How to Conduct a Share Issuance in Hong Kong: A Comprehensive Guide for Companies

In the business world, Hong Kong is recognized as a hub for international companies due to its favorable tax regime and legal system. However, as a company grows and requires more capital for expansion, the question arises: how to effectively raise additional funds? Issuing shares is one of the best ways to attract capital to finance the company’s growth. 

When establishing a private limited company in Hong Kong, a shareholder can independently determine the number of shares that will be considered as the company’s share capital. According to the Hong Kong Companies Ordinance (Cap. 622), such a company is required to have at least one share with a nominal value of 1 Hong Kong dollar. A private limited company can expand its number of shareholders to 50 people. This allows the company to attract additional capital by issuing new shares to new shareholders, increasing their total number. This process is called share issuance (issuing new shares). 

What Objectives Does Share Issuance Achieve? 

Issuing company shares may be necessary to achieve various objectives, such as: 

1. Attracting Investments: One of the main reasons for issuing shares is to obtain additional financial resources for business expansion, strengthening its position in the current market, investing in new projects, or repaying existing debts. 
2. Increasing the Number of Shareholders: Issuing new shares allows attracting new investors, which contributes to diversifying the shareholder composition, capital, experience, and knowledge, as well as reducing dependence on a limited circle of shareholders. 
3. Strengthening Market Positions: The attracted funds can be directed towards strategic acquisitions or mergers, which strengthens the company’s market position. 
4. Employee Motivation: Share issuance can be part of an employee reward system, such as providing stock options, which promotes their motivation and retention in the company. 

These objectives can contribute to the sustainable development and long-term growth of the company. 

This article will discuss the process of share issuance in a private limited company in Hong Kong, describing the main stages and legal requirements. 

Preparing for Share Issuance in Hong Kong 

Preparing to issue shares in a private company in Hong Kong requires careful execution of several important steps in accordance with the Hong Kong Companies Ordinance. Here are the key steps: 

1. Review of the Memorandum and Articles of Association (MOA): 

Before initiating a share issuance, it is essential to thoroughly review the company’s MOA. It may contain restrictions or special conditions for issuing shares, such as the need for shareholder approval. This aligns with the requirements of the Hong Kong Companies Ordinance, which governs the company’s internal procedures. 

2. Compliance with Regulatory Requirements: 

The company must ensure compliance with all regulatory obligations, including: 

• Timely submission of NAR1 reports to the Hong Kong Companies Registry. 
• Renewal of the business registration certificate. 
• Filing of tax returns with the Inland Revenue Department and ensuring no tax liabilities. 
• Adherence to other mandatory requirements set by Hong Kong law. 

It is difficult to imagine the attractiveness of a share issuance for a company that has outstanding basic legal obligations. 

3. Register of Members: 

Ensure that it contains up-to-date information on the company’s current shareholders. The register must be maintained at the company’s registered office in Hong Kong. According to the Companies Ordinance, the register should include: 

• The name and address of each shareholder. 
• The number and classes of shares owned by each shareholder. 
• Dates of share acquisition and any changes in the shareholding structure. 

The register must be available for inspection by shareholders and regulatory authorities, ensuring transparency and accuracy. 

4. Share Certificates: 

Ensure that all current shareholders have share certificates signed by the company’s director. As stipulated by the Companies Ordinance, a share certificate confirms ownership and includes: 

• The company’s name and registration number. 
• The shareholder’s name and the number of shares. 
• The class of shares and the unique certificate number. 
• The date of certificate issuance. 

The certificate serves as legal proof of share ownership and must be securely stored. The company must not neglect its duty, and the director should exercise due diligence in issuing share certificates to confirm the current shareholding structure. 

These steps ensure legal compliance and facilitate a successful share issuance, supporting the company’s sustainable development. 

Stage of Share Issuance in Hong Kong 

1. Conducting a Board Meeting   

After confirming compliance with all necessary conditions, the company proceeds to the next crucial step—holding a board meeting. At this stage, an official decision is made to issue new shares. The minutes of the meeting should be meticulously documented and include the following key elements: 

• Number of Shares to be Issued: Determining the exact number of shares to be offered for sale, considering the company’s strategic goals and market conditions or specific agreements. 
• Type of Shares (Common or Preferred): Deciding which classes of shares will be issued, taking into account the rights and privileges they provide to shareholders. Common shares typically grant voting rights, while preferred shares may offer fixed dividends. 
• Nominal Value of Shares: Establishing the nominal value of each share, which can affect their perceived value in the market and the company’s financial indicators. 
• List of Potential Shareholders: Identifying and approving the list of individuals or organizations to whom the new shares will be offered. This may include existing shareholders as well as new investors who are strategically important to the company. 

Additionally, the meeting may discuss other issues such as the share placement strategy, marketing support for the issuance, and assessment of potential risks. Decisions made at this stage should align with the company’s long-term goals. 

2. Shareholder Approval of Share Issuance in Hong Kong 

The procedure for approving the issuance of shares is a key stage that requires the consent of the company’s shareholders. This consent can be achieved through two main methods: 

• At a general meeting of shareholders; 
• Through written consent from all involved parties. 

At the general meeting of shareholders, all details of the upcoming share issuance are discussed, such as the number of shares, their nominal value, and the potential impact on the company’s current capital structure. Shareholders have the opportunity to ask questions and express their opinions before making a final decision. 

