Learn about Hong Kong’s stock market capitalization from our detailed guide. Acquire knowledge on different categories of common stocks, the ways of issuing shares, and the requirements for compliance. How share capital hampers shareholders rights and what are the implications of changing either by increasing or decreasing it.
Capital share is an integral part of corporate structure. It features the money provided by shareholders for their participation in the company either by way of full or partial ownership or equity. In the case of Hong Kong, shareholding is a key variable that establishes the duties and the rights of the shareholders.
Within this dynamic framework, observing the legal framework and adhering to its regulations is mandatory for entrepreneurs and investors while having a clear understanding of share capital would undoubtedly help them in this regard.
The understanding of requirements of company registration may be useful in the registration process of a company. Hence, we shall sweep away the curtain and contemplate the different features of share capital in this all-encompassing guide.
Content Outline
Share Capital Types in Hong Kong
There are 4 types of share capital in Hong Kong which is:
- Authorized share capital
- Issued share capital
- Paid-up share capital
- Unissued share capital
Knowing these types of issued share capital is important, especially if you’re asking yourself about what does issued share capital mean. Issued share capital consists of the market value of shares that a corporation has already issued to the shareholders. Those are not the same as ‘paid in share capital’ that is also known as paid-up capital which refers to the part of issued share capital for which shareholders have fully paid.
Let’s explore each type of share capital:
1. Authorized share capital
Share capital, which is also known as nominal capital, indicates the maximum value of the shares that a company is permitted to issue to the shareholders in terms of the legislation. The value of this company is in its Memorandum of Association records and is noted at the time of its establishment. The point to understand here is that all authorized share capital may not be issued instantly. On the contrary, the company would have to apply for amendment of the Memorandum of Association through a resolution of the shareholders if the company decides to issue shares over its authorized share capital.
2. Issued share capital
Derived from the number of shares that a company has allocated and issued to shareholders this share capital is known as issued share capital. These are those shares that are allotted from the authorised share capital and for which the company has the due payment, either by cash or by other assets. The share capital that has been issued may or may not be equal to the share capital that has been authorised. However, as it is less, it cannot exceed it. It is important to keep in mind that a company’s right of pledge against shares comprises their issued share capital and not the authorised share capital.
3. Paid-up share capital
Paid-up share capital is a term used to define the number of outstanding shares of the issued capital for which shareholders have fully paid. It can be in the form of cash, or an agreed value of assets or services equivalent to the stipulated amount. It is noteworthy that there is a distinction between issued shares and paid-up shares, so that a company can issue shares that are partially paid. As a example, a company could issue shares to a shareholder who would not pay the nominal value fully at the beginning with the agreement to come up with the remaining value at a later time.
4. Unissued share capital
Issued share capital, on the other hand, consists of the range of shares that were not issued to shareholders. These shares, however, will be kept in the company’s possession which would allow for additional capital to be raised by issue of these shares whenever it becomes necessary. Please keep in mind that these shares may still aggregate the maximum limit of the company’s authorised share capital, and it is necessary to amend the Memorandum of Association in case the limit for raising funds is exceeded.
Requirements for Share Capital and Compliance
The minimum share capital of a company is compulsory for business registration in Hong Kong.
Minimum share capital required to incorporate a business
The law of Hong Kong suggests a sole requirement for a company which is the presence of at least one share for carrying out the process of company incorporation. Nonetheless, the designated minimum capital for incorporation is not fixed unlike in certain sectors e.g., banking and finance which have a compulsory minimum capital. This gives firms, regardless of their sizes, from small start-ups to enterprises, a chance to locate and operate in Hong Kong. Nonetheless, companies must take both the current needs of operations and the plans for growth into consideration when selecting the type of share capital.
Though the minimum share capital requirement is not specified by law, it is common for private companies to establish a minimum share capital of HK$1; and for public companies, the minimum is set at HK$10,000.
The par value and currency implications
In Hong Kong, a share capital can be in any currency, not just Hong Kong dollars. This gives rise to the flexibility of companies, particularly for those who are dealing with international business. The second factor is the previous practice of Hong Kong companies when issuing shares, which used to have a par value, a nominal value given to each share. But, with the Companies Ordinance revision in 2014, companies can now go for share issuance with no par value. This permits easier accounting and enables the company to choose among dividend distribution options.
Distribution and Assignment of Shares
Acquisition and transfer of shares are fundamental procedures for shareholders when it comes to the sale and purchase of shares that pertain to that particular company. The allotment is the primary process whereby shares are initially distributed among shareholders, while the transfer is what follows later on through sales or the transfer of shares from one shareholder to another.
Steps involved in allocating and issuing new shares
In Hong Kong, new allotment and issuance of shares are required in a series of stages. First, they confirm that they can issue shares only within the company’s authorized share capital. Then again, the directors shall make a board resolution, which should contain the specified number of shares and the price of shares issued by the board. In addition, the necessary shareholders’ approval may be required if the company’s articles of association mandate it. Following the approval the company issues share certificates to the shareholders, and the share register is updated accordingly.
