Shareholders' rights in private and public companies in Hong Kong: overview
A Q&A guide to shareholders' rights in private and public companies law in Hong Kong.
The Q&A gives an overview of types of limited companies and shares, general shareholders' rights, general meeting of shareholders (calling a general meeting; voting; shareholders' rights relating to general meetings), shareholders' rights against directors, shareholders' rights against the company's auditors, disclosure of information to shareholders, shareholders' agreements, dividends, financing and share interests, share transfers and exit, material transactions, insolvency and corporate groups.
Types of limited companies and shares
The main types of companies enjoying limited liability are:
Private companies limited by shares (private companies).
Public companies limited by shares (public companies).
Companies limited by guarantee.
Private companies are the most common type of limited liability company and are the type most often used by foreign investors.
Private companies have shareholders who hold share certificates. A private company is defined as a company that by its articles of association (articles) must:
Restrict the right to transfer its shares.
Limit the number of shareholders to 50 (excluding employees and past employees).
Prohibit any invitation to the public to subscribe for shares or debentures in the company.
Public companies have shareholders who hold share certificates. Companies limited by shares that do not fulfil the requirements of a private company (see above, Private Companies) are considered to be public companies.
Public companies may or may not be listed on The Stock Exchange of Hong Kong Limited (HKSE). Companies listed on the HKSE are regulated by the Rules Governing the Listing of Securities on the HKSE (Listing Rules).
Companies limited by guarantee
Companies limited by guarantee do not have shareholders, and may instead issue membership certificates to each of the company's members. For companies limited by guarantee, the liability of the members is limited to an amount which the members have agreed to contribute in the event of the company's liquidation. Companies limited by guarantee are generally used by charities, non-profit organisations and other associations.
Hong Kong law is very flexible in relation to the types of shares and other securities that can be issued by companies.
Rights attaching to shares are normally set out in the company's articles. The main types of shares and other financial instruments are set out below.
Ordinary shares are the most common type of share issued by a company. Often, companies will only issue ordinary shares.
Typically, holders of ordinary shares have equal rights (that is, rank pari passu), pro rata based on the numbers of shares owned by them, in respect of voting or receiving dividends or distributions in a liquidation.
Preference shares carry a preferential right to dividends and/or distributions in a liquidation ranking ahead of ordinary shares. The right to a dividend is normally a right to a fixed percentage of the nominal value of the shares and can be cumulative (that is, if no dividend is declared in any year, the arrears can be carried forward). The voting rights attached to preference shares can be different from those attached to ordinary shares and, in some cases, can only be exercised if the preference dividend is in arrears.
Non-voting shares have most of the rights that are attached to ordinary shares. However, the holders of these shares are not entitled to vote at a shareholders' general meeting (GM).
Deferred shares enjoy limited rights to dividends or distributions, and rank behind preference shares and ordinary shares. They are generally non-voting shares.
Redeemable shares are by their terms redeemable at the option of the shareholder or the company, according to the mechanism set out in their terms of issue.
Companies can issue debentures, which are debt instruments whose holder is a creditor of the company. In some cases, the holders of debentures will hold security over the company's assets. Debenture holders are creditors of the company and their rights to distributions essentially rank ahead of the rights of shareholders.
Convertible and exchangeable bonds
Convertible and exchangeable bonds are debt instruments issued by a company which, depending on the type of bond, carry an option to:
For convertible bonds, convert the bond into shares of the company, at an agreed price.
For exchangeable bonds, exchange the bond into shares of another company, at an agreed price.
In certain circumstances, conversion or exchange is mandatory. Prior to conversion or exchange, the bondholders are creditors of the company who rank ahead of shareholders in a distribution on liquidation.
A warrant is an instrument issued by a company which entitles its holder to subscribe for shares in the company during a particular period and at a particular price. Warrants can confer rights on the warrant holders, however, until such time the warrant holders exercise their option to subscribe for shares, they are not shareholders.
An option is similar to a warrant which entitles its holder to subscribe for shares in the company during a particular period and at a particular price (see above, Warrants), but is generally issued by the company to its employees instead of investors.
A company limited by shares must have at least one shareholder. Companies limited by shares which do not fulfil the requirements of a private company (see Question 1) are considered to be public companies.
Companies limited by guarantee do not have shareholders.
General shareholders' rights
The general rights of shareholders include:
The right to vote at the shareholders' general meeting (GM).
The right to receive dividends declared by the company.
The right to receive the audited accounts with the directors' report and the auditor's report of the company and certain notices and circulars.
The right to receive a distribution in a liquidation once the creditors have been repaid.
Variation of rights
The rights of shareholders can be varied by amending the articles. Any amendments to the company's articles must be done by special resolution.
A variation of the rights of shareholders holding shares of a particular class is subject to further statutory protection, as it normally requires passing either:
A resolution approved by written consent of all the shareholders of the particular class who are entitled to vote.
A special resolution of the holders of shares of the particular class at a GM.
Such variations are generally provided in the company's articles and shareholders' agreements. Most rights of shareholders are set out in the articles. For shareholders holding shares of the same class, the rights of shareholders rank equally.
Shareholders' agreements can contain agreements for the relevant shareholders, setting out the manner in which they will exercise their rights (see Questions 29 to 31).
The rights of shareholders in private companies and public companies are generally similar, subject to the requirements for private companies provided in Question 1.
