Consultation on Automatic Exchange of Financial Account Information in Tax Matters in Hong Kong Launched  

The Government has launched a two-month public consultation on proposals to apply the prevailing international standards on the automatic exchange of financial account information in tax matters (AEOI) in Hong Kong.  These international standards were promulgated by the Organisation for Economic Cooperation and Development (OECD). 

Exchange of information for tax purposes is seen as an important avenue to enhance tax transparency and combat cross-border tax evasion.  To date, Hong Kong has only opted for exchange of information upon request by counterparties to “comprehensive avoidance of double taxation agreements” with Hong Kong.  In July 2014, OECD released the AEOI, calling on governments to collect from their financial institutions financial account information of overseas tax residents, and exchange the information with jurisdictions of residence of the relevant account holders on an annual basis. 

The Government is now consulting the market with proposals to apply the requirements through legislation, including proposals relating to:

  • definitions of financial institutions (FIs);
  • types of reportable information the FIs have to obtain from account holders;
  • the due diligence procedures and reporting requirements that the FIs have to follow:
  • the statutory powers of the Inland Revenue Department to collect relevant information from FIs and forward such information to designated parties;
  • the enforcement sanctions for non-compliance; and
  • confidentiality of information exchanged provisions.

The Government currently aims to commence the first information exchange by the end of 2018, subject to the condition that the relevant amendment bill can be passed by the Legislative Council by mid-2016.

The deadline for submission of comments on this Consultation Paper is 30 June 2015.

A copy of the Consultation Paper can be downloaded via the following link:

SFC’s FAQs on Real Estate Investment Trusts Updated

 The Securities and Futures Commission (SFC) has added a new Question 16A to the FAQs on Real Estate Investment Trusts (REITs) to make it clear that to comply with corporate governance practices, if an INED (independent non-executive director) of the REIT manager is to serve more than 9 years, his/her further appointment should be subject to a separate resolution to be approved by unitholders of the REIT.  The papers to the unitholders accompanying that resolution should include the reasons why the board of the REIT manager believes he/she is still independent and should be re-elected.

A copy of the updated FAQs can be downloaded via the following link:


SFC Obtains Disqualification Order Against Former Director of a Listed Company

The SFC has obtained a disqualification order under section 214 of the Securities and Futures Ordinance (SFO) against Mr Lam Yick Sing, a former executive director of Tack Fat Group International Limited (Tack Fat) (now known as Tack Fiori International Group Limited).

The SFC alleged that, amongst others, the company:

  • proposed to acquire a 40% interest in a timber company in Cambodia, but falsely announced that the vendor was an independent third party, when in fact the transaction was a sham involving an undisclosed connected party; and
  • entered into various loan agreements with various money lenders, but failed to ensure that shareholders were given all information they might reasonably expect in relation to those loan agreements.  Some of those loan agreements involved the pledging of significant assets of the company, which indicated a serious deterioration in the financial position of the company.

The Court of First Instance granted order disqualifying Mr Lam from being a director or being involved in the management of any listed or unlisted corporation, without leave of the court, for a period of six years effective from 27 March 2015, after Mr Lam admitted that he:

  • failed to ensure that Tack Fat gave its shareholders all the information they might reasonably expect, and to comply with the disclosure requirements under the Listing Rules;
  • abdicated his responsibilities as a director of a publicly listed company;
  • breached his duties as a director in failing to exercise reasonable care and diligence in the management of Tack Fat, to act in good faith and in the best interests of Tack Fat, and to implement a sound and prudent system of financial control so as to minimise the risk of misappropriation of company assets; and
  • was partly responsible for the business or affairs of Tack Fat having been so conducted.

