On 16 August 2023, our Partner and Council Member of The Law Society of Hong Kong Ms Heidi Chui and Partner Rodney Teoh attended the 2023 Annual Conference of In-House Lawyers organized by The Law Society’s In-House Lawyers Committee. The conference was held at the Hong Kong Convention and Exhibition Centre under the theme “From In-House Connector to Super-Connector”.

Dr. Thomas So, Member of The National Committee of the Chinese People’s Political Consultative Conference and Past-President of The Law Society of Hong Kong (2nd from the left); Ms. Heidi Chui, our Partner and Council Member of The Law Society of Hong Kong (2nd from the right); and our Partner Mr. Rodney Teoh (3rd from the left)

The conference gathered a diverse range of guest speakers to discuss cutting-edge market topics, including the latest national development strategies, cross-border dispute resolution, intellectual property, and the Hong Kong IPO market. Mr. Paul Lam, Secretary for Justice of the HKSAR, and Mr. C.M. Chan, President of The Law Society of Hong Kong, delivered speeches at the conference.

Mr. Paul Lam, Secretary for Justice of the HKSAR (Left), and Mr. C.M. Chan, President of The Law Society of Hong Kong (Right)

For more information, please contact our Partners Ms. Heidi Chui or Mr. Rodney Teoh.

We are delighted to announce that our Senior Associate Mr. Michael Lau has successfully passed the Guangdong-Hong Kong-Macao Greater Bay Area Legal Professional Examination (GBA Exam) interview assessment, making him the seventh lawyer from our firm to pass the GBA exam interview assessment. Our 6 other lawyers who have already obtained the GBA qualification are Partners Mr. Willy Cheng, Ms. Heidi Chui, Mr. Rodney Teoh, Mr. Gordon Tsang, Consultant Mr. Philip Tsang and Senior Associate Mr. Terence Lau.

The GBA Exam is a liberalization measure under the Agreement on Trade in Services to the Mainland and Hong Kong Closer Economic Partnership Arrangement. Hong Kong legal practitioners with five or more years of post-qualification experience can provide legal services in the nine Mainland municipalities in the GBA (Guangzhou, Shenzhen, Zhuhai, Foshan, Huizhou, Dongguan, Zhongshan, Jiangmen and Zhaoqing) on specified civil and commercial legal matters to which the Mainland laws apply.

Our firm will continue to strengthen our legal services in the GBA to meet the diverse legal needs of clients in the region.

On 2 August 2023, the Court of Appeal (“CA”) delivered a decision in 律政司司長 訴IPFUND Asset Management Limited及另一人 (the “IPFUND case”) ¹, which reversed the decision of the District Court delivered on 22 April 2016² and effectively closed a significant loophole to the licensing requirements under the Securities and Futures Ordinance (Cap.571) (“SFO”).

These basic matters aid our understanding of the main arguments in the IPFUND case:-

– There are 10 types of “regulated activities” under the SFO³. Carrying on or holding out as carrying on a business⁴ in a regulated activity without the corresponding license from the Securities and Futures Commissions (“SFC”) is an offence under the SFO.

– Many of the “regulated activities” (e.g., Type 1 – dealing in securities) are defined directly or indirectly by references to “securities”, which in turn is defined in Schedule 1 to the SFO.

– “Securities”, as defined in the SFO, includes interests in any collective investment scheme (“CIS”) but does not include shares in a private company⁵.

– The definition of CIS⁶ is the subject of numerous case authorities and warrants an article of its own. For the present purposes, the readers only need to know that a CIS is not restricted or defined by asset type (i.e., bonds, stocks, money or land etc.) and investors to a CIS do not have day-to-day control of the assets in the CIS.

In the IPFUND case, the 1st Defendant (“D1”) was the 2nd Defendant’s (“D2”) corporate vehicle to implement an arrangement (“Arrangement”) whereby landed properties would first be acquired with funds from multiple investors, the acquired properties would then be sold for profit, and the profits of sale (less the two Defendants’ (“Ds”) own charges) would be split among the investors in accordance with their respective stakes. More specifically, each purchase would be carried out through a shelf company (incorporated as a Hong Kong private company) for the singular purpose of holding the acquired property until sale, each shelf company would have nominal shareholder(s) having some back-to-back instruments purportedly acknowledging the investors’ beneficial interest in the shares of the shelf company, and each shelf company would only subsist until either the purchase was cancelled or the sale was completed.

Ds were charged with carrying on and/or holding out as carrying on a business in a regulated activity (i.e., Type 1 regulated activity) on the premises that (i) the Arrangement was a CIS, and (ii) by selling interests in a CIS to the investors, Ds were dealing in securities.

At first instance, the District Court found the Arrangement to be a CIS, but acquitted Ds on the finding that the investors bought shares in private companies (i.e., the shelf companies) instead of interests in a CIS.

Even though each case turns on its own facts, the decision of the District Court left a huge question mark on whether the licensing requirements under the SFO may be circumvented by the use of private companies one way or another. Such is the government’s determination to close the loophole that it pursued the appeal for over 5 years without even asking for the reversal of Ds’ acquittal.

