Nature and Type of Equity Finance available after Opening a Business in Hong Kong


Generally, it was said that, after starting a company in Hong Kong shareholder is actually the owner of the company and thus status of a shareholder was that of an owner of the company. This ownership was conferred on the basis of the legislation related to the joint stock companies which regards shareholders to be the beneficial owners of the assets of the company. However, this notion was negated in mid-19th century where courts regarded shares to be an autonomous form of property. This notion defines that after starting a company in Hong Kong, shareholders will no longer be owners of the company and its assets. Hence, possessed shares by each shareholder was the only asset or property, to his/her name. According to Paddy Ireland, this transforming notion was the basis of the development and expansion of Stock Market in 19th Century. With the growth and inception of developed stock markets, shares were then seen as the readable marketable commodities, which can be bought and sell with ease. This rapid development resulted in the realization of the shares as money bank, and thus need to liquidate the assets of the company in result of winding up was very much unrealized. This is the reason, shares were seen as the source of profit having their own respective values and reliable, because they can be bought and sold in the market with ease. This development not only brought revolution in the stock market and corporate sector but also compelled legislation to adopt the prevailing development of share market. May be this is the reason due to which law and courts started to see shares as a separate form of property with value of their own and totally independent of company’s assets.

So, from now on, after company incorporation Hong Kong a share is to be regarded as an intangible property conferred to the person who own it and carries rights & obligations under company’s constitution and the legislation of company registry. The rights which are conferred to the shareholder upon possession of share(s) includes:

  • Right to vote in the company’s general meeting.
  • Right to receive dividends.
  • Right to receive return on company’s capital, upon winding up of company.
  • Any other right, as stated in constitution of company or any related provision of Cap. 622.

Section of 134 of Cap. 622 states the status of the share for shareholder as:

Share is a personal property of the shareholder.

There is a confusion that whether calling share as a personal property would be more relevant or share should be called the one defined in the notion of 19th century, which says, shares to be the ticket of beneficial interests in the company. Legal commentator comment that; Section 134 of Cap. 622 related to company incorporation Hong Kong should be seen as the beacon of light for such confusing situations. Thus upon definition of Companies Ordinance, share should now be seen as the status of personal property. The court’s directions to consider shares as an autonomous property, independent from assets of the company can also be argued as the referral argument to the support of considering shares as the personal property and the only beneficial interest of the shareholder in the company.

Courts defines shares of same class as fungibles and regard them as indistinguishable from each other.

What are the types of shares?

Not every share can be called similar to the other. Hence, after create company Hong Kong if company’s constitution allows, then share can be distributed into different share classes such as ordinary shares and preference shares. Now the question arises that why company would need to issue different share classes and what benefit would company obtain from them? Company introduce different classes of shares so as to attract the external investment because rights and obligations of one share class is different from the rights and obligations of another share class. Difference may exist in voting rights, dividend rights and rights related to return on company’s capital. Company can have different share categories such as Class A shares, Class B shares or etc. But these categories are not exhaustive and company is allowed to devise its own rights and obligations pertaining to different share classes.

Now let’s move on to know about two broad categories of corporate share classes i.e. ordinary shares and preference shares.

Equity Financing through Ordinary Shares

If company do not have any different share class and has only one share class, then such shares of company would be called as ordinary shares. But where company has the preference shares, then this does not mean that being the fundamental class of shares, ordinary shares would enjoy any sort of preference or superiority over the preference shares. Hence, both of these share classes would have their own standing.

Holders of ordinary shares of the company are called the residual bearers of risks in the company because they are the ones who would get return on company’s capital at last or after all claimants have been paid. As they have to bear greater risk of loss of investment, there are some benefits in their lot too. In case company is gaining profits and business is in the profitable status then ordinary shareholders would be the one who would enjoy most of the profits. They will also be entitled to all the surplus profits and assets of the company after preference shareholders and creditors of the company have been paid fully with respect to their claims.

Equity Financing through Preference Shares

In addition to ordinary shares subjected to the certain circumstances, company can issue preference shares. Rights conferred to the preference shareholders include:

  • As long as company is in profitable stage, preference shareholders hold the right to fixed annual dividends.
  • Preference shareholders has the right to receive dividends before ordinary shareholders.
  • In case of winding up of company, preference shareholder enjoys priority over the ordinary shareholder regarding return of company’s share capital.
  • Preference shareholders holds limited voting rights and shall be allowed to vote in the general meeting only when dividends are in arrears.

