Directors' Conflicts of Interest and Connected Transactions in Hong Kong

Hong Kong Directors Conflicts and Connected Transactions

A Hong Kong company director owes fiduciary duties to the company under the Companies Ordinance (Cap. 622). These duties include an obligation to avoid conflicts of interest and to disclose any personal interest in transactions the company proposes to enter. Part 9 of Cap. 622 sets out the rules governing hong kong directors conflicts and connected transactions. A director must act in good faith, exercise reasonable care, and avoid situations where personal interests conflict with those of the company.

Connected transactions, those between the company and a director or a person connected with a director, require board approval or, in certain cases, member approval. The company secretary ensures disclosures are properly recorded and that the company maintains the necessary statutory registers.

Hong Kong Director Conflict of Interest Cap 622

Section 662 of Cap. 622 codifies the director's duty to avoid conflicts of interest. A director must not put himself in a position where his personal interests conflict, or may conflict, with the interests of the company. This captures any direct or indirect interest in a transaction, arrangement, or contract with the company. The duty applies regardless of whether the company could have secured better terms. If a director breaches this duty, the company may seek rescission of the contract, an account of profits, or damages.

The director must also declare the nature and extent of any interest in a proposed transaction or arrangement at the earliest possible board meeting. Section 665 requires the declaration to be made in writing or orally at the meeting. The board minutes must record the declaration. Failure to disclose can render the transaction voidable at the company's option and expose the director to civil liability.

Hong Kong Connected Transaction Rules

Connected transactions under Cap. 622 are those between the company and a director, a shadow director, or a person connected with a director, a spouse, a child, or a company controlled by the director. The rules are stricter than those for ordinary conflicts because of the heightened risk of self-dealing.

Section 666 provides that a director who has an interest in a transaction must not vote on the resolution to approve it, unless the board resolves otherwise. The director may still attend the meeting and speak. The minutes must record that he did not vote. If the transaction requires member approval under the company's articles of association or under Cap. 622, the director must also ensure that the connected person does not vote on the resolution.

The company secretary should maintain a register of directors' interests in shares and debentures, as required by section 658. This register forms part of the statutory records and must be kept at the registered office or a prescribed place.

Hong Kong Company Director Duty to Avoid Conflicts

The duty to avoid conflicts is a core fiduciary duty. It sits alongside the duty to act within the company's constitution, the duty to exercise independent judgment, and the duty to exercise reasonable care, skill, and diligence. Section 662(1) states that a director must avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the company's interests.

The duty applies even if the company suffers no loss. The director cannot profit from his position without the company's consent. To enter a transaction that would otherwise breach the duty, the director must obtain approval from the board or the members, depending on the company's articles. The company secretary should ensure that the board minutes or written resolution clearly record the nature of the conflict and the basis on which approval was given.

Hong Kong Cap 622 Director Fiduciary Duties

Cap. 622 codifies the fiduciary duties that directors owe to the company. These duties are owed to the company itself, not to individual shareholders or creditors. The key fiduciary duties under the Ordinance are:

• Duty to act in good faith in the company's best interests (section 661)
• Duty to exercise reasonable care, skill, and diligence (section 662)
• Duty to avoid conflicts of interest (section 662)
• Duty not to accept benefits from third parties (section 663)
• Duty to declare interests in proposed transactions (section 665)

A director who breaches these duties may be liable to the company for any loss suffered. The company may also recover any profit the director made from the breach. The director's duty of care is assessed objectively: the director must exercise the care, skill, and diligence that would be exercised by a reasonably diligent person with both the general knowledge, skill, and experience that may reasonably be expected of a person carrying out the director's functions, and the general knowledge, skill, and experience that the director actually has.

Role of the Company Secretary in Managing Conflicts

The company secretary is responsible for ensuring that the company complies with its obligations under Cap. 622 regarding directors' conflicts and connected transactions. The role covers:

• Maintaining the register of directors and the register of directors' interests
• Ensuring that board minutes record all declarations of interest and any votes taken
• Preparing written resolutions where the board or members need to approve a connected transaction
• Notifying the Companies Registry of any changes to the register of directors using Form ND2A or ND2B
• Keeping the Significant Controllers Register (SCR) up to date, as a significant controller may also be a connected person

The company secretary should also advise the board on whether a proposed transaction requires member approval under the company's articles or under Cap. 622. If the company has a shareholders agreement, the secretary should check whether the agreement imposes additional restrictions on connected transactions.

Practical Steps for Directors

Directors should take the following steps to comply with their duties:

1. Disclose any personal interest in a proposed transaction at the earliest board meeting.
2. Ensure the board minutes record the disclosure and any resolution approving the transaction.
3. Refrain from voting on any resolution in which they have an interest, unless the board resolves otherwise.
4. Keep the company secretary informed of any changes to their interests or connected persons.
5. Review the company's articles of association and any shareholders agreement for additional requirements.

The company secretary should also ensure that the company's customer due diligence procedures under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615) identify connected persons, particularly where the company secretary holds a TCSP licence and provides trust or company services. The designated representative for the SCR should be aware of any connected transactions that may affect the register.