Steps to Reducing Share Capital in Hong Kong

In Hong Kong, a number of procedures and legislation outlined in the Companies Ordinance (Cap. 622) guide companies, particularly private companies limited by shares, which are the most common type of private company structure in Hong Kong, in the process of share capital reduction.

While this process is straightforward, it can save your company from financial trouble or even bankruptcy in specific situations.

Share capital, also known as authorized share capital, refers to the total value of a company's shares as defined by their nominal value (par value).

Start-up businesses often use a reduction to save on fees while they're getting their feet wet, but larger companies may also wish to capitalize on this process.

Share capital reduction must first be approved by the company's board of directors.

Following this, a shareholders' meeting will be held in order for the proposal to be voted on.

All orders for share capital reduction are made through the Registrar of Companies.

The company has one month to submit all the necessary paperwork, and the required minimum number of Directors must be present.

The process often takes around one month, but sometimes more time is needed. It must follow very strict procedures for the changes to register correctly on the company's records.

Steps to Share Capital Reduction in Hong Kong

In Hong Kong, companies have two main options for reducing their share capital: the court-free method and the court-sanctioned method. Each method caters to different situations and has its own set of requirements.

Court-Free Method

This method is preferred due to its speed and lower cost. However, it comes with specific eligibility criteria.

Company Solvency

The company must be solvent, meaning it can pay its debts as they fall due. The directors need to provide a written solvency statement confirming this.

No Creditor Objections

No creditor should object to the reduction. If there are objections, the court-sanctioned method becomes necessary.

Reduction Criteria Met

The reduction must comply with specific criteria outlined in the Companies Ordinance (Cap. 622). These include not leaving only redeemable shares and ensuring the reduction is fair and equitable to all shareholders.

Steps in Court-Free Method

Internal Review and Approval

• The company reviews its Articles of Association and contracts to identify any restrictions or potential issues with the reduction.
• The board of directors passes resolutions to approve the reduction.
• Each director makes a written solvency statement.

Shareholder Meeting and Public Notice

• Shareholders are notified and called to a meeting to vote on the proposal. For approval, a special resolution (usually requiring a 75% majority vote) is needed.
• A public notice of the proposed reduction is published in the Hong Kong Gazette.

Finalization with Registrar of Companies

• After three months from the public notice, the company files the required documents with the Registrar of Companies.
• Upon approval, the company's share capital is formally reduced, and cancelled shares are removed from the capital structure.

Use this method if your company is solvent, there are no creditor objections, and the reduction meets the criteria.

Court-Sanctioned Method

This method involves a court application and is used in scenarios where the court-free method isn't suitable.

If the company is not solvent, it can still reduce its share capital through a court order.

Also, if creditors object to the reduction using the court-free method, the court-sanctioned method allows the court to consider the objection and potentially approve the reduction with adjustments.

And, in situations where the reduction involves intricate details or conflicts with shareholder rights, the court's oversight might be necessary.

Steps in the Court-Sanctioned Method

Preparation of Petition

A petition is prepared outlining the reasons for reduction and seeking the court's approval.

Court Hearing

A hearing is held where the company presents its case and any objecting parties can present theirs. The court considers the arguments and decides whether to approve the reduction.

Order from the Court

If approved, the court issues an order outlining the specifics of the reduction.

Finalization with Registrar of Companies

Similar to the court-free method, the company files the court order and other required documents with the Registrar of Companies for registration of the reduction.

Consider this method if your company is insolvent, if creditors object, or if the reduction involves complexities.

Why Reduce Share Capital?

Share capital reduction can be useful for many reasons:

• Reduces the total number of shares, which means that each shareholder will hold a larger ownership percentage of the company's equity.
• Used to reduce running costs because fees are calculated on the total shareholding of an organization.
• Changes back to share capital increase if it is required in the company's future.
• Can be a simple and effective way to save your business from going out of business.
• Beneficial for many reasons including reducing expenses, increasing the percentage of shares owned by shareholders, and avoiding bankruptcy due to various fees calculated on a company's shareholding.
• If a company has accumulated surplus capital or distributable reserves, a reduction can be utilized as a means to return this excess to shareholders, often being more tax-efficient than paying dividends.
• Through the use of surplus capital for reduction, the company can decrease its overall share capital without directly affecting the paid-up capital, which represents the amount shareholders have invested.
• Share capital reduction can simplify a complex capital structure characterized by multiple share classes, making the company more appealing to investors and simpler to manage.
• Reduction can serve as a signal of confidence in the company's future prospects to investors.

Share capital reduction will not be successful if it is carried out to avoid creditors or save the business from bankruptcy.

This action involves strict procedures and requires approval from both the company's Board of Directors and shareholders before a vote is held at a shareholders' meeting.

Reduction of share capital can take a month or more as it follows very specific procedures.

Company Share Repurchases (Share Buybacks)

In Hong Kong, company share repurchase or share buyback refers to a process in which a company buys back its own shares from existing shareholders.

Companies can also consider share buybacks from shareholders to manage their capital.

• Targeted Reduction: Companies can repurchase specific shares from particular shareholders.
• Market Signaling: Repurchases can signal investors' confidence in the company's prospects.

It's important to note that company repurchases are subject to regulations and implications different from those of share capital reduction.

Conclusion

A private company limited by shares (LTD) and a public limited company (PLC) in Hong Kong will follow the procedures for share capital reduction outlined in the Companies Ordinance (Cap. 622). These procedures typically involve obtaining board approval, holding a shareholder general meeting, filing relevant documentation with the Registrar of Companies, and ensuring compliance with solvency requirements.

Share capital reduction is beneficial not only because it reduces expenses but also because it increases the percentage of shares owned by shareholders.

A reduction can be carried out to avoid creditors or save the business from bankruptcy, but this will cause the share capital reduction to fail.

Share capital reduction always follows strict procedures and must first be approved by the company's board of directors before being put to a shareholders' meeting for voting.

Share capital reduction always takes a month or more to complete, but share capital reduction should never take longer than necessary as procedures must be followed correctly in order to register changes correctly on the company's records.

Share capital reduction can be beneficial because it reduces expenses, increases share ownership percentage, avoids bankruptcy fees, and saves the business if necessary. Share capital reduction can be carried out to avoid creditors or save the business from bankruptcy.

Share capital reduction is an excellent strategy that every company should consider when reducing expenses becomes necessary.

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