New obligation for unlisted Hong Kong companies to keep a register of their significant controllers

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1 January 2018 New obligation for unlisted Hong Kong companies to keep a register of their significant controllers Does your company know who all of its ultimate significant controllers are? Will you be ready to keep a register of their details? From 1 March 2018, companies incorporated in Hong Kong will need to maintain a register of persons having significant control over them, known as a significant controllers register or SCR. This register will not be made public and it will not need to be filed with the Companies Registry, but law enforcement officers can have access to it upon demand. This new obligation does not apply to overseas companies even if they have a Part 16 non-hong Kong company registration status. Hong Kong companies with shares listed on the Hong Kong Stock Exchange will be exempt, as information on their significant shareholders is already disclosed to the public pursuant to the Securities and Futures Ordinance. However, their Hong Kong subsidiaries will still need to comply. The requirement is being introduced following recommendations on enhancing the transparency of beneficial ownership of companies by the Financial Action Task Force (which sets international standards on combatting money laundering and terrorist financing and of which Hong Kong is a member). The new rules are targeted at those who carry out criminal activity such as money laundering or terrorist financing behind opaque corporate structures. However, they will also impact legitimate unlisted Hong Kong companies, as they will need to record information about their significant controllers for the first time. Which companies have to keep a SCR? The obligation to keep a SCR applies to all companies formed and registered under the Companies Ordinance, including companies limited by shares, companies limited by guarantee and unlimited companies ( companies ). Companies which have their shares listed on the Hong Kong Stock Exchange are exempted from the requirement. Who can be a significant controller? The SCR regime aims to identify individuals or governments who control companies. If they have a significant influence or control over a company, the following may need to be included in the company s SCR: an individual of any nationality or residence a government of any country or territory or part thereof an international organisation whose members include two or more countries or territories or their governments A local authority or local government body of any country or territory 1

2 (they are collectively referred to as registrable persons ). What makes someone a significant controller? A significant controller is someone who meets one or more of the following five criteria: the person holds, directly or indirectly, more than 25% of the issued shares (or capital/profits, as the case may be) the person holds, directly or indirectly, more than 25% of the voting rights the person holds, directly or indirectly, the right to appoint or remove a majority of the board of directors the person has the right to exercise, or actually exercises, significant influence or control over the company the person has the right to exercise, or actually exercises, significant influence or control over the activities of a trust or firm which is not a legal entity but whose trustees or members satisfy any of the above criteria (in their capacity as such) The meaning of exercising significant influence or control is explored in Chapter 10 in the Guideline on the Keeping of Significant Controllers Registers by Companies published by the Companies Registry. It states that a person exercises significant influence or control over a company if the company generally adopts the activities which the person desires or the person can direct the activities of the company, or the person has absolute decision rights or veto rights over decisions in the running of the company s business, such as: adopting or amending the company s business plan changing the nature of the company s business making any additional borrowing from lenders appointing or removing the CEO Furthermore, it is noted that all relationships that a person has with the company or its management should be considered to ascertain whether the cumulative effect of those relationships puts the person in a position where the person actually exercises significant influence or control over the company. How does it work for companies controlled by other legal entities? In a chain of legal entities, a company s SCR will need to identify: its members which are legal entities and are significant controllers. The legal entities could be a body of persons, corporation, partnership, incorporate or unincorporate, so long as it is a legal person under its local law ( registrable legal entities ); and any registrable person up the chain. Therefore, (i) legal entities incorporated or established overseas or in Hong Kong that are members of Hong Kong companies and (ii) registrable persons will need to be recorded on the SCR. How are indirect interests treated? A person is treated as holding a share or right indirectly if it has a majority stake in a legal entity that holds the share or right itself or through a chain of legal entities each of which (other than the last) has a majority stake in the entity below it and the last one holds the share or right in the company. Applying the rules becomes complex where there is a long chain of ownership. The below diagrams illustrate some examples. 2

3 A majority stake means: holding a majority of voting rights; being a member and having the right to appoint or remove a majority of the board; being a member and controlling a majority of the voting rights pursuant to an agreement with other members; or having the right to exercise, or actually exercising, dominant influence or control over that entity Mr. Wong Ms. Lee Mr. Chan BVI Holdco A 26% HK Company B 26% + no other control or rights 74% Cayman Holdco C 60% BVI Holdco D 30% HK Company E Ms. Yeung HK- or overseasincorporated company listed on HKEX (F) HK Company G Mr. Chan is a registrable person as he holds more than 25% of the shares in B. He holds them via A in which he has a majority stake. Holdco A is a registrable legal entity as it holds more than 25% of the shares in B. Ms. Lee is a registrable person. She indirectly holds more than 25% of the shares in E. She holds them via C (in which she has a majority stake ), which in turn has a majority stake in another entity (D) which holds shares in E directly. Mr. Wong is not treated as indirectly holding the shares in E held via C as he has no majority stake in C. It would be necessary to consider whether Mr. Wong has the right to exercise significant influence or control over E. D is a registrable legal entity as it holds more than 25% of the shares in E. F is a registrable legal entity as it holds more than 25% of the shares in G. Ms. Yeung indirectly holds shares in G via F, but she is not a registrable person of G because of an express exemption in the Companies Ordinance where the registrable legal entity is a HKEX-listed company. What do companies have to do? Companies must take reasonable steps to identify their significant controllers and keep the information updated, including by sending notices to any person they know or have reasonable cause to believe should be recorded on the SCR, within seven days after first having such knowledge or belief. No notices need to be sent if the company already knows that a person or legal entity needs to be recorded in the SCR and all the required details have been provided to the company. Companies are encouraged to keep a record of the steps taken to comply with their obligations. Companies must also send notices to anyone who they know or have reasonable cause to believe knows the identity of someone who should be recorded on the SCR, or information from which their identity can be established. 3

