Company Law

 

 

HKSAR COMPANY LAW REGIME: DISCUSSION ON NECESSARY CHANGE
Table of Contents

 

I.      Introduction.. 3

II.     Legal Framework in Hong Kong.. 4

III.        Identified Areas of Company Law... 4

A.    Directors’ Duties and Executive Liability. 4

B.    Filing of Financial statements: Need for Corporate Disclosure. 6

C.    Shareholder Primacy. 7

IV.       Conclusion.. 8

V.    References.. 9

 

 

 

 

I.              Introduction

Business environments are admittedly dynamic in nature. The way business is handled now is significantly different how it is carried out decades ago. Concurrently, state laws are ratified to ensure that the proper standards of doing business are followed. In line with the changing nature of the business environment, laws will concomitantly have to adapt to these changes. This is true in the case of Hong Kong. Its jurisdiction is covered the Companies Ordinance (Cap 32). Up until a couple of years ago, the state was using this regime to keep the business environments in Hong Kong safe from any items of abuse and protect industries as well as shareholders in the process. 

In the last couple of years, the Financial Services and Treasury Bureau (FSTB) has taken steps in reviewing the existing legal framework for the business environment in Hong Kong. The review of the ordinance brought about several proposals for reforms, which took place in public consultation processes. The following discussions will be examining these proposals for reform. In the process, a look at other jurisdictions on company laws will be taken into consideration. However, the main source of information regarding the observations and arguments provided in this paper will come from the Companies Ordinance (Cap 32) itself. Specific areas of company law will be discussed like the duties directors, transparency on financial statements, and the legal recourse of shareholders.

II.            Legal Framework in Hong Kong

The major legal document that governs over the business environment in Hong Kong is the Companies Ordinance (Cap 32). It is the piece of legislation that allows entities in Hong Kong to form and operate companies in the special administrative region. In order to properly analyse the proposed reforms in several areas of this law, an introduction to this ordinance is required. The limits and scope on which a company could use are detailed in this piece of legislation. Along with these, terms pertaining to the institutions and certain provisions that safeguards the interests of the stakeholders of the organisation are specified in this ordinance. Rights of the creditors as well as the major stockholders of the companies are detailed in this law. It is needless to say that this is one of the lengthiest and most intricate ordinances in the administrative region. In an attempt to modernise these existing laws, authorities in Hong Kong has taken steps to review the legislation to impart certain improvements and adopt certain best practices from other jurisdictions.

III.           Identified Areas of Company Law A.   Directors’ Duties and Executive Liability

In the jurisdiction of Hong Kong, the duties of directors are primarily seen in case laws and common law principles. The recent amendments in the Ordinance pertaining to directors involve changes in the technical terminologies and procedures with reference to the directors. However, the actual duties of directors in Hong Kong are still limited to case laws and common law principles which mean that it is still inaccessible and even subject to individual interpretation. The only concrete evidence of a list of directors’ duties is seen in the Non-Statutory Guidelines on Directors' Duties forwarded by the Hong Kong Companies Registry. These duties include:

Principle 1: Duty to act in good faith for the benefit of the company as a whole

Principle 2: Duty to use powers for a proper purpose for the benefit of members as a whole

Principle 3: Duty not to delegate powers except with proper authorization and duty to exercise independent judgement

Principle 4: Duty to exercise care, skill and diligence

Principle 5: Duty to avoid conflicts between personal interests and interests of the company

Principle 6: Duty not to enter into transactions in which the directors have an interest except in compliance with the requirements of the law

Principle 7: Duty not to gain advantage from use of position as a director

Principle 8: Duty not to make unauthorised use of company’s property or information

Principle 9: Duty not to accept personal benefit from third parties conferred because of position as a director

Principle 10: Duty to observe the company’s memorandum and articles of association and resolutions

Principle 11: Duty to keep proper books of account

 

The operational term in these set of duties is seen in its title: non-statutory. This means that these terms have no intimation of executive liability in instances where these principles are infringed. On this note, one must point out the possible benefits of codifying the duties of the directors into a statute. Other jurisdictions like UK have started to implement such legal reforms. In the context of the Companies Act 2006, ss170 to 181 specifically points to the statutory duties of the directors of corporations. These are primarily based on the common law principles and recent interpretations of courts on the issue. In any case, the codification of such principles was with the ends of making the laws more predictable, definite, and accessible to the public.

In the current state of the HK laws, codification seems to be rather appealing. Other sources of the directors’ duties come from the Listing Rules of the Hong Kong Stock exchange. At the most, this piece of agreement in HK may present the set of codes with the highest legal ascendancy as it is contractually binding. Given the necessary statutory backing, this regime will provide an opportunity for the state to further modernise its legal systems.

