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
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.
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.
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.
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).
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.