A copy of the Court’s judgment can be downloaded from the link below:


The Takeovers Panel Issues its Written Reasons for Ruling Certain “Warehousing” Arrangements in Breach of the Takeovers Code  

As reported in the last issue of our Regulatory Bulletin, the Takeovers and Mergers Panel (Takeovers Panel) found that the chairman of Chevalier Group, Mr Chow Yei Ching (Mr Chow), his son, Mr Oscar Chow Vee Tsung, and Mr Joseph Leung Wing Kong, had breached the Codes on Takeovers and Mergers and Share Buy-backs (Takeovers Code) by acting in concert with the late Ms Nina Kung to obtain or consolidate control of ENM Holdings Limited (ENM) through acquisition of voting rights, and failing to make a mandatory general offer under the Takeovers Code, which constitutes a breach of Rule 26.1.

At the relevant time, Ms Kung was the largest shareholder of ENM, holding about 34.64% shareholding interest.  Through “warehousing” arrangements, Mr Chow acquired a total of 160 million shares of ENM (approximately 9.69% of ENM’s issued share capital) on Ms Kung’s behalf and at her request.  This increased the collective shareholding of the concert group in ENM from 34.64% to 44.33%, thereby triggering a mandatory general offer obligation under the Takeovers Code.  However, none of the share acquisitions in ENM by Mr Chow on Ms Kung’s behalf were publicly disclosed and they remained undisclosed for a protracted period.

The Takeovers Panel endorsed the three conditions, as set out in another Takeovers Panel’s decision in Hung Hing Printing Group Limited, which have to be met for persons to be considered “acting in concert” under the Takeovers Code:

  1. more than one person are actively cooperating pursuant to an agreement or understanding;
  2. the purpose of the cooperation is to obtain or consolidate control of the target company; and
  3. at least one of the persons is actively cooperating to acquire voting rights attaching to shares in the target company.

The Takeovers Panel further elaborated that :

  • it was not necessary that every person in the concert group must have as his/her purpose the obtaining or consolidation of control of the target company personally so long as at least one person within the concert group had that purpose; and
  • it was not necessary that every person in the concert group actively sought to acquire voting rights of the target company so long as at least one person within the concert group did so.

 A copy of the Takeovers Panel’s decision can be downloaded via the following link:

Practice Note 2 Revised

The Takeovers Executive has revised Practice Note 2 on issues relating to profit forecasts under Rule 10 of the Takeovers Code.

Many Takeovers Code-related transactions also constitute notifiable transactions under the Listing Rules.  In these cases, the requirements of Rule 10 of the Takeovers Code and Listing Rule 14.58 can conflict with one another.

Listing Rule 14.58 requires the disclosure of the net asset value of, and net profits or losses attributable to, the assets acquired or disposed of for the two financial years immediately preceding the transaction (Required Financial Information) in the announcement that contains details of the transaction. Listing Rule 14.58 does not require the Required Financial Information to be audited.

In a Takeovers Code-related transaction, the Required Financial Information, if unaudited and disclosed in an announcement, would constitute a profit forecast under Rule 10 of the Takeovers Code and would therefore need to be “reported on” by  the company’s financial advisors and its accountants or auditors in accordance with Rule 10.4.

Revised Practice Note 2 asked that in cases where listed companies encounter genuine practical difficulties (time-wise or otherwise) in meeting the reporting requirements under Rule 10.4, the Takeovers Executive should be consulted at the earliest opportunity.  The Takeovers Executive will normally consent to the publication of the Required Financial Information without full compliance with Rule 10, provided that:

  1. the relevant announcement contains an appropriate warning that the Required Financial Information does not meet the standard required by Rule 10 and that shareholders and potential investors should exercise caution in placing reliance on the Required Financial Information in assessing the merits and demerits of the transaction; and
  2. the Required Financial Information will be reported on as soon as practicable thereafter and the relevant reports set out in the next document to be sent to shareholders. This may require the issuance of a supplemental document to shareholders if an offer document, response document or whitewash circular has been issued. It follows that a waiver from the Stock Exchange from Listing Rule 14.58 should normally no longer be required.

A copy of the revised Practice Note 2 can be downloaded via the link below:


New Listing Decision Issued

The Stock Exchange of Hong Kong Limited (Stock Exchange) has published a new Listing Decision (LD86-2015) on the issue of whether cash flow generated during a period of non-compliance by a GEM Board listing applicant (Company A) should be counted towards the calculation of minimum cash flow under GEM Listing Rule 11.12A(1).

