News
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Submitted by // K Bowers, Partner / Solicitor Advocate
23 June 2017


Non-disclosure of inside information does not equate to insider dealing 

Securities and Futures Commission v Yiu Hoi Ying Charles and Others [2017] HKCU 1027

Introduction

In a recent Court of Appeal decision, the Court dismissed an appeal brought by the Securities and Futures Commission ("SFC") against the determination of the Market Misconduct Tribunal ("MMT") and clarified the difference between "non-disclosure" and "use" of inside information in respect of the meaning of "insider dealing" in the Securities and Futures Ordinance, Cap. 571 ("SFO").

Background

The MMT proceedings were brought by the SFC to investigate senior executives at Asia Telemedia Limited ("ATML") for an alleged breach of the insider dealing provisions contained in part XIII of the SFO. The MMT found that there was no breach of the insider dealing provisions as the senior executives were able to successfully raise a defence under s. 271(3) of the SFO, on the ground that their dealings were solely motivated by a speculative surge in the price of the company shares, and not by their knowledge of inside information.

The meaning of "use" under s. 271(3) of the SFO

The SFC's argument in the appeal was that the definition of "using inside information" in s. 271(3) should include the withholding or non-disclosure of relevant information. In the SFC's view, the senior executives should have known that if they had disclosed the inside information, the speculative surge in the price of the company shares would have been halted. By selling the shares without disclosing the information, they obtained a higher return on the shares than if they had disclosed the information. Therefore, the SFC argues, withholding inside information should have the same meaning as using inside information and the defence under s.271(3) should not apply.

The Court rejected the SFC's argument. The Court regarded the extension of the definition of "use" to "withholding" or "non-disclosure" within the meaning of s. 271(3) as a strained interpretation. Widening the definition in this way would mean that any senior executive who deals in the shares of the company whilst in possession of inside or price-sensitive information ("PSI") would be committing insider dealing, even if the deal was not motivated by his knowledge of the information. In the Court's view, this would have the effect of making the defence under s.271(3) inoperable.

The Court also noted in the judgement that since Part XIVA of the SFO already imposes an obligation to disclose PSI, there was no reason to widen the meaning of 'using' inside information to limit the scope of the s. 271(3) defence. In the Court's view, the regulatory intent to ensure the disclosure of inside information was 'fully reflected' in Part XIVA of the SFO.

Conclusion

The Court made a clear distinction between insider dealing and the non-disclosure of inside information. Under Part XIVA of the SFO, listed companies and their officers have a continuing obligation to disclose inside information. On the other hand, the insider dealing rules are intended to prevent those in the know from using inside information to manipulate the market.

The Court of Appeal in dismissing this case confirmed the use of the 'no profit motive' defence under section 271(3) of the SFO. However, as the MMT noted in the original decision, only in rare circumstances will a person who deals in shares of a listed company whilst in possession of inside information be able to demonstrate that his dealing was totally unconnected with any desire to make a profit or avoid a loss by using that information. It remains best practice to disclose inside information as soon as reasonably practicable and to deal only after due disclosure.


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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News //
Submitted by // K Bowers, Partner / Solicitor Advocate
16 June 2017


Farewell to the Automatic Opt-in - What you should know about the Arbitration Ordinance from 1 June 2017 onwards!

Introduction

The Arbitration Ordinance (Cap. 609) ("Ordinance") which came into operation on 1 June 2011, replacing the previous ordinance (Cap. 341) ("Old Ordinance"), has recently undergone a change. Specifically, after a 6-year transitional period, the automatic opt-in applicable to domestic arbitration provisions expired on 1 June 2017. This has important implications for parties wishing to engage in arbitration from 1 June 2017 onwards.

Background

Under the Old Ordinance, arbitration could either be governed by the domestic or international regime. The Ordinance abolishes the distinction between domestic and international arbitration by creating a unitary regime for arbitration (based on UNCITRAL Model Law), bringing it more in line with modern international arbitration practices and standards. It also preserves certain provisions which were only applicable to domestic arbitration by providing an automatic opt-in system.

Automatic Opt-in before 1 June 2017

Previously, pursuant to section 100 of the Ordinance, parties would (unless agreed to the contrary) enjoy automatic opt-in into Schedule 2 of the domestic regime if their arbitration agreement specifically referred to "domestic arbitration" and was entered into (i) before the commencement of the Ordinance; or (ii) at any time within a period of 6 years after the commencement of the Ordinance.

