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Submitted by // K Bowers, Partner / Solicitor Advocate
30 August 2017


BIG CHANGE IN HONG KONG'S CORPORATE REGULATORY REGIME

Companies (Amendment) Bill 2017 - Significant Control Register

The Hong Kong government has recently published the Companies (Amendment) Bill 2017 ("Bill") under which Hong Kong companies will be required to keep and maintain a register of significant controllers ("SCR"). The Bill is part of an effort by the government to strengthen Hong Kong's regulatory regime for combating money laundering and terrorist financing, and to bring Hong Kong more into line with international standards.

Register of Significant Controllers

Under the current proposals, an applicable company will be required to keep and maintain a register of people who have significant control over that company ("Significant Controllers"). The SCR must contain the prescribed content and be kept at the registered office of the applicable company, or at a prescribed place.

Scope of Application

The requirement to keep and maintain a SCR will only apply to a company as defined under the Bill ("Applicable Company"), which includes all Hong Kong companies, but does not include listed companies. Listed companies are not required to keep a SCR as the Securities and Futures Ordinance (Cap 571) already requires listed companies to keep a register of interests in shares.

The other notable exception to the new requirement is that a non-Hong Kong company will not be required to maintain a SCR, even if the company is registered (not incorporated) in Hong Kong.

In addition to the above exceptions, the Financial Secretary will also have the power to make further exceptions.

Definition of Significant Control

Both a natural person and a legal entity will be required to be registered in the SCR if they have significant control over the applicable company. A person or legal entity has significant control over an applicable company if the person or legal entity meets one or more of the following requirements:-

  • holding, directly or indirectly, more than 25% of: either the issued shares in that company if it has share capital; or the right to share in the capital or profits of that company if it does not have share capital;
  • holding, directly or indirectly, more than 25% of the voting rights in that company;
  • holding, directly or indirectly, the right to appoint or remove a majority of the board of directors of that company;
  • having the right to exercise, or actually exercises, significant influence or control over that company; or
  • having the right to exercise, or actually exercises, significant influence or control over the activities of a trust or a firm, not being a legal person under the relevant governing law, whose trustee(s) or member(s) meet(s) one or more of the requirements specified above.
Under the proposals, only a "registrable person" is required to be recorded in the SCR.  Under the Bill, a natural person who has significant control but holds such interest though a listed company will not be a registrable person.  In addition, only a legal entity immediately above an applicable company in the chain of ownership is required to be entered into the SCR.

Duties and obligations of applicable companies
 
An applicable company has a number of duties under the Bill in relation to the SCR.  In addition to the duty to keep a SCR, an applicable company also has the duty to:-
 
  • carry out investigations and obtain information about its Significant Controllers;
  • keep information on the SCR up to date, including recording any registrable change. A registrable change occurs where a person ceases to be a significant controller or any other change which results in any particulars in the SCR being incorrect or incomplete; and 
  • notify the Registrar of Companies of the place at which the SCR is kept and any change in the place at which the register is kept, subject to certain exceptions.

Under the Bill, an applicable company is also required to give notice to a relevant person ("Notice") if the company knows, or has reasonable cause to believe that:-

  • the person is a Significant Controller;
  • the person knows the identity of another person who is Significant Controller; or
  • there is a registrable change with respect to that person, the details of which are required to be contained in the SCR.
A person who has received Notice must confirm or provide particulars relating to the registrable person or registrable legal entity.  Note that it is the company which has the duty and obligation to identify and give Notice.  The Bill does not contain any requirements that a Significant Controller must give notice to the company that it holds a controlling interest.
 
Inspection of the SCR
 
Whilst every applicable company will be required to keep a SCR, it is not a requirement for the SCR to be made open for inspection by the public. Under the Bill, only a Significant Controller whose name is entered in the SCR or a law enforcement officer have the right to inspect and obtain a copy of the SCR. A law enforcement officer is defined in the Bill, and includes an officer of the Companies Registry, Customs and Excise Department, Hong Kong Monetary Authority, Hong Kong Police Force, Securities and Futures Commission, and other government or statutory bodies. 
 
If a company fails to comply with a request by a law enforcement officer to inspect or make a copy of the SCR, the officer may apply for an order from the Court to allow inspection. 
 