The background is that Company A conducted its business (Business) without complying with certain regulations (Regulations) for 22 months (Period of Non-compliance) during its track record period.  The Regulations specifically stipulated that no person shall carry on the Business unless all the requirements under the Regulation had been complied with, and any breach of the Regulations was an imprisonable offence. Company A would not meet the minimum cash flow requirement under GEM Rule 11.12A(1) if the cash flow generated from the Business during the Period of Non-compliance (Non-compliant Cash Flow) was excluded.

The Stock Exchange considered that:

  1. the compliance of the Regulations was fundamental and a pre-requisite for the legal operation of Company A’s business;
  2. any breach of the Regulations was considered serious in nature; and
  3. the Period of Non-Compliance had lasted for a substantial part of the track record period. 

Therefore, the Non-compliant Cash Flow could not be regarded as being generated in the ordinary and usual course of Company A’s business, and should be excluded from the calculation of minimum cash flow under GEM Listing Rule 11.12A(1).  As a result, Company A was not eligible for listing.

A copy of this Listing Decision can be downloaded via the following link:


Ordinance Establishing Scripless Securities Market Gazetted

The Securities and Futures and Companies Legislation (Uncertificated Securities Market Amendment) Ordinance 2015 was gazetted on 27 March 2015 to provide for a legal framework to enable the introduction of an uncertificated (i.e. paperless) securities regime.  The Secretary for Financial Services and the Treasury has yet to appoint the commencement date of the Ordinance.

The Ordinance will, on commencement, amend the SFO, the Companies Ordinance and a few other ordinances including the Stamp Duty Ordinance to create the framework for the regulation of the uncertificated securities market.  Details relating to the operation and regulation of the uncertificated securities market regime will be set out in new subsidiary legislation to the made by the SFC under the SFO.  Major changes introduced by the Ordinance include the following:

  • The uncertificated securities market initiative will be implemented in phases, and the initial phase only covers shares of Hong Kong incorporated companies that are listed or to be listed on the Stock Exchange - the Government and the SFC are currently in discussion with certain relevant overseas jurisdictions with a view to extending the uncertificated securities market regime to cover shares of overseas companies listed on the Stock Exchange;
  • The existing paper-based system will be retained for the time being to run in parallel with the new scripless system, so that investors will be able to choose whether to hold their shares in certificated or uncertificated form.  The investors may also choose to convert their holdings from one form to the other;
  • The register of members of a company participating in the initiative will consist of two parts, namely, one recording uncertificated shares and the other recording certificated shares; and
  • Regulatory and operational matters relating to the new uncertificated securities market environment will be overseen by the SFC, which will be empowered to make relevant rules and prescribe penalties for breach.

A copy of the Ordinance can be downloaded via the link below:

Note: members of the Cadwalader team advised on the initial establishment of the CCASS in Hong Kong in the early 1990’s.

HKTVN Succeeds in its Judicial Review Application

Hong Kong Television Network Limited (HKTVN) previously applied for a judicial review against the decision (Decision) of the Chief Executive in Council (CEIC) dated 15 October 2013 refusing HKTVN’s application for a domestic free television licence (FTV licence).  The judicial review application was premised on a number of grounds, including that the Decision was made in breach of a stated Government policy, the statutory discretion entrusted in the CEIC in granting a FTV licence was unconstitutional, the Decision was tainted with various procedural unfairness, and was in any event irrational.

The Court of First Instance allowed the application on the grounds that:

  1.  the Decision was made in departure from the Government’s publicly stated policy (Policy) made in 1988 to the effect that the Government would not impose any pre-set limit or ceiling as to the number of FTV licences that could be granted, subject to physical or technological constraints; and
  2.  HKTVN had a legitimate expectation that its FTV licence application would not be rejected on the basis that there would be a pre-fixed number of licences to be granted.

The Court remitted the application to the CEIC for reconsideration in light of the Policy.  It was said in the newspaper that the Government was considering the next step.

A copy of the Court’s judgment can be downloaded via the following link: