The directors’ report has an important function in providing shareholders with information about the company’s business which may not be ascertainable from the financial information given in the accounts.
Subject to certain exemptions (see below), the directors of a company are required to prepare a directors’ report for each financial year of the company which must be in line with sections 390, 543(2) and Schedule 5 of the Companies Ordinance (Chapter 622, Laws of Hong Kong)(the “CO”), the Companies (Directors’ Report) Regulation (Chapter 622D, Laws of Hong Kong) as well as include the matters set out in any other regulation made by the Financial Secretary under section 452(3) of the CO.
General content requirements
For each financial year of a company, its directors’ report must contain the following information:-
- the name of every director during the financial year;
- the principal activities of the company in the course of the financial year; and
- any other matter that is material for the members’ appreciation of the state of the company’s affairs (the disclosure of which, in the opinion of the directors, will not be harmful to the interests of the company).
Specific content requirements
In addition to the general content requires for directors’ reports set out in the CO, which apply to all companies, the Companies (Directors’ Report) Regulation (Chapter 622B, Laws of Hong Kong) impose further detailed content requirements for directors’ reports.
A directors’ report must state the particulars of any transaction, arrange or contract in which the company or a group company is a party, and in which a director had, directly or indirectly a material interest. The particulars stated shall include the principal terms of the transaction, arrangement or contract, the names of the parties, the name of the director having a material interest and the nature of that interest. This disclosure will not be required in the case of a company falling within the reporting exemptions of the CO (see below).
Similarly, if at any time in a financial year a company had been party to any arrangement whereby any director had been able to acquire any benefit by acquiring shares in or debentures of the company or any other company, such director’s interest must be explained in the directors’ report and the name of the director concerned must be given.
The total amount of donations made by a company for charitable or other purposes where such donations total HK$10,000 or more will need to be stated in the directors’ report.
Where a company has issued shares or debentures, the directors’ report must state the reasons for such issuance, the classes of shares or debentures issued, the amount of such shares or debentures issued and the consideration received.
If the company is a party to any equity-linked agreement, the directors’ report for the financial year must detail the reason for the entry into the agreement, the nature and the terms of the agreements, and the number and the classes of shares issued under the agreement.
Any dividend payment recommended by a company’s directors in a financial year must be stated in the directors’ report.
Where a director resigns or refuses to stand for re-election, and the company has received notice of the director’s reasons, a summary of such reasons must be given in the directors’ report. This disclosure will not be required in the case of a company falling within the reporting exemptions of the CO (see below).
If a company enters into a contract with a person by which that person undertakes the management and administration of the company, and such person is not engaged in full-time employment of the company, the directors’ report shall state the existence of the contract and name any director or shadow director with any interests in the contract.
Obligation for a directors’ report to contain a business review
The directors’ report of a company must contain a business review, unless the company falls within the reporting exemptions.
Reporting exemptions (exemption from the preparation of a business review)
It would not be necessary to include a business review will in a directors’ report if the relevant company falls within the exemptions detailed in sections 359 and 388(3) of the CO in the relevant financial year.
A company falling within the reporting exemptions includes:-
- an eligible private company – which means a private company that, in addition to satisfying any two of the following criteria: (i) a total revenue for the financial year not exceeding HK$200 million, (ii) total assets not exceeding HK$200 million, and (iii) an average number of employees for the financial year not exceeding 100, passes a resolution in general meeting, where members holding at least 75% of the voting rights vote in favour of the company falling within the reporting exemption, and the remaining members do not vote against the resolution;
- a small private company ‒ which means a private company that satisfies any two of the following criteria: (i) a total revenue for the financial year not exceeding HK$100 million, (ii) total assets not exceeding HK$100 million, and (iii) an average number of employees for the financial year not exceeding 100;
- a small guarantee company ‒ which means a guarantee company with a total revenue for the financial year not exceeding HK$25 million;
- the holding company of a group of eligible private companies, a group of small private companies, or a group of small guarantee companies;
- a private company with no subsidiary, and which is not a subsidiary of another company;
- a private company where all the members agree in writing that the company is to fall within the reporting exemption;
- a private company or a company limited by guarantee that is the holding company of a group of small private companies or a group of eligible private companies;
- a company that is the wholly owned subsidiary of another body corporate; or
- a private company that does not fall within the abovementioned exemptions and a special resolution is passed at least six months before the end of the financial year by the members to the effect that the company is not to prepare a business review.
A holding company that prepares consolidated group accounts is required to produce a group director’s report (but not an individual director’s report). Where a director’s report is prepared for a group, the business review included in such a report must cover the businesses of all those group companies required to produce a business review on a consolidated basis.
Purpose of business review
As mentioned above, the business review forms part of the director’s report, unless the relevant company is exempted from such reporting obligation. The purpose of the business review is to inform members of the position of company’s business and to help them assess how the directors have performed their common law duty to act for the benefit of the members as a whole.
Contents of business review
A company that does not fall within any of the reporting exemptions is required to prepare a business review which must include the matters specified in Schedule 5 to the CO. In a group of companies where the directors of the holding company prepare consolidated financial statements, the directors must also prepare a consolidated director’s report with a business review for the group.
The business review must contain:-
- a fair review of the company’s business;
- a description of the principal risks and uncertainties facing the company;
- particulars of important events affecting the company that have occurred since the end of the financial year; and
- an indication of likely future development in the company’s business.
The business review must, to the extent necessary for an understanding of the development, performance or position of the company’s business, include an analysis using:-
- financial key performance indicators; and
- where appropriate, other key performance indicators, including information relating to environmental matters and the company’s key relationships with its employees, customers and suppliers.
Approval and signing of a directors’ report
The directors’ report must be approved by the board of directors and signed on the board’s behalf by:-
- a director, or
- the company secretary.
There is no statutory requirement to date the report.
Revisions to directors’ reports
When a revision is made to a directors’ report, the revision will be deemed to have been approved by the directors on the date of the original directors’ report as if it was included in the original directors’ report.
If any part of a directors’ report is replaced or revised with a supplementary note, the directors must make a statement in a prominent position of the report that the revised directors’ report replaces or revises the original directors’ report (as the case may be) and that it is taken as having been approved by the directors on the date of the original directors’ report. In addition, the date of the revision should also be stated.
Criminal liabilities and penalties
Failure to comply with the requirement to prepare a directors’ report constitutes a criminal offence by every ‘responsible person’, which means any person who:
- was an officer or shadow director of the company; and
- such person authorises or permits, or participates in, the failure to comply with the requirement to prepare a directors’ report.
An offence will be committed by the company and each responsible officer if a directors’ report fails to state the name of the person who signed the report on the directors’ behalf.
The penalty for each of these offences is a ‘level 4’ fine (i.e. a fine of an amount ranging from HK$10,001 to HK$25,000).