Comment
 
The new requirement to keep and maintain a SCR is a very significant departure from the existing corporate transparency regime in Hong Kong. At present, a Hong Kong company is only required to disclose information about its members, directors and its company secretary. The new proposals will require applicable companies to take a far more active role in monitoring and identifying the beneficial ownership of the company shares.  
 
At this stage, the key issues businesses in Hong Kong should be aware of are the scope of application of the Bill and the relevant exemptions. Under the current proposals, non-Hong Kong companies and listed companies are exempt from keeping a SCR. Further, any interest held by a natural person through a listed company and any interest held by a legal entity which is not directly above the company in the chain of ownership is not required to be entered into the SCR.
 
Pending debate and approval by the Legislative Council, the Bill is intended to come into operation on 1 March 2018. As the law in this area is still developing, companies should keep a close eye on development in this area and begin preparing for compliance with the new statutory requirements.
 
 
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
30 August 2017


Publication of the updated Notes to Purchasers of First-hand Residential Properties

Introduction

On 1 August 2017, the updated ''Notes to Purchasers of First-hand Residential Properties'' (''Notes'') were published by the Sales of First-hand Residential Authority (''SRPA''). The updated Notes will come into force from 1 November 2017, substituting the previous version published during April 2014. The Notes highlight issues that prospective purchasers should be aware of when considering whether or not to purchase first-hand residential properties.

Changes in the Notes 

The SRPA has added the following information to the following sections in the updated Notes:

Section 3 - Price list, payment terms and other financial incentives

Prospective purchasers who are interested in entering into any mortgage loan plans offered by financial institutions specified by the vendor should study the details of the mortgage loan plans as set out in the price list of a development. If prospective purchasers have any questions about the mortgage loan plans, they should check with the concerned financial institutions directly prior to entering into a preliminary agreement for sale and purchase. 

Section 4 - Property area and its surroundings

The external and internal dimensions of residential properties as provided in the floor plans in a sales brochure exclude plaster and finishes. Consequently, purchasers should keep this in mind if they decide to buy furniture before the handing over of the residential property.

Section 7 - Information on Availability of Residential Properties for Selection at Sales Office

Section 7 is a new section. Prospective purchasers should check with the vendor which residential properties are available for selection. If a "consumption table" is displayed by the vendor at the sales office, prospective purchasers can check from the table the progress of sale on any given date (e.g. residential properties that are offered for sale at the beginning of that particular day, and which of them have been selected and sold during that day). Making this information available should provide prospective purchasers with added protection from market rumours and speculation.

Section 8 - Register of Transactions

Prospective purchasers are advised to check the Register of Transactions of a development to understand the actual sales condition, and not to take the number of registrations of intent, or cashier orders a vendor has received as an indicator of the sales volume of a development. 

Section 15 - Estimated material date and handing over date for uncompleted first-hand uncompleted residential properties and completed residential properties pending compliance

An authorised person who is appointed under the Buildings Ordinance as a coordinator of building works for a development may grant one or more extensions of time for the completion of a development beyond the estimated material date. Consequently, the handing over date of a property may be delayed. Vendors are required under the Residential Properties (First-hand Sales) Ordinance (''RPFO'') to provide affected purchasers with a copy of the relevant certificate of extension. Purchasers should ask the vendor if they have any questions about the handing over date of the property. 

Vendor's liability under the RPFO

Section 19(1) of the RPFO states that a sales brochure must advise on the steps that a person should take for his or her own protection before deciding to purchase a residential property. A sales brochure that has incorporated the Notes in full will be considered to have complied with the requirement under section 19(1) of the RPFO.

As a transitional arrangement, either the previous April 2014 version of the Notes or the updated Notes can be incorporated in a sales brochure for the purposes of section 19(1) of the RPFO if the date of printing or the date of examination of a sales brochure falls within the period between 1 August 2017 and 31 October 2017. Vendors must use the updated Notes if the date of printing or the date of examination is on or after 1 November 2017.

Comment

Prospective purchasers should study the updated Notes carefully when considering whether or not to purchase first-hand residential properties. As for vendors, they must incorporate the updated Notes in sales brochures from 1 November 2017 onwards to comply with the RPFO.

Click here to see the updated Notes.

 

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.

