New guidance notes
In July 2016, the Institute set up seven Interest Groups under the Technical Consultation Panel to produce guidance notes on key topics in governance and company secretarial practice. This article reviews the latest additions to the guidance note series.
The Institutes Interest Groups project has demonstrated the value of bringing together the Institutes considerable network of expertise for the benefit of members and the community. In its first year, the project published five guidance notes on non-governmental organisations (NGO) governance, technology governance, Hong Kongs new competition law, and mergers and acquisitions (parts one and two) in Hong Kong.
This year the series is expanding further. A guidance note on initial public offering governance was published in August 2017 and reviewed in the September
2017 edition of this journal. This article reviews the three latest guidance notes to be added to the Institutes website: www.hkics.org.hk, on competition law, company law and NGO governance.
The Competition Ordinance (Cap 619) has been high on the agenda of governance professionals since it came into effect in 2015. The Institutes Competition Law Interest Group published its first guidance note on the new law in December 2016, providing an introduction to, and overview of, the ordinance. Its second guidance note, published in September 2017, looks at the sectors that have been impacted so far by Hong Kongs new competition regime.
The enforcement mechanism established by Cap 619 has been of as much interest to practitioners as the wording of the competition law itself. This is because, following the new trend in legislation in Hong Kong, the new law takes a largely principles-based approach to preventing anti-competitive behaviour. The prohibitions of the first and second conduct rules, for example, focus on behaviour which prevents, restricts or distorts competition. How has this wording been interpreted so far by the Competition Commission and the Competition Tribunal? Moreover, what have been the enforcement priorities of the Commission?
The focus of the second competition law guidance note is therefore on the activities of the Competition Commission to gauge what practitioners can expect going forward. The guidance note is arranged under each relevant sector to make it more user-friendly. It also looks at global competition law trends that may provide clues to how Hong Kongs competition law may impact those sectors in the future.
So what has the Commission been up to in the first two years of operation? The guidance note looks at the first case brought by the Commission to the Competition Tribunal in March 2017. The Commission alleges that five IT companies engaged in bid-rigging. The IT companies allegedly colluded in July 2016 in relation to a tender for the supply and installation of an IT server system to the Hong Kong Young Womens Christian Association (YWCA). The Commission says the companies agreed to submit dummy bids to satisfy the YWCAs minimum requirement of five tenders. However, the bids contained a number of unusual features which alerted the YWCA to the bid-rigging behaviour, such as identical responses, identical typographical errors and omission of key information. The case is continuing.
The guidance note also looks at the publication, in September 2016, of a proposed block exemption order in the shipping sector, which would allow shippers to discuss and agree on operational arrangements, including joint operation of vessel services and the exchange of vessel space. The Commission considers that these agreements will generate economic efficiencies in the operation of liner shipping services. The final decision is still pending.
The guidance note also looks at two market studies carried out by the Commission. In May 2016, the Commission reported that it had detected potentially widespread bid-rigging in the building maintenance and renovation market. It found patterns consistent with bid-rigging after analysing tender records from about 500 public projects. It also received substantial anecdotal evidence suggesting regular bid-rigging. In May 2017, the Commission published the findings of its study of the auto-fuel sector, finding no evidence that retailers were colluding on prices.
Finally, the guidance note also looks at the decisions of the Communications Authority V the regulator of the Competition Ordinance in the telecommunications sector. The Communications Authoritys powers to regulate telco mergers predates the enactment of the Competition Ordinance. Since the Competition Ordinance came into effect, the Authority has cleared two telco mergers V the acquisition by Hong Kong Broadband Network Ltd of two companies owned by New World Telephone Holdings Ltd, and the sale of Wharf T&T to MBK Partners and TPG.
The Institutes Company Law Interest Group published its first guidance note earlier this month, looking at the provisions of the Companies Ordinance (Cap 622) relating to directors duties. Cap 622 replaced the former Companies Ordinance (Cap 32) in March 2014 and brought in a new directors duties regime. Most obviously, it codified a directors duty of care, skill and diligence for the first time in Hong Kong law.
The company law guidance note points out that company secretaries need to be well versed in the basics of a directors duties. They are frequently asked to provide views to the chairman and board of directors as to whether directors have individually and/or collectively discharged their directors duties, and they need to advise directors on the extent of their liabilities under the law.
The guidance note is designed to be a handy reference to the revised law on director duties in Hong Kong. It starts with a discussion of the implications of the codification of a directors duty of care, skill and diligence. The new law adopts a dual objective and subjective test.
- Under Section 465(2)(a) of Cap 622, a director is required to possess the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company. This is known as the objective test.
- Under Section 465(2)(b) of Cap 622, where a director is appointed due to some special knowledge, skill or experience, a higher standard of care, that is the general knowledge, skill and experience that the director has, will be placed on him compared to those without such knowledge, skill or experience. This is known as the subjective test.
