The main parts of the Companies (Amendment) Ordinance 2003 will come into effect on 13 February 2004 followed by certain important amendments to the Listing Rules of the Stock Exchange of Hong Kong Limited (the "Listing Rules") on 31 March 2003. Many of these changes relate to corporate governance issues and are the result of extensive consultation carried out with a view to increasing transparency amongst listed companies. Further changes are anticipated in the near future.
In this email alert, we will focus on the main amendments to the Listing Rules as well as some of the key aspects of the Companies (Amendment) Ordinance 2003.
Amendments to the Listing Rules affecting currently listed companies
While the Hong Kong Stock Exchange continues to monitor recent developments in other parts of the world with regard to quarterly reporting and disclosure of all senior executives’ remuneration by name and is expected to include these in non-compulsory codes of best practice for next year, the following significant changes will be implemented on 31 March 2004 :-
- all directors’ remuneration to be disclosed on a "named" basis in the annual report;
- number of independent non-executive directors to be increased from 2 to 3 (subject to 6 months transition period);
- a new definition of "transactions" for the purpose of "notifiable transactions";
- refined classification of "notifiable transactions" to make the various size tests more reliable;
- tightened disclosure rules for "connected transactions" and expanded definition of "connected person";
- reverse takeovers and acquisitions involving a change of control to be treated as new listings, effectively abolishing "back-door" listings;
- placings at more than a 20% discount to the last closing price to be forbidden;
- failure to publish financial results in time to result in automatic suspension (subject to 9 month transition period).
Amendments to the :-(listing Rules affecting future listing candidates)
The following rules have been amended regarding new listing applicants: -
- 3-year profit requirement to be waived for firms with a market capitalization of more than H:-|$4 billion and revenue of more than H:-|$500 million over the last 12 months (or H:-|$2 billion market capitalization and positive cash flow of at least H:-|$100 million in aggregate over the 3 preceding financial years);
- the expected minimum market capitalization on listing to be increased from H:-|$100 million to H:-|$200 million;
- minimum number of shareholders at the time of listing to be increased from 100 to 300 and to 1000 for companies exempted from the 3-year profit requirement.
Private Companies permitted to have 1 director and 1 shareholder
One of the significant changes introduced in the Companies (Amendment) Ordinance 2003 is that a private company will now be permitted to have only one director and one shareholder. This avoids the artificiality of involving other persons in the corporation simply to meet formal corporate requirements. While the section relating to one shareholder forming a quorum at a shareholder’s meeting overrides the provisions of the Articles, so there is no need to amend the Articles, it will still be necessary to amend the Articles to allow one director to form a quorum at a board meeting.
Where one member is also the sole director, the company may in general meeting nominate a natural person as a reserve director who will only become a director upon the death of such sole director.
However, one needs to note that where a private company has only one director, such director cannot also be the secretary of the company.
Other Amendments to the Companies Ordinance
The following changes should also be noted, some of which were highlighted in our October 2003 email alert : -
- shareholders to have right to enforce the terms of the memorandum and articles of association (s23);
- court approval not required in case of reduction of share capital to redesignate the nominal value of share to a lower amount (s58);
- threshold for shareholders to call general meetings reduced to 2.5% of voting rights or 50 shareholders (s115A);
- shareholders can remove directors before the expiration of his term of office by passing ordinary resolution instead of special resolution (s157B)
- directors to be vicariously liable for any tort committed by the alternate director appointed by them, but the alternate director remains personally liable for any act or omission (s153B);
- scope of s157H expanded in relation to loans to directors to cover quasi-loans and s161B regarding particulars to be disclosed in accounts of loans to officers;
- companies can give broad indemnities to directors in respect of liabilities to third parties, and properly insure them against any liability incurred by them in the course of performing their duties save for fraud (s165).
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.