The new Companies Ordinance (Cap. 622) (the “Ordinance”) contains various provisions relating to the fair dealing of directors. These rules, in particular, deal with situations where a director of a Hong Kong company is perceived to have a conflict of interest. They help govern the various transactions which may involve directors or connected entities which require the approval of members of the company, such as loans and similar transactions, payments for loss of office and the employment of directors for periods longer than 3 years.

Some of the new initiatives include:-

1. Expanding of prohibitions on loans and similar transactions to cover a wider category of persons considered to be connected with a director

In order to avoid potential conflicts of interests between a company and its directors, companies are prohibited from entering into loans or other similar transactions with a director or persons connected by him. The ambit of persons considered to be connected with a director for this purpose has now been widened to include more persons than previously stated under the processor Companies Ordinance (Cap. 32) (now the Companies (Winding Up and Miscellaneous Provisions) Ordinance). These include:-

• An adult child, adult step-child, adult illegitimate child or adopted child of any age;
• A parent;
• A cohabitee;
• A minor child, minor step-child, minor illegitimate child or minor adopted child of the cohabitee who lives with the director;
• An associated body corporate;
• A trustee of a trust which includes the director’s minor adopted child; and
• A business partner of the director’s minor adopted child.

2. Requiring disinterested members’ approval for various prohibited transactions’

A company is now required to obtain approval from its disinterested members before entering into certain types of connected transactions. These will include loans, quasi loans and any credit arrangements with its directors. This requirement applies to private companies, companies limited by guarantee and subsidiaries of a public company.

Disinterested members, or members whose voting rights simply would not count in deciding whether to enter into the connected transaction, include but are not limited the relevant directors., former directors, relevant connected entities and any person who holds shares in the company in trust for these persons/entities. Those who are considered disinterested depend on the nature and the circumstances surrounding the proposed transaction.

 

3. Expanding the prohibition on payments for loss of office

It was (under the old regime) and continues to be unlawful for companies to make payments to its directors or its former directors for compensations for loss of office or as consideration for retirement from office, without members’ prior approval. There were, however, certain gaps in the previous legislation which allowed for this to happen. These gaps have now been closed under the Ordinance by expanding the various related prohibitions. For example, the prohibitions now include payments to any entities connected with the director. Payments to persons made at the direction of, or for the benefit of the director or a connected entity are now also strictly prohibited.

 

4. Widening the ambit of disclosure previously required of directors under the predecessor Companies Ordinance (Cap. 32)

Directors are under a general duty to disclose any material interests, direct or indirect, in contracts or proposed contracts with the company which is of material significance to the company’s business and to disclose to the board of the directors the nature of such interest at the earliest meeting of directors. This duty to disclose has been widened under the Ordinance. For example, directors must disclose any “transactions” or “arrangements” and instead of merely “contracts” they are interested in. For public companies, directors are also required to disclose interests of entities connected with him, unless he is not aware of the interest or transaction in question. Directors are required not only to disclose the “nature” but also the “extent” of that interest. This duty to disclose now also extends to a “shadow director” which is understood as a person in accordance with whose directions or instructions the directors or a majority of the directors of the company are accustomed to act.

If you require any further information on fair dealing of directors, connected transactions or connected entities, or any other Commercial and M&A matters please contact:-

Publication Date: 10th September 2014

 

Chris Gordon | cgordon@robertsonshk.com | +852 2861 8413
Chris Lambert | clambert@robertsonshk.com | +852 2861 8417
Jennifer Wong | jwong@robertsonshk.com | +852 2861 8318