Hong Kong: New Hong Kong Companies Ordinance - Directors

Last Updated: 30 January 2014
Article by Vistra

1. Directorship

(a) Restriction on Corporate Directors

The new CO requires at least one natural person as director for every private company but it allows a grace period of 6 months after the commencement of the new CO for an existing company to make changes to its board for satisfying the new requirement.

(b) Clarifying the Standard of Directors' Duty of Care, Skill and Diligence

The new CO introduces statutory objective and subjective standards of directors' duties as follows :-

  • Objective test – the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions of the director in relation to the company; and
  • Subjective test – the general knowledge, skill and experience that the director has.

It is also specified in the new CO that the said duties apply to a shadow director.

(c) Responsible Person

The threshold for contravention of the current Companies Ordinance (the "CO") by officers is lowered under the new CO where a person will be liable as a responsible person if he is an officer or a shadow director of a company and he authorises or permits, or participates in, the contravention or failure.  

The new CO removes the "wilful" threshold for prosecution against contravention and accordingly, reckless conduct may also be prosecuted.

(d) Clarifying the Rules on Indemnification of Directors against Liabilities to Third Parties

The new CO permits a company to indemnify a director against liability incurred by the director to a third party if the specified conditions are met.

To enhance transparency, a company which provides any permitted indemnity to its or its associated company's directors must disclose the indemnity provision in the directors' report and make it available for inspection by any member on request.

(e) Ratification of Director's Conduct

The new CO introduces a disinterested members' approval requirement (the "Disinterested Members' Approval") for a company to ratify a director's conduct amounting to negligence, default, breach of duty or breach of trust in relation to the company. Under the Disinterested Members' Approval, it is required to disregard every vote in favour of the resolution by an interested member.

(f) Enabling the Registrar to give directions to a company relating to the appointment of directors and company secretaries

The Registrar is empowered under the new CO to issue a direction to a company where it appears to the Registrar that any of the requirements in the provisions relating to the appointment of directors or company secretaries is contravened.
 

Non-compliance with the direction is an offence and the company and every responsible person of the company will be liable to a fine.

2. Fair Dealings by Directors

Fair dealings by directors are governed by Part 11 of the new CO which mainly covers the following four areas:-

(a) Prohibitions on Loans, Quasi-Loans and Credit Transactions to Directors 

The CO contains provisions prohibiting a company from entering into loans or similar transactions with a director of a company, a director of its holding company and certain parties related to or connected with such director.

To enhance corporate governance, the new CO expands the prohibitions for a specified company (which refers to (i) a public company or (ii) a private company or a company limited by guarantee that is a subsidiary of a public company) to include additional categories of persons as entities connected with a director and introduces the requirements for Disinterested Members' Approval.

For the purpose of facilitating business operation, the new CO allows all companies to be exempted from the prohibitions if the transaction is approved by its members.

The new CO also introduces two new exceptions to the prohibitions :-

  • new exception for loan, quasi-loan and credit transaction of value not exceeding 5% of (i) the company's net assets or (ii) its called-up share capital in the absence of relevant financial statements;
  • new exception for providing funds to meet expenditure of a director in defending (i) proceedings in connection with any alleged negligence, default, breach of duty or breach of trust relating to the company or its associated company or (ii) investigation or regulatory action in connection with any alleged misconduct by the director relating to the company or its associated company, subject to certain conditions;

With respect to the existing exceptions, the new CO removes or relaxes some of the financial limits.

The criminal sanction under the CO for contravention of the prohibitions of loans and similar transactions to directors and relevant entities is repealed under the new CO.       

(b) Prohibitions on Payments for Loss of Office to Directors or Former Directors

The CO prohibits a company from making certain payments to its director or former director by way of compensation for loss of office or as consideration for retirement from office, without members' prior approval.

To enhance corporate governance, the new CO extends the restrictions as follows :-

  • extending the restrictions to (i) an entity connected with the director or former director; (ii) a person at the direction of or for the benefit of the director or former director or entity connected with him; and (iii) director or former director of the holding company;
  • extending the restriction to include payment in connection with the transfer of the undertaking or property of the company's subsidiary (i.e. not only on the company's undertaking or property);
  • extending the restriction to include payments in connection with all transfers of shares in the company or in its subsidiary resulting from a takeover offer.

The restrictions could be released if the transaction is approved by members of the company.   In case of a public company, the Disinterested Members' Approval is required.

(c) Long-Term Employment of Director

The new CO introduces new requirement of members' approval for long-term employment of a director if the guaranteed term of the employment exceeds or may exceed three years.   In case of a public company, the Disinterested Members' Approval is required.

(d) Disclosure of Directors' Interests

To modify the law in line with other common law jurisdictions, the new CO widens the ambit of the disclosure requirements as follows :-

  • widening the coverage to include "transaction" and "arrangement", in addition to "contract";
  • in case of a public company, extending the disclosure requirement to any material interest of an entity connected with a director unless the director is not aware of such interest or the transaction, arrangement or contract in question;
  • extending the scope of disclosure to include "extent" of the interest, on top of the "nature";
  • extending the disclosure requirements to shadow directors.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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