The key opt-in provisions under Schedule 2 include:-
• appointment of a sole arbitrator in absence of an agreement (section 1);
• consolidation of arbitral proceedings by the Court (section 2);
• referral of preliminary questions of law to the Court (section 3);
• ability to challenge an arbitral award on the ground of serious irregularity (sections 4 and 7); and
• ability to appeal against an arbitral award on questions of law (sections 5, 6 and 7).

In a nutshell, up until 1 June 2017, parties to arbitration had the benefit of automatically enjoying the "convenience" of the opt-in system by simply stating that their arbitration is a "domestic arbitration" in their arbitration agreement.

However, this position has recently changed.

Current Position

From 1 June 2017 onwards, the automatic opt-in provision is no longer in force. It is no longer sufficient for parties who wish for the provisions of Schedule 2 to apply to simply state in their arbitration agreement that their arbitration is a "domestic arbitration". Rather, pursuant to section 99 of the Ordinance, parties wishing to opt into some or all of the provisions of Schedule 2 must now make express reference in their arbitration agreement to the exact provisions which they wish to apply to their agreement.

A benefit of this change is that parties now have the flexibility of adopting Schedule 2 in whole or in part by cherry-picking specific provision(s) which they wish to incorporate into their arbitration agreement.

So what did / does this mean in practice?

Below are some key examples of how the position has changed.

 

The Old Ordinance (Cap. 341)

The Ordinance (Cap. 609)

Domestic arbitration

International arbitration

Before 1 June 2017

After 1 June 2017

Automatic opt-in for "domestic arbitration" (unless otherwise agreed)

 

 

 

 

 

 

Unitary regime for arbitration (based upon UNCITRAL Model Law)

 

 

Lapse of automatic opt-in; parties may cherry-pick which provision(s) of Schedule 2 are to apply by making express reference to them in their arbitration agreements.

No. of arbitrator

Sole

Parties had the freedom to determine the number of arbitrators, failing which it would either be 1 or 3 (as decided by the Hong Kong International Arbitration Centre)

Sole

Consolidation of arbitrations

 

X

Determination of preliminary question of law by Court

 

X

Challenging arbitral award on the ground of serious irregularity

 

X

Appeal against arbitral award on question of law

X


Comments

Whilst arbitration agreements providing for "domestic arbitration" concluded before 1 June 2017 will not be affected, this change carries important implications for all parties entering into arbitration agreements on or after 1 June 2017.

This is particularly so for the construction industry, as "domestic arbitration" is frequently referred to in a number of standard forms for main contracts. In short, so long as the arbitration agreement in the main construction contract provides for "domestic arbitration" and was entered into before 1 June 2017, Schedule 2 should continue to apply to arbitration agreements contained in every construction sub-contract entered into after 1 June 2017.
[1]

Going forward, parties should bear this recent change in mind when drafting arbitration agreements and / or take steps to amend any existing contracts in standard forms, especially if they wish for any of the Schedule 2 provisions to apply.

_________________________________________________
[1] subject to certain conditions under section 101 of the Ordinance 

 

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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News //
Submitted by // K Bowers, Partner; M Withington, Partner
16 June 2017


Clawback Provisions in Insurance Agency Contracts Upheld

Re Lo Kwai Ying Louisa [2017] HKCU 880

Background

A recent Court of First Instance decision is of particular relevance to insurers which seek to claw back payments previously made to their ex-agents, in instances where the agent no longer represents the insurer and/or subsequently joins a competing insurer.

Facts

The decision related to bankruptcy proceedings. The creditor was an insurance company, and the debtor Ms. Lo, was an agent of the insurer. Ms. Lo resigned in March 2011 and within a month joined another insurer as its agent. Pursuant to a service agreement and an agency agreement between the insurance company and Ms. Lo ("Service Agreement" and "Agency Agreement" respectively, and "Agreements" collectively) the insurance company claimed that Ms. Lo owed it. (1) monthly finance payments ("MF Payments"), and (2) training costs ("Training Costs Fee").

Pursuant to the Service Agreement, Ms. Lo was required to repay the insurance company the MF Payments if she joined another insurer within 48 months from the commencement date of the Agency Agreement.

