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The Companies (Amendment) Bill 2003, which seeks to improve the prospectus regime, enhance corporate governance and modernise the registration regime for oversea companies, will be gazetted tomorrow (June 13) and introduced into the Legislative Council on June 25.
"We aim to bring about improvement to the Companies Ordinance (the Ordinance) in a number of areas, including offers of shares and debentures, shareholder remedies, registration requirements for oversea companies, incorporation procedures, and the definition of "subsidiary" for the purposes of group accounts," a government spokesman said today (June 12).
"One of the key objectives of the Bill is to enhance shareholder remedies as recommended by the Standing Committee on Company Law Reform (SCCLR) under Phase I of its Corporate Governance Review. This is in line with the Government's commitment to upgrading our corporate governance standards.
"The amendments proposed under the Bill will also serve to make our company law more business-friendly, thereby ensuring that the Ordinance continues to provide Hong Kong with a commercial legal infrastructure that is commensurate with its status as a major international commercial center," the spokesman said.
The proposed changes relating to the prospectus regime are the second phase of a three-phase exercise to overhaul the existing regulatory framework for offers of shares and debentures, which has been endorsed by the Financial Secretary as one of the initiatives to increase liquidity.
"The Securities and Futures Commission (SFC) has been a key driving force in bringing this phased reform to fruition. We look forward to the early completion of the reform, the third and the last phase of which will culminate in a proposal to revamp our regulatory framework for offers of shares and debentures scheduled for consultation by the SFC by September 2004," the spokesman said.
"Most of the prospectus-related proposals will ease the compliance burden and accommodate new offering structures and offering methods, thereby enhancing flexibility and versatility in the issuance activities in the local capital market, yet in keeping with the regulatory perspective," he added.
The proposed amendments to implement SCCLR's recommendations on shareholder remedies relate to statutory derivative action, unfair prejudice remedies, orders for inspection of company records, and injunction orders.
The SCCLR has also approved the proposed changes to simplify the filing requirements for oversea companies and enhance the disclosure requirements for oversea companies as a result of a comprehensive review of Part XI of the Ordinance and all the other provisions of the Ordinance which apply to oversea companies.
The definition of "subsidiary" for the purposes of group accounts is proposed to be amended to more closely align with that adopted in the International Accounting Standards. This would ensure that the group accounts would better reflect the financial position of a company. The definition of "subsidiary" for purposes other than the preparation of group accounts would not be affected.
Opportunity is also taken to enable electronic incorporation of companies, and to remove the existing upper limit of 20 on the number of partners in a partnership, which is no longer appropriate.
The SCCLR was formed in 1984 to advise the Financial Secretary on necessary amendments to the Companies Ordinance, the Securities Ordinance and the Protection of Investors Ordinance (now subsumed under 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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Following is a summary of the major amendments proposed in the Companies (Amendment) Bill 2003:
(A) Amendments updating the prospectus regime
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(1) Carving out from the definition of "prospectus" offering documentation in relation to specified types of offers for providing certainty as to the types of offers that can be made without triggering the prospectus regime. The types of offers specified include offers to "professional investors", offers to not more than 50 persons, etc.
(2) Making clear that subject to necessary investor protection safeguards, it is permissible for issuers to issue "awareness advertisements" setting out basic factual and procedural information concerning offers of shares and debentures.
(3) Expanding the existing exemption power of the Securities and Futures Commission (SFC) under sections 38A and 342A of the Ordinance by providing the SFC with an additional ground of exemption: that the exemption would not be prejudicial to the interest of the investing public; and increasing the number of provisions in respect of which exemptions may be granted.
(4) Permitting a prospectus to be made up of more than one document each of which is a prospectus in its own right, which can be authorized, registered and issued separately, for facilitating the conduct of programme offers (i.e. offers made on a repeat or continuous basis or through successive tranches). Safeguards to ensure that investors are given access to all relevant information and other safeguards applicable to a standalone prospectus are included as appropriate.
(5) Amending the prospectus civil and criminal liabilities provisions under the Ordinance for enhancing investor protection.
(6) Removing the discrepancies in certain regulatory requirements applicable to offers made by companies incorporated locally and overseas for providing a level playing field.
(7) Empowering the SFC to update certain regulatory requirements by way of subsidiary legislation for more timely response to market developments, including the detailed information required in a prospectus.
(B) Amendments enhancing shareholder remedies
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(8) Providing for a statutory derivative action that may be taken on behalf of a company by a member of the company. In general, prior leave of the court is not required for the commencement of the action. Pre-action notice, unless otherwise dispensed with by the leave of the court, has to be served on the company before the commencement of the action. The court is empowered to grant orders as to the costs incurred by a member taking a derivative action. Approval or ratification by the company of the conduct that is the subject matter of the action would not be a bar to action.
