Share Capital Structure for Hong Kong Company
An essential aspect of the overall development and growth of a company is understanding its share capital structure. Following the new Companies Ordinance (Cap. 622), every incorporated limited company in Hong Kong should follow the provisions related to the core concept of share capital, and its creation, transfer and issuance.
The share capital structure is an important part of any company, as it evaluates the long-term financial management position of a business and sources of funding. Generally, the share capital structure is designed to represent the company’s debt obligations and equity. It reflects every type of obligation as a slice of the stack, ranked as per the increasing risk, cost, and decreasing priority in a liquidation event (such as bankruptcy).
Before we learn more about the share capital structure of Hong Kong companies, let’s explore what shares are and the role of shareholders in the company.
Share and Shareholder of Hong Kong Company
To get a better understanding of a company’s share capital structure, let us first understand the meaning of shares and shareholders. A share is a portion of the company offered to investors for their investment in the company. In short, a company issues shares of their stocks to represent the company’s ownership claims. The following would give a much better explanation for what a shareholder and shares are.
Shares in a Hong Kong Company
A share is the unit ownership in the company measured in the form of invested money. Basically, a share is a moveable property, and it can be transferred between different shareholders for liability in the first place, and interest in the second.
The definition of shares is not so complicated, but to bring the exact meaning of this definition, let’s break it down through an example. Let’s say you set up a new company in Hong Kong, ABC limited. Of course, the company will have the capital in the form of cash and the assets invested by the shareholders that in turn receive shares.
Three investors named Dean, Michael, and Burrows have approached you to invest in your company. They each invest HK$10,000 for share capital of the company. That amount would be considered as the share capital. So, after the new investment, the total share capital of the company would stand at HK$30,000. Distribute the amount invested in the company across three shareholders at the value of HK$1 per share, and each shareholder would own 10,000 ordinary shares. So, now, all the three shareholders each own 10,000 ordinary shares each.
Note: Always remember that the share itself is an item of property, so it can be issued or transferred to the shareholders of the company. However, the share capital is not refunded unless the business is being wound up.
Shareholders in a Hong Kong Company
Shareholders are also known as the stockholders. When investors decide to invest in the company to obtain company equity, they become the shareholders of that organization. However, this power varies in proportion to the shares being held, respectively. So if your company has a joint ownership system, then the shareholders will jointly have ownership over the company.
For instance: If one investor partly owns 50% or more of shares, then that investor has the power to amend the Articles of Association and the firm’s name. In fact, they can also allow the firm to buy the shares of other shareholders or reduce the share capital. In the same way, when a certain party has owned 100% shares of the company, then they have complete power over the company regulation.
Shareholder rights and obligations
After understanding the idea about shares and shareholders of the company, let’s discuss the general explanation of the rights related to share capital. The specific rights of the shareholders would be included in the Articles of Association. Below are some general information:
- To vote for the corporation’s Board of Directors.
- When the company is winding up, the shareholders have rights on the surplus of the assets after the payment of all incurred debts.
- When profit arises in the company, shareholders are entitled to receive a dividend.
Obligations of shareholders
Next, take a good look at the obligations of shareholders.
Investment as a capital injection
Shareholders can ensure that the company has the capital to run the business by subscribing to its shares. In order to meet all the shareholder’s obligations, the shares have to be completely paid for.
If, somehow, the shares are not completely paid during the subscription, the shareholders have the liability to pay the balance when the company is winding up or when a company calls the shareholders to pay.
Nature and classes of shares
Shares represent a shareholder’s personal property that can be measured in the form of monetary or other types of assets. With the new Hong Kong Company Ordinance, shares can be classified into different classes. All these shares have different voting rights, and the right to receive the amount of money invested in the company if the company undergoes insolvency.
- Ordinary shares: Ordinary shares are the most basic types of shares, divided with an equal value. These shares have the same obligations and rights as other ordinary shares.
- Preference shares: These shares are often considered as non-voting; it gives a preferential right to the shareholders to the fixed amount of dividends.
- Redeemable shares: These shares are issued with special preferences that the company will buy these shares someday at a fixed date or at the directors’ discretion.
- Deferred ordinary shares: In these shares, the shareholders will not get the dividends, until other classes of the shares have received a minimum dividend.
- Non-voting shares: It means that the shareholders will not have the right to attend any general meeting or voting. These shares are basically issued to the company’s employees to receive their remuneration as dividends.
- Management shares: This class of shares carries extra voting rights for particular holders to retain their control.
What is share capital in a Hong Kong company?
You may have seen ”share capital’‘ several times, but what does it exactly mean? While incorporating a business in Hong Kong, share capital is one of the first areas that needs to be defined.
Being a separate legal entity from the business owner, limited company shares can be issued to shareholders who invest in the company. In general, the company’s creditors look at the assets of the company for payment. Share capital if locked into the company, and can be returned to the members-only subject to the strict rules of a shares buyback or reduction of capital. The shareholders are the members and the owners of the company.