Furthermore, the Agency Agreement provided that (1) Ms. Lo would repay the insurance company any outstanding loan advanced by it to her if she ceased to be an agent for the insurance company, and (2) Ms. Lo would repay the cost of training provided by the insurance company if she joined another insurer within 36 months from the commencing date of the Agency Agreement.

Ms. Lo had terminated her Agency Agreement within 24 months of the date of commencement of the Agreements and registered with another insurer 1 month after the Agreements were terminated. The insurance company therefore claimed the full cost of both the MF Payments and the Training Costs Fee.

A statutory demand dated 10 December 2014 was duly served on Ms. Lo. No application was made to set aside the statutory demand. The insurance company then commenced bankruptcy proceedings against Ms. Lo.

Ms. Lo's Argument

Ms. Lo's argument was that (1) the MF Payments were 'commissions' and not 'loans' (because she would otherwise be working for 'no reward') (2) the terms of the Agreements were "unreasonable" and "unfair" (3) no one explained the terms of the Agreements to her (4) she was misled by the insurance company into signing the Agreements, and (5) the amount stated in the statutory demand and bankruptcy petition was overstated.

Court's Decision

The principles of opposing a bankruptcy petition are well-established in that a debtor must show a bona fide dispute on substantial grounds. The Court held that Ms. Lo had failed to demonstrate that she had a bona fide dispute for the following reasons:

1. It was clear from the Agreement that the MF Payments and Training Costs Fee were repayable upon Ms. Lo joining a competing insurer. Ms. Lo was paid basic commission, overriding commission, etc. which was dependent on her performance (in other words, she was not working for 'no reward'). The Court added that whether MP Payments were in substance not "loans" but her "commission" was irrelevant to the real question in dispute. It is important to note that in this case, the Judge also held that the Agency Agreement did not involve an employment. As such, the loan could not be considered as employee remuneration.

2. There was no allegation that Ms. Lo was induced by any representations made by the insurance company.

3. The insurance company owed no duty to explain the Agreements to Ms Lo. The Court quoted Shiu Chung v Ming Shiu Sum
[1] in which Riberio PJ cited an earlier Court of Final Appeal decision that "generally speaking, when a person signs a legal document, he or she is bound by the act of signature: As a matter of general law, it is no defence to say that he or she did not understand the contents of a legal document, as he or she can take the simple precaution of not signing until its contents have been fully explained and understood".

4. An overstatement is not fatal to a bankruptcy petition, so long as it does not cause any prejudice. In this case, the overstatement was negligible compared to the size of the debt. Further, there was no suggestion that Ms. Lo would have settled the debt if the correct amount had been stated.

The Court therefore made the usual bankruptcy order with costs against Ms. Lo.

Conclusion

These kinds of clawback provisions are commonplace in agency and service agreements in the insurance industry. This case demonstrates that the Courts are prepared to enforce these kinds of provisions by the application of general contract law principles. Bankruptcy proceedings should therefore be appropriate where agents fail to repay amounts due. However, clawback provisions should be carefully drafted in order to ensure that they are valid and enforceable. In addition, clawback provisions in employment contracts may not be so readily enforced.
_______________________________________
[1] [2006] 9 HKCFAR 334


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; intellectual property; 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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Press //
Submitted by // C Tan, Partner
31 May 2017


Howse Williams Bowers ("HWB"), a leading Hong Kong independent law firm, acted as the legal adviser to the sole sponsor and the underwriters in relation to the approximately HK$87 million share offer and listing of VBG International Holdings Limited (Stock Code: 8365) ("VBG") on the Growth Enterprise Market of the Stock Exchange. Dakin Capital Limited acted as the sole sponsor while Ping An Securities Limited and Dakin Securities Limited acted as the joint bookrunners and joint lead managers. The shares commenced trading on the Growth Enterprise Market of the Hong Kong Stock Exchange on 26 May 2017.

VBG is one of the leading financial services providers in Hong Kong, which provides corporate finance advisory services, placing and underwriting services and business consulting services. It ranked fifth among all Hong Kong-based corporate finance houses in terms of IPO fund raising in 2016 for its sponsorship role in respect of corporate finance advisory services.

HWB is honoured and delighted to be part of an important milestone of VBG, which is an established client of the firm. The HWB team, led by partner Chia Ching Tan, had lead responsibility in the verification process, legal documentation, corporate and regulatory issues and general transaction management.


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; intellectual property; 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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