The New Companies Ordinance (Part 2)

In this second update on the provisions of the new Companies Ordinance affecting banks and financial institutions, we will discuss changes relating to the constitutional documents, third parties dealing with a company, par value, numbering of shares, replacement of lost share certificates, and use of the seal.

Memorandum of Association

Under the existing law, the constitutional documents of a Hong Kong company are its Memorandum of Association and Articles of Association.

The Memorandum of Association will be abolished. The provisions of companies' existing Memorandum of Association (such as the object clause, if it has one) will be deemed by the new Ordinance to be provisions of the Articles of Association.

The existing requirement to state in the Memorandum of Association the “authorised share capital” (i.e., the maximum amount of share capital that the company may issue) will be removed. Instead, a company having a share capital may state in its Articles of Association the maximum number of shares that it may issue.

Protection for persons dealing with a company

1. A company's powers will be limited by any limitation in its Articles of Association. A shareholder may sue to restrain the company from acting in contravention of the limitation.
2. However, in favour of a person dealing with a company in good faith, the power of the directors to bind the company will be deemed to be free of the limitation.

   The new Ordinance provides that mere knowledge that an act is beyond the directors' powers under the Articles of Association is not bad faith. Further, a third party is not obliged to inquire as to the limitations on the power of the company's directors to bind the company.

   Notwithstanding these seemingly wide terms, the protection actually afforded to a third party dealing with a company may be quite limited.

   Furthermore, even if the transaction is saved by the new Ordinance, the third party may incur liability at common law by reason of the directors exceeding their powers.

3. The protection will not apply if the parties to the transaction include an “insider”, such as a director of the company or of its holding company, or an entity or a person connected with the director. The new Ordinance suggests that the rights of a third party to the transaction are not affected, but at the same time it gives the Court a wide power, on application by the company or the third party, to affirm, sever or set aside the transaction on any terms the Court thinks just. How this new power will be exercised, and whether the rights of third parties will be adversely affected, remain to be seen.
4. The protection will also not apply where the company is registered without “Limited” as the last word of its name, such as a charitable organisation.

Par value

1. The new Ordinance adopts a mandatory rule of no par value for shares for all Hong Kong companies which have a share capital.

   Under the existing law, Hong Kong companies with a share capital can only issue shares that have a par value. Par value (also known as “nominal value”) is the minimum price at which, generally speaking, shares can be issued.

   Par value was originally intended as a measure to protect creditors and shareholders. However, it can in fact be misleading, because the par value does not necessarily indicate the real value of the share. Other jurisdictions, such as Australia and Singapore, have moved to no par value shares.

2. Under the new Ordinance, all existing shares will be treated as if they had no par value. In other words, the par value stated on existing share certificates will legally be disregarded. There will be no minimum price at which shares must be issued.
3. The new Ordinance will facilitate changes in a company's capital structure. For example, the share capital can be increased by the company issuing new shares, or simply by funds or other assets being provided by the shareholders. Shares can be “subdivided” by increasing the number of shares. “Consolidation” of shares into a smaller number will be simplified. The number of shares can just be reduced with no effect on the share capital. Bonus shares can be issued, with or without increasing the share capital.
4. Under the existing law, the excess of the actual issue price of a share over its par value is called the “share premium”. There are restrictions on how a company can deal with share premium and its accounting treatment.

   Upon the abolition of par value, there will be no share premium. The new Ordinance will deem any share premium to be part of the share capital. The currently permitted uses of share premium will be preserved (for example, to pay for bonus shares). For this purpose, the company will need to maintain records of the balance of the existing share premium account.

5. The concepts of paid up capital, issued capital and partly paid shares will remain relevant. But they will relate to the total consideration paid or agreed to be paid for the shares issued, rather than to par value.
6. The new Ordinance contains provisions to facilitate the transition to no par value. For example, a reference in an existing contract or document to the par or nominal value of a share will be deemed to be a reference to the nominal value of the shares immediately before the commencement date of the new Ordinance.

Numbering of shares

Shares will not be required to have a distinguishing number, if, for example, all the issued shares in the company are fully paid up and rank equally for all purposes.

Replacement of lost share certificates of a listed company

A listed company is required to publish a notice before issuing a replacement certificate. The new Ordinance will simplify the publication requirements.

Where the value of the shares is below HK$200,000 (increased from HK$20,000 under the existing law), the notice will be published on the listed company's website for 1 month (instead of in the newspapers). For such shares, there will be no requirement to publish a notice in the Gazette after issue of the new certificate.

Where the value of shares is at or above HK$200,000, the notice will be published on the company's website for 3 months and once in the Gazette within 1 month (instead of once in the Gazette in each of 3 consecutive months).

Seal

Under the existing law, a deed needs to be executed by a company by affixing its seal. There was an argument that formalities, such as affixing a seal, served a cautionary, and thus useful, function. In practice, this formality seems to be merely cumbersome.

The new Ordinance provides that a company may have a common seal.

It will no longer be necessary to affix the seal onto a deed. Instead a company may execute a deed by having the document signed by the director (if it has only 1 director), or by 2 directors (or a director and the company secretary) (if it has 2 or more directors). This method of signing will suffice, if the document states that it is executed by the company as a deed.