Legal guide for company directors and CEOs in Hong Kong

  1. ESG obligation for Directors and CEOs
    1. 1. Do existing directors’ duties contain obligations that apply to matters that could be categorised as an ESG consideration, e.g. the environment, employee welfare?  
    2. 2. Are there other obligations of directors that relate to ESG considerations, e.g. health and safety, gender pay inequality, etc.? 
    3. 3. What recent changes have occurred or are expected with respect to directors’ responsibilities in relation to ESG considerations?
    4. 4. What obligations do directors have in relation to ESG disclosure and/or reporting?
  2. Duties and responsibilities of directors
    1. 1. What form does the board of directors take?
    2. 2. What is the role of non-executive or supervisory directors?
    3. 3. Who can be appointed as a director? 
    4. 4. How is a director appointed?
    5. 5. How is a director removed from office?
    6. 6. What authority does a director have to represent the company?
    7. 7. How does the board operate in practice?
    8. 8. What contractual relationship does the director have with the company?
    9. 9. What rules apply in respect of conflicts of interest?
    10. 10. What other general duties does a director have?
    11. 11. To whom does the director owe duties?
    12. 12. How do the director’s duties change if the company is in financial difficulties?
    13. 13. What potential liabilities can a director incur?
    14. 14. How can a director limit his/her liability?
  3. Coronavirus (COVID-19) considerations for directors
    1. 1.  What are the key issues for directors during the Covid-19 crisis?
    2. 2. What government relief measures have been made available to directors?
    3. 3. What changes have been made to directors’ duties as a consequence of the COVID-19 crisis?

ESG obligation for Directors and CEOs

1. Do existing directors’ duties contain obligations that apply to matters that could be categorised as an ESG consideration, e.g. the environment, employee welfare?  

Existing directors’ duties do not contain obligations that apply to matters which could specifically be categorised as an ESG consideration. 

2. Are there other obligations of directors that relate to ESG considerations, e.g. health and safety, gender pay inequality, etc.? 

The Companies Ordinance contains requirements on the contents of the annual directors’ report of a Hong Kong company. Broadly speaking, the directors’ report should contain a business review with a discussion on the company’s environmental policies and performance; the company’s compliance with the relevant laws and regulations; and an account of the company’s key relationships with, among others, its employees, customers and suppliers that have a significant impact on the company. Companies may be exempted from reporting if they fall within the reporting exemption under the Companies Ordinance. 

For companies listed on The Stock Exchange of Hong Kong Limited (the “Hong Kong Stock Exchange”), the Rules Governing the Listing of Securities on the Stock Exchange (the “Listing Rules”) require that the nomination committee of a listed company has a policy concerning diversity of board members which relates to matters including gender, age, cultural and educational background. 

3. What recent changes have occurred or are expected with respect to directors’ responsibilities in relation to ESG considerations?

The recent changes generally relate to companies publicly listed on the Hong Kong Stock Exchange.

In December 2020, the Hong Kong Securities and Futures Commission announced that it plans to enhance companies’ climate-related disclosures aligned with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations which will be mandatory across relevant sectors by 2025. The TCFD Recommendations cover areas such as governance, strategy and risk management, and metrics and targets to assess and manage relevant climate-related risks, for which directors may be responsible.

In April 2021, the Hong Kong Stock Exchange also published a consultation paper aiming to strengthen the corporate governance practices and ESG measures, encouraging enhanced attitudes towards ESG for listed companies and their boards of directors. Gender diversity as well as climate-related risks are among the themes the Hong Kong Stock Exchange proposed to enhance. 

4. What obligations do directors have in relation to ESG disclosure and/or reporting?

Apart from the requirements for the contents of the directors’ report referred to in question 2 above, the Listing Rules contain the “ESG Reporting Guide” which requires a listed company to publish an ESG report annually. The ESG Reporting Guide includes mandatory disclosure requirements and “comply or explain” provisions. 

