This guide is an introduction to the legal personality of a Hong Kong limited liability company. If you are establishing a company in Hong Kong for the first time, it is recommended that you familiarize yourself with this information. To learn how to incorporate a company in Hong Kong, refer to Setting Up a Hong Kong Company.

In the eyes of the law, a Hong Kong limited liability company is an artificial person with a separate legal identity distinct from its shareholders and its directors. Status as a separate legal identity entitles a company to:

• Enter into contracts in its own name
• Sue and be sued in its own name
• Exist perpetually independent of its members. In other words the company continues to exist notwithstanding the death or resignation of its directors, shareholders, employees and other company officers
• Own its own property and assets. Shareholders cannot claim this property, as it is in the name of the company who is the rightful owner.
• Create floating charges, by borrowing money and creating a form of security for its creditors

Section 5(1) of the Hong Kong Companies Ordinance defines the powers of a company as:

1. A company has the capacity, rights, powers and privileges of a natural person
2. A company may do anything which it is permitted or required to do by its Memorandum or by any enactment or rule of law

A company operates through its officers or members. The directors are considered the lifeblood of the company, followed by the shareholders. The directors and shareholders are responsible for what the company does, as their actions constitute the company’s actions. The extent of power that the directors and shareholders can exercise is defined by Hong Kong’s company law in general and the company’s Memorandum and Articles of Association, in particular.

Managing a company is equated to decision making and both directors as well as shareholders partake in this responsibility. The task of managing the company’s affairs rests with the board of directors who make policy and management decisions. The directors’ decisions is then ratified by shareholders who are entitled to vote their agreement (or dissent) at a general meeting. The shareholders’ voting rights are defined by the Memorandum or Articles of Association of the company.

Directors

A private limited company in Hong Kong must have at least one director – person or corporate body; local or foreigner; above 18 years of age. Public companies must have at least two directors.

Directors have to perform a supervisory and managerial role in the company, steering it in the right direction. The extent of the directors involvement in the day-to-day business operations will vary according to the size of the company. However, all directors, irrespective of the company size, must retain effective control of the company and ensure that it is legally compliant at all times. Directors must maintain transparent and open communication with the company’s stakeholders and where necessary, delegate powers responsibly and ensure that there is accountability. They must have a good working knowledge of all aspects of the company. Directors must participate in corporate planning, financial decision making and other strategic planning of the company. Additionally, they must exercise their statutory or administrative duties and their general law or fiduciary duties of loyalty and good faith.

Directors’ duties in Hong Kong include: a) Fiduciary duties, and b) Duties of skill and care. The Companies Registry of Hong Kong has published eleven general principles of directors’ duties and includes the following:

1. Duty to act in good faith for the benefit of the company as a whole.
2. Duty to use powers for a proper purpose for the benefit of members as a whole.
3. Duty not to delegate powers except with proper authorization and duty to exercise independent judgment.
4. Duty to exercise care, skill and diligence.
5. Duty to avoid conflicts between personal interests and interests of the company.
6. Duty not to enter into transactions in which the directors have an interest, except in compliance with the requirements of the law.
7. Duty not to gain advantage from the use of position as “director”.
8. Duty not to make unauthorized use of company’s property or information.
9. Duty not to accept personal benefit from third parties.
10. Duty to observe the company’s Memorandum and Articles of Association.
11. Duty to keep proper books of account.

Breach of directors’ duties can result in civil and/or criminal sanctions. Alternatively, s(he) may be disqualified from acting as a director. In addition, company directors who authorize a civil wrong such as copyright infringement or signing a guarantee, will be held as personally liable and can be sued.

Shareholders

A private limited company in Hong Kong must have at least one shareholder – person or body corporate; local or foreigner; above 18 years of age.

Shareholders make a financial investment in the company by buying shares in the company. In broad terms, they own a part of the company in proportion to the shares they own. Shareholders buy shares with the hope of getting a return on their investment. In the event of the company making profits, shareholders are entitled to the profits by way of dividends. Usually, shareholders are not directly involved in the management of the company and appoint a board of directors for this purpose. In a way, the board of directors run the company on behalf of the shareholders, to whom they are accountable. Shareholders also have the power to modify provisions in the company’s Memorandum or Articles and can disallow alteration of the company’s capital.

