A Q&A guide to corporate governance law in Hong Kong.
The Q&A is part of the PLC multi-jurisdictional guide to corporate governance law. For a full list of jurisdictional Q&As visit www.practicallaw.com/corpgov-mjg
The main corporate entities used in Hong Kong are limited liability companies. A limited liability company can be a private company limited by shares, or a public company limited by shares or limited by guarantee.
Private limited liability companies. This is the most common form of corporate entity used in Hong Kong. A private company must have at least one founder member taking at least one share. The maximum number of members is limited to 50. A private company's constitutional documents must contain provisions that restrict the right to transfer its shares, and a private company cannot offer its shares to the public. Subject to certain exceptions, a private company must include the word "limited" at the end of its name.
Public limited liability companies. A public company is a limited liability company other than a private company. A public company may have more than 50 members and can be limited either by shares or by guarantee, but the latter form is primarily used for non-profit-making or charitable purposes. Public companies limited by shares can offer their shares to the public and many, but not all, of them have their shares traded on the Stock Exchange of Hong Kong Limited (SEHK).
The regulatory framework for corporate governance and directors' duties in Hong Kong comprises legislation, non-statutory rules, codes and guidelines published by the related regulatory bodies, the company's constitutional documents and case law, as explained below:
Legislation. This includes:
Companies Ordinance (Chapter 32 of the Laws of Hong Kong) (CO). This is the principal piece of legislation that applies to all companies incorporated in Hong Kong. Some of the provisions are equally applicable to non-Hong Kong incorporated companies that establish a place of business in Hong Kong; and
Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) (SFO). This applies to companies (wherever incorporated) whose shares are listed on the SEHK.
Non-statutory rules, codes and guidelines. These include:
A Guide on Directors' Duties. This non-statutory guide was published by the Companies Registry of Hong Kong in July 2009 and outlines the general principles for a director of a company in the performance of his functions and exercise of his powers;
The Hong Kong Codes on Takeovers and Mergers and Share Repurchases. These are non-statutory rules governing takeovers and mergers and off-market share repurchases in relation to public companies in Hong Kong. These Codes are administered by the Securities and Futures Commission of Hong Kong (SFC);
The Listing Rules. These are the rules promulgated by the SEHK for companies listed on the Main Board and the Growth Enterprise Market (GEM) of the SEHK. There are two separate sets of rules, namely the Main Board Listing Rules and the GEM Listing Rules (together, the Listing Rules), for companies listed on the Main Board and GEM of the SEHK, respectively, but they are basically identical. In addition to the Listing Rules, the SEHK has also issued, and may from time to time issue, interpretations of the Listing Rules, practice notes and guidance materials on listing matters;
Corporate Governance Code (previously known as Code on Corporate Governance Practices). This is contained in Appendix 14 to the Main Board Listing Rules and Appendix 15 to the GEM Listing Rules. The Corporate Governance Code sets out the principles of good corporate governance (see Question 3);
Guidelines on Disclosure of Inside Information. These are non-statutory, non-regulatory guidelines issued by the SFC to assist companies listed on the SEHK to comply with their obligations to disclose inside information under Part XIVA of the SFO;
Guidelines for Directors and the Guide for Independent Non-Executive Directors. These are non-statutory, non-regulatory guidelines issued by the Hong Kong Institute of Directors.
The company's constitutional documents. These include:
memorandum and articles of association; and
for listed companies, the terms of reference of the board committees.
There is no statutory corporate governance code in Hong Kong. However, in January 2005, the SEHK introduced the Code on Corporate Governance Practices (Old Code), which applies to companies listed on the SEHK. The Old Code has been amended and renamed the Corporate Governance Code (CG Code), which became effective on 1 April 2012. The CG Code covers the following areas:
Board practice.
Segregation of the roles of chairman and chief executive officer (CEO).
Board composition.
Appointment, re-election and removal of directors.
Nomination committee.
Responsibilities of directors.
Supply of information to directors.
Remuneration of directors and senior management and board evaluation.
Financial reporting, internal control and audit committee.
Delegation of management functions by the board and board committees and corporate governance functions.
Communication with shareholders and voting by poll.
Company secretary.
The CG Code sets out the principles of good corporate governance and two levels of recommendations:
Code provisions.
Recommended best practices.
