Articles

Corporate & Commercial

Corporate & Commercial

By Christopher Hooley

 

Background

 

In October 2014, a paper entitled “Transparency and Beneficial Ownership” was published by the Financial Action Task Force (“FATF”).

Although that paper did not mention Hong Kong by name, the relevant recommendations stated were expressed to be “recognised as the global anti money laundering and counter-terrorist financial standard”.

 

FATF has consistently stated that that there must be adequate, accurate and timely information on the beneficial ownership and control of legal persons that can be obtained or accessed by the competent authorities and attaches considerable importance to this in the ongoing and highly publicized international fight against money laundering and against other unlawful activities.

In order to achieve such a statutory regime, the Hong Kong Government now intends to amend the Companies Ordinance (Cap 622 of the Laws of Hong Kong) so as to require all Hong Kong companies to obtain and hold up to date beneficial ownership information available for public inspection.  Listed companies will be exempted from this requirement as they are already subject to other strict disclosure requirements under the Securities and Futures Ordinance.

As a result of the October 2014 FATF paper, Hong Kong’s Financial Services and Treasury Bureau (the “Bureau”) issue, in early January this year, a “Consultation Paper” to enhance the transparency of the beneficial ownership of Hong Kong companies, including requiring Hong Kong companies to maintain a register of persons with significant control (a “PSC Register”) for each company.  Such a register would be open to the general public for inspection.

 

What does beneficial ownership actually mean

Any person who satisfies one or more of the following will be affected:

(a) directly or indirectly holds more than 25% of the shares;
(b) directly or indirectly holds more than 25% of the voting rights;
(c) directly or indirectly holds the right to appoint or remove a majority of directors;
(d) otherwise has the right to exercise, or actually exercising, significant influence or control; or
(e) has the right to exercise, or actually exercises, significant influence or control over the activities of a trust or a firm whose trustees or members satisfy any of the first four conditions.

 

PSC Register

The Bureau proposes that each Hong Kong company be required to identify and keep a register of people falling into one or more the above categories.  This requirement will extend to legal entities with significant control over the company.  This is intended for individuals who exercise control through a holding company or other structures.  To enable a Hong Kong company to maintain its PSC Register, each company will be obliged to take reasonable steps to ascertain its registerable individuals and legal entities.  

Companies will also have to enter on their individual PSC Register details of an authorised person responsible for providing such information and for providing further assistance to law enforcement agencies, as and when required.  

 

Public Inspection of PSC Register

Each Hong Kong company will be required to make its PSC Register available for inspection by any shareholder without charge or by any member of the public on payment of a fee.  

A company must notify the Registrar of Companies where its PSC Register is kept, if not kept, at its registered office.

 

Timetable 

The consultation period ends on 5th March 2017.

Assuming that the Hong Kong Government does introduce legislation into the Legislative Council, it is likely that the Hong Kong Government will want to enact legislation prior to the next FATF evaluation visit to Hong Kong, which is scheduled for October and November 2018.

 

 

Oldham, Li & Nie

February 2017

By Christopher Hooley and Matthew Lo

 

Nowadays walking past a Hong Kong Fitness Centre or Beauty Salon puts you at risk of encountering a salesperson, aggressively selling memberships or beauty treatments.

However, did you ever wonder whether such sales techniques are actually a breach of the law and does not current Hong Kong law already provide adequate protection for consumers interested in such products/services?

Separately, is there still a need for a statutory cooling-off period to protect consumers?

 

Hong Kong Current Law - Trade Descriptions (Amendment) Ordinance

Current consumer protection is provided in part through the Trade Descriptions (Unfair Trade Practices) (“Amendment Ordinance”) which amended the Trade Descriptions Ordinance (Cap 362) and which now expressly prohibits six specific “trade practices”.

Those six trade practices are now express offences under the Amendment Ordinance, being (1) false trade descriptions of services, (2) misleading omissions, (3) aggressive commercial practices (ie the aggressive sales techniques referred to above), (4) bait advertising, (5) bait-and-switch, and (6) wrongly accepting payment.

Enforcement of the Amendment Ordinance is through the Hong Kong Consumer Council, with whom a consumer may lodge a complaint. So it is the Consumer Council that decides whether or not to take legal action against an offending business.

If a business is found guilty of engaging in any one of these six trade practices, it may be subject to criminal sanctions; on conviction on indictment, with fines of $500,000 and imprisonment of 5 years. On a summary conviction, fines of $100,000 and imprisonment of 2 years may be imposed.

In addition to the consumer protection through the Hong Kong Consumer Council, consumers could choose to institute a private action based on contract law or tort, although costs may be prohibitive.

