Asia: Corporate Newsletter - June 2013

by DLA Piper

Companies ordinance rewrite: the latest

The third batch of subsidiary legislation for the implementation of the new Companies Ordinance was gazetted in May:

Title of the gazetted subsidiary legislation  Purpose of the subsidiary legislation 
Companies (Model Articles) Notice Companies incorporated in Hong Kong are required to have articles of association to regulate their internal management. The new Companies Ordinance empowers the Financial Secretary to prescribe model articles for companies, and this subsidiary legislation sets out those model articles. A company may adopt any or all of the provisions of the model articles as its articles.

The model articles will replace the default articles set out in the existing Ordinance (eg Table A).
Company Records (Inspection and Provision of Copies) Regulation  The Companies Ordinance provides for the rights to inspect certain records required to be kept by companies. The provisions concerning the rights to inspect and obtain copies of records are contained in the principal Ordinance, whilst this subsidiary legislation will deal with the detailed provisions concerning the arrangements for inspection and provision of copies and related matters.

This subsidiary legislation introduces a comprehensive regime for inspection of company records and consolidates the arrangements for different types of company records. 
Companies (Non-Hong Kong Companies) Regulation  Non-Hong Kong companies are required to apply for registration within one month of the establishment of a place of business in Hong Kong. In addition, they must deliver to the Companies Registry certified copies of their certificate of incorporation, constitution, latest accounts as well as annual returns.

This subsidiary legislation details these requirements applicable to non-Hong Kong companies. 
Companies (Fees) Regulation  This subsidiary legislation prescribes the various fees payable for (i) the registration of companies/documents, (ii) inspection or obtaining of documents/information, (iii) the Companies Registrar's approval or licence and (iv) other miscellaneous fees payable under the Ordinance. 

In related news, the draft Companies (Unfair Prejudice Petitions) Proceedings Rules (Rules), which form part of the subsidiary legislation to the new Companies Ordinance, have been submitted by the government to the Legislative Council. The Rules prescribe the detailed technical and procedural matters regarding unfair prejudice petitions, for example, the form/presentation of the petition and the drawing up and service of the court orders. The Rules will be particularly relevant to minority shareholders because they provide a form of redress if the company's affairs are conducted in a manner which is unfairly prejudicial to their interests.

It is understood that the government still intends to bring the new Companies Ordinance into operation in the first quarter of 2014 after the various pieces of subsidiary legislation have been enacted.

Liquidity arrangements for listings by introduction

Listing by introduction is one of the listing methods in Hong Kong, and involves the listing of securities of a company which are already in issue and listed on another stock exchange. The listed company’s securities which are held by existing holders will first need to be transferred to the company’s Hong Kong register before they can be traded in Hong Kong. Because of this, a company that intends to list on the Hong Kong Stock Exchange (SEHK) by way of introduction must submit its proposed liquidity arrangements for vetting when it submits its listing application form – the purpose of this is to ensure there is sufficient liquidity of these securities to meet the potential demand on the Hong Kong market (especially during the initial period of listing) to ensure trading of these securities is conducted in a fair and orderly manner.

The SEHK has recently issued a new guidance letter (GL53-13) to elaborate on the requisite liquidity arrangements that companies must establish during the first one to three months of the introduction. These arrangements encompass the following:

  • Arrangements for batch/expedited removal services - these include services to transfer (and expedite transfers of) existing securities from the company's overseas securities registers to their Hong Kong registers to satisfy the expected demand for their securities in Hong Kong,
  • Appointment of designated securities dealers - at least one regulated entity acceptable to the SEHK must be appointed to carry out arbitrage, bridging and other trading activities to enhance the liquidity of the company's securities. Such activities must be conducted in line with market practice and requirements under the regulatory framework (eg regulations regarding short-selling); and
  • Investor education - adequate arrangements must be in place to inform the investing community of the securities transfer process and the liquidity arrangements in Hong Kong. These include, for example, the web proof information pack published on the SEHK's website and the company's website, as well as public announcements regarding developments/updates on the liquidity arrangements.

