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Submitted by // K Bowers, Partner/Solicitor Advocate; M Withington, Partner
03 April 2018

 

ILO Complaint channels for insurance policyholders

Click here to see the International Law Office Article

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Submitted by // J Wong, Partner
22 March 2018


 Black Day for ICOs in Hong Kong?

The Hong Kong Securities and Futures Commission ("SFC") has blocked ICO issuer Black Cell Technology Limited ("Black Cell") from continuing its initial coin offering ("ICO") to the Hong Kong public earlier this week. Black Cell has agreed to unwind ICO transactions for Hong Kong investors and has undertaken not to devise, set up or market any scheme that constitutes a Collective Investment Scheme ("CIS") unless in compliance with the relevant requirements under the Securities and Futures Ordinance ("SFO"). This follows the SFC's concerns that Black Cell may have been engaged in unlicensed activities[1] and unauthorised promotional activities [2].

That firm regulatory action against ICOs would occur sooner or later is not unexpected, as the SFC signalled its reservations regarding cryptocurrencies and ICOs in circulars in September 2017 and again in February 2018. The SFC also revealed that it had questioned several cryptocurrency exchanges and ICO issuers about their activities.

The SFC found that Black Cell had promoted an ICO to sell digital tokens to investors through its website accessible by the Hong Kong public, with the pitch that the ICO proceeds would be used to fund the development of a mobile application and holders of the tokens would be eligible to redeem equity shares of Black Cell.

The SFC has stated that it considers such arrangement may constitute a CIS under the circumstances. An interest in a CIS is regarded as a form of "securities" as defined in the SFO, so where an ICO involves an offer to the Hong Kong public to acquire an interest or participate in a CIS, prior authorisation and licensing requirements under the SFO are triggered unless an exemption applies.

Although the SFC's announcement focussed on CIS, we believe there was another feature that arguably makes the tokens "securities" (that is, falling into the wider meaning of "securities" in the SFO and not just the narrower category of CIS) : the promise that token holders would get equity shares.

This is not the first time that the SFC has taken action to shut down arrangements which they think constitute a CIS. In 2013, the SFC formed the view that an offer to sell 360 hotel room units at a development called The Apex Horizon appeared to be an invitation to participate in a CIS. Following this, essentially, the transactions were unwound; purchasers of the units were reimbursed their deposits, any part payments made together with interest and offered an amount of $10,000 as reimbursement of any reasonable legal and other expenses.

Just as in The Apex Horizon case, the SFC's announcement with regard to Black Cell Technology illustrates that the SFC does not hesitate to step in early and take robust positions regarding arrangements with which they are not comfortable, and in both cases these companies were forced to back down (even though they may have disagreed with the SFC's views). This reinforces our advice to clients who are keen to enter into activities involving cryptocurrencies and ICOs in Hong Kong : obtain legal advice on what you can and cannot do, be realistic about what you can achieve with an ICO or your fintech business, understand the risks associated with operating in an environment where the laws are complex and occasionally unclear and be prepared to engage with the Hong Kong regulators.


[1] Certain activities regarding the creation and sale of financial products require an SFC license under section 114 of the SFO.
[2] Offers to the public must be authorised by the SFC under section 103 of the SFO.


About Us

Howse Williams Bowers is an independent law firm which combines the in-depth experience of its lawyers with a forward thinking approach.

Our key practice areas are corporate/commercial and corporate finance; commercial and maritime dispute resolution; clinical negligence and healthcare; insurance, personal injury and professional indemnity insurance; employment; family and matrimonial; property and building management; banking; financial services/corporate regulatory and compliance.

As an independent law firm we are able to minimise legal and commercial conflicts of interest and act for clients in every industry sector. The partners have spent the majority of their careers in Hong Kong and have a detailed understanding of international business and business in Asia.

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 // K Bowers, Partner / Solicitor Advocate; P Yeung, Senior Associate
14 March 2018

 

Courting Danger

Legal issues can seriously affect a company's employee branding, Richard James Havis looks at the top 10 small-print pitfalls and how to avoid them.

