Issue of Shares in Hong Kong - Allotment of Shares
Last updated: March 2024
The Hong Kong Companies Ordinance stipulates that when you incorporate a business, at least one share has to be issued and given to the company founder. A limited company in Hong Kong provides flexibility for its owners because it’s limited by shares. But what if the business expands and needs more share capital? In this article, we’ll talk about how shares are allocated in a private limited company, what’s required for the process, and the steps for increasing a company’s shares.
What is share allotment or issue of shares?
A share is a piece of equity ownership in a business owned by an investor who gives capital in exchange for dividends or capital gain distributions.
Among other business structures, a Hong Kong Private Limited Company stands out among international investors and companies in Hong Kong due to its distinct legal identity, which shields shareholders from liability. For instance, when establishing a Private Limited Company, investors have the flexibility to determine the number of shares, with the law mandating at least one share valued at 1 Hong Kong dollar under the Hong Kong Companies Ordinance (Cap 622).
A Private Limited Company can accommodate up to 50 shareholders, facilitating capital growth by issuing additional shares through a process known as share allotment.
The process of share allotment involves issuing new shares to accommodate more shareholders or to raise additional capital. This step enables the company to adapt to changing business needs and expand its ownership base. Each new share represents ownership in the company and can be issued at a nominal value, typically 1 Hong Kong dollar per share, as stipulated by law.
As the company’s ownership structure evolves, it’s crucial to maintain compliance with regulatory requirements. The Companies Registry of Hong Kong mandates the regular submission of the Annual Return form, reflecting any changes in shareholders or shares. This ensures that the company’s information remains up-to-date, aligning with local regulations.
What is the difference between share issuance and share transfers?
Share transfers involve modifying the current proportion of a company’s shares and are often used when a corporation wants to transfer existing shares to someone who is already linked with the company or a shareholder.
Share issue process, on the other hand, entails the directors’ allotment of company shares to unrelated allottees and the subsequent issuing of these shares to the allottees.
After the allotted parties have been put into the company’s shareholder register with the appropriate authorities, shares are issued to them.
What are the rights of shareholders in Hong Kong?
Shareholder rights can be incorporated into the Articles of Association, which typically states that:
- If there are any leftover profits, dividends can be paid to shareholders.
- After all fees have been paid, shareholders can get the company’s remaining assets if the company dissolves.
- The right to vote is determined by the type of stock that was issued. There are shares that are non-voting and shares that have multiple votes that can be issued.
- Right to obtain audited financial statements, directors’ and auditors’ reports, as well as certain notices and circulars.
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Pre-conditions to issuing shares for a Hong Kong Pte Ltd
Some people might think that issuing new shares for a Hong Kong company is as easy as putting money into the company’s bank account. However, it’s not that simple, and there are certain conditions that must be met first. Here are some of them:
- Articles of Association (AoA): The company’s Articles of Association outline how the process should be conducted, especially regarding issuing new shares. For instance, existing shareholders usually need to unanimously agree to add a new shareholder, or else the process could face challenges.
- Annual Return compliance: It’s important for a company to stay compliant with Hong Kong authorities by submitting their Annual Return on time. If a company has fallen behind in compliance, they may not be able to proceed with issuing new shares until they catch up with their filings.
- Audited Financial Statement: Each year, companies must submit their Audited Financial Statements to government authorities. For processes like issuing new shares, the latest financial statements are required to assess the company’s financial standing. If a company is behind in their filings, they’ll need to complete their accounting and audits for all previous fiscal periods before they can issue new shares.
Submitting audited financial statements for share allotment ensures transparency and helps potential investors understand the company’s financial health before investing. For example, investors would want to know if the company has high debts, which could impact their decision to invest.
Complete guide to Profits tax return in Hong Kong
Step by step process to issuing new shares
In Hong Kong, every incorporated company must have at least one registered shareholder. These shareholders don’t have to be Hong Kong residents and might be individuals or legal entities such as corporations.
After ensuring that the company meets all the requirements, we can now go through the steps to issue new shares:
Board Resolution Approval: The company directors create and pass a written resolution approving the following:
- Number of new shares to be issued
- Type of shares
- Issue price
- Potential shareholders (allottees)
This proposal is then sent to the shareholders for their agreement.
Shareholders’ Resolution Approval: Once the directors prepare the proposal, it needs approval from the shareholders. This can be done by obtaining signatures from all shareholders or holding a meeting where the majority vote in favor. For the initial share issuance, this step may be built into the company formation process.
Meeting Conditions and Issuing Shares: After shareholder approval, it’s essential to review the company’s Articles of Association (AoA) for any additional requirements. If everything aligns, the shares can be allocated to the new shareholder. Note, some AoAs might have clauses regarding pre-emptive rights (where existing shareholders get first preference).
Update Company Register: Update the company’s register of members to reflect the new shareholdings. This includes:
- Shareholder names and addresses
- Number of shares owned
- Share class
- Date of issuance
Submission of Form NSC1 (Return of Allotment): This form, available on the Companies Registry website, needs to be completed and submitted. It includes details like the number of shares allotted, amount paid or to be paid, type of share, and shareholder information (individual or corporation). Submit this form to the Companies Registry within two months of issuing the shares.
Issuing Share Certificates: The certificate issued to the new shareholder must match the information provided in the form. It includes transaction details and confirmation if the shares are fully paid up. After applying, new shareholders should receive their share certificates within two months.
Hong Kong imposes a stamp duty on share issuance, typically 0.2% of the share's value. Ensure that the total value of issued shares does not exceed your company's authorized share capital. If it does, increase the authorized capital through relevant procedures.
It’s highly recommended to consult professionals for guidance on the specific process and to ensure all filings are done correctly. If you have questions or need help with issuing shares in Hong Kong, feel free to reach out to Sleek.
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Frequently asked questions
How do I issue new shares for my private limited company in Hong Kong?
To issue new shares, you need to follow certain legal procedures. First, obtain approval through board and shareholders’ resolutions. Then, submit the necessary forms to the Companies Registry and issue share certificates to the new shareholders.
What are the legal requirements for allotting shares in a private limited company?
Legal requirements include obtaining approval from the board of directors and shareholders, ensuring compliance with the company’s Articles of Association, and submitting relevant forms to the Companies Registry.
Can existing shareholders prevent the allotment of new shares in a private limited company?
Existing shareholders may have preemptive rights or other protections against dilution. However, if proper procedures are followed and there are no restrictions in the Articles of Association, new shares can typically be allotted without their consent.
What documents are required for the allotment of shares in a private limited company?
Documents required may include board and shareholders’ resolutions authorizing the allotment, share allotment forms, share certificates, and any necessary agreements or contracts.
Are there any restrictions on the number or type of shares that can be allotted in a private limited company?
Restrictions may vary based on the company’s Articles of Association, applicable laws, and any existing agreements. It’s important to review these documents to determine any limitations on share allotment.
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