The CG Code adopts the comply or explain approach. Listed companies must state whether they have complied with the code provisions set out in the CG Code for the relevant accounting period in their interim reports and annual reports. Where a listed company deviates from any of the code provisions, it must give considered reasons. In relation to the recommended best practices, listed companies are encouraged, but are not required, to state whether they have complied with them and give considered reasons for any deviation.
The Listing Rules require that listed companies include a corporate governance report (CG Report) in their annual reports. The CG Report must contain the prescribed information regarding the corporate governance practice of the listed company. Any failure to comply with the mandatory disclosure requirements will be regarded as a breach of the Listing Rules and the SEHK may impose various sanctions, including:
Issuing a private reprimand, a public statement involving criticism or a public censure.
Requiring the breach to be rectified within a specified time period.
Suspending the trading in the shares of the listed company.
Cancelling the listing.
Since the introduction of the Old Code in January 2005, the SEHK has conducted regular reviews to monitor compliance by listed companies with the Old Code. According to the results of the reviews, virtually all listed companies complied with 41 or more of the 45 code provisions in the Old Code.
To promote the development of a higher level of corporate governance among listed companies and to encourage better accountability of listed companies and directors, the SEHK amended the Old Code in January 2012. A small number of code provisions in the Old Code have been promoted to provisions in the Listing Rules because of their importance while some of the recommended best practices under the Old Code have been upgraded to code provisions in the CG Code. The mandatory disclosure requirements for the CG Report have also been revised.
The CO adopts a unitary board structure for companies incorporated in Hong Kong.
The board of directors bears the ultimate responsibility for the management and operations of the company. Directors can exercise all the powers of a company except any power reserved to the shareholders under the CO and the company's memorandum and articles of association. The board can establish board committees to deal with specific matters of the company, or delegate its powers to the company's senior management and/or appoint a managing director or a CEO who will be responsible for the day-to-day management of the company's business.
The board comprises all of the directors of the company. The law does not distinguish between executive directors and non-executive directors. Each director is individually and collectively responsible for the management and operations of the company.
There is no statutory or regulatory requirement for a Hong Kong company to appoint an employee to its board of directors.
A private company must have at least one director while a public company (whether listed on the SEHK or not) must have at least two directors. A company listed on the SEHK must have at least three independent non-executive directors, one of whom must possess appropriate professional qualifications, or accounting or related financial management expertise and must have independent non-executive directors representing at least one-third of its board by 31 December 2012. A director must normally be a natural person, except that a private company may have a body corporate as its director if the company is not a member of a listed group. There is no statutory limit on the maximum number of directors, but a company can, in its articles of association, place a limit on the maximum number of directors.
A director must attain the age of 18. There is no upper limit on the age of a director.
There is no nationality restriction on the identity of directors.
There is no restriction on the gender of directors.
The law does not distinguish between executive directors and non-executive directors and does not recognise supervisory directors. The Listing Rules and the CG Code recognise the value and importance of non-executive directors and independent non-executive directors, who usually work on a part-time basis and advise on the strategy and policy of the company without being involved in the day-to-day operations.
A company is not legally required to have a minimum number of non-executive directors or independent non-executive directors. The Listing Rules require that every listed company must have at least three independent non-executive directors, one of whom must possess appropriate professional qualifications, or accounting or related financial management expertise, and must have independent non-executive directors representing at least one-third of its board by 31 December 2012.
In assessing the independence of an independent non-executive director the Listing Rules require a listed company to take into account, among other things, whether the director has any interest in, or any business relationship with, the listed company or its connected persons.
Non-executive directors are subject to the same duties and liabilities as other directors.
There are no legal restrictions on the roles of individual board members, except that a director cannot be the secretary of the company at the same time. The CG Code contains code provisions that require the position of the chairman of the board and the CEO to be assumed by different persons.
The appointment of directors is governed by the CO and the company' articles of association. The ultimate authority for the appointment of directors vests in the shareholders of the company. Typically, the articles of association provide that directors are appointed by the shareholders at the general meetings. The board may from time to time appoint a director to fill a casual vacancy or as an additional director to the board. However, that director will only hold office until the next annual general meeting where he can stand for re-election.
In relation to listed companies, the CG Code contains code provisions that require that any director appointed by the board to fill a casual vacancy must retire and that director can stand for re-election at the first general meeting after his appointment.