 

Protection of Consumers under the Amendment Ordinance

The Consumer Council does provide consumers with a practical channel to take action against Fitness Centres and Beauty Salons, as shown below:

In April 2016, California Fitness was publicly named and criticized by the Consumer Council for aggressive sales practices deployed in the sale of gym memberships and services to consumers, such practices being deemed intimidating, pressuring and misleading consumers into signing for such memberships, while failing to explain key contractual terms during the sale process, often involving long-term contracts valued at tens of thousands of dollars.

California Fitness itself continued to receive an increasingly large number of complaints from consumers (227 in 2013, 296 in 2015), representing over half the number of total complaints against Fitness Centres in 2015 (577) before it went out of business last year.

In another instance, staff of a Beauty Salon were convicted for engaging in aggressive commercial practices, after having continuously pressured a consumer for one and a half hours, urging that customer, on the basis that there were lumps on the consumer’s chest, to purchase a body treatment package of HK$140,000. The customer yielded despite initially expressing reluctance.

In a third case, a Beauty Salon director and sales manager were given a suspended sentence for misleading customers into believing that the customers would be obtaining a diploma from an Australian vocational institution, although that vocational institution no longer had the right to issue the qualification. The director and sales manager were found liable for engaging in a commercial practice that was a misleading omission.

 

The particular problem with Fitness Centres and Beauty Salons

Despite the implementation of the Amendment Ordinance, there is still evidence that some Fitness Centres and Beauty Salons breach the Amendment Ordinance by engaging in one or more of the six above prohibited trade practices.

Statistics recently published by the Consumer Council show that the number of consumer complaints against Fitness Centres and Beauty Salons for engaging in these six trade practices continue to rise year on year.

Additionally, statistics from the Hong Kong Customs and Excise Department, show that the number of complaints against Fitness Centres between January and March 2015 was substantially less than in the period between January and March 2016. Similarly, the number of complaints against Beauty Salons during the period between January and March 2015 was far less than in the period between January and March 2016.

 

Does Current Legislation Adequately Protect Consumers dealing with Fitness Centres and or Beauty Salons?

Hong Kong’s current consumer protection legislation is consistent with the United Nations Guidelines for Consumer Protection, as it provides consumers with a channel, the Consumer Council, to take action against any businesses who are in breach of the provisions of the Amendment Ordinance.

However, even the Consumer Council agrees that aggressive sales practices, and other potentially “unfair trade practices” still remain widespread, especially in relation to Fitness Centres and Beauty Salons.

Lawmakers have long pushed for a statutory cooling-off period, allowing consumers who have been allegedly ‘forced’ into signing contracts to cancel such contracts and get their money back. Cooling-off periods were discussed by LegCo as long ago as 2007, when proposals were made to align Hong Kong’s statutory consumer protection with that of the European Union and the United States.

Statutory cooling-off periods were further debated by LegCo in 2011, and the Consumer Council made suggestions to the Fitness Centre industry last year about self-regulation.

There does remain strong support from lawmakers for statutory cooling-off periods to be implemented for the protection of consumers. In May last year, a motion was passed by the LegCo Panel of Economic Development to “urge the Government to introduce legislation on the imposition of mandatory cooling-off periods, and accord priority to implementing a statutory cooling-off period for pre-paid services involving a lot of complaints and large amount of payment, such as those provided by Fitness Centres and Beauty Salons.”

However, despite the above motion, the Government has failed to take any definitive action, stating that more deliberation and research is required before any action is taken.

Is it not now time for some action to be taken, rather than more deliberations? Should there not now be the implementation of a statutory cooling-off period?

 

This article is for information purposes only. Its contents do not constitute legal advice and readers should not regard this article as a substitute for detailed advice in individual instances.

By Christopher Hooley, Partner

 

INTRODUCTION

In recent years, many complaints have been lodged with the Hong Kong Police about “financial intermediaries” luring potential borrowers into applying for low interest loans, and then defrauding them of the money borrowed. In some instances, people have been defrauded out of millions of Hong Kong Dollars. So in an attempt to regulate these unscrupulous “financial intermediaries”, the Hong Kong Government has now introduced a number of conditions which each licensed money lender must observe.

These conditions (“Conditions”) took effect on 1st December 2016, and were introduced to:  

  1. Increase public awareness of unscrupulous financial intermediaries; and
  2. Prevent those “financial intermediaries” (each a “Third Party”) from charging borrowers with separate fees; and
  3. Improve and enhance the transparency between the licensed money lender, any Third Party and every intended borrower.

