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The Risks of Breaking a Hong Kong Employment Contract Before It Commences

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Prelude

It is not at all surprising in Hong Kong for job applicants to back out of the already accepted job offer and accept a better job offer with a more competitive remuneration package. In practice, usually the innocent employer would save themselves the hassle of chasing after the defaulting recruits and simply find a substitute from the job market, especially for those junior or middle-level positions. However, this may not always be the case and the recent judgment handed down by the Court of Appeal in the Hong Kong case Law Ting Pong Secondary School v Chen Wai Wah [2021] HKCA 873 demonstrated clearly that not honouring a signed employment contract may come with a price even before commencement of the employment. 

Overview of the case facts

The case of Law Ting Pong Secondary School started off at the Hong Kong Labour Tribunal and was argued all the way up to the Court of Appeal. 

In gist, this case concerned a teacher who was offered employment by a local secondary school. On 17 July 2017, this teacher was given (a) an Offer of Appointment; (b) the Conditions of Service for Teachers; and (c) a Letter of Acceptance in respect of his then potential employment with the school. The teacher signed and returned the Conditions of Service and the Letter of Acceptance to the school on the same day. The Letter of Acceptance stated that:- 

“I accept the appointment offered in your letter dated 17th July 2017 in accordance with the attached Conditions of Service for Teachers in Law Ting Pong Secondary School.

I also understand that once I accept this contract, the conditions of the new contract will come to [sic] immediate effect e.g. I need to give three months’ notice to terminate my employment with the school.

I confirm that I have read and understood all the above conditions and hereby agree to abide by them.”

The Conditions of Service stated that the period of employment would be “from 1st September 2017 to 31st August 2018”. Under the Conditions of Service, the teacher was required to give the school three months’ notice in writing, or payment in lieu of notice, or a combination of both in order to terminate the employment contract “in order to terminate my [i.e. his] employment with the school” [Emphasis Added] (the “Termination Provisions”). In August 2017 the teacher backed out of the contract. The school then claimed against the teacher for payment in lieu of notice pursuant to the Termination Provisions. 

The school succeeded at the Labour Tribunal and was awarded damages in the sum of HK$139,593 (equivalent to 3 months’ payment in lieu of notice). 

The teacher subsequently appealed against such decision and the same was overturned by the Court of First Instance. The Court of First Instance held that the Letter of Acceptance did not form part of the specified terms offered by the school to the teacher, as, inter alia, the Conditions of Service did not make any reference to the Letter of Acceptance. Accordingly, the employment should be read as only starting on 1 September 2017 in accordance with the terms of the Conditions of Service, and hence the teacher was not liable to make any payment in lieu as his employment had not commenced at the time when he back out of the employment contract.

Thereafter, the school further appealed against the decision of the Court of First Instance and the Court of Appeal restored the decision of the Labour Tribunal. The judgment of the Court of Appeal can be summarised as follows:-