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Submitted by // J Wong, Partner
29 August 2017


FREE MARKETS OR FREE FOR ALL: DEALING WITH NEW ECONOMY COMPANIES 

The Hong Kong Stock Exchange, or HKEX, is reviewing Hong Kong's listing regime, and has published two papers detailing its proposals to (i) enhance the GEM board ("GEM Reform Paper"); and (ii) create a new listing board separate from the existing Main Board and GEM Board ("New Board Paper"). The plan is to allow a more diverse range of companies to access capital markets in Hong Kong.

GEM Reform Paper

GEM currently allows companies to list under less stringent admission requirements than those under the Main Board, and enables them to transfer to the Main Board under a GEM "streamlined process". It seems this has achieved limited success. So, it may be time for a new approach. The table below is a snapshot of the HKEX's key proposals relating to the GEM and Main Board.

 

GEM

Main Board

 

Track record period

No change

No change

Cashflow requirement

Increased from HK$20 million to HK$30 million

No change

Minimum market capitalization at time of listing

Increased from HK$100 million to HK$150 million

Increased from HK$200 million to
HK$ 500 million

Minimum public float value at the time of listing

Increased from HK$30 million to HK$45 million

Increased HK$50 million to

HK$125 million

Controlling shareholders post IPO lock up

Current: Controlling shareholders cannot sell shares for the first six months upon listing.  For the next six months, controlling shareholders may sell shares but should retain control

Proposal: Controlling shareholders cannot sell shares for the first year upon listing. For the next year, controlling shareholders may sell shares but should retain control

Public offering

Previous: free to decide the offering mechanism provided disclosure is made.

Proposal: mandatory offering of at least 10% of the total offer size

No change


The New Board Paper

The HKEX also wants to attract "New Economy" industries to Hong Kong, such as technology companies. The HKEX has proposed a New Board to accommodate pre-profit companies, companies with non-standard governance features (including Weighted Voting Rights ("WVR") structures) and Mainland Chinese companies that wish to secondarily list in Hong Kong.

The New Board Paper proposes a new board, with two "segments":

  • New Board PRO, for companies that do not meet the financial or track record criteria for GEM or the Main Board; and 
  • New Board PREMIUM, for companies that meet the existing financial and track record requirements of the Main Board, but which are currently ineligible to list because they have non-standard governance structures.
 

New Board PRO

New Board PREMIUM

Who can invest?

Professional investors only

Professional and retail investors

Market cap requirements 

No track record or minimum financial criteria, market cap of over HK$200 million

Quantitative entry requirements same as Main Board

Listing Adviser

Financial Adviser

Sponsor

Listing Documents

“Listing Document” which contains all material that would be required by a professional investor in order to make an investment decision

Prospectus

Listing Approval

Listing Department

Listing Committee

Fast track delisting

After 6 months of suspension

After 90 calendar days of suspension

Public float

Requirement that a listing applicant has a minimum of 100 investors at the time of listing and a minimum public float at listing of 25% (same as the current requirement for GEM)

Follow the Main Board open market requirements. Equity securities of an applicant must be held by at least 300 holders with a public float requirement of 25% of the total number of issued shares


Impact on market participants

Many observers believe that Hong Kong missed out on important listing opportunities so this could be a welcome opportunity to open Hong Kong’s market to a more diverse range of issuers.

Others are, however, concerned that loosening these changes to the regulatory regime may weaken Hong Kong's high regulatory standards.

The HKEX recognises the concerns and has proposed possible approaches to manage these risks including prominent disclosure of WVR and other "non-conventional" governance structures and the associated risks as well as sunset clauses (that is, the structure expires after a certain period of time).

The deadline for feedback from the market has just passed, and now we await the HKEX's next steps. There seems to have been general support for the HKEX's initiatives, so we predict that -

  • The New Board will be established (although whether New Board PREMIUM will exist on a standalone basis or as a separate segment on Main Board remains to be seen).
  • Companies with WVR or other "non-conventional" structures will be allowed to list, with safeguards such as clear disclosure.
  • Other changes considered to be necessary to empower investors such as class action lawsuits and litigation funding will gain traction and, hopefully, some positive attention from the government and regulators.

It remains to be seen how HKEX will handle the more difficult tasks of repositioning GEM, defining what are "New Economy" companies and deterring "shell farming" (the listing of a company that is eventually taken over and into which the buyer inserts assets; hence the new business has bypassed the intense scrutiny of the usual listing process).