Alternatively, written consent can be used to expedite the process, especially if all shareholders agree with the proposed terms of issuance. This avoids the need for a meeting, which can be convenient for companies with a small number of shareholders or in situations requiring quick decisions. 

If the company has multiple shareholders, they may be granted preemptive rights to purchase new shares. This right allows existing shareholders to maintain their stake in the company, preventing dilution of their equity. The preemptive right can be exercised within a specified period, after which the remaining shares may be offered to new investors. 

Thus, the process of approving share issuance in Hong Kong is aimed at ensuring transparency and protecting the interests of all shareholders, contributing to the company’s sustainable development. 

3. Preparation of the Share Issuance Agreement 

After shareholder approval, it is necessary to draft an agreement that details all the conditions of the share issuance. This document plays a crucial legal role in protecting the interests of the company, as well as existing and new shareholders. The agreement should clearly outline payment terms, distribution of rights, and other important parameters to ensure transparency and clarity of the transaction. 

Key elements that the share issuance agreement should include: 

• Number of Shares: Specifies the exact number of shares to be issued, allowing determination of the new shareholders’ participation in the company. 
• Transaction Amount: Defines the total value of the share issuance, including the price per share and the total amount the company intends to raise. 
• Rights of New Shareholders: Describes the rights and privileges granted to new shareholders, such as voting rights, dividend rights, and other important aspects. 
• Payment and Transfer Terms: Establishes specific deadlines for payment and transfer of shares to new shareholders, ensuring adherence to agreements and timely fulfillment of obligations. 

Additionally, the agreement may include terms for exiting the share capital, dispute resolution procedures, and other legal aspects to help avoid misunderstandings in the future. This makes the agreement an important tool for maintaining trust and stability in the relationship between the company and its shareholders. 

4. Submission of Form NSC1 to the Hong Kong Companies Registry 

After completing the share issuance process, the company must submit Form NSC1 to the Hong Kong Companies Registry within one month. This step is critically important for complying with all legal norms and maintaining up-to-date corporate information. Form NSC1 includes key data that must be accurately and completely specified: 

• Number of Issued Shares: Indicates the total number of shares issued in the transaction, allowing for an update of the company’s capital data. 
• Amount Paid for Shares: Records the total amount received by the company for the issued shares, which is important for financial reporting and tax purposes. 
• Type of Shares: Specifies which shares were issued—common or preferred—helping to determine the rights and privileges of new shareholders. 
• Details of New Shareholders: Includes information about new shareholders, such as their names, addresses, and the number of shares acquired, necessary for updating the company’s register of members. 

Submitting Form NSC1 not only ensures the company’s compliance with legal requirements but also promotes transparency and strengthens trust in relationships with shareholders and regulatory authorities. Late submission or inaccurate information can lead to fines and other legal consequences, so it is important to pay due attention to this process. 

Additionally, regularly updating data in the Companies Registry helps maintain the relevance of company information, which can be useful for potential investors and partners when assessing the company’s reliability and stability. 

Administrative Procedures After Share Issuance in Hong Kong 

1. Issuance of Share Certificates 

After submitting Form NSC1, the company must issue share certificates. These documents confirm ownership of shares and serve as important legal evidence for shareholders. The process of issuing certificates must be completed within two months after the share placement.   

   Share certificates should include the following information: 

• Company Name: The full name of the company issuing the shares. 
• Registration Number: The unique identifier of the company in the Companies Registry. 
• Number of Shares: The total number of shares owned by the shareholder. 
• Type of Shares: The class of shares, such as common or preferred. 
• Shareholder’s Name: The full name of the share owner. 
• Date of Issuance: The date the certificate is issued. 

It is essential to ensure the accuracy and completeness of the information on the certificates, as they confirm ownership rights. Shareholders are advised to keep certificates in a secure place and notify the company of any loss or damage to obtain duplicates. 

2. Updating the Register of Members in Hong Kong 

The final step is updating the register of members. This document reflects all information about new shareholders, their shares, and types of shares. The process must be completed within two months after the share issuance. In Hong Kong, maintaining an up-to-date register of members is mandatory for companies.   

An updated register of members helps the company effectively manage corporate rights and obligations and promptly notify shareholders of key events, such as meetings and dividend payments. The accuracy of the information in the register is crucial for upholding shareholder rights and strengthening trust between the company and its investors. 

3. Updating the Register of Significant Controllers 

Changes in the share capital structure may alter the composition of the company’s significant controllers. If this occurs, the Register of Significant Controllers must be updated. This register includes information about individuals (or entities) who meet at least one of the following criteria: 

• Owns more than 25% of the company’s shares directly or indirectly, or, if the company has no share capital, is entitled to more than 25% of the capital or profits. 
• Controls more than 25% of the company’s voting rights. 
• Can appoint or remove the majority of the board of directors. 
• Exercises or has the right to exercise significant influence or control over the company. 
• Exercises or has the right to exercise significant influence or control over the activities of a trust or firm that is not a legal entity, where trustees or members meet any of the first four conditions concerning the company. 

If this requirement is violated, the company and each responsible person commit an offense, and each is subject to a level 4 fine, with an additional fine of HKD 700 for each day the offense continues. 

4. Notifying Business Partners 

If necessary, inform banks, clients, suppliers, and other partners with whom the company has business relationships.