  1. The Offer of Appointment, the Letter of Acceptance and the Conditions of Service were given to the teacher together when the school’s offer of employment was made, thus the terms of all the three documents were accepted as a “package deal”. Accordingly, it must be plain and reasonably understood by the teacher, that the school was offering (and only ready to offer) employment on the basis set out in all the three documents. It follows that the Letter of Acceptance formed part of the contract between the school and the teacher, thus should be taken into consideration for adjudication of the matter. 
  2. A reasonable person shall take the Letter of Acceptance to mean that the terms of the employment contract would come into immediate effect such that the teacher would have to give 3 months’ notice to terminate the same. This shall be obvious as the notice requirement under the Termination Provision was specifically used as an example of the terms of the employment contract taking immediate effect.
  3. Further, the fact that the period of employment would start from 1 September 2017 only meant that the teacher’s performance of teaching duties was to commence on a future date. In general, a valid contract had legal effects, for example, as to repudiatory or anticipatory breach, and was enforceable immediately when it was made, irrespective of the time of performance. Hence, although performance of teaching duties would commence on a future date (i.e. 1 September 2017), as from 17 July 2017 (i.e. the date of signing the contract) both parties were both legally bound to perform their obligations under the contract.
  4. In response to the defendant teacher’s argument that the amount required to terminate the employment contract under the Termination Provision was wholly disproportionate to the monetary loss that the school might suffer and any legitimate interests of the school (thus is a penalty clause and unenforceable), the Court ruled that a clause could only be a penalty if it operated upon a breach of contract (i.e. a liquidated damages clause). The payment of a sum in lieu of notice under the Termination Provisions was a contractually agreed method of lawful termination of the employment contract; it was not in the nature of damages for breach of contract. It was therefore a primary obligation to pay rather than a secondary obligation arising upon the breach of a primary obligation of performance, thus not a penalty clause.
  5. The Court further completed the analysis by commenting that the Termination Provisions would still be enforceable even if the same was a liquidated damages clause. On this issue, the Court of Appeal clarified the test to determine whether a clause was a penalty clause was, whether the relevant clause was out of all proportion to the innocent party’s legitimate interest in enforcing the contract; and that the innocent party could have a legitimate interest in the performance of the contract or some appropriate alternative to performance that goes beyond compensation. In applying the test, the Court shall first identify the legitimate interest of the innocent party that is being protected by the clause, then move on to assess whether the clause is out of all proportion to such legitimate interest by considering the circumstances in which the contract was made. 
  6. Accordingly, the teacher was ordered to, inter alia, pay to the school HK$139,593, being payment in lieu of 3 months’ notice.
Takeaways

The case of Law Ting Pong Secondary School suggests that once the employment contract is signed, the agreed notice under its termination provision has to be observed, even before the commencement of the employment.

However, it is arguable that Law Ting Pong Secondary School turns on its specific facts that the employer school has made it explicit on the Letter of Acceptance that the conditions of the employment contract came to immediate effect upon execution and the notice requirement under the Termination Provision was specifically used as an example for illustrating the same. 

Further, it is also not certain as to what the Court’s decision would be if any probation period is provided for in respect of the relevant employment. It seems the Court did not pay any regard to Section 6(3A) of the Employment Ordinance (Cap.57) when reaching its decision in Law Ting Pong Secondary School, which provides that:-

“Where in any contract of employment, whether in writing or oral, it has been expressly agreed that the employment is on probation and the contract makes provision for the length of notice required for its termination such contract may be terminated —
(a) notwithstanding the length of notice provided for in the contract, by either party at any time during the first month of such employment without notice or payment in lieu;

(b) by either party at any time after the first month of such employment by giving to the other party notice of the agreed period, but not less than 7 days.”

In light of the Court of Appeal’s decisions in Law Ting Pong Secondary School, it seems the legal position in such scenario could possibly be, albeit awkward, (a) the employee will be required to give notice equals to such length as stated in the employment contract if he chooses to back out of the contract; and (b) no notice is required if he chooses to terminate his employment in the first month of his probation by operation of Section 6(3A) of the Employment Ordinance (which kicks in following the commencement of the employment).

How can OLN help?

As can be seen, it would be advisable for employers to clearly and expressly document in its employment contract the notice period and/or the termination mechanism if the employee fails to show up on the commencement date of employment as agreed. The degree of clarity required in this regard can be very demanding. 

We have practical experience in helping employers with the drafting and review of employment-related documentation to ensure the same complies with the employment law regime in Hong Kong and latest development on the same, so as to protect employers’ interest.
 
On the other hand, we also assist, from time to time, employees on the review of employment-related documentation and advise employees on any potential legal consequences arising from their employment contracts.

If you have any question regarding the topic discussed or other employment issues, please contact our Partner Mr. Victor Ng at victor.ng@oln-law.com or our associate Ms. Barbara Kwong at barbara.kwong@oln-law.com for further assistance.

July 2021

Disclaimer: This article is for reference only. Nothing herein shall be construed as Hong Kong legal advice or any legal advice for that matter to any person. Oldham, Li & Nie shall not be held liable for any loss and/or damage incurred by any person acting as a result of the materials contained in this article.

