Corporate Agreements for Establishing a Company in Hong Kong

Establishing a company in Hong Kong is a streamlined process, but its long-term success hinges on a solid legal foundation. While the incorporation itself requires submitting basic documents to the Companies Registry, the real corporate governance framework is built upon key internal agreements. The two most critical documents are the Articles of Association and the Shareholders' Agreement.

This article explains the purpose, key clauses, and importance of each.

1. Articles of Association (AoA)

The Articles of Association (公司章程) are the company's constitution. It is a public document filed with the Hong Kong Companies Registry and binds the company and all its members.

Purpose: To govern the internal management and procedures of the company. It outlines the relationship between the company and its directors and shareholders.

Key Clauses Typically Found in the AoA:

· Share Capital: Details the authorized share capital, different classes of shares (e.g., Ordinary, Preferred), and their respective rights (voting, dividend).
· Directors' Powers & Duties: Defines the powers, responsibilities, and procedures for appointing and removing directors.
· General Meetings: Sets out the rules for calling and conducting shareholder meetings, including voting procedures and quorum requirements.
· Transfer of Shares: Outlines the process for transferring shares, which may include pre-emption rights (giving existing shareholders the first right to buy shares before they are sold to an outsider).
· Dividends: Details the policy for declaring and distributing dividends to shareholders.

Default Status: If a company does not register its own custom AoA, it automatically adopts the standard "Model Articles" from the Hong Kong Companies Ordinance, which may not be suitable for all businesses.

2. Shareholders' Agreement (SHA)

The Shareholders' Agreement (股東協議) is a private, confidential contract between some or all of the shareholders. It is not filed with any public registry.

Purpose: To define the rights, obligations, and protections of the shareholders amongst themselves. It deals with the private understanding between the owners of the company.

Key Clauses Typically Found in an SHA:

· Deadlock Resolution: Mechanisms to resolve a situation where shareholders are unable to make a decision (e.g., mediation, casting vote).
· Restrictive Covenants: Prevents shareholders from competing with the company or poaching key employees.
· Drag-Along and Tag-Along Rights:
 · Drag-Along: Allows a majority shareholder to force minority shareholders to join in the sale of the company.
 · Tag-Along: Allows a minority shareholder to join a sale initiated by a majority shareholder.
· Exit Strategy: Details the process for a shareholder to sell their shares, including valuation methods (e.g., fair market value determined by an auditor).
· Funding and Capital Contributions: Outlines agreements on future funding requirements and how shareholders will contribute.
· Confidentiality: Legally binds shareholders to keep company information secret.

Why You Need Both Documents

While there can be overlap, these documents serve different purposes and complement each other:

· The AoA is a public document for external compliance and basic internal governance.
· The SHA is a private document for internal relationship management and protecting shareholder investments.

The SHA can cover more flexible and detailed arrangements than the AoA. If there is a conflict between the two, the Shareholders' Agreement will usually prevail among the shareholders, but the AoA remains the binding document for third parties.

Essential Steps for Establishment

1. Incorporate the Company: Submit the "Incorporation Form (NNC1)" and your custom Articles of Association (or adopt the Model Articles) to the Companies Registry.
2. Draft the Shareholders' Agreement: Simultaneously, all shareholders should negotiate and sign the SHA. This is a critical step that is often overlooked by new companies.
3. Seek Professional Advice: The specific terms of your AoA and SHA are vital. It is highly recommended to engage a Hong Kong law firm and corporate service provider to draft these documents tailored to your business structure and goals.

A successful corporate foundation in Hong Kong requires more than just a business registration certificate. Drafting a robust set of Articles of Association and a comprehensive Shareholders' Agreement is an essential investment. These corporate agreements provide clarity, prevent future disputes, protect shareholders' rights, and create a stable framework for your company's growth and success.