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Hong Kong: a world where the old and the new live side by side

Hong Kong SAR

  1. Hong Kong Limited Partnership Fund (“LPF”) Regime

Hong Kong is the second largest private equity hub in Asia after Mainland China. As an international financial centre, Hong Kong has a vital role to play in the Funds Industry, and is committed to strengthening its position as a jurisdiction of choice for Private Funds in Asia for investment and wealth creation in the region.

Significant milestone for private fund structuring in Hong Kong

The Hong Kong LPF Ordinance was enacted on 31 August 2020, aiming to allow Private Funds to set up and operate locally as Limited Partnerships. The new LPF regime provides an alternative investment vehicle for private fund managers who are raising funds or investing in Asia and looking for a regionally domiciled fund vehicle.

Main Features of the Hong Kong LPF

It is widely used by Closed-Ended Private Funds such as private equity, venture capital, real estate, infrastructure, debt and special situation funds;

  • Fund structure is governed by a Limited Partnership Agreement with General Partner (“GP”) and at least one Limited Partner;
  • A simple and user-friendly set-up process by registration with the Registrar of Companies by a Hong Kong registered law firm or solicitor;
  • Tax benefits: no capital duty and no stamp duty: LPF is typically in scope under the unified funds exemption and carried interest can be tax exempted.

Key parties and operation obligations

  • GP is responsible for daily management and control of the LPF, assuming unlimited liability;
  • Investment Manager must be SFC-licensed if undertaking regulated activities in Hong Kong;
  • Auditor is appointed to perform independent fund audit annually;
  • AML responsible person is to carry out anti-money laundering compliance functions;
  • Proper custody management is required;
  • A registered office is maintained in Hong Kong;
  • Independent party such as fund administrator may be engaged for fund valuation and investor services as necessary and applicable.

It is proposed that the LPF regime will allow re-domiciliation of offshore funds to Hong Kong provided that the migrating offshore fund meets the same set of eligibility requirements of an LPF. Hence the new LPF regime will no doubt provide ample opportunities and long-term growth for the Fund Industry and the Private Equity sector in Asia.

2. Trust or Company Service Providers license

To enhance the due diligence commitments on the designated non-financial businesses and professionals, a licensing regime was introduced under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance on 1 March 2018.

Any person who carries on a trust or company service business as defined in the guideline is required to obtain a Trust or Company Service Providers license (“License”) from the Registrar of Companies. The License will be granted for three years’ period and the Licensee needs to renew it subject to a ‘fit and proper’ test.

Anyone who carries on the relevant business without a TCSP license is liable on conviction for a fine of HK$100,000 and imprisonment for 6 months.

3. Legal update

Waiver of registration fees for annual returns (except for late delivery) for 2 years.

With effect from 1 October 2020, registration fees for annual returns delivered to the Companies Registry on time and within the concession period from 1 October 2020 to 30 September 2022 (both dates inclusive) are waived. This applies to all private and public companies having share capital, companies limited by guarantee and registered non-Hong Kong companies.

Increase of stamp duty rate on transfer of Hong Kong stock

With effect from 1 August 2021, the rate of stamp duty payable on sale or purchase of Hong Kong stock is increased from 0.1% to 0.13% of the consideration or value of each transaction payable by buyers and sellers respectively.

New Inspection Regime under the Companies Ordinance

Proposals have been made to the Legislative Council on the timing of implementation of the new inspection regime by the public about the Usual Residential Addresses (“URAs”) and full identification numbers (“IDNs”) (collectively “Protected Information”) of directors, company secretaries and other relevant persons as follows:

Phase 1 – from 23 August 2021, companies may replace URAs of directors with their correspondence addresses, and replace full IDNs of directors and company secretaries with their partial IDNs for public inspection on their own registers;

Phase 2 – from 24 October 2022, Protected Information on the Index of Directors on the Register of the Registry will be replaced with correspondence addresses and partial IDNs for public inspection. Protected Information in the documents filed with the Registry after commencement of this phase will not be provided for public inspection.