Under the ESG Reporting Guide, the board of directors of a listed company is required to issue a statement containing: (i) a disclosure of the board’s oversight of ESG issues; (ii) the board’s ESG management approach and strategy, including the process used to evaluate, prioritise and manage material ESG-related issues (including risks to the listed company’s businesses); and (iii) how the board reviews progress made against ESG-related goals and targets with an explanation of how they relate to the listed company’s businesses be disclosed in the ESG report. 


Duties and responsibilities of directors

1. What form does the board of directors take?

A board of directors (the “Board”) in Hong Kong usually takes the form of a single tier where there is no distinction between executive function and supervisory function. Apart from the law, the conduct and powers of the Board are largely governed by the articles of association of the company and subject to the ultimate authority of the members of the company, i.e. the shareholders.

2. What is the role of non-executive or supervisory directors?

In the context of a private company, there is no legal requirement for a non-executive or supervisory director in Hong Kong. However, a director of a private company may make reference to the Corporate Governance Code under the Listing Rules for improving its corporate governance by appointing and authorising an officer to perform the function of a non-executive director.

3. Who can be appointed as a director? 

If an individual is to be appointed as a director of a company, he/she must be (i) at lease 18 years old; (ii) must not be an undischarged bankrupt; (iii) must not be subject to a disqualification order and the director must consent to act as a director.

4. How is a director appointed?

The first director of a company is named concurrently with the incorporation of the company. Subsequently, shareholders may appoint directors, subject to the articles of association of the company, by ordinary resolution for an unlimited period of time. The board may also appoint directors to fill casual vacancies, but the tenure will only last until the forthcoming annual general meeting (“AGM”) of members of the company, i.e. the shareholders and the concerned directors must retire and stand for re-election at the AGM.

Companies should also observe the filing requirements for the appointment and change of directors.

5. How is a director removed from office?

The shareholders may remove a director by passing an ordinary resolution at a meeting where a specific notice is given for the proposed resolution to remove the director. A director must be given the right to be heard.

A director may also be removed from office by disqualification order issued by the court. And upon the appointment of a liquidator, all the powers of the directors shall cease. 

6. What authority does a director have to represent the company?

A third party dealing with a director acting on behalf of a company may assume that the director can bind the company, and he/she is not required to inquire as to any limitations on the director’s authority to bind the company, which may be found in the company’s articles or otherwise. Where a director acts beyond his/her authority, he/she may be held personally liable for any losses arising from such misconduct and the concerned transaction may become voidable.

7. How does the board operate in practice?

Any director may call for a board meeting by issuing a notice for a directors’ meeting to each director. The directors should pay attention to the requirements for notice period and quorum. A quorum is usually two unless otherwise provided for by the articles of association.

There are no specific statutory requirements on the formality to hold a directors’ meeting, but it cannot be just a casual encounter. Also, directors need not be in the same place to hold a meeting as long as directors can communicate with each other which means phone call or video conferencing are an acceptable mode of meeting. No matter which mode of meeting is taken, directors should prepare minutes for the directors’ meeting and the minutes shall be kept for a minimum of ten years.

Resolutions are decided and passed by a majority of votes and in the event of an equality of votes, the chairperson usually gets a second and casting vote. When all eligible directors indicate to each other (either directly or indirectly) by any means that they share a common view on a matter, the Board can pass a resolution by way of a written directors’ resolution and no meeting is required.

8. What contractual relationship does the director have with the company?

The appointment of a director does not automatically create a contractual relationship between the director and the company. The company may, according to its own policy and discretion, enter into a service agreement or an employment contract with the director specifying the remuneration package and his/her job duty.

9. What rules apply in respect of conflicts of interest?

Directors owe a duty to avoid conflicts between personal interests and interests of the company such that he/she must not allow personal interests to conflict with the interests of the company. Such duty to avoid conflicts of interest may still survive after the termination of directorship. The below summarises some statutory requirements and principles in respect of conflicts of interest between the directors and the company:

Duty not to enter into transactions in which the directors have an interest except in compliance with the requirements of the law 

A director of a company has certain duties where he/she has a material interest in any transaction to which the company is, or may be, a party. Until he/she has complied with these duties, he/she must not, in the performance of his/her functions as a director, authorise, procure or permit the company to enter into a transaction. Furthermore, he/she must not enter into a transaction with the company, unless he/she has complied with the requirements of the law.

Duty to disclose conflicts of interest to the shareholders and other directors 

The law requires a director to disclose to other directors the nature and extent of his/her interest in a proposed transaction before the company enters into the same transaction. 

Under certain circumstances, the articles of association may prescribe procedures to secure the approval of directors or members in respect of a proposed transaction which may require the concerned director to abstain from voting and not to be counted towards quorum.

Corporate opportunities doctrine

In case of an opportunity arising before the company and the director, the director shall not take the opportunity for himself/herself without first disclosing the opportunity to the company.

Failing to observe the abovementioned requirements, the directors may be liable for profit reaped from usurping corporate opportunities or secret profit earned from the transaction concerned.

10. What other general duties does a director have?

Duties of directors may be broadly summarised in the principles set out below:

Duty to act in good faith for the benefit of the company as a whole

A director of a company must act in good faith in the best interests of the company. This means that a director owes a duty to act in the interests of all its shareholders, present and future. In carrying out this duty, a director must (as far as practicable) have regard to the need to achieve outcomes that are fair as between its members.

Duty to use powers for a proper purpose for the benefit of members as a whole

A director of a company must exercise his/her powers for a “proper purpose”. This means that he/she must not exercise his/her powers for purposes that are different from purposes for which they were conferred. The primary and substantial purpose of the exercise of a director’s powers must be for the benefit of the company. If the primary motive is found to be for some other reasons (e.g. to benefit one or more directors and to gain control of the company), then the effects of his/her exercise of his/her power may be set aside. This duty can be breached even if he/she has acted in good faith.

Duty not to delegate powers except with proper authorisation and duty to exercise independent judgment

Except where authorised to do so by the company’s articles of association or any resolution, a director of a company must not delegate any of his/her powers. He/she must exercise independent judgment in relation to any exercise of his/her powers.

Duty to exercise care, skill and diligence

This means the care, skill and diligence that would be exercised by a reasonably diligent person with:

  • the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company; and 
  • the general knowledge, skill and experience that the director has.

Duty not to gain advantage from use of position as a director

A director of a company must not use his/her position as a director to gain (directly or indirectly) an advantage for himself/herself, or someone else, or which causes detriment to the company.

Duty not to make unauthorised use of the company’s property or information

A director of a company must not use the company’s property or information, or any opportunity that presents itself to the company, of which he/she becomes aware as a director of the company. This is except where the use or benefit has been disclosed to the company in general meeting and the company has consented to it.

Duty not to accept personal benefit from third parties conferred because of position as a director

A director or former director of a company must not accept any benefit from a third party, which is conferred because of the powers he/she has as director or by way of reward for any exercise of his/her powers as a director. This is unless the company itself confers the benefit, or the company has consented to it by ordinary resolution, or where the benefit is necessarily incidental to the proper performance of any of his/her functions as director.

Duty to observe the company’s constitution and resolutions

A director of a company must act in accordance with the company’s articles of association and other constitutional documents. He/she must also comply with resolutions that are made in accordance with the company’s constitution.

Duty to keep accounting records

A director of a company must take all reasonable steps to ensure that the company keeps accounting records that are sufficient to show and explain the company’s transactions and disclose with reasonable accuracy the company’s financial position and financial performance.

11. To whom does the director owe duties?

The director owes a duty to the company as a separate legal entity.

12. How do the director’s duties change if the company is in financial difficulties?

Unlike England and Wales, Hong Kong laws have no concept of “insolvent trading” or “wrongful trading”. However, directors may be subject to both civil and criminal penalties and a disqualification order if they engage in fraudulent trading. Fraudulent trading occurs when any business of the company has been carried on with the intent to defraud creditors of the company or creditors of any other person or for any fraudulent purpose. To avoid breaching the fraudulent trading provisions, a director must not allow the company to incur further credit knowing that there is no reasonable prospect of avoiding insolvency.

Nevertheless, the directors should always observe his/her general duties as a director as discussed above.

