Articles

Corporate & Commercial

Corporate & Commercial

By Christopher Hooley, Partner

The aim of Trade Description Ordinance (Chapter 362) (the “Ordinance”) was to protect consumers against “unfair” practices. However, the protection for consumers under that Ordinance is still quite limited since the Ordinance only relates to the false description of “goods”, and does not cover “services”.

The Trade Descriptions (Unfair Trade Practices) (Amendment) Ordinance 2012 (the “Amendment Ordinance”) was passed on 17 July 2012, is expected to come into operation in the middle of 2013 and is hoped to partially fill the existing void.

The Amendment Ordinance:

• Extends the coverage of the Ordinance;
• Creates new offences against “unfair trade practices”;
• Strengthens the enforcement powers of the authorities; and
• Provides some degree of consumer redress.

1. Extended Coverage of the Ordinance

• Wider definition of “trade description”

The current definition of “trade description” in respect of goods, is restrictive. It only covers matters such as indications of quantity, method of manufacture, composition of the goods, so other pertinent and important descriptions, such as price indications, are not covered by the Ordinance.

In order to provide better protection to consumers, the Amendment Ordinance expands the definition of “trade description” to covers the above matters, indications of availability, price including the existence of any price advantage or discount. It also includes indications that a particular person has acquired the products in questions, which may cover certain celebrity endorsements. For example, if a fitness centre advertises that Jackie Chan, the movie star, has joined that gym, but actually he has not, that now amounts to a false trade description.

• Extension of application of the Ordinance

As discussed above, the Ordinance only covers false trade description of goods, and it does not apply to services.

There is an obvious need to bridge the gap given the service-oriented nature of Hong Kong’s economy, so the Amendment Ordinance now prohibits false descriptions in respect of the services provided in consumer transactions.

However the Amendment Ordinance does not apply to certain regulated sectors, such as the insurance and financial services sectors, and nor does it apply to professional practices such as accounting, law and architecture because they are already under their separate regulatory regimes.

In addition, the Amendment Ordinance does not apply to land, buildings, houses and flats, which are governed by another regulatory regime under the auspices of the Housing Bureau.

• Extra-territoriality

The Amendment Ordinance provides that a trader commits an offence under the Amendment Ordinance even if it is targeting consumers outside Hong Kong if, at the time of engaging in the practice, that trader is in Hong Kong or has Hong Kong as its usual place of business. This extra-territoriality clause is a clause especially designed for catching cross-jurisdictional consumer transaction such as online transaction. So internet traders operating from Hong Kong can be caught by the Amendment Ordinance, if they only sell to overseas consumers.

2. Creation of New Offences

The Amendment Ordinance creates five new offences, being misleading omissions, aggressive commercial practices, bait advertising, bait-and-switch and wrongly accepting payment.

• Misleading Omissions

The offence of misleading omission is committed if a trader omits or hides material information, or provides such information in an unclear or untimely manner, which results in the consumer making a decision that he or she would not have made otherwise. “Material Information” is broadly defined. It includes any information about product that the ordinary consumer needs to make a decision. Additional delivery charge is one of example of Material Information.

• Aggressive commercial practices

The offence of aggressive commercial practices is committed if a trader conducts a commercial practice that is significantly impairs the consumer’s freedom of choice through the use of harassment, coercion or undue influence, and results in the consumer making a decision that he or she would not have made otherwise. This offence targets the trader who uses harassment, coercion or undue influence in pressuring a consumer to sign up for goods or services, for example lengthy sales pitches or preventing consumers from leaving the business premises.

• Bait advertising

The offence of bait advertising is committed if a trader advertises for the supply of products at a specified price where there are no reasonable grounds for believing that it will be able to offer for supply those products at that price for a reasonable period and in reasonable quantities. To ensure that businesses acting in good faith are not in advertently caught, the Amendment Ordinance further provides that if a trader has clearly states the period for which, or the quantities in which, the products at a specified price are offered for sale, this is not bait advertising.

• Bait-and-switch

The offence of bait-and-switch is committed if a trader makes an offer to sell a product at a specified price with the intention of promoting a different product through any of defined tactics, such as refusing to show the product to a consumer, showing a defective sample and refusing to take orders for the product or deliver it within a reasonable time.

