The job of rewriting a law of the size and complexity of Hong Kong’s Companies Ordinance does not come around very often. This month CSj talks to Ada Chung about the lessons she has learned over the last seven years since she took up her post as Registrar of Companies and found herself at the centre of the largest-scale law reform process in Hong Kong’s recent history – the Companies Ordinance rewrite.
Thanks for giving us this interview. I know you are busy with the implementation of the new Companies Ordinance, how has the transition to the new regime been going?
‘I’m happy to say that the implementation has been going very smoothly. We have been incorporating companies under the new regime, the majority of documents have been filed using the new forms and there hasn’t been any system breakdown. I want to stress that we adopted an entirely new system on the third of March. In the past we had eight categories of companies, now we only have five categories. We also have new requirements such as the need to file a statement of capital and this has required the introduction of new forms.’
The Companies Ordinance rewrite has been a massive undertaking, both for you personally and the Companies Registry – what have you learned from this process?
‘I would say the main lesson I have learned from this mammoth exercise is that no one single person can make this happen. You need a great team effort and I am very grateful I do have a very good team here at the Companies Registry. I must say that we are also very much indebted to members of the HKICS, who have given us very valuable advice and input all along the process, and to all those who responded to the public consultation exercises. In total we held eight public consultations since March 2007 and we received a lot of responses.
I’m also grateful to members of the legislature who undertook a detailed scrutiny of the bill – that involves a lot of hard work and consideration as well. I attended the meetings in LegCo and for the main Companies Bill itself we had over 40 meetings taking over 120 hours – I think that must be a record.
So this is not down to any one single person’s effort, you need to have a whole team working together to accomplish this. Another lesson I learned is that you really can’t rush something like this, you have to take it step by step.’
There have been criticisms, however, that the process took too long.
‘The Companies Ordinance deals with very complicated and technical matters. Given the complexity of the work involved, this was not something we could rush into. We wanted to resolve all the issues by taking into account appropriate market conditions, and also market responses, to arrive at a policy decision. All these processes take time, but I do believe that the end result is something good for the market; it reflects the wisdom and the valuable contributions of all relevant stakeholders.’
Having been through that elaborate process, is there a sense of frustration that the Companies Ordinance only applies to companies incorporated in Hong Kong and the majority of our listed companies are incorporated overseas?
‘The intention of the administration all along has been that the Companies Ordinance will lay down the legal framework for the operation and the incorporation for all companies incorporated in Hong Kong. This is in line with the regimes in other comparable common law jurisdictions such as the UK, Australia and Singapore where their company laws mainly govern companies incorporated in their respective jurisdictions.
There is a separate regime which governs all companies listed in Hong Kong regardless of their domiciles, and that is the Securities and Futures Ordinance and the listing rules. They contain comprehensive requirements which aim to protect the investing public with specific regard to the nature of listed companies and are not applicable to non-listed companies in Hong Kong.
I don’t think we can belittle the Companies Ordinance because, by the end of February this year, there were over 1.17 million companies registered with the Companies Registry and around 99% of those companies are private companies. Only 1% are public companies. Among listed companies, companies such as China Mobile, which is the second largest company in terms of capitalisation, and Cheung Kong and Henderson Land are all Hong Kong companies.’
With the implementation of the ‘business review‘ requirement in the new Companies Ordinance, is it fair to say that the Companies Ordinance actually imposes a higher standard on ESG reporting than the listing rules?
‘In certain areas, and the business review is one such area, we have moved ahead. I believe this is a good thing because internationally there is a development towards integrated reporting. We consulted the market and respondents believe that they are in a position to comply with the requirement. I’ve also personally checked the experience in the UK. A survey to assess the effect of a similar requirement introduced by the Companies Act of 2006 found that directors didn’t find this to be problem and everyone switched to the new system quite readily. So I don’t believe that this will be a problem for the Hong Kong market.’
Do you agree that the problem with relying on the listing rules to govern listed companies is that there is not much sanction available to regulators if a listed company breaches the rules, whereas with the Companies Ordinance there are very clear sanctions involved?
‘There is no doubt that the Stock Exchange of Hong Kong is committed to the enforcement of the listing rules. Sanctions that can be imposed include, among other things, a reputational public sanction; directing remedial and enhancement action to be taken; denial of facilities of the market; directing trading suspension; and in exceptional cases, cancelling the listing of the issuer. There have been discussions over the years about giving statutory backing to the listing rules. I’m sure you are aware that statutory backing has been given to the disclosure of price-sensitive information.
In certain areas, we have taken into account the requirements in the listing rules in drafting the new Companies Ordinance. For example, under the new Companies Ordinance, approval of members must be obtained for any contracts under which the guaranteed term of employment of a director with the company exceeds three years; this length of time was actually taken from the listing rules. Another example is the new requirement for the inclusion of a ‘business review’ in directors’ reports. Taking into account the nature of private companies, private companies are allowed to disapply the provisions relating to the business review by virtue of a special resolution. Similarly, the provisions for disinterested members’ approval do not apply to private companies.
We have to strike a balance. While we are trying to enhance corporate governance by introducing new rules we don’t want to increase companies’ compliance costs unnecessarily.’
Few would argue that the consultation process is a bad thing, but is there a danger that it can get hijacked by vested interests? Are there times when the government needs to push ahead with reforms that are in the best interests of the market as a whole?
‘In so far as the rewrite exercise is concerned, if we are talking about whether we have to take into account the views that are expressed in response to the public consultations, I would say yes, we tried to do that as far as possible. Otherwise I think it would be fruitless to hold public consultations – it’s not just a rubber stamping exercise.
