Transfer of shares in a Hong Kong private company: Process and fees.

The company’s shareholders determine ownership of a Hong Kong private company, and there may be times when the company must transfer shares to a new holder, such as bringing in a new partner/investor or exiting the company and transferring the shares to the remaining shareholders.

Whatever the scenario, this guide will explain what is needed to transfer shares in a Hong Kong company and any fees incurred in the process.

Reasons for transferring shares

As a business, it is common that there may be a transfer of shares at some point during its operations, mostly because a shareholder leaves or retires. However, other scenarios when transferring shares is necessary include:

• A director who is also a shareholder resigns or is removed from the company
• Transfer of shares between existing shareholders in terms of group reorganisation
• Changing the existing proportion of shares between shareholders because of new profit sharing or ownership arrangement
• Selling the company

Required documents for transferring shares

Specific documents must be prepared for the transfer of shares in a Hong Kong company, which are required to be submitted to the Inland Revenue Department (IRD).

The required documents are:

• Bought and Sold Notes
• Instrument of Transfer
• Certified management accounts within three months for the company and its subsidiaries
• Latest audited accounts within six months for the company and its subsidiaries
• Copy of Company’s resolution detailing the distribution of dividends (if applicable)
• Copy of the articles of association
• Copy of Annual Return (NAR1) and latest Return of Allotment (NSC1)
• A statement on whether the company and its subsidiaries has acquired any investments, landed property or rights to acquire landed property and, if so, with a completed Schedule of Landed Properties [Form IRSD102]
• Sale and purchase agreement (if any)

What to consider before transferring shares in Hong Kong

There are certain key conditions to consider before transferring shares in a company.

These conditions are:

• Check for any limitations or restrictions on the transfer of shares in the articles of association
• Review the company’s shareholders’ agreement for any limitations or restrictions
• Ensure that the board resolution or general meeting resolution regarding the transfer has been passed
• Verify that other shareholders have been offered to purchase the shares

Pre-emptive rights

Pre-emptive rights grant existing shareholders the first right to purchase any shares being offered for sale by another shareholder. This protects existing shareholders from unwanted dilution of their ownership stake and voting rights in the company. The company’s articles of association typically outline the process for exercising pre-emptive rights.

Transfer of shares procedure

According to the Hong Kong Companies Ordinance, all Hong Kong private companies must have a provision in their articles of association detailing the restriction of share transfers and other provisions related to the transfer of shares.

The most common restrictions regarding share transfer are:

• The board of directors must approve all share transfers
• Share transfers are subject to directors’ refusal
• Shares must first be offered to existing shareholders according to the pre-emptive rights

The share transfer process can be completed within three to five business days.

First, ensure that the shares have been offered to the existing shareholders according to the company’s articles of association. Both the transferee (buyer) and the transferor (seller) should sign the share transfer form. The next step is to prepare the required documents, provide the transfer form for stamping and submit it to the Stamp Office.

Once the documents are stamped, the share transfer process is completed.

Refusal to transfer shares

According to section 151 of the Companies Ordinance, in the case that the board of directors refuses to approve the transfer of shares, the board must send a notice of refusal to the transferee and transferor within two months following the lodgement of the share transfer.

The transferor and transferee may request a statement of the reasons for the refusal. Within 28 days, the company must send the person who made the request a statement of the reasons or register the transfer.

If the company fails to send the transferee and transferor a notice of refusal, send a statement of the reasons for the refusal or register the transfer, the company and everyone responsible are liable to a fine at level 4 (HKD 25,000) and a fine of HKD 700 each day if the offence continues.

Alternatives to share transfer

In some cases, a full share transfer might not be the most suitable option.

Here are some alternative solutions to consider:

• The company itself can buy back the shares from the shareholder. This can be a good option if the company has sufficient cash reserves and wishes to maintain its ownership structure.
• Instead of transferring shares, the company can sell specific assets to another company. This can be useful if only a portion of the business is being sold.
• Two companies can merge into a single entity, combining ownership and assets. This can be a strategic option for growth or market consolidation.

Stamp duty and fees

The transfer of shares is subject to stamp duty at 0.26% of the consideration or the shares’ net asset value to be transferred, whichever is higher.

Stamp duty for each instrument of transfer has a fee of HKD 5.00.

When is stamp duty paid?

Stamp duty must be paid within two days after the sale or purchase of shares if it takes place in Hong Kong. If the sale or purchase takes place outside Hong Kong, stamp duty must be paid within 30 days.

Late stamp duty penalties

Failure to pay stamp duty within 30 days may result in the following penalties:

Tax implications

It is important to note that there might be tax implications associated with transferring shares. The tax treatment depends on various factors, including the seller’s residency status, the type of shares being transferred and any potential capital gains. Consulting with a tax advisor is recommended to understand the specific tax liabilities involved.

Conclusion

Transferring shares in a Hong Kong private company is a well-defined process governed by the Companies Ordinance and the company’s internal governance documents. Whether prompted by a shareholder’s departure, a change in ownership structure or the introduction of new investors, it is essential to ensure the correct procedures are followed and the required documents are properly prepared.

Understanding pre-emptive rights, obtaining board approval and meeting stamp duty obligations are key steps to ensure the transfer is valid and enforceable. While the process can generally be completed within a few business days, certain scenarios, such as refusal to transfer or tax implications, may require additional attention.

Before proceeding, businesses should review any limitations set out in the articles of association or shareholders’ agreement and consider whether alternative solutions such as a share buyback or asset sale may be more suitable. Given the potential legal and tax considerations, seeking professional advice can help ensure a smooth and compliant transaction.

How Acclime can help with share transfers

Navigating share transfers and company governance in Hong Kong can be complex, especially for businesses unfamiliar with the legalities involved. If you are unsure about any aspect of share transfers or company governance in Hong Kong, Acclime can be a valuable resource. Our team of experts can provide guidance and ensure your business remains compliant.