4 Companies must designate at least one person as their representative to assist law enforcement officers regarding their SCR. The representative must be: a member, director or an employee of the company who is a natural person resident in Hong Kong; or an accounting professional, a legal professional or a company service provider 1. The SCR may be in English or Chinese and must be kept at the company s registered office or another place in Hong Kong. If it is kept away from the registered office, the company must notify the Companies Registry where it is kept. What needs to be recorded in the SCR and when? The SCR must contain: details of every significant controller (see table below) any change to the details recorded the name and contact details of the designated representative if the company does not have a significant controller, a negative statement to that effect if the company has reasonable cause to believe that it has significant controller(s) but it has been unable to identify them, or confirm their details, or the company is investigating to determine whether it has a significant controller, a statement to that effect Registrable persons Name Correspondence address Identity card number or passport number and issuing country (where relevant) The date the person became a significant controller Nature of the person s influence or control Registrable legal entities Name Address of its registered/principal office Its legal form and registration number (or equivalent) The date it became a significant controller Nature of its influence or control A company must enter the details of a significant controller into its SCR within seven days after they have all been confirmed or after the details come to the notice of the company. Details about a registrable person must be confirmed before they are entered in the SCR. What if a company does not have any significant controllers? A company must keep a SCR even if it does not have a significant controller and a negative statement to that effect must be recorded. Who can inspect the SCR? Companies must make their SCR available for inspection upon demand by a law enforcement officer (such as an officer of the Companies Registry, Hong Kong Monetary Authority, Police, Inland Revenue, Insurance Authority and SFC) and permit the officer to make copies. Significant controllers recorded on the SCR may also request to inspect the SCR without charge and be 1 There are other trust or company service providers which may be appointed as a designated representative, so long as they are licensed under the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance, Cap

5 provided copies. What happens if companies do not comply with their obligations? If a company fails to comply with its obligations regarding the SCR (including taking reasonable steps to identify its significant controllers and updating the details), both the company and every responsible person of the company will have committed a criminal offence, punishable by a fine of HKD 25,000 and, where applicable, a further daily fine of HKD 700. What happens if recipients of a notice from the company fail to comply or provide false information? If a person who has received a notice from a company relating to its SCR fails to provide the information requested within one month from the date of the notice, the notice addressee and every related person (if any) will be guilty of a criminal offence and liable to a fine of HKD 25,000. If a person knowingly or recklessly makes a statement which is misleading, false or deceptive in the SCR or makes a statement or provides any information that is misleading, false or deceptive in a material particular the reply to a company s notice, the person commits a criminal offence and is liable to a fine of up to HKD 300,000 and imprisonment for up to two years. Action to take Companies should start to identify their significant controllers, particularly within complex group structures. They should also start to consider how they will go about sending the necessary requests for information unless significant controllers voluntarily provide that information. The rules are not straightforward and establishing whether a person is a significant controller will require careful consideration by reference to each company s ownership structure. Where to find the rules The rules will be contained in a new Division 2A of Part 12 of the Companies Ordinance, Cap. 622 (inserted by the Companies (Amendment) Ordinance 2018 which will become effective on 1 March 2018). Companies should refer to the Guideline on the Keeping of Significant Controllers Registers by Companies published by the Companies Registry, which includes detailed guidance, examples of registers and notices, suggested wording for the nature of control and additional matters to be noted in the SCR. For assistance on the new rules, please contact your usual contact at Linklaters. Authors: Alex Bidlake and Terri Poon. This publication is intended merely to highlight issues and not to be comprehensive, nor to provide legal advice. Should you have any questions on issues reported here or on other areas of law, please contact one of your regular contacts, or contact the editors. Linklaters Business Services (H.K.) Limited. All Rights reserved Please refer to for important information on our regulatory position. We currently hold your contact details, which we use to send you newsletters such as this and for other marketing and business communications. We use your contact details for our own internal purposes only. This information is available to our offices worldwide and to those of our associated firms. If any of your details are incorrect or have recently changed, or if you no longer wish to receive this newsletter or other marketing communications, please let us know by ing us at marketing.database@linklaters.com. A New obligation for unlisted Hong Kong companies to keep a register of their significant controllers 5