Allotment of Shares - The Issue of Shares in Hong Kong

Having a Private Limited Company registered in Hong Kong comes with many advantages. The attractive tax regime for corporations registered in Hong Kong, and its strong regulatory system, give certainty to international investors and entrepreneurs that their efforts will be protected. Additionally, since the requirements for setting up this kind of company are low, it’s the preferred choice to incorporate an entity in Hong Kong. Besides, it’s often used to do business with China, due to its proximity, and it’s a more similar system to the western countries.

A limited company offers flexibility to its owners since it’s limited by shares. But what happens when the business grows and there’s a need to increase the share capital of the company for its operations? In this article, we’ll be focusing on what is the allotment of shares of a private company limited by shares, what is needed for the process, which steps to take to finalise the increase of shares of a limited company. We will be discussing more details in the next sections to come. 

What Is an Allotment of Shares?

Before we move on to the main topic, we must review some of the basic aspects of a Hong Kong Private Limited Company.  As we’ve previously mentioned, this kind of business entity is one of the most common vehicles used in Hong Kong by International investors and companies due to the level of protection that it offers by having its own separate legal identity from its shareholders. A Private Limited Company by shares reduces the risk of the exposure of the assets of a foreign investor, which could be a corporation registered outside of Hong Kong or a foreign individual. 

For example, when establishing a Private Limited Company in Hong Kong, an investor can decide the number of shares that are going to be registered in the company as its share capital. It’s a requirement by the Hong Kong Companies Ordinance (cap 622), that a Private Limited Company has at least one share with a value of 1 Hong Kong dollar. Additionally, a Private Limited Company is allowed to increase the number of its shareholders to a maximum of 50 people. In this sense, it’s possible to raise capital by issuing new shares to add new shareholders. This is what is known as the process of allotment of shares. 

Furthermore, as a company changes or increases the number of its shareholders or its shares,  it’s required that the updated information of the company is submitted to the Companies Registry of Hong Kong, in the Annual Return form of the company, which must be submitted every year and updated regularly according to the changes that the company goes through to comply with the local regulations of Hong Kong.

Now that we have a better understanding of one of the key aspects of a Private Limited Company and the process of creating new shares, we can move on to the next section.

What Is Required When Increasing Capital?

Some people may believe that to issue new shares from a Hong Kong company, a new shareholder must just inject the agreed amount of capital into the company’s business account. Nevertheless, the process is not just a simple transaction and some conditions should be met before. In this section, we’ll mention some of them in a general way:

• Articles of Association (AoA): the Articles of Association of the company should be consulted since they mention how this process should be carried out, especially if there are going to be new shares issued. For example, normally the existing shareholders must all agree unanimously when decking to add a new shareholder. Otherwise, the process could run into difficulties. 
• Annual Return compliance: something that is not normally mentioned in the process, is the fact that a company that is behind in their compliance with the local authorities of Hong Kong such as forgetting to submit the Annual Return in due time or for several years, cannot carry out a process until they catch up to the year that the process is intended to be done. 
• Audited Financial Statement: in the same line of thought as the previously mentioned point, once a year a company must submit their Audited Financial statements to the government authorities. For a process such as this, the latest financial statements are needed to see the standing of the company. In the case that a company is delayed by several years, it will need to do the accounting, and audit until the last fiscal period. Otherwise, it will not be possible to issue new shares. Why do companies need to submit the audit to do an allotment of shares? Imagine you want to invest in a company, business looks good, but you need to know the status of that entity, probably sales appear to be ok, but maybe debts are too high, in that case, you will consider twice the investment. 

Steps to Issuing New Shares

As we have seen in the previous section, once the conditions are met in the company, it is possible to start the process to issue new shares. Here we will enlist the steps needed for the process:

1. Board Resolution Approval: A resolution created by the directors must be done in writing with the specifics of the number of shares to be issued. This proposal is later on sent to the shareholders for their approval.

2. Shareholders' Resolution Approval: once the proposal has been prepared by the director or directors of the company, it must be approved by the shareholders. There are a few ways to obtain their approval, for example, obtaining the signature of all shareholders on the proposal, or having a shareholder's meeting and voting on the subject with a relative majority.

3. Conditions and the Issuance of Shares: once the approval of the shareholders has been obtained, it's important to check the Articles of Association (AoA) of your company to see if there are any other clauses or conditions to be fulfilled. If everything is in order you can assign the shares to the new shareholder. 

4. Submitting Form NSC1 (Return of Allotment): this form can be obtained on the Companies Registry website and must be filled up and submitted. Some of the information that must be included in the form is: the number of shares assigned to the new shareholders, the amount paid or to be paid by the shareholder, the type of share, as well add the details of the shareholder (individual or corporation).

5. Certificates of Shares Creation: as with the information submitted in the form, the certificate issued to the new shareholder must contain the same information as well, such as the details of the transaction and if they were fully paid up.

Other Considerations

Here we will mention a point, that we consider, will add some protection to the process of issuing new shares:

• Contract for the Allotment: if there’s the intention to add a shareholder to the company, the creation of a contract must be considered as a way to protect the company and the previous shareholders.
• Timeframe: after the submission of the application, the new shareholders must receive their share certificates within two months. 

Conclusion

We’ve talked in the article about the flexibility that a (Private) Limited Company offers. Its internal structure will allow you to add or buy the shares of other shareholders. It’s important to highlight that allotting shares will need some technical knowledge. An expert on the topic of the AoA (Articles of Association) of your company should be consulted. We suggest that you approach your Company Secretary! They can help you to sort out the process, so you don’t have to worry!