Phase 3 – from 27 December 2023, data subjects could apply to the Registry for protecting from public inspection their Protected Information contained in documents already registered with the Registry before commencement of Phase 2, and replace such information with their correspondence addresses and partial IDNs.

Notwithstanding the above, specified Persons could apply to the Registry for access to Protected Information from Phase 2 onwards

Please do not hesitate to contact us should you require any further information.

ARTICLE BY: Alex Cho 

CEO – Sino Corporate Services GroupSino Group

Singapore jostles with London for top arbitration spot

Singapore now rivals London as the most popular seat for international arbitration, with Hong Kong coming a close second, a global survey has found.

A study by international firm White & Case, in partnership with Queen Mary University of London, has revealed that the popularity of Asian arbitral hubs has grown significantly in the past five years. Asked to select their preferred seats, 54% of respondents chose London and Singapore – the latter making the top spot for the first time. Meanwhile, half of the 1,200 respondents picked Hong Kong.

In 2015, Singapore garnered just 19% of the votes, while Hong Kong was picked by 22% of arbitration users.

According to the report, the increases enjoyed by Asian seats ‘may correlate with a relative reduction in the percentage of respondents who included traditionally dominant European seats, such as London, Paris and Geneva, in their answers.

‘London was selected by 64% of respondents in 2018, making it the most selected that year, but it dropped to 54% in this edition of the survey. Paris fell even further, from its second place showing in 2018, with 53% of respondents including it in their selections, to fourth place this year, as a seat of choice for 35% of respondents.’

The report also revealed a lack of enthusiasm for remote proceedings among arbitration users. While just 16% of respondents said they would ‘postpone the hearing until it could be held in person’, only 8% would actively prefer to hold substantive hearings remotely rather than in-person or using a mix of in-person and virtual formats.

The survey found a significant preference for international arbitration in conjunction with alternative dispute resolution (ADR) as opposed to on a stand-alone basis. This follows a trend over recent years.

 

IFLR Asia-Pacific Awards 2021 Shortlist Announced

Conyers is once again shortlisted in the IFLR Asia-Pacific 2021 Awards.

We are pleased to be nominated as Offshore Firm of the Year this year again, an award that we won in 2020.

In addition, five of our significant matters advised by our Hong Kong and Singapore based lawyers are shortlisted as Deals of the year:-

The IFLR Asia-Pacific awards celebrate legally innovative cross-border transactions, teams and firms in the region. The results will be announced virtually on Thursday, 25 March 2021. For more information on the nominations, please visit: https://www.iflr.com/article/b1qj1khd0cnqmz/iflr-asia-pacific-awards-2021-shortlist-revealed

HONG KONG HK

UN express concerns over Hong Kong National Security Law

Seven UN human rights experts signed a letter to the Chinese government expressing concerns about whether China is complying with its international obligations for human rights standards. The letter, made public Friday, specifically questioned The Law of the People’s Republic of China on Safeguarding National Security in the Hong Kong Special Administrative Region, or the “National Security Law.”

As noted in the letter, sent September 1, the UN has expressed concerns regarding this law before and has exchanged several communications with Chinese officials about it. The UN members who wrote this letter also cited numerous obligations imposed by the UN requiring greater care in the passage of laws, such as by encouraging specific laws so as to “prevent ill-defined and/or overly broad laws which are open to arbitrary application and abuse and may lead to arbitrary deprivation of liberty.”

The National Security Law at issue was passed on July 1, and it went into force that same day. It specifies four categories of offenses that are said to endanger national security: “secession, subversion, terrorism and collusion with a foreign country or with external elements.”

Terrorism is defined broadly as including damage to physical property “such as sabotage of transport facilities or public services.” A UN Special Rapporteur released a thematic report in 2019 stating that “[d]efinitions of terrorism that include damage to property, including public property … seriously affect the right to freedom of assembly … [and] can be used against individuals engaging in social movements where damage to property is unwittingly incurred.”

In light of these and other concerns expressed in the letter, the UN requested a response to their points, an explanation of how the law does not infringe on the rights that China is obligated to provide under international law, how the country will be enforcing the law to not infringe on such rights, and the positive measures and oversight of the exercising of this law.