As a general rule, decisions taken at a shareholders' general meeting (GM) are passed by ordinary resolution, which requires a majority of votes more than 50% of shareholders attending and voting. However, certain types of decisions must be passed by special resolution, which requires the support of at least 75% of the votes of shareholders attending and voting (see Question 12).
The new Companies Ordinance (Chapter 622, Laws of Hong Kong), which came into force on 3 March 2014, has updated the law in this respect.
For members' scheme of arrangement (not involving a takeover offer or a general offer) the following are required:
Approval by shareholders representing at least 75% of the voting rights present and voting at the GM.
Approval by a majority in number of the shareholders present and voting at the GM (headcount test). However, the court has the discretion to dispense with the headcount test.
For a takeover and privatisation scheme, the following are required:
The support of a majority of shareholders present, representing at least 75% of the voting rights present and voting at the GM.
The votes cast against the scheme not exceeding 10% of the total voting rights attached to all disinterested shares (10% objection test). The 10% objection test replaces the traditional headcount test (see above).
Any shareholder and its associates must abstain from voting on the resolution if such shareholder has a different interest in such scheme than the other shareholders.
Accordingly, with the exceptions of a scheme of arrangement for a listed company or delisting, minority shareholders who together hold less than 25% of the shares in a company do not have a right of veto in relation to the resolutions passed at GMs.
General meeting of shareholders
Calling a general meeting
A company is not required to hold an annual general meeting (AGM) provided:
Everything required to be done at the meeting is done by written resolution.
Copies of the documents required to be produced at the meeting are provided to each member of the company on or before the circulation date of the written resolution.
A company can dispense with holding an AGM by written resolution or resolution at a shareholders' general meeting (GM) that has been passed by all members. A single-member company is exempt from the requirement to hold AGMs. A dormant company is also exempt from the requirement to hold AGMs. Unless exempted, companies must hold an AGM within the following periods:
For public companies, within six months after the end of the accounting reference period.
For private companies or companies limited by guarantee, within nine months after the end of the accounting reference period.
Directors of a company must lay the following documents before the AGM:
A copy of the reporting documents (including the company's financial statements).
The directors' report.
The auditor's report.
It is best practice that directors be re-elected at AGMs based on a rotation system. However, directors of private companies often continue until they resign or are removed.
Subject to the above exceptions, a company must hold an AGM in respect of each financial year of the company.
The main decisions which are normally made by shareholders in an AGM are as follows:
The appointment and removal of directors (although the articles may also provide that the directors themselves may appoint and remove directors in certain circumstances).
The remuneration of directors (although often the GM will allow the board to set the remuneration of directors).
The appointment, removal and remuneration of the auditor (although the appointment may also be done by the directors in the case of a casual vacancy, and often the GM will allow the board to set the auditor's remuneration).
The approval of the directors' report, the auditor's report and the annual accounts.
The declaration of final dividends.
The other main decisions which must be made by shareholders in a GM are as follows:
The articles normally reserve all decisions regarding the day-to-day running of the company's business to the directors. However, in exceptional cases the articles may confer additional approval rights on the GM.
For listed companies, the Listing Rules provide that certain matters, such as "connected transactions" and certain substantial acquisitions or dispositions, require shareholder approval.
It is expressly permitted for a company to hold a shareholders' general meeting (GM) at two or more places and use any technology that enables shareholders who are not together at the same place to listen, speak and vote at the GM (Companies Ordinance (Chapter 622, Laws of Hong Kong)). Companies can set out their own specific rules and procedures for holding such meeting in its articles.
See also Question 11, Written resolutions.
However, due to the number of shareholders holding a GM by telecommunication or by written resolution is likely to be impractical for listed companies.
Notice of a shareholders' general meeting (GM) must be sent to all shareholders entitled to receive notice in accordance with the Companies Ordinance (Chapter 622, Laws of Hong Kong).
Depending on the type of meeting, a company must provide the following notice periods:
For an annual general meeting (AGM), 21 days' notice.
For all other GMs, 14 days' notice (subject to a longer period if provided for in the company's articles).
For certain matters (for example, the removal of directors and auditor and appointment of auditor in certain situations), a special notice of not less than 28 days before the GM.
The notice must include the place, day, and time of meeting, as well as nature of the business to be dealt with in the GM (subject to the articles). Notice must also be given of any proposed resolutions. Unless the articles provide otherwise, the quorum required for a GM is two members present in person or by proxy. For one-member companies, the quorum is that member in person or by proxy.
If for any reason calling a meeting in the manner provided in the company's articles or under the Companies Ordinance is impracticable (see Question 13), the court can order that a meeting be called and conducted in such a manner as the court deems fit. However, the courts have been reluctant to exercise this power.
Show-of-hands or poll
Normally, voting is done by a show-of-hands, unless a poll is demanded. Each member or proxy present is entitled to one vote on a show-of-hands. Where a shareholder has appointed more than one proxy, the proxies so appointed are not entitled to vote on a show of hands.
Voting rights and share class
The voting rights of holders of shares of the same class are proportionate to the number of shares held by them. As among holders of shares of different classes, the voting rights can vary in accordance with the terms of the articles.
For listed companies, the Listing Rules require that:
The voting power of the shares bears a reasonable relationship to the nominal value of such shares.
Any vote of shareholders at a shareholders' general meeting (GM) must be taken by poll (unless the chairman of the meeting, in good faith, decides to allow a resolution relating purely to a procedural or administrative matter to be voted on by a show-of-hands).
