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Transactions in relation to Share Capital

 
Q1.

For transactions in relation to share capital, are there any initiatives introduced under the new Companies Ordinance (Cap. 622) (“the new CO”) that aim at facilitating business operation?

 
Q2.

What are the changes in respect of a solvency test under the new CO?

 
Q3.

What are the procedures for court-free reduction of capital based on a solvency test under the new CO?

 
Q4.

What are the requirements and procedures for a company to buy back its shares out of capital subject to a solvency test under the new CO?

 
Q5.

What are the procedures for providing financial assistance for acquisition of shares subject to satisfaction of a solvency test under the new CO?

 
Q6.

Is there any requirement for an amalgamated company in a court-free amalgamation to increase its share capital?

 
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Q1.

For transactions in relation to share capital, are there any initiatives introduced under the new Companies Ordinance (Cap. 622) (“the new CO”) that aim at facilitating business operation?

 
Answer:

Yes. The following initiatives to facilitate business are introduced under the new CO in relation to share capital transactions –

 

Adopting a uniform solvency test based on cash-flow for different types of transactions in relation to share capital (see Q2 below);

Introducing an alternative court-free procedure for reducing capital based on a solvency test (see Q3 below);

Allowing all types of companies (rather than just private companies, as in the old Companies Ordinance (Cap. 32) (“the old Ordinance”)) to purchase their own shares out of capital (“buy-backs”), subject to a solvency test (see Q4 below); and

Allowing all types of companies (whether listed or unlisted) to provide financial assistance for acquisition of the company’s own shares or the shares of its holding company (“financial assistance”), subject to a solvency test (see Q5 below).

 
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Q2.

What are the changes in respect of a solvency test under the new CO?

 
Answer:

Under the old Ordinance, there were minor differences between the solvency tests applicable to buy-backs and financial assistance. For buy-backs, the solvency statement had to be accompanied by an auditors’ report. For financial assistance, there was an additional requirement for the solvency statement to provide for the situation where the company intended to commence winding up within 12 months of the date of the proposed financial assistance.


Under the new CO, a uniform solvency test for buy-backs and financial assistance is adopted, and its application is extended to the court-free procedure for reduction of capital. There is no need to attach the auditors’ report to the solvency statement (sections 204 to 206).

 
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Q3.

What are the procedures for court-free reduction of capital based on a solvency test under the new CO?

 
Answer:

The key features of the court-free procedures for reduction of capital subject to compliance with the solvency test under the new CO include –

 

All the directors need to sign a solvency statement in Form NSC17 in support of the proposed reduction (section 216);

The company needs to pass a special resolution within 15 days after the date of the solvency statement (sections 215 to 217) and deliver the special resolution to the Registrar of Companies (“the Registrar”) within 15 days for registration;

The company must publish notice of the relevant information in the Gazette. The company must also publish notice in newspaper or give written notice to creditors to the same effect as the Gazette notice. These notices must be published or given within the statutory timeframe. The Form NSC17 must be delivered to the Registrar for registration no later than the day on which the company publishes the Gazette notice or the creditors’ notice or gives written notice to creditors, whichever is the earlier (section 218);

Any creditor or non-approving member of the company may, within 5 weeks after the special resolution is passed, apply to the court for cancellation of the resolution (sections 220 to 222); and

The company must deliver after the 5-week period (but no later than 7 weeks) to the Registrar a return of reduction of capital in Form NSC19 if there is no court application (section 224), or within 15 days after the court makes the order confirming the special resolution or the proceedings are ended without determination by the court (section 225).

 

The reduction of share capital takes effect when the Form NSC19 is registered by the Registrar (section 215).


For details about reduction of share capital by special resolution supported by solvency statement, please see Subdivision 2 of Division 3 of Part 5.

 
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Q4.

What are the requirements and procedures for a company to buy back its shares out of capital subject to a solvency test under the new CO?