聘用香港僱員、獨立承包商及實習生：無風險方針

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為節省開支及盡可能以符合成本效益的方式營運，許多初創公司及中小企將嘗試透過委聘獨立承包商、實習生及其他無薪職工壯大其團隊。

儘管該等替代方案似乎具吸引力，但僱主在選擇填補空缺的方式方面並沒有無限的自由。實質上，履行僱員工作的任何個人可能被勞資審裁處及法院依法視為該公司的僱員，這可能導致公司須承擔未付薪金及其他僱傭權利。

此文章將分項列出聘用僱員、獨立承包商及實習生的主要法律要求，並提供小貼士，以確保閣下的業務的工作安排符合有關法律。

聘用僱員

在香港，受雇為僱員的人士一般為持續、長期需要其技能及經驗的人士，並準備根據業務需要提供服務。該角色的長期性質意味著僱主可依賴僱員以維持獨立承包商及實習生無法提供的服務。

在法律上，僱主須知悉以下事項：

  • 根據香港僱傭法例，僱員擁有僱傭地位，享有僱主必須提供的特定權利（如最低工資、強積金供款、法定假期、休假、生育保障、終止聘用通知期、遣散等）。
  • 任何由同一僱主連續雇用四星期或以上，且每週工作至少18小時的人一般將被視為僱主的僱員，屬連續性合約。
  • 不論閣下與員工的僱傭合約對薪金、 法定 假期、通知及遣散安排的描述，作為僱主，閣下須遵守各項香港僱傭法例所規定的法定最低要求。
  • 所有受僱傭條例保障的僱員，不論其指定職位或工作時間，均享有上述法定權利及保障。該條例並無區分「長期」、「臨時」、「全職」、「兼職」僱員與彈性工作員工。
  • 作為僱主，閣下有法定責任向稅務局以稅務為目的申報薪金及終止聘用。

聘用獨立承包商或顧問（「承包商」）

一般而言，承包商為能夠為閣下的業務提供短期及獨特專業知識的人士。他們可以是由以項目為基礎的程式員，到臨時首席財務官或首席技術官。視乎閣下的要求及彼等的要求，彼等可能於閣下的處所或場外工作。然而，在法律上，除僱員外，還有多項特點：

  • 承包商並無僱傭地位。彼等與閣下業務的關係將不受香港僱傭法例或強積金法例規管，且彼等將無權收取閣下提供予僱員的福利。
  • 閣下的業務與承包商之間的關係幾乎完全由雙方之間的合約決定，因此閣下可隨時終止與承包商的協議（受合約條款規限），並將有責任於終止承包商的服務時提供通知或作出賠償。
  • 與僱員不同，並無法律要求向承包商支付至少最低工資。閣下可自由協定任何付款條款，而有關條款對承包商而言屬合理及可接受。
  • 承包商負責其所提供和投入的，以及交付成果的成功或失敗。彼等通常保留對何時、如何及何時完成工作的控制權。
  • 承包商可同時與其他公司訂約。
  • 承包商一般使用其本身的設備（除合約另有規定外），此舉可減少間接成本。
  • 承包商向閣下提交發票以收取項目款項。
  • 閣下不負責向稅務局報告承包商的收入，更不用說就該收入預扣或徵收稅款。

如果我們發現錯誤，會發生甚麼情況？

在法律要求方面，承包商具有獨特的靈活性，使彼等成為雇用僱員履行相同職責的便利替代方案。不幸的是，初創公司有時會陷入這樣一種陷阱，認為他們與職工有獨立的承包商關係，因為他們的協議說明瞭這樣的安排因此無需擔心。這種情況同樣適用於創辦人，他們經常錯誤地認為有獨立的承包商關係，或獲豁免遵守香港最低工資及僱傭法例。然而，倘發現實質上存在僱員與僱主的關係，則職工被授予的任何的職銜均無關重要。稅務局及法院將對此不予理會，而且公司可能會因未付工資和僱傭法定權利而陷入困境。

聘用實習生

如上文所述，香港僱傭法例一般不會區分不同僱傭類別。與普遍信念相反，實習生並非法律以外存在的「魔法」職工類別。除以下若干例外情況外，實習生亦為有權享有香港僱傭法例權利及保障的僱員。首先，讓我們區分有薪實習生和無薪實習生。無薪實習生基本上為獲豁免最低工資的特別類別職工。基本上分為兩個子類別：