This article was published in the Hong Kong & China HR Yearbook 2017, Clarified Post and extensively quotes HWB Partner, Kevin Bowers

The main employment legislation in Hong Kong is the Employment Ordinance (EO). This guarantees certain minimum benefits, including paid annual leave, paid leave and paid maternity and paternity leave. The ordinance applies to all workers in Hong Kong, regardless of nationality. There are other mandatory laws, such as the Minimum Wage Ordinance (MWO) and the Occupational Safety and Health Ordinance. Here, we look at the 10 most important employment issues through recent or pending legal decisions that may affect the actions of HR professionals.

Employers do not have to pay employees gratuities if they consider the service unsatisfactory

Employers in Hong Kong do not have to pay employees a gratuity if there is no "satisfactory completion" of their contract, the Court of First Instance ruled in May 2017. Completion requires the employees not only "sit out the appointment" until the end of the term, but also discharge their duties and obligations in a manner deemed acceptable by the employer.

In Chok Kin Ming vs Equal Opportunities Commission (EOC), the EOC successfully appealed against a Labour Tribunal ruling that it had failed to pay an employee his end-of-contract commission. The employee had argued that "satisfactory completion" only applied to the dimension of time.

The court found that the EOC was entitled to withhold the gratuity because of the employee's conduct in a private forum at a church meeting, which amounted to a conflict of interest and therefore impeded the satisfactory completion of his employment. The employee's contractual employment terms included the EOC's Code of Conduct, which forbade him from participating in activities in which a conflict of interest could arise. The ruling says that employees' conduct towards their employment is not limited to their working hours.

"To minimise the instance of disputes about the interpretation of gratuity or bonus terms, these provisions in employment contracts should be clearly and precisely drafted to provide that these payments are subject to defined conditions, and where appropriate, the discretion of the employer," say Kevin Bowers, a partner and solicitor advocate at Howse Williams Bowers, where he acts for both employees and employers. "The employer should also have in place corporate policies which expressly state that the employees are subject to these conditions."

Employers can charge a fee for supplying employees with personal data

Employees can make a data access request (DAR) to their employers, which asks the employer to provide them with copies of any data the employer holds that relates directly or incorrectly to them. The data may include appraisals, personnel files, disciplinary records and anything that is practicable for the employer to supply, which relates to the employee's name. The employer can charge a fee for the data, and can withhold the data from the employee until the fee is paid.

However the employer cannot charge an "excessive" fee, and the fee must be "directly related to" and "necessary" to carry out the DAR. If an employer can produce the data without incurring any costs, there should be no fee. Not all costs incurred by an employer are deemed "necessary" - for instance administration costs are not considered direct and necessary. The fee must reflect the direct labour costs incurred by the employer in providing the data, and should be kept to a minimum.

"It is important for employers to bear in mind that the right to impose a DAR fee should not be exercised with the aim of deterring employees from making DARs," says Bowers. "Where employees believe that they have been charged excessively for compliance with their DARs, they may lodge a complaint with the Privacy Commissioner's Office. Ultimately, it is the employer's responsibility to justify the fee and how it relates to the compliance costs incurred. In calculating the DAR fee, proportionality is key."

Moonlighting employees may be breaching their employment contracts

A moonlighting employee, even one who takes employment with a business not directly in competition with the primary employer, is still at risk of breaking the law. Questions may arise about the employee's restrictive covenants (which are used by employers to protect their legitimate business interests if the employee leaves) and the implied term of trust and confidence (the obligations owed to the employer by the employee and vice-versa). In Hong Kong there is an increasing emphasis on the reciprocal duties of trust and confidence between employers and employees.

Moonlighting employees could also be committing an offence under section 9 of the Prevention of Bribery Ordinance. The case of secretary for Justice vs Chan Chi Wan Stephen highlights the issue. Steven Chan was the former general manager of TVB, and also hosted the channel's show Be My Guest. Chan hosted a show called Additional Be My Guest at a shopping mall in 2009 and afterwards received HK$112,000 for the work from a third-party company. Chan's contract stated he could not take any employment outside TVB unless written permission was given, and that was not obtained. Chan was charged and found guilty under section 9 of the Prevention of Bribery Ordinance, but was acquitted on appeal to the Hong Kong Court of Final Appeal.

