Guide to Setting up a Business in Hong Kong (2) - Hong Kong Companies

1. Introduction

Private companies

The appropriate vehicle for a business which wants to:
(1) limit its liability
(2) obtain private funding only
(3) generate financial returns for its shareholders
is a private company limited by shares. The great majority of companies in Hong Kong are private companies limited by shares and in this brochure we limit our discussion accordingly.

A private company is a company which, in its articles of association:
(1) restricts the right to transfer its shares
(2) limits the number of its members to 50 (excluding employees)
(3) prohibits any invitation to the public to subscribe for any shares or debentures of the company.

Liability of shareholders

The liability of each member of a company is limited to the amount (if any) unpaid on the shares held by that particular member. Accordingly, if the company becomes insolvent and is wound up, the shareholders stand to lose their agreed investment in the company only, and need not make any further contribution to meet the company's liabilities.

Ongoing maintenance obligations

The ongoing maintenance obligations relating to a Hong Kong company are set out in detail below. These obligations can be divided into annual obligations and those obligations which only arise where there has been a change in relation to the corporate structure and other matters. Where a company becomes dormant, it will not be necessary for the company to comply with these annual obligations.

Pre-incorporation contracts

Any person who purports to enter into a contract in the name of or on behalf of a company which has not yet been incorporated will be personally liable for that contract. The contract may be ratified by the company after incorporation (in which case the person will no longer be personally liable) but this situation can usually be avoided in the first place by the use of a "shelf" company.

2. Incorporation of a Company

General

The incorporation of a private company in Hong Kong requires at least one shareholder (who subscribes his name to the memorandum of association of the company). There may be registered with the memorandum of association, articles of association signed by the subscriber to the memorandum. After the constitutional documents are filed with (and a Statement of Compliance and the prescribed capital fee are submitted to) the Registrar, the Registrar will issue a certificate of incorporation certifying the name and the date of incorporation of the company.

Name

A company can be incorporated with any name (except for names which are the same as existing company names). The Registrar has the power to require a company to change its name, including where the name gives so misleading an indication of the nature of the company's activities in Hong Kong as to be likely to cause harm to the public or it is too like another name of an organisation established in Hong Kong under any ordinance at the time of registration.

A company may be incorporated with either an English name or a Chinese name or both. Where a company is incorporated with an English and a Chinese name so that both names appear on the certificate of incorporation, the two names together constitute the full formal name of the company. This means that both names should be used on the company's seal and in all documents. If both an English and a Chinese name are to be used it is worth considering the meaning of the name in both languages and ensuring that the translation from the primary to the secondary language is well done. The secondary name may be a translation or a transliteration of the primary name or wholly unconnected with it.

Shareholders

Every company must have at least one registered shareholder. There is no requirement that a shareholder be resident in Hong Kong. Any legal entity can be a shareholder in a company, including a company, receiver, liquidator or sole proprietor. In order to save time, we normally incorporate companies with one of our nominee companies acting as subscriber. The first share is usually transferred to one of the ultimate shareholders or their nominees after incorporation. We can, however, provide continuing nominee shareholders services.

Memorandum and articles of association

The memorandum of association of a company may include, among other things, the objects and powers of the company. As a company is deemed to have the capacity and the rights, powers and privileges of a natural person, a detailed description of a company's objects and powers does not generally now have to be included in its memorandum of association and registered with the Registrar (as it had to be before 1997). Shareholders may choose to set out the company's objects and powers if they wish to limit them. As the exception to the general rule, companies incorporated to promote charitable and similar objects, and which have been authorised to dispense with the use of the word "Limited" in their name, must provide a description of their objects and powers.

The articles of association are the regulations (or bye-laws) of the company. They normally follow a standard form, incorporating the regulations contained in Table A (the first schedule of the Companies Ordinance) or a more detailed version which excludes Table A and contains all the regulations in the articles themselves, or a combination of the two. To the extent to which specific articles (regulations) are not registered with the Registrar, the provisions of the articles of association in Table A will apply.