  • 實習學員
  • 工作經驗學員

彼等之間的主要區別在於實習學員的實習工作須由修讀的教育機構安排或獲其認可，且該實習工作是課程的一部份，而工作經驗學員的實習工作無需獲認可或與工作經驗學員修讀的課程有關。倘實習學員符合法定標準，他開始實習時可以是任何年齡。然而，工作經驗學員當開始實習時必須為26年或以下。

初創公司與工作經驗學員可協議將實習的首59天（自開始日期起按日曆基準計算）視為獲豁免學生僱用期，如此，於該期間，僱主將獲豁免支付法定最低工資。然而，倘僱用期超過59日，工作經驗學員有權至少獲支付最低工資。務請注意，不論是否與同一僱主訂立，工作經驗學員於同一歷年內不得有超過一個獲豁免學生僱用期。

符合學生實習要工作求的實習允許實習學員在沒有報酬的情況下合法地在工作，與工作經驗學員不同，豁免最低工資的規定並沒有時間限制。

然後就是有薪實習生了。在香港將任何人描述為 「有薪實習生」的用詞有點不當，因為「有薪實習生」可能是真正符合上述無薪實習生法律定義的人（但閣下慷慨決定支付報酬）以及不符合該等定義的僱員，以致閣下必須至少向其支付最低工資。

要記住的重要一點是，除非閣下已證明候選人符合「無薪實習生」的所有相關標準，否則最安全的做法是假設此人將作為一名「有薪員工」加入閣下的團隊。

請注意，作為僱主，如果有薪實習生年滿 18 歲並連續受雇 60 個日曆日或以上，閣下將需要向其繳納強積金。如有疑問，請在聘用此類候選人之前向有經驗的律師尋求意見清，因為倘證明其中任何人不符合所有標準，則閣下可能需要為已開始工作的欠薪、未支付的強積金供款以及一些嚴重的法律處罰負責。

記住閣下的工作場所健康及安全責任

作為企業，閣下初創公司或中小企不僅對閣下的僱員負有健康及安全責任，亦對處所內任何的無薪職工負有健康及安全責任。時刻謹記，閣下有持續責任確保其健康及安全。

我們需要什麼協議？

無論閣下擬填補團隊空缺的哪個職位，閣下均需訂立正確起草的協議，列明受聘期間的職位、職責、薪酬及任何福利。倘閣下是一家初創公司，閣下可能需要就如何將股權（以股份或購股權形式）納入閣下僱員的薪酬待遇內有關法律意見。

不要忘記在協議中加入保密條款及智慧財產權保護

初創公司在實習協議中更經常未有加入合適的保密及智慧財產權保護，而獨立承包商協議中的保密條款亦經常起草不當，使其無用。閣下應就該等條文採取風險管理方法，並針對各業務所面對的特定風險作出調整。請與閣下的律師交談，他將協助閣下作出所需安排。

一般而言，除非閣下的合約另有規定，否則任何為閣下的業務工作的人士將擁有其所開發的任何智慧財產權，不論是否為軟體代碼、圖形、標誌、行銷材料或簡單意念。因此，作為初創公司進行新興業務，閣下須確保僱傭合約、實習協議及獨立承包商協議包含保障閣下業務的法律權利及版權歸屬分配。

香港批出首個原授標準專利註冊

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知識產權署於2021年6月4日, 即自申請人提交原授專利申請之日起14個月內, 批出首個原授標準專利註冊。

原授專利制度是於2019年推出的專利制度改革的其中一部份, 為發明人提供可獲取標準專利保護額外之途徑，從而節省了需要先在香港以外的指定司法管轄區提交專利申請，然後在香港進行再註冊的需要。

有關原授專利和專利改革的其餘部分的詳細資訊，請參閱我們較早之前的”香港新專利制度“文章。

如果您就任何有關香港的專利發明保護或其他知識產權保護方面有任何疑問，請隨時與我們的知識產權團隊聯絡 info@oln-ip.com 。

2021年7月

Wearing Red Soles has a Price

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Distinction, that was the key. The day Louboutin took his assistant’s nail polish in 1993 and painted the sole of the shoe he was making, he was telling the entire world, or at least the European Union, that shoes with red soles must be Louboutin’s. 