"Whilst [Secretary for Justice vs Chan Chi Wan Stephen] is apparently good news for Hong Kong employees, it would be irresponsible and unacceptably risky for moonlighting employees to take up second jobs, or any additional employment, without first obtaining their current employer's informed written consent," says Bowers. "This will ensure compliance with their ongoing employment obligations and allow them to steer clear of any criminal prosecution."

The MPF offset mechanism may be abolished

Former Chief Executive CY Leung announced in his final policy address in January 2017 plans to "progressively abolish" the offset mechanism under the Mandatory Provident Fund (MPF) system. Employers are currently allowed to offset severance payments and long-service payments against the employer's contributions to employees' MPF (retirement) scheme benefits.

A company that dismisses an employee who has more than five years of service must currently pay a long-service fee equal to the number of years of service multiplied by two­-thirds of the employee's monthly income up to HK$15,000 for each year and a maximum of HK$390,000.

The government noted that the abolition will have no retrospective effect - "employers' MPF contributions before the implementation date of the proposal will be grandfathered" Leung said - and employers may be subsidised for a portion of the cost in the first 10 years following the abolition. Furthermore, severance and long-service payments may be reduced from two-thirds to half of the employee's monthly wages.

"Although this recent (employee-friendly) proposal contemplates a reduction in the amount of severance and long-service payments in order to reduce the burden on Hong Kong employers, and employers would have 10 years from the implementation of the proposal within which to plan for the change - during which the government would bear part of the costs involved in these payments - it is likely to be vigorously opposed by the business sector," Bowers says. "It will be opposed on the basis that, if implemented, it will hit small and medium-sized businesses hard at a time when they can ill afford this additional financial exposure at the same time as paying the ever-increasing costs of doing business in Hong Kong."

The Employment Amendment Bill compels employees to reinstate employees without the employer's consent

The Employment Amendment Bill, which was announced in Legco in May 2017, compels employers to reinstate employees who have been unlawfully dismissed without the employer's prior consent. An employer must agree to reinstate the employee before the court can make the order under current law. The proposed penalty for employers who fail to comply with the order of reinstatement is set at three times the employee's monthly wage up to a maximum of HK$72,000.

However, it's rare for the court to make an order for reinstatement, as by that time the relationship between employer and employee has usually deteriorated to such a point that returning to work is untenable.

"Notwithstanding this apparently employee-friendly legislative improvement, the reality of the position is that this legislative change is unlikely to improve the lot of employees in any meaningful way in circumstances where, by the time an employer and an employee participate in contested Labour Tribunal proceedings, neither party is particularly keen to renew their relationship," says Bowers. "The end result is that the Labour Tribunal Presiding Officer is highly unlikely to force an employee to go back to work for an employer who he/she no longer trust or wants to work for."


About Us

Howse Williams Bowers is an independent law firm which combines the in-depth experience of its lawyers with a forward thinking approach.

Our key practice areas are corporate/commercial and corporate finance; commercial and maritime dispute resolution; clinical negligence and healthcare; insurance, personal injury and professional indemnity insurance; employment; family and matrimonial; property and building management; and financial services/corporate regulatory and compliance.

As an independent law firm we are able to minimise legal and commercial conflicts of interest and act for clients in every industry sector. The partners have spent the majority of their careers in Hong Kong and have a detailed understanding of international business and business in Asia.

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 // J Wong, Partner
14 March 2018


TO LAUNCH OR NOT TO LAUNCH 

Introduction

Whilst Hong Kong is welcoming of financial technology, or Fintech, initiatives, the financial services regulators continue to be cautious about some aspects of Fintech that involve investments by the public, namely cryptocurrencies and ICOs. For example, they have warned investors to proceed with caution due to the uncertain and currently (mostly) unregulated nature of the assets.