13. What potential liabilities can a director incur?

The applicable civil penalty for fraudulent trading is that any persons who are knowingly parties to the fraudulent trading carrying on of the business shall be personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company. The civil penalty will only be applicable if the fraudulent trading becomes apparent in the course of the winding up of the company. The applicable criminal penalty may consist of a fine of an unlimited amount and/or a jail sentence of up to five years. The criminal penalty may apply whether or not the company is being wound up.
Where the court makes any determination in connection with fraudulent trading, it may also make a disqualification order in relation to any directors who are knowingly parties to the fraudulent trading for a maximum period of 15 years.

14. How can a director limit his/her liability?

Subject to the provisions of the relevant statutes and the articles of association of the company, directors shall be entitled to be indemnified out of the assets of the company against all losses or liabilities incurred or sustained by him/her as a director of the company in defending any proceedings, whether civil or criminal, in which judgment is given in his/her favour, or in which he/she is acquitted, and against any loss in respect of his/her personal liability for the payment of any sum primarily due from the company. Further, a company may also arrange directors’ liability insurance for the directors of the company in respect of potential costs and liabilities arising from claims that may be brought against the directors. 

Any terms of contract or articles with the purpose to exclude liability for negligence and breach of duty are void under the laws of Hong Kong.


Coronavirus (COVID-19) considerations for directors

1.  What are the key issues for directors during the Covid-19 crisis?

Work safety: Under the Occupational Safety and Health Ordinance, employers must, so far as reasonably practicable, ensure the safety and health at work of all employees. While there has not been any specific employment legislation with respect to COVID-19, the Labour Department has strongly urged employers to take precautionary measures which include providing face masks to employees and adopting flexible working arrangements to avoid group gatherings. The Labour Department has also reminded all employers to observe their statutory duties and contractual employment obligations when dealing with matters such as paid sick leave, salary payment and redundancy payment as a result of the COVID-19 crisis.

Economic and Social change: The COVID-19 crisis has seriously hampered the local economy and many companies, especially those in the tourism, retail and catering sectors, are now facing tightened cashflow with adverse impact on solvency. Directors should from time to time assess the operational, financial and cashflow aspects of their businesses and consider any legal implications from both a going concern and an insolvency perspective. 

Technology: COVID-19 has caused many businesses to shift their focus to online operation. Apart from upgrading the technological infrastructure to facilitate a smooth transition from offline to online, directors should not forget to upgrade online security levels to fulfil their obligation to protect personal data under the Personal Data (Privacy) Ordinance.

Prevention measures and regulation: The Hong Kong Government has promulgated the Prevention and Control of Disease (Requirement and Directions)(Business and Premises) Regulation and the Prevention and Control of Disease (Prohibition on Group Gathering) Regulation which suspend various types of business operations and impose a range of requirements on social distancing and health protection. Directors should ensure compliance with these regulations.

Dispute on Contracts: The COVID-19 crisis has led to various unprecedented disruptions to business which may lead to disputes when one party fails to perform its contractual obligation.

2. What government relief measures have been made available to directors?

In April 2020, the Hong Kong Government released a package of measures to support individuals and businesses affected by COVID-19, among which is a wage subsidy, calculated on 50% of salary with a cap of HKD 9,000 per month, to employers who undertake not to make workers redundant for a limited period of time and to spend 100% of the subsidy on paying wages to their employees.

The Hong Kong Government has also set up various subsidy schemes for industries such as catering, tourism and aviation, retail and construction. The Hong Kong Government has also granted a special 100% concessionary low-interest loan for which the Hong Kong Government will provide 100% guarantee. Some government taxes and levies such as the business registration fee, rent and rates, and profit tax have been waived, reduced or postponed to further lessen the burden on companies. (For further details, please refer to the government website).

3. What changes have been made to directors’ duties as a consequence of the COVID-19 crisis?

There are no legislations enacted in Hong Kong in relation to directors’ duties as a consequence of COVID-19 and thus, directors’ duties remain largely the same.

Portrait ofShirley Lau
Shirley Lau
Partner
Hong Kong (CMS CMNO - Lau, Horton & Wise LLP)