B.   Filing of Financial statements: Need for Corporate Disclosure

The current ordinance states that companies with limited liabilities are exempted from filing their financial statements to the Companies Registry (CR). This should be amended for the benefit of the public. Specifically the laws should require these types of companies to file their financial statement for public inspection. This highlights the need for disclosure of any corporation regardless of size. The company should be monitored on whether all the energies of the board is geared toward the progress of the organisation and not driven by selfish means. (Mitchell, 1995, 1) This also highlights the fiduciary duties of the board of directors’ to the company and its shareholders. (p7)

In this regard, protection on the part of creditors and shareholders of the corporations especially in instances where the company is deep in debt and operating with a huge deficit. More particularly, this is imperative as the courts of Hong Kong has the capacity to wind up companies as seen in Securities and Futures Commission v MKI Corp Ltd [1995] 2 HKC 79. The decision of the court to carry out this act is based on s327 of the Companies Ordinance. This is also applicable to foreign companies operating in Hong Kong territory.

C.   Shareholder Primacy

Proponents of shareholder primacy intimate that valuable information regarding the intentions of the directors should be imparted to the shareholders of the company. (Kennedy, 2000) In the same manner, the primacy of these individuals is seen in the availability of remedies in instances where they are aggrieved by the directors of the corporation. In the case of shareholder remedies, the Companies (Amendment) Ordinance 2004 has given major developments in this area. Particularly, shareholders are given opportunities for derivative actions (s168BA-168BK), right to inspect records (152FA-152FE), and remedies for unfair prejudice (s168A). Other opportunities for minority shareholders to remedy their situation is seen in s350B(1) of the amendments as they are given the chance to apply for court injunctions in instances where a fiduciary duty is breached or any other infringement in the Companies Ordinance took place.

The question remains, do these amendments adequate for shareholders in Hong Kong? Compared to other jurisdictions, the Hong Kong remedies fall short. For instance, in s459-461 of the UK Companies Act 1985 does not only provide the right to file for injunction, it also gives the courts power to make orders in the process. Moreover, s122(1) and s125(2) of the UK Insolvency Act 1986 gives the courts the authority to wind up companies if it was considered equitable and just for all involved. This is still absent in the legal framework of Hong Kong. This means that compared to the regime in UK, the Hong Kong regime on shareholder remedies offer less protection and less recourse from courts. This is one of the major actions of the administrative region to modernise its company law to be concurrent with the recent trend towards the improvement of corporate governance and transparency. It provides an avenue for the minority shareholders of the company to exercise their rights as part-owners of an organisation. With the ratification of such amendments, the judicial element of the administrative regions should expect a possible exponential rise in class actions among minority shareholders in Hong Kong.

IV.          Conclusion

Hong Kong has always been one of the hubs for business in Asia. Companies seeking to gain profit and operate in a rather lucrative environment realises the potential of the administrative region for their businesses. The regime covering the business environment in Hong Kong show considerable appeal on the companies coming from both local and foreign soil. This has always been the case even before the region was under British rule. However, the changes brought about by the environment both in Hong Kong and overseas have made it necessary to install reforms on its legal framework. The discussions above shows that Hong Kong is considering changes that focuses more on the welfare of the stakeholders of businesses. The reform in the areas involving duties directors, transparency on financial statements, and the legal recourse of shareholders shows that protection of its investors is sought by administrative region.

This begs the question whether the reforms were sufficient. The short answer is no. However, the reviews carried out and the public consultations provided by the state are a significant step in the development of the legal framework in the business environment of Hong Kong. In the same regard, this shows that the companies the currently operates, and those that seek to operate, in the administrative region will have to deal with regulations that places the interests of its shareholder first and foremost. Were the proposed amendments considerably stringent, especially in overseas companies? Possibly, but these significantly improves the prospectus regime of the administrative region which consequently ensures proper trading procedures from companies based locally and abroad.  

V.           References

Books

Mitchell, L., 1995. Progressive Corporate Law. Boulder, Colorado: Westview Press..

 

Hong Kong

Companies (Amendment) Ordinance 2004. Available in: http://www.isdc.ch/d2wfiles/document/4265/4017/0/Companies%20amendment%20ordinance%202004.pdf [Accessed 29 May 2008]

Non-Statutory Guidelines on Directors' Duties. Available in: www.cr.gov.hk/en/publications/docs/director_guide_e.pdf [Accessed 29 May 2008]

Companies Ordinance (Cap 32). Available in: http://www.hklii.org/hk/legis/ord/32/ [Accessed 29 May 2008]

Securities and Futures Commission v MKI Corp Ltd [1995] 2 HKC 79

 

United Kingdom

Companies Act 1985. Available in: britlaw.free.fr/company/companies_act_1985.htm [Accessed 29 May 2008]

Insolvency Act 1986. Available in: www.insolvencyhelpline.co.uk/insolvency-act/index.php [Accessed 29 May 2008]

Companies Act 2006. Available in:  www.opsi.gov.uk/acts/acts2006/pdf/ukpga_20060046_en.pdf [Accessed 29 May 2008]

 

 

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