The CO provides that a company can by an ordinary resolution remove a director from his office before expiry of his term of office. This resolution cannot be passed by way of a written resolution of the shareholders. It must be passed by the shareholders at a general meeting at which the director concerned has the right to attend and speak. A shareholder proposing a resolution to remove a director must give a special notice of 28 days to the company, which must then give the shareholders at least 21 days' notice to convene an extraordinary general meeting at which that resolution is considered and passed.
The articles of association may contain provisions restricting the term of appointment of directors. The model articles of association (Table A in Schedule 1 to the CO) (Model Articles) provide that at the annual general meeting of the company, one-third of the directors must retire from office. In relation to listed companies, the CG Code requires each director to be subject to retirement by rotation at least once every three years. The Listing Rules also require a listed company to obtain prior shareholders' approval for any director's service contract that either:
Is for a term of more than three years.
Can only be terminated on notice of more than one year or on payment of compensation of more than one year's emoluments.
Directors need not be employees of the company.
In general, shareholders do not have a right to inspect directors' service contracts unless the company's articles of association expressly provide for this.
Directors are neither prohibited from holding nor required to own shares in the company. However, directors are prohibited from dealing in the company's shares during certain blackout periods before the announcement of the company's results or when they are in possession of unpublished price sensitive information relating to the company.
Part XV of the SFO requires directors of listed companies to disclose their interests in the shares of the listed company of which they are directors.
Typically, the company's articles of association provide that directors' remuneration is determined by the company at a general meeting. It is common for the board to obtain a mandate from shareholders at a general meeting to authorise the board to fix the directors' remuneration.
The Listing Rules contain provisions that require listed companies to establish a remuneration committee chaired by an independent non-executive director for the purposes of, among other things, determining the remuneration packages of all executive directors and senior management. A majority of the members of the remuneration committee should be independent non-executive directors.
The CO requires a company to include in its accounts details regarding directors' emoluments. The Listing Rules require that a listed company disclose in its financial statements details of its directors' emoluments on a named basis.
It is not a legal requirement for the directors' remuneration to be approved by the shareholders of the company, although the Model Articles contain a provision that states that the remuneration of the directors is determined by the company at a general meeting. The Listing Rules also requires a listed company to obtain prior shareholders' approval for certain types of directors' service contracts (see Question 9).
The conduct of business of the board of directors is regulated by the relevant provisions of the CO and the company's articles of association. The length of notice and quorum for board meetings as well as the voting requirements for passing resolutions at board meetings are usually set out in the articles of association of the company. The Model Articles set out the following requirements:
Length of notice for board meeting. There is no specific length of notice required for the holding of board meetings. Under common law, directors must be given reasonable notice of board meetings. What amounts to a reasonable notice depends on the circumstances.
Quorum for board meeting. Unless otherwise fixed by the directors, two directors constitute a quorum for a board meeting.
Voting requirements. Resolutions at the board meetings are decided by a majority of votes and, if the votes are equal, the chairman of the board meeting has a second or casting vote.
The CG Code provides that notice of at least 14 days should be given of a regular board meeting of a listed company.
The directors are collectively and individually responsible for the management of the company and may exercise all the powers of the company for that purpose, subject to matters that are reserved to the general meeting as provided in the CO, the company's articles of association and, in relation to listed companies, the Listing Rules.
Shareholders may from time to time pass resolutions at a company general meeting to restrict directors' powers as they think fit.
The indoor management rule (that is, the Turquand Rule) applies so that any restrictions in the powers of directors are not enforceable against third parties unless the third parties have actual notice of these restrictions. The doctrine of constructive notice has been abolished by the CO, so that a person is not taken to have notice of any matter merely because that matter is disclosed in the constitutional documents of the company or any resolutions or returns filed with the Registrar of Companies in Hong Kong.
The Model Articles contain provisions that allow directors to delegate any of their powers under the articles of association to committees of the board or a person (for example, a managing director). The board is not legally required to delegate specific responsibilities, although it is common for boards to appoint a CEO or a managing director and delegate to him the powers of the board to handle the day-to-day management of the company.
The Listing Rules require listed companies to establish an audit committee comprising non-executive directors only and a remuneration committee comprising independent non-executive directors as a majority. The CG Code contains code provisions that require a listed company to establish a nomination committee consisting of independent non-executive directors as a majority.