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
25 August 2017


Are PRC State-Owned Entities entitled to assert Crown immunity?

TNB Fuel Services SDN BHD v China National Coal Group Corp [2017] 3 HKC 588

Summary

In the recent case of TNB Fuel Services SDN BHD v China National Coal Group Corp [2017] 3 HKC 588, the Court of First Instance ("CFI") dismissed a claim of Crown immunity by a Chinese state-owned enterprise ("SOE").

In December 2014, the Applicant obtained an arbitral award against the Respondent, whereby it was ordered to pay approximately US$5.2 million in damages for its breach of contract ("Award"). In June 2015, the CFI granted an order for enforcement of the Award. In April 2016, the Applicant obtained a charging order nisi against the Respondent in respect of its shares in a Hong Kong company ("Shares").

In response, the Respondent (which is wholly owned by the State-owned Assets Supervision and Administration Commission ("SASAC") of the State Council of the PRC Central People's Government ("CPG")) opposed the charging order nisi being made absolute on the ground that it is an entity of the CPG and is therefore entitled to assert Crown immunity against enforcement of the Award by execution against the Shares.

Ultimately, the CFI dismissed the Respondent's assertion of Crown immunity and granted a charging order absolute in respect of the Shares.

Doctrine of Crown Immunity

According to the common law doctrine of Crown immunity, the Crown enjoys immunity from being sued in its own courts and immunity from execution, which arises from the principle that "the sovereign can do no wrong". As established in the leading case of Hua Tian Long (No. 2) [2010] 3 HKLRD 611, the doctrine continues to apply in Hong Kong following its handover to China in 1997. Since then, following on from the British Crown, the CPG is entitled to claim Crown immunity in the Courts of Hong Kong.
[1]

Judgment

The Respondent's claim was dismissed on the following bases:

(1) Lack of authority to assert Crown immunity

It was held that the Respondent had "…failed to show that it had authority to assert Crown immunity on behalf of the CPG, and that no such claim has been validly made on behalf of the CPG..." Specifically, the only assertion of the alleged status of the Respondent came from its general legal counsel, Zhou. There was no assertion that Zhou was authorized by SASAC or CPG or any authority other than the Respondent itself to make such a claim.

In reaching its finding, the Court construed a letter issued by the Hong Kong and Macao Affairs Office of the State Council stating that the Respondent is "an independent legal entity, which carries out activities of production and operation on its own, independently assumes legal liabilities, and there is no special legal person status or legal interests superior to other enterprises" ("Letter"). It was the Court's view that the Letter defeated the Respondent's assertion of Crown immunity.

(2) Failure to satisfy the "control test"

The CFI then went on to consider whether the Respondent was subject to the control of the CPG by applying the "control test". The relevant factors taken into consideration by the Court include the following:-

(i) independent discretion enjoyed by the entity;
(ii) control exercised by the Crown as investor;
(iii) separate legal personality of the entity;
(iv) power of the Crown to appoint and remove senior officers of the entity; and
(v) financial autonomy of the entity.

It was agreed between the parties that the question of whether the Respondent was controlled by the CPG was a matter of PRC law. On the facts, it was found that the Respondent was not a part of CPG, nor of SASAC, in that it is a "separate corporate entity…enjoys the rights to possess, use, profit from the dispose of its property, has operation autonomy, and is able to exercise independent powers of its own which were safeguarded by law". Accordingly, it was held that the Respondent was not entitled to Crown immunity.

The CFI distinguished the position of the Respondent from that of the defendant in Hua Tian Long (No. 2) in which the Court found that the defendant "…was at all times under the control of the Ministry of Communications…not a separate legal entity and was itself part of the Ministry of Communications…and entitled to assert Crown immunity."

Comment

This case shines light on the approach which the Hong Kong Courts may take when dealing with claims of Crown immunity by Chinese SOEs in Hong Kong.

Seeing as an assertion of Crown immunity does not conclusively bind the Court, and the entitlement to Crown immunity is to be decided on a case-by-case basis (depending on the particular circumstances and evidence available), Chinese SOEs wishing to assert Crown immunity in Hong Kong and parties wishing to engage in business with Chinese SOEs should seek legal advice, where necessary.

___________________________________________________
[1] Note: Crown immunity does not apply to arbitration proceedings in Hong Kong.

 

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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