Shareholders who are individuals can attend a GM in person or by proxy. Shareholders who are companies can attend a meeting through a representative.
The procedures for appointing a proxy are normally set out in the articles. The notice calling a GM typically contains a specimen form of appointment of proxy, which is usually in the form required under the articles. The form must be delivered to the company within a period of not more than 48 hours before the time of the meeting.
A large proportion of shares in listed companies are held through a Central Clearing and Settlement System nominee. A shareholder holding shares in a listed company through such a nominee can ask that nominee to transfer the shares to it so that it can attend a meeting directly. Otherwise, the shareholder must ask that nominee to appoint a corporate representative or proxy, or exercise other rights, in respect of its beneficial shareholding.
It is possible to pass resolutions by written consent of all of the shareholders of the company. When a resolution is passed in writing, the company must send a copy of the resolution to the auditor before or at the same time the resolution is sent to the shareholders for signature. A resolution to remove an auditor or a director before the expiry of the period of its office must be made at a GM.
Aggregating shares to exercise voting rights
Shareholders can agree among themselves on how they will exercise their voting rights. However, for listed companies, such agreements may cause the shareholders to become:
"Concert parties" under the Code on Mergers and Takeovers (Takeover Code). If this occurs, the shareholdings will be aggregated for the purpose of considering whether a mandatory general offer to the other shareholders to purchase their shares must be made by the concert parties (see Question 40).
"Connected persons" under the Listing Rules. This can give rise to the requirement that the company issues a circular to the shareholders or obtain their approval at a GM in respect of any transactions involving them.
Subject to disclosure requirements in relation to their interests in listed companies.
Certain decisions must be passed by special resolution, which requires the support of at least 75% of the votes of shareholders attending and voting. The most important matters which require a special resolution include:
Changing the name of the company.
Changing the company's articles.
Authorising the provision of financial assistance for the acquisition of the company's own shares.
Authorising the buy-back of shares.
Authorising a reduction in the company's share capital.
Approving a scheme of arrangement for members.
Sanctioning a variation of class rights.
Winding-up the company, or putting the company into dormancy.
For transactions which require minority approval, see Question 6.
Shareholder rights relating to general meetings
Under the Companies Ordinance (Chapter 622, Laws of Hong Kong), shareholders with 5% or more of the company's share capital can require the directors to convene a shareholders' general meeting (GM). To exercise this right, the requesting shareholders must deliver a signed requisition stating the objects of the meeting.
If the company's directors do not convene a GM within 21 days of receiving the requisition, the requesting shareholders (or half of them) can convene a GM themselves.
In addition, unless otherwise provided in the articles, a GM can be called by any two or more shareholders holding 10% of the total voting rights of all the members with a right to vote at a GM. This power enables shareholders to convene a GM if the company has no directors.
For meetings convened by shareholders, since the notice convening the shareholders' general meeting (GM) must contain the text of the proposed resolutions, the subject matter of the discussion will naturally be determined by the shareholders.
Any shareholder attending a GM (whether the meeting was convened by the shareholders or the directors) can seek information pertinent to the subject matter of the resolution before the resolution is put to a vote, to enable him to decide how to vote.
A listed company must provide all material information to shareholders no later than ten business days before the date of the relevant GM.
Generally, a validly passed resolution adopted by the shareholders' general meeting (GM) is binding on minority shareholders. However, there are a number of protections afforded to minorities, as follows.
Changes to objects/provisions in memorandum of association
Where a relevant private company makes changes to the objects (that defines the capacity of a company) or provisions in its memorandum of association, and such changes could lawfully have been contained in its articles instead (and will be deemed under the Companies Ordinance (Chapter 622, Laws of Hong Kong) to form part of the articles), shareholders holding 5% of the shares can apply for a court order to cancel the alteration. The application must be made within 28 days of the special resolution approving the change.
Variation of class rights
Where class rights are varied, the holders of not less than 10% of the shares of the relevant class can apply to court to have the variation set aside. The variation can then only have effect if confirmed by the court. The court will only allow the application if satisfied that the variation would unfairly prejudice the shareholders of the relevant class. The application must be made within 28 days of the passing of the resolution.
Redemption or buy-back of shares
Where a resolution has been passed by a private company to approve a redemption or buy-back of shares out of capital, a shareholder who did not vote in favour of the resolution can apply to court for its cancellation. On hearing the application, the court can make an order as it deems fit, including:
Cancelling or confirming the resolution.
Adjourning the proceedings, to arrange for the purchase of the dissentient shareholders' interests or the protection of the dissentient shareholders' interests.
The shareholder must apply to the court within five weeks of the resolution being passed.
Company affairs prejudicial to shareholders
Any shareholder may petition for a court order on the ground that the affairs of the company are being conducted (actual or proposed act or omission) in a manner which is unfairly prejudicial to the shareholders or part of the shareholders. Courts have broad jurisdiction to make an order, but will not make an order if it is apparent that the appropriate resolution is a sale of shares and that there is a mechanism for determining a fair price. Courts will also strike down a petition if a reasonable offer for the petitioner's shares is made and the petitioner declines the offer. If a court decides to grant the petition, it may make such orders as it deems fit (including orders regulating the affairs of the company, providing that certain shareholders or the company buy back shares held by other shareholders, or restraining the company from doing or continuing a particular act).
A shareholder can bring a statutory or common law derivative action for any of the following:
An order authorising proceedings to be brought on behalf of the company against such persons as the court deems fit.
An order appointing a receiver or manager.