Documentation and processes for sharing transfers
Transfer shares in a Hong Kong company is done as follow. The first thing would be the share transfer form which has to be duly filled out and signed by both the transferor and transferee who will then submit it. In case of the shares not being fully paid, the directors of the company require to approve the transfer. Approval of the transfer leads to the affected share register being updated, the old share certificate being canceled, and the issuance of a new certificate in the name of the transferee. It is essential for the company to keep in mind that any share transfer might affect its control on the company and its influence, as a result, it should be done in a very careful way.
Increasing and Reducing the Share Capital
Sometimes companies may experience cases where they need to either increase or decrease their share capital. As for the rise of the share capital, it takes place via new shares or rights issues.
However, the option of share capital reduction for Hong Kong companies is to either purchase back shares and reduce the issued share capital or initiate a capital reduction scheme which involves the cancellation of share capital. It is a regulated process that is aimed at protecting the interests of creditors and shareholders.
Procedure for raising share capital
A company would seek to raise its share capital by issuance of new shares or rights issues. When new shares are issued, the company does that by offering additional shares to the current shareholders or the new investors. Secondarily, a rights issue allows current shareholders to purchase the new shares, in proportion to their existing shareholding before any new prospects have the chance. This ensures that existing shareholders keep their percentage of ownership in the company. Both methods under the Companies Ordinance make sure all shareholders are dealt with appropriately.
Reduction of the share capital through buybacks or capital reduction plans
The reduction of share capital may be done through the process of buying back shares or a capital reduction scheme. A share buyback is an action that entails the company buying back its shares from the existing shareholders and as a result the issued share capital is decreased. A capital reduction scheme works as reducing the nominal value of the shares or cancelling unpaid shares; which in turns reduce the authorised share capital. Both processes involve getting approval from the shareholders and in some cases from the court to participate to the interests of the creditors of the company.
Keeping Records of Share Capital
Accounting for share capital is one of the most important functions of any organization. Correct share capital records allow to trace the ownership structure, ownership changes, and rights and obligations of shareholders. The accounting of share capital covers the issuance of shares and the accurate maintenance of the company’s share ownership records. This is critical in order to make decisions more efficiently and to comply with the legal requirements.
Accurate share register and capital records
Keeping a register of shares and capital accounts up-to-date and accurate is of utmost importance for transparency and compliance with regulations, and it is the basis of good accounting. The shareholders’ register helps the company keep a precise account of its ownership structure and changes in it. It is an important document for decision-making purposes. Additionally, these records are equally useful in providing proof of ownership for the shareholders and important details during audits, dispute resolution, and any possible investment or sale.
Complying with report and disclosure protocols
Hong Kong-listed companies are subject to different reporting and disclosure requirements related to the share capital. To illustrate, they should report to the Companies Registry any amendments to the share capital e.g. new issuances or share transfers. Also, the annual return should reflect the current shareholders and the updated share capital constituting the company. Violation of the obligations will attract various penalties and legal issues.
Shareholding and Rights for Shareholders
The composition of a company’s share capital, and especially in the case of a limited company’s share capital, is one of the most important aspects of company ownership and control. The share capital related decisions should always be done with the goals of not distorting the company`s existing ownership structure and the dynamics of the control. In addition, the interests of shareholders are closely related to share capital, which gives business shareholders the right to vote and dividends entitlement.
Voting privileges and entitlement to dividends
The ownership rights of shareholders are directly linked to the size of share capital, in particular to their voting rights and dividends. Usually, each share only possesses a vote, and the amount of return paid out is in direct proportion to the number of shares owned. Nevertheless, a company may offer particular classes of shares, for example, preference shares, that have distinct privileges. The recognition of these rights obliges shareholders to be active participants in corporate decision-making and thus get their share of the profits.
Effects of share capitalization on control and ownership
The company’s share structure can be a decisive factor in determining the company’s ownership and control. For instance, an increase in the number of shares may lead to a dispersal of the ownership among existing shareholders which in turn may reduce their influence over company’s decisions. However, a share buyback could also stifle control and cause a concentration of power. Consequently, the share capital issue should take into account how it will affect the ownership structure and the dynamics of control.
Conclusion
Shares are a double-edged sword, a tool that might help accelerate business development and yet sometimes hamper control in the company if not managed properly. For Hong Kong, the tax issue of capital gains as of now is non-existent but maximum caution is required to prevent its potential amendments
Affirming and formulating an effective share structure can lead to company growth, equal opportunities, and accountability. Know simple math to determine the share capital which is necessary to have a clear picture of your company’s financial health.
To make sure you are well informed about Hong Kong’s share capital, please contact FastLane Group for free consultation and quotation. FastLane Group specializes in HK income tax, accounting, and advisory services, which address specific individual needs. We provide our services for all of your financial objectives to ensure that you have the assistance you need to prosper in the dynamic business scene of Hong Kong. Contact us now!