In general, companies incorporated by our firm are incorporated with detailed articles rather than Table A articles. Articles may include a wide range of special provisions to meet individual situations, such as special classes of shares and pre-emption rights on the transfer of shares.

Initial share capital

The amount of a company's initial authorised share capital, the number of shares and the par value of each share must be stated in the company's memorandum of association. The authorised share capital is the maximum amount of share capital which the company may issue.

There is no minimum authorised capital required and, as a capital fee is payable on authorised (and not issued) share capital, unless there are particular reasons for a high initial authorised capital, most companies are incorporated with a fairly low authorised capital which is increased later as the company's need for capital grows. It is common for companies to start with an authorised capital of HK$1,000 or HK$10,000 divided into shares of HK$1 or HK$10 each. The capital can, however, be denominated in any currency and there are no legal prohibitions on a company having a multi-currency capital structure, although in practice this can be quite cumbersome.

The share capital may be divided into different types or classes of shares, including preference shares, in which case the capital clause in the memorandum of association should reflect this. A company may also have shares with different nominal values or carrying differing rights.

At least one subscriber share must be issued on the incorporation of a company, but the balance of the authorised capital may be issued and paid up in accordance with the company's capital equirements.

Shares may be allotted for cash, services or other consideration such as the transfer of property. The issued share capital may be issued at "par" value or may be partly paid-up or paid at a premium. If a company's articles of association permit, shares may also be issued as redeemable shares.

Registered office

Each Hong Kong company must have a registered office in Hong Kong to which all official communications and notices (including service of process) may be addressed. The address of the registered office of a new company must be notified to the Registrar from the day on which a company begins to carry on business or within 14 days after the date of incorporation of the company, whichever is earlier. Our address must be used as the registered office address when we also provide company secretarial services to the company.

Timing/shelf companies

It is always possible to set up a new company but many of our clients prefer to acquire a "shelf" company (a company which has already been incorporated using our standard form memorandum and articles of association). The main advantage in acquiring a shelf company is that it is not necessary to wait for the Registrar to
process the incorporation, which usually takes about 10 working days. Once acquired, the name and/or the memorandum and articles of association of the shelf company can be changed if the client so desires.

Fees

We can provide, on request, details of the costs involved in incorporating a new company or acquiring a shelf company. Our standard charges include:

(1) legal expenses

(2) filing and other government fees

(3) business registration certificate

(4) printing charges

(5) statutory books (share register, minute book, etc.)

(6) common seal and in either case are based on the adoption of standard form memorandum and articles of association. Our standard charges do not include the items listed below as post-incorporation matters as these are charged for separately on a time-spent or item basis.

3. Post-incorporation matters and general requirements

Directors

Hong Kong private companies must have at least one director. The directors need not be resident in Hong Kong. Anyone who is over the age of 18 may, subject to certain exceptions, be appointed as a director. Corporate directors may be appointed in the case of a private company, unless the company is a member of a group of companies of which a Hong Kong listed company is a member. Where a private company has only one shareholder and that shareholder is the sole director of the company, the company may nominate a person over the age of 18 as a reserve director to act in the place of the sole director in the event of the latter's death.

The particulars of the directors (which as a matter of practice includes alternate directors) and reserve director of a company must be filed with the Registrar within 14 days of their appointment/nomination.

Directors must disclose to the other members of the board as soon as possible any material interest, direct or indirect, which they may have in any contract or proposed contract with the company which is significant in relation to the company's business. If a director fails to do so, that director may be accountable to the company for any profit he or she makes from that contract, also the director can be subject to a default fine. In certain circumstances the contract may also be voidable at the option of the company. Generally a director may not vote at, or be counted towards the quorum of, a meeting to discuss the matter in which he is interested although often this is relaxed in the articles of associations. Where any general interests exist (for example, where the director is a director or shareholder of other companies), it is common for a general disclosure to be made at the first meeting of the directors after the appointment of the relevant director or as soon as possible.