An order requiring the payment of damages to persons who have been unfairly prejudiced.
These actions can be brought by a shareholder on behalf of the company where the company is harmed by certain types of misconduct and the company does not pursue its rights.
The Companies Ordinance gives standing to members of associated companies to bring or intervene in proceedings on behalf of the corporation for misconduct committed against the company. Typically, the parties involved in the misconduct are in control of the company. In the action, the company is a defendant and the court will grant the remedy sought to the company.
Order for winding-up
A shareholder can apply for an order for the winding-up of the company. There are a number of specific grounds for the making of a winding-up order together with a residual ground of it being just and equitable that the company should be wound up. The grounds include:
Failure of the main objects.
Carrying out a fraudulent or illegal business.
Failure of mutual trust and understanding among the shareholders.
Other reasons on the basis of which the court considers it to be just and equitable to wind up the company.
Shareholders' rights against directors
The first directors of the company are normally appointed by the company subscriber. Thereafter, the procedure for their appointment and removal is as set out in the articles.
The best practice is for directors to retire by rotation and then offer themselves for re-election. The articles also normally provide that the board of directors can fill a casual vacancy or appoint an additional director until the next annual general meeting (AGM) (and the shareholders can choose to refuse the re-appointment of such director at that AGM).
For listed companies, the Listing Rules provide that every director must be subject to retirement by rotation at least once every three years.
The articles normally vest the broad authority to run the day-to-day business of the company in the directors, and courts are reluctant to interfere in the day-to-day business of the company.
In addition to the matters reserved to the shareholders' general meeting (GM) (see Question 8), the GM can intervene in a number of limited situations by ordinary resolution:
Where the board is unwilling or unable to act.
Where the board seeks approval for acts beyond its powers.
Where the board seeks ratification of a breach of fiduciary duty (see Question 19).
Any shareholder may also bring unfair prejudice and derivative actions (see Question 16).
The company's directors have a duty to exercise care, skill and diligence, which is codified under the Companies Ordinance (Chapter 622, Laws of Hong Kong). The consequences for breaching this duty (or threatening a breach) are civil penalties derived from common law and equitable principles. A mixed test applies regarding this duty:
An objective test applies to ensure the director was required to attain a minimum standard of care that cannot be adjusted down.
A subjective test applies to place a higher standard on the director if he was appointed due to some special knowledge, skill or experience (as such, a director under the test cannot limit or exclude his liability).
Actions for the breach of a director's duty of care must be brought under the Companies Ordinance instead of the common law or equitable duty of care.
Other fiduciary duties of directors remain in case law and are not codified under the Companies Ordinance. These duties include the directors' duty to:
Act in good faith and for the benefit of the company.
Exercise powers for a proper purpose and for the benefit of the shareholders as a whole.
Not delegate powers except with proper authorisation.
Exercise independent judgement.
Avoid conflicts between personal interests and interests of the company.
Not enter into transactions in which the directors have an interest, except in compliance with the requirements of the law.
Not gain advantage from the position as a director.
Not make unauthorised use of the company's property or information.
A shareholder who wishes to bring a legal action against the directors would probably need to do so through a derivative action enforcing the rights of the company against the particular director (see Question 16, Derivative actions). The principal circumstance that could prompt such an action is a breach of fiduciary duties.
Authorisation/ratification for conduct
In limited circumstances (and subject to exceptions) a company can:
Authorise conduct by a director in advance, to avoid the conduct being regarded as a breach of duty.
Ratify a breach of duty that has already occurred, to relieve the director from liability to the company.
Authorisation/ratification must be done by shareholders in a shareholders' general meeting (GM), with adequate disclosure of material facts provided to them. However, when authorising/ratifying the conduct at the GM, the following votes will be disregarded:
The votes of a shareholder who is a director in respect of whose conduct ratification is sought.
The votes of an entity connected with that director in respect of whose conduct ratification is sought, or a shareholder holding shares in trust for that director or entity.
Where a director has a conflict of interest in relation to a proposed/actual transaction, arrangement or contract, he must declare the nature and extent of the interest to the board before it has been entered into (or as soon as reasonably practicable afterwards). If he fails to do so, and the transaction is approved, the resolution approving the transaction/arrangement/contract may be set aside.
In addition, the company's articles typically provide for more detailed provisions regarding declarations of directors' interests, for example:
Whether or not the interested director can vote on a matter.
If the interest director does vote: whether his vote will be counted, and whether he may be counted in a quorum.
Hong Kong law also restricts loans, guarantees, quasi-loans and credit transactions between a company and its directors and their associates.
For listed companies, the requirement for directors to declare their interest is widened to include material interest of entities connected with the relevant director. Under the Listing Rules, the articles of a listed company must provide (subject to certain exceptions) that a director:
Must not vote on any resolution approving any contract or arrangement in which he or any of his associates has a material interest.
Must not be counted in the quorum present at the board meeting.
In addition, if any such transaction requires shareholder approval, any shareholders with a material interest in the transaction must abstain from voting (Listing Rules).
Private companies and companies limited by guarantee
For private companies and companies limited by guarantee, there is no requirement for the board to include a certain number of non-executive, supervisory or independent directors.
The Listing Rules contain specific requirements for a listed company.
Non-executive directors. For a listed company, the board of directors must include at least three independent non-executive directors. At least one of the independent non-executive directors must have appropriate professional qualifications or accounting or related financial management expertise. A listed company must appoint independent non-executive directors representing at least one-third of the board.
Audit committee. Every listed company must establish an audit committee comprising non-executive directors only. The audit committee must comprise a minimum of three members, at least one of whom is an independent non-executive director with appropriate professional qualifications or accounting or related financial management expertise as required under the Listing Rules. The majority of the audit committee members must be independent non-executive directors of the listed company. The audit committee must be chaired by an independent non-executive director.
Remuneration committee. A listed company must establish a remuneration committee chaired by an independent non-executive director and comprising a majority of independent non-executive directors.
Nomination committee. A listed company must establish a nomination committee which is chaired by the chairman of the board or an independent non-executive director and comprises a majority of independent non-executive directors.
Other committees. Other supervisory board committees can be formed with specific written terms of reference which deal clearly with the authorities and duties of the relevant directors who are members of such committee.
Private companies. Under the Companies Ordinance (Chapter 622, Laws of Hong Kong), the directors' remuneration must be disclosed in the company's financial statements. Subject to any limitation in the articles, the directors of private companies are free to set their own remunerations.
Listed companies. Under the Listing Rules, the directors' remuneration must be disclosed in the company's financial statements. In addition, all listed companies in Hong Kong must disclose such details in its financial statements on a named basis. All listed companies in Hong Kong are required to set up remuneration committees to formulate remuneration policy for the board's approval.
A company must receive prior written approval from the shareholders before it can agree to grant a director a service contract employing the director for a term exceeding three years. A memorandum setting out the proposed service contract (including the term) must be sent to every shareholder. For a listed company, disinterested shareholders' approval is required and the votes of the director or any person holding shares on trust for him must be disregarded.
Shareholders' rights against the company's auditors
The company's auditor is normally appointed and removed at the annual general meeting (AGM). However, the first auditor can be appointed by the directors at any time before the first AGM, or by the members in a shareholders' general meeting (GM).
The auditor will hold office until the AGM following his appointment has concluded. The appointed auditor can be nominated for reappointment at the next AGM.
The following procedure applies to the removal of the auditor:
The auditor can be removed from office by ordinary resolution at a GM of which special notice has been given at least 28 days before the GM.
A copy of the special notice must be given to the auditor proposed to be removed. Special notice and notice of the GM should be given to shareholders at the same time and in the same manner. If this not practicable, the company must give the special notice to shareholders at least 14 days before the GM by advertisement in a newspaper circulating generally in Hong Kong (or in any other manner allowed by the articles).
The auditor is allowed to make written representations to the company and can request the company to give a copy to every shareholder to whom notice of GM is sent (alternatively the auditor can require that such representation be read out in the GM).
Once the ordinary resolution is passed, the company must lodge a specified form at the Hong Kong Companies Registry (Companies Registry).
A person must meet the requirements set out in the Professional Accountants Ordinance (Chapter 50, Laws of Hong Kong) to be qualified for the appointment as a company's auditor (for example, one requirement is that the person must be a certified public accountant, holding a practising certificate). A firm of certified public accountants can also be appointed as auditor under the firm name.
The following persons cannot be an auditor of the company:
The company's own officers or employees.
A person who has been disqualified from the appointment as the auditor of a company that is a subsidiary undertaking or a parent undertaking of the company (or a subsidiary undertaking of that parent undertaking).
An auditor commits a criminal offence if he both:
Holds the opinion that adequate accounting records have not been kept.
Knowingly or recklessly omits the necessary statement required to be included in the auditor's report.
The criminal provision only has a narrow scope of operation. Where the auditor fails to comply with its statutory duties, the company has a cause of action against the auditor under common law for his breach of duty. There is no provision for civil liability in relation to the auditor's breach under the Companies Ordinance (Chapter 622, Laws of Hong Kong).
Disclosure of information to shareholders
Generally, directors must provide and disclose the following information to the shareholders:
Notices of shareholders' general meetings (GMs).
The directors' report.
The auditor's report.
The annual accounts of the company.
For listed companies only, circulars and other documents required to be provided to shareholders under the Listing Rules. These documents normally include information regarding:
connected transactions or substantial acquisitions or disposals;
changes to the articles; and
other circulars in respect of the provision of further details regarding resolutions to be proposed at GMs.
All shareholders are entitled to the above information, regardless of the number of shares owned by them. Shareholders are not otherwise entitled to receive written information about the meeting agenda before, during, or after the GM.
In addition, listed companies must ensure equal dissemination of information to the market and are not allowed to selectively disclose price sensitive information to particular shareholders.
There is no general requirement to provide a shareholder with a copy of the GM's minutes (however, see Question 28).
For listed companies, Hong Kong's inside information provisions impose statutory obligations on listed companies and directors to disclose material price sensitive information (that is, inside information) as soon as reasonably practicable after it has come to the listed company's knowledge.
The Securities and Futures Commission is responsible for enforcing those obligations.
There is only a corporate governance code for listed companies. The principles of the code have two levels of recommendations:
Code provisions. Listed companies are expected to comply with the code provisions (but can choose to deviate from them). Listed companies must state whether they have complied with the code provisions for the relevant accounting period in their interim reports and annual reports and give considered reasons for any deviation.
Recommended best practices. These are for guidance only. Listed companies are encouraged (but not required) to state whether they have complied with recommended best practices and give considered reasons for any deviation.
Shareholders have limited rights to inspect company documents. The shareholders are entitled to receive the directors' report, the auditor's report and the company's annual financial statements (see Question 25). In addition, any shareholder can request to inspect the following without charge (however, the request must be in the prescribed manner and a fee is charged for copies of the document(s)):
Register of debenture holders.