The listing document itself should also contain a dedicated section on matters such as the batch/expedited removal services, activities provided by the designated securities dealer and details of investor education activities performed by the company and the sponsor in relation to the liquidity arrangements.Listing applicants should note however that the above liquidity arrangements are for reference only and may be varied depending on matters such as the company’s circumstances or capital holding structure. Companies intending to list on the SEHK by introduction should take into account the potential demand in Hong Kong for their securities when designing their liquidity arrangements. Where necessary, legal advice and guidance from the SEHK should be sought.

Guidance on disclosure of risk factors

As a continuation of the Simplification Series 1, the SEHK has published guidance letter GL54-13, which focuses on disclosure in the "Risk Factors" section of listing documents. As a basic position, the SEHK states that the section should be presented in a manner that is concise, organised logically, uses plain language and provides sufficient relevant information to explain how the risks affect the listing applicant. Descriptions of risk factors should be consistent with the information in other sections of the listing document.

Set out below is further guidance provided by the SEHK:

  • Layout: related risk factors should be grouped together under appropriate headings, eg "risks relating to the applicant's industry". Under each heading, risks should be discussed individually (ie each risk factor should focus on disclosing a single principal risk). Risk factors within each heading should be presented in order from most to least important,
  • Relevance: for each risk discussed, the listing applicant should explain clearly and in context how that risk has a significant effect on the applicant, its industry or the offering. The applicant should describe what the actual risk is (instead of just providing the background information) and the nature and extent of such risk. Where possible and meaningful, the applicant should also disclose the likely impact of that risk in quantitative terms,
  • Mitigation: risk factors should relate to risks that the applicant is unable to adequately mitigate. For instance, it is not appropriate to include the applicant's possible failure to comply with legal requirements as a risk factor because each applicant is expected to comply with the relevant laws and regulations. Also, mitigating facts should be excluded from the description of each risk factor as they may divert investors' attention from the impact of that risk; and
  • Disclaimers: blanket disclaimers to the effect that there may be undisclosed risks should not be included, because this goes against the purpose of risk factor disclosures (ie to provide meaningful cautionary statements to help investors understand and focus on the applicant's specific risks).

Listing applicants should note that the GL54-13 only provides guidance as to how the identified risk factors should be disclosed. The responsibility of identifying and determining risk factors that are applicable to the applicant's business, however, remains with the listing applicants themselves. Listing applicants should also be aware that they should disclose an identified risk even if it has a low probability of occurring, otherwise there may be significant legal and regulatory consequences for non-disclosure.

Labuan now an acceptable jurisdiction

The SEHK has considered and accepted Labuan (a federal territory administered by Malaysia) as a jurisdiction for an issuer’s incorporation under the Listing Rules, provided that a Labuan listing applicant will have to address any shareholder protection deficiency based on its individual circumstances and amend its constitutional documents to satisfy a particular requirement. Listing applicants will also have to demonstrate a reasonable nexus with Labuan.

Future listing applicants incorporated in Labuan may follow the streamlined procedures in Guidance Letter GL12-09. In practice, it means that they need not complete a detailed line-by-line comparison of the list of shareholder protection areas as listed in the Joint Policy Statement regarding Listing of Overseas Companies issued in March 2007 - instead they can adopt similar arrangements as the previous Labuan issuer and amend their constitutional documents accordingly.

Reduction of business registration levy

Following the introduction of the one-stop company incorporation and business registration service in 2011, a person who applies for incorporation of a local company or registration of a non-Hong Kong company under the Companies Ordinance will be deemed to have made a simultaneous application for business registration. Upon approval of an application for company incorporation or registration, the Companies Registry will issue the certificate of incorporation/registration and the business registration certificate in one go.

With effect from 19 July 2013, the levy rate per annum for the business registration certificate will be reduced from HK$450 to HK$250.

