13 Jul 2017

Corporate insider - July 2017

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New register of significant controllers1

From 1 March 2018, every company incorporated in Hong Kong, except for companies listed on the Hong Kong Stock Exchange, will be required to keep and maintain a register of all persons who have significant control of the company. A company must keep such a register even if that company has no significant controller. The register must be kept at the registered office of the company or other place to be prescribed by regulations.

Listed companies are exempted from the requirement because they are subject to more onerous requirements under securities laws, such as the Securities and Futures Ordinance.

Persons who have significant control

A person is regarded as having significant control over a company if one or more of the following conditions are met:

  • the person holds, directly or indirectly, more than 25% of the issued shares or voting rights in the company;

  • the person has, directly or indirectly, the right to appoint or remove a majority of the board of directors of the company; and

  • the person has the right to exercise, or actually exercises, significant influence or control over the company or over the activities of a trust or firm whose trustees or members (in their capacity as such) meet one of the above conditions.

A person will be treated as indirectly holding a share in a company if (s)he holds a majority stake in a legal entity which in turn holds the share in the company. This principle will also apply where there is a chain of companies, provided that each legal entity holds a majority stake in the one immediately below it.

Note that merely having “significant influence” is sufficient to give a person “significant control”, regardless of that person’s direct or indirect shareholding. The concept of “significant influence” goes beyond just the shareholders of a company and would seem to include a person who has such influence on the affairs of a company through a contract or an understanding. However, there is currently no elaboration on what is meant by “significant influence”, although it appears to be a subjective assessment. Clearly, further guidance on this would be helpful.

Finding out whether a company has significant controllers

A company must take reasonable steps to ascertain whether it has any significant controllers and to identify each of them. Where a company reasonably believes that a person is a significant controller of the company, the company is required to serve a notice on such person, requesting confirmation whether it/he/she is a significant controller of the company and, if it/he/she is a significant controller of the company, requiring the person to confirm or provide all particulars that are required to be entered in the register of significant controllers.

If a company fails to serve such notice, the company and each of its responsible persons will be liable for a fine. In addition, any person who receives such a notice will be liable for a fine if it fails to respond to the notice within 1 month.

Contents of register

A company’s register of significant controllers must contain:

  • each significant controller’s name and address;

  • for individuals, HKID/passport number and for entities, registration number;

  • the date on which the person came to have significant control over the company;

  • the nature of the person’s control over the company; and

  • for legal entities only, the entity’s legal form and the law that governs it (such as the laws of the place of its establishment or incorporation).

The register of significant controllers must also contain:

  • where the company believes that it has a significant controller but has not been able identify that person, a note to that effect for each such unidentified person;

  • where the company has identified a person as a significant controller, but has not been able to confirm all of their details, a note to that effect for each such person;

  • where the company is taking steps to ascertain whether it has any significant controllers, a note to that effect; and

  • where the company has no significant controllers, a note to that effect.

Keeping the register up-to-date

A company must keep the information on its register of significant controllers up to date. Where a company reasonably believes that the particulars of a significant controller have changed, the company is required to serve a notice on such significant controller, requesting the significant controller to confirm either that there have been no change or the updated particulars.

If a company fails to serve such notice, the company and each of its responsible persons will be liable for a fine. In addition, any person who receives such a notice will be liable for a fine if it fails to respond to the notice within 1 month.

Access to the register

The register is not available for inspection by the public, but a person whose name is entered in the register has a right to request to inspect the register without charge. In addition, the Companies Registry and law enforcement officers may inspect the register. Following a demand made to the company by an officer of the Companies Registry or a law enforcement officer, it must make the register available for inspection at the location where it is kept and allow the officer to take copies of the register.

Licensing regime for trust or company service providers2

A new licensing regime will be put in place to regulate persons carrying on a business of providing trustee or company services with effect from 1 March 2018. This new regime will be administered by the Companies Registry.

From 1 March 2018, it will be an offence to carry on a trust or company service business without a licence. Additionally, it will be an offence to become an ultimate owner or a director of, or a partner in, a licensed trust or company service provider without the approval of the Companies Registry.

Persons who need licenses and approvals

Licences to carry on a trust or company service business can be granted to individuals carrying on business as sole proprietor, partnerships or corporations.

For partnerships, each partner and each ultimate owner must separately be approved to be a partner or ultimate owner (as the case may be) of the licensed business. For corporations, each director and each ultimate owner must separately be approved to be a director or ultimate owner (as the case may be) of the licensed business.

Fit and proper test

A licence (in the case of the business) or approval (in the case of partners, directors or ultimate owners) will only be granted if the applicant is “fit and proper”.

In determining whether a person is “fit and proper”, the Companies Registry will consider all matters which it considers relevant, including whether that person has been convicted of a criminal offence (in particular, in relation to money laundering, terrorist financing and drug trafficking) and (in the case of individuals) whether the person is an undischarged bankrupt or subject of bankruptcy proceedings and (in the case of corporations) whether the person is in liquidation or the subject of a winding up order or a receiver has been appointed in relation to it.

The same test applies to the applicant that is carrying on the business as well as to (where relevant) directors and ultimate owners.

Ultimate owner

An ultimate owner of a partnership is an individual who, directly or indirectly, is entitled to or controls more than a 25% share of the capital or profits of the partnership or more than 25% of the voting rights in the partnership or who exercises ultimate control over the management of the partnership.

An ultimate owner of a corporation is an individual who, directly or indirectly, including through a trust or bearer share holding, owns or controls more than 25% of the issued share capital or is entitled to exercise or controls the exercise of more than 25% of the voting rights of the corporation.

Transitional arrangements and period of validity of licence

Anyone carrying on a trust or company service business and who holds a valid business registration certificate as at 1 March 2018 may continue to carry on the business for a transitional period of 120 days thereafter.

The business must apply for a licence within the 120-day transition period. If at the end of the transition period, the business has not applied for a licence, it must cease to carry on the business.

A licence that is granted will normally be valid for a period of 3 years, but may be revoked earlier if the Companies Registry considers that the individual (in the case of an individual carrying on the business), or a partner or ultimate owner of a licensed partnership or a director or ultimate owner of a licensed corporation is no longer fit and proper.

Enhanced client due diligence requirement

The Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) (Amendment) Bill 2017 introduced a statutory requirement on trust or company service providers, as well as legal professionals, accounting professionals and estate agents to carry out client due diligence in accordance with Schedule 2 of the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institution) Ordinance. The requirements include requirements to identify and verify the identities of their clients and beneficial owners and to understand the purpose and intended nature of business relationships with the client.

Some of these professionals are already required, by rules administered by their professional bodies, to carry out similar due diligence, but this change introduces a new statutory basis for such requirements.

1 Introduced by the Companies (Amendment) Bill 2017, which will amend the Companies Ordinance

2 Introduced by the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) (Amendment) Bill 2017, which will amend the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institution) Ordinance

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Paul Westover

Paul Westover
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