In 2021, the French shoe designer is suing Amazon for trademark infringement… again. 

The worldwide well-known online marketplace is offering High Heeled shoes with red soles, similar to those protected by Louboutin’s trade mark.

The case has been referred by the Luxembourg Court to the Court of Justice of the European Union.

The Red Sole Monopoly recognised in 2018 

Louboutin’s red is well protected: on 12th June 2018, the Court of Justice of the European Union ruled in Case C-163/16 Christian Louboutin and Christian Louboutin SAS v Van Haren Schoenen BV that a trade mark consisting of a colour applied to the sole of a shoe may be registered in the EU. 

The Court held that a sign, such as that at issue, cannot, in any event, be regarded as consisting ‘exclusively’ of a shape, where the main element of that sign is a specific colour designated by an internationally recognised identification code. 

Previously, the Paris Court of Appeal had also considered that the application of a colour to a specific location on a product constituted a distinct and protectable trademark. 

Therefore, in the European Union, only Louboutin is allowed to paint the sole of its shoes with the bright red number 18.1663TP in the Pantone colour chart. 

Louboutin vs Amazon  – Chapter 1, Belgium

Marketplaces like Amazon are online sales platforms connecting buyers and sellers. 

Let’s say that a seller other than Louboutin wishes to offer Red Sole Shoes through Amazon. Should Amazon be liable for trademark infringement by a seller on the platform? 

Is the storage of counterfeit goods for sale considered an infringement of trade mark rights in the European Union? 

Amazon was sued by Louboutin in Belgium in order to engage its liability. 

In August 2019, Amazon was found directly liable for the counterfeiting of the red Louboutin sole by a Brussels Court even though Amazon was only in charge of the storage and shipping of the products. 

However, in April 2020, in Coty vs Amazon case, the Court of Justice of the European Union excluded any liability of Amazon judging that only the seller and not the platform has the purpose of offering those goods for sale.

National Courts within the European Union are bound by the Court of Justice of the European Union decisions. Based on the recent Coty Vs Amazon C 567/18 decision, the Brussels Court of Appeal partially overturned Louboutin’s decision in June 2020. Therefore, Louboutin lost its case. 

Louboutin vs Amazon – chapter 2, Luxembourg 

Amazon is evolving, mainly through new services launched during the pandemic. Nowadays, Amazon not only stores and ships the products, but also promotes and advertises counterfeit products through its “Fulfilment by Amazon” offer. This new era of online services could be considered as the platform’s active involvement in the sale of infringing products.

Louboutin has sued Amazon before the Court of Luxembourg. The novelty of the case compared to the 2020 Belgian lawsuit is the “Fulfilment by Amazon” offer.

Is the use of a sign identical with a trade mark in an advertisement displayed on a website attributable to its operator if, in the perception of a reasonably well informed and reasonably observant internet user, that operator has played an active part in the preparation of that advertisement or if that advertisement may be perceived by such an internet user as forming part of that operator’s own commercial communication?

Is the shipment, in the course of trade and without the consent of the proprietor of a trade mark, to the final consumer of goods bearing a sign identical with the mark constitutes a use attributable to the shipper only if the shipper has actual knowledge that that sign has been affixed to those goods?

Is such a shipper the user of the sign concerned if the shipper itself or an economically linked entity has previously made an active contribution to the display, in the course of trade, of an advertisement for the goods bearing that sign or has taken the final consumer’s order on the basis of that advertisement?

The Court of Justice of the European Union was seized on those terms by the Luxembourg Court on the 8th of March 2021. 

Given the reasoning of the previous ruling by the Court of Justice of the European Union, we foresee a different issue for Amazon this time. Since Amazon is now actively promoting the goods, the Court of Justice of the European Union might consider that the platform The expected judgement will be crucial for Amazon services in the entire European Union. 

Are you considering exporting your products to the European Union? OLN’s French Practice and IP Department can assist you to make sure you are not infringing EU trademark law. 

