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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 being a share owner.

Thanks to the Companies Ordinance law, ownership management is more flexible for companies incorporated in Hong Kong. In other words, the system is designed to be very business-friendly, which is consequentially beneficial to company shareholders.

On top of that, any class of share can be issued by a company with desired rights, as agreed upon for those shares in the company’s Article of Association or the terms of issue of the shares.

Overview:

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 (i.e. cash and other assets that can be seen as non-cash consideration) invested by the shareholders that receive shares for it.

Let’s say for example a total of three shareholders, John, Mike, and Dean, each put in HKD 10,000 as share capital in a Hong Kong company to purchase as common stock. 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 Hong Kong company stands at HKD 30,000. Distribute that amount across each shareholder at the nominal value of HKD 1 per share, which was the issue price they paid. John, Mike, and Dean now each own 10,000 ordinary shares each.

Keep in mind that a share itself is an item of property that you rightfully paid for. Therefore, the share and its value can be transferred by sale or gift. This is true for both ordinary and preference shares.

What is shareholding?

When a company is limited by shares, shareholding is a way of manifesting the legal power shareholders possess. This is true everywhere in the world, and not just Hong Kong.

This power varies in proportion to the shares which are being held respectively. Basically, when there is a system of joint ownership in companies, the shareholders jointly own the company.

If a certain party owns 50% or more of shares (which is the minimum share capital required to have deciding power within the company), this party has the power to amend the Article of Association and the firm’s name. Also, this party can reduce the company’s share capital or even allow the Hong Kong firm to buy its own shares from other shareholders. According to Hong Kong company law, 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 for that particular Hong Kong business as they own the total amount of preferred shares.

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 structure for share capital under the new Companies Ordinance in Hong Kong is now very flexible. There is no authorized share capital (i.e. maximum number of shares issued or minimum amount of share capital), no par value, or no currency restriction. In order words, the company may issue any number of new shares in any value and present the issued shares 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 Hong Kong 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, if the Hong Kong company issued 10,000 shares at the face value of HKD 100 for each share within a structure based on share capital. Then, the issued share capital of that company is HKD1,000,000 based on the value and number of issuing shares (i.e. 10,000 x HKD100).

After the incorporation of the Hong Kong company, share capital can be increased by allotment. When there are shares allotted in companies, these shares need to obtain the approval from the existing shareholders. Additionally, share transfers are also allowed; however, they are subject to stamp duty.

Why is share capital structure important for a company?

The first important benefit of a good structure for share capital is the increase in the value of a Hong Kong 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 of the share capital fully. When there is a properly-designed capital structure in the Hong Kong business, 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 in their share capital.

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 shareholders 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 structure maximizes shareholders’ wealth through the minimization of the overall cost of the share 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 according to Hong Kong company law. 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 Hong Kong company, the investors ensure that the company can have the capital to run the business. The value of the shares has 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.

Personal liability

The liability of a Hong Kong 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 and won’t be forced to pay any money as Hong Kong law aims to protect creditors.

However, if the court finds that the Hong Kong company is just a shell and not a separate business entity from the shareholder, shareholders should be accountable for the company and will be liable for the money that is owed.

Wrap up

Now that you have had a chance to see what the landscape in Hong Kong looks like when it comes to shares, share capital, 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 and educate you about Hong Kong share capital structure and requirements as well as the Companies Ordinance law in Hong Kong and all the related terms.

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