Drafting a law is a complex and costly business so the temptation to borrow, lock stock and barrel, from overseas precedents is great. The principle here, however, should be ‘borrower beware’ because the history of the diffusion of law is littered with failed legal transplants. This month, CSj looks at the advantages and hazards of legislative borrowing.

The first thing on the agenda when a jurisdiction is seeking to devise, or indeed revise, a piece of legislation or regulation is a ‘comparative study’ – research into overseas precedents for the law in question. If another jurisdiction just happens to have spent US$20 million on revising an equivalent piece of primary legislation, it makes every sense to take a look at what they’ve come up with before you embark on a similar exercise. What happens next, however, is the interesting bit.

The simplest next step of course is for the home jurisdiction to help itself to all, or relevant parts, of the overseas law. This is the ‘cut and paste’ school of legislative drafting. It is not hard to see its appeal. There is no copyright in statutes so overseas legislation is open plunder, and it certainly comes cheaper (both in terms of time and money) than a full legislative review. Just to put that in context, back in 2005 the government estimated that the current Companies Ordinance rewrite exercise in Hong Kong would incur an annual recurrent expenditure of over HK$20 million (the process has already been ongoing for six years), plus a nonrecurrent expenditure of about $19 million to $22 million for engaging external consultants.

External consultants, a dedicated team of staff to administer the project, public consultations – it all adds up. On the other hand, a tactical application of the ‘cut and paste’ method appears to offer, with the click of your paste button, a ready-to-enact, professionally-produced new law for minimal outlay. Sounds perfect? There is of course a catch, because effective legislation is a much more chimerical creature than you might expect. The ‘text’ of the law is easily copied, but what makes it effective is not so easily acquired.

Advice from an experienced borrower

Hong Kong knows a thing or two about legislative borrowing. This has a lot to do with the accident of history which meant that, in 1842, this huddle of fishing villages in the Pearl river estuary suddenly acquired a very alien and unfamiliar legal system – wholesale. As is well known, the British administration imported British laws to administer the fledgling colony of Hong Kong. First came the Application of English Law Ordinance in 1843. The first Companies Ordinance was enacted in 1865, and, like most of the other laws imported from Britain, it was copied almost word for word from a British prototype – in this case the UK’s 1862 Companies Act.

‘This method of legislating has been called legislative imperialism or legislative xeroxing,’ says Ted Tyler, Deputy Principal Government Counsel at Hong Kong Department of Justice, and Senior Assistant Law Officer Commercial III (Companies Ordinance Rewrite). ‘Local conditions and business vehicles, for example in Hong Kong the ancient form of Chinese limited partnership, were ignored for the benefit of the imperial masters. English company law was, like the Westminister political system, the civil service, cricket and afternoon tea, considered to be one of the blessings that the mother country brought to the benighted colonies.’

It might seem strange that a decade into the 21st century, Hong Kong’s company law still so closely resembles that of the UK, but the slow process whereby Hong Kong has been developing a company law to meet the needs of the more than half a million local and overseas companies registered here is highly revealing of the dangers and opportunities of legislative copying.

Anthony Rogers, Former Chairman of the Standing Committee on Company Law Reform (SCCLR), has been closely involved in this process. He emphasises that there is nothing necessarily wrong with borrowing from overseas. ‘One does not start anything from scratch and we all stand on the shoulders of those who have gone before us. Whatever one does in the way of reform, one has to take notice of what others have done,’ he says.

Nevertheless, he adds, caution is needed. ‘The starting point has to be the system one has at present. One also has to take into account the particular economic and legal environment. Those are different in each country. Although company law is statute-based and the company is a creature of statute, jurisprudence has evolved and different jurisdictions have different concepts. For example in Hong Kong, drawing upon UK law, directors of a company owe fiduciary duties to the company. In other jurisdictions the directors of a company owe fiduciary duties to the shareholders. In many respects that is a subtle distinction, nevertheless it is a point that has to be taken into consideration. If fundamental changes are to be made the matter has to be carefully considered and all the implications evaluated.’

As Mr Rogers points out, laws do not operate in a vaccuum. Any would-be borrower therefore needs to have a thorough knowledge of:

  1. the culture and environment from which they wish to borrow, and
  2. the local culture and environment into which the legislation will be imported.

Based on this knowledge, he or she would then need to assess whether the legislation in question has any chance of becoming successfully ‘localised’.

  1. Think before you copy

Where you borrow your legislation from is perhaps the first issue that needs to be considered. Legal historians trace two dominant lineages in the diffusion of law globally – the common and the civil law families – and there are many differences, some subtle some fundamental, between these two lineages which need to be considered. The common law family, for example, puts more reliance on judicial interpretation, while the civil law tends to be more rule-based. Common law systems tend to concentrate power in a unitary board, whereas civil law systems tend to rely on a two-tier board system where a supervisory board monitors the board of directors.