Directors' duties under Hong Kong law are currently not codified but are derived from a number of sources, including statute law, case law and the constitution of the company. If a director fails to comply with these duties, he may be liable to civil or criminal proceedings and may be disqualified from acting as a director. Directors' duties can be classified into two broad categories: fiduciary duties, and duties of skill, care and diligence. The Companies Registry of Hong Kong has published a guide on directors' duties, which sets out the following 11 general duties for a director in the performance of his functions and exercise of his powers:
Duty to act in good faith for the benefit of the company as a whole.
Duty to use powers for a proper purpose for the benefit of members as a whole.
Duty not to delegate powers except with proper authorisation and duty to exercise independent judgement.
Duty to exercise care, skill and diligence.
Duty to avoid conflicts between personal interests and interests of the company (see Question 20).
Duty not to enter into transactions in which the directors have an interest except in compliance with the requirements of the law.
Duty not to gain advantage from use of position as a director.
Duty not to make unauthorised use of company's property or information.
Duty not to accept personal benefit from third parties conferred because of position as a director.
Duty to observe the company's memorandum and articles of association and resolutions.
Duty to keep proper books of account.
If theft and fraud by a director is proved, then he is criminally liable. He may also be disqualified as a director and may be personally responsible for all relevant debts of the company.
The CO and the SFO impose various liabilities on directors of listed companies in relation to the issue of and dealing in securities and the provision of information relating to securities. These include:
Civil and criminal liabilities under the CO for any untrue statements in a prospectus.
Civil and criminal liabilities for engaging in any market misconduct offences under Part XIII and XIV of the SFO.
Civil liabilities for failing to procure the listed company to make timely disclosure of inside information under Part XIVA of the SFO.
Criminal liabilities under the SFO for providing false or misleading representations or information to the regulators.
Civil liability under the SFO for making false or misleading public communication.
Criminal liability under the SFO for failing to make proper and timely disclosure in respect of a director's interests in the shares and debentures of the listed company.
Directors of listed companies must also observe the relevant requirements under the Listing Rules for dealing in securities.
In the event of a winding-up, whether court-ordered or voluntary, a director will be criminal liable if he is found to have:
Failed to comply with the obligations imposed on him in the liquidation of the company.
Given or concealed property of the company in liquidation with intent to defraud creditors.
Failed to keep books for the two years before the winding-up of the company.
Engaged in fraudulent trading.
A company is liable for health and safety of its employees under common law as well as under various statutes. In particular:
The Occupational Safety and Health Ordinance (OSHO) imposes certain obligations on employers or occupiers of premises in relation to the health and safety of those working at a workspace.
The Factories and Industrial Undertakings Ordinance (FIUO) also imposes a general statutory duty on employers to ensure the health and safety at work of those persons employed by them at industrial undertakings.
When a company is convicted of any offence under any of these ordinances and that offence was committed with the consent or connivance of any of its directors, or was attributed to his neglect, the director will also be guilty of the offence.
Environmental legislation covers a wide number of regulatory controls. These include:
Air pollution control.
Waste disposal.
Noise control.
Ozone layer protection.
Dumping at sea.
Any contravention of environmental laws may render a director liable if the offence was committed with the consent or connivance of that director, or was attributed to his neglect or omission.
The long-awaited Competition Ordinance was enacted in June 2012, which introduced a cross-sector competition law regime in Hong Kong. It aims to prohibit anti-competitive agreements and concerted practices, abuse of a significant market position that have the purpose or effect of substantially reducing competition and anti-competitive mergers (initially in the telecommunications sector only). The Competition Ordinance will only come into force at a date to be decided by the government. A disqualification order of up to five years may be made against a director if a company of which he is a director has contravened a competition rule and the tribunal considers that his conduct renders him unfit to be a director.
The Telecommunications Ordinance prohibits unauthorised access to computers by telecommunications. The offence of false accounting under the Theft Ordinance also covers falsifying computer records. When a company is convicted of any of these offences and the offence was committed with the consent or connivance of any of its directors, the director will also be guilty of the offence.
There are no other significant sources of directors' liability.
Generally, a director's liability cannot be restricted or limited if the director's liability arises from any negligence, default, breach of duty or breach of trust, and a company cannot indemnify a director against that liability.
A company can indemnify a director against liability incurred by him:
In defending any proceedings, whether civil or criminal, if judgment is given in his favour or in which he is acquitted.
In connection with any application for relief from his liability in respect of any negligence, default, breach of duty or breach of trust, provided that relief is granted to him by the court.
A company can obtain and buy for a director:
Insurance against any liability to the company, a related company or any other party in respect of any negligence, default, breach of duty or breach of trust (excluding fraud) of which he may be guilty.
