Difference between the Shares and Stocks with Discussion on the Issuance of Shares for an Incorporate HK Company

Possession of shares indicate towards the interest of the shareholder but not in the assets of the company, because assets of the company are possessed by the company itself and shareholders do not have any possession rights on the assets of the company. This confusion can create a lot of misunderstandings in the mind of the shareholder, so let’s shed some light on the legal nature of the shares:

  • Shares or any interest of the member has the status of a personal estate and can be transferred to other members or any one eligible to be the member of the company in the matter as specified in the constitution of the company. Hence, on account of this, share(s) possessed by the shareholder shall be of a personal estate rather than the nature of a real estate.
  • Share is basically the interest of the shareholders in the company in relation to the sum of money shareholders provided to acquire shares of the company. Purpose of liability comes at first, while the interest of the shareholders is considered to be a secondary thing. It must be noted that, possession of shares does not certify the interests of shareholders in the company, instead it is a type of interest measured against the sum of money having certain rights and liability.

After company incorporation HK, there are two terminologies used in the corporate sectors in relation to the shareholders i.e. Shareholders and the Stockholders. There isn’t any substantial difference between both of these terms and they can be used interchangeably. Furthermore, there isn’t any restriction on the issuance of warrants to the bearers in respect of stocks possessed by them. Therefore, it can be said generally that, both stocks and shares reflect the interests of the members in the company. However, there do exist some delicate differences between both corporate terms which are as follows:

  • As shares can be issued on the partial payments, stocks do not possess such generous characteristic, because stocks shall be issued only upon full payment.
  • If company wants to convert its shares to the stocks then it must be ensured that; the shares in question must be fully paid and there shouldn’t be any outstanding balance on part of the payment. Once shares have been converted into the stocks, then member shall now be called the stockholder of the company. Stockholder would now possess the monetary nature of stocks such as $50,000 of stocks rather than number of shares in the company such as 500 shares.
  • Shares are indivisible because fraction of shares can neither be traded nor be subjected to transfer. However, stocks can be transferred in fractions even the precise value of stocks can be transferred. For instance, consider that Mr. X possess precise value of $5450.60 stocks, then these stocks even though being in fraction can be transferred, however, if we talk of shares then it is not possible to transfer 100.6 shares of Mr. X to Mr. Y.
  • Stocks possess the convertible nature which means that shares can easily be reconverted back to the fully paid shares, if company deems to do so. The reconverted shares do not need to be in the original denomination in which they were previously converted to the stocks.

Issuance of Shares

Wherever an incorporate HK company creates new shares in the company which are supposed to be acquired by the shareholders, then company issues shares. They can either be issued to the existing shareholders of the company or the new shareholders of the company from outside of company. However, some critics say that issuance of shares by the company seems to be contradicting with the situation where shares are disposed by one shareholder to the other shareholder of the company. There are basically two broad categories for issuing of shares by the company i.e. Issuance of shares upon the incorporation of company and the Issuance of share after the incorporation of company. Former ones are known as the First Shareholders while the latter ones are known as the Subsequent Shareholders.

Issuance of Shares upon the Incorporation of Company

The ones who acquire the shares of the company upon company incorporation are known as the First Shareholders of the company. The First shareholders of the company are considered to be the founding members of the company because their name is mentioned in the constitution of the company and they sign the company’s constitution in the capacity of the founding members of the company. Company’s constitution would exclusively state the number of shares to be acquired by each founding members. As per Section 112 of Cap. 622; founding members are considered to have agreed to become the member of the company and upon the registration of company in Hong Kong Business Registry their names should be included in the company’s members register. Even if names of the founding members have not been entered into the company’s register of member, still founding members would be considered to act as the members of the company as soon as company get incorporated. As far as shares of the founding members are considered, they shall consider to be issued on the date, when company was registered in Hong Kong Business Registry.