A director may normally be removed by an ordinary resolution of the company even where there is an agreement, or there is a provision in the memorandum or articles of association, to the contrary. The removal of a director under this statutory power entails certain procedures designed to allow the director to make representations against the proposed removal. The articles of association may also expressly provide for the removal of directors in other ways. Removal of a director contrary to an agreement with the company may give rise to a claim by the director against the company.

Issuing shares

The issuing of new shares in a company is a three-stage process involving the allotment by the directors of the shares to particular persons and then the issuance of the shares to such persons after the entering into the company's register of shareholders of the relevant particulars.

Allotments of shares, other than allotments pursuant to offers to existing shareholders pro rata to their existing holdings, may only be made with the prior approval of the shareholders in general meeting. This approval may be given either in relation to a particular allotment or allotments or generally. In either case this shareholder approval expires (if not previously revoked by the company in general meeting) when the next annual general meeting of the company is held or ought to be held.

A return of allotment of shares, disclosing the members and their shareholdings must be filed with the Registrar within one month of the date of the allotment. If this time limit is not met, the Registrar will usually refuse to accept the return of allotments for filing and an application will have to be made to the court for leave to file the return out of time.

A share may be beneficially owned by someone other than the registered holder. In the case of a private company, it is not normally necessary for the identity of the beneficial owner to be revealed to the company or to any authority or to be a matter of public record, although a subsidiary is required to state in its accounts the name of its ultimate holding company. We provide a nominee shareholder service.

Secretary

Each Hong Kong company must have a secretary who or which is resident in Hong Kong. If the company has a sole director, that person cannot also be the secretary of the company. The particulars of the secretary must be filed with the Registrar within 14 days of the appointment of the secretary. The secretary's responsibilities include keeping a register of the company's members, directors, charges and the company's minutes.

Kaizen can provide secretarial services and where we do so we usually require that the registered office be at our Office. 

Auditors and books of account 

A Hong Kong company must keep proper books of account and have the accounts audited annually by Hong Kong registered auditors. It is advisable for the auditors to be appointed as soon as practicable after incorporation, especially where advice is required on accounting systems and the like. The first auditors are generally appointed by the directors. The appointment of auditors is normally reconfirmed at each annual general meeting. Auditors may be removed by an ordinary resolution of the shareholders. (Most of the large international accounting firms have offices in Hong Kong and can act as auditors. There are also many reputable and competent local accounting firms.)

The books of account must be open to inspection by the directors at all times. If the books are kept outside Hong Kong, certain accounts, returns and other information must be sent to and kept in Hong Kong for inspection by the directors, at least once every six months. The board has the power to decide where the books of account are kept, or where the accounts, records and other information are to be sent. A company must keep its books of account for at least seven years.

Bankers 

After a company is incorporated it may open bank accounts in Hong Kong and elsewhere. A directors' resolution will usually be required to authorise the opening of each account and to authorise signatories to operate that account. Most banks have standard form resolutions which they require to be passed in connection with the opening of any account.

It is important to ensure that the company's cheques and other financial instruments include the name of the company in full. It should also be made clear on the face of the instrument that any individual signatory signs "for and on behalf of" the company to avoid any personal liability on the part of the signatory.

Financial year 

The financial year end of the company should be determined, and any change in the financial year end authorised, by a directors' resolution.

The initial choice of financial year end must permit accounts to be prepared, audited and laid before an annual general meeting within 18 months of incorporation.

Business registration

All Hong Kong companies must register under the Business Registration Ordinance.

Seals and chops

A Hong Kong company must have a common seal which is normally kept with the statutory records of the company at the registered office. If a seal is required for use outside Hong Kong, an official seal can be adopted by a directors' resolution, provided that the use of an official seal outside Hong Kong is authorised by the articles of association and (where they are stated in the memorandum of association) the company's objects include the transaction of business outside Hong Kong.

As a matter of practice, many authorities in Hong Kong, in particular governmental and other regulatory authorities, expect a signature on behalf of a company to be accompanied by the imprint of a rubber stamp or "chop" showing the name of the company and some words indicating the authority of the signatory. There is, however, no legal requirement for such chops.

