
  
• Every company must have a secretary which can be an individual or a corporate body, but must be resident in Hong Kong;
  
• Meetings can be held anywhere in the world;
  
• Accounts must be prepared, filed and audited;
  
• The migration and re-domiciliation of corporate entities to or from a foreign jurisdiction is not permitted;
  
• Annual returns must be filed.

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Hong Kong Public Company Limited by Shares

A public company (plc) is any limited company which is not a private company.

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Hong Kong Branch of Overseas Company

Overseas companies starting businesses in Hong Kong can form a private company limited by shares, as above, or can simply establish a branch.

When a company incorporated outside Hong Kong establishes a place of business in Hong Kong, it must lodge the following documents with the Registrar of Companies:

• A Certified copy of its charter or memorandum and articles of association;
  
• Particulars of directors and the company secretary;
  
• Name and address of a resident of Hong Kong authorised to accept notices on behalf of the company;
  
• Power of attorney or other document appointing a Hong Kong representative;
  
• Address of principal place of business in Hong Kong and addresses of registered office and principal place of business in the company's country of incorporation; and
  
• A Certified copy of the certificate of incorporation.

A branch office is relatively easy to set up but is open to greater potential liability than a limited company since it is not treated in Hong Kong law as a separate legal entity.

In some countries, branches have tax advantages as against limited companies, for a foreign parent, but not in Hong Kong: the territorial basis of taxation means that the branch will be taxed exactly as a limited company, on Hong Kong-source income (see Direct Corporate Taxation).

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Hong Kong Limited Partnership

The law is contained in the Limited Partnership Ordinance. Limited partnerships have the following characteristics:

• The maximum number of partners permitted by law is 20;
• Limited partnerships consist of general and limited partners; there must be at least one general partner whose liability for the firms debts is unlimited; the remaining partners are limited partners whose liability is limited to the amount of their unpaid share capital;
• A limited partner cannot reduce or take out his share capital whilst the partnership continues in existence and is not allowed to take an active part in the management of the partnership nor bind the same vis a vis third parties in default of which provision he assumes the liability of a general partner;
• Limited partnerships must be registered at the Companies Registry under the Limited Partnership Ordinance in default of which they are deemed to be general partnerships with unlimited liability for each and every partner;
• All partnerships are required to obtain a business license under the provisions of the Business Registration Ordinance which license costs USD340 per annum.

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Hong Kong Sole Proprietorship

As in the UK, a sole proprietorship has the nature of a partnership with one partner, and the owner does of course have unlimited liability for his firm's debts. As an unincorporated business, a sole proprietorship is subject to profits tax in exactly the same way as any other business; but the rate of tax is 15% instead of 16.5% on taxable income

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Hong Kong Trusts

Trust law in Hong Kong is virtually identical to English trust law and is contained in the provisions of the Trustee Ordinance (an Ordinance which is modeled on the English Trustee Act 1925).

Both fixed and discretionary trusts may be settled in Hong Kong. Documents do not have to be registered and there are no statutory requirements in Hong Kong for a trust to make annual returns, submit audited financial statements, etc., unless it is carrying on business in Hong Kong.

Unlike most offshore jurisdictions Hong Kong has not tampered with trust laws in order to make the jurisdiction a more attractive jurisdiction in which to create a settlement. Hong Kong will therefore not normally be a suitable location for an asset protection trust.

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