Digital tokens that are issued through an ICO and cryptocurrencies are generally characterised as virtual commodities by the regulators in Hong Kong. This means that tokens are generally not subject to Hong Kong laws that regulate the issue and use of currency and money. However, this is not the end of the matter as there are a myriad of other financial services and other laws that may apply. For example, digital tokens may be regarded as a "security" as defined in the Securities and Futures Ordinance ("SFO") in certain circumstances. A "security" is widely defined and catches most forms of investment products including shares, bonds, futures and forwards, derivatives and collective investment schemes; there are limited exclusions. The categorisation of a token as a security will have licensing implications for issuers, unless an exemption or exclusion applies. The carrying on of unlicensed activities in Hong Kong is a serious offence and can involve criminal sanctions.

In anticipation of ICO regulations that are expected to be drafted and implemented in the near future, this alert discusses some practical considerations that issuers may want to consider when thinking of conducting an ICO in Hong Kong.

Show me the money

A token issuer looking to open a bank account in Hong Kong may face some difficulty, as the Hong Kong Monetary Authority has published a guideline reminding banks to exercise "prudent risk management" in relation to services involving virtual commodities. Issuers therefore should be prepared to provide evidence of their good standing and the legitimacy of their business operations in Hong Kong.

Do you know your client?

Issuers should, from the outset, adopt a robust know-your-client procedure when on-boarding participants, so as to mitigate risks of being exposed to money laundering, terrorist financing or fraudulent transactions. The facilitation of such criminal activities, depending on the circusmtances, may amount to "aiding and abetting", an offence where the aidor or abettor is treated as culpable as the main perpetrator.

Nothing is certain but death and taxes

Hong Kong corporations are subject to tax on all profits arising in or derived from Hong Kong. Currently, it is unclear as to whether virtual currency raised from an ICO would be regarded as an assessable profit. Further, whether profits are regarded as being derived from Hong Kong is a question of fact and therefore is very dependent on factors including the nature of the profits and the operational structure of the issuers' business.

The paperwork

Token sales should include a whitepaper, a technical paper, token terms and conditions of sale and a privacy policy. Depending on the nature of the ICO, the legal structure of the issuer may also be relevant, and the issuer should consider its articles of association, shareholders agreements and directors' agreements, if any.

In preparing the ICO documents, issuers should consider the scope of the disclaimers, the current regulatory landscape in other jurisdictions if they foresee that the ICO will attract interest from participants in other jurisdictions as well as Hong Kong privacy data laws. The disclaimers in the ICO document should cover the risks associated with the issuer's operations and more importantly, underscore the risks for participants to take part in an ICO. We do not recommend disclaimers in fine print; they should be clear and prominent.

It's a gamble

Beyond the SFO, an ICO issuer should also be mindful of other relevant laws that may apply. Depending on the operational arrangement underlying the tokens, other financial services regulations may be relevant such as the Payment Systems and Stored Value Facilities Ordinance, the Pyramid Schemes Ordinance, the Money Lenders Ordinance, the Gambling Ordinance and the Betting Duty Ordinance.

Buyer beware

The focus of this article has been common pitfalls and practical considerations from an ICO issuer's point of view, but we briefly mention in this section some questions that investors should consider before investing in an ICO. For example, who is the investor contracting with? What rights come with the investment? Is it possible for the investor to sell his or her token, and if so, how and when and at what cost?

Key takeaways

The regulatory minefield needs to be navigated carefully, if an ICO is to be successful. Our key takeaways are:

• Does your virtual token have features that may make it an investment product that is regulated?
• Who are your target participants?
• What measures should you implement when on-boarding the ICO participants?
• What additional corporate steps should be taken when setting up an entity in Hong Kong?
• What information should you obtain from the participants?
• How should such information be handled?
• How should your operations be structured, taking into account Hong Kong tax implications?


About Us

Howse Williams Bowers is an independent law firm which combines the in-depth experience of its lawyers with a forward thinking approach.

Our key practice areas are corporate/commercial and corporate finance; commercial and maritime dispute resolution; clinical negligence and healthcare; insurance, personal injury and professional indemnity insurance; employment; family and matrimonial; property and building management; banking; financial services/corporate regulatory and compliance.

As an independent law firm we are able to minimise legal and commercial conflicts of interest and act for clients in every industry sector. The partners have spent the majority of their careers in Hong Kong and have a detailed understanding of international business and business in Asia.

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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