Transferring shares and changing shareholders in a company is not just a formal procedure but an important process that can significantly impact both the ongoing operations and the development of the business. This is especially relevant for companies registered in Hong Kong, where the legal and tax aspects of share transfers have their own characteristics.
Shareholder changes in Hong Kong can occur for various reasons:
- An owner exits the business;
- The company or business is sold entirely;
- New investors are brought in;
- The company structure is reorganized;
- Shares are distributed as part of family inheritance;
- Mergers or acquisitions occur;
- Conditions of an investment agreement are fulfilled;
- The company’s strategic direction changes;
- Corporate disputes between shareholders are resolved.
In each case, it is necessary to consider not only the interests of the parties involved but also the legal requirements.
This article will cover all the key stages of changing a shareholder in a Hong Kong company, including document preparation, stamp duty payment, and administrative procedures, as well as provide practical recommendations for simplifying the process and minimizing risks.
Preparatory Stage in the Process of Share Transfer in Hong Kong
Before starting the share transfer process, it is important for the company to properly prepare. Preparation will help avoid delays and unforeseen issues at later stages. Here are some key steps:
- Review the Company’s Articles of Association
The first step is to check the Articles of Association for any restrictions on share transfers. In some cases, there may be provisions requiring approval from other shareholders or the Board of Directors before shares can be sold or transferred to third parties.
- Notify Shareholders and Obtain Their Consent
If the Articles of Association include provisions requiring the consent of other shareholders for share transfers, it is necessary to follow the procedure for obtaining their written consent or offering them the right of first refusal. This is an important step, as ignoring it can lead to disputes within the company or even lawsuits from shareholders.
- Prepare Financial Statements
If the company’s last audited financial statements were prepared more than 6 (six) months ago, updated management accounts will need to be prepared. These accounts must be approved by the director. The data in the statements are necessary to determine the value of the shares, especially in the case of selling a stake to third parties.
Process of Formalizing the Transfer of Shares in a Hong Kong Company
After preparing all necessary documents and obtaining shareholder consent, the actual transfer of shares can begin. This process consists of several key steps, each of which must be executed with particular attention.
- Preparation of the Share Sale and Purchase Agreement
The main document governing the terms of the share transfer is the Share Sale and Purchase Agreement. This agreement outlines all important aspects of the transaction: the price of the shares, obligations of the parties, and the terms and conditions for completing the transaction.
In some cases, shares may be transferred without a sale and purchase agreement. In such instances, a separate agreement is drafted to confirm the gratuitous transfer of shares.
- Preparation of the Sold & Bought Note
This document, used in the transfer of shares, records the transaction between the seller and the buyer. It serves as official confirmation of the sale and purchase of shares, detailing the terms of the transaction. It typically includes information such as the names of the parties, the number of shares, the price per share, the total transaction amount, and the date of the transaction.
- Preparation of the Instrument of Transfer
The Instrument of Transfer is a legal document used in the transfer of shares between parties. It acts as an official agreement detailing the transfer, including the names of the seller and buyer, the number of shares, and other important conditions. This document is necessary for updating the company’s register of shareholders to record the new owner and usually requires signatures from both parties involved in the transaction.
- Certification of Signatures
The signatures of the parties on the documents typically need to be certified by an authorized third party: a notary, lawyer, accountant, or another independent third party. This is necessary to minimize the risk of signature forgery and, consequently, illegal actions by the parties.
- Submission of Documents to the Hong Kong Inland Revenue Department
After signing the documents, they must be submitted to the Hong Kong Inland Revenue Department (IRD) for stamping and payment of stamp duty. If the share transfer takes place in Hong Kong, documents must be submitted within 2 days of the share sale. If the transfer occurs outside Hong Kong, the submission period extends to 30 days.
- Payment of Stamp Duty
The stamp duty on the sale or purchase of any Hong Kong shares is charged at a rate of 0.1% based on the consideration amount or the value of the shares on each Sold note and each Bought note, totaling 0.2%.
Stamp duty is a mandatory tax levied on the transfer of shares. Both parties to the transaction—the seller and the buyer—are required to pay the stamp duty in equal shares.
Contract notes are subject to stamp duty based on the paid price. If the paid price is below the market value of the shares on the date of sale and purchase/transfer, stamp duty will be calculated based on the market value. For listed shares, the market value is usually the closing price on the Hong Kong Stock Exchange on the last trading day before the sale and purchase/transfer date, for stamp duty calculation purposes. For unlisted shares, the value should be determined based on the latest financial reports of the company whose shares are being transferred. Additional information may be requested by the Stamp Office if necessary.
Contract notes are not required for the transfer of shares as a gift. In such cases, the instrument of transfer is subject to a fixed duty of 5 Hong Kong dollars per piece plus full ad valorem duty based on the value of the shares transferred as outlined above.