A Foreign Ministry spokesperson, Hua Chunying commented on the UN letter during a press conference on Friday, stating “We urge [the UN] to earnestly respect the purposes and principles of the UN Charter, discard ignorance, prejudice and double standards, and stop interfering in Hong Kong affairs and China’s internal affairs.” Chunying also stated that the law is widely accepted in Hong Kong, despite the many ongoing protests against the law throughout the region.

HONG KONG HK

K&L Gates Expands Hong Kong Office With Former Orrick Team

K&L Gates has recruited a team of three partners specializing in an integrated funds and private equity practice.

Sook Young Yeu, Scott Peterman and William Ho all join from Orrick Herrington & Sutcliffe, which has decided to close its Hong Kong office. Yeu and Peterman, both funds specialists, were partners with Orrick while Ho, who advises on private equity transactions, was of counsel with the firm. The trio are joined by two associates at K&L Gates.

Yeu, who led Orrick’s Hong Kong office since joining in 2005 through Orrick’s takeover of legacy Coudert Brothers’ China offices where she had been practicing since 1989. She’s advised Asian investors on investing U.S. and other cross-border funds and on private equity investment.

Peterman has an active fund formation practice advising the structuring of various private, investment and real estate funds. Last year, he advised Hong Kong-based fund manager Pacific Hawk Ltd. on launching the first open-ended fund in the city following legislative change. He joined Orrick in 2017 from Jones Day where he was of counsel. Before that, he was a partner with Sidley Austin.

Ho focuses his practice on advising private equity houses and companies on fund raising transactions, investments and mergers and acquisitions. In May, he advised Taiwan-based live streaming site operator M17 Entertainment Ltd. on a $26.5 million Series D from investors including Singapore-based venture capital fund Vertex Growth Fund. Ho joined Orrick in 2018 from Paul, Weiss, Rifkind, Wharton & Garrison where he was an associate for three years. Earlier in his career, he trained and practiced with Slaughter and May.

The trio bring in-depth industry experience in the technology, media, telecommunications, and fintech sectors, said David Tang, K&L Gates’ Hong Kong-based Asia managing partner, in a statement. “The additions of Sook, Scott, and Will significantly broaden and deepen our funds and private equity practices in Asia,” he said.

Last year, K&L Gates added in Hong Kong capital markets partner Guiping Lu from elite Chinese firm Haiwen & Partners.

China introduces new Hong Kong security law

China introduced a controversial national security law Thursday that could place restraints on the pro-democracy movement in Hong Kong.

The law prohibits acts of “sedition, foreign interference, terrorism and secession.” China cited national security concerns for implementing the measure, but many warn the law will be interpreted broadly and cover protests.

China’s legislature begins its annual National People’s Congress meeting on Friday, where it could pass the law without deliberation from the legislature in Hong Kong.

Under the institution of “one country, two systems,” such a measure would need to pass the Hong Kong legislature. The legislature attempted to pass national security legislation earlier this year, but failed after being met with opposition from protesters.

The summer of 2019 marked a significant resistance to the Chinese government from pro-democracy protestors. The movement has since subsided in the form of public protest as the COVID-19 outbreak has spread throughout the world, including in Hong Kong.

Pro-democracy leaders are speaking out against the proposal and its procedure. “This is the end of Hong Kong. This is the end of ‘One Country, Two Systems.’ … Beijing has completely breached its promise to the Hong People. A promise enshrined … in the basic law,” declared lawmaker Dennis Kwok.

HONG KONG HK

Osborne Clarke latest firm to exit HK market

UK firm Osborne Clarke is set to close its Hong Kong office, with operations scheduled to come to an end by June – the second international firm to announce that it would shutter its office in the city in just over a month.

Recently, U.S. firm Orrick, Herrington & Sutcliffe announced it would wind down its Hong Kong operations by the end of August.

