Procedure and Consideration for the Issuance of Shares after starting a Company in Hong Kong

Shares and the shareholders are the most valuable asset for any corporate entity after open company in Hong Kong because they are the ones who would rescue company in the hour of need. By the term rescue, it indicates towards the situation where company needs to raise the capital of the company to entertain its corporate endeavours. So, for such situation after HK company formation, the company can raise capital through the issuance of shares and the shareholders would be the one who will buy the shares and thus shall provide company with the required capital.

Ascertaining its importance, there was the need to regulate the process for issuance of shares. So, following are some of procedures and considerations that must be ensured, while issuing the shares of the company.

Procedure for the Issuance of Shares

The first procedure regarding issuance of shares after starting a company in Hong Kong is to make sure the approval status for such transaction. Hence, it is mandatory to seek the approval of the company in general meeting before the allotment of shares, as per Section 88 (3) of Cap. 622. In general view, such allotment of shares would be done through the contractual agreement between the company and the allottee. For such contract, an allottee would put forward the offer under contract law to the company and directors of the company would ascertain this offer on behalf of the company. After affirmation and verification on the parts of directors, company would then accept the offer and shall subsequently issue a notice, notifying that offer of the allottee has been accepted, and thus he/she is entitled to the allotment of shares. For example, consider the situation where company makes a public offer pursuant to the prospectus, then issuance of prospectus and application for the buying of shares shall be treated as the invitation to buy the shares of the company. An applicant who wish to subscribe to the shares shall send the application to company, this application would be considered as the offer made by the applicant. After this application procedure, it will now be up to the discretion of company whether or not to accept the offer. However, not every time applicant is supposed to make an offer, instead it is possible that company may itself make an offer to allocate specific number of shares to the offeree. Provisional Allotment Letter is the one example of such contractual offer from the company to the offeree where company would itself provisionally allots the prescribed number of shares to the allottee which would then decide whether or not to accept the subscription offer. Generally, such trend is seen in the situations where company offers issuance of shares to its existing shareholders.

Now the readers might confuse the term “allotment” and the “issue” in relation to the matter of shares, regarding which term would be appropriate to use after open company in Hong Kong? Legal commentators comments that neither of these terms are of technical nature, hence there exist no precise meaning of them. However, it is recommended to use word “Allotment” where agreement or contract is in debate regarding shares of the company between the allottee and the company and where directors of the company has allocated certain number of shares to the allottee. It is suggested to use word “issue” only in the situation where shares have been issued to the shareholder and his/her name has been included in the company member’s register.

As per the ss 627-628 of Cap. 622, once shares have been allotted to the specific person, then it is mandatory to get his/her name registered in the company register of member(s). An allottee shall not be considered as the member of the company nor holds the entitlement to the legal title of shareholder until and unless his/her name has been registered in company’s register of members. There can be some delays due to any uncertain circumstances. Hence to cater this, Cap. 622 for Hong Kong company formation services lays down the time frame for the registration of allottee name in the register of member and as per the script of Cap. 622, allottee’s name should be included in the company register of member within two months of allotment of shares. For the situation where company fails to register the name of allotte in its register of member than such act would be considered as the breach of allotment contract. On account of this breach, allottee holds the entitlement to seek for the specific performance of the contract. It must be kept in mind that such entitlement would not be sought in the situation where damages would be a more appropriate remedy to seek in case of such breach of contract. Listed companies and the companies whose shares are readily available in the market are those companies against whom allottee can seek for damages in case of breach of contract of allotment.

As per the Section 142 of Cap. 622; listed company is required to deliver the return of allotment to the Registrar office within one month of share allotment. This document should exclusively entertain following:

  • Number of the shares that have been allotted to the subjected person.
  • Name and address of the person to whom shares have been allotted.
  • The amount paid or considered to be paid by the allottee in relation to the allotted shares.
  • It is mandatory to send the updated Statement of Company’s capital. Company’s statement capital should clearly shed light on the total issued shares, total paid up capital and the total issued capital of the company, as of yet.

In addition to this, it is the responsibility of the company under Section 144 of Cap. 622 to deliver the share certificate to the shareholder.