 
Answer:

Under the new CO, in general, all companies are allowed to fund buy-backs out of capital, subject to a solvency requirement. The requirements and procedures are similar to the new court-free procedure for reduction of capital, which include –

 

All the directors need to sign a solvency statement for payment out of capital in Form NSC17 (section 259);

The company needs to pass a special resolution within 15 days after the date of the solvency statement (sections 258 to 260) and deliver the special resolution to the Registrar within 15 days for registration;

The company must publish a notice of the relevant information in the Gazette. The company must also publish notice in newspaper or give written notice to creditors to the same effect as the Gazette notice. These notices must be published or given within the statutory timeframe. The Form NSC17 must be delivered to the Registrar for registration no later than the day on which the company publishes the Gazette notice or the creditors’ notice or gives notice to creditors, whichever is the earlier (section 261);

Any creditor or non-approving member of the company may, within 5 weeks after the special resolution is passed, apply to the court for cancellation of the resolution (sections 263 to 265);

The payment out of capital and the redemption or buy-back must be made no earlier than 5 weeks and no later than 7 weeks after the special resolution is passed, unless otherwise ordered by the court (section 258); and

The company must, within 15 days after the date on which the shares are delivered to the company, deliver a return in Form NSC2 to the Registrar for registration (section 270).

 

For details about payments for share redemptions and buy-backs, please see Subdivision 6 of Division 4 of Part 5.

 
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Q5.

What are the procedures for providing financial assistance for acquisition of shares subject to satisfaction of a solvency test under the new CO?

 
Answer:

The new CO allows all types of companies (listed or unlisted) to provide financial assistance under one of the three procedures set out in sections 283 to 289.

 

The first procedure (section 283)

A company may give financial assistance if the assistance and all other financial assistance previously given and not repaid, is in aggregate less than 5% of the shareholders’ funds;

The giving of the assistance must be supported by a solvency statement and a resolution of the directors in favour of giving the assistance;

The assistance must be given not more than 12 months after the solvency statement is made; and

Within 15 days after giving the assistance, the company must notify its members of the details of the assistance.

 

The second procedure (section 284)

A company may give financial assistance if it is approved by written resolution of all members of the company;

The giving of the assistance must be supported by a solvency statement and a resolution of the directors in favour of giving the assistance; and

The assistance must be given not more than 12 months after the solvency statement is made.

 

The third procedure (section 285)

A company may give financial assistance if it is approved by an ordinary resolution;

The giving of the assistance must be supported by a solvency statement and the board must resolve that giving the assistance is in the interests of the company;

The company must send to each member at least 14 days before the resolution a notice which contains all information necessary for the members to understand the nature of the assistance and the implications of giving it for the company;

The assistance may only be given not less than 28 days after the resolution is passed and not more than 12 months after the day on which the solvency statement is made; and

Members holding at least 5% of the total voting rights or members representing at least 5% of the total number of members of the company may, within the 28-day period, apply to the court to restrain the giving of the assistance (sections 286 to 288). If an application is made, the company must give notice to the Registrar in Form NSC9 within 7 days after the day on which the application is served on the company (section 286(5)). Within 15 days after the making of an order by the court, the company must deliver an office copy of the order to the Registrar for registration (section 289).

 

Under the new CO, the procedures in respect of giving financial assistance have been simplified and there is no filing obligation except when there is a court application. For details about authorization for giving financial assistance, please see Subdivision 4 of Division 5 of Part 5.

 
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Q6.

Is there any requirement for an amalgamated company in a court-free amalgamation to increase its share capital?

 
Answer:

Sections 678 to 686 of the new CO allow two or more companies to be amalgamated and continue as one company without involving court procedures in the following cases:

 
(a)

A holding company may amalgamate with one or more of its wholly owned subsidiaries (a vertical amalgamation) and continue as one company (amalgamated company).

(b)

Two or more wholly-owned subsidiaries of a holding company may amalgamate (a horizontal amalgamation) and continue as one company (amalgamated company).

 
 

In a vertical amalgamation, the shares of each of the amalgamating subsidiaries will be cancelled (section 680). In a horizontal amalgamation, the shares of all but one of the amalgamating companies will be cancelled (section 681) with only the shares of the amalgamated company remaining. Section 678(2) of the new CO states that “A cancellation of shares under this Division is not a reduction of share capital for the purposes of Part 5.”

 
 

Section 685(3) states that on the effective date of an amalgamation each amalgamating company ceases to exist as an entity separate from the amalgamated company and the amalgamated company succeeds to all the property, rights and privileges, and all the liabilities and obligations, of each amalgamating company. Regarding the share capital, there is no requirement under Division 3 of Part 13 of the new CO for an amalgamated company to increase its share capital upon amalgamation. If the directors of the amalgamated company decide to increase the share capital, for example by capitalizing any reserves in the amalgamated company, then this would be an increase in share capital in accordance with section 170. Under section 171, the company will have to deliver a notice of alteration of share capital to the Registrar of Companies for registration within one month.

 
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