Insurance against any liability incurred by him in defending any proceedings, whether civil or criminal, taken against him for any negligence, default, breach of duty or breach of trust (including fraud) of which he may be guilty in relation to the company or a related company.
Under the CO, a shadow director is "a person in accordance with whose directions or instructions the directors or a majority of the directors of the company are accustomed to act". This may include a parent company or a controlling shareholder whose instructions have always been followed by its subsidiary. However, a person is not considered a shadow director based on the fact that he has, in his professional capacity, given advice that the directors or the majority of the directors of the company have complied with.
A number of provisions in the CO are expressly stated to be applicable to shadow directors, although in some cases (for example, prohibition of loans to directors and contracts with a sole member who is a shadow director) a body corporate is not to be treated as a shadow director of any of its subsidiaries by reason only that the directors or a majority of the directors of the subsidiary are accustomed to act in accordance with its directions or instructions.
The provisions of the SFO also apply to shadow directors in the same way as to the formally appointed directors, because a director "includes a shadow director and any person occupying the position of director by whatever name called" (SFO). The Listing Rules also define a director to include "any person who occupies the position of director by whatever name called" (Listing Rules).
A director has a duty in common law to avoid conflicts between his personal interests and interests of the company. The CO requires a director to declare his interest in a proposed contract with the company at the board meeting before the transaction is approved by the board. The articles of association may allow a director to vote on the resolution approving a contract in which that director is interested after he has duly declared his interest in the contract. The Listing Rules require that any director who has a material interest in a transaction must not be counted as a quorum of, and must not vote on the related resolution at, the relevant board meeting.
The CO prohibits a company from granting loans to, or providing security in connection with a loan made by, its directors, subject to certain exceptions. However, a private company (not being a member of a listed group) can do so if the transaction has been approved by the company at a general meeting.
The Listing Rules provide that any transactions entered into between a listed company and its directors constitute connected transactions for the company and are, depending on the value of a given transaction, subject to the reporting, announcement and independent shareholders' approval requirements.
A director of a private company can buy or sell the shares of the company he is a director of subject to the requirements set out in the articles of association.
A director of a listed company must observe the applicable requirements under the Listing Rules and the SFO when dealing in the shares of the listed company. A director must not deal in the shares of the company during the prescribed blackout periods before the announcement of the results of the company or when he is in possession of any unpublished price sensitive information. If a director deals in the shares of the company when he is in possession of price sensitive information, he may attract civil and criminal liabilities under the SFO.
All companies must make available certain statutory registers and minutes of general meetings for inspection by shareholders. Subject to rules relating to protection of personal data and legal professional privilege, the court may grant orders allowing access to books and records by shareholders. Shareholders are also entitled to receive the company's annual accounts.
When offering securities to the public, companies must disclose various information as required by the CO and the Listing Rules.
Listed companies are subject to further disclosure obligations under the Listing Rules and the SFO, for example, disclosing inside information, large transactions with third parties and connected transactions, half-yearly results and quarterly reports (for companies listed on GEM) (see also Question 37).
There are a number of requirements on companies to provide certain information to public and regulatory bodies such as the Companies Registry, the Inland Revenue Department, the SEHK and the SFC.
A company must convene an annual shareholders' meeting once every calendar year and not more than 15 months from the date of the last annual shareholders' meeting. Instead of a physical meeting a company may deal with matters intended to be dealt with at the meeting by way of a resolution signed by all the shareholders.
Generally, the following matters are dealt with at the annual shareholders' meeting:
Laying of the company's accounts before the shareholders.
Appointing the company's auditors and determining their remuneration.
Retirement and re-election of directors.
Declaration of final dividends.
In the case of listed companies, granting general mandates to the directors to issue and repurchase shares.
The directors of a company must convene an extraordinary general meeting if they have received the following:
In companies with a share capital, requests from shareholders holding not less than 1/20th of the paid-up capital of the company carrying the right to vote at general meetings of the company.
In companies without a share capital, requests from members representing not less than 1/20th of the total voting rights of all the members having a right to vote at general meetings.
Subject to the provisions of the company's articles of association, two or more members holding not less than 1/10th of the issued share capital or, if the company does not have share capital, not less than 5% in number of the members of the company may call a meeting.