• Wrongly accepting payment

The offence of wrongly accepting payment is committed if at the time of a trader accepting payment for a product, (a) it intends not to supply the product or to supply a materially different product or (b) there are no reasonable grounds for believing that it will be able to supply the products. This offence is introduced to deal with the problems raised in the course of one of increasingly popular forms of consumptions, pre-payments for goods or services. A typical example is a series of yoga center closure in 2010.

• Defence

The common defence available to all offences under the Amendment Ordinance is (a) the commission of the offence was due to a mistake, reliance on information supplied by a third party, act of another person or an accident or (b) a trader had taken all reasonable precautions to avoid the commission of the offence.

In respect to bait advertising and wrongly accepting payment, there are additional defences available to these two offences. Although the expression of these two defences is a bit different, the core of them is quite similar, that is the trader can prove that it had taken remedial action to supply products, e.g. causing a third party to supply the same or equivalent products.

• Penalty

Any trader who is found guilty of engaging in any of the above acts will have committed a criminal offence, subject to the maximum penalty of HK$ 500,000 and imprisonment for five years.

It is important for directors, managers and principle officers to be aware that they may have personal liability under the Amendment Ordinance. If an offence under the Amendment Ordinance is committed by a company, and it is proved that the offence was committed with the consent or connivance or is attributable to the neglect of, any director, manager or principle officer of that company, that person also commits the offence and is liable to be proceeded against and punished accordingly.

3. Enforcement

• Additional power of authorities

Under the Amendment Ordinance, the Customs and Exercise Department remains the enforcement agency for the Ordinance. In addition, the Amendment Ordinance confers enforcement powers on the Telecommunication Authority in respect of the telecommunications and broadcasting service sectors.

The Amendment Ordinance also strengthens the existing enforcement powers of the enforcement agency. Under the Amendment Ordinance, the enforcement agency is empowered to inspect books or documents kept by a trader for ascertaining whether any offence under the Amendment Ordinance has been or is being committed.

• Compliance-based Mechanism

The Amendment Ordinance introduces a compliance based mechanism. Under this mechanism, the enforcement agency may seek undertakings from a trader suspected of engaging in an unfair trade practices to stop and not to repeat an offending act. If there is a breach of such undertaking, the enforcement agency may seek injunctions from the court.

4. Consumer Redress

In order to facilitate aggrieved consumers to seek restorative justice, the Amendment Ordinance empowers the Court to order the convicted person to compensate the aggrieved consumer for any financial loss resulting from the offence.

More significantly, the Amendment Ordinance creates a private right of action for the aggrieved consumers to allow them to institute civil actions for damages against traders in breach of the Amendment Ordinance, which they do not have under the current Ordinance.

5. Commentary

The Amendment Ordinance aims to provide better protection for consumers against unfair trade practices. However with its wide coverage, it has the potential to catch business practices which might not be regarded as unfair. Therefore persons engaged in consumer related business in Hong Kong must be aware of these changes, review their practices and conduct training for their employees on the recent changes in business practice.

OLN’s Corporate and Commercial team provides practical advice and business solutions based on a clear understanding of the latest law and practices.

We are glad to discuss how the Amendment Ordinance may impact on your business as required.

Hong Kong’s Competition Ordinance

Thursday, 04 October 2012 11:50

Update


Hong Kong’s Competition Ordinance

Hong Kong’s Competition Ordinance (“the Ordinance”) was adopted on 14 June 2012 but is not yet in full force. It is expected that there will be a transitional period of at least 12 months since the Competition Commission and Competition Tribunal still need to be established.

The Ordinance is broad reaching and restricts a substantial amount of anti-competitive activities which may have far reaching implications for Hong Kong. However, certain Hong Kong businesses which fall below a combined annual financial threshold will be exempt, but only provided that their combined annual turnover is less than HK$200 million and more importantly provided that their activities do not involve serious anti-competitive activity.

The First Conduct Rule

The First Conduct Rule relates to agreements, decisions and concerted practices that have the object or effect of preventing, restricting or distorting competition in or outside Hong Kong.

Any agreement, concerted practice or discussion made by an undertaking, meaning “any entity, regardless of its legal status or the way in which it is financed, engaged in economic activity” that has the object or effect of preventing, restricting or distorting competition whose combined annual turnover is less than HK$200 million will however be exempt from the First Conduct Rule.

Notwithstanding, any agreement, concerted practice, or decision of an undertaking that involves serious anti- competitive activity (price fixing, market allocation, output control and bid-rigging) will never be exempt for the First Conduct Rule whatever the turnover of the relevant undertaking.

