The Companies (Amendment) Ordinance 2018 ("CAO") came into effect on 1 March 2018. It introduced several new requirements for enhancing transparency of corporate beneficial ownership and control with a view to fulfilling Hong Kong's international obligations in, among others, combating tax evasion, money laundering and terrorist financing.
Under the CAO, every Hong Kong incorporated company (except listed companies) must maintain a significant controllers register ("SC Register") showing the company's up-to-date beneficial ownership information, to be accessible by law enforcement officers upon demand.
Meaning of significant controllers
The SC Register should identify any significant controllers of the company, who include:
(i) a registrable person who is a natural person that has significant control over the company; and
(ii) a registrable legal entity e.g. a company, which is a shareholder of the company that has significant control over the company.
A person or entity has "significant control" over the company if the person or entity fulfils one or more of the following conditions:
- holds, directly or indirectly, more than 25% of the issued shares in the company or, if the company does not have a share capital, holds, directly or indirectly, a right to share in more than 25% of the capital or profits of the company;
- holds, directly or indirectly, more than 25% of the voting rights of the company;
- holds, directly or indirectly, the right to appoint or remove a majority of the board of directors of the company;
- has the right to exercise, or actually exercises, significant influence or control over the company; and
- 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.
In relation to condition 4, there will be an indication of "significant influence" where a person can ensure that a company generally adopts the activities which that person desires. Where a person can direct the activities of a company, this will indicate "control". The Guideline on the Keeping of Significant Controllers Registers by Companies issued by the Companies Registry has provided detailed guidance with illustrative examples on the above conditions.
A company's obligations in relation to the SC Register
The non-exhaustive key obligations of a company are highlighted below:
1. issue written notices to persons whom it has reasonable cause to believe are significant controllers within 7 days after the company first has that knowledge or belief, and enter the required particulars of a registrable person into its SC Register within 7 days after they have been confirmed by the registrable person;
2. keep the register updated by making any registrable change with respect to each of its significant controllers, which includes a significant controller's cessation as a significant controller, and a change rendering the particulars already entered incorrect or incomplete;
3. take reasonable steps to identify the significant controller(s), including reviewing the company's register of members, articles of association, shareholders agreements or other agreements and issuing notice(s) to any person who is believed to be the significant controller and any person who is believed to know the identity of the significant controller; and
4. designate a representative to provide assistance relating to the company's significant controllers register to a law enforcement officer.
Non-compliance with the SC Register obligations is a criminal office, with both the company and every responsible person of the company potentially liable for a fine of HK$25,000 and possible additional daily fines of HK$700. Any person or entity that knowingly or recklessly provides misleading, false or deceptive information in a material particular may be liable to a fine up to HK$300,000 and 2-year imprisonment.
The way forward
In light of the CAO, companies should ensure that they take appropriate actions to comply with the new legal requirements. The first step is to identify their significant controllers. This exercise requires careful consideration of the ownership structure to establish whether a person is a significant controller, particularly for companies with complex group structures. Apart from taking reasonable steps in reviewing a company's constitutional documents and other relevant covenants and agreements, the exercise may also involve inquiring and assessing the company's business operation arrangements, such as how business activities are carried out, in ascertaining any other person with significant influence or control over the company. Hong Kong companies should be aware of their continuing obligations in this regard.