4 Maintenance - annual requirements

Annual accounts/directors' report

A profit and loss account and a balance sheet for the company must be audited by Hong Kong registered auditors and laid before the shareholders in general meeting within 18 months of incorporation and then at least once in every calendar year. There are lengthy and detailed provisions in the Companies Ordinance regarding the types of accounts to be prepared and we can supply further details on request. Generally, Hong Kong private companies having a share capital are not required to file their accounts with the Registrar.

A directors' report must be prepared in conjunction with the annual accounts. The Companies Ordinance provides a list of what this report should contain and this list includes details of contracts with the company or certain companies with which it is associated which are significant in relation to the company's business and in which any director has a material interest.

Annual general meeting

An annual general meeting of the shareholders must be held within 18 months of incorporation and then at least once in every calendar year, although not later than 15 months after the last annual general meeting. (This 15 month period may be extended at the discretion of the Registrar upon payment of a fee.) An annual general meeting must be held even though there may be no accounts available for presentation to the meeting and no other relevant business to attend to.

Before the annual general meeting is held, the directors must approve the accounts and the directors' report, they may recommend a dividend and must resolve to call the annual general meeting. If all the shareholders entitled to attend and vote at the annual general meeting so agree, the meeting may be held at short notice, but otherwise at least 21 clear days' notice is required. Copies of any audited accounts to be considered at the annual general meeting must be sent to all shareholders, debenture holders and other persons so entitled not less than 21 days before the date of the meeting, unless all shareholders entitled to attend and vote at the meeting otherwise agree.

An annual return must be filed with the Registrar at least once a year (except if there has been no change in the filed particulars since the date of the last annual return, in which case a certificate confirming this fact can be filed in lieu of an annual return).

The annual return contains among other things:

(1) particulars of the authorised and issued share capital of the company

(2) the names and addresses of its directors and the secretary

(3) the names and addresses of its registered shareholders

(4) the amount secured by any registered charges.

The return must be signed by a director or the secretary of the company and must be filed within 42 days of the anniversary of the incorporation of the company. Public companies and companies limited by guarantee without a share capital must file their annual return within 42 days of the annual general meeting in each year.

5. Maintenance - changes in particulars

Filing obligations

A company must file the relevant particulars with the Registrar within the period indicated, in the event of:

(1) any change in the directors or secretary or in the filed particulars of any existing directors or secretary - 14 days

(2) any change in the location of the registered office - 14 days

(3) any increase in the authorised share capital (this also requires the payment of a capital fee) - 15 days

(4) any relocation of the company's statutory books from the company's registered office - 14 days

(5) any change of name of a company – 15 days after the passing of the resolution

(6) the passing of a special resolution (other than special resolutions to change the name of a company) or certain other resolutions - 15 days

(7) any allotment or issue of new shares (this also requires the payment of a capital fee on the amount of any premium over the nominal value at which the shares are allotted or issued) - one month

(8) the creation of a charge over certain types of assets or the acquisition subject to an existing charge of certain types of assets, in either case whether the asset is within or outside Hong Kong - 5 weeks

In relation to the last two items, if the relevant particulars are not filed with the Registrar within the prescribed period, an application will have to be made to the Court for an extension of the time within which the particulars may be filed. Any such application will need to be supported by an affidavit giving an explanation as to why the particulars were not filed within the prescribed period.

Change of name

To effect a change in the name of a company (which includes the adoption or abandonment of a formal English or a Chinese version of the name):

(1) the shareholders must approve of the change in name by special resolution

(2) the new name must be registered with the Registrar It normally takes about 10 working days from the time of the filing of the specified form giving notice of the change of name for the certificate of change of name to be issued. The change in name is effective from the date on such certificate.