The rights conferred to the preferred shareholder is supposed to differ from company to company because it is totally dependent upon the company’s constitution and the terms of agreement between the issuing company and to the person holding the preferred shares.

Preferred shares introduce some form of equity financing and thus one can say that it has some features of debt. From the investors point of view, preferred shares are favorable for those investors who are risk-averse and wanted to invest in the business which offers them risk level in between ordinary shares and different types of debts. Another advantage offered by the preference shares to the investors is that; preference shares are considered more liquid form of investment than the debentures. Preference shares listed in the stock exchange are considered to be more marketable than the debentures.

Equity Financing through Redeemable Shares

While ordinary shares and the preference shares are the two broad categories of corporate shares, there are other types of shares through which equity financing could be obtained.

Redeemable shares are those shares which can be brought back by the company from the shareholder under the terms of issue or can be redeemed at the fixed price on a fixed date. These shares follow the literal meaning of word redemption which says that; company can acquire back redeemable shares by paying shareholder, the value of the share. As per Section 269 of Cap. 622, the returned shares or the shares brought by the company would be considered cancelled and invalid once it has been redeemed.

From the investor point of view, redeemable shares are attraction to them because investor can realize their investment any time prior to waiting for the company to wind up. Investors find this factor attractive because if shares are being traded thinly, then they can redeem them to realize their investment.

From the company point of view, redeemable shares are favorable for the situation where company seeks short term financing. Under Section 234 (3) of Cap. 622, company is not allowed to issue redeemable shares until and unless it has other issued shares, other than the redeemable shares. As per the Section 268 of Cap. 622, redeemable shares cannot be redeemed unless they have been paid fully. Directors of the company are allowed to set the terms and the way under which shares can be redeemed, provided set terms must be in compliance with company’s constitution as well as comply with the subsections 257 to 266 of Cap. 622.

Equity Financing through Bearer Shares

After create company Hong Kong, possessor of bearer share is not allowed to be included in company member register. Previously company was allowed to issue the bearer shares. Provisions of predecessor companies ordinance authorized company’s to issue bearer shares. If company’s constitution allows to do so, then company can authorize the possession of shares under company’s common seal and by stating that bearer of warrant is authorized to the specified shares.

But if we talk of now, then as per the Section 139 of Cap. 622, companies are not authorized to issue the bearer shares. Money laundering was the subjected reason which amounted to the ban on the issuance of bearer shares because there were reported lack of transparency in matters such as ownership of shares and the transfer of shares. However, bearer shares issued before the enactment of Cap. 622 are considered valid, provided they are not surrendered to the competent authority for cancellation.

We used the word “share warrant” for bearer shares, you may be confused to read it so let’s define this. Share warrant is the title which depicts of the entitlement of the subjected person to the shares, in his/her possession. In England, share warrant is considered as a negotiable document and transactions such as the transfer or buying of shares can be carried out by transferring the share warrant to the transferee from the transferor.

If bearer shares are issued to the bearer, then it is mandatory that company member’s register must entail the reason for issuance of shares, accompanied with the date of issuance of shares and the statement mentioned on the share warrant.

As per the Section 139 (2) of Cap. 622; holder of bearer shares prior to the enforcement of Cap. 622 is entitled to have its name included in register of member, provided shareholder surrendered bearer shares for the cancellation.

Strictly speaking holder of the bearer share is not entitled to be considered as the member of the company because his/her name is not included in the company member register. However, subjected to the special circumstances, constitution of the company may act to consider him/her to be the member of the company, either for some specific purpose or fully.

Equity Financing through Stock

Share is something which has the indivisible nature and thus it is not possible for the shareholder to transfer fraction of it to the transferee. For example, assume that shareholder holds one share in the company valued at $2, then shareholder cannot transfer this share to the transferee at $1.

However, stocks are something which differ shares on account of nature of being fractionable and divisible. For example, assume the situation where one person holds stocks with the net value of $500, then shareholder is entitled to transfer any fraction of this stock to anyone. But if we ignore this minute detail, then one can generally say that; there is no difference between the shares and stock and both are same.

Previously companies were allowed to convert their paid-up shares to the stocks and vice versa. However, now under the Section 138 of Cap. 622, companies are not authorized to issue stocks. May be one reason of such restriction is the corporate culture of Hong Kong where stocks are not more common and there is no reason for them to retain in corporate culture of Hong Kong. Just like bearer shares, any issued stocks prior to the enactment of Cap. 622 are still valid and such stocks can be converted into the shares. However, once converted, they shall not be allowed to be converted back to the stocks.