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Submitted by // J Lun, Associate
14 February 2012

Amendments To The Listing Rules Relating To The Code On Corporate Governance Practices

On 28 October 2011, The Stock Exchange of Hong Kong Limited (the "Stock Exchange") published the Consultation Conclusions on Review of the Corporate Governance Code and Associated Listing Rules ("Corporate Governance Conclusions"). In December 2011, the Stock Exchange published certain amendments to the Rules Governing the Listing of Securities on the Stock Exchange (the "Listing Rules") and in particular, the Code on Corporate Governance Practices (the "Code") which incorporate amendments to implement some of the proposals in the Corporate Governance Conclusions. The Stock Exchange will publish another batch of Listing Rules amendments which implement the remaining proposals in the Corporate Governance Conclusions in due course.

 

The changes to Listing Rules will be implemented in different stages:

  • most amendments to the Rules have become effective on 1 January 2012;
  • Code and certain Rules will be effective on 1 April 2012;
  • new Rule requiring the listed issuer to appoint independent non-executive directors ("INEDs") representing at least one-third of the board must be complied with by 31 December 2012; and
  • new Rule requiring company secretary training will be staggered according to the date of appointment of an individual as company secretary of an issuer.

 

As a reminder, the Code contains a combination of rules, code provisions ("CPs") and recommended best practices ("RBPs") as follows:

  • Rules: these require mandatory compliance by all listed issuers. If a listed issuer does not follow a Rule, it will have breached a Listing Rules;
  • CPs: listed issuers are expected to comply with, but may choose to deviate from the CPs. Where a listed issuer does not follow a CP, it must give reasons in the Corporate Governance Report (the Code will include a new section to clarify that deviations from CPs are acceptable if the listed issuer considers there are more suitable ways for it to comply with the principles);
  • RBPs:  these are for guidance only. If a listed issuer chooses not to comply with any RBPs, it does not need to explain.

 

We set out below some of the key changes which will be effective on 1 April 2012.

Directors’ time commitments and training

  • Directors’ time commitments: a new Principle will be introduced providing that the board should regularly review the contribution by a director to performing his responsibilities to the listed issuer, and whether he is devoting sufficient time performing them. Also, a new CP will be included that directors should inform the listed issuer of any change to their significant commitments in a timely manner.
  • Directors' training: a RBP on directors’ training will be revised and upgraded to a CP. Also, a Note will be introduced to the CP stating that directors should provide the listed issuer with records of training they received.  Furthermore, there will be a new requirement that a listed issuer will be required to disclose in its Corporate Governance Report how directors complied with the CP on training.


The board and board committees

  • Corporate governance policy: new CPs will be introduced stating that the board should be responsible for corporate governance and that an issuer should establish terms of reference on duties that should be performed by the board or committees delegated by the board. Furthermore, there will be a new mandatory requirement which requires a listed issuer to disclose the corporate governance policy and duties performed in the Corporate Governance Report.
  • Remuneration Committee:  new Rules will be introduced requiring the remuneration committee to have a majority of INED as members and be chaired by an INED. A listed issuer that fails to comply with these Rules will be required to immediately announce its reasons for not doing so and any other relevant details. The CPs will also be amended to state that where the remuneration committee is not delegated the responsibility to determine remuneration of executive directors and senior management, the remuneration committee should retain an advisory role to make recommendations to the board.
  • Nomination Committee: certain RBPs will be upgraded to CPs requiring the nomination committee to have a majority of INED members and chaired by an INED or board chairman, and to review the structure, size and composition of the board at least annually.
  • Audit Committee: a RBP will be upgraded to CP which will state that the audit committee’s terms of reference should include arrangements for employees to raise concerns about financial reporting improprieties, and the relevant CP will be amended to state that an audit committee should meet the external auditor at least twice a year. There will also be a new RBP recommending the audit committee to establish a whistleblowing policy and system.


Communication with shareholders

  • Shareholder communication policy: a CP will be introduced to require listed issuers to establish shareholders’ communication policy
  • Constitutional documents: a Rule will be introduced requiring a listed issuer to publish on its website and on the Stock Exchange’s website the updated and consolidated version of its constitutional documents, and a new requirement that a listed issuer must disclose any significant change to its constitutional documents during the year in its Corporate Governance Report.
  • Shareholders’ rights: a new mandatory disclosure requirement will be introduced so that a listed issuer will be required to disclose certain specified shareholders’ rights in its Corporate Governance Report. A new Rule will also be introduced requiring a listed issuer to publish on its website the procedures shareholders can use to propose a person for election as a director.


Company Secretary

  • Company secretary: a new section will be added to the Code on the role and responsibilities of a company secretary which include the CP that the company secretary should be an employee of the listed issuer or if the listed issuer uses an external service provider, it should disclose the identity of the person with sufficient senority at the listed issuer for the external provider to contact.

 

For more details, please refer to the following links:
Corporate Governance Conclusions (pdf)
Stock Exchange FAQ (pdf)

 

About us

HWB is a new, independent Hong Kong law firm which combines the in-depth experience of its lawyers with a creative, forward thinking approach.  Our key practice areas are maritime and commercial dispute resolution and corporate / commercial law, with particular skills in medico-legal law. 

As an independent Hong Kong law firm, we are well positioned to provide high quality legal services to local and international clients whilst minimising the limitations of legal and commercial conflicts of interest.  The partners' long history in the city enables us to deliver a blend of international know-how and Asian insight. 

At HWB we understand business and above all our focus is on results.  We are committed to providing all our clients with realistic, commercial legal advice that gives them ‘edge’.

 

Disclaimer: The information contained in this article is intended to be a general guide only and is not intended to provide legal advice.  Please contact pr@hwbhk.com if you have any questions about the article.

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Submitted by // S Smallbone, Reg Foreign Lawyer
14 February 2012

Enforcement of Arbitration Awards

Gao Haiyan and XIe Heping  v. Keeneye Holdings Limited and New Purple Golden Resources Development Limited (CACV 79/2011)

This Court of Appeal decision considered the practice of med-arb (a process by which a mediation is undertaken part way through an arbitration), re-affirmed the importance of enforcing arbitration decisions of other courts and giving due weight to the decisions of the courts of other countries.

Facts

The case concerned an application by Gao Haiyan and XIe Heping ("Applicants") for the enforcement of an arbitration award, against Keeneye Holdings Limited and New Purple Golden Resources ("Respondents").

By an award handed down by the Xi’an Arbitration Commission ("Commission"), the Applicants had successfully overturned a share transfer agreement which they signed under duress.  Following the tribunal’s decision the Respondent appealed to the Xian Intermediate Court ("Xi’an Court"), claiming bias during the med-arb and a breach of the arbitration rules.  Significantly, in dismissing the Respondent’s appeal the Xi’an Court held that by participating in the arbitration without raising a complaint, the Respondent had waived its right to object to conduct of the arbitration after the event and, in any event, on the evidence there had been no breach of the arbitration rules.

With a final decision awarded in Xi’an, the Applicant sought to enforce judgment in Hong Kong.  The Respondent resisted, arguing (again) that the tribunal had been biased and that its right to make such a claim had not been waived.

First Instance

At first instance, Reyes J found in favour of the Respondent.  He refused to uphold the award "as a matter of public policy" and said that it would be wrong to uphold an award "tainted by an appearance of bias."  His decision was overturned.

Appeal

In coming to its decision, the Court of Appeal considered the arbitration rules of the Commission and the Handbook of ICC Arbitration which noted that "Failure to raise an issue will result in waiver under many if not most of the national legal systems."

In the judgment of Tang VP, Reyes J. had not given enough weight to the decision of the Xi’an Court.  In particular, he cited the judgment of Coleman D J. in Minmetals Germany GmbH v. Ferco Steel Ltd [1999] CLC 647.

As a result of this appeal decision it is clear that any court hearing an application to enforce an arbitral award which has already been considered by the courts of the supervisory jurisdiction under which it was originally handed down, must give great weight to the importance of sustaining the finality of the determination by the courts that supervisory jurisdiction.

He said that:

"although one might share the learned Judge’s unease about the way in which the mediation was conducted because mediation is normally conducted differently in Hong Kong, whether that would give rise to an apprehension of apparent bias, may depend also on an understanding of how mediation is normally conducted in the place where it was conducted.  In this context, I believe due weight must be given to the decision of the Xi’an Court"

Whilst the practice of med-arb in the PRC may be viewed with some skepticism this Court of Appeal decision restores faith in the enforceability in Hong Kong of arbitration awards handed down by respected Arbitration institutions.

 

About us

HWB is a new, independent Hong Kong law firm which combines the in-depth experience of its lawyers with a creative, forward thinking approach.  Our key practice areas are maritime and commercial dispute resolution and corporate / commercial law, with particular skills in medico-legal law. 

As an independent Hong Kong law firm, we are well positioned to provide high quality legal services to local and international clients whilst minimising the limitations of legal and commercial conflicts of interest.  The partners' long history in the city enables us to deliver a blend of international know-how and Asian insight. 

At HWB we understand business and above all our focus is on results.  We are committed to providing all our clients with realistic, commercial legal advice that gives them ‘edge’.

 

Disclaimer: The information contained in this article is intended to be a general guide only and is not intended to provide legal advice.  Please contact pr@hwbhk.com if you have any questions about the article.

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Submitted by // Y Ho, Associate
14 February 2012

Insurance Broker Commission: No Secret Profit

Introduction

The judgment of the Court of First Instance in Hong Kong on 6 January 2012 in the case of Hobbins v Royal Skandia Life Assurance Ltd. & Clearwater International Ltd., HCCL15/2010 ("Hobbins") confirmed that the customary practice in the insurance industry for insurance brokers to receive commission from the insurers would not be contrary to s.9 of the Prevention of Bribery Ordinance ("PBO"), provided that the commission is not in excess of the normal level of commission paid in the insurance market and that that the broker had made disclosure to its client.

This has provided much assurance to insurance brokers regarding the legitimacy of receiving commissions from insurers and useful guidance on the extent of its duty of disclosure to its clients.

Background Facts

Hobbins was an extremely successful businessman and an experienced investor.

Clearwater, an insurance broker acted as Hobbin's agent to purchase Investment Linked Assurance Scheme products from Skandia and other insurers.

Clearwater made it known to Hobbins from the outset of their relationship that it made money from commissions and fees paid by insurers whose products were purchased by Hobbins.  It is also clearly stated in the client agreements with Hobbins that Clearwater would be earning commission from such of his business as Clearwater placed with insurers.

Hobbins later sought to set aside those investment schemes and to be restored to the position he was in immediately before purchasing those products. 

The Court found no basis for holding any of the contracts void or unenforceable.  All of Hobbins' claims against Skandia and Clearwater were dismissed.

Key Findings on Issues in Hobbins

  1. Agency

    It has long been established at common law that insurance brokers are acting solely as agents for an insured.  The mere fact that an insurer pays brokerage fees to a broker does not mean that the broker is undertaking to perform any obligation on behalf of the underwriter.

    In order to establish agency there must be express or implied authority for the agent to enter into any transaction or act in any way on the principal's behalf.  It was clear in this case from the contracts between the insurers and Clearwater that Clearwater was not appointed as an agent and it had no express or implied authority to enter into any transaction or act in any way on the insurer's behalf.  Therefore Clearwater was not an agent of the insurer.

  2. Illegal Contract

    There is "lawful authority" for the commercial practice that an insurance broker acts as an agent of the insured and not of the insurance company.  It has long been settled at common law that commission paid to an insurance broker by an insurer does not constitute an ilIegal secret profit unless it is in excess of what is normally paid within the insurance market.

    In this case, there is no evidence that the level of commissions or fees received by Clearwater was excessive by industry standard.

  3. Breach of Fiduciary, Common Law or Statutory Duty

    Equity imposes on the agent a duty to make disclosure of commission or fees earned from third parties in connection with the agent's handling of a principal's business.  That duty however did not extend to providing specific details of the quantum of commission.

    There was no dispute that Clearwater disclosed the fact that it would be remunerated by way of commissions and other fees received from the insurers.  It was then up to the principal to ask the insurance broker for further and better particulars of the commission to be received and then decide accordingly whether to proceed with a transaction.

    To impose a duty on the broker to specifically disclose the quantum of commission it expected to receive would be a standard at odds with case law on prevailing commercial practice among insurance brokers.  If there is to be a change that initiative has to be for the legislature to bring about.

HKFI Initiatives

Prior to Hobbins, concerns over the applicability of s.9 PBO on the commission received by insurance broker have already prompted the Hong Kong Federation of Insurers to issue a circular to all its member companies on 13 October 2011, to draw to their attention to the risk of such breach ("HKFI Circular"). 

The HKFI Circular advised insurers to require brokers to disclose to their clients that they will receive a commission from the insurer as a result of taking up the policy issued by the insurer and proposed that a broker must sign a declaration to the insurer that he has made such disclosure.  

Since Hobbins, the Hong Kong Federation of Insurers has in its January 2012 Monthly Brief announced that the Task Force on the disclosure of Intermediaries Remuneration has been re-activated to review the need to refine the legal advice provided to Member Companies in the HKFI Circular and to explore the possibility of devising a simplified version of the Broker’s Declaration in the context of the Prevention and Bribery Ordinance and protect the legal position of insurers.

Conclusion

Pending further revision to the HKFI Circular, Hobbins now gives clear authority that:

  1. an insurance broker is only an agent of the insured;

  2. commission received from the insurer does not constitute an illegal secret profit unless it is in excess of what is normally paid within the insurance market; and

  3. it is sufficient for insurance brokers to disclose to the insured the fact that it would be remunerated (and only remunerated) by way of commissions and other fees received from insurers, without specifying to the insured the amount of commission received.


About us

HWB is a new, independent Hong Kong law firm which combines the in-depth experience of its lawyers with a creative, forward thinking approach.  Our key practice areas are maritime and commercial dispute resolution and corporate / commercial law, with particular skills in medico-legal law. 

As an independent Hong Kong law firm, we are well positioned to provide high quality legal services to local and international clients whilst minimising the limitations of legal and commercial conflicts of interest.  The partners' long history in the city enables us to deliver a blend of international know-how and Asian insight. 

At HWB we understand business and above all our focus is on results.  We are committed to providing all our clients with realistic, commercial legal advice that gives them ‘edge’.

 

Disclaimer: The information contained in this article is intended to be a general guide only and is not intended to provide legal advice.  Please contact pr@hwbhk.com if you have any questions about the article.

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News //
Submitted by // W Wu, Paralegal
14 February 2012

Privity of Contract

As Reyes J. expounded in a recent Court of First Instance judgment, "…that cannot be a right result.  It violates the principle of privity of contract"[1]

The common law doctrine of privity of contract has existed in English law since the middle of the nineteenth century when it was firmly established in Tweddle v Atkinson[2] and reaffirmed by the House of Lords in Dunlop Pneumatic Tyre Co. Ltd. v Selfridge & Co. Ltd.[3] Under the Hong Kong Basic Law, this doctrine survived the transition post 1997 and to this day remains alive and well within the HKSAR common law system.

Under the existing Hong Kong "privity" doctrine a person cannot acquire and enforce rights under a contract to which he is not a party.

For example, if A has an agreement with B that A would do something for C and A subsequently does nothing, C cannot enforce the contract against A because C is not a party (or "privy") to the contract. "The doctrine of ‘privity’ requires a person to be ‘privy’ to a contract before he can sue on it,"[4]

The doctrine has accordingly been reformed in many common law jurisdictions, including Australia (the Northern Territory, Queensland and Western Australia) Canada, England and Wales, New Zealand and Singapore.

In November 2010, the Department of Justice advised the Law Reform Commission ("LRC") of the Administration's plan to implement the LRC's recommendations contained in the report on Privity of Contract, published in October 2005. The Department of Justice said:

"The Department of Justice has carefully considered the recommendations in the Law Reform Commission's report on Privity of Contract and agrees with the Commission that the doctrine of privity of contract should be reformed by means of a comprehensive, systematic and coherent legislative scheme. The Department of Justice intends to prepare a Bill to implement this proposal and will consult relevant stakeholders on the draft legislation in due course."

The LRC’s recommendations, if adopted, will bring Hong Kong’s law inline not just with the law in other parts of the common law world, but also with common sense. The result of the LRC’s proposals will be that third parties (persons not "privy" to a contract) should, subject to the intention of the contracting parties, be able to enforce agreements for their benefit.

For example, A is buying a watch from B, which A makes clear at the time of purchase is intended as a gift for C. "Under the existing common law, C cannot sue B if the watch proves defective, as C is not a party to the contract. However, under the LRC’s proposals, C is a party intended by A and B to be benefited by the purchase and he can sue B directly,"[5]

Other examples of the effect of the proposed reform on everyday life are:

  1. Contracts for holiday packages – A enters into an agreement with a tour company for a holiday package for his parents. The tour company fails to honour its promise under the contract. Since the contract was made for the benefit of A’s parents, they would, subject to the intention of the contracting parties, be entitled to claim in breach of contract against the tour company. The parents, however, cannot enforce the contract under the current law.

  2. Building contracts – A developer enters into a contract with a building contractor for the provision of labour and materials of a specified standard, intending that the contract would benefit the purchaser who buys the unit in the development. If the building contractor fails to provide materials of the specified standard, the purchaser of the unit can, subject to the intention of the contracting parties, sue the building contractor for damages arising from the breach. The purchaser of the unit, however, cannot enforce the contract under the current law.

  3. Insurance contracts – B is a sub-contractor of A. B takes out an insurance policy with an insurer (C) to cover his and A’s liability to employees’ compensation. A is not joined as a party. One of B’s employees is injured in the course of employment because of the negligence of one of A’s employees. A pays the required compensation to B’s employee. Under the existing law, A would have difficulties in seeking indemnity from C, since A is not a party to the insurance contract even though the parties intend to benefit him. In contrast, A would be able to seek indemnity from C under the report’s proposals.

The report makes clear that the LRC does not recommend the complete abolition of privity, as the LRC believes that it is important to preserve the principle of freedom of contract. The contracting parties’ freedom of contract should be respected and they should be able to opt out of any new statutory provisions giving rights of suit to third parties.

So it appears that the wheels are turning and the movement towards making the words of Reyes J. within Sinokor Merchant Marine Co Ltd v Vessel Marcatania, a distant and less frequent visitor in future contract litigation.
 

About us

HWB is a new, independent Hong Kong law firm which combines the in-depth experience of its lawyers with a creative, forward thinking approach.  Our key practice areas are maritime and commercial dispute resolution and corporate / commercial law, with particular skills in medico-legal law. 

As an independent Hong Kong law firm, we are well positioned to provide high quality legal services to local and international clients whilst minimising the limitations of legal and commercial conflicts of interest.  The partners' long history in the city enables us to deliver a blend of international know-how and Asian insight. 

At HWB we understand business and above all our focus is on results.  We are committed to providing all our clients with realistic, commercial legal advice that gives them ‘edge’.

 

Disclaimer: The information contained in this article is intended to be a general guide only and is not intended to provide legal advice.  Please contact pr@hwbhk.com if you have any questions about the article.



[1] Sinokor Merchant Marine Co Ltd v Vessel Marcatania Court of First Instance, 2 December 2011

[2] (1861) 1 B&S 393.

[3] (1915) A.C. 847.

[4] Mr Benjamin Yu, SC, Press Release - LRC report on privity of contract released, 25 October 2005

[5] Mr Benjamin Yu, SC, Press Release - LRC report on privity of contract released, 25 October 2005

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