Either of the following shareholders can require the moving of a resolution at an annual general meeting:
Shareholders holding not less than 1/40th of the total voting rights of all the shareholders having the right to vote at an annual general meeting.
Not less than 50 shareholders holding an average of not less than HK$2,000 of paid-up capital per shareholder.
In addition to the right to require the moving of a resolution at an annual general meeting, these shareholders can also require the circulation of a statement of not more than 1,000 words with respect to the matters referred to in any proposed resolution or the business to be dealt with at any general meeting.
Any shareholder can bring a derivative action for misfeasance committed against the company. Misfeasance is defined as fraud, negligence, default in complying with any statutory provision or rule of law, or breach of duty. A shareholder can also apply for an injunction against an individual or a director for any breach of the CO.
There is a statutory remedy for any shareholder who complains that the affairs of the company have been conducted in a manner unfairly prejudicial to the interests of the shareholders generally or some part of the shareholders. That shareholder may apply to the court by petition and the court has power to:
Make an order to restrain the commission of the act or the continuation of the conduct.
Make an order that proceedings be brought in the name of the company.
Appoint a receiver or manager of the whole or part of a company's property or business.
Make orders for regulating the conduct of the company's affairs in the future, or for the purchase of the shares of any shareholder by other shareholders or by the company itself.
Award damages and interest to any shareholders where it is found that their interests have been unfairly prejudiced.
A shareholder may also apply to the court for an injunction against an individual or a director for any breach of the CO or a breach of the director's fiduciary duties.
Shareholders need not have any minimum shareholding to be entitled to the above rights and remedies.
There are no specific statutory provisions relating to internal control of business risks other than directors' general duties.
The CG Code sets out the principles and practices of good corporate governance for listed companies (see Question 3). One of the areas covered by the CG Code is internal control.
The code provisions in the CG Code set out some standards for internal control that require the directors to conduct, at least once annually, a review of the effectiveness of the internal control system that must cover all material controls like financial, operational and compliance controls and risk management functions, and to report its review to shareholders.
All listed companies must set up an audit committee whose main functions include assisting the board of directors to provide an independent review of the effectiveness of the financial reporting process, internal control and risk management system of the company. The audit committee should obtain assurance that management has identified key risks in relation to business objectives and that appropriate measures have been in place to mitigate the risks identified. The audit committee should also ensure that management will adopt an effective internal control system and consider any findings of investigations conducted by internal audit or issues raised in the external auditor's management letter.
The company is primarily liable for the preparation of its financial statements. Directors must prepare and attach to the balance sheet of a company a report on the profit or loss of the company for the financial year and the state of the company's affairs as at the end of that year.
Directors must cause the company to lay the profit and loss account, or in the case of a company not trading profit an income and expenditure account, at the annual general meeting of the company.
Directors must take all reasonable steps to ensure that a company's balance sheet and profit and loss account are audited to give a true and fair view of the state of affairs of the company and the profit and loss of the company.
Failure to comply with the above obligations may result in the directors being liable to a fine and imprisonment.
The Listing Rules require listed companies to send copies of the annual report and accounts to its shareholders within four months of the company's financial year-end. Under certain situations the company may send a summary financial report to its shareholders.
Except for dormant companies meeting the requirements of the CO, the accounts of Hong Kong companies must be audited.
The first auditor of a company may be appointed by the directors before the first annual general meeting and the first auditor holds office until the conclusion of the company's first annual general meeting. If the directors do not do so, shareholders can appoint the first auditor at a general meeting.
Thereafter, a company's auditor is appointed on an annual basis at the annual general meeting and the auditor holds office until the conclusion of the company's next annual general meeting.
An auditor can be removed before its term of office expires by an ordinary resolution at a general meeting. The shareholder proposing to remove an auditor must give the company special notice of at least 28 days before the meeting. The auditor has the right to be heard and to make a written representation in relation to the resolution.
An auditor can also resign at any time by giving a notice to the company together with a statement that he is not aware of any circumstances connected with his resignation that should be brought to the attention of shareholders or creditors of the company, or if he is aware of any circumstances, a statement of these circumstances.
Any casual vacancy in the office of an auditor may be filled by appointment by the directors or shareholders at a general meeting.
The CG Code requires that the terms of reference of the audit committee (which all listed companies must set up) include making recommendations to the board of directors on the appointment, re-appointment and removal of auditors.
Auditors must be certified public accountants qualified for appointment as auditors under the Professional Accountants Ordinance. They must not act as an auditor if they are either:
An officer or servant of the company.