Being the owners of the company, shareholders are entitled to the following rights:

• Right to vote: This includes voting for the appointment or removal of directors and auditors.
• Right to dividends: A company’s profits can either be reinvested in the company to increase its value or paid out as dividends. If the profits are paid out as dividends, shareholders are entitled to receive a share.
• Right to own a portion of the assets if the company is liquidated
• Right to receive information about the company: This helps to prevent the company’s managers from acting to the detriment of the shareholders. Secondly, if an irregularity has occurred in the conduct of the company’s affairs, the ability to obtain information can be important for shareholders in deciding whether to take action against the wrongdoers.
• Right to propose shareholder resolutions

Company Secretary

A private limited company in Hong Kong must have a local resident company secretary – individual or body corporate. The sole shareholder and director cannot also act as the company secretary.

The company secretary is a key officer in any company and plays the role of “Chief Administrative Officer” discharging his/her duties as per the law. The company secretary is responsible for:

• Arranging meetings
• Taking down minutes of the meetings
• Maintaining the company’s statutory books
• Filing necessary documents such as annual returns with the Companies Registry
• Ensuring that the company’s statutory compliances are met with
• Registering share transfers
• Acting as the principal channel of communication between the directors and officers of the company

Appointment of the company secretary is usually done in accordance with the company’s Articles of Association. In most cases, the directors appoint the secretary and fix his/her remuneration.

Memorandum and Articles of Association

A company’s Memorandum and Articles of Association are its lawful Constitution. The Memorandum regulates the external affairs and relations of the company. The Articles regulate the internal relations between the members themselves and between the company and its members. The Articles prescribe the rules for running of the company’s internal affairs. The Articles are usually subordinate to the Memorandum and in case of a conflict the terms of the Memorandum prevail.

The Memorandum must state:

• The company’s name
• The company’s share capital
• That the liability of the company’s members is limited
• That the registered office of the company is situated in Hong Kong
• The objects of the company i.e. the proposed business and powers of the company

Note: As per the Hong Kong Companies Ordinance, only certain categories of companies need to compulsorily state their objects.

The Articles usually state:

• Rules concerning the holding of meetings
• The process for appointment of directors
• The relationship, rights, duties and responsibilities of members

The Memorandum and Articles are statutory contracts and have a legally binding effect on the company and its members. As a result, both the company and its members must observe all the provisions that are set out in the Memorandum and Articles.

Share Capital

The investment made in a company by its owners (i.e shareholders) is the share capital and principal source of finance for any private limited company.

There are two types of share capital for Hong Kong companies – authorized capital and issued or paid-up capital. Although there is no minimum share capital requirement, the general norm for companies incorporated in Hong Kong is to have a authorized share capital of HKD 10,000 represented by 10,000 ordinary shares of HKD 1.00 each. The authorized share capital can be increased anytime after the company has been incorporated. However, you will have to pay the Hong Kong government a capital duty of 0.1% for share capital over HKD 10,000. The capital duty is capped at HKD 30,000 in each case. The minimum issued/paid-up capital is usually 1 share of HKD 1.00. There is no limit or restriction on the maximum amount of share capital for both types. Share capital can be expressed in any major currency and is not restricted to the Hong Kong Dollar alone. Shares can be freely transferred, subject to a stamp duty fee. Bearer shares are not allowed.

Summary

A limited liability company in Hong Kong has a legal identity of its own, distinct from its members. This enables the company to acquire assets, go into debt, enter into contracts, sue or be sued in its own name. The liability of the shareholders is limited to the amount of their respective shareholdings/investment. A change of membership does not affect the company’s continued existence. Business expansion is facilitated by the ease of raising finances, by bringing in new shareholders or issuing more shares to existing shareholders. Complete or partial transfer of ownership of companies can be done by selling all or part of its total shares, or through the issue of new shares to additional investors. As a result most entrepreneurs choose to use the limited liability company structure in Hong Kong as their business structure.