Navigating Share Capital in Hong Kong Limited Companies
The “Private Company Limited by Shares”, or limited company, is the most common vehicle to run an operating business in Hong Kong. Understanding share capital is important to make informed decisions whether to choose this vehicle.
The limited company has long been a popular choice for businesses in Hong Kong thanks to its flexibility in corporate governance. With the introduction of the new Companies Ordinance on 3 March 2014, these benefits have only grown.
This article will take a deeper look at the rules around share capital to better understand what makes the limited company the go-to entity for doing business in Hong Kong.
What are shares?
Shares are units of ownership in a company that represent a claim on a portion of the company’s assets and profits.
There are different types of shares, including ordinary shares and preference shares.
An ordinary share typically includes the right to vote, the right to participate in profit distributions and the right to participate in liquidation dividends and proceeds when the company winds up.
Holders of preference shares have priority over ordinary shareholders in receiving dividends and return of capital, though they often have no voting rights.
Should a Hong Kong-registered company have more than one class of share, the rights of each class have to be set out in the Articles of Association.
Shareholders of a Hong Kong limited company can be either an individual or a body corporate, may be of any nationality and reside anywhere in the world.
What is share capital?
The share capital of a company is the total amount of contributions, in the form of cash and/or other kinds of assets, that the company has received from its shareholder(s) in exchange for company shares.
This capital is used by the company to fund its operations and growth. Limited companies always have this type of capital. Hong Kong company law, however, does not prescribe a required minimum amount for it. It may be as little as $1 for one share.
The share capital structure in Hong Kong
Since the introduction of the new Companies Ordinance (CO) in 2014, the structure for share capital in Hong Kong has been very flexible.
There is no authorised share capital (i.e. no maximum number of issued shares), no par value, and the share capital may be expressed in any major currency.
Hong Kong companies are required to disclose their share capital and shareholding information in their annual return, which is filed with the Companies Registry (CR). This information is publicly available and can be accessed through the CR’s online database.
Abolition of par value
Before the new CO in 2014, Hong Kong-incorporated companies were required to have a nominal value, also known as “par value”, ascribed to their shares. In general, this is the minimum price at which shares can be issued.
This par value system has been abolished since 2014 for all companies, including those incorporated before the commencement date. This allows for a friendly and clear business environment and makes it easier for companies to structure their own share capital.
Adopting a no-par regime is in line with international trends as it is generally accepted that par value no longer satisfies its original purpose, which was to protect shareholders and creditors. Other common law jurisdictions, such as Australia, New Zealand and Singapore, have also abolished par value.
Any amount received for issuing company shares should now be recorded as part of the share capital.
Since there is also no longer the concept of “authorised share capital”, there is no limitation on the number of shares that a company may issue.
Alteration of share capital
The no-par environment allows for greater flexibility in altering the share capital.
A company may increase its capital without issuing new shares, while it may also convert its shares into a smaller or larger number with no visible effect on the share capital.
Additionally, a company doesn’t need to issue new shares to capitalise its profits and may also issue bonus shares without increasing its share capital.
Shares which have not yet been taken, agreed to be taken, or that have been forfeited may even be cancelled.
In all cases of altering the share capital, a notice with a statement of capital must be submitted to the Companies Registry in Hong Kong.
Reduction of share capital
The process of reducing a company’s share capital has been simplified under the new CO.
Before, companies could only reduce the capital through a special resolution produced by the shareholders and the official approval of a court.
While this process remains in place, a much easier and quicker alternative has been added: a court-free procedure based on a solvency test.
The main features of this new procedure are:
- All the directors need to sign a solvency statement
- This is the key aspect of the court-free procedure, as the directors need to state that the company will be able to pay off any debts in 12 months following the reduction.
- The company needs to obtain shareholder approval through a special resolution
- A notice must be published in the Gazette and newspapers regarding the company’s approval of the reduction
- Shareholders and creditors may apply to court to object the reduction within a five-week period
The importance of a good share capital structure
A well-structured share capital can provide numerous benefits to a company, including the ability to raise additional capital through the sale of additional shares, the ability to attract and retain investors, and the ability to manage the company’s financial risk.
It is important for companies to carefully manage their share capital, as it can affect the company’s financial stability and its ability to raise additional capital through the sale of additional shares.
How HKWJ can help
HKWJ Tax Law together with its sister company Triple Eight Limited can provide further detailed advice regarding the share and share capital issues for companies, such as:
- the types of shares to be issued
- the structure of the share capital
- the increment, allotment, reduction and cancellation of shares.
We can also assist in preparing the required documents and filing with the Hong Kong Companies Registry.
Reach out to us via the form below or call +852 2804 0889.
The HKWJ Group is a one-stop holistic service provider and advisor to help your business grow. Within the Group, HKWJ Tax Law assists with financial administration, such as payroll, bookkeeping and accounting, as well as tax and legal matters. At Triple Eight Ltd, we provide a wide range of professional and corporate services, such as company secretarial services, bank account opening and company incorporation.