From 1 March 2018, The Companies (Amendment) Ordinance has introduced a new requirement for Hong Kong private companies to create and retain a verified significant controllers register (SCR). This article presents the Companies Registry’s responses to a number of questions raised by members of the Institute regarding the SCR.

If the company secretary of a group is employed as the designated representative for the group, is it necessary for there to be individual appointments by each member of the group companies? The employment is for the whole of the group and under contract (third party) rights the employed company secretary and each group member have rights against each other. We urge the Companies Registry to allow for the employed company secretary over the group function to perform the requisite role without further appointments by members of the group.

‘If the company secretary of a group of companies is employed as the designated representative for the whole group, whether the company secretary will then be employed by each company of the whole group and whether it is necessary for individual appointments by each company essentially depend on the terms of the employment contract and who are the contracting parties, which are all questions of fact. Please note that in order to comply with Section 653ZC(2)(a) (on the employee point), the company secretary must be an employee of a company if he/she is to be appointed as the designated representative of that company. Alternatively, the designated representative can be an accounting professional, legal professional or a trust or company service provider (TCSP) licensee.’

If the designated representative is not in the office, who can help a law enforcement officer? Is the company liable if it waits for the designated representative to become available? Further, how would the Companies Registry deal with the situation where it does not know who is the designated representative, as there is no obligation to file a return to disclose the identity of the designated representative where the SCR is kept at the registered office? The company secretary should know the Companies Registry’s working procedures in this regard to facilitate the relationship between the designated representative and the Companies Registry and law enforcement officers.

‘Please note that under Section 653X, it is the company’s obligation at any reasonable time to make its SCR available for inspection by a law enforcement officer on demand at the place where the register is kept. If no Form NR2 in respect of the location of the SCR is filed, the law enforcement officer will go to the registered office address of a company for the purpose of the inspection.’

Hong Kong, unlike certain other jurisdictions, provides no exemption to stop due diligence with listed companies. In practice, it is difficult to trace the registrable person from a listed company. We are of the view that the specified entity should be amended in due course to include listed companies. In the interim, there is a question as to why the CEO of a listed company cannot be the registrable person as he or she should have the requisite control over the listed company. This is the position adopted in certain other countries. We urge the Companies Registry to agree to allow this to be permitted.

‘Under Section 653C, a company is not required to investigate further beyond a registrable legal entity provided it is listed in Hong Kong. Specified entities are a distinct type of organisation for which the law makes special provisions and treats them as registrable persons. Listed companies and specified entities are different types of entities, and it is inappropriate to include listed companies as specified entities. Some roles or relationships would not on their own result in a person being considered to be exercising significant influence or control over a company. Whether a CEO of a listed company can be a registrable person of an applicable company depends on whether he/she has the right to exercise, or actually exercises, significant influence or control over the company.’

In terms of sending notices to persons who the company knows, or has reason to believe that they will know, who the significant controller(s) is/are, does the Companies Registry expect the company to send notices to all the members of a parent company (for example, disclosed under an organisation chart) or is a notice served on the parent company sufficient? As it would be impractical to serve notices to the members of the parent company, we believe that service of a notice to the parent should be sufficient. Also, if the top-level company, after it has been served with a notice, says that it has no significant controller, would the company have discharged its obligation by entering this information into the SCR? Is any further investigation, which appears impractical, of the members required? What are the Companies Registry’s views on these matters?

‘Section 653P(3) requires a company to give a notice to a person who knows the identity of the significant controllers. The question as to whom the notice should be given should be left to the company as long as Section 653P(3) is complied with. Section 653P(1) requires a company to take reasonable steps to ascertain and identify whether there is any significant controller of the company. Whether the company has discharged its obligation depends on the facts of each case.’

The company is supposedly required to record a registrable change. The law only requires this where the company has the appropriate level of knowledge. Is it correct to assume that, in the absence of any event bringing about this knowledge, there is no obligation upon the company to continuously monitor changes? This would be impracticable.

‘Please note that Section 653T requires a company to give a notice to its significant controller in accordance with Section 653U only when the company knows or has reasonable cause to believe that there is a registrable change in respect of the significant controller.’

Is the specified entity of an State-owned enterprise, State-owned Assets Supervision and Administration Commission or the China State, or is there no specified entity?

‘What entity is a specified entity is stated in Section 653A. If the ultimate beneficial owner of a company is the government of the People’s Republic of China, it is the specified entity.’

A Hong Kong private company limited by shares is wholly-owned by a nominee in trust for a provident and retirement plan, which was set up for the purpose of managing the mandatory provident fund of the group employees. The trustees can administer the trust under the trust deed. Under this situation, aside from the particulars of the trustees, who is required to be stated in the significant controllers register as a registrable person for a provident fund? We are aware of Paragraph 10.6 of the applicable guidelines, but what is the situation for a provident fund?

‘Condition (e) contains no specific provision for a trust for a provident fund. The company needs to find out whether there is any person (other than the trustees) who has the right to exercise, or actually exercises, significant influence or control over the activities of the trust.’

In considering whether a person holds shares indirectly in a chain of ownership ending up with the registrable legal entity holding more than 25% of the shares in the Hong Kong entity, the law requires the company to consider Conditions (a) to (d). If there is no person holding more than 50% (being a majority stake) in the ultimate owner (which can be a listed company, a private company, a trust or partnership), it will be logical to explore criteria (d) in relation to the stake. The difficulty is to identify someone with dominant control or influence. It is not clear to us why there is the concept of dominant influence in Criteria (d) relating to stakes in shares but significant influence in Conditions (d) and (e). What is the reason behind the need to make a distinction? If dominant influence is the criteria to apply, then if the decision is made by the board collectively, it is quite clear that no one can have a dominant influence if each director has equal voting rights. Does the company have to register all the directors?

‘Section 7(2) of Schedule 5A sets out the criteria, including the right to exercise, or actually exercise, dominant influence or control, for a person to have a majority stake in a legal entity (Section 7(2)(d)). It can be seen that the threshold for determining whether a person has a majority stake in a legal entity is higher than that required for determining whether a person has significant influence or control over a company, and dominant influence or control should be construed accordingly. If no person meets any of the criteria under Section 7(2) of Schedule 5A in relation to a legal entity, then there is no person having a majority stake in that legal entity.’

SIDEBAR: A word of thanks

Members of the Institute have been in the forefront of the compliance efforts in relation to the requirement for Hong Kong private companies to create and retain a verified significant controllers register. The Institute’s Companies Registry Customers Liaison Group formally presented members’ questions to the Companies Registry, and the Institute is grateful for the Companies Registry’s responses given in this article.

In addition to the questions relating to this issue, the Institute has also communicated members’ questions relating to the new licensing regime for trust and company service providers (TCSPs) as contained in the Anti–Money Laundering (Financial Institutions) (Amendment) Ordinance. We will keep members posted about the Companies Registry’s responses. Meanwhile, the Institute is grateful to the Companies Registry for the issue of a recent Frequently Asked Questions relating to the TCSP licensing requirements in group situations following representation by the Institute on the vexed issue.

The Institute also expresses gratitude to Neil McNamara FCIS FCS, Edith Shih FCIS FCS(PE), David Fu FCIS FCS(PE), Natalia Seng FCIS FCS(PE), Samantha Suen FCIS FCS(PE) and Mohan Datwani FCIS FCS(PE) from the Institute; as well as Ada Chung JP, Registrar of Companies, and Margaret Chan, Senior Solicitor, Companies Registry.