Issuance of Shares after the Incorporation of Company

Shareholders who acquire shares of the company after incorporation of company are known as the Subsequent Shareholders of the company. After the company incorporation HK, company holds the right to issue shares either to its existing shareholders or to the new investors who wish to acquire shares of the company. However, Section 88(3) of Cap. 622 regulates this further issuing of shares especially in the circumstances where constitution of company has set the limits of shares to be issued by the company to the one wishing to acquire the shares. As per the script of Section 88(3) of Cap. 622:

If constitution of the company has mentioned the numbers of maximum shares that can be issued to the shareholders by the company, then company is not allowed to issue shares beyond this set limit. However, if company deems to issue shares more than the set limit, then it should first put forward the amendment in the clause related to maximum number of shares, to be issued.

Alteration in the constitution to modify the set limit regarding maximum number of shares to be issued, can easily be done with the help of the ordinary resolution.

The process of share issuance is done in quite a corporal manner where both the issuer and the allottee enter into the agreement related to the issuance of shares to the person seeking to acquire shares of the company. Such agreement is called Subscription agreement and the one who is allotted the entitlement to the shares of the company is called the subscriber of the shares. It must be noted that shares are issued to the allottee upon the terms of contract and once shares have been issued to him/her, allottee is entitled to have his/her name in company’s register of member.

After company registration Hong Kong, it can issue shares either publicly or privately. Public companies are allowed to offer its shares to the general public, subjected to the company’s compliance with the Pt. 2 of Cap.32. Private issuance of the shares involves the mechanism where company issues its shares to the particular investor.

Pt. 4 Div. 2 of Cap. 622 (ranging from ss 140-146) sets out the provisions related to the allotment, issuance of shares and the matters related to the return on allotments. These provisions also discuss the matters related to the issuance of share certificate upon allotment.

Pro Rata and Non-Pro Rata Offer

Company can offer shares to its existing shareholders in two ways i.e. either through pro rata offer or through non-pro rata offer. Pro rata offer constitutes the mechanism where existing shareholder is offered proportion of shares in relation to its currently possessed shares. For example, “one-five” means that for every five shares possessed by the existing shareholder, one new share would be offered to him/her to take up in the company. Rights issue is another name of pro rata offer. They can either be renounceable or non-renounceable. In non-renounceable offer, only the subjected shareholder to whom offer was extended, is entitled to take up the new shares in the company. While in renounceable offer, if the subjected person who was offered new shares does not want to take up offered shares, then he/she can renounce the offered shares in favour of a nominee of him/her who would then take up the offered shares on his/her behalf.

If we see the matter of non-pro rata offer, then it is the normal and simple share offer to the existing shareholders of the company which does not entertains any formality like pro rata offer. As per ss 140-141 of Cap.622 directors of the company are not entitled to issue or allot shares of the company or to offer them to anyone without the prior approval of company’s members in general meeting. However, this approval is subjected to exemption, if shares are offered through pro rata offer. This provision is enacted so as to protect the existing shareholders of the company from the situation where their holdings in the company could be subjected to dilution without their prior consent. But wherever such approval is mandatory to be provided, then ordinary resolution as per ss 141 would be sufficient. Approval through ordinary resolution is facilitated so as to enable the exercise of power to allot shares to the allottee. However, if approval is not meant to be given through ordinary resolution, then standing approval is recommended because it would give general authorisation to the company from the members of the company to issue shares of the company to the aspiring members.

For the situations where approval is given by way of standing approval, then this approval would stand valid until the conclusion of next annual general meeting of the company, from the day approval was given. If due to any circumstances, anticipated annual general meeting of the company could not be held then matter and validity shall be extended to the next subsequent annual general meeting of the company.

As we know that under the Section 140 of Cap. 622 approval of company’s members is required for any non-pro rata offer. Same approval is required as per Section 140 (1) (b) of Cap. 622 for non-pro rata grants of rights related to the subscription or conversion of any awarded security into the shares of the company.

As per Section 140 (6) of Cap. 622;

Failure to obtain the approval does not invalidates or voids the allotment of shares.

Thus, it can be said that any allotment of shares made under Section 140-141 of Cap. 622 would not be held void and invalid merely on account of reason that such allotment was made in lieu of breach of relevant provisions. However, if allottee was aware of the situation that subjected allotment is being in contravention of the regulations of legislation and companies laws, then allotment of share to this person would be set aside, based on the General Common Law Principles. Director who was involved in the contravention of legislation or company’s law during the allotment of shares, shall be held criminally liable for such contravention.