Increases in authorised and issued share capital

Any increase in the authorised share capital of a company requires the approval of the shareholders. A company's articles of association typically provide for the increasing of the company's authorised share capital by way of ordinary resolution. Any increase in authorised share capital will attract a capital fee. Notice of the increase must also be filed with the Registrar.

The procedure for allotting and issuing new shares and the related filing obligations are set out below.

Changes to memorandum or articles of association

Most of the provisions of a company's memorandum and articles of association can be changed by special resolution.

There are exceptions to this general rule. Where a company has issued different classes of shares, the special rights of any one class may, subject to the articles of association, be changed only with the approval of 75% of the holders of shares of that class. Where the special rights exist by virtue of the memorandum of association and there is no provision for alteration, all such shareholders must agree before the rights can be changed. Also, a member must agree in writing to an alteration to the memorandum or articles of association which requires that member to take or subscribe for more shares or increase his liability to contribute to the share capital of the company or otherwise pay money to the company.

A signed copy of every special resolution and every resolution varying a provision in the memorandum or articles of association must be filed with the Registrar and annexed to every copy of the memorandum and articles of association of the company issued subsequently to any such change. When the memorandum or articles of association is amended a printed copy of the memorandum or articles as amended must be filed with the Registrar.

Share transfers

The transfer of legal title to shares in a Hong Kong company is effected by an "instrument of transfer". Beneficial title to shares is transferred by way of contract notes (a bought note and a sold note).

Contract notes must be submitted for stamping within two days (30 days if the sale takes place outside Hong Kong) of their execution. Ad valorem stamp duty is levied on each contract note (i.e. both the bought note and the sold note) at the rate of HK$1.00 per HK$1,000 or part thereof, of, whichever is the higher of the consideration paid or the value of the shares transferred (so that the total rate of duty on a sale of shares is effectively 0.2%). Exemptions from stamp duty are available for intra-group transfers. We will be pleased to provide more detailed advice on the requirements for exemption on request.

In the case of a private company, a copy of the latest audited accounts (consolidated where relevant) or latest management accounts (if audited accounts have not been prepared or if they are not up to date) together with details of any land and properties held and a copy of any sale and purchase agreement must normally be submitted when the documents are lodged for stamping. The Stamp Office may also require additional information.

The instrument of transfer attracts a HK$5 fixed duty. In the case of a sale and purchase of shares by a person who is not resident in Hong Kong, the ad valorem stamp duty can be paid on the instrument of transfer in addition to the HK$5 fixed duty if contract notes have not been made out and stamped.

Where a transfer of the beneficial ownership is made otherwise than by sale and purchase e.g. by way of gift, the instrument of transfer is stampable at the fixed rate of HK$5 plus ad valorem stamp duty of 0.2% of the value of the shares at the date of transfer.

When there is a sale of beneficial ownership only and no transfer of legal ownership (i.e., where the shares will remain registered in the name of the same person as a nominee for the beneficial owner), contract notes must be made out and ad valorem stamp duty of 0.2% paid. An instrument of transfer will not be required in this case but it is advisable for there to be a declaration of trust (see below).

Ad valorem stamp duty is not payable on a transfer in registered ownership which does not involve any change in the beneficial ownership of the shares. Where shares are registered in the name of a nominee, it is sensible to execute a declaration of trust and to have the declaration of trust adjudicated as not chargeable to duty. The fee for this is HK$50. Adjudication can avoid later disputes with the Stamp Office about the beneficial ownership of shares.

Penalties for failure to stamp documents within the required time range from two to ten times the amount of duty payable, although the Collector of Stamp Revenue has power to remit the whole or any part of any penalty in appropriate cases. Neither the company nor any other person is permitted to act on or in general rely in court proceedings on any stampable instrument which is not duly stamped. An unstamped instrument may not be registered in the company's books.

After stamping (and compliance with any other formalities prescribed by the articles of association), the transfer can be registered in the statutory books of the company and a new share certificate issued.

Share transfers are sometimes restricted by, for example, provisions in the company's articles of association which require that the shares are first offered for sale to existing shareholders.

