Hong Kong: The New Companies Ordinance

Impact On Use Of Offshore Vehicles
Last Updated: 12 March 2014
Article by Appleby  

Hong Kong's new Companies Ordinance will come into force on 3 March 2014. Much of its content is designed to modernise Hong Kong companies and make them easier to operate. Historically, certain aspects of the Hong Kong company law regime have encouraged the use of offshore vehicles, typically in Bermuda, the Cayman Islands and the British Virgin Islands. Will the modernisation exercise in the new legislation reduce demand for such vehicles?

Before dealing with the relative merits of the companies legislation in the various jurisdictions, one point worth noting is that stamp duty will remain payable on most transfers of shares in Hong Kong companies. There is no stamp duty in Bermuda, Cayman or the BVI on transfers of shares, and so the use of such companies will deliver a saving on any subsequent transfer of shares (unless the transfer of the shares in the offshore vehicle attracts stamp duty for some other reason, e.g. by virtue of a listing on the Hong Kong Stock Exchange). This alone may explain the popularity of offshore vehicles for many in the business community in Hong Kong. For others, however, the relative ease of use of a corporate vehicle may be a factor.

Financial Assistance

The new Ordinance retains the prohibition against financial assistance for both public and private companies, but adds further exceptions to those currently available and simplified the "whitewash" procedure. In the major offshore jurisdictions, including Bermuda, Cayman and the BVI, there is no prohibition against financial assistance, making even a simplified whitewash procedure (or the need to seek out an exception) relatively onerous. In addition, while Hong Kong-incorporated subsidiaries are unable to provide financial assistance for the acquisition of shares in their Hong Kong-incorporated parent company, offshore subsidiaries of the Hong Kong parent should continue to be able to provide such financial assistance following Arab Bank v Mercantile Holdings. This can be useful when selling a group to a buyer who needs to finance the acquisition.

Financial Reporting

While the new Ordinance will introduce numerous welcome measures such as simplified financial reporting for small and medium-sized enterprises that satisfy certain criteria, an audit requirement will remain. This can be contrasted with the various offshore jurisdictions, where audits are not required or, in the case of Bermuda, the requirement can be waived by the directors and members.

Removal of Requirement for Memorandum of Association/Authorised Capital

The new Companies Ordinance does away with the requirement for a memorandum of association: the constitution of a Hong Kong company will now consist solely of its articles of association (and, for existing companies, the provisions of their memoranda will be deemed to be part of their articles). The new Ordinance also provides that, unless the objects of the company are restricted in its articles, there will be no restrictions on its powers. While removing the requirement for a separate memorandum of association, the only consequence per se is a change to the drafting and presentation of a Hong Kong company's constitutive documents. It is interesting to note that, while the directors of a Hong Kong company who cause it to exceed its powers will be in breach of their duties (and liable to the company for the consequences), those acts will remain valid for a third party dealing with the company in good faith.

This mirrors the position in the BVI and Cayman, while Bermuda company law does not provide third parties with such protection. Interestingly, while conventional BVI business companies enjoy unfettered capacity (at least as far as a third party dealing with them in good faith is concerned), the BVI does offer the ability to incorporate a "restricted purpose company". This specialist vehicle veers away from the standard offshore company model, with its wide corporate powers, and instead provides a vehicle which can be legally restricted to only enter into specific transactions. If the restricted purpose company engages in an activity that is not listed in its constitutional documents, then those transactions are deemed void, whether or not the counterparty is dealing with the restricted purpose company in good faith. These vehicles can be useful in transactions where a company is required not to depart from a specific core purpose. The strict treatment should it do so is not available if a Hong Kong company is used.

Capital Increases and Share Issues

Another requirement that will no longer apply to companies formed after the new Ordinance becomes effective is the need for an authorised capital. This will mean that shares can be issued without the need to create additional capital "headroom". This is already the position in the BVI where a company can issue unlimited number of shares or a maximum number as specified in its memorandum of association, but the requirement for an increase in the authorised share capital of Cayman and Bermudian companies remains. However, the new Ordinance does require shareholder approval before directors may issue shares, which rather negates this advantage. There is no such requirement for Bermuda, Cayman and BVI companies, which makes private companies incorporated in these jurisdictions easier to administer (although such a requirement can be built into their constitutive documents if required).

The new Ordinance also does away with the par value of shares. Shares in BVI and Cayman companies may (but do not need to) have a par value: the choice remains with the promoters of the company.

