Information

Social enterprises are businesses with a social purpose. Unlike an ordinary business which is focused on maximizing profits for its owners/shareholders, the main objective of a social enterprise is the achievement of specific social objectives through business approaches. Unlike a charity which has social objectives but does not generally carry on a business or commercial activities, a social enterprise carries on business and is often “for-profit”.

Social enterprises can take many legal forms. A social enterprise is not defined by its legal form but by its social mission, objectives, the participation of its shareholder groups in its governance and activities and the way it uses the profits generated by commercial activities.

Before setting up a social enterprise, one should carefully consider the social mission of the social enterprise, risk management, access to finance, tax and power structure. Such considerations may affect the choice of a legal form.

One way of limiting the potential risks to the founders and shareholders of a social enterprise is to use a “limited company” legal form for the social enterprise. In Hong Kong, many social enterprises are established as a private company limited by shares or a private company limited by guarantee. However, the legal form must still allow the social enterprise the freedom and flexibility to take advantage of any business opportunities that arise.

Please check out this link for an overview and comparison of possible legal structures for a social enterprise: [insert link to legal comparison]

The legal comparison contains (i) a summary and comparative analysis of legal structures which are commonly used by social enterprises in Hong Kong, the United Kingdom, the United States and Singapore and (ii) a description of distinctive features of innovative legal structures only available in the United Kingdom and the United States.

One way to protect the social mission and the corporate governance of a social enterprise is to have safeguards, checks and balances built into its constitution.

To illustrate, many social enterprises have adopted a “mission lock” statement and a cap on profit sharing in their constitution.

The constitution should also contain a carefully thought out structure. In general, a two-tier structure is most common in common law jurisdictions such as the United Kingdom, Hong Kong and Singapore where a smaller group of individuals is responsible for the day-to-day running of the organisation (i.e. the board of directors, board of management, management committee or board of trustees), but are accountable to a wider group of individuals (i.e. the members or the shareholders). In general, the members or shareholders are only involved in making the key, critical decisions and meet less frequently as compared to the board. This basic structure may be developed in a number of ways to suit the particular social enterprise.

We have prepared sample constitution for social entrepreneurs who wish to establish their social enterprises as a private company limited by shares or a private company limited by guarantee in Hong Kong:

• Private company limited by shares: [insert link to sample constitution]
• Private company limited by guarantee: [insert link to sample constitution]

In preparing the sample constitution above (the “Model Constitution”), we have considered various sources, including the constitution set out in the Hong Kong Companies Ordinance that would be adopted by default (unless otherwise specified) to all companies incorporated in Hong Kong (the “HK Default Constitution”).

We have used the HK Default Constitution as a starting point and added certain aspirational and recommended provisions based on a review of other sources, such as the constitution of notable social enterprises in Hong Kong, Singapore and the United States,  the certification criteria for B-Corps, the Corporate Governance Code under the Hong Kong Listing Rules and the terms of reference of well-known companies listed on the Hong Kong Stock Exchange such as Swire Pacific, MTR Corporation and Hong Kong Broadband.

To increase the transparency and accountability of a social enterprise’s social impact performance, the Model Constitution contains a provision for the preparation of an “Annual Benefit Report”.

To raise the standard of corporate governance, the Model Constitution also contains optional references to the establishment of committees by the board of directors, such as audit, remuneration, nomination and corporate governance committees.

Please also check out the links below for sample “terms of reference” of board committees for the following companies listed on the Hong Kong Stock Exchange.

[Insert links for Swire Pacific, MTR Corporation, HK Broadband Network]