Stepping into the Hong Kong business scene requires a solid understanding of a crucial concept: share capital. Generally, it refers to the amount of money the company raised for doing business by issuing common shares or preferred stock.
Since private companies limited by shares, or limited companies, are prevalent in Hong Kong, share capital’s role is even more vital. To help you navigate this element, let’s explore its key features below.
Overview of the share capital in Hong Kong
Share capital, also known as equity capital or capital stock, is the total amount of capital that a company raises by issuing shares to its shareholders.
It is a key component of company particulars, representing the shareholding interest of investors. In other words, this is the amount shareholders pay for their shares in exchange for partial ownership and investment in the company.
What is shareholding?
Shareholding is the act of owning shares in a company, turning individuals or entities into shareholders or equity holders.
As shares are equal to parts of the entity’s ownership, shareholders in Hong Kong naturally hold specific rights and obligations, including the authority to make critical decisions and benefit from financial returns.
Legal regulations governing share capital in Hong Kong
Share capital is primarily governed by a well-established legal framework known as the Companies Ordinance (Cap. 622).
In particular, this ordinance specifies the rules related to the types of shares, share classes, issuing and transferring shares, share buyback, disclosure requirements, and so on. Among the regulations, there are several details to take note of:
No par value of shares
Par value is the minimum price at which shares can be issued, also referred to as a nominal value. Hong Kong adopts a mandatory system of no-par value, meaning shares are not bound by a minimum price.
Since there’s no par value limiting the price, a company can modify the number of shares without affecting the total share capital issued and vice versa.
For example, if the company initially issues 500 shares at $20 each, it has $10,000 in share capital. Later, when it issues an additional 500 shares, it can adjust the share value to $10 each and maintain the total share capital, which remains at $10,000.
No share premium
Due to the no-par regime, the share premium, which is an extra amount that investors pay for shares to reflect the perceived value of the company, no longer exists. This is because there would be no par value to subtract from the issue price.
No minimum share capital requirement
As a result of the no-par regime, there is no minimum share capital amount. However, private companies will usually set this amount at HK$1. On the other hand, public companies may set a higher number of up to HK$10,000 to reflect their larger scale. Additionally, businesses requiring special licenses to operate might be subject to a higher amount.
No restriction on the currency
The flexibility in expressing share capital is a notable feature in Hong Kong. Unlike being confined solely to the Hong Kong Dollar, companies engaged in international business have the freedom to denominate their share capital in any major currency.
Beyond the Companies Ordinance, your company could be subject to additional regulations outlined in other relevant legal documents. Thus, consulting with local experts is advisable.
The impact of share capital on the company
Having an adequate amount of share capital ensures a solid shareholding structure.
With a well-organized share system, the entity can gain the trust of investors and secure funding for growth seamlessly, raising the overall value of the entity. Moreover, given Hong Kong’s stringent regulatory landscape, a flexible structure is necessary for adapting to future changes like mergers or acquisitions.
In addition, this facilitates suitable financial approaches (e.g., equity financing, debt instruments, or both) for businesses to reduce expenses and enhance profits with confidence.
Quick tip for constructing the share capital
A useful strategy for managing share capital is to include a reasonable amount of long-term debt capital in your overall capital structure.
This can help reduce unnecessary expenses because the cost of debt capital is typically lower than that of equity or preference share capital, mainly because interest payments on debt are tax-deductible.
What are some common types of share capital?
Generally, the types of share capital often correspond to the different classes or characteristics of shares issued. Below are the 4 types of share capital you should know:
Authorized share capital
Authorized share capital is the maximum value of shares that a company is legally authorized to issue to its shareholders. This is also referred to as the “nominal share capital” or “registered share capital”.
When you incorporate your company in Hong Kong, you can choose to declare your company’s authorized share capital in the Articles of Association, but this amount does not have to be fully issued or paid up.
Issued share capital
The issued share capital is the portion of the authorized capital that has been sold to shareholders.
Suppose a company has an authorized share capital of 1 million shares, each with a face value of $1. However, if the company has only sold 500,000 shares to shareholders, then the issued share capital amounts to $500,000. The remaining are deemed unissued and can be issued in the future if the company’s owner chooses to do so.
Paid up share capital
Paid-up share capital refers to the portion of the authorized share capital that has been issued to shareholders and for which they have made the required payment, in exchange for the shares they own.