Types of share capital
For Hong Kong incorporated companies, the share capital is defined as issued capital. There is no minimum requirement of the share. It can be authorized that the share capital of HK$ 1,000 is represented by 1,000 ordinary shares of HK$ 1.00 each. Though after incorporating the Hong Kong company, the approved share capital can be increased, and the company has to pay a capital duty of 0.1% for share capital over HK$ 10,000 to the Hk government. In every case, capital duty will be limited to HK$ 30,000.
Why is share capital important?
Now that you have an idea about share capital and its types, let’s understand the importance of the share capital in Hong Kong incorporated companies.
The first benefit of a reliable share capital structure is to increase the company’s value. If you really want to increase the market price of your shares and securities, you need to have a sound share capital structure.
The second benefit of the perfect share capital structure is that it allows business enterprises to utilize all available funds. With a properly-designed capital structure, all the financial requirements will be properly determined.
Thirdly, it helps to secure the company’s value from under and over-capitalization. A good and reliable share structure helps the management to increase the company’s profit in the form of a higher return to the equity shareholders. It will give a hike for the increase in earning per share, done by the mechanism of trading on equity.
Furthermore, a sound capital structure helps the shareholders maximize their wealth through the minimization of the overall cost of capital. And when it comes to solvency, a stable capital structure helps the company to reduce the risk of increasing too much debt capital. During solvency, the profits are distributed for mandatory payment of interest to the supplier of the debt.
Is there a minimum share capital in Hong Kong?
Following the Companies Ordinance of Hong Kong, there is no as such minimum requirement of share capital for the company. However, companies acquiring special licenses or permits from the government can run, such as banks, traveling, financial institutions, or insurance companies. These types of companies require to have a certain amount of share capital as per the regulations of the authorities.
Even though there is no minimum capital requirement for HK companies, maximum legal entities start with a minimum amount, say for example 1,000 HK$. And they use a share value of 1.00 HK$ each. Some companies do prefer to have the share capital in the foreign currency, but it becomes difficult for them to change the currency in HK dollars after incorporation. A minimum issued or paid-up capital will typically have a value of one share of 1 HK$.
Transfer and Issuance of new shares
While operating the business activities in Hong Kong, business owners can transfer or issue new shares to the shareholders. However, the process of transferring and issuing new shares is not that simple.
Transferring of Shares in Hong Kong
Following the company’s Article of the association, all the private limited companies have the provision to transfer the shares of their business. However, there are certain constraints in transferring the shares. Normally, the transfer of Hong Kong shares is subject to a HK stamp duty, more specifically to the IRD. As per the Stamp Duty Ordinance, the rate of the stamp duty is 0.2% of the share consideration and fair market value,, whichever is higher. Therefore if the company has started any business operations in the past, it may be required to submit it’s accounts when transferring shares.
It means that if your company is transferring 100% of the shares worth of HKD $500,000 to other shareholders, then the stamp duty on the transfer of shares would be HKD $1,000.
The stamp duty is payable by each transferee (buyer), and transferee (seller). But it should be supported by the instrument of the transfer signed by both the transferor and the transferee and delivered to the company. The instrument of the transfer needs to be endorsed by the Commissioner of Stamp Duty. It specifies that the stamp duty has been paid.
Here Startupr can help you. For an effective completion of transferring share to the shareholder, you will need to hire a professional who can help you. Startupr is one-stop-service who can help your business with professionals qualified for the tasks.
Issuing new shares
In Hong Kong, the shares are issued by the directors of the company. The shares can only be issued to the new shareholders once it has been mentioned in the register of the company’s shareholders with relevant details. After getting approval from the existing shareholders, the distributions of the shares may be done. This approval can be delivered either in a particular form of allotment or allotments in general. After that, the process of issuing new shares in Hong Kong can only be done. When the return of allotment of shares, disclosing of members and shareholders must be filed with the Companies Registry within one month of the assignment’s date.
Startupr can also help you in issuing new shares to the company’s shareholders. We have years of experience in helping companies restructure their share structure and for those looking to raise more funding from investors.
Use Eqvista to issue and manage your Hong Kong company shares
With everything clear about what a share, a shareholder, the capital structure, and the rights and obligations of the shareholder are for a Hong Kong company, you may need some software to help manage all the company’s shareholding. This is where Eqvista can help. Eqvista is a sophisticated cap table application that helps the company to issue and manage its shares all in one place.
With this application, you can easily add a shareholder in your Hong Kong company and issue/transfer shares to them. You can also use the app to help record all the shares in the company, and even offer different types of options, warrants and convertible notes to interested parties.
By now, you would have a better understanding of shares, shareholders and a good share capital structure, and how they are important for your Hong Kong business. The company needs to have a sound share capital structure to grow the business.
If you are also thinking about transferring or issuing new shares in your company, let Startupr assist you. We can help you with all your important company filings.