Most Read Contributor in Hong Kong, September 2016
Keywords: new companies ordinance,
restrictions, guaranteed employment, service contract, compliance,
As Hong Kong's new Companies Ordinance has come into force
on 3 March 2014, now is the time to consider whether your
company's service contract with your managing or executive
director is in compliance with the new law.
In this legal update, we look at the permitted length of an
executive director's service contract.
Under the old law
Under the old Companies Ordinance, a company could enter into an
employment contract with its director for a guaranteed period
exceeding three years. This opened up the risk that a majority
shareholder could arrange a long fixed-term employment contract for
an individual not terminable by notice. The executive director
would then become "untouchable" as it would be too
expensive to remove him from office before his contract has
Under the new law
Under the new Companies Ordinance, a company cannot enter into
any service or employment contract with its director without the
shareholders' approval if the contract provides for a
guaranteed period of employment that exceeds or may exceed
three years ("long-term contract").
The restriction applies to the following contracts:
Fixed-term contract exceeding three years which is either
not terminable by the company by notice, or only
terminable in specific circumstances
Contract terminable by the company by notice exceeding three
The aggregate guaranteed period of the contract plus the
required notice period exceeds three years
To have a valid long-term contract, the company must obtain
shareholders' approval through a resolution of the
shareholders, and the required resolution must satisfy the specific
requirements set out in section 532 of the new Companies
The new restriction applies to long-term contracts not only of
directors but also "shadow directors". A "shadow
director" is defined in the new Companies Ordinance to mean a
person in accordance with whose directions or instructions the
directors, or a majority of the directors of the Company are
accustomed to act.
The new law does not however affect fixed-term contract
exceeding three years if the contract can be terminated at any time
by notice not exceeding three years.
What does this mean?
The new Companies Ordinance does not have retrospective effect,
which means any existing long-term contract between the company and
its executive director is not affected by the new law.
However, any long-term contract to be entered into with an
executive director after 3 March 2014 is void to the extent of the
contraventions. Consequently, the long-term contract would become
terminable by the company upon giving reasonable notice. Likewise,
the executive director should also be able to terminate his
contract by giving reasonable notice to the company, although this
is not expressly stated in the new legislation. Depending on the
industry, reasonable notice may vary from three to six months.
This "unintended" consequence could be undesirable if
the company needs the executive director to hold the reins during a
critical period. So, check out the new law before entering into a
new service contract!
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This article provides information and comments on legal
issues and developments of interest. The foregoing is not a
comprehensive treatment of the subject matter covered and is not
intended to provide legal advice. Readers should seek specific
legal advice before taking any action with respect to the matters
discussed herein. Please also read the JSM legal publications
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