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Shareholder rights and protection under the Hong Kong Companies Ordinance (Cap 622) (CO)

(this article was also published on https://www.pwfo.org/blog/shareholder-rights-and-protection-under-the-hong-kong-companies-ordinance-cap-622-co)

 

An individual subscribing for share(s) in a private company limited with share capital has to pay for the agreed amount. Once this is done, there is no further liability due from this person to the company.

CO does not stipulate the minimum amount of share capital nor its currency. If a company has only one shareholder, the usual paid-up capital is HK$1 for 1 share. Operational costs can be funded by director / shareholder as loan to the company. Multi-national corporations may choose the currency of its headquarters e.g. USD, YEN etc. Multiple currencies and different classes of shares with different voting rights can also be arranged.

If a company has more than one shareholder, special provisions can be included in the articles of association i.e. constitution to offer more protections to the shareholders e.g. borrowing exceeding certain amounts, pledge of fixed assets etc. have to be approved by shareholders at general meeting.

Important matters e.g. change of company name, commencement of liquidation have to be approved by shareholders with at least 75% of the votes in favour of the resolution.

A shareholder can transfer share(s) to another shareholder or to a third party. Share transfer is subject to the board approval or some other restrictions as laid down in the articles of association. Refusal is not normal. Explanation has to be given to the shareholder concerned why transfer is declined. CO also provides for shareholder(s) to sell shares back to the company. There are different procedures if the company uses accumulated profits or share capital to buy back the share(s). Once the transaction is completed, the share(s) will be cancelled.

The company has to hold annual general meeting (AGM) to present the latest audited financial statements to the shareholders for adoption, re-appoint auditors and also to re-appoint directors if this is required under the articles of association of the company. Shareholder can appoint proxy to attend the meeting. Questions can be raised by the shareholder of his proxy at the meeting which the board of directors must answer. AGM can be dispensed with if the shareholders agree or if there is only one shareholder. In this case, written resolutions can be passed to approve all the aforementioned matters.

Appointment of auditors and preparation of audited financial statements are mandatory. If the auditors discover any wrongful doing or any issues which should be brought to the attention of the shareholders, the auditors can voice it out as auditors have the right to attend all types of general meeting. If an auditor resigns from a company, he must confirm whether there are issues the shareholders have to be aware of. The same confirmation has to be given to the incoming auditor too.

Depending on the size of the companies, shareholders can agree to a simplified version of the audited financial statements provided that there is no vote against the preparation of such version. This however does not preclude an individual shareholder power to demand for full and more complex disclosure of the financial status of the company.

If the shareholder(s) considers there are material matters to be discussed during the year, any shareholder or a group of shareholders holding at least 5% of the voting shares can ask the board of directors to summon a general meeting. If the directors fail to do so, the shareholder(s) can proceed to do so and all expenses are to be borne by the company.

However, management is in the hands of the board of directors. In most circumstances, a shareholder can also be appointed as a director. These 2 roles are different. A director should act in the best interests of the company, not for a shareholder nor a particular group of shareholders.

Companies Registry (CR), the Government Department in charge of the implementation and enforcement of the CO, has issued a Guideline on the Directors’ Duties. Before taking up the appointment, the director must have read this Guideline and is confident of his / her capacity in discharging the duties. Therefore, a director should avoid conflict of interest. If he/ she is involved with a material contract with the company, declaration of interest should be made following the rules set up by the company and the legal provisions of the CO.

If a director is being considered incompetent or not performing the director duties properly, shareholder(s) at general meeting can pass a resolution with more than 50% votes to remove the director.

In addition to removal, shareholder(s) can also inform the CR of the directors’ failure to discharge the duties in a proper manner. Investigation may be taken by the CR on the acts of the director. There are cases in the website of the CR indicating the penalties levied on certain directors for their non-compliance of the CO.

 

Useful links:

https://www.cr.gov.hk/en/home/index.htm

https://www.cr.gov.hk/en/companies_ordinance/docs/Guide_DirDuties-e.pdf

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