Applicability

Each person or company involved in the procuring, negotiation, obtaining, application, guaranteeing or securing the repayment ofa loan, but who is not a solicitor instructed by the intended borrower for the sole purpose of providing legal services, nor the lender, nor the borrower of the loan, is considered to be a Third Party for the purposes of the Conditions.

The Conditions can be considered within the following four practical areas.

1. Pre contract Obligations

Every licensed money lender now has an obligation, before entering into any loan agreement with an intended borrower, to:

  1. Ensure that there is no Third Party involved, OR
  2. That the Third Party has already been successfully registered with the Registrar of Money Lenders;
  3. Ask the intended borrower whether he has entered into or signed any agreement with a Third Party;
  4. State in writing the intended borrower’s reply to (2) above;
  5. If the intended borrower’s reply to (2) is “Yes ”, then the licensed money lender must
    1. obtain the name and address of the Third Party
    2. state in the intended loan agreement the name and address of the Third Party, whether the licensed money lender is in any way related to the Third Party, and if so the nature of such relationship;
    3. request the intended borrower to provide a copy of the Third Party agreement; and
    4. attach such agreement to the actual loan agreement.
  6. Explain to the intended borrower all the terms of the loan agreement, in particular
    1. the interest rate per annum and total interest payable under the loan agreement;
    2. the repayment amounts; and
    3. the consequences of a default in repayment; and
  7. Seek confirmation in writing from the Third Party to that
    1. he has not and will not receive any benefit from the intended borrower for his role in the loan, and
    2. the Third Party has not agreed with the intended borrower that the intended borrower provide any benefit to any other party, whether for purchase of any goods or services;

and keep written, video or audio records, to prove compliance with all the above.

 

2. Registration Obligations

Each licensed money lender must inform the Registrar of Money Lenders about each Third Party, by submitting a “Notice of Particulars of Third Party Appointed by Licensed Money Lenders in relation to Granting of Loans” (ML-ATP 1 form), to include the name, address and identification number of each such individual or company considered as a Third Party.

Upon successful registration to the Registrar of Money Lenders, the name and address of a Third Party will appear on the Register kept by such Registrar of Money Lenders.

 

3. Personal Data Obligations

Each licensed money lender has an obligation to take steps to ensure that the collection and usage or disclosure of all personal data for the purposes of or in relation to the licensed money lender’s business would be in compliance with the provisions of the Personal Data (Privacy) Ordinance (Cap 486).

 

4. Advertising Obligations

Any money lending advertisement, whether published by a licensed money lender in his own name or through another person, in any form, must contain the following:

  1. The money lender’s telephone hotline for handling complaints; and
  2. A risk warning statement in the same language as that of the advertisement or the relevant part thereof, in specified form.

 

Question: Are the Conditions a stop gap measure, or a long term solution?

The Conditions suggest that there is no current intention to regulate the “financial intermediaries” themselves, as the extended protection for a borrower now comes from imposing more onerous obligations on the actual licensed money lenders themselves.

The argument that the Conditions will be a long term solution may be weak, given that no due diligence will be conducted on the “financial intermediaries” themselves, so there will still remain loopholes for unscrupulous “financial intermediaries” to take advantage of borrowers, it is merely that those financial intermediaries will be shown on a Register. 

Practically, whether the Conditions work will be seen from on the number of complaints now lodged with the Hong Kong Police regarding unscrupulous “financial intermediaries”.

 

This article is for information purposes only. Its contents do not constitute legal advice and readers should not regard this article as a substitute for detailed advice in individual instances.

Crowdfunding in Hong Kong

Wednesday, 13 April 2016 12:14

By Christopher Hooley and Henry Fung

 

“Crowdfunding” is one of the current buzz words of an adoring internet public, not least because of Joshua Wong advising that his new political party is to be funded in this way.

 

So what does this new social trend really mean, does it allow the Hong Kong public to support and or invest in projects and does it actually work in Hong Kong?

 

Background

“Crowd-funding: An Infant Industry Growth Fast”, published by International Organization of Securities Commissions on 5th February 2014, defines “crowdfunding” as the use of a small amount of money, obtained from a large number of individuals or organizations, to fund a project, a business or personal loan, and other needs, through an online web based platform

According to a survey carried out by the European Securities and Markets Authority, crowdfunding in Europe has been growing at yearly rates above 50% since 2009. Crowdfunding has, therefore, already emerged in Europe as an alternative funding source and a practical and convenient way to raise funds. 

