Next Monday, March 3, 2014, the Hong Kong New Companies Ordinance will go into effect. The Hong Kong Legislative Council enacted this overhaul of the existing companies laws provisions in July 2012, and on October 25, 2013, the Secretary for Financial Services and the Treasury published the requisite notice to implement the upcoming March 3 effective date.
According to a January 24, 2014 Directorship article (here), the new statutory provisions “represent a major milestone in a comprehensive exercise to rewrite and modernize Hong Kong’s Companies Ordinance.” The New Companies Ordinance introduces a number of changes, including new provisions codifying the duties and liabilities of directors of Hong Kong companies. As discussed briefly below, these new provisions may have important D&O insurance implications.
The text of the New Companies Ordinance (NCO) can be found here. Part 10 of the New Companies Ordinance, which contains the new provisions regarding directors’ duties and liability, can be found here. A January 2014 PricewaterhouseCoopers summary of the changes in the NCO can be found here. A January 2014 summary from the Vistra firm of the NCO provisions pertaining to directors’ duties and liabilities can be found here.
With respect to the directors’ duties, in Section 465, the NCO codifies directors’ duties to exercise “reasonable care, skill and diligence.” The statutory provisions specify both objective and subjective standards for directors’ duties. A director is required to exercise the care, skill and diligence “that may reasonably expected of a person carrying out the functions carried out by the director in relation to the company,” as well “the general knowledge, skill and experience that the director has.”
As noted in the February 27, 2014 memo from the Meyer Brown JSM law firm (here), “directors are required to achieve at least the objective standard set out in Section 465 and the standard will be higher if they possess particular knowledge or skills.” Section 465 provides that the remedies for breach of the duty are the same as at common law or equity – that is, compensation or damages. Because the directors’ duties are owed to the company, “any claim is likely to be brought by shareholders or liquidators by way of derivative claim.”
With respect to the potential liability of officers, the NCO introduces the concept of a “Responsible Person,” who is a director or officer of the company who “authorizes or permits, participates in, or fails to take all reasonable steps to prevent” the violation of the NCO. Because the NCO removes the “willful” misconduct threshold that applies under the current Companies Ordinance, the NCO lowers the threshold for the imposition of liability and potentially increases directors and officers liability exposure.
The NCO permits companies to indemnify directors for liabilities incurred to third parties, subject to specified conditions. However, as is the case under the existing Companies Ordinance, the NCO prohibits companies from indemnifying directors for liabilities to the company itself or an associated company, as well as “any liability incurred “in criminal proceedings.
Significantly, Section 468 (4) NCO expressly provides that the NCO’s indemnifications provision “does not prevent a company from taking out and keeping in force insurance for a director … against any liability attaching to the director in connection with any negligence, default, breach of duty or breach of trust (except for fraud” in relation to the company or associated company” or “any liability incurred by the director in defending any proceedings.”
In light of the new codification of the directors duty of care, skill and diligence and the NCO’s “new formulation of “Responsible Persons,” directors will, according to the Meyer Brown JSM memo, face “a risk of increased exposure.” Moreover, because the NCO prohibits indemnification under certain circumstances, “directors must therefore rely on the protection afforded by Side A of the D&O Insurance and should ensure that the cover extends to any breach of statutory provisions,” such as the NCO.
In addition, because the NCO permits indemnification of directors for liabilities to third parties, “companies should ensure that the reimbursement cover under Side B of the D&O insurance is sufficient to cover any reimbursement.” I know our Hong Kong colleagues are well aware that these changes have been coming but for the rest of us, it is important to know that these changes are about to take effect.
As for Hong Kong itself, it is a great place, as I noted in my Travel Post (here) about my visit to the city. I took the picture at the top of this post from Victoria Peak while I was there.