But market views do vary over time. I think a very good example of that is the disclosure of directors’ residential addresses. Back in 2011 when we consulted on this issue, the views were already divided but there was a majority in support of introducing the new regime and that’s why we went ahead and introduced the new regime. Subsequent to the amendment of the law, when the subsidiary legislation was going to be discussed in LegCo in 2013, the media came back with very strong objections and we had to review the whole thing again. For the time being the law is still there, but we have suspended the commencement of the relevant provisions pending further consultations with the market players and all relevant stakeholders.
Directors’ duties is another very controversial area. When we consulted the market on directors’ duties in 2008, the administration had no definite stance on whether we should codify the whole range of directors’ duties, or whether we should only codify certain aspects. We consulted the market and the response was again very divergent. About half of the respondents were in support of the codification of the full range of directors’ duties and there was a bare majority against. We tried to strike a balance by codifying directors’ duties of care, skill and diligence in the Companies Ordinance.’
Now that the rewrite has been completed, are there areas where you personally would have liked the ordinance to have gone further than it does – are there reforms that didn’t make it into the law that you would have supported?
‘Yes. I think it would be a good thing to codify the full range of directors’ duties in the Companies Ordinance to make them more accessible to directors. The beauty of codification is that it provides clear guidance to everyone.’
Would you have supported the inclusion of the duty to act in the interests of the company?
‘That is more controversial. The UK moved ahead and included this duty but respondents to our 2008 consultation said that they had doubts about the UK approach. Including this duty would have meant that directors would have to take into account the interests of employees, creditors, etc, and the market had concerns about that. We agreed to wait and see how the UK implemented this provision at the time – so far I don’t think it has caused any major problems.’
The new Companies Ordinance has brought in extra enforcement powers for the Companies Registry – how will this impact your work?
‘The new powers are essential for the Registry to operate efficiently. In the past we had to rely on people’s cooperation, but under the new Companies Ordinance, if we suspect that a certain specified offence has been committed, we have the power to ask people to provide further information and explanation. We have also introduced a new ‘compound offer’ regime. In relation to certain simple and straightforward filing offences, we are now able to make a compound offer to the defaulters. This is something like a traffic fine; as long as they pay the penalty and comply with the filing requirements, then we can dispense with prosecution. This will mean that we can save very precious judicial resources since we will not need to go through the judicial process for each and every filing default.
Our policy direction is to devote more resources to investigating problematic cases and making more inspections. We have set up a new inspection team since the implementation of the new Companies Ordinance and this team will be focusing on things like checking the correctness of companies’ registered office addresses and conducting site visits. We have come across cases where the registered office address is incorrect.’
Was this one of your own initiatives?
‘Yes. We get a lot of filing defaults that are minor and routine, but before the new Companies Ordinance we had to spend quite a lot of resources on them. We hope that the compound offer regime will free up some of our resources so we can focus on more serious defaults.’
Company legislation doesn’t stand still, how do you see things moving in the future in Hong Kong and how would you like to see it moving?
‘The business environment is changing all the time and I don’t believe that the Companies Ordinance will stop here. We will need to review the ordinance from time to time and introduce amendments, for example, to enhance the transparency of reporting. Internationally, there has been a consultation paper on integrated reporting already so I’m glad we moved ahead with the business review provisions, but there may be other provisions which will be enforced internationally and which may necessitate further amendments to the Companies Ordinance.
Alongside that, there have been developments locally, for example the transition to a scripless securities market. Sometime this year, a bill will be submitted to LegCo on scripless shares and we will need to amend the Companies Ordinance in order to tie in with the proposal in relation to scripless securities. So the world is changing all the time and this is an ongoing process.’
One of the trends that has interested Chartered Secretaries is the move towards principles-based regulation. At the moment, of course, Hong Kong only has the Corporate Governance Code subject to a principles-based approach, but do you see that as a trend that may develop in Hong Kong?
‘The Corporate Governance Code is quite different because it is not legislation. When we talk about legislation, certainty is a must. If the law is vague it will be very difficult to enforce and it will be unfair to all those who may be in breach of the law.
So, as far as legislation is concerned, I think we would have difficulty in taking a principles-based approach. In the new Companies Ordinance there are quite a number of areas where we tried to set out more details in the law to make it easier for people to comply. For example we added new rules relating to proposing and passing written resolutions which were not in the old law.’
Do you think in the future there will be more convergence with PRC companies law?
‘I think that is a possibility, but the PRC situation is quite different. Their system is a civil law system and our system is a common law system, so I don’t think it will be possible for a complete convergence to happen. Notwithstanding that, there are some possible areas of convergence. For example, the PRC has been streamlining its company registration system making it more similar to our own. In the past you had to get several licences in the PRC before you could incorporate a company, now you can incorporate a company first before you get the other licences. In the past they also had a minimum capital requirement but they have removed that as well for most cases.
I think our exchanges with our counterparts in the PRC are of mutual benefit. We may be able to take the good things from each other’s laws. It may not be a one-way process, the Hong Kong and the PRC companies laws can benefit from each other.’
One final question – do you have any particular message for company secretaries?
‘I would like to thank all members of the profession who have provided us with valuable advice in the Companies Ordinance rewrite process. Members of the profession sat on the advisory boards and the president of HKICS sat on the Standing Committee on Company Law Reform, we are much indebted to them for their contributions. For company secretaries in general, we are looking forward to working with them hand in hand in implementing the new Companies Ordinance. We will continue with our efforts to promote awareness of the ordinance and we are happy to assist them if they have any questions in relation to the new law.