Considerations for the Issuance of Shares

Shares cannot be issued vaguely because company is subjected to certain rights and liabilities towards the shareholders. Hence, there are certain considerations required to be entertained while issuing shares to the aspiring shareholder(s). Following are some of these considerations:

Issue Price of the Share

The price which allottee is supposed to pay in relation to the number of shares, allotted to him/her is called the issue price of the share. Issue price is usually the reflection of the market value of the company’s shares.

After the abolition of par value in Cap. 622, issuance of shares on the par value or at discount value is strictly prohibited. Abolition of issuance of shares at par or nominal value means that, subjected to the fiduciary duties of the directors, shares can be issued at any price as set by the competent authority. Director’s power to issue shares of the company is of the fiduciary nature and hence, it is required that such exercise should be made in the best interest of company. While issuing the shares whose value is greater than the consideration required to be paid for them, then directors of the company must give the close consideration. Company can give close consideration with respect to the rights of the shareholders under the constitution of company. The suggested close consideration could be the one where shareholder is given the right to participate in the transactions regarding distribution of company’s assets in case of winding up of company or any such transactions related to the assets of the company. These extended rights are awarded on account of the equality and to promote the uniformity within the organisation, because if such shareholder would be given rights as of in proportion to its acquired shares and at par with other shareholders, then such conferment would not do justice to its rights with respect to the consideration charged from him/her. It must be noted that; if consideration received from the existing shareholder is greater than the value of the subjected share, then value of such share would subject to dilution and thus director would hold to be in breach of his/her fiduciary duty by acting unfair to the subjected shareholder.

Full and Partly paid Shares

If full payment in relation to the acquired shares is made at the time of issuance of shares, then such shares would be called the fully paid shares. But, if shares are issued on term of partial payment and on the understanding that remaining would be paid later, then such shares would known as partly paid shares. Holder of partly paid shares would be liable to pay the remaining due amount at the time company make a call or if company is in liquidation. In the condition of liquidation, shareholder of partly paid share would be held liable to the liquidator regarding payment of due amount. It is possible that terms of agreement could specify the dates to which remaining amount shall be paid in fixed instalments. Hence in these circumstances, liability to pay the due amount at the time of call by the company, would not arise. However, payment on the fixed instalments is not considered to be as equivalent to the call notice, but failure to pay the due amount in instalments shall impose the same liability under constitution of the company, on the shareholder as would have been imposed in case of not complying with the call notice.

In case of a HK company formation that is listed in the Stock Exchange, then it is the responsibility of the company to ensure that share certificate be issued only when shares have been fully paid. For those private companies who have adopted Model Articles, only fully paid shares are permitted to be issued. However, those public companies who have adopted the Model Articles need not to issue share certificate only upon full payment, instead they can issue shares even upon partly payment. Articles 68-79 of Model Articles discusses the partly paid shares. Article 70 of  Model Articles gives directors of the company, right to make call to the partly paid shareholders of the company. But, it must be kept in mind that director should not exercise such power for some personal or improper purpose. Hence, it is mandatory to make sure that director is exercising power in the bona fide interest of the company and not for some improper or personal purpose. To negate any uncommercial and un-ethical activity in this matter, it is necessary that members of the company should be treated equally, and no member shall be treated special or inferior than other members of the company. This is also important in order to make sure that director do not make different calls to different shareholder, however this clause can be amended through the proper procedure.

For the situations where shareholder is found to be failing in complying with the call made by the company regarding payment of outstanding dues, then company has the right to sue this non-abiding shareholder. Constitution also provides for the way through which company is allowed to have lien on the shareholder, so that subjected amount could be secured. For example, Article 68 of Model Articles allows the company to sell the subjected shares if the due amount has not been made even upon call notice. Lien is considered to be an equivalent charge of equitable charge.

Non-Cash Considerations

There is the consideration which says that, allottee can provide non-cash considerations. For example, consider the situation where a sole trader incorporates his/her business and upon incorporation transfers his/her business to the company. After transferring the assets to the company, he/she trades the business as equivalent to the issue of shares to him/her. If on later, it is revealed that non-cash assets of the company posses greater market value then it would now be considered that allotte has not provided sufficient assets to the capital of the company. Hence on account of this, he/she shall consider possessing partly paid shares instead of fully paid shares. However, this technical matter would not be questionable in the court as long as evidence reports that director has acted honestly and in best interest of the company.