Issue & Allotment Of Shares: A Helpful Guide For Hong Kong Businesses

Share capital is a crucial aspect for limited companies in Hong Kong, and as the business expands, its capital may need several adjustments to align with the current needs. These changes are likely done through the issue and allotment of shares.

The above processes play an integral role in corporate finance by facilitating capital raising for companies. For that reason, let us explore the definitions of issue and allotment of shares, as well as the essential steps in today’s article.

Overview of Hong Kong issue & allotment of shares

To help you better understand these processes, this section will provide you with detailed definitions and information about the issuance and allocation of shares in this robust jurisdiction.

What is the issue of shares in Hong Kong?

Issue of shares is when a company increases its share capital by creating and offering new shares. This involves the company making a decision to issue additional shares and then making these shares available for purchase by investors.

Companies often undertake share issuance to raise funds for a variety of purposes, such as financing expansion plans, funding research and development, reducing debt, or enhancing overall financial flexibility.

What is the allotment of shares in Hong Kong?

Allotment of shares is the allocation of the purchased shares to specific individuals or entities who have applied to purchase shares during the issuance period. This activity takes place right after the new shares are announced and issued.

To put it simply, issuing shares includes the entire process of the creation and sale of new shares, while allotment of shares is only the action of distributing those newly issued shares to specific buyers.

Who can allot shares in a Hong Kong company?

According to the Hong Kong Companies Ordinance (Cap. 622), the directors of a company can allot shares if the company approves in advance through a formal resolution with a specified expiration date.

Note that the approval of share allotment right can be given unconditionally or subject to several conditions, for a particular exercise of power or in general. Furthermore, this decision can be revoked or varied by another company resolution at any time.

Now that we’ve covered the essential definitions and requirements, it’s time to take a look at the detailed steps of Hong Kong share issuance and allotment in the upcoming section.

Methods for companies to issue and allot new shares

The following are some of the common methods for this process:

Initial Public Offerings (IPOs)

An IPO is when a private company becomes a publicly traded company by offering its shares to the general public on a stock exchange.

In this event, the company works with underwriters and investment banks to determine the offer price and the number of shares to be issued. The shares are then sold to institutional and retail investors through the stock exchange, marking the company’s transition from private to public ownership.

Rights issues

This option encompasses the issuance of new shares to existing Hong Kong shareholders, giving them the right (but not the obligation) to purchase additional shares at a predetermined price, often at a discount to the current market price.

Notably, companies tend to offer rights to current shareholders in proportion to their current shareholding so they can maintain their proportional ownership. They can then choose to exercise their rights or sell their rights in the open market.

Private placements

During private placements, the company negotiates and sells shares to a limited number of investors in a private transaction. Private placements are typically used when a company needs to raise capital without going through the extensive regulatory requirements and public scrutiny associated with an IPO.

In this case, the terms of the placement, including the price and number of shares, are negotiated directly between the company and the investors.

Steps to share issuance and allotment in Hong Kong

Issuing and allocating shares of a business in a jurisdiction as robust as Hong Kong consists of several key steps governed by stringent legal frameworks.

Listed below are detailed instructions for Hong Kong companies that have never gone through an initial public offering:

Step 1: Assess the company’s capital needs

The initial phase involves a thorough examination to determine the precise amount of capital required to fuel the business’s vision. Through detailed financial evaluations, including budgeting, forecasting, and consideration of market conditions, the company shall identify the necessary funding for future plans.

Moreover, for companies planning to issue shares without an IPO, this is when you choose which investors to issue your shares to and how many shares to issue.

Step 2: Seek stakeholders’ approval for issuing new shares

Under the Companies Ordinance (Cap. 622), the company directors must draft and sign a formal written resolution, stating the exact number of shares to be issued, for the relevant directors to issue and allot new shares.

Once the resolution has been passed, it must be delivered to shareholders (if any) as a proposal. The shareholders will then approve of the decision by:

• Signing directly on the proposal; or
• Through a meeting for voting, with approval granted based on a majority decision.

Additionally, the company will need to consider its Articles of Association for any additional clauses or conditions to be fulfilled.

Step 3: Sign an agreement and make payment

After obtaining the necessary approvals, the company proceeds to the formalization stage. A legally binding agreement is drafted and signed between the company and the underwriters or investors involved in the share issuance.

Simultaneously, the investors shall make the necessary payments associated with the issuance. This involves the transfer of funds from investors to the company, completing the financial aspect of the share issuance.

Post-allotment obligations for Hong Kong companies

After the completion of the issue and allotment procedures, the business must fulfill several mandatory duties. The three most crucial ones include:

Submit the Return of Allotment

Within one month after an allotment of shares, the entity must deliver a specified Form NSC1 – Return of Allotment to the Registrar to inform them of the share allotment. This document shall include the information below:

• The exact number of shares allotted
• Each allottee’s name and address
• The increased amount of share capital resulted from the allotment (if any)
• A statement of capital reflecting the updated details on the share structure (e.g., the total number of issued shares, the current share capital amount, shareholders’ identity, etc.)

If the company fails to meet this filing requirement due to uncontrollable or accidental events, the responsible person(s) can apply for a court extension period.

Update the registers of members

Within 2 months of the date of the allotment, the business must register the allotment of shares by updating the details of its current members in the register of members:

• The name and address of each member;
• The date they officially become a member;
• The date they stop being a member (if applicable);
• The specific shares held by each member, and
• The amount paid or agreed upon as payment for the shares by each member.

Issue the share certificates to shareholders

Finally, the business must also complete the certificates for the shares and have the certificates ready for delivery no later than 2 months after the allotment. The information on these certificates corresponds to the details previously submitted in the Return of Allotment form.

It’s important to note that there are penalties for failing to submit the Return of Allotment, update the membership register, or issue share certificates on time and accurately:

• A fine at level 4 (HK$25,000) for the company and every person responsible.
• An additional $700 fine for each day the offense continues.

To wrap up

In summary, the issue and allotment of shares are pivotal processes for Hong Kong limited companies seeking to raise their capital structure, facilitate growth, and engage with potential investors.

Today’s article has thoroughly addressed key aspects: from essential definitions to the necessary steps of issuing and allotting new shares to help you navigate the processes better. Alternatively, you can consider opting for our services for a smooth and hassle-free journey.

If you have any inquiries or require assistance with business operations in Hong Kong, our dedicated team is available to provide helpful insights via service@bbcincorp.com. Get in touch with us today!

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