Guide to Major Changes of the New Hong Kong Companies Ordinance Affecting Directors

1. Introduction

The new Companies Ordinance ("the new CO") introduces changes in relation to directors with a view to enhancing corporate governance, improving regulation and facilitating business.

2. Directors' Duty of Care, Skill and Diligence

The new CO clarifies the standard of directors' duty of care, skill and diligence. Section 465(2) of the new CO sets out a mixed objective and subjective test for the standard of a director's duty to exercise reasonable care, skill and diligence.

It also clarifies the rules on indemnification of directors against liabilities to third parties. Section 469 of the new CO permits a company to indemnify a director against liability incurred by the director to a third party if the specified conditions are met. Certain liabilities and costs must not be covered by the indemnity, such as criminal fines, penalties imposed by regulatory bodies, etc.

3. Directors' Conflicts of Interests

To avoid directors' conflicts of interests, the following measures are introduced under the new CO -

• expanding the prohibitions on loans and similar transactions to cover a wider category of persons connected with a director;
• requiring ratification of conduct of directors by disinterested members' approval;
• requiring disinterested members' approval for various prohibited transactions in the case of public companies, and for loans and similar transactions in the case of a private company or company limited by guarantee that is a subsidiary of a public company;
• expanding the prohibitions on payments to directors for loss of office;
• requiring members?approval for directors?employment exceeding 3 years; and
• widening the ambit of disclosure required under section 162 of the Companies Ordinance (Cap. 32) ("Cap. 32").

4. Loan to Directors

To facilitate business operation, sections 500 to 504 of the new CO provide for the prescribed approval of members as an exception to the general prohibition on loans, quasi-loans, credit transactions etc. The exception applies to all companies. Further, two new exceptions to the prohibitions on loans and similar transactions have been introduced:-

(1) exception for loan, quasi-loan and credit transaction of value not exceeding 5% of net assets or called-up share capital (section 505); and

(2) exception for funds to meet expenditure incurred or to be incurred by a director on defending proceedings or in connection with an investigation or regulatory action (sections 507 and 508).

5. Transitional Arrangements

So far as it relates to directors, section 165 0f Cap. 32 which relates to the possible liability of directors continues to apply in relation to any relevant exemption or indemnification provision existing immediately before the commencement of sections 468, 469 and 470 0f the new CO.

If a company has dispensed with the holding of an annual general meeting in accordance with section 613 0f the new CO, the condition specified in section 157HA(4)(b) of Cap. 32 in respect of a transaction to provide any of its directors with funds to meet expenditures as described in section 157HA(3)(a) of Cap. 32, which is still outstanding on the commencement of Division 2 of Part 11 0f the new CO continues to apply as if the condition was that: -

(1) the approval of the company is required on or before the last date on which the company would otherwise have been required to hold an annual general meeting; and

(2) any liability falling on any person in connection with the transaction must be discharged within 6 months after that date if that approval is not forthcoming.

Sections 163, 163A, 163B, 163C and 163D of Cap. 32 continue to apply in relation to a loss of office or retirement specified in those sections that occurred before the commencement of Division 3 of Part 11 of the new CO. In the case of a directorship, a loss of office or retirement occurred when the person ceased to be a director; in the case of any other office, when the person ceased to hold the office.

It is proposed in the Companies (Residential Addresses and Identification Numbers) Regulation that only members of a company, public officers, public bodies, liquidators and other specified persons will be allowed access to the protected information.