The Second Conduct Rule

The Second Conduct Rule seeks to prevent undertakings with a substantial degree of market power from carrying out exploitative conduct that has the object or effect of preventing, restricting or distorting competition in or outside Hong Kong.

Such abuse means predatory behaviour towards competitors or, limiting production, matters or technical development to the prejudice of consumers.

Notwithstanding, such conduct by an undertaking whose annual combined turnover is less than HK$40 million is exempt, but not where there are serious anti-competitive activities.

As such, typical Hong Kong SME’s will not be unduly concerned by the Competition Ordinance but they will still have to ensure that their business practices are such that they are not involved in any serious anti competitive activity.

Chris Hooley
Oldham, Li & Nie
October 2012

OLN is a Hong Kong Law Firm, rated one of the top law firms in Asia. Solicitors provide legal advice in Corporate & Commercial Law, Dispute Resolution, Intellectual Property, Employment & Business Immigration, Divorce & Family Law, Insolvency and Restructuring, Personal Injury Law, Probate and Estate Planning, China Practice, French Practice.

The Foreign Account Tax Compliance Act (“FATCA”) was enacted in 2010 and becomes effective on 31 January 2013.

Although this is not Hong Kong legislation, since it is legislation aimed at preventing tax abuse by United States taxpayers who hold financial assets and offshore accounts, outside the United States, it will have application in Hong Kong.

FATCA provides a new regime for the reporting of tax information and focuses on tax withholding. It has been created to identify United States nationals holding assets overseas US, i.e. in non-US institutions, including both Foreign Financial Institutions (FFIs) and Non-Financial Foreign Institutions (NFFIs), and to apply a withholding tax, if reporting requirements are not met.

FFIs will include “foreign” (i.e. non-US) incorporated banks, trust companies, investment entities, insurance companies and other investment vehicles.


Tax Information Reporting Requirement

Under FATCA, United States taxpayers with non-US financial assets with an aggregate value exceeding US$50,000 will be required to report those assets to the US Internal Revenue Service (IRS).

Further, FFIs must entered into a special agreement with the IRS by 30 June 2013, by which the FFIs are obliged to conduct due diligence to identify United States nationals who own foreign assets or offshore accounts and to report the same to the IRS annually.

NFFIs are also required to provide details information, such as the name, address and US Taxpayer Identification Number (TIN) of each of its substantial owner (who owner more than 10% of interest) of a corporation’s stock.


Withholding Tax

Under FATCA, a 30% withholding tax will be imposed on any “Withholdable Payments”, made to (a) non-participating FFIs, (b) individual accountholders fail to provide sufficient information to determine whether or not they are a U.S. person, including U.S. citizens or residents, or privately owned US corporation, or (c) other NFFIs accountholders fail to provide sufficient information about the identity of substantial U.S. owners, who owns, directly or indirectly, more than 10% of the stock of a corporation.

Withholdable Payments include any payments of U.S. sourced income, such as interest, dividends, rents, royalties, services fees, as well as gross proceeds from the sales of securities that generated U.S. sourced income.


The Impact of FATCA in Hong Kong

To comply with FATCA, participating FFIs need to identify U.S. nationals who have assets / accounts and need to impose withholding tax on each payment transaction of these persons.

Such reporting and tax withholding obligations may be in conflict with local laws in Hong Kong not least in respect of privacy, non-disclosure, or legal restrictions on withholding tax etc.

However, if a relevant local law does not allow the participating FFIs to perform their obligations, then the FFIs must close the relevant account. This may result in lost business for the FFIs.

If a FFI does not comply, it will suffer a 30% withholding tax on each relevant payment transaction.


Conclusion

To protect themselves, the FFIs must do the following before January 2013:-

• Review all clients’ accounts and assets details and decide whether (1) to enter into agreements with the IRS agreeing to the requirements of FATCA or (2) to cease to hold US assets and terminate all US accounts;

• Check that compliance under FATCA will not breach any local laws in Hong kong;

• Review all agreements entered into with the clients to ensure performance of the obligations under FATCA will not breach any term of these agreements.

It remains to be seen how in practice FATCA will operate and be regulated in Hong Kong.

OLN will continue to monitor the situation, as it progresses.