Register of directors.
Register of company secretaries.
Records of resolutions and meetings.
Register of members.
Copy of any management contract (by which a person undertakes the management and administration of the whole or any substantial part of any business of the company) or a written memorandum of its terms (if the contract is not in writing). This can be obtained during the period that the management contract is in force and also during the period of one year after the date of its termination or expiry.
The shareholders can also inspect the public record of registerable charges at the Companies Registry.
Shareholders holding 2.5% of the voting shares, or not fewer than five shareholders, can apply to the court for an order allowing them to inspect the company's records or documents. The inspection can be conducted by the persons applying to the court or someone on their behalf. Copies of the records/documents can be made unless the court orders otherwise. However, the court will only make this order if satisfied the application is in good faith and the inspection being applied for is for a proper purpose.
Finally, public companies are required to file their directors' reports, auditor's reports and annual financial statements at the Companies Registry. Once filed, these documents will be available for public inspection.
Shareholders' agreements are enforceable and are frequently entered into in respect of arrangements among shareholders of joint ventures conducted through a company.
Typical provisions in shareholders' agreements include:
Rights to appoint and remove directors.
Pre-emptive rights in relation to:
the issue of new shares; and
the transfer of existing shares.
Provisions regarding the further financial requirements of the company.
Veto rights by particular shareholders or groups of shareholders in relation to certain reserved matters.
Put-and-call options in respect of shares.
Deadlock resolution provisions.
Shareholders' agreements can last indefinitely or terminate on the occurrence of an event of default or other event. If the agreement terminates, the rights of the shareholders will revert to their general statutory rights (in the absence of a shareholders' agreement).
Shareholders' agreements do not need to be disclosed to the public or registered in any public registry. However, if the shareholders' agreement requires some of its provisions to be replicated in the company's articles (which is customary), these changes must be passed by special resolution and subsequently filed at the Companies Registry.
A company can only issue a dividend from its distributable profits (that is, accumulated realised profits less its accumulated realised losses).
Dividends cannot be paid:
Out of the company's share capital.
In advance of the generation of distributable profits.
Dividends must be paid in accordance with the procedures or requirements specified in the company's articles. Usually, the directors recommend an amount of dividends to be paid, and the shareholders in a shareholders' general meeting (GM) (usually an annual general meeting (AGM)) makes the declaration of dividends.
In addition, a listed company can only issue a dividend if, once the dividend has been distributed, the company's net assets are equal to or greater than the total of its called-up share capital plus undistributable reserves, and the distribution of the dividend does not reduce the amount of such assets to be lower than such total. "Undistributable reserves" of a listed company include:
Any revaluation reserve, which consists of the balance of unrealised profits less accumulated unrealised losses.
Any other reserve that the company is prohibited from distributing under other ordinances or under its articles.
Therefore, a listed company cannot distribute its realised profits without first making good any excess of unrealised losses over unrealised profits.
As discussed in Question 3, a company can issue deferred shares with limited rights to dividends or preference shares with preferential rights to dividends (in which case, relative to preference shares, ordinary shares' rights to dividends will be limited and, relative to deferred shares, ordinary shares' rights to dividends will be preferred).
When recommending dividends, the directors must act in the general interest of all classes of shareholders and must not favour any one class at the expense of another.
The articles of a company can confer a power on the directors to pay interim dividends before the end of the financial year. For example, the model articles under the Companies Ordinance (Chapter 622, Laws of Hong Kong) allow directors to pay interim dividends to the shareholders from time to time (if it appears to the directors to be justified by the profits of the company). Therefore, where the company has sufficient profits at any time before the end of the financial year, subject to the company's articles, the directors can resolve to pay interim dividends to shareholders in advance of the declaration of any final dividend after the end of the financial year.
Financing and share interests
A shareholder can charge its shares with either:
A legal charge.
An equitable charge (which is more customary).
In the case of a legal charge, the shareholder (as chargor) transfers the legal title to the shares to the chargee.
In the case of an equitable charge, the shareholder (as chargor) remains the registered owner of the shares, but deposits the share certificates with the chargee, usually with the signed undated instrument of transfer and sold note (and, in the case of private companies, also with undated directors' resignations and resolutions to give effect to the transfer of shares).
It is unlawful for a company (or any of its subsidiaries) to directly or indirectly give financial assistance for either:
The acquisition by another person of shares of the company before or at the same time as the acquisition is made.
The reduction or discharge of a liability incurred for the purpose of acquiring shares in the company after the acquisition is made.
The term "financial assistance" is broadly defined to include assistance by way of a gift, guarantee, security, indemnity, release, waiver, loan or any other financial assistance given by a company as a consequence of which the net assets of the company is reduced by a material extent or to zero.
Certain transactions are expressly exempted from the prohibition on giving financial assistance, including:
A dividend distribution.
A distribution on liquidation.
An allotment of bonus shares.
A reduction of share capital.
Certain redemptions or buy-back of shares.
Lending money in the ordinary course of the company's business activities.
Providing money for the purpose of enabling employees to purchase shares in the company in employee share schemes.
Certain limitations apply to the availability of the above exemptions for listed companies.
Despite the above, the restriction on the giving of financial assistance will not be violated if:
The financial assistance is given for more than one purpose and the principal purpose is not to give assistance for the acquisition of shares or the discharge of a liability incurred for the acquisition of shares.
