From 1 March 2018, companies incorporated in Hong Kong, except listed companies, are required to keep a significant controller register at their registered offices. This article will give a brief introduction of the newly enacted Division 2A, Part 12 of the Companies Ordinance, cap. 622 relating to the significant controller register, and their major implications and take-aways.
The new changes will apply to all companies incorporated under the Companies Ordinance, whether they are companies limited by share or guarantee or unlimited companies, but exclude non-Hong Kong companies and listed companies.
The register must be kept at its registered office or a place in Hong Kong and the company must inform the Company Registry by filing a Form NR2. The new changes primarily impose obligations on the company to: –
1.keep a Significant Controller Register (“SCR”) at the company’s registered office or a prescribed place;
2.take reasonable steps to identify the company’s significant controllers, including the giving of notices and obtaining their required particulars;
3.enter the required particulars of its significant controllers in the SCR;
4.keep the required particulars in the SCR up-to-date; and
5.make the SCR available for inspection and taking of copies by a law enforcement officer and a significant controller whose name has been entered in the SCR.
The reasons for introducing these changes are for enhancing transparency of beneficial ownership in locally incorporated companies so as to fulfil Hong Kong’s international obligations in relation to anti-money laundering and terrorist financing. It is therefore noteworthy that the SCR is only open to inspection by law enforcement officers, which include the Hong Kong Police, officers from the Company Registry, the ICAC, the SFC etc., as well as the significant controllers themselves, but not the general public.
Under the new law, the company has to enter the required particulars, such as name, address, identity card number, the date on which he becomes the controller and the nature of his control over the company, of the significant controller in the SCR. A significant controller can be a natural person or a legal entity. All these are straight-forward enough. The crux is how to determine who is a significant controller.
On this issue, the new law sets out 5 conditions and if one is met, the person is a significant controller: –
1.The person holds, directly or indirectly, more than 25% of the issued shares in the company;
2.The person holds, directly or indirectly, more than 25% of the voting rights of the company;
3.The person holds, directly or indirectly, the right to appoint or remove a majority of the board of directors of the company;
4.The person has the right to exercise, or actually exercises, significant influence or control over the company; or
5.The person has the right to exercise, or actually exercises, significant influence or control over the activities of a trust or a firm that is not a legal person, but whose trustees or members satisfy any of the first four conditions (in their capacity as such) in relation to the company.
The company is required by the new law to take reasonable steps to identify its significant controllers, which include reviewing all documents and information readily available, considering interests in the company held by individuals, legal persons and trusts and considering evidence of joint arrangements etc. If a company knows or has reasonable cause to believe that a person is a significant controller of the company, the company must give notice to the person within 7 days of such knowledge or belief, to require that person to confirm if he is a significant controller, and that person must so confirm within 1 month.
Major implications and takeaways from these changes: –
1.The burden to report significant controllers rests with the company and its board of directors, not the significant controllers. There is no positive and automatic obligation on the part of the significant controllers to inform the company of their significant control over the company. Their obligation to disclose only arises when they receive the notice from the company to enquire whether they exercise significant control over the company. So, in this sense, the new law increases the administrative burden of the company.
2.However, even this burden on the company is not an absolute one. It is not an absolute obligation to find out or identify who the significant controllers are. Instead, it is only a burden to take reasonable steps to ascertain whether there is any significant controller and if so, to identify them. So, the crux is “taking reasonable steps”, which include the steps mentioned above. Once it is satisfied that reasonable steps have been taken, the company has discharged its duties, notwithstanding that no significant controllers can be ascertained or identified. So, it is important to record, and indeed the Company Registry encourages, the company to record what reasonable steps have been taken.
3.In small private companies in Hong Kong, where most majority shareholders may also be directors or have representation on the board, it is not difficult to ascertain who are the significant controllers. It may however be more difficult for medium or large private companies where management and ownership are different.
4.From the above definition of “Significant Controllers”, it is obvious that they are not limited to the immediate level of shareholders. It could, for example, extend to the 2nd, 3rd or 4th (and so on and so forth) level or strata in the shareholding structure. Indeed, in some cases, a person needs not be a shareholder to be a significant controller. For example, a company or its majority shareholder may enter into an agreement e.g. a loan agreement whereby the company or the majority shareholder grants a third party e.g. lender the right to appoint or remove the majority of the company’s directors. So, in this situation, the lender may be considered a significant controller.
5.The SCR is only open to inspection by Hong Kong’s law enforcement agencies and the significant controllers themselves, not the general public. However, persons dealing with the company such as potential lenders, investors may require the company to disclose the SCR voluntarily as a condition for loan or investment. In this sense, the existence of the SCR does help enhance corporate transparency in Hong Kong.