Latest developments in the prc: foreign exchange rules further simplified for FDI in China

On 11 May 2013, the State Administration of Foreign Exchange of the PRC (SAFE) released the Provisions on Foreign Exchange Administration of Inbound Direct Investment by Foreign Investors (?????????????????), which entered into effect on 13 May 2013 (SAFE Circular 21). This is another important piece of SAFE regulation related to foreign direct investments (FDI) in China following the issuance of several circulars in this area by SAFE since late 2012. SAFE Circular 21 is regarded as a further step for SAFE to simplify and streamline the foreign exchange administration regime for foreign investors. A list of FDI-related foreign exchange regulations that have been abolished (????????????????) and the Operating Guidelines and Specifications on Matters Relating to the Inbound Direct Investment Business (????????????) (Operating Guidelines) are also attached to SAFE Circular 21.

Relationship with SAFE Circular 59 and other SAFE regulations

In late 2012 and early 2013, SAFE promulgated a series of regulations aiming to simplify the foreign exchange procedures for foreign investors investing in China. Those regulations include SAFE Circular 58 (relating to foreign invested partnerships (FIPs)) 2, SAFE Circular 59 (relating to inbound and outbound investments) 3 and SAFE Circular [2013] No. 19 (relating to foreign debts) 4. Amongst these regulations, SAFE Circular 58 was abolished by SAFE Circular 21, and the relevant foreign exchange procedures applicable to FIPs have now been integrated into SAFE Circular 21 (eg item 1.2, 1.3 and 1.4 of the Operating Guidelines). Under SAFE Circular 21, FIPs are generally treated the same way as other foreign-invested enterprises (FIEs) in terms of relevant foreign exchange matters.

SAFE Circular 59 covers foreign exchange matters for both inbound and outbound investments, while SAFE Circular 21 only deals with inbound investments. SAFE Circular 59 has simplified foreign exchange procedures for FDI, and based on comments solicited from various parties on SAFE Circular 59, SAFE enacted this SAFE Circular 21 to further streamline foreign exchange matters for inbound investments. In short, SAFE Circular 21 supplements and takes precedence over the part of SAFE Circular 59 dealing with inbound investments.

SAFE Circular [2013] No. 19 specifically regulates foreign debt registrations, which are not within the scope of SAFE Circular 21. For any foreign-debt-related foreign exchange procedures, SAFE Circular [2013] No. 19 should be followed.

Registration-oriented foreign exchange regime

Article 3 of SAFE Circular 21 expressly provides that foreign exchange matters of FDI activities are only subject to the registration regime (in contrast to the verification-oriented regime prior to SAFE Circular 59). Similar to SAFE Circular 59, SAFE Circular 21 abolishes various SAFE approval/verification requirements for foreign exchange procedures, and lists out the matters requiring SAFE registration in a more streamlined and unified way.
According to SAFE Circular 21, a foreign investor or FIE needs to complete registration with SAFE for the following FDI matters:

  • Payments from overseas relating to the start-up expenses for setting up an FIE,
  • Establishment of an FIE,
  • Capital contributions to an FIE or payments of consideration to acquire Chinese companies from Chinese investors,
  • Changes to the registered capital of an FIE, such as increases/decreases of registered capital or equity transfer of an FIE,
  • Cancellations of incorporation of an FIE or conversions of an FIE into a domestic company; and
  • Re-investments by an FIE in China.

The Operating Guidelines attached to SAFE Circular 21 provide detailed instructions for SAFE and its local branches to follow when reviewing the application for each of the above registration matters. In addition, the Operating Guidelines also provide template registration forms to be used for such registrations. These instructions and template forms offer very useful information for both the applicants and SAFE officials, which will facilitate the registration process.