Chris Hooley
Oldham, Li & Nie
21st August 2012

OLN is a Hong Kong Law Firm, rated one of the top law firms in Asia. Solicitors provide legal advice in Corporate & Commercial Law, Dispute Resolution, Intellectual Property, Employment & Business Immigration, Divorce & Family Law, Insolvency and Restructuring, Personal Injury Law, Probate and Estate Planning, China Practice, French Practice.

New Hong Kong Companies Ordinance

Thursday, 23 August 2012 18:13

The Legislative Council passed the new Companies Ordinance on 12th July 2012. It aims at modernizing Hong Kong’s legal framework for the incorporation and operation of companies in Hong Kong.

To facilitate implementation of new CO, over ten regulations will have to be made in 2013-2014. The new CO is expected to commence operation in 2014.

The material changes in the new Companies Ordinance are set out as follows:-

Shares

  1. Abolishing par value for shares.
  2. The concept of authorized capital will no longer apply to company formed on or after the commencement date of the new CO. Limit on the companies formed before the commencement date may be removed by an ordinary resolution.
  3. Introduce new exceptions which allow all companies to provide financial assistance for the purpose of acquiring the company’s own shares or the shares of its holding company, subject to a solvency test and the relevant approvals in the following three scenarios:-
    • Approval of board of directors where the aggregate amount of financial assistance does not exceed 5% of the company’s paid-up share capital and reserves;
    • Approval of the board of directors together with the approval of all of the members by written resolution; or
    • Approval of board of directors with the approval of the members by ordinary resolution, subject to the right of members holding at least 5% voting rights of the company to petition to the court for a restraining order.
  4. Introducing an alternative court free procedure for reducing capital based on a solvency test.


Constitution and meetings

  1. Removal of requirement for memorandum of association. The object clauses and limited liability status may be included in the articles.
  2. Permitting a general meeting to be held at more than one location using electronic technology.
  3. Allowing companies to dispense with AGMs by unanimous shareholders’ consent.
  4. Making the use of common seal optional and relaxing the requirements for a company to have an official seal for use aboard.


Directors

  1. Requiring at least one director who is a natural person.
  2. Providing standard for company directors’ duty of care, skill and diligence in new CO ad to incorporate a mixed objective and subjective test.
  3. Introducing more effective rules to deal with directors’ conflict of interest.
  4. Requiring the conduct of directors’ to be ratified by disinterested shareholders’ approval to prevent conflict of interest and possible abuse of power of interested majority shareholders in ratifying unauthorized conduct of directors.

Shareholders

  1. Introducing a comprehensive set of rules for proposing and passing a written resolution.


Enforcement

  1. Strengthening the enforcement regime in relation to the liabilities of officers of the companies for companies’ contravention of provisions in the new CO. Under the new CO, the officer may be liable if he “authorizes or permits, or participates in, the contravention or failure”. The threshold of liability is lowered.
  2. Providing new powers for Registrar to obtain documents or information to ascertain whether any conduct that would constitute an offence in relation to the provision of false or misleading statement to the Registrar has taken place.


Reporting

  1. Allowing companies meeting specified size criteria (e.g. SME) to prepare simplified financial statements and directors’ report.


Deregistration / Dissolution


  1. Imposing three additional conditions for deregistration of defunct companies, namely the applicant must confirm that the company is not a party to any legal proceedings and that neither the company nor its subsidiaries has any immovable property in Hong Kong, to minimize any potential abuse of the deregistration procedure.
  2. Introducing a new administrative restoration procedure for a company dissolved by the Registrar in straightforward cases, without the need for recourse to the court.



Chris Hooley
Oldham, Li & Nie
21st August 2012

OLN is a Hong Kong Law Firm, rated one of the top law firms in Asia. Solicitors provide legal advice in Corporate & Commercial Law, Dispute Resolution, Intellectual Property, Employment & Business Immigration, Divorce & Family Law, Insolvency and Restructuring, Personal Injury Law, Probate and Estate Planning, China Practice, French Practice.

Hong Kong’s Competition Bill

Thursday, 19 August 2010 16:06

By Christopher Hooley, Partner

Hong Kong's Competition Bill (the Bill) was gazetted on 2nd July 2010. The Bill aims to prohibit conduct that has the purpose or effect of preventing, restricting or distorting competition in Hong Kong and to prohibit mergers that could substantially lessen competition in Hong Kong.

If enacted, the Bill will have far reaching implications for all companies conducting business in Hong Kong.

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