Osborne Clarke has had a presence in Hong Kong for over five years. The firm launched its office there – its first foray in Asia – after hiring two Bird & Bird partners, Marcus Vass and John Koh, who established the associated Hong Kong firm Koh Vass & Co. Since February 2019, the firm had been trading as Osborne Clarke.

However, the last 12 months have been very disruptive for law firms in Hong Kong, with first the political protests, and then the coronavirus pandemic, negatively impacting business conditions.

Osborne Clarke’s Hong Kong office has eight members, including two partners and two associates.

Following the closure of Hong Kong operations, the firm will refocus its regional growth plans on its Shanghai and Singapore offices, as well as its association with Indian firm BTG Legal.

HONG KONG HK

Baker McKenzie Elects Milton Cheng as Next Chair

Leading global law firm Baker McKenzie is proud to announce that following a vote of its partnership, Milton Cheng has been elected as the next Chair of the Firm.

Based in Hong Kong, Milton is the Managing Partner of the Hong Kong office and concurrently the Chief Executive overseeing Baker McKenzie’s offices and businesses across eight countries in the Asia Pacific region.

Milton has considerable experience in mergers and acquisitions, real estate investment trusts, financial services regulation, corporate finance and corporate restructurings. He regularly advises clients — including REIT and other asset managers, financial institutions, multinationals and Hong Kong-listed groups — on a wide range of acquisition, REIT, restructuring, regulatory and corporate finance matters.

A graduate of King’s College London, Milton became a partner of Baker McKenzie in 1999 and is admitted to practice in Hong Kong and in England & Wales. He is the Firm’s first Asian Chair.

Milton Cheng, Chair-elect of Baker McKenzie said, “I am truly honored by the trust my fellow partners have placed in me. I look forward to working with all of them and my colleagues across the world to build on the great work of my predecessors to make Baker McKenzie the global law firm of choice.”

Milton, who will serve in the role for four years, takes up the position with effect from October 17, 2019 succeeding Jaime Trujillo, who has been Acting Global Chair since October 2018.

Jaime said, “We had a group of outstanding candidates for our next Chair and the partners had a difficult decision to make. In choosing Milton we have someone who can take this great Firm to the next level. I offer him my sincerest congratulations.”

KPMG adds to Asia legal presence

The KPMG Global Legal Services network is pleased to announce that it has expanded its legal capabilities in Asia Pacific by establishing a new law firm in Hong Kong, known as SF Lawyers.

SF Lawyers is the newest member of the KPMG’s Global Legal Services network. It will initially commence operations with four senior hires and two senior associates joining either now or over the next few months, and with plans for around 20 lawyers in the first year. The four senior hires are Shirley Fu, Rodney Chen, Leo Tian and David Murray, and they will be supported by Alex Ma and Sherman Wong as senior associates. Brief details of the senior hire profiles are included below. An additional launch of legal services in Shanghai is expected in 2019.

Honson To, Chairman of KPMG Asia Pacific and China, says: “We warmly welcome SF Lawyers as the newest member of the KPMG Global Legal Services network, which has grown by 30 percent in 2018 alone, and has significant growth ambitions just beginning to be realised across the Asia Pacific region.”

“With increased global connectivity and the digitalisation of many business functions, SF Lawyers will be uniquely positioned to deliver on the needs of both domestic clients (including going outbound) and multinational clients entering or transacting in the Chinese market. Working in conjunction with KPMG, SF Lawyers will provide clients with legal services in key areas such as M&A and deals, and infrastructure projects. It will also offer technology enabled legal services, while leveraging significant investments in robotics, artificial intelligence and other technologies developed globally and in China through the KPMG Digital Ignition Centre.”

“The firm will also help provide clients with global legal solutions, leveraging our legal services practices across 76 jurisdictions, together with KPMG’s presence in 154 countries around the world”, To adds.

SF Lawyers will be operating in association with KPMG Law in Australia, which is led by Stuart Fuller, the former Global Managing Partner of King & Wood Mallesons.  Fuller has recently moved to KPMG where he occupies the role of Asia Pacific Regional Leader for Legal Services.