As we have seen, Hong Kong inherited its company law from the UK. Mainland China’s company law has been influenced by both common and civil law traditions but it is certainly closer to the civil than the common law ethos. For example, it embraces both the supervisory board and the concept of co-determination whereby the board needs to take into account the interests of employees when making its decisions.

These differences clearly pose many challenges to attempts to harmonise the regulatory regimes in Hong Kong and mainland China. Ted Tyler reveals that the Companies Bill Team, during its early research for the current Companies Ordinance rewrite exercise, did look at PRC Company Law. ‘The view was taken that the Chinese legislation was in typical civil law jurisdiction style, which was not appropriate for the new Companies Ordinance,’ he says.

A similar snag derailed the very thorough but largely ignored consultancy study of the Companies Ordinance carried out by Ermanno Pascutto and Cally Jordan in 1990s (see ‘The hazards of legislative borrowing: a case study’ on page 13). The SCCLR rejected many of the consultants’ recommendations that were based on the US Model Business Corporation Act on the basis that they were not suited to the Hong Kong environment.

Does this mean that Hong Kong is ‘stuck’ with a clone of UK company law? Respondents to this article answered a hearty ‘no’. In fact, the hazards of borrowing US legislation highlighted by the SCCLR in its review of the 1997 Consultancy Report also have implications for Hong Kong’s continued reliance on UK companies legislation. The UK, like the US, has far more diversely-held companies than in Hong Kong. The UK, like the US, also mandates far more publicly available information about companies’ financial performance.

  1. Think before you paste

If a thorough examination of the ‘lending’ jurisdiction’s culture and environment whether those laws are effective or not in their adoptive homes depends less on the wording of the legislation than on the legislative ‘infrastructure’ in place in the borrowing jurisdiction is needed before you help yourself to any of that overseas legislation on your wish list, just as important is a thorough examination of your own jurisdiction’s culture and environment.

As mentioned above, the written text is not what makes a particular piece of legislation work. The US Model Business Corporation Act and the UK’s Companies Act have been widely copied around the world, but whether those laws are effective or not in their adoptive homes depends less on the wording of the legislation than on the legislative ‘infrastructure’ in place in the borrowing jurisdiction. Does that jurisdiction have effective regulatory and legislative bodies, for example? Does it have independent and commercially literate courts? Does it have a free and active media? Law enforcement is just as important as law drafting. What is the point of having a beautifully crafted law imported from overseas when you are incapable of enforcing it locally?

Gordon Jones, Hong Kong’s former Registrar of Companies, pointed out in a recent HKICS ‘Fellows Sharing’ event that a good capital market infrastructure is what underpins Hong Kong’s success as an international financial centre. He also warned that this infrastructure cannot be taken for granted and must be strenuously defended. After all, it cannot be ‘borrowed’ overnight like a piece of legislation.

Where are we heading?

For over a century, revisions to the UK’s Companies Act have been followed, after a few years delay, by corresponding revisions to Hong Kong’s Companies Ordinance. This happened throughout the 20th century and the current revision of the Companies Ordinance has followed the same formula. The launch of the current rewrite in 2006 was in fact timed to give Hong Kong the opportunity to review the UK White Bill that led to the Companies Act of 2006.

In the context of Hong Kong’s current status as an SAR within the PRC, not to mention current global geopolitical trends, we can expect Hong Kong’s companies legislation to forge an increasingly divergent and independent path. In fact, Anthony Rogers points out, with each successive rewrite Hong Kong’s Companies Ordinance has incrementally diverged with UK legislation.

‘The UK has been subject to various requirements of European law,’ he says. ‘So, increasingly, differences have emerged. It is true to say that Hong Kong’s company law has hitherto remained closer to the [UK] 1948 Act, if not earlier legislation. Now that the process of rewriting the Companies Ordinance is coming to an end, it is inevitable that more differences will emerge.’

It is hard to say at this stage where this path will lead us, but there are two clear trends to look out for:

  1. the harmonisation of Hong Kong and PRC company law, and
  2. the diffusion of global norms.

There appear to be limits on how far both of these trends will influence Hong Kong. We have seen, for example, a number of fundamental differences in the civil law-influenced company law in mainland China and the common law-influenced company law in Hong Kong. The global convergence of corporate governance standards might seem to be in a stronger position to influence the direction of company law reform in Hong Kong. The increase in cross-border listings and the globalisation of financial markets, together with the increasing influence of institutional investors, all point to a closer convergence of governance standards around the globe. Moreover, major advances have already been made in this respect over the last decade. Look, for example, at the way the International Accounting Standards Committee (IASC) has pioneered international accounting standards, or the way the International Organisation of Securities Commissions (IOSCO) has pioneered the harmonisation of securities regulation.

