Due diligence checklist for a Hong Kong company acquisition

Due Diligence Checklist for a Hong Kong Company Acquisition

A buyer acquiring a Hong Kong company must verify the target’s legal standing, ownership structure, and compliance history through the Companies Registry and statutory records. The Companies Ordinance (Cap. 622) obliges every company to maintain specific registers and file prescribed forms with the Registrar. This checklist identifies the documents to review, the red flags to watch for, and the practical steps to confirm the target is clean.

Hong Kong Company Due Diligence

Due diligence begins with the public records at the Companies Registry. The registry holds every filing a company has made since incorporation: annual returns, change notifications, and charges. Obtain a current company search report and review the following.

• Form NAR1 - the annual return filed within 42 days of the return date. Check that each annual return was filed on time and that the particulars (registered office, directors, secretary, shareholders) match the seller’s representations.
• Form NR1 - notification of a change of registered office address. Verify the current registered office is a physical Hong Kong address, not a PO box.
• Form ND2A - appointment or cessation of a director or secretary. Confirm that all current directors and the secretary are properly recorded.
• Form ND2B - change in particulars of a director or secretary. Check for discrepancies in names, addresses, or identification numbers.
• Form ND4 - resignation of a director or secretary. Ensure resignations were filed promptly and that no former officer remains on the register.

A missing or late filing is a red flag. The Companies Registry imposes late filing fees, and repeated non-compliance can lead to prosecution. If the target has not filed an annual return for two or more years, the company may be struck off.

Acquire Hong Kong Company Checklist

When you acquire a Hong Kong company through a share purchase, the buyer inherits all liabilities, unpaid taxes, undisclosed creditors, compliance failures. The following checklist covers the key areas to investigate.

Share Capital and Ownership

Hong Kong operates a no-par-value regime. There is no authorised share capital. The issued share capital is recorded in the register of members. Request a copy and verify:

• The names and addresses of all current shareholders.
• The number of shares held by each member.
• The date each member was entered in the register.
• Any transfers that have not yet been recorded.

If the target has issued shares in the past, check these filings. Form NSC1 - return of allotment of shares. Confirm that every allotment was reported within one month. Form NSC2 - return of redemption or buy-back of shares. Verify that any buy-back complied with the conditions in the Companies Ordinance. Form NSC11 - notice of alteration of share capital. Check that any increase, reduction, or reorganisation was properly filed.

Share Transfer History

A share transfer is effected by an instrument of transfer accompanied by bought and sold notes. The instrument must be presented to the Inland Revenue Department for stamp duty assessment before the transfer is registered. Review the instrument of transfer for each past transfer. Confirm it was properly executed and stamped. Review the bought and sold notes, which record the consideration and the parties. Review the stamp duty receipt. Duty is 0.1% from the buyer and 0.1% from the seller, plus a fixed HK$5 on the instrument. Duty is charged on the higher of the consideration and the value of the shares. If the target holds real assets, a transfer at nominal value is still charged on the asset value.

Unpaid stamp duty is a serious issue. The Inland Revenue Department can assess duty on past transfers and impose penalties. The buyer may become liable if the duty remains unpaid at completion.

Hong Kong Target Company Due Diligence

Due diligence extends beyond the Companies Registry to the statutory registers every company must maintain at its registered office. The Companies Ordinance (Cap. 622) requires the following registers.

• Register of members - records all shareholders and their shareholdings. The register must be available for inspection by any member or creditor.
• Directors register - lists all current and former directors, with their full names, addresses, and identification numbers.
• Secretary register - records the company secretary, who must be an individual ordinarily resident in Hong Kong or a body corporate with a registered office in Hong Kong.
• Charges register - records all charges (security interests) created by the company. Each charge must be registered with the Companies Registry within one month of creation using Form NM1. A charge that is not registered is void against a liquidator or creditor.

Request copies of all statutory registers and compare them to the public records. Discrepancies may indicate that the seller has not filed required changes or that the registers have not been updated.

Charges and Encumbrances

A company search from the Companies Registry will show all registered charges. The charges register at the registered office may contain additional details, the terms of the charge, any variation. Review Form NM1, the notice of creation of a charge. Confirm that every charge was registered within the statutory period. Review the charge document itself to understand the secured amount, the assets charged, and any restrictions on disposal. If the target has granted a floating charge over its assets, assess whether the charge crystallises on a change of control.

Share Purchase Due Diligence Hong Kong

Share purchase due diligence requires the buyer to verify that the target has complied with all statutory obligations under the Companies Ordinance. The following areas are commonly overlooked.

Annual Return Compliance

The annual return (Form NAR1) must be filed every year within 42 days of the return date. The return date is the anniversary of the company’s incorporation or, if the company has changed its accounting reference date, the date specified in Form NAC4. Check that every annual return has been filed on time. Check that the particulars in the annual return match the statutory registers. Check that the annual return includes a copy of the audited financial statements if the company is not exempt from audit.

A company that has not filed an annual return for two or more consecutive years may be struck off the register. Request a certificate of continued registration from the Companies Registry.

Director and Secretary Appointments

The Companies Ordinance requires every company to have at least one director who is a natural person and at least one director who is ordinarily resident in Hong Kong. The company secretary must be an individual ordinarily resident in Hong Kong or a body corporate with a registered office in Hong Kong. Verify that all current directors and the secretary are properly appointed and recorded in the directors register and secretary register. Verify that any resignation (Form ND4) was filed promptly. Verify that the directors have not been disqualified under the Companies Ordinance or the Securities and Futures Ordinance.

Registered Office

The registered office must be a physical address in Hong Kong. A PO box is not acceptable. Verify the current registered office address through the Companies Registry and confirm that the company can receive service of process at that address.

Red Flags

The following issues should trigger further investigation: missing or late annual returns; unpaid stamp duty on past share transfers; discrepancies between the statutory registers and the Companies Registry records; charges that have not been registered (Form NM1 missing); directors or secretary who are not ordinarily resident in Hong Kong; a registered office that is a virtual office or a shared address without a physical presence; outstanding penalties or late filing fees.

A buyer who identifies any of these red flags should seek legal advice before proceeding. The seller may be required to rectify the issues as a condition of completion.