Fuller says: “We are excited about the association between KPMG Law in Australia and SF Lawyers in Hong Kong, which is reflective of the increasingly important trade and business flows between the two jurisdictions. We are not trying to be a traditional law firm. Our approach is different, with a focus on offering our clients integrated global legal advice and solutions, where we are able to work seamlessly with existing KPMG clients who are looking for local and multijurisdictional counsel. As someone who has lived and worked in Hong Kong for 6 years, I am proud to see SF Lawyers as the newest entry to the network in Asia.”

HONG KONG HK

Hong Kong Dispute Resolution: Plans for 2019 and Beyond?

Here, we take a look at market trends and emerging best practices in the dispute resolution space to offer a guide as to what could be top of mind for practitioners in 2019 and beyond

Arbitration

What’s on the horizon? We’ve seen key changes in the evolution of the arbitration arena in Hong Kong, with a host of reforms undertaken to boost efficiency, create clarity, and to align the city’s mechanisms with those of England & Wales, Australia and Singapore. Most notably, the issuance of the Code of Practice for Third Party Funding came into effect on 1 February. This expressly allows for third party funding for arbitration and related matters and this key development irrefutably abolishes the doctrines of champerty and maintenance. What we will expect to see this year is greater clarity and transparency in the Hong Kong panorama as it enables a person or entity who has no interest recognised by law in the arbitration to be a third party funder. The Code, which was published in early December 2018, outlines the practices and standards for third party funders. An advisory body will oversee elements that pertain to funding agreements, confidentiality, conflicts of interest, termination and other related issues.

What you can expect to see: Greater clarity and transparency and a spike in the number of funding agreements as Hong Kong’s landscape aligns itself with forward-thinking jurisdictions. It is likely that these new provisions will make it easier to ensure that strong claims can be pursued; and will allow claimants to hedge their costs. In construction disputes, which are often lengthy and expensive, funding may allow parties to spread risk by not having to bear the whole cost of bringing or defending a claim, and will certainly provide considerable cash flow benefits – the traditional ‘life-blood’ of the construction industry.

DVC’s Anthony Houghton SC and Benny Lo closely examined the impact of the Code at the high-level Think Hong Kong, Think Global event in Tokyo recently.

For more on recent trends on how third party funding is viewed by the courts in a civil claim, refer to the recent Raafat Imam v. Life (China) Company Limited and Others [2018] HKCFI 1852 case featuring DVC’s Clifford Smith SC, Sabrina Ho and Tommy Cheung. The Mongolian Mining and China Solar cases, are cases of third party funding in the insolvency context.

For more on third party funding in the insolvency domain and the interaction between insolvency and arbitration please see Look-Chan Ho’s overview from 2018’s Arbitration Week and Look-Chan Ho and Tommy Cheung‘s presentation on Controlling Costs.

Belt & Road Initiative

Another prominent change to Hong Kong’s landscape in 2019 includes the Belt & Road Initiative.

The Belt & Road Initiative which is made up of a belt of overland corridors and a maritime road of shipping lanes linking over 60 countries will bring about complex investment opportunities bisecting the transport, logistic, maritime, telecommunications and other sectors. With multiple cross-border investors tied together contractually, this will inevitably (and unavoidably) lead to a myriad of disputes impacting international trade, commercial, company & insolvency, intellectual property, construction, telecommunications and other major sectors. Given that arbitration is the most popular and cost-efficient mechanism used to resolve cross-border disputes, Hong Kong is geographically poised to leverage contentions arising from these ventures. DVC has handled numerous enforcement (and setting aside) of awards.

The proposed Greater Bay Area initiative is potentially another landmark infrastructure project that will link Hong Kong, Macau and nine cities in Guangdong Province in order to establish a trading, logistical, manufacturing and technological axis for commercial activity. Another significant change entailed the implementation of the new administered arbitration rules (‘HKIAC Rules’) enacted in Q4 of last year.

What you can expect to see: 2019 and going forward, due to the HKIAC Rules being implemented, we will likely see many gridlocked parties turn to Hong Kong as a seat for these arbitrations.