On appeal, the CA canvassed various technical issues, such as whether shares in a private company are excluded from the definition of CIS⁷ and whether the shelf companies in the Arrangement were de facto private companies⁸ , but the critical issue is this:-

What interest have the investors acquired from Ds?

One would have thought it is intuitive that, in respect of a CIS built and run with funds from investors, the investors must have acquired some interest in the CIS. But the special features in the Arrangement have required both Courts to perform some mental gymnastics.

Ultimately, the CA looked beyond the mere form of the shelf companies as private companies and considered the overall circumstances of the Arrangement, including (among other things) the singular purpose and short lives of the shelf companies and how the investors were paid splits of profits of sale rather than dividends, and concluded that the investors in fact purchased interest in a CIS and not shares in private companies⁹ .

In other words, where the licensing requirement in respect of a CIS is in question, we ought to stick to the principle of substance over form.

Please contact our Partners Ms. Cornelia Chu and Mr. Dominic Lau for any enquiries or further information.

This news update is for information purposes only. Its content does not constitute legal advice and should not be treated as such. Stevenson, Wong & Co. will not be liable to you in respect of any special, indirect or consequential loss or damage arising from or in connection with any decision made, action or inaction taken in reliance on the information set out herein.

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^#1[2023] HKCU 3281
^#2[2016] HKCU 1436
^#3 Different types of regulated activities are defined in in Schedule 5 to the SFO.
^#4The District Court judge held that D1 and D2 operated the Arrangement by way of business (because of the leasing of office, D1’s description of its business in its business registration application and website, the number and continuity of the investment schemes as well as the consultancy fee charged by D1.
See footnote 2 judgement at §148,160 and 194.
⁵Schedule 1 to the SFO.
⁶CIS is broadly defined in Schedule 1 to the SFO. Generally speaking, CIS has four elements: (1) the scheme must involve an arrangement in respect of property; (2) participants do not have day-to-day control over the management of the property even if they have the right to be consulted or to give directions about the management of the property; (3) the property is managed as a whole by or on behalf of the person operating the arrangement; and/or the contributions of the participants and the profits or income from which payments are made to them are pooled; and (4) the purpose of the arrangement is for participants to participate in or receive profits, income or other returns from their acquisition or management of the property.
See footnote 5.
⁷In considering the applicability of the private company shares exemption, the CA’s approach was to determine what kind of interest the investor was acquiring, and if the purpose of investor was not, or was not intended to be, to acquire, dispose of, or subscribe for shares in a private company, the private company shares exemption should not apply to ‘dealing in securities’.
See footnote 1 judgement at §118.
⁸The CA held affirmatively for the reason that the articles of association of all shelf companies involved contain a provision that complies with section 11(1) of the Companies Ordinance (Cap.622) (i.e. a private company’s articles of association shall limit the number of members to 50).
See footnote 1 judgement at §129.

⁹See footnote 1 judgement at §95-114.

本所欣然宣布，我们的合伙人、诉讼及争议解决部主管徐凯怡律师获一邦国际网上仲调中心有限公司 (eBRAM)委任为仲裁员调解员及亚太经济合作组织中立者，任期为期5年至2027年12月31日

关于一邦国际网上仲调 (eBRAM)

eBRAM是一家非牟利担保有限公司，于2018 年获亚洲国际法律研究院、香港大律师公会及香港律师会支持而成立。eBRAM旨在利用创新技术构建能力，满足正在迅速增长的跨境争议解决服务需求。eBRAM将努力与国际组织和专业团体（例如亚太经济合作组织 (APEC) 、东南亚国家联盟 (ASEAN) 、一带一路沿线国家及其他地区）开展协作，为避免和解决国际商业纠纷作出贡献。

eBRAM在册调解员和仲裁员汇聚了来自全球具有丰富经验的资深调解和仲裁专才。eBRAM通过包括区块链、人工智能、软件机器人和云技术等最新技术，开发网上争议解决 (ODR) 平台；在争议解决程序中为各方提供支援。

如阁下有任何查询，请联络本所合伙人徐凯怡律师。

We are delighted to announce that our firm and partners have been shortlisted as finalists in 8 categories at the ALB Hong Kong Law Awards 2023. We are honoured to be recognized for our dedication and expertise across various practice areas.

• Civil Litigation Law Firm of the Year
• International Arbitration Law Firm of the Year
• Matrimonial and Family Law Firm of the Year
• Private Wealth Law Firm of the Year
• Hong Kong Law Firm of the Year
• Dispute Resolution Lawyer of the Year – Ms. Heidi Chui
  
• Woman Lawyer of the Year – Ms. Heidi Chui
  
• Young Lawyer of the Year (Law Firm) – Mr. Gordon Tsang
  

The ALB HK Law Awards is an annual event that recognizes and celebrates the outstanding achievements of law firms, in-house legal teams, and individual lawyers in Hong Kong and the region. The winners will be announced at the awards ceremony on 15 September 2023 at the JW Marriot.

To view the complete list of finalists, please click here.

For more information, please contact our Partners Mr. Willy Cheng, Ms. Heidi Chui, or Mr. Gordon Tsang.