Corporate governance in Hong Kong

“Corporate governance is the system by which companies are directed or controlled”

Report of the Committee on the Financial Aspects of Corporate Governance, Gee & Co, London, 1992, said Cadbury Report

 

In Hong Kong, relevant provisions for private (i.e. non listed) companies can be found in a number of sources including the basic law, the Companies ordinance, a specific company’s articles of association, if any, agreements between the shareholders and guidance from the Companies Registry (Guide of directors duties) and the Hong Kong institute of directors.

Prior to getting into the detail of how corporate governance is relevant for joint-venture companies or companies raising funds and more generally, any company with shareholders whose interests are not aligned, we address 3 questions often asked by our clients and prospective clients.

 

Recurring question No. 1.- Whether a majority of shares means a majority at both members meetings and board meetings?

The straightforward answer is no. Different rules apply to voting for shareholders meetings and for the board of directors. The Companies Ordinance provides that votes at members meetings are counted on a show of hands unless someone requires the votes to be counted. In practice, show of hands only applies when the result is the same as it would be by counting the number of votes attached to the shares held by each member present or represented at the general meeting. Board of directors’ votes are counted by head: a shareholder with no representation at board level has no say for all matters dealt with at board level, no matter how many shares it holds.

Corporate governance rules, typically agreed in a shareholders agreement or joint-venture agreement help to ensure that – all members with a minimum holding of voting rights (usually around 15-20%) are represented at board level and strategic decisions are submitted to the majority, and sometimes all members for approval (veto rights).

 

Recurring question No. 2. – What are the rights of a shareholder in a Hong Kong private company?

Statutory shareholders rights in a nutshell:

  1. Vote in shareholders meetings or written resolutions of members (see below ordinary and special resolutions)
  2. Dividends (in proportion of stake: only if profits available for distribution + decision of the board)
  3. Maintain stake in the capital of the company (issue of new shares not allotted to shareholders in proportion to their shareholdings is subject to ordinary resolution
  4. Portion of the assets if the company is liquidated
  5. Information: once a year, board and audit reports together with the company’s financial statements
  6. Propose shareholder resolutions (according to the section 580 CO, the shareholder must represent at least 2.5% of the total voting rights of all the shareholders who have a relevant right to vote or at least 50 shareholders who have a relevant right to vote)

Ordinary resolutions (simple majority, i.e. 50% +1 vote):

  • Appoint or remove directors
  • Appoint or remove auditors

Special resolutions (qualified majority of 75% +1 vote):

  • Turn a company “dormant”
  • Alteration of the company’s articles of association
  • Change the name of the company
  • Varying class of shares rights
  • Reduction of share capital
  • Share buy-back by the company under general offer
  • Appoint a person to investigate the company’s affairs

Since statutory rights of Hong Kong private company shareholders are few and limited, shareholders ‘agreement usually complement such with increased information rights (reporting), provisions to ensure a sit at the table for certain decisions, veto rights, transfer clauses (preemption rights, tag along, drag along, call/put options and liquidity clauses)

 

Recurring question No. 3. – What is the role of the board of directors?

Once appointed by the members, the directors are almighty and accountable.

Directors are collectively empowered to take all decisions to manage the company. To third parties, anything done by the directors for and on behalf of the company, binds the company. This is called the Turquand’s rule.

Directors appoint the company secretary, make decisions on bank authorizations, prepare or arrange to delegate the preparation of accounting documents, financial statements, director’s report.

Directors are accountable. They have both fiduciary and statutory duties (both general) and specific obligations that can be found mainly in the Companies Ordinance. Breaches are sanctioned in case of financial prejudice.

Members have a say on the company’s auditors appointment and financial statements shall be laid before them once a year in general meeting for approval. If directors do not enable members to exercise such powers, members have few options:

  • Start the process for director’s removal which requires the director(s) to be removed to be heard by the members.
  • Call a general meeting to appoint new directors (requires a shareholder holding a majority of shares.

Since the protection awarded to shareholders by the Companies Ordinance is pretty shallow, a prudent shareholder will negotiate to increase such rights by having the articles of association of the company amended or more generally by shareholders agreement.

 

Illustration No. 1. – Corporate governance provisions specifically relevant for fundraising companies at seed stage

  • Investors information rights
  • Founders powers and authority
  • Lock-up period and limitations on transfer of shares

 

Illustration No. 2. – Corporate governance provisions specifically relevant for joint ventures

  • Board representation of members
  • Board meeting rules (notice, quorum, reserved matters)
  • Whether independent non-executive directors and committees for audit or remuneration are suitable considering the size and admin organization of the joint-venture
  • Reserved matters for the members
  • Transfer of shares and exit provisions
  • Deadlock resolution mechanism

 

How can we help?

We assist our clients to identify relevant amendments to the statutory provisions of Hong Kong law and the most appropriate document to formalize such: articles of association, shareholders agreement, policies or else.

We advise our clients when needed to make a strategic use of the applicable corporate governance provisions by providing analysis and drafting the documents agreed with our client.

 

Pricing

Our fees will depend on the urgency and complexity of the situation. It will be based on hourly rates for crisis’s or one-off situations. For continued support and advice to ensure proper implementation of a new shareholders agreement or for drafting policies, we may agree on a fixed fee or retainer for a minimum period of 6-months.