Companies (Amendment) Ordinance 2003 to Improve Corporate Governance and Make Company Law

Press Release

Companies (Amendment) Ordinance 2003 to improve corporate governance and make company law more business-friendly

December 12, 2003

The Secretary for the Financial Services and the Treasury has appointed February 13, 2004 as the commencement date of the Companies (Amendment) Ordinance 2003 (save for section 67 relating to the index of directors).

"This Ordinance, when brought into operation, will enhance our corporate governance regime, and make our company law more business-friendly, thereby ensuring that our companies legislation continues to provide Hong Kong with a commercial legal infrastructure that is commensurate with its status as a major international commercial centre," a Government spokesman said .

The Ordinance aims to implement certain Phase I recommendations of the Standing Committee on Company Law Reform (SCCLR) on the review of the Companies Ordinance (Annex), which seek to enhance the protection of shareholders' rights, update the requirements regarding directorships etc, and make some amendments regarding technical matters. It also introduces some changes to the Companies Ordinance to simplify the filing requirements, and to facilitate electronic processing at the Companies Registry, in anticipation to the operation of its Integrated Companies Registry Information System (ICRIS).

The spokesman added, "Phase I of the ICRIS, which allows customers to conduct online searches on the documents kept by the Companies Registry over the Internet round-the-clock, is currently at an advanced stage. It should start to provide online search services in early 2004. To avoid any serious impact on this implementation schedule, the commencement of section 67 of the Ordinance, which involves substantial modifications to the system design of the ICRIS, would need to be deferred until after the live run of the Phase I of the ICRIS."

Section 67 of the Ordinance expands the scope of the index of directors under the Companies Ordinance to cover any person who is nominated by a one-member/director company in general meeting to act in place of the sole member/director of the company upon the latter's death (ie, a reserve director). This reserve director mechanism was proposed in response to the concerns raised by the Bills Committee during the scrutiny of the Ordinance that there was no separate mechanism to deal with issues arising from the death of such a company's sole member and director pending the grant of probate or letters of administration to the deceased estate.

The SCCLR was formed in 1984 to advise the Financial Secretary on necessary amendments to the Companies Ordinance, the then Securities Ordinance and the then Protection of Investors Ordinance (now consolidated into the Securities and Futures Ordinance) to ensure that Hong Kong's company law continues to meet the needs of the business community. Members are drawn from a wide spectrum - lawyers, accountants, company secretaries, businessmen, academics, and representatives of government departments and regulatory bodies.

Annex

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The SCCLR's Phase I recommendations included in the Ordinance relate to three areas, namely, shareholders' rights, requirements regarding directors and technical matters, as follows:

(A) Shareholders' Rights

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(1) Amending the law to give every shareholder the right to enforce the terms of the memorandum and articles of association of the company.

(2) Reducing the threshold for circulating shareholders' proposals to 2.5% of the voting rights or 50 shareholders to make it easier for shareholders to make their views known to the company.

(3) Amending the law to provide for the removal of directors by ordinary resolution instead of special resolution, the latter being a higher threshold.

(4) For public companies, repealing the right under section 8 of the Companies Ordinance to resort to the court to annul amendments to the objects clause in the memorandum of association of the company.

(B) Requirements regarding Directorships

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(5) Making directors vicariously liable for any tort committed by their alternates unless otherwise stated in the company's articles of association.

(6) Providing a statutory definition of "shadow director" in the Companies Ordinance to include someone who can influence a majority of the directors.

(7) Clarifying that a company is unable to give an indemnity to its directors or officers for liabilities incurred to the company or a related company but allowing companies to obtain insurance for directors and officers to cover certain liabilities to the company or a related company and other parties.

(8) Amending the law such that the prohibition of a company from making loans to or providing security for loans to directors is extended to include modern forms of credit.

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(9) Permitting the formation of a company by one person; permitting a private company to have a minimum of one director; prohibiting the incorporation of a company limited by guarantee with a share capital; amending Table A in the First Schedule to the Companies Ordinance to remove the directorial autonomy rule; defining the term "manager" to which the definition of "officer" refers; providing a much reduced time limit for the completion of transfers of shares of public companies; and providing that court approval is not required where a reduction of share capital is solely for the purpose of a redesignation of the par value to a lower amount, subject to certain safeguards.