(9) Amending section 168A of the Ordinance to provide that the court may award damages to the members of a company where it is found that their interests have been unfairly prejudiced, and to award such interest on the damages awarded as the court thinks fit. Past members (and their personal representatives) are also allowed to take action under this section in so far as the conduct complained of took place while they were members of the company. Section 168A is also proposed to be amended to empower the court to make an order for the compensation of costs incurred by the members and past members undertaking the action; and to allow members of oversea companies, as well as companies incorporated in Hong Kong, to commence an action under that section;
(10) Empowering the court, on application by a member, to make an order to allow the member or his representative to obtain access to such records, to facilitate members of an oversea company or Hong Kong company to exercise their rights to obtain access to company records.
(11) Empowering the court, on application by an affected person or the Financial Secretary, to grant an injunction restraining any person from engaging in conducts which constitute contravention of the Ordinance or a breach in fiduciary or other duties owed to a company. The court may also order any person to do any act or thing.
(C) Amendments improving the registration system for oversea companies, streamlining the incorporation procedures and making other miscellaneous changes
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(12) Replacing the existing term "oversea company" by "non-Hong Kong company". The registration requirements for non-Hong Kong companies would also be streamlined. The period where a non-Hong Kong company is required to have an authorized representative after it ceases to have a place of business in Hong Kong would be shortened from three years to one year. A non-Hong Kong company would be allowed to terminate the appointment of its authorised representative for the purposes of the Ordinance.
(13) Clarifying the circumstances under which a non-Hong Kong company is required to register charges on its properties in Hong Kong. Opportunity is also taken to provide in the Ordinance that specified forms shall be used for the filing of documents such as notice of dissolution, notice of cessation of place of business of a non-Hong Kong company for the purpose of registration under Part XI of the Ordinance; and in relation to service on a non-Hong Kong company that does not have a registered address, amend section 338(2)(b)(ii) to allow service on its place of business within the previous 12 months instead of 3 years.
(14) Providing that the certification of copies of documents required to be delivered to the Registrar of Companies as true copies may be done in Hong Kong. The categories of persons who may certify copies of such documents and the competency of the translators who produced certified translations for the purposes of the Ordinance will also be expanded.
(15) Enhancing the disclosure requirements for non-Hong Kong companies by requiring such companies which are obliged to publish accounts by the law in another jurisdiction or by a regulatory body to deliver annual returns together with their latest published accounts to the Registrar of Companies. Where a non-Hong Kong company is in liquidation (regardless of whether this is in the place of incorporation), the company would be required to state its name and place of incorporation in all its advertisements. The company would also be required to deliver to the Registrar of Companies notice of commencement of its liquidation and notice of appointment of the liquidator, regardless of whether the liquidation proceedings are commenced in the place of incorporation.
(16) Including provisions to enable electronic incorporation of a company and streamline the incorporation procedure. The existing term "subscriber" is also proposed to be replaced by "founder member". In the interest of protection of personal data in public registers, the purposes for which documents kept or maintained by the Registrar of Companies under the Ordinance may be made available for public inspection will be set out. The upper limit (i.e. 20) on the number of partners in a partnership, which is no longer appropriate, will be removed.
(D) Amendments relating to the definition of "subsidiary" for the purposes of group accounts
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(17) Introducing new terms of "subsidiary undertaking", "parent company" and "parent undertaking". The term "undertaking" includes body corporates, partnerships and other unincorporated associations. This is an important improvement to the existing provision where a subsidiary or a holding company must be a body corporate. Without this amendment, assets and liabilities of partnerships and unincorporated associations within a group can be kept out of the group accounts, even when substantially all the risks and rewards are retained in the group. The "right to exercise a dominant influence over another undertaking" (defined as the right to give directions with respect to the operating and financial policies of that other undertaking which its directors will be obliged to comply with) would be added to the existing tests of determining the existence of a parent/subsidiary relationship;
(18) Introducing "true and fair view override" provisions to the effect that if compliance with the requirements of the Ordinance does not result in a true and fair view of the state of affairs of the company or the group, the directors should depart from these requirements to the extent necessary to give a true and fair view. In most cases, a departure is expected to be necessitated only when required by the Hong Kong Statements of Standard Accounting Practice to the extent that these differ from the Ordinance. Additional information in order to present a true and fair view should be given in the accounts or in a statement annexed to the accounts. Particulars of any such departure, the reasons for it and its effect should be given in the accounts or statement. The "true and fair override" provisions will cater for the evolving nature of accounting reporting requirements.
End/Thursday, June 12, 2003
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