Anthony Rogers is cautious, however, about how far this process can go. ‘Certain aspects of securities law are more likely to be harmonised,’ he says, ‘but again the diversity of the needs of different countries makes it unlikely that there can be a common code in respect of securities. Furthermore, the legal systems of different countries would make it difficult for there to be total uniformity.’

He adds that the endeavour to harmonise the regulation of insolvency globally has met with similar hurdles. ‘I have had some dealing with efforts to harmonise cross-border insolvency rules. That can be achieved to a certain extent, but insolvency rules differ from country to country. In the US, for example, they differ from State to State. The best one can hope for is a degree of harmonisation coupled with a mechanism for cross-border cooperation, but even that meets grave practical problems.’

The unsavoury spectacle of world leaders failing to forge a consensus of action on the serious environmental challenges facing us at the moment does not encourage too much optimism about how quickly we are likely to see global governance standards gaining worldwide acceptance. National political interests have a well-known habit of getting in the way of international co-operation.

 

A review of Hong Kong’s new Companies Ordinance follows on pages 16–19.

For more information on the early history of Hong Kong’s company law and business environment, see the ‘Division of Duties and Responsibilities Between the Company Secretary and Directors in Hong Kong’ (April 2001), by Phillip Lawton and Ted Tyler, available on the HKICS website under ‘Publications/Research Papers’. The latest update to that research ‘The significance of the company secretary in Hong Kong’s listed companies’ is also available on the HKICS website.

 

SIDEBAR: The hazards of legislative borrowing: a case study

In 1994, the Hong Kong government launched a comprehensive review of Hong Kong’s company law by commissioning a consultancy study of the Companies Ordinance. The consultants, Ermanno Pascutto and Cally Jordan, duly delivered their Consultancy Report of the Review of the Hong Kong Companies Ordinance in March 1997.

The Consultancy Report suggested that Hong Kong’s Companies Ordinance was out of touch with the needs of the business community in Hong Kong. What Hong Kong needed to do was to make a break from the British tradition and, like many other former commonwealth countries such as Australia and New Zealand, it should reform its companies legislation with an emphasis on business facilitation and deregulation.

While the consultants were certainly advocating moving away from UK law, they were not arguing that Hong Kong should reinvent the wheel. There was a much better, and as it happens just as copied, model out there ripe for plunder – the US Model Business Corporation Act (MBCA). The consultants suggested that the Revised MBCA (it was first published in 1950 and revised in 1984), together with the Canada Business Corporations Act (CBCA), would be better suited to a major international financial centre like Hong Kong.

Some of the consultants recommendations – for example, single director companies – have since been adopted. The majority, however, were rejected (the SCCLR accepted only 35 of the 112 consultants’ recommendations). In its review of the Consultancy Report, the SCCLR concluded that one of the benefits of the report is that it highlights the issues involved in borrowing laws and legal ideas from overseas. As mentioned in the main article, one key issue is whether the overseas law or idea has any chance of adapting to the legal culture and environment into which it is being imported.

The business environment in the US contrasts in many ways to that in Hong Kong. One obvious difference is that far more US companies are diversely held. Thus, the recommendation of the Consultancy Report that directors’ interested transactions be made subject to majority shareholders’ approval overlooks the fact that in Hong Kong interested directors are most likely to be controlling shareholders. The proposal was therefore rejected.

‘A foreign rule, be it decisional or statutory, must be examined in the context of its legal and regulatory system,’ the SCCLR pointed out in its Report on the Recommendations of a Consultancy Report of the Review of the Hong Kong Companies Ordinance (February 2000). Thus, while some of the deregulatory innovations of the MBCA work fine in North America their transplant to Hong Kong could prove disastrous.

The consultants recommended, for example, making audits voluntary for private companies. A respondent to the SCCLR’s consultation on the Consultancy Report pointed out that in the US there is a lot more publicly available information about companies’ financial performance which compensates for the relatively lax companies legislation. In Hong Kong, without access to such information the audit serves an important function, particularly for creditors.

The lesson, therefore, is that local adaptation is key. The SCCLR pointed out in its review of the Consultancy Report that – ‘being an international community, Hong Kong has been fully cognisant of the value of comparative studies. There is hardly a policy paper or reform proposal that does not refer to different solutions adopted in different jurisdictions.’ However, the review also says that ‘as an experienced borrower of foreign models, Hong Kong is also aware of the need to be cautious in such exercises.’

The ‘Consultancy Report on the Review of the Hong Kong Companies Ordinance’ (March 1997) and the ‘Report of the Standing Committee on Company Law Reform on the Recommendations of a Consultancy Report of the Review of the Hong Kong Companies Ordinance’ (February 2000) are available on the Companies Registry website (www.cr.gov. hk). See ‘Standing Committee on Company Law Reform/ consultation papers and reports’

 

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