To ensure the Stamp Office can correctly calculate the stamp duty, the following documents must be provided:
- The company’s Articles of Association (if registered less than 18 months ago) or the latest copy of the annual return (Form NAR1) for companies older than 18 months;
- The latest copy of the Return of Allotment (Form NSC1) for capital increases not reflected in the Articles or Annual Return;
- A certified copy of the Share Sale and Purchase Agreement or confirmation of its absence, signed by the seller or buyer;
- If the company has commenced operations: a) the latest audited reports and certified management accounts; b) a copy of the dividend resolution if dividends were paid after the latest audited reports; c) other necessary documents.
- For newly registered companies that have not yet commenced operations and do not have audited reports, confirmation with a copy of the certificate of incorporation is required.
Methods of Paying Stamp Duty
Stamp duty can be paid in the following ways:
- Traditional method: through physical submission of documents at the Inland Revenue Department office.
- Electronic submission (e-stamping): a faster and more convenient method that allows stamp duty payment online through the e-Stamping system.
Consequences of Late Payment
Significant penalties are imposed for late payment of stamp duty:
- If the delay is 1 month or less, the penalty will be twice the amount of the stamp duty.
- For delays up to 2 months, the penalty increases to four times the amount.
- If the delay exceeds 2 months, the penalty can reach ten times the amount of the stamp duty.
Administrative Procedures After Share Transfer in Hong Kong
After successfully transferring shares and paying the stamp duty, several administrative procedures must be completed to finalize the change of shareholder. These ensure compliance with the law and reflect changes in the company’s shareholder structure.
- Updating the Register of Members
Once the Hong Kong Inland Revenue Department has reviewed the documents and applied the stamp, the company must update the register of members (shareholders register). This register records all changes in the company’s shareholders and details of the new shareowners.
According to Hong Kong law, the register of members must be updated within 2 months after signing the documents. Failure to meet this deadline may result in penalties.
- Issuing New Share Certificates
After completing the share transfer process and updating the register of members, the company must issue a new share certificate to the new shareholder. This document confirms ownership of the shares and includes information about the number of shares, the owner, and the certificate number.
Similar to the register of members, the company has 2 months to issue new share certificates.
As part of this process, the company must verify the identity of the new shareholder. This includes making copies of original identification documents (or accepting notarized documents) and confirming their current residence. A relevant document issued no more than 90 days before they became a controlling person of the company must be provided.
- Notifying the Companies Registry of Shareholder Changes
While there is no immediate requirement to notify the Hong Kong Companies Registry of the share transfer, changes in the shareholder structure must be reflected in the company’s annual return (Form NAR1), submitted to the Hong Kong Companies Registry. This report is filed annually within 42 days of the company’s anniversary and contains up-to-date information on the company’s shareholder structure. Failure to submit the report on time may also result in penalties.
- Updating the Register of Significant Controllers
If the change in shareholders affects the company’s significant controllers, the Register of Significant Controllers must be updated. This register contains information on individuals who meet at least one of the following criteria:
- Directly or indirectly owns more than 25% of the company’s issued shares or, if the company does not have share capital, is entitled to more than 25% of the company’s capital or profits.
- Directly or indirectly owns more than 25% of the company’s voting rights.
- Has the right to appoint or remove the majority of the company’s board of directors.
- Has the right to exercise or actually exercises significant influence or control over the company.
- Has the right to exercise or actually exercises significant influence or control over the activities of a trust or firm that is not a legal entity but whose trustees or members meet any of the first four conditions concerning the company.
- Informing Business Partners
This includes notifying banks, clients, suppliers, and other parties with whom the company has established business relationships.
Upon completing all the steps described above, the process of changing a shareholder in the company can be considered complete. All changes in the company’s structure must be properly documented and reflected in its internal documentation and registers.
After completing these steps, the process of changing the shareholder is considered complete.
Frequently Asked Questions (FAQ)
To transfer shares, the following documents need to be prepared:
- Share Sale and Purchase Agreement (optional but highly recommended);
- Sold & Bought note, Instrument of Transfer (confirmation of the transaction);
- The latest audited or management financial statements of the company.
Additional documents may be required if the company’s Articles of Association include restrictions on share transfers.
The stamp duty is 0.2% of the greater amount: the transaction price or the market value of the shares.
If the company’s latest audited financial statements are outdated (more than 6 months old), management accounts for the current period will need to be prepared. If the company has just started its operations and audited financial statements are not available, a confirmation letter stating that the company has not yet conducted operational activities will suffice.
The following penalties are imposed for late payment of stamp duty:
- Delay up to 1 month — double the amount of the stamp duty;
- Delay up to 2 months — four times the amount;
- Delay of more than 2 months — ten times the amount of the stamp duty.
These penalties can significantly increase the costs of transferring shares, so it is important to adhere to the established deadlines.
This depends on the provisions of the company’s Articles of Association. If the Articles include a right of first refusal or require approval of the transaction by other shareholders or the Board of Directors, these requirements must be met. Without fulfilling them, the share transfer may be deemed invalid. Before starting the transfer process, it is important to check the Articles and, if necessary, obtain written consent from the shareholders.