When a business issues shares, shareholders are typically required to pay a certain percentage of the nominal or face value of the shares.
How do issued share capital and paid up capital differ from each other?
While issued share capital covers all shares available to be issued by a company, paid-up share capital is the total value of the shares that shareholders have paid in reality.
In short, the paid up capital is the actual financial contribution of the company.
Called up and uncalled share capital
When shares are issued, the business may not require immediate full payment. Called up share capital is the amount for which shareholders have been asked to pay.
In contrast, uncalled share capital is the portion for which shareholders have not yet been requested to make payments. It shows the potential future financial commitment that they may be called upon to fulfill.
To exemplify, if a company issues shares with a face value of $1 each and asks shareholders to pay 70% initially, the called-up and uncalled share capital would be $0.70 and $0.30 per share, respectively.
What changes can you make to the company’s share capital?
To adapt to changing financial landscapes, businesses undertake changes to their share capital, which may include increases and reductions of the existing amount.
Increase of share capital
Increasing the share capital of a company involves expanding the total value of its issued shares, thereby enhancing its financial capacity. This can be accomplished through two primary methods:
Issuance of new shares
This means creating and selling additional shares beyond the current number. These shares are typically offered to both existing shareholders and potential investors. Although this decision dilutes the previous ownership stake, it provides fresh capital by issuing and allotting the shares to suitable shareholders.
Rights issue
On the other hand, in a rights issue, existing shareholders are given the privilege to purchase additional shares directly from the company at a reduced price. Notably, the number of new shares is proportional to their current possession. They can also make transfers of shares to other stakeholders.
Reduction of share capital
Hong Kong companies might decide to decrease their share capital for various reasons. This could be to balance out losses, return excess capital to shareholders, or simply restructure their financial position.
There are two common methods of reducing capital in Hong Kong, which are:
Share buyback
During a share buyback, the company repurchases its shares from existing shareholders. The repurchased shares are then canceled, leading to a reduction in total share capital.
Cancellation of shares through a capital reduction scheme
Meanwhile, the cancellation of shares entails a deliberate decrease in the number of existing shares, either by eliminating a portion of them or by reducing their nominal value.
How to make changes to the company’s share capital
In Hong Kong, making changes to a company’s share capital involves a set of procedures and compliance with legal requirements. Below are general steps for reference to guide you through the process:
Step 1: Obtain approvals from directors and shareholders
The initial step involves convening general meetings on alterations to the share capital with the board and major shareholders for approval. In case of a conflict regarding a reduction in share capital, a court process might also be involved for resolution.
Step 2: Prepare and file the necessary documents
Once an agreement has been reached among the key stakeholders, the next step is to adjust the relevant company documents and submit them to the Companies Registry.
These typically encompass:
- An updated Articles of Association
- A special resolution
- A notice of alteration containing a Statement of Capital reporting the company’s current subscribed capital
Step 3: Update the registers
After receiving approval from the relevant authority, the final step is to update company registers to accurately reflect the approved changes. This includes, but is not limited to:
- Register of members: include any new shareholders resulting from the changes
- Share capital register: Reflect the revised structure and details of the share capital
By following these steps diligently, your business can navigate the process of changing share capital in Hong Kong while complying with legal and regulatory standards.
Adjusting your share capital is simple with BBCIncorp
To ensure a smooth and compliant update to your capital structure, seeking support from professionals is essential.
Our Hong Kong corporate secretary services handle the paperwork so you can promptly make adjustments for your company. Contact our team today for timely support.
Conclusion
Above are the vital definitions and processes regarding the Hong Kong share capital an entrepreneur must keep in mind. Through this article, we aim to equip you with a comprehensive understanding of informed business decisions in the region.
If you’re planning to establish a Hong Kong limited company by shares, consider partnering with BBCIncorp for a seamless experience.
Should you have any queries about operating your business in Hong Kong, don’t hesitate to reach out to us today via service@bbcincorp.com. Our dedicated support team is always available to help.
Disclaimer: While BBCIncorp strives to make the information on this website as timely and accurate as possible, the information itself is for reference purposes only. You should not substitute the information provided in this article for competent legal advice. Feel free to contact BBCIncorp’s customer services for advice on your specific cases.
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