Author: Susan Gordon
Service Area: Financial Services
Date: April 2012
Country: Hong Kong


Financial Services Newsletter
Issue 2 of 2012: April


Hong Kong Court of Final Appeal to hear Tiger Asia case

by Joanna Fung (

On 23 February 2012, Hong Kong's Court of Appeal overturned the Court of First Instance's decision to strike out proceedings against Tiger Asia Management LLC (Tiger Asia) and its officers (together the Tiger Asia Parties) and gave the Hong Kong Securities and Futures Commission (SFC) authority to pursue sanctions against Tiger Asia.

By way of background, the SFC commenced proceedings in August 2009 under section 213 of the Securities and Futures Ordinance (SFO) against the Tiger Asia Parties, seeking remedial orders and an injunction in relation to allegations that the Tiger Asia Parties had contravened certain insider dealing and market manipulation prohibitions under the SFO. Among other things, the SFC had for the first time sought orders to prohibit Tiger Asia from dealing in all listed securities and derivatives in Hong Kong. In the Court of First Instance, the Tiger Asia Parties argued that the court had no jurisdiction under section 213 to make findings that Tiger Asia had contravened the SFO without a pre-existing criminal conviction or determination by the Market Misconduct Tribunal (MMT). The SFC, however, argued that section 213 was a free-standing remedy, not subject to decisions by either the criminal courts or the MMT. The Court of First Instance ruled in favour of Tiger Asia. In overturning the decision, the Court of Appeal noted that section 213 "...provides valuable tools to the Commission to protect the investing public which is an important objective of the SFO..." and " ...much needed ammunition to the Commission to protect investors."

The Court of Appeal's decision has significant ramifications as it substantially broadens the SFC's existing powers. Section 213 proceedings can now be commenced before and independent of any criminal or MMT proceedings against an alleged offender. The decision increases the options available to the SFC to obtain wide-ranging relief from the Court of First Instance, particularly in situations where an alleged offender is located overseas. This decision confirms that the SFC can bypass criminal or MMT proceedings and apply directly for section 213 orders which include relief against parties irrespective of their location (while retaining the option to bring a criminal prosecution at a later stage), and in doing so, creates a significant deterrent to those who contravene the SFO.

On 18 April 2012, the Court of Appeal granted leave for the Tiger Asia Parties to take their case to the Court of Final Appeal.

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Payments of dividends out of capital
by Alwyn Li (

In recent authorisation applications to the Hong Kong Securities and Futures Commission (SFC) in respect of funds which allow payments of dividends to be made out of capital, the SFC has requested the following additional disclosures to be covered in the offering documents:

  1. A statement to the effect that the management company may amend the dividend policy subject to the SFC's prior approval and by giving not less than one month's prior notice to investors;
  2. A risk disclosure stating that the dividends paid out of capital amount to a return or withdrawal of part of an investor's original investment or from any capital gains attributable to that original investment; such dividends may result in an immediate decrease of the Net Asset Value per share / unit; and
  3. A statement that the compositions of the latest dividends (i.e. the relative amounts paid from income and capital) are available from the management company on request and on its website (if any).

In addition to the above, the SFC has requested the management company submit an undertaking that all future marketing materials for the fund will adhere to these disclosure requirements.

Similar requests have also been made by the SFC in relation to applications for funds which allow other payments (e.g. management fees) out of capital.

The SFC has not issued any policy updates or other publications on why the above requests are currently being sought. However, we understand that under the SFC's Handbook for Unit Trusts and Mutual Funds, the SFC has the power to request for disclosure of such information as it considers necessary for investors to be able to make an informed decision of the investment.

The concept of payments of dividends out of capital was in the past prohibited by some regulators in overseas jurisdictions. The Central Bank of Ireland (Central Bank) lifted its prohibition in February 2012 - Irish authorised retail funds, including UCITS, may pay dividends out of capital provided that they comply with the various disclosure requirements.

By way of historical background, the Central Bank's prohibition on retail funds paying dividends out of capital was due to concerns for investor protection, in that retail investors may not be aware of the potential for capital erosion and the danger that returns which include distributions out of capital may mislead investors. However, due to the fact that many countries across the globe have aging populations, there is now increasing investor demand for investment products that can provide a consistent flow of income with a certain tolerance for a stable decline in the net asset value. In light of this, the Central Bank has recently determined that rather than an outright prohibition, its concerns for payments of dividends out of capital can be addressed by means of enhanced disclosures.

