All You Need to Know About the Issue of Shares in Hong Kong
10 minute read
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.
When growing a company, you can increase your capital by issuing shares to shareholders. This is a crucial decision you as a business owner have to make when you scale up your business for growth. After all, investors want a piece of your company in return for their help.
Let’s find out more about the issue of shares for Hong Kong business, and what you need to do administratively to issue shares in this article.
Overview:
Shares and shareholders in Hong Kong
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.
A shareholder, sometimes known as a stockholder, is a person, company, or organization that holds at least one share of a firm’s equity stock.
To put it simply, if you possess a share in a business, you are a shareholder and effectively own a small bit of it.
Shareholders reap the rewards of a company’s success because they basically own it. Increased stock prices or financial profits delivered as dividends are examples of these benefits.
When a corporation loses monetary assets, the share price lowers, which can result in shareholders losing their own cash or seeing their portfolios suffer losses.
Although most businesses hold stock, only publicly traded businesses are listed on the stock exchange.
Shareholders’ rights
Many investors are unaware of their rights as stock owners.
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.
How to issue 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.
To issue a share, you have to follow the steps below:
- First of all, you need to acquire the consent of the shareholders.
- Next, you have to take care of the registration of the allottee to the company register of members.
- Finally, you have to provide notice to the relevant authorities.
Types of issue of shares
The shares of a corporation can be rendered in a variety of ways.
Public issue
The issue of shares, or convertible securities, in the primary market by the company’s promoters is known as a public issue or public offering. This is often done to attract new investors.
In a public offering, the shares are offered for sale to the general public in order to acquire capital, for which the firm issues a prospectus. Investors who want to subscribe for shares submit a request to the corporation, which subsequently distributes shares to them. An Issuer is an entity that creates a new issue.
Right issue
In a right issue, current shareholders are offered equity shares or convertible instruments at a discounted rate on a specific date set by the corporation.
Instead of establishing a new issue, the main goal of issuing the right shares is to raise money by providing shares to existing equity shareholders in proportion to their holdings.
Composite issue
A composite issue is one in which an already publicly traded business offers shares with public-cumulative rights and allots the shares at the same time.
Bonus issue
These are free additional shares granted to present shareholders in proportion to the entirely paid-up equity shares owned by them on a specific day, as the name implies. The company’s securities premium account is used to issue these shares.
Private placement
A private placement is when companies raise money by selling shares to a small group of investors, such as mutual funds, banks, insurance companies, pension funds, and so on.
Difference between share issuance and share transfers
It’s important to distinguish 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.
The Hong Kong 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.
Why do companies issue shares?
Here’s why companies consider issuing shares to shareholders.
Shareholder obligations
When a third party buys your company’s stock, you would have additional cash to run your company. To be eligible for capital gains and dividends, a shareholder must completely pay for the shares. If the shareholder doesn’t fully pay for the shares, they are required to pay the remaining balance when the firm requests it or if the company closes down.
Business ownership
In exchange for services, some companies provide equity shares (free or low-cost shares) to founders. Because these shares are given out in exchange for services, they don’t demand cash right away or in advance, or are priced cheaper than market value. After that, the founders normally contribute enough money to ensure the company’s short- and medium-term viability. This model might be more applicable to startup owners.
Grow capital for expansion
Additionally, there are reasons that are related to capital and expansion funds. To obtain money for starting costs, startups can issue shares to non-founders of the company. Rent, insurance, marketing, security deposits, equipment, and other expenses are examples of these expenses. This is typical of startups, as they frequently have high costs before generating money.
External equity
Moreover, external equity can be added to a company’s balance sheet by issuing shares to outside investors. To create equity, attract prospective lenders, and acquire money for expansion, startups and small businesses must issue shares. Your company doesn’t have to return equity, unlike debt. When smaller companies issue shares to create greater equity, the debt to equity ratio in the balance sheet improves.
What is the method of issue of shares?
Let’s dive deeper into the three steps that you need to take when it comes to the Hong Kong share issue process.
Obtaining a company’s shareholders consent
When issuing stock for the first time, the corporation must seek approval from shareholders during a public meeting. This must happen before any shares, securities convertible into shares or options, warrants, or similar rights to subscribe for any shares or convertible securities are allotted, issued, or granted.
The company would then publish a notice stating that the offer to the allottee has been accepted and that they are entitled to the allocation of shares once the shareholders have confirmed in the General Meeting that they would proceed with the issuing of the ordinary shares.
Registration of allottees to the company register of members
Despite being allottees to newly issued shares, these persons cannot be considered members of a company or have any legal right to the title of shareholders until their names are included in the company’s register of members.
Business owners should follow Cap. 622 of the Hong Kong Companies Ordinance when revising the register of members. It specifies that within two months of the share allotment, a company’s register of members should be revised to reflect the new allotted.
A corporation may be judged to have broken the allocation contract if it fails to update its register of members within the specified time frame.
Noticing the relevant authorities
The company must produce the Return of Allotment to the Hong Kong Companies Registry within one month of the allotment of shares. This document should contain the following information:
- Number of shares that the allottee has been granted.
- Individual’s name and address.
- Sum paid or to be paid by the allottee in exchange for the shares.
- Submit an updated Statement of Company’s Capital, which should include information on the company’s total issued shares, total paid-up capital, and total issued capital.
Bear in mind that the Hong Kong Companies Registrar may refuse to allow the return of allotments for the filing of the Change of Company Shareholders in Hong Kong if a company fails to meet the one-month deadline.
Wrap up
Due to the importance of issuing shares, there are clear implications for non-compliance. Since many Hong Kong business owners are unfamiliar with the procedure of issuing shares, they risk facing penalties if they don’t follow Hong Kong Company Laws.
As a result, it is recommended that those who are unfamiliar with their local obligations hire a professional service provider. If you have questions or need help with issuing shares in Hong Kong, feel free to reach out to Sleek.
Our team of experts has extensive experience in this and other business topics. Our corporate secretary services will provide guidance and help so that your company can be better and more efficient for success.