The guidance note points out that while the objective test sets a minimum standard for all directors which cannot be adjusted down, the subjective test imposes a standard that may be adjusted upwards for directors who are employed due to their special knowledge and skill. The guidance note also clarifies that the provisions of Companies Ordinance apply to all directors of a Hong Kong incorporated company, including shadow directors (see Section 465(5)). A shadow director is a person in accordance with whose directions the directors, or a majority of directors, are accustomed to act.
The all important question, of course, is how this new regime will be interpreted by regulators and the courts in Hong Kong. Consequently, the guidance note looks at the two cases that have been brought in Hong Kong courts on the breach of a directors duty of care, skill and diligence.
In the first case, Securities and Futures Commission (SFC) v Yin Yingneng Richard & Others , the SFC brought disqualification proceedings against the directors of a GEM listed company, First China Ltd, in connection with a payment to the seller of a company acquired by the listed company purportedly pursuant to a pre-completion mutual understanding which was held by the court not to have existed. The directors and former directors of the listed company were ordered to compensate the listed company for wrongfully causing it to make the above payment to the seller. This was despite the fact some of the directors did not personally gain from the wrongdoing.
In the second case commenced earlier this year, a company brought an action against its director and a senior manager for failing to present cheques issued by a company which subsequently went bankrupt, and making up subsequent resale transactions to cover the loss. Judgment on whether the director was in breach of his duties has yet to be made.
Another important issue covered by the guidance note is the degree to which directors can limit their liability under the new regime. A key issue here is the limits of directors and officers insurance. If a director serves a listed company, the listed company is required under the Corporate Governance Code to purchase appropriate insurance to cover legal actions against its directors (see Para A.1.8 of Appendix 14 of the listing rules), or alternatively must explain the reasons for the deviation from the above requirement in its interim (Para 44 of Appendix 16 of the listing rules) and annual report (Para 6.3(n) of Appendix 14 of the listing rules). However, under common law, a court may invalidate an insurance contract on public policy grounds if it insures a director for regulatory or criminal fines.
The Institutes Public Governance Interest Group published its second guidance note earlier this month. The Groups first guidance note, published in August 2016, was the first guidance note to be published under the Interest Group project. It looked at the qualities required of those at the helm of NGOs and examined some key issues in NGO governance via a hypothetical scenario of a director getting involved in an NGO for budding musicians.
The second public governance guidance note continues this hypothetical case study to consider the initial issues and steps that the director should consider in setting up an NGO. In the scenario, the director seeks advice from a company secretary on how to set up an NGO focused on running an international exchange programme for talented, budding musicians. The guidance note covers the advice the fictional company secretary would need to give, such as an assessment of the available legal structures for the NGO, the compliance issues to consider and how to achieve tax-exempt status.
Regarding the available legal structures for the NGO, the guidance note explores the suitability of:
- a trust
- a society established under the Societies Ordinance
- a company under the Companies Ordinance (including a company limited by guarantee), and
- a statutory body.
The guidance note suggests that the most appropriate structure for the directors NGO would be a company limited by guarantee due to the ability of this structure to accommodate a large number of members and to minimise the personal liabilities of the director(s). The guidance note then guides the reader through the steps needed to set up a company limited by guarantee, such as choosing a name, preparing the Articles and preparing the incorporation form (Form NNC1G) and the Notice to Business Registration Office (IRBR1).
The focus of the guidance note, in keeping with the remit of the entire guidance note series, is on providing timely, relevant and practical advice to those involved in this area of practice. In addition to the advice on NGO governance, the guidance note also provides a handy reference for the sources of information and guidance available in Hong Kong, for example the publications available on the Companies Registry website: www.cr.gov.hk, and the Inland Revenue Department website: www.ird.gov.hk.
The guidance notes reviewed in this article are available from the publications section of the Institutes website: www.hkics.org.hk. The next guidance note in this series, on ethics, bribery and corruption is scheduled to be published this month.
SIDEBAR: A word of thanks
The Hong Kong Institute of Chartered Secretaries would like to give special thanks to all those involved in its Interest Groups project. The membership of the Interest Groups covered in this review are set out below.
Competition Law Interest Group
- David Simmonds (Chairman)
- Brian Kennelly QC
- James Wilkinson
- Professor Mark Williams
- Mike Thomas
- Neil Carabine
Company Law Interest Group
- Benita Yu (Chairman)
- Angela Mak FCIS FCS
- Loretta Chan FCIS FCS
- Paul Moyes FCIS FCS(PE)
- Wendy Yung FCIS FCS
Public Governance Interest Group
- April Chan FCIS FCS (Chairman)
- Lau Ka-shi BBS
- Rachel Ng ACIS ACS
- Samantha Suen FCIS FCS(PE)
- Stella Ho
- Stella Lo FCIS FCS(PE)
Mohan Datwani FCIS FCS(PE), Senior Director and Head of Technical & Research, serves as secretary to the Institutes Interest Groups. Feedback on this project is welcome; please contact Mr Datwani at: firstname.lastname@example.org.