Written: June 2021

OLN IP Ranked Tier 1 in Copyright/Trademarks in ALB IP Rankings 2021

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Congratulations to Benjamin Choi and Vera Sung and the rest of the OLN IP team on being listed as a tier 1 firm for Trademarks/Copyright and as a tier 2 firm for Patents in the Asian Legal Business ‘Asia IP Rankings 2021’ for Hong Kong. For more details, please click here.

We are especially proud of this news given OLN IP is new venture. Established by OLN Oldham, Li & Nie on the 1st January 2021, OLN IP is a consultancy led by Benjamin Choi and Vera Sung. It offers tailored, commercially-driven advice to intellectual property owners, across the different IP asset classes, including IP portfolio management. For more details, please click here.

May 2021

Proposed Changes to the Profit Requirement for Main Board IPO

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Introduction

2020 was a year of turmoil, with the outbreak of COVID-19 in late 2019 and early 2020, global economy experienced the biggest slowdown in recent decades. Despite the economic downturn and the poor market sentiment, the Hong Kong IPO market saw an increase in the total IPO funds raised in 2020 by more than 26% when compared with 2019 totalling HKD397 billion and if compared with 2018, total IPO funds raised rose by 38%, while the total number of new listings dropped by approximately 15% compared with 2019 and by approximately 29% compared with 2018. 

Consultation of the Stock Exchange

The Stock Exchange of Hong Kong Limited (“Stock Exchange”) published a number of consultation papers in 2020, out of which the consultation on Corporate WVR Beneficiaries and Main Board Profit Requirement are likely to have bigger impact on the IPO market performance in 2021.

In January 2020, the Stock Exchange published the Consultation Paper on Corporate WVR Beneficiaries (“WVR Beneficiaries Consultation Paper”) proposing to extend the WVR regime to permit corporates to benefit from WVR, subject to appropriate safeguards. 

In November 2020, the Stock Exchange published the Consultation Paper on the Main Board Profit Requirement (“Profit Requirement Consultation Paper”) proposing to increase the profit requirement for Main Board listing applicants. 

The current requirement for a Main Board listing applicant is that the minimum profit attributable to shareholders shall be HKD50 million for the 3 years preceding the application, with HKD20 million for the most recent financial year and an aggregate of HKD30 million for the 2 preceding financial years. In the Profit Requirement Consultation Paper, the Stock Exchange proposed 2 options for the increase:

Option 1: raises the overall profit requirement by 150%, with a minimum profit attributable to shareholders of HKD50 million for the most recent financial year and HKD75 million for the preceding 2 financial years

Option 2: raises the overall profit requirement by 200%, with a minimum profit attributable to shareholders of HKD60 million for the most recent financial year and HKD90 million for the 2 preceding financial years

Reasons for the change

The main reason for this proposed change is that since the increase in the market capitalisation requirement from HKD200 million to HKD500 million in 2018, the implied historical P/E ratio based on the market capitalisation requirement jumped from 10 times to 25 times. The new profit requirement will bring the implied historical P/E ratio of companies only marginally meeting the profit and market capitalisation requirements down to 8-10 times, a level similar to that prior to the market capitalisation increase in 2018. The Stock Exchange has indicated that the proposed increase in profit requirement is aimed at:

  • Deterring creation of shells for subsequent disposal at a profit. 
  • Further distinguishing Main Board from GEM, attracting only sizeable companies that can meet high market standards to list on Main Board.
  • Improving the overall quality of Main board issuers.

Who would be affected most by this proposed increase in profit requirement? Obviously, companies that originally planned to list on GEM, pre-revenue biotech companies and those companies that can meet the new profit requirement will not be affected by this proposal. This proposed increase will surely drive some of the intended applicants who just marginally met the current profit requirement out of the game, unless they turn to list on GEM instead, or wait a few more years until their profits meet the new requirement. The new profit requirement does not only apply to potential Main Board listing applicants, but it also applies to listed issuers who intend to transfer their listing from GEM to the Main Board.