A partner or employee of an officer or servant of the company.
These restrictions also extend to a company within the company's group.
There are no statutory restrictions on non-audit work that auditors can do for the company.
The CG Code recommends that the audit committee develop and implement policy on the engagement of an external auditor to supply non-audit services so as to ensure that this does not impair the independence and objectivity of the external auditor.
Auditors' liability to the company is based on a broad principle of using due skill and care and not acting negligently. Their liability is also regulated by their terms of engagement with the company. Generally, auditors have a potential common law liability to the company's shareholders and third parties. Auditors are also criminally liable if they knowingly or recklessly cause an audit report to include any matter that is materially misleading, false or deceptive.
The CO prohibits any agreements that seek to limit auditors' liability to the company or a related company in respect of negligence, default, breach of duty or breach of trust in relation to the company.
It is common for listed companies in Hong Kong to highlight their corporate social responsibility (CSR) efforts in their annual reports.
There is no specific law or regulation governing CSR but various NGOs in Hong Kong lay down guidelines on CSR practices. The SEHK has also published a reporting guide for listed companies to report on environmental, social and governance (ESG) matters which cover workplace quality, environmental protection, operating practices and community involvement. Listed companies are encouraged, but not obliged, to include ESG matters in their annual reports for the years ending after 31 December 2012.
The company secretary plays an important role in the administration of the company. The main duties of a company secretary are to ensure that the company complies with relevant regulations and procedural matters, including maintaining the company's registers, organising meetings, sending out notices of meetings, attending, recording and keeping minutes of meetings and filing forms and documents with the Companies Registry.
The CG Code also lays down guidelines for directors to seek the advice of the company secretary with a view to ensuring that board procedures and all applicable rules and regulations are followed.
Institutional investors and other shareholder groups provide guidelines to listed companies on good corporate governance practices. Those that hold a significant shareholding in companies may exert a direct and strong influence on corporate governance, particularly in areas such as board composition, CEO duality, leadership diversity and ownership concentration.
The new Companies Ordinance (New CO) was passed on 12 July 2012. However, it will commence operation after enactment of the subsidiary legislation, tentatively scheduled for 2014. The New CO is a significant milestone in the development of company law in Hong Kong.
In mid-2006, the Government launched a major and comprehensive exercise to rewrite the CO with a view to modernising Hong Kong's company law and making it more user-friendly. Three topical public consultations were conducted in 2007 and 2008 to gauge views on a number of complex subjects. The Financial Services and Treasury Bureau incorporated the proposals together with other recommendations of the Standing Committee on Company Law Reform into a draft Companies Bill for further public consultation in two phases in 2009 and 2010. The Companies Bill was gazetted on 14 January 2011 and it was introduced into the Legislative Council on 26 January 2011. The Legislative Council formed a Bills Committee to scrutinise the Companies Bill in February 2011. After 44 meetings, the Bills Committee completed its scrutiny of the Companies Bill in June 2012 and the Companies Bill was passed by the Legislative Council on 12 July 2012.
The New CO aims to achieve four main objectives, to:
Enhance corporate governance.
Ensure better regulation.
Facilitate business.
Modernise the law.
Some of the key measures for enhancing corporate governance under the New CO include the following:
Improving the accountability of directors so as to enhance transparency and accountability by restricting corporate directorships in private companies.
Clarifying and codifying directors' duty of care, skill and diligence.
Enhancing shareholders' engagement in the decision-making process and facilitating their participation through the introduction of a comprehensive set of rules for proposing and passing a written resolution and reducing the threshold requirement for shareholders to demand a poll.
Improving the disclosure of company information by requiring public companies and larger private companies to furnish a more analytical and forward-looking business review as part of the directors' report.
Strengthening auditors' rights to obtain information from a wider range of persons, including the officers of a company's Hong Kong subsidiary undertakings and persons holding or accountable for the company or its subsidiary undertakings' accounting records for performing the auditors' duties.
Fostering shareholder protection by strengthening rules on directors' conflicts of interests, including:
expanding the requirement for seeking shareholders' approval for directors' employment contracts that exceed a term of three years; and
requiring approval of disinterested shareholders where shareholders' approval is required for transactions of public companies and their subsidiaries.
