Nominal value (also known as "par value") of shares is the minimum price at which shares can generally be issued. The new Companies Ordinance (Cap. 622) ("the new CO") adopts a mandatory system of no-par for all local companies having a share capital and retires the concept of par value for all shares. This is in line with international trends to provide companies with greater flexibility in structuring their share capital.
It is generally accepted that par value does not serve its original purpose of protecting creditors and shareholders, and in fact may even be misleading because the par value does not necessarily give an indication of the real value of the shares.
In other comparable common law jurisdictions, there is also growing acceptance of no-par value shares. It is considered that retiring the concept of par creates an environment with greater clarity and simplicity and is more desirable for the business community generally. Jurisdictions that have adopted mandatory no-par value shares include Australia, New Zealand and Singapore.
(II) The New No-par Regime
There is no essential difference between a share of no par value and one having a par value. Both represent a share, being a fraction of the equity, but par value share has attached to it a fixed face value, and share without par value does not.
Under the old Companies Ordinance (Cap. 32) ("the old Ordinance") companies incorporated in Hong Kong and having a share capital were required to have a par value ascribed to their shares. This represented the minimum amount at which a share can be issued.
Companies must also declare in their Memorandum of Association the maximum amount of share capital that may be issued by the company (the requirement for "authorised share capital").
The amount of the excess of the issue price of the share over its par value is designated as "share premium". Under the old Ordinance, there were restrictions on how a company could deal with share premium and how it had to be accounted for.
Under the new CO, as a result of migration to mandatory no-par, relevant concepts such as par value, share premium, and requirement for authorised share capital are no longer necessary and are abolished.
A company has greater flexibility to alter its share capital in a no-par environment, for example, a company is able to capitalise its profits without issuing new shares and to allot and issue bonus shares without increasing its share capital (section 170 of the new CO).
The full proceeds of a share issue will be credited to share capital under the new regime and becomes the company's share capital. The notion of issued or paid capital will continue to be relevant even after the abolition of par value, and it would then also reflect the amount in the share premium account. In other words, it will represent the amount the company actually receives from its shareholders as capital contribution.
The concept of paid up capital, issued capital and partly paid shares are still relevant. But they will be related to the total consideration paid or agreed to be paid for the shares issued, and not tied to par value.
The issue price of a share is a commercial bargain between the company (which issues the share) and an investor (who subscribes for the share and becomes a shareholder). The abolition of par has removed the minimum price at which shares may be issued, but this does not give directors a completely free hand in setting the issue price. They would still have an overriding fiduciary duty to set the price in good faith.
No. Bonus shares can continue to be issued notwithstanding that there is no longer a share premium account since in a no-par environment, shares can be issued without transferring an amount to the share capital account (section 170(2)(d) of the new CO).
Companies will continue to be able to effectively consolidate and subdivide shares. Whilst there is no nominal amount to be divided for no-par shares, a similar result to subdivision can be achieved by increasing the number of shares. The process of consolidating shares into a smaller number should be considerably simplified where there are no par values to contend with. The number of shares will just reduce with no visible effect on the share capital (section 170(2)(e) of the new CO).
(III) Effective Date of Change
The abolition of par value for the shares of all Hong Kong companies has become effective upon commencement of the new CO on 3 March 2014.
No. The new regime applies to all local companies regardless of whether the companies are formed before or after the commencement date of the new CO. Section 135 of the new CO provides that shares in a company have no par value and that this section applies to shares issued before the commencement date of the section as well as shares issued on or after that date.
(IV) Transitional Arrangements for Existing Companies
No. All shares issued, before, on and after the commencement date of the new CO shall have no par value. The law has deemed all shares issued before the abolition to have no par value (section 135 of the new CO). There is no conversion process required from the companies.
Nonetheless, individual companies may wish to review their particular situation to determine if they need to introduce more specific changes to their documents having regard to their own unique circumstances, e.g. the company's constitutional documents, contracts entered into by the company, trust deed involving the company and share certificates for use under the no-par regime by the company.
With the abolition of par value, "share premium" no longer exists. There is a deeming provision in the new CO to provide for the amalgamation of the existing share capital amount with the amount in the company's share premium account (section 37 of Schedule 11 to the new CO). The previously permitted uses of share premium existing on the date of commencement of the new CO have been preserved, for example, to pay up shares which are issued as bonus shares (section 38 of Schedule 11 to the new CO). For this purpose, the company should continue to maintain records of the balance of the former share premium account.
Yes. On the commencement date of the new CO, any amount standing to the credit of the company's capital redemption reserve becomes part of the company's share capital (section 37 of Schedule 11 to the new CO).
No. As explained in Q11 and Q12, there is a deeming provision in the new CO for this purpose.
From the accounting point of view, what the company needs to do is to transfer the amounts standing to the credit of the share premium account and capital redemption reserve account to the share capital account on or after the commencement date of the new CO. Financial statements for years ending on a date before the commencement date of the new CO should continue to disclose the share premium account and capital redemption reserve account. Financial statements for years ending on a date on or after the commencement date of the new CO should reflect the transfer of the balances of the share premium account and capital redemption reserve account into the share capital account.
No. The liability of a shareholder for calls in respect of money remaining unpaid on shares issued before the commencement date of the new CO (whether on account of the nominal value of the shares or by way of premium) is not affected by the fact that the shares in question ceased to have a nominal value (section 39 of Schedule 11 to the new CO). The shareholder remains liable for the unpaid amount.
Upon commencement of the new CO, the provisions in the Memorandum of Association of an existing company (deemed to be provisions in the Articles of Association after commencement of the new CO) relating to authorised share capital and par value of the shares are for all purposes to be regarded as deleted (section 98(4) of the new CO). The share capital of a company would be its issued share capital. There are also transitional and deeming provisions in Schedule 11 of the new CO dealing with the migration to no par.
No. The statutory deeming provision in the new CO (section 40 of Schedule 11) provides that for the purpose of interpreting and applying (i) a resolution of a company made and (ii) a trust deed or other document executed before the commencement of the new CO, a reference to the par or nominal value of a share (whether made expressly or by implication) is a reference to the nominal value of the shares immediately before that commencement date.
The new CO contains transitional and deeming provisions relating to the move from par value shares to no-par value shares (sections 35 to 41 of Schedule 11). The provisions are intended to provide legislative safeguards to ensure that contractual rights defined by reference to par value and related concepts will not be affected by the abolition of par. The transitional and deeming provisions save considerable work, expense and time for companies and reduce the possibility of disputes.