With the growing popularity of the Hong Kong open-ended fund company (OFC) structure following revisions to the OFC Code in September 2020, fund managers are increasingly looking at practical considerations when planning ahead on the establishment of new OFCs. One of the key areas is the appointment of the OFC’s board of directors.
The key operators of an OFC are the directors, the investment manager and the custodian. Currently, the board of an OFC must have at least two directors who are natural persons aged 18 or over, and at least one director must be independent from the custodian, i.e. he or she cannot be a director or employee of the custodian. A body corporate must not be appointed as a director of the OFC. In addition, a person who is an undischarged bankrupt must not be appointed as a director, except with the leave of court. Where an overseas director is appointed, a processing agent must also be appointed.
To be eligible for appointment as an OFC director, he or she must be of good repute, appropriately qualified, experienced and proper for the purposes of carrying out the business of the OFC. The appointment of the directors as key operators of the OFC requires the approval of the Hong Kong’s Securities and Futures Commission (SFC) and in considering whether a person satisfies the above eligibility requirements, under the OFC Code, the SFC may take into account, amongst other things, (i) such person’s relevant qualifications and/or experience; and (ii) whether the person or any business with which the person has been involved, has been held by any court or competent authority to have breached any company, securities or financial market laws and regulations, have been held for fraud or other misfeasance, or has been disciplined by, or disqualified from, any professional body.
As a key operator of the OFC, the directors are required to comply with the spirit of the OFC Code’s General Principles when administering, managing or dealing with any matters relating to the operation of an OFC including the following:
diligence and competency;
proper protection of assets;
management of conflicts of interest;
regulatory compliance; and
compliance with constitutive documents.
The directors will also owe statutory fiduciary duties and a duty to exercise reasonable care, skill and diligence to the OFC in the same manner as a director of an ordinary Hong Kong limited company. However, the OFC directors will also specifically be required to use reasonable care, skill and diligence to oversee the activities of the investment manager and custodian as part of their overall duty to oversee the operations of the OFC.