It is worth noting that, in contrast to the previous versions of foreign exchange operating guidelines where the required application documents list usually contains an item named "other documents/materials as required by SAFE", the Operating Guidelines attached to SAFE Circular 21 have removed such "all encompassing" item to provide more certainty to the applicants. In addition, SAFE Circular 21 also shortens the review time for SAFE to process the registration application to five working days (which can be extended to 20 working days in special circumstances). These have been seen as welcome signals that SAFE will treat FDI registrations more as a formality than a substantive review.

Once the required SAFE registrations are done, the foreign investor or the FIE may proceed with the following foreign exchange matters directly with the relevant banks:

  • Account openings for various foreign exchange accounts, such as start-up expense accounts, capital accounts, assets realisation accounts and re-investment accounts,
  • Cross-border payments or domestic fund transfers; and
  • Settlements and purchases of foreign exchange (note that RMB settlement of foreign exchange in the capital account for equity re-investment in China is still subject to the relevant SAFE control).

The Operating Guidelines also provide detailed guidance for banks to follow when handling the above foreign exchange matters for FDI activities.

Abolition of several SAFE circulars

According to the list of abolished regulations attached to SAFE Circular 21, a total number of 24 SAFE circulars relating to inbound direct investments have been abolished. Amongst the abolished regulations, it is worth noting that SAFE Circular on Distributing the Operating Procedures regarding Foreign Exchange Administration for Financing and Round-trip Investments by PRC Residents through Overseas Special Purpose Vehicles (?????????«?????????????????????????????»???) (SAFE Circular 19) has been abolished. However, since SAFE Circular 75 5 still remains effective, relevant foreign exchange registrations thereunder regarding round-trip investments are still required. For foreign exchange registrations relating to special purpose vehicles (SPV) established by PRC residents, procedures under items 2.10 6 , 2.11 7, 2.12 8, 2.13 9 and 2.14 10 of the operating guidelines attached to SAFE Circular 59 should be followed. Regarding inbound investments made by such SPVs, SAFE Circular 21 has incorporated the relevant foreign exchange registration into the ordinary registration requirements applicable to other FDI activities.


SAFE Circular 21 is seen as a welcome move for SAFE to further simplify and streamline the foreign exchange administration regime for FDI in a more systematic way. SAFE has sent a clear signal that China's foreign exchange regulatory regime has been shifted from an approval/verification-oriented system to a registration/filing-oriented regime. The issuance of SAFE Circular 21 will no doubt further facilitate FDI activities in China and the internationalisation of the Renminbi.

1 The SEHK has been publishing the Simplification Series, which aim to provide guidance on disclosure in various sections of a listing document. Other topics which have been previously discussed in the Simplification Series include the "Industry Overview" section (SEHK guidance letter GL48-13), "History and Development" section (SEHK guidance letter GL49-13) and the "Business" section (SEHK guidance letter GL50-13).

2 SAFE Circular on Relevant Issues Regarding Administration of Foreign Exchange for Foreign Invested Partnership (????????????????????????????), effective from 17 December 2012 (SAFE Circular 58).

3 SAFE Circular on Further Improving and Adjusting the Foreign Exchange Administrative Policy on Direct Investment (??????????????????????????????),effective from 17 December 2012 (SAFE Circular 59).

4 SAFE Circular on Issuing the Administrative Measures of Registration of Foreign Debts (???????????«????????»???), effective from 13 May 2013.

5 SAFE Circular on Issues relating to Foreign Exchange Administration for Financing and Round-trip Investments by PRC Residents through Overseas Special Purpose Vehicles (??????????????????????????????????), effective from 1 November 2005.

6 Foreign exchange registration for overseas special purpose vehicles established by PRC residents (????????????????).

7 Foreign exchange change of registration for overseas special purpose vehicles established by PRC residents (??????????????????).

8 Foreign exchange verification for purchase/payment of foreign currency by domestic individuals relating to the overseas special purpose vehicles established by PRC residents (?????????????????).

9 Foreign exchange cancellation of registration for overseas special purpose vehicles established by PRC residents (??????????????????).

10 Supplement foreign exchange registration for overseas special purpose vehicles established by PRC residents (?????????????????).

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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