 

Different Activities

It is now generally accepted that there are four main types of crowdfunding activity:-

  1. equity crowdfunding: where investors invest in a project or a business which is usually a start-up, through an online platform, and in return are issued shares or debt issued by the company raising the money, or an interest in participating in the profits or income of the collective investment scheme;
  2. peer-to-peer lending: where online crowdfunding platforms try to “match” lenders (i.e. investors) with borrowers (i.e. issuers) to provide unsecured loans to individuals or projects;
  3. reward / pre-sale crowdfunding: where the payer receives returns in the form of physical goods or services in return for the money paid, e.g. funders can finance new movies, iPhone cases, video games, etc; and 
  4. donation crowdfunding: where sums are raised through online crowdfunding platforms, but only for “charitable” causes.

 

Risks

Of course, the risks associated with crowdfunding activities, are the same as in other more traditional forms of funding and non exhaustively are :-

risk of default;

  1. risk of illiquidity of the investment and dilution of stock value;
  2. risk of platform failure and insolvency, 
  3. risk of fraud;
  4. risk where the platforms operate outside Hong Kong;
  5. information asymmetry and lack of transparency;
  6. cyber security issues; and
  7. possible illegal activities.

 

The Recent International Trends

In the United Kingdom, the Financial Conduct Authority introduced a “10 percent rule”, whereby investors who were neither sophisticated, nor high net-worth individuals, had to certify that they were not committing more than a tenth of their net assets to any crowdfunding venture.

In the United States, the Government introduced the Jumpstart Our Business Startups Act which lifted restrictions on companies from selling shares to the general public through crowdfunding platforms.

 

Hong Kong

Despite the growing popularity of crowdfunding elsewhere in the world, the Hong Kong Government has yet to introduce specific legislation to lighten the regulatory environment that currently controls the raising of funds in Hong Kong.

 

Hong Kong’s Existing Statutory Regulations and Requirements

Where a crowdfunding activity involves an offer to the Hong Kong public to acquire or purchase securities (e.g. shares, debt instruments or an interest in a collective investment scheme), that crowdfunding activity is subject to:-

  1. the prohibition on the issue of any advertisement, invitation or documents which to the issuer’s knowledge is or contains an invitation to the public to acquire securities or participate in a collective investment scheme, unless exemption applies or the Securities and Futures Commission grants an authorization to do so, under the SFO; and
  2. prospectus registration requirements under the C(WUMP)O in respect of any document offering shares in or debentures of a company to the public, unless an exemption applies.

The crowdfunding platform operator will also be subject to the licensing obligations, IF the crowdfunding activity and/or the business of the operator constitutes one or more of the following “regulated activities”, as defined under the SFO

  1. Type 1: dealing in securities;
  2. Type 4: advising on securities;
  3. Type 6: advising on corporate finance;
  4. Type 7: providing automated trading services; and/or
  5. Type 9: asset management.

Moreover, there are certain requirements under Part III of the SFO relating to automated trading services and recognized exchange companies which may be applicable to those crowdfunding platforms that operate such business activities.

 

Conclusion

Young entrepreneurs in other countries are already tapping into the crowdfunding market to launch projects. 

Perhaps in recognition of this, the Hong Kong Financial Securities Development Council released a paper in March of this year, where it provided a general overview of proposed regulatory possibilities for equity crowdfunding, but that paper did not include any timelines or concrete suggestions as to what might be implemented.  

So, individuals and companies seeking to engage in crowdfunding activities in Hong Kong must be aware that such activities do involve significant risks and that as yet there is no specifically tailored regulatory environment. 

 

This article is for information purposes only. Its contents do not constitute legal advice and no reader should regard this article as a substitute for detailed advice in individual circumstances instances.

 

 

By Christopher Hooley, Gary Wong and Henry Fung

 

Background

Under the common law “doctrine of privity of contract”, a person cannot acquire or enforce rights under a contract unless he or she is party to that contract. 

For example, if Party A and Party B enter into a contract whereby Party A agrees to provide goods or services to a third party, the third party company, which is not a party to the contract, as it never signed the original written contract, has no rights at law to claim compensation from Party A, if Party A fails to provide goods or services or provides faulty goods or services and/or if Party B is unable or unwilling to enforce that contract. 

This common law doctrine has long been criticized for creating unsatisfactory commercial results.

The traditional approach to address and to avoid this privity of contract doctrine and to actually confer benefits on a third party was always to include collateral contracts/warranties, trust arrangements, agency arrangements or a deed poll in addition to the substantive main contract.

Recognising the need to reform the long established privity of contract rule, the Government passed the Contracts (Rights of Third Parties) Ordinance (Cap.623) (the “Ordinance”) which provides a comprehensive framework in which to enforce third party rights. 

The commencement date of the Ordinance is 1 January 2016, and the Ordinance will apply to all contracts entered into on or after its commencement date. 