Reductions of Capital

The new Ordinance allows companies to undertake capital reductions without the need for court approval, provided that the company has first obtained a special resolution from disinterested shareholders, published its intention in the Government Gazette and provided that it will, following the capital reduction, satisfy a new statutory solvency test. The solvency test is passed if the company will be able to pay its debts as they become due during the 12 months immediately following the reduction of capital, and immediately after the capital reduction there will be no ground on which the company could be found to be unable to pay its debts.

This echoes the position in Bermuda where the shareholders can approve a reduction of share capital provided that on the date the reduction is to be effected, there are no reasonable grounds for believing that the company is, or after the reduction would be, unable to pay its liabilities as they become due. In Cayman, a court order is still required, while a much more liberal regime operates in the BVI, where the maximum number of authorised shares of a company can simply be changed by amending the memorandum of association without the need to pass any solvency or asset test.


The new Ordinance removes the need for a company to pass a "headcount" test. As with many jurisdictions whose companies legislation is based on its English equivalent, Hong Kong has historically required schemes of arrangement to be approved by a majority in number representing three quarters by value of the members or creditors (as applicable) of a company. It will no longer be necessary to satisfy the headcount test where a scheme of arrangement involves a takeover offer or a general offer to buy back shares in a Hong Kong company: such a scheme may be approved by shareholders holding three quarters of the voting rights in a company, provided that the dissenting votes do not exceed 10 per cent of the voting rights attached to all disinterested shares in the company. This is a welcome development for Hong Kong companies.

While it remains to be seen whether the major offshore jurisdictions will follow suit, it is worth nothing that a BVI or Cayman target can be acquired by way of merger (including a merger with a foreign company in the case of a BVI target), with the approval of a simple majority of shareholders (in the BVI) or a two-thirds majority (in Cayman). In Bermuda, the approval threshold is a three-quarters majority, unless the bye-laws provide otherwise. In an acquisition context, therefore, a facility already exists in the offshore jurisdictions to allow a company to be acquired without applying a headcount test to its shareholders.

The new Companies Ordinance does provide for an amalgamation procedure for Hong Kong companies, provided that they are wholly owned entities within the same group.

In relation to the above matters, with the possible exception of the lack of a headcount test for schemes of arrangement, offshore vehicles incorporated in Bermuda, the BVI or Cayman are at no disadvantage to their Hong Kong counterparts. In addition, offshore companies also continue to enjoy numerous additional advantages over their onshore cousins, including the ability to redomicile, the ability to choose from a greater variety of corporate vehicles, and enhanced confidentiality.

Redomiciliation Process

A feature of companies incorporated in most offshore jurisdictions is the "continuation" or "redomiciliation" process. In essence, this means that a company can migrate from one jurisdiction to another, and the entity, on its arrival in the new jurisdiction of choice, is deemed to be the same entity that left the previous jurisdiction. This means that if an offshore jurisdiction is no longer favoured (for whatever reason), the owners can move it to any other offshore jurisdiction that has corresponding legislation (most offshore jurisdictions do). The only available alternative in Hong Kong would usually be a share swap with the newly formed company in the destination jurisdiction, or a more complex scheme of arrangement.

Availability of Different Corporate Vehicles

In addition to the numerous advantages discussed above, Hong Kong's companies legislation does not provide for certain entities that exist in the offshore world. In addition to the restricted purpose company referred to above, the offshore world offers segregated portfolio companies (SPCs) and protected cell companies (PCCs). These are single legal entities whose assets and liabilities can be allocated to different cells or portfolios within the company. The assets and liabilities of those portfolios and cells are ring-fenced from those of other portfolios or cells, making them useful for funds or captive insurance arrangements.

Certain offshore jurisdictions also offer incorporated cell companies, which are near-relations of SPCs and PCCs but where each cell constitutes a separate legal entity.


BVI and Cayman companies, in particular, offer a degree of confidentiality not found in Hong Kong companies. In both jurisdictions, the register of members and the register of directors are not required to be made available to the public.


In conclusion, many of the steps taken are positive, and result in a much-needed modernisation of Hong Kong's companies legislation. There remain, however, numerous advantages to the use of offshore companies: even when a parent company is incorporated in Hong Kong, the ability of offshore subsidiaries to provide financial assistance without prohibition is an incentive to continue with their use within a group structure. In addition to those advantages identified above, offshore companies enjoy greater flexibility (especially when privately held) than their Hong Kong counterparts.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Mayer Brown
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Mayer Brown
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions