Hong Kong Share Capital Structure and Requirements
12 minute read
Individuals own shares of limited companies, and with those shares come the benefits and responsibilities of owning a share.
Thanks to the Companies Ordinance law in Hong Kong, ownership management is more flexible. In other words, the system is designed to be highly flexible, which is quite beneficial to shareholders.
On top of that, any class of share can be issued by a company with desired rights as agreed for those shares in the company’s articles of association or the terms of issue of the shares.
- What are shares?
- What is shareholding?
- What is the share capital structure?
- Why is share capital structure important for a company?
- Shareholders’ rights and obligations
What are shares?
To best understand this complex issue, it would be wise to learn the exact definition of shares.
A share is the interest of a shareholder in the company measured by a sum of money, for the purposes of liability in the first place, and of interest in the second, but also consisting of a series of mutual covenants entered into by all the shareholders in accordance with the laws.
This definition is not too difficult to understand, but let’s try to break it down through an example to better explain the function of a share. Let’s say that AB Company Limited is set up. The company has the capital (cash and other assets) invested by the shareholders that receive shares for it.
A total of three shareholders, John, Mike, and Dean, each put in HK$10,000 as share capital. The common way to represent this distribution is that the company issues 10,000 ordinary shares valued at HK$1 to each of the three shareholders.
The total share capital of the company stands at HK$30,000. Distribute that amount across all three shareholders at the value of HK$1 per share. John, Mike, and Dean now each own 10,000 ordinary shares each.
Keep in mind that a share itself is an item of property. Therefore, it can be transferred by sale or gift.
What is shareholding?
When a company is limited by shares, shareholding is the way of manifesting the legal power shareholders possess.
This power varies in proportion to the shares which are being held respectively. Basically, when there is a system of joint ownership, the shareholders jointly own the company.
If a certain party owns 50% or more of shares, this party has the power to amend the articles of association and the firm’s name. Also, this party can reduce the share capital or even allow the firm to buy its own shares from other shareholders. It can even shut down the business.
Logically, when a certain party owns 100% of shares, that party (sole shareholder) has complete power over the company regulation.
In general, private companies only have one class of shares (ordinary shares). But, some companies issue more than one class of shares. Also, certain rights have to be set out for certain share classes. This is usually written in the company’s articles.
What is the share capital structure?
The share capital structure under the new Companies Ordinance is now very flexible. There is no authorised share capital (i.e. maximum number of shares to be issued), no par value, no currency restriction. In order words, the Company may issue any number of shares in any value and in any currencies.
Share capital is the total amount of capital provided by all shareholders of the company in return of proportion of shares, possessed by each shareholder of the company. For HK companies, the type of share capital is Issued capital.
Issued capital refers to the total value of the shares that are actually allotted. For instance, the company issued 10,000 shares at the value of HKD100 for each share. Then, the issued capital of that company is HKD1,000,000 (10,000 x HKD100).
After the incorporation of the company, share capital can be increased by allotment. Such allotment of shares need to obtain the approval from the existing shareholders. Besides, shares of the company can also be transferred, however, it is subject to stamp duty.
Why is share capital structure important for a company?
The first important benefit of a sound capital structure is the increase in the value of a company.This kind of capital structure helps to increase the market price of shares and securities. As a result, this increases the company’s value.
A good capital structure allows a business enterprise to utilize the available funds fully. When there is a properly-designed capital structure, financial requirements are determined and funds are raised in such proportions from various sources for the best possible utilization.
This also secures a company from over-capitalization and under-capitalization.
The next important point is the return issue. To be precise, a good structure allows management to increase the profits of a company in the form of a higher return to the equity shareholders.
To put it simply, this means that there will be an increase in earning per share, which is done by the mechanism of trading on equity. If the rate of return on capital employed exceeds the fixed rate of interest paid to debt-holders, the company is trading on equity.
The next two issues are the minimization of the cost of capital and solvency. A sound capital structure maximizes shareholders’ wealth through the minimization of the overall cost of capital.
This can also be achieved by incorporating long-term debt capital in the capital structure as the cost of debt capital is lower than the cost of equity or preference share capital since the interest on the debt is tax-deductible.
When it comes to solvency, a good capital structure never allows a business enterprise to go for too much raising of debt capital because, at the time of low profits, the solvency is disturbed for mandatory payment of interest to the supplier of the debt.
Shareholders’ rights and obligations
Now, let’s take a look at the general explanation of the rights related to shares. This would typically be included in the Articles of Association.
- Shareholders are entitled to receive a dividend of the company when profits arise.
- If the company should go through winding-off, they are entitled to the surplus of assets when all the debts incurred have been paid.
- Various shares may carry the right to vote only in particular conditions where the company has different classes of shares. Generally speaking, shares carry one vote each at general meetings.
Next, take a good look at the obligations of shareholders.
Investment as a capital injection
By subscribing to the shares of a company, they ensure that the company can have a capital to run the business. The shares have to be paid completely to meet the obligations.
However, if the shares are only paid in part at the time of subscription, the shareholders have the liability to pay the sum on the balance sheet when the company calls the shareholders to pay, or when the company is wound up.
The liability of a company’s (limited by shares) shareholders is limited to any amount unpaid on the shares held by the shareholders. Generally, shareholders shall not be responsible for any debts or liabilities incurred by the company. However, if the court finds that the company is just a shell and not a separate business entity from the shareholder. Then, shareholders should be accountable for the company.
Now you have had a chance to see what the landscape in Hong Kong looks like when it comes to shares and various capital structures.
Should you have any further questions, do not hesitate to contact Sleek. Our team of experts will be glad to help.