6 Management

Directors and board meetings

Responsibility for the overall management of a Hong Kong company typically rests with its board of directors. Generally, the board authorises the actions of the company through board resolutions passed at board meetings or, if authorised by the articles, by written resolution signed by all the directors or a stated proportion of them.

There is no Hong Kong requirement that board meetings be held in Hong Kong or at any specific intervals. Normally, reasonable notice of meetings must be given to each director, but the articles of association can modify this general obligation. The board of directors may delegate its powers to certain persons. A certain degree of delegation is, so far as third parties dealing with the company are concerned, normally implied in the case of managing directors and senior employees of a company.

Where a private company only has one director and that director takes a decision that may be taken at a meeting of directors, the decision shall be evidenced by a resolution in writing or a written record of the decision which must be delivered to the company
within 7 days of the decision having been made.

Shareholders and shareholders' meetings

Certain decisions however must, by law, be made or sanctioned by the shareholders in general meeting. This is done by the passing of an ordinary or, in some cases, a special resolution. Such resolutions may be proposed as special business at annual general meetings or at separately convened meetings, called extraordinary general meetings.

An ordinary resolution requires a simple majority of the shareholders who attend and vote at a meeting to approve it. A special resolution, on the other hand, requires a 75% majority of the shareholders who attend and vote at a meeting to approve it.

Generally, 14 clear days' notice is required for a meeting at which an ordinary resolution is proposed and 21 clear days' notice is required for a meeting at which a special resolution is proposed or for the holding of an annual general meeting. A majority in number of shareholders having the right to attend and vote at general meetings who together hold not less than 95% in nominal value of all the shares, or all the shareholders in the case of an annual general meeting, may agree that a meeting be held at short notice.

The articles of association should make provision for the quorum and voting rights and will determine whether or not the chairman of the meeting has a casting vote. There is a statutory right on the part of a shareholder to appoint a proxy to attend and vote on his or her behalf at any meeting at which the shareholder is entitled to attend and vote. A statement to this effect must be included in the notice of each general meeting. A proxy need not be a member and will have the same right to speak at the meeting as his or her appointor. A corporation which is a member can attend a meeting by appointing a representative to attend the meeting on its behalf. Such a representative can speak and vote on a show of hands or on a poll. A proxy's rights to vote are limited to voting on a poll unless the Articles provide otherwise. It is usually necessary to lodge appointments of proxies (but not of corporate representatives) in advance of the meeting.

A company's articles of association will usually permit resolutions to be passed by a written resolution signed by all the shareholders, without the need to hold a meeting, however notice of written resolutions must be provided to the auditors at or before the time of submission to members for signature.

Where a private company only has one shareholder and that shareholder takes a decision that may be taken in a shareholder' meeting, the decision shall be evidenced by a written resolution or a written record of the decision which must be delivered to the company within 7 days of the decision having been made.

7. Dormant companies

An inactive Hong Kong private company may be classified as "dormant". To become "dormant" the company must pass a special resolution (see Part B, paragraph 6.4) authorising its directors to deliver to the Registrar the special resolution declaring that the company will become dormant . Once the necessary formalities have been complied with, the company will be exempt from complying with the requirements for holding annual general meetings, preparing and filing annual returns and carrying out audits of its accounts.

A company will be eligible to apply for dormant status if, since the date of incorporation or any other specified date, it has not entered into what is known as a "relevant accounting transaction". A "relevant accounting transaction" is a transaction which is required by Section 121 of the Companies Ordinance to be entered into the company's books of account. This includes the receipt and expenditure of money and the sale and purchase of goods, assets and liabilities, but does not include a fee which a company is required to pay by law, for example the annual business registration fee.

Prior to a company ceasing to be dormant, the directors must deliver to the Registrar a further special resolution declaring that the company intends to enter into a relevant accounting transaction, at which stage the company will cease to be dormant and the normal requirements will apply again. The advantage of being able to put a company into dormancy is that the cost of maintaining the company can be significantly reduced without having to wind up or apply to the Registrar to de-register the company.