Effect of the new Profit Requirement

With the increase in the profit requirement for new listing applicants, the Stock Exchange expects the number of eligible companies to drop drastically. Based on the number of applications received by the Stock Exchange between 2016 and 2019, about 60% of the applicants would have become ineligible for listing upon adoption of either Option 1 or Option 2 of the new profit requirement.

Companies in early stage of development or small to medium-sized companies which have lower profits will be affected by the new profit requirement. But this does not mean they will be refused access to the capital market at all. These companies can still apply to list on GEM and raise funds for their future development. They still can transfer their listing to Main Board once they are able to meet the new Main Board profit requirement.

Transitional arrangement

The Stock Exchange acknowledges that there are companies who may have already commenced their listing project on the basis of the current profit requirement. As the new profit requirement is expected to come into effect not earlier than 1 July 2021, the Stock Exchange believes that there should be sufficient time for these potential applicants to prepare and submit their listing applications prior to the new profit requirement coming into effect. 

As indicated in the Profit Requirement Consultation Paper, applications submitted prior to the new profit requirement becoming effective will be assessed under the current profit requirement, provided that such applications have not lapsed for more than 3 months, been withdrawn, rejected or returned by the Stock Exchange. All applications submitted prior to the new profit requirement effective date will be allowed to be renewed ONCE after the new profit requirement effective date if the renewal is submitted within 3 calendar months after the original application is lapsed such that the application will continue to be assessed under the current profit requirement. But any further renewal of applications after the first renewal will be subject to assessment under the new profit requirement.

It should be noted that any applicant who has submitted their listing application prior to the new profit requirement coming into effect will not be permitted to withdraw their application and re-submit again just shortly before the new rules’ effective date such that the application will have a longer period of assessment and vetting under the current profit requirement.

Temporary relief

This may even apply to companies which might otherwise have fulfilled the new profit requirement but for the economic downturn in 2020 which caused its final year of profit attributable to shareholders to drop below the proposed new threshold. In the Profit Requirement Consultation Paper, Stock Exchange raised a point on whether temporary relief shall be granted to good quality companies with strong historical financial performance whose financial results were adversely affected by COVID-19 if certain conditions were met. If such temporary relief is adopted by the Stock Exchange, any potential company seeking such relief shall submit an application to the Stock Exchange for consideration on a case-by-case basis. As it is unclear whether this temporary relief will eventually be adopted after the consultation, it would seem unwise for companies to wait for the consultation conclusion rather than submitting their listing application prior to the effective date of the new profit requirement. If it turns out the temporary relief is not adopted, these companies may lose the chance of submitting their application before the new rule comes into effect, and will have to wait until they meet the new profit requirement.  

Conditions for granting temporary relief:

1. Aggregate profit during Track Record Period (TRP) meets the aggregate proposed profit requirement;
2. Positive cash flow from operating activities from ordinary course of business;
3. Circumstances affecting the financial performance is only temporary;
4. At least 6 months of TRP falls in 2020;
5. Sufficient disclosure on the likelihood of recurrence of circumstances affecting its financial performance plus mitigation measures undertaken plus profit forecast covering 1 full financial year after listing

GEM transfer of listing

Since the publication of the Profit Requirement Consultation Paper, sponsors have been actively pursuing potential cases trying to persuade and convince interested companies considering listing on the Main Board or a transfer to the Main Board from GEM to kick start the process in order to meet the last day for submission prior to the new rules becoming effective such that their applications will still be considered and assessed under the current profit requirement. 

Outlook for 2021

Since the proposed change in the profit requirement, if eventually adopted, will only come into effect not earlier than 1 July 2021 together with the proposed transitional arrangements which apply to applications filed before the effective date of the new rules, we can most certainly expect a surge in the number of new listing applications and transfer of listing applications to be submitted prior to the effective date of the new profit requirement. Applicants who have commenced their IPO or transfer of listing projects will definitely speed up their process with a view to submit the application before the new rule comes into effect. Even the Stock Exchange indicated in the Profit Requirement Consultation Paper that it is expected the number of applications will increase before the new rules come into effect. In fact, the Stock Exchange has accepted 102 Main Board listing applications since 1 January 2021 which is more than the combined applications for July to December 2020. Just in April 2021 the Stock Exchange has accepted 33 Main Board listing applications. It is very likely that the expected increase in number of both Main Board listing applications and GEM transfer applications will inevitably delay the process and vetting time of applications, whether these applications can proceed to listing within the original 6 months plus the additional 6 months of a renewed application under these circumstances in order to rely on the current profit requirement remain to be seen.