The financial assistance is given in good faith in the interest of the company.
The financial assistance rules have been reviewed and streamlined under the Companies Ordinance (Chapter 622, Laws of Hong Kong), which has introduced three streamlined authorisation procedures applicable to both listed and unlisted companies. Under the streamlined procedures, a solvency statement must be signed by the directors who voted in favour of the board resolution approving the giving of financial assistance. The solvency statement must set out the decision to approve the provision of financial assistance in full. Finally, one of the following must apply:
The financial assistance does not exceed 5% of the company's share capital.
The giving of financial assistance is approved by all of the company's shareholders.
The assistance has been approved by ordinary resolution (subject to various procedural requirements and timing restrictions).
Share transfers and exit
Shares in a company are freely transferable by the shareholders unless this has been restricted by company's articles.
The articles can provide that the directors have the authority to decline to register a transfer of shares either for one or more specific reasons or in their sole discretion. Limited by their fiduciary duties, the directors' authority must be exercised in good faith and in what the directors consider to be the best interests of the company.
Under the Companies Ordinance (Chapter 622, Laws of Hong Kong), if a company declines to register a share transfer, it must give notice of the refusal to the relevant transferor and transferee within two months after the share transfer is lodged. Further, the transferor and the transferee can request the company to give reasons for its refusal to register the transfer, and the company must provide such reasons or register the transfer within 28 days after receiving such request.
The directors require approval by a shareholders' general meeting (GM) to allot shares other than pro-rata to existing shareholders. This gives shareholders a form of pre-emption right in the absence of approval by a GM.
In addition, shareholders' agreements can include a pre-emptive right to the effect that the company cannot issue new shares unless it gives existing shareholders the right to subscribe for such shares pro rata to their existing shareholdings (see Question 29).
As mentioned in Question 1, one of the components of the definition of a private company is that the articles must restrict the shareholders from transferring their shares. Under common law, the directors of a private company can, in their absolute discretion, decline to register any transfer of shares. However, as mentioned above, the company must provide the reasons of its refusal to register the transfer if it receives a request from the transferor and transferee requesting the company to give reason for the refusal (see above, General rules).
In the case of a listed company, the shares must be freely transferable in order for the company to meet the listing requirement (that is, that there be an open market for company's securities).
In the case of an unlisted public company, the articles can provide that the shares can be transferred without restriction.
The capital structure of a company, including the different classes of shares and the rights attaching to these classes of shares, is typically set out in the company's articles.
A special resolution is required to reduce the share capital, buy back shares or amend a company's articles (see Question 6). For details of variation of class rights, see Question 5, Variation of rights.
Minority shareholders who do not own more than 25% of the shares do not have a veto right on such matters.
Except for regulated entities or entities holding particular government licences, there is no general requirement to obtain any governmental or regulatory approval for a transfer of shares.
For listed companies, the following must disclose their interest (and change of interest) in accordance with the disclosure regime under Hong Kong law:
Substantial shareholders (that is, any person holding 5% or more of any class of voting share capital of a listed company).
Directors of the company.
A company can buy back its own shares (that are fully paid) provided:
This is not expressly prohibited by its articles.
The company has issued shares which are not redeemable.
The price for the shares that are bought back could be paid out of:
The company's distributable profits.
The proceeds of a new issue of shares.
Out of the company's capital (however, listed companies are prohibited from making a payment out of capital for the buy-back of its own shares on a recognised stock market or on an approved stock market) (see also below).
An unlisted company can only buy back its own shares pursuant to an agreement approved in advance by special resolution.
Private companies can only buy back shares from capital subject to the following requirements:
The payment out of capital must be approved by a special resolution.
A solvency statement must be made by all of the company's directors (in relation to payment out of capital).
The payment out of capital must be made no earlier than five weeks and no later than seven weeks after the date of the special resolution.
The solvency statement must be delivered to the Companies Registry for registration.
Notice of the purchase must be either:
published in the Hong Kong Government Gazette and a Chinese and English language newspaper;
communicated by notice in writing to each creditor (the company's shareholders or creditors have a five-week period to apply to court for an order to cancel the special resolution for the payment to be made out of capital (see also Question 16)).
The return of share buy-back (being a filing in the prescribed form) must be delivered to the Companies Registry after the date on which the shares are delivered to the company.
For listed companies, the company can only buy back its own shares:
Under a general offer to all shareholders or all shareholders holding a particular class of shares.
As a market purchase of shares listed on a recognised stock exchange; or
Otherwise when approved by both:
the Hong Kong Securities and Futures Commission; and
a special resolution by disinterested shareholders holding 75% of the shares attending and voting at a general meeting of the shareholders.
There is no general statutory right of withdrawal. A company can issue shares that are redeemable at the option of the shareholder. A company has the choice to pay for a redemption out of:
The company's distributable profits.
The proceeds of a new issue of shares.
The company's share capital (subject to satisfaction of a solvency test under the Companies Ordinance (Chapter 622, Laws of Hong Kong)).
If the company fails to redeem shares when required, the shareholder will not be entitled to collect damages, and the courts will not grant specific performance for the redemption if the company shows that it is unable to finance the purchase out of its distributable profits.
In relation to unfair prejudice actions (see Question 16, Company affairs prejudicial to shareholders), a court can grant an order that certain shareholders must purchase the shares held by other shareholders. In this case, the court will direct how the shares will be valued.
