Corporate governance is the system of rules, practices, and processes by which a company is directed and controlled. The purpose of corporate governance is to facilitate effective and prudent management that can help the company in its long-term successes. It involves balancing the interests of the company’s stakeholders, such as the board of directors, shareholders, customers, suppliers and the government.
Each stakeholder have different roles and responsibilities, and the harmonious merge between them results in good corporate governance. The division of roles between the shareholders and directors must be highlighted. Directors govern the management and operation of the company, while the shareholders own and control the company by their shares. Usually, the founders of start-ups tend to be both the shareholders and directors. However, as the company grows, the power of control over the company will need to be delegated to directors. However, to fulfil the shareholder’s aim and their input, there is a mechanism for shareholders to monitor the directors, which will be later explained.
2. Power of Shareholders
2.1 Power of Voting
Shareholders retain the power to decide on key matters of the company through their power to vote. Most of these key matters must be listed in the companies’ Articles of Association, or the Companies’ Ordinance if not specified.
- Election of Directors
Shareholders vote for the election of directors (Model Articles, Art22(1)(a)). A director may be appointed by ordinary resolution. However, some start-up companies may wish to have each shareholder appoint one director.
- Removal of Directors
Shareholders may remove any director before the expiration of his/her term under the Companies Ordinance. The effect of this section cannot be altered by the Articles of Association.
- Other matters requiring shareholders’ approval
- Alteration of Articles of Association
- Changes to outstanding shares (e.g. allotment of shares)
- Amalgamations (mergers or consolidation)
- Members’ winding up by special resolution
2.2 AGMs and EGMs
Shareholders’ power to vote is exercised through two types of meetings: annual general meeting (AGM) and extraordinary general meeting (EGM).
- AGMs are shareholders meetings held within 6 months after the close of each financial year for public companies; and within 9 months for private companies. Directors possess a duty to call the AGM into action.
- EGMs are shareholders meeting, separate from AGMs. They can be called by either the directors or shareholders.
Prior to the meeting, a notice must be distributed to all shareholder with the required information (e.g. date, time, place, actions or resolutions to be discussed).
- Written Resolutions
Instead of meetings, a written resolution may be adopted. However, this is not applicable to the removal of a director. A written resolution is passed when its unanimously agreed by the members.
2.3 Derivative Actions and Unfair Prejudice
Shareholders’ power of control can be oppressed by directors and other shareholders. If the Articles or Shareholders Agreement fail to stipulate measures, the law provides final resort for distressed shareholders.
- Derivative Action
This allows shareholders to take a court action against the company’s directors for misconduct. Usually, the misconduct can be cured by the company through a majority vote of the shareholders. But, if the majority shareholders fail or refuse to take action against the director(s), a derivative action can be used.
- Unfair Prejudice
This allows for shareholders to sue other shareholders where they act in an unfairly prejudicial manner, thus breaching the legitimate expectations that shareholders have in relation to how the company should be managed. These usually arise from personal relationships between the shareholders and agreements between them upon forming the company; thus, these actions are usually limited to smaller companies where shareholders have pre-existing relationships with each other.
3.1 Delegation of Powers
Shareholders in larger companies will usually delegate their powers to directors.
3.2 Directors’ Legal Duties
Directors are subject to legal duties, including:
- Act in good faith;
- Act in best interests of company;
- Avoid conflicts between interests of company and director’s interests
- Exercise care, diligence and skill
- Avoid fraudulent trading
A director incurs criminal liability of will be personally liable for compensation of loss/damage or may be suspended from the position if he/she breaches these duties.
3.3 Independent Non-Executive Directors (INEDs)
INEDs facilitate better corporate governance and listed companies are required to appoint a certain number of INEDs. In smaller companies, they are not required but may serve a useful function. The concept of “independence” excludes directors who are by any means related to the company (e.g. shareholders, former employees etc.)
The advantage of appointing INEDs is that they provide better check and balance mechanisms for accountability to shareholders. For small enterprises, they can take on additional roles like networking agents or providing knowledge for effective business developments.
4. Company Secretaries
4.1 Company Secretaries
Each company must appoint a company secretary. They are appointed by the directors. Their role is to ensure the company notifies the Company Registrar about changes to its identities, names and addresses of company’s directors and that the company submits its annual returns.
5. Overseas Companies with place of business in HK & HK companies operating overseas
- Company Secretaries
If the company is incorporated in a foreign jurisdiction but has a place of business in HK, the company must comply with applicable HK laws as well as the laws of the place of incorporation.
HK incorporated companies operating outside of HK must comply with HK laws with respect to disclosure obligations. But different jurisdictions have different laws and companies may need to be wary of them, such as, labour practices and employment law; protection of property rights (IP rights); tax regimes; system for dispute resolutions etc.
6. Listed Companies
In HK, companies may be listed on either the Main Board of the GEM Board. Thus, companies are subject to either the Main Board Listing Rules or the GEM Board Listing Rules. The two rules refer to specific matters of corporate governance. They include stringent requirements like a minimum number of INEDs or the need for an independent remuneration committee.
7. Additional Resources
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