In this issue of the New Companies Ordinance Series, we will discuss major changes in relation to directors of a Hong Kong Company.
Subject to a 6-month grace period after the new Companies Ordinance becomes effective, any company must have at least one natural person to serve as director. Sole corporate director is not permitted.
Currently, directors' duties are governed by common law. The existing Companies Ordinance has no reference to such duties.
The new Companies Ordinance will codify the common law duties of a director to exercise care, skill and diligence. A mixed subjective and objective test will be adopted in line with developments in other common law jurisdictions.
Under the new Companies Ordinance, a director of a company must exercise reasonable care, skill and diligence. The new law further elaborates that "reasonable care, skill and diligence" means the level of care, skill and diligence which would be exercised by a reasonably diligent person having (i) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director (the objective test) and (ii) the general knowledge, skill and experience that the director has (the subjective test). This level of duty also applies to shadow directors (i.e. a person who gives instructions or directions to directors).
In case of a breach of directors' duties, existing civil consequences of breach of duty under common law continue to apply.
The other fiduciary duties of directors remain uncodified and will continue be governed by common law rules and equitable principles. These include the duty of directors to act in good faith and in the best interest of the company, avoiding conflict of interests, and exercising powers bona fide for proper corporate purposes.
Ratification of Director's Conduct
The current Companies Ordinance does not provide for ratification of acts or omissions of directors. The ratification of acts and omissions of directors is subject to common law rules which generally require members' approval in a general meeting.
The new Companies Ordinance codifies the above general common law rule of ratification of director's conduct. Further, it provides that ratification of negligence, default or breach of duty or trust of a director requires the approval of disinterested members or unanimous consent of members. The common law rule as to certain acts that are incapable of being ratified still applies. Non-ratifiable conduct includes illegal acts, acts contravening the articles of association, fraud on minority and act of dishonesty of directors.
Loans and Similar Transactions to Directors
Under the existing law, there is a general prohibition on companies making loans and undertaking similar transactions to directors unless certain exceptions apply. In case of a listed company or a company in a listed group, the prohibition extends to certain persons connected with the directors.
This prohibition is preserved in the new Companies Ordinance and the list of connected persons, in the case of a listed company or a company in a listed group has been expanded. Connected persons now include persons such as adult children (including own children, step-children, illegitimate children or adopted children), parents and cohabitees etc.
The new Companies Ordinance introduces new exceptions from the prohibition. The exception permitting members to approve loans etc. to directors (which is currently only available to private companies not within a listed group) will be extended to all companies. There are also two new exceptions : (i) loans etc. not exceeding 5% of net assets or called-up share capital; and (ii) funds to meet expenditure by a director in defending proceedings or regulatory investigations/actions. A number of exceptions have also been modified to relax existing financial thresholds.
The new Companies Ordinance also abolishes the criminal sanctions for breach of the provisions on loans etc. and preserves only the civil penalties.
Long-term Service Contracts
Currently, there is no provision requiring the approval of the members of a company for long-term service of a director. This has changed in the new Companies Ordinance. Members' approval will be required for any contracts under which a director is guaranteed service for a term which exceeds or may exceed 3 years.
Payments for Loss of Office
Under the existing law, payments to directors or former directors of a company as compensation for loss of office or consideration for retirement from office are prohibited unless disclosed to members and the prior approval of the company is obtained. In order to prevent the loophole of indirectly making such payments, the new Companies Ordinance extends the prohibition to include payments to connected entities of a director and payments to a person made at the direction of, or for the benefit of the director or a connected entity of the director.
Disclosure of Material Interests
Under the existing law, a director who has a material interest in a contract or proposed contract with the company which is of significance to the company's business must disclose the nature of such interest to the board of directors at the earliest directors' meeting that is practicable.
The scope of disclosure under the new Companies Ordinance has been widened. Directors will now have to disclose (i) transactions and arrangements, in addition to contracts and (ii) the extent of the interest, in addition to the nature in such transactions, arrangements and contracts. Directors of public companies will now also need to disclose the interests of their connected entities. These requirements also apply to shadow directors.
Personal Data of Directors
Currently, directors who are natural persons are required to provide their residential addresses and identification numbers in documents filed with the Companies Registry for incorporation and registration purposes. Such information is available for public inspection. However, there are concerns over the privacy and possible misuse of personal data.
Under the new Companies Ordinance, directors are required to provide a correspondence address in addition to their residential address. The correspondence address will be made available for public inspection while only specified persons (such as public officers and public bodies) will be granted access to a director's residential address. Identification numbers will be subject to similar restrictions. Only partial numbers will be made available to the public while access to full numbers will only be limited to specified persons. However, given the large volume of data already registered with the Companies Registry, existing data will only be withheld from public inspection upon application and payment of a fee.
Having said this, the relevant provisions in the new Companies Ordinance concerning the protection of personal data of directors will not commence on 3 March 2014. The commencement of these provisions are yet to be confirmed.