Protection of a third party

Section 4 of the Ordinance, gives a third party the right to enforce the terms of a contract (including a term that excludes or limits liability) if:-

  1. the contract expressly provides that the third party may do so; or
  2. the term purports to confer a benefit on the third party.

But exactly who is that third party?

The third party must be expressly identified in the contract by name or as a member of a class or as answering a particular description. 

However, the Ordinance also confers benefits on a third party who was not in existence when the contract was entered into, which implies that benefits can also be conferred on “future members” of a class.

Key Features of the Ordinance 

1. Applicable Contracts

  • The Ordinance applies to all contracts that are entered into after 1 January 2016. However, it does not confer a right on a third party to enforce a term of a contract of employment against an employee, and will not apply to the following other categories of contract:-
  • a bill of exchange, a promissory note or any other negotiable instrument;
  • a deed of mutual covenant;
  • a covenant relating to land;
  • a contract of carriage;
  • a contract for the carriage of goods by air;
  • a letter of credit; and
  • a company’s articles having effect as a contract under seal.

2. Alteration of third party’s right, variation and rescission of the contract

  • If a third party can enforce a term of a contract under the Ordinance, under certain conditions, then the contracting parties may not, without the third party’s consent:- 
  1. rescind the contract; or 
  2. vary the contract so that the third party’s rights are altered or extinguished. 
  • The consent from the third party will be necessary if:- 
  1. the third party has assented to the contractual term and the promisor has received notice of the assent; or 
  2. the third party has relied on the contractual term and the promisor is aware of the reliance or the promisor can reasonably be expected to have foreseen that the third party would rely on the contractual term. 

3. Protection of the contracting parties

  • If the third party brings proceedings to enforce a term of a contract, the promisor may, pursuant to Section 8 of the Ordinance, raise matters by way of defence and set-off:-
  • those arise from or in connection with the contract and is relevant to the term in question; 
  • where an express term of the contract provides for the matter to be available to the promisor, by way of defence or set off to such third party claim; or
  • that would have been available to the promisor by way of defence or set-off if the third party had been a party to that contract.
  • The promisor may be protected from double liability to the extent the promisor has discharged the obligations to the third party or has paid to the promisee losses or expenses in relation to the term being enforced.

4. Assignment

  • The third party may assign its enforceable right under a term of the contract to another person in the same way as a contracting party may assign a right under the same contract, unless the contract expressly provides otherwise or such right is personal to the third party and is not assignable.

Your decision

The Ordinance creates some uncertainty if the contract is silent on whether a contractual term is intended to be enforceable by a third party.

As such, if you do not intend to have the Ordinance apply to your contract, you should expressly opt out from its provisions. 

The following is an example of an “opt out” clause:-

“Neither this [Agreement] nor any document issued pursuant to this [Agreement] shall confer any benefits on any third parties. 

No third party may enforce any term of this [Agreement] or of any provision contained in any document issued under this [Agreement]. 

The provisions of the Contracts (Rights of Third Parties) Ordinance (Cap. 623) of the laws of Hong Kong are hereby expressly excluded from this [Agreement] and/or any other documents issued pursuant thereto.”

Alternatively, you can select certain terms of the contract to be enforceable by a third party under the Ordinance, but you can exclude the remaining terms of the contract as follows. 

“The provisions of the Contracts (Rights of Third Parties) Ordinance (Cap. 623) of the laws of Hong Kong are hereby expressly excluded from this [Agreement] and/or any other documents issued pursuant thereto, save and except for [the name of that third party] who may enforce [the clause number] of the [Agreement].”

Conclusion

Since the Ordinance will significantly impact on a broad range of contracts entered into on and after 1 January 2016, every Client should consider the following issues when preparing their contract:-

  • Will a third party or a class of third parties benefit from the contract?
  • Should the Ordinance be applied to or be excluded from the contract? 
  • If the Ordinance is to be applied:-
  • identify the third party or a class of third parties;
  • identify which terms of the contract are to be enforceable by the third party;
  • specify the circumstances where the contract can or cannot be varied or rescinded by the contracting parties, and whether consent from the third party should be required;
  • whether the right of the third party should be assignable to another person;
  • whether the third party’s rights and/or remedies for breach by a contracting party should be limited; and
  • whether a contracting party’s rights of defence, set-off or counterclaim against the third party should be limited. 
  • If the Ordinance is to be excluded, the contract should include an “opt-out” clause to contract out the provision of the Ordinance from the contract.

This article is for information purposes only. Its contents do not constitute legal advice and readers should not regard this article as a substitute for detailed advice in individual instances

 

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