On 1 January 2013, the statutory disclosure regime under Part XIVA of the SFO came into force whereby listed corporations are required to disclose inside information in a timely manner unless any of the safe harbours applies. Civil sanctions are introduced for non-compliance of the requirement and there is liability to compensate those who have suffered financial losses as a result of the breach. The new disclosure regime replaces the previous disclosure requirements under the Listing Rules, which do not have the force of law. The disclosure rules impose considerable responsibility on directors and other officers of Hong Kong-listed corporations to ensure compliance of the disclosure rules. The new statutory disclosure regime makes a positive step in enhancing corporate governance and market transparency.
Under the new disclosure regime, listed corporations must disclose to the public as soon as reasonably practicable "inside information" that has come to the company's knowledge. The new disclosure regime broadly adopts the existing definition of inside information from the insider dealing regime of the existing SFO. This information, in relation to listed corporations, means specific information that is:
Relevant to the company or a shareholder or officer of the company or the listed securities and their derivatives.
Not generally available to persons who are accustomed or would be likely to deal in the listed securities of the company.
If generally known to these persons above, the information would likely to materially affect the price of these securities.
Every officer of a listed company (including a director, manager or secretary of the company or any other person involved in its management) is under an obligation to take all reasonable measures to ensure that proper safeguards exist to prevent the company breaching the statutory disclosure requirement. If a listed company breaches a disclosure rule, each of its officers could be held individually liable if the company's breach is a result of any intentional, reckless or negligent conduct of the officer.
The new disclosure regime provides several "safe harbours" where non-disclosure or delayed disclosure would not be regarded as a breach of the SFO. Examples include:
When disclosure is prohibited or constitutes a contravention of a restriction under law.
When the relevant information concerns an incomplete proposal or negotiation.
When the relevant information is a trade secret.
When the relevant information concerns the provision of liquidity support from the Exchange Fund or a central bank.
When the SFC has waived the disclosure requirement.
Possible penalties include, among others, a maximum fine of HK$8 million, disqualification of directors for a maximum of five years, or a "cold shoulder" order that will deprive an officer of the ability to deal in securities, futures contracts and other investments for up to five years.
To enhance board effectiveness and corporate governance among listed companies, on 13 December 2012, the SEHK published consultation conclusions on the proposed amendments to the CG Code to include measures to promote board diversity. Commencing from 1 September 2013, a new code provision will be introduced in the CG Code which requires the nomination committee of a listed company to have a policy concerning diversity in the board. Listed companies will also be required to disclose the policy or a summary of the policy in the CG Report.
Main activities. The CR is a government department and is responsible for providing services to incorporate Hong Kong companies and to register non-Hong Kong companies. It also administers various ordinances, principally the CO.
W www.cr.gov.hk/en/home/index.htm
Main activities. The SFC is an independent statutory body set up to regulate the securities and futures markets in Hong Kong. It derives a broad range of investigative, remedial and disciplinary powers from the SFO and its subsidiary legislation.
W www.sfc.hk/web/EN/index.html
Main activities. The SEHK is both a stock exchange and a regulator of listed companies in Hong Kong. The SEHK administers the listing, trading and clearing rules. As a market regulator, the SEHK works closely with the SFC to ensure orderly and fair markets.
W www.legislation.gov.hk/eng/home.htm
Description. This website sets out all the current ordinances and subsidiary legislation of the Hong Kong Special Administrative Region in both English and Chinese. This website is an official website and is maintained by the Department of Justice of the Hong Kong Government.
T +852 2533 2711
F +852 3150 3711
E hilda.chiu@shlegal.com
W www.shlegal.com
Qualified. Hong Kong, 1992; England and Wales, 1993
Areas of practice. Corporate; corporate finance; mergers and acquisitions; compliance; commercial.
Recent transactions
Advising a number of Chinese companies newly listed on the SEHK on directors' duties and liabilities and compliance with various aspects of the Listing Rules, including the CG Code.
Advising various companies on the SEHK on corporate governance issues and changes introduced to the CG Code in 2012.
T +852 2533 2832
F +852 3150 3832
E victor.lee@shlegal.com
W www.shlegal.com
Qualified. Hong Kong, 2002; England and Wales, 2007 (non-practising)
Areas of practice. Corporate finance; mergers and acquisitions; regulatory and compliance; general corporate; commercial; employment.
Recent transactions
Advising various companies listed on the SEHK on directors' duties and liabilities and compliance with various aspects of the Listing Rules (including the CG Code), Takeovers Code and SFO.