Holding Foreign Companies Accountable Act

In addition to the proposed new profit requirement, the passing of the Holding Foreign Companies Accountable Act (HFCAA) by the US government in December 2020 will also be a driving force for more US-listed Chinese companies to apply for secondary listing on the Stock Exchange pursuant to Chapter 19C of the Listing Rules. The Act requires auditors of US listed foreign companies to allow the Public Company Accounting Oversight Board (PCAOB) to inspect their audit work papers as a means to protect investors and further public interests in the preparation of informative, accurate and independent audit report. If a company fails to comply with this for 3 consecutive years, the Act requires that the SEC prohibit the securities of such company from being traded on a national securities exchange, including OTC trading.  will render the company liable to be delisted from the US stock exchange. 

With the HFCAA becoming law in the US, and the successful homecoming listings of US-listed Chinese companies in Hong Kong in 2020, we can expect the number of homecoming listings of US-listed Chinese companies to continue to grow in 2021. Amongst the top 10 largest IPOs in terms of funds raised in 2020, three of which are secondary listing of NASDAQ primary listed Chinese companies, ranking first, third and sixth. All three of these secondary listing companies are in the TMT sector, their total funds raised comprised 18.5% of the total IPO funds raised in 2020. TMT continues to be the hottest sector ranking first in terms of total funds raised in the Hong Kong IPO market in 2019 and 2020.

Consultation Conclusion on Corporate WVR Beneficiaries

The Consultation Conclusion on Corporate WVR Beneficiaries published in October 2020 further opened the gate for Greater China Issuers (having centre of gravity in Greater China) that are:

1.    controlled by one corporate WVR beneficiary (or a group of corporate beneficiaries acting in concert) which is the largest shareholder in terms of shareholders’ votes and such votes controlled by the WVR beneficiary is not less than 30% of the total shareholders’ votes (at or before 30 Oct 2020); and 
2.    primary listed on a Qualifying Exchange (being NYSE, NASDAQ and London Stock Exchange Main Market and belonging to the Premium Listing segment) on or before 30 October 2020,

to apply for secondary listing in Hong Kong.

These issuers, known as Qualifying Corporate WVR Issuers, will be treated in the same way as the Grandfathered Greater China Issuers under Chapter 19C of the Listing Rules. Qualifying Corporate WVR Issuers seeking to secondary list on the Stock Exchange shall be an innovative company and shall satisfy the qualifications for listing set out in Chapter 19C of the Listing Rules.

The total number of new listings in 2020 under the new listing regime, i.e. biotech companies, innovative companies with weighted voting rights structures and concessionary secondary listings, was 27, compared with 11 in 2019 and 7 in 2018, showing an increase by 145% and 286% respectively. 

Conclusion

The consultation period for the change in Main Board profit requirement ended on 1 February, the consultation conclusion is not yet available when this article is published. We will find out when the consultation conclusion is published which option the Stock Exchange will adopt.

In the 3 months since the Stock Exchange published the Profit Requirement Consultation Paper, the Stock Exchange has accepted a total of 44 new listing applications (including transfer of listing applications and Reverse Takeover) in November, December 2020 and January 2021. As rightly predicted by the Stock Exchange, the number of new listing applications (including transfer of listing applications and Reverse Takeover) accepted by the Stock Exchange in the three months between February and April 2021 almost doubled, totalling 85 applications. We shall see whether the number of applications accepted in the coming months prior to the new profit requirement coming into effect will continue to increase.

If you wish to learn more about listing in Hong Kong, please feel free to speak to our Simon Wong.

Simon Wong
+852 2186 1848 / +852 9460 9816
simon.wong@oln-law.com
Partner, Corporate & Commercial
Oldham, Li & Nie

May 2021