Shareholders' agreements can provide contractual methods which give shareholders the right to have their shares purchased on specified terms.
Listed companies are subject to restrictions in the Listing Rules for "connected transactions" and "substantial transactions". These transactions may require the preparation of a circular to shareholders and/or the approval of shareholders.
The Code on Mergers and Takeovers (Takeover Code) regulates takeovers and mergers affecting public companies in Hong Kong. The Takeover Code takes effect when either:
A person or group of persons acting in concert (see Question 11) acquires shares representing 30% or more of the voting rights of a company.
A person or group of persons acting in concert who hold not less than 30% and not more than 50% of the voting rights of a company, acquire an additional 2% of the voting rights in any 12-month period.
In either case above, such persons must make an offer to purchase the shares of all of the company's shareholders, under which all shareholders of the same class are to be treated in the same manner and shareholders holding different classes of equity must be treated comparably.
On a liquidation, the assets of a company are first applied to repay the company's liabilities. Any remaining assets are distributed to the shareholders in accordance with their rights and interests in the company as set out in the company's articles.
On liquidation, the company's shareholders may also be required to contribute any unpaid amount on their shares and, in the case of a company limited by guarantee, to the extent required to meet its obligations, any amount that they agreed would be contributed on a liquidation.
The conduct of the liquidation is the responsibility of a liquidator. If the liquidation is ordered by a court, the liquidator will be appointed by the court and act under the court's direction. In a voluntary liquidation, if the directors certify that the company is solvent, the shareholders will have the right to appoint the liquidator (otherwise, the company's creditors will appoint the liquidator).
The shareholders can pass a resolution in a general meeting (GM) for the company to be liquidated if either:
The period during which the company is to exist according to the articles expires.
An event that would trigger the termination of the company under the articles occurs.
At any other time, the shareholders must pass a special resolution for the company to be liquidated. The articles cannot restrict the right to voluntarily liquidate the company.
The shareholders can also petition the court for the winding-up of the company on various grounds, including insolvency or the more general ground that it is just and equitable that the company be wound up.
Generally, the approach of Hong Kong law is to regard companies as being separate from their shareholders and not to pierce the corporate veil. Under this approach, companies which are part of a group are regarded as independent legal entities.
However, in relation to the relationship between subsidiaries and holding companies, the courts have been prepared to pierce the corporate veil under the following limited circumstances:
Where the corporate form has been used as a sham concealing true facts.
Where one company could be said to be an agent for another.
In the case of liability for tort, where an action has been permitted to proceed against the parent company where the damage occurred as a result of tortious activities of various subsidiaries.
Nevertheless, the general approach of not piercing the corporate veil is a robust one.
One statutory exception to regarding companies as independent entities is in respect of the preparation of group accounts. In this context, if a company has subsidiaries, group accounts dealing with the states of affairs and profit and loss of the company and its subsidiaries on a consolidated basis must be prepared and laid before the holding company in a shareholders' general meeting (GM). This requirement is not applicable if the company is a wholly-owned subsidiary of another company, or where the subsidiaries are not material, or where all of the following applies:
The company is a partially owned subsidiary of another body corporate in the financial year.
At least six months before the end of the financial year, the directors notify shareholders in writing of the directors' intention not to prepare consolidated statements for the financial year, and the notification does not relate to any other financial year.
As at three months before the end of the financial year, no member has responded to the notification by giving the board a written request for the preparation of consolidated statements for the financial year.
Hong Kong law also requires that a company and its subsidiaries have the same financial year (unless the directors, in their opinion, deem that there are good reasons to have separate financial years).
For the purpose of this question and Question 46, a "holding company" is one of which another company is a subsidiary. A "subsidiary" is a company which has its board of directors controlled by the holding company, where more than half of the share capital or voting power is controlled by the holding company or where a company is a subsidiary of another company which is itself a subsidiary.
The general proposition of law is that the shareholders do not have a duty to the companies in which they hold shares, but the directors appointed by them have fiduciary duties owed to their company (see Question 19).
There is some very limited scope to argue that, in certain circumstances, the shareholders of a company may owe duties of a fiduciary type to the other shareholders of the company. However, the authorities will give rise to a strong presumption against finding any such duties. In this case, the rights of the shareholders would be to bring an unfair prejudice action or a derivative action (see Question 16).
It is possible for a company to hold shares in another company, but it is not possible (with certain exceptions (see below)) for a subsidiary to hold shares in its parent company, and any allotment or transfer of shares to the subsidiary will be deemed void.
The exceptions are:
Any shareholdings existing prior to 1984.
Where the subsidiary is a personal representative or trustee or is holding shares by way of security.
Where the company is already a shareholder of another company on the date it becomes a subsidiary of that other company.
Where the subsidiary is allotted shares through the exercise of conversion rights of shares in its holding company.
Where the subsidiary acquires shares as a consequence of capitalisation of reserves or profits of the holding company.
However, even when the exceptions apply, a subsidiary which is a shareholder of its holding company has no right to vote at the shareholders' general meetings of the holding company.
David Yun, Partner
Kirkland & Ellis
Professional qualifications. Hong Kong; England and Wales; New South Wales, Australia
Areas of practice. Corporate; public and private mergers and acquisitions; joint ventures; private equity; corporate finance and corporate governance issues.
Joey Chau, Partner
Kirkland & Ellis
Professional qualifications. Hong Kong
Areas of practice. Corporate; public and private mergers and acquisitions; joint ventures; private equity and corporate governance issues.