In simple terms, a company’s share capital structure includes the company’s equity and debt that has been acquired through issuing shares to shareholders.
The Companies Ordinance in Hong Kong lays out the provisions regarding share capital requirements, the responsibilities of shareholders, and the governance of transferring and issuing new shares.
To ensure a better understanding of a company’s share capital structure, it is important to first understand what shares are, the different types of shares, who the shareholders are, and what their role is in a company.
Moreover, the concept and requirements relating to transferring and issuing new shares will also be outlined.
What does it mean to have shares in a company?
A company share can be defined as a unit of equity or ownership.
A share of a company owned by an individual represents ownership of that particular company.
Owning shares in a company means that you have voting rights in terms of the management of the company as well as a right to the company’s earnings depending on how much your share is and how much you have invested in the company.
There can be a minimum of 1-50 shareholders in a limited company, and the amount invested by each shareholder in the company makes up the company’s share capital.
What are the different types of shares?
There are six different types of shares which have been classified as ordinary shares, preference shares, redeemable shares, deferred ordinary shares, non-voting shares and management shares under the Hong Kong Companies Ordinance.
1. Ordinary shares
The most common type of shares issued by a company is ordinary shares.
Here, each share holds one vote and represents the equal right to receive any dividends and capital distribution if the company is to be dissolved.
2. Preference shares
If you hold a preference share, you have a preferential right to return of capital and dividends.
You hold a priority over ordinary shareholders and will be entitled to receive dividends before them.
However, you do not have any voting rights, and in some cases, preference shares can be redeemable.
3. Redeemable shares
A redeemable share is one that has certain special terms and can be repurchased at a later date in the future by the company.
The director of the company can fix the date of the repurchase and share redemption price.
4. Deferred ordinary shares
Compared to ordinary shares, deferred ordinary shares have fewer rights as dividends are only paid once all the other different types of shares have been paid back.
Their right to the dividend is deferred until every other type of share is dealt with.
Additionally, those who hold deferred ordinary shares do not have certain voting rights.
5. Non-voting shares
As a non-voting share has no voting rights or right to participate in a general meeting attached to it, it is often allotted to family members or employees of the other shareholders.
6. Management shares
If you hold a management share, you have more control in the company’s operations as you are entitled to extra voting.
What are shareholders, and what are their rights?
Anyone who owns a share in a company is known as a shareholder.
A shareholder can both be an individual or an organization that has bought shares in a company.
They are also known as stockholders who are entitled to receive dividends based on the profitability and success of the company.
Depending on the type of share they hold, they have certain voting rights, can participate in the general meeting and can even be elected to be on the board of directors.
What are shareholders’ roles and responsibilities?
As part of the share capital structure, a shareholder has various responsibilities which include but are not limited to:
- Both appointing and removing the directors of the company
- Monitoring the company’s financial statements and other documents
- Participating in and attending the Annual General Meeting (AGM)
- Voting in matters discussed in the AGM and during elections
- Ensuring that the company has the capital to run its business
What is share capital?
Back to identifying what a share capital is – It is one of the key components necessary to incorporate a limited company in Hong Kong.
The share capital refers to the total amount of capital that is obtained by the shareholders of the company under the investment they have made.
Moreover, the share capital is only returned to the shareholders if the rules attached to the buyback of shares are met.
The share capital for all limited companies in Hong Kong is known as issued capital which is the total value of the shares allotted to shareholders.
It is important to note that according to the Hong Kong Companies Ordinance, there is no requirement for a company to have a minimum share capital.
Why do you need to have a good share capital structure?
After understanding what is included in a company’s share capital and understanding each of its components, we will know to explore the importance of a secure share capital structure.
1. Gain insight into the stakeholders involved
A coherent share capital structure provides an overview of the interests of all the parties involved in the operations of the business.
It highlights the debts owned along with how much equity each shareholder owns.
2. It increases in company value
Having a properly designed capital structure allows the claims and interests of the shareholders to be understood and highlighted.
Therefore, the value of the firm, along with its market price, is also maximised.
3. It ensures that all available funds are utilized
A good share capital structure makes meeting financial requirements more convenient as a breakdown of financial components are already provided.
This further ensures that all funds are raised in the right manner and amount.
4. Shareholder wealth is maximized
A secure and stable share capital structure ensures mitigates any potential risks for the companies and prevents the company from entering into excessive debt.
5. Costs are minimized
The cost of financing and meeting financial requirements is also minimized with secure share capital structure enabling the company to lower its overall costs.
6. It creates opportunities for investment
A proper capital structure enables the company to attract new investment opportunities as a strong share capital structure attracts potential investors.
How can you transfer shares in Hong Kong?
All limited companies in Hong Kong can transfer the shares of their business unless otherwise stated in their Articles of Association.
There is a detailed process set out for anyone who wants to transfer existing shares to another person or company in Hong Kong.
Firstly, the transfer of shares must be according to the provisions set out in the company’s Articles of Association.
The transfer must also be following all other rules of the company and must also be approved by the company shareholders.
The following documents are also required to transfer shares:
- The share transfer contract document
- The instrument of the transfer document
- The sales and purchase agreement
- Any required audit reports or financial statements
Once the required documents are provided with a stamp duty must also be paid.
All documents need to be sent off to the Stamp Office.
The entire process is complete upon all transfer documents being stamped and certified.
Here is what you should always have in mind:
- A share capital structure and the allotment of shares is an important part of the operations of a company
- A share is defined as a unit of ownership and anyone who owns a share in a company is entitled to receive dividends and has voting rights
- There are six different types of shares in Hong Kong
- The share capital refers to the total amount of capital that is obtained through the shareholders’ investment
- Having a good share capital structure is extremely beneficial for a company
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