The SFC's approach is in line with that of the Central Bank and is a reflection of the SFC's efforts in seeking to strike a balance between investor demands and investor protection.

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Regulation of ILAS in Hong Kong
by Eve Leung (

Under the Hong Kong regulatory regime, investment-linked assurance schemes (ILAS), which are also commonly known as "unit-linked insurance policies", and their investment options must seek authorisation from the Securities and Futures Commission (SFC) prior to being offered to retail investors in Hong Kong. ILAS issuers, being insurance companies, are under the prudential regulation of the Insurance Authority. The SFC is involved in the regulation of ILAS only to the extent that certain ILAS documents may need to be authorised by the SFC prior to their issuance in Hong Kong. ILAS offering documents must comply with the disclosure requirements in the SFC's Code on Investment-linked Assurance Schemes (ILAS Code).

Under the ILAS Code, an authorised ILAS must issue an offering document which includes a Product Key Facts Statement (KFS), and a personalised Illustration Document based on the prescribed format on the SFC's website. The KFS must describe the ILAS, but does not need to cover details of the underlying investment options. The Illustration Document must show, among other things, the encashment values if investors surrender the policy prior to maturity. ILAS advertisements must be pre-vetted by the SFC and comply with the Advertising Guidelines.

When applying for SFC authorisation, an Application Form, Information Checklist and the KFS Checklist should be completed. These forms and checklists are available from the SFC's website. In general, applications of new ILAS and new investment options are subject to application fees. A fee waiver may be granted by the SFC for an investment option if it is linked to an SFC-authorised retail fund.

An ILAS may contain more than one investment option. Some ILAS offer investment options linked to SFC-authorised funds as well as other portfolios that are internally managed by the insurance company on a discretionary basis. However, we understand that recently the SFC has only authorised investment options linked to SFC-authorised funds. Issuers who intend to offer an ILAS scheme with an "open architecture", i.e. an ILAS with an open platform of investment choices which can be linked to any authorised retail funds or other asset classes (e.g. bonds), should consult the SFC prior to making an application.

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SFC announces temporary break in annual licensing fees
by Jane McBride ( and
Lavita Pong (

The SFC announced on 26 March 2012 that annual licensing fees will be waived for two years from 1 April 2012 for all licensed corporations and registered institutions (i.e. banks). The waiver will cover fees payable for firms as well as their licensed individuals. The waiver applies to annual licensing fees but not to licensing application fees or transfer fees.


According to the SFC, the objective is to relieve the regulatory cost burden on the securities and futures industry because market conditions are considered difficult.

Based on figures submitted to the Legislative Council Panel on Financial Affairs relating to the SFC's 2011-12 budget, the SFC's reserves increased by 40% from HK$4,820 million as at December 2008 to HK$6,743 million as at December 2010. The public voiced various ideas as to what the SFC should do to reduce the surplus. The SFC subsequently announced it is considering purchasing its own premises, a move taken by the Hong Kong Monetary Authority several years ago.

The SFC previously granted a one-year waiver of annual licensing fees in February 2009 and mentioned difficult market conditions as one of the reasons at the time. With the 2009 waiver, there was some confusion in the market as to how the fees would be pro-rated. For the current scheme, all annual licensing fees that become payable between 1 April 2012 and 31 March 2014 will be waived and fees payable before or after these dates will not be waived. There are no pro-rating arrangements.

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Japan: confidential information and intellectual property rights in the workplace
by Daisuke Morimoto ( and
Stephen D. Bohrer ( of Nishimura & Asahi

Many companies in Japan rely on side agreements with employees concerning the protection of confidential information and the assignment of intellectual property rights. Such provisions should dovetail with the protections afforded under a company's work rules. Failure to do so could expose an employer to significant losses.

A company in Japan that employs ten or more persons is required to prepare work rules that specify the conditions of employment. Japanese labor laws provide a non-exhaustive list of matters that should be dealt with in the work rules, such as working hours, rates of pay, vacation policies and dismissal procedures. The work rules should address all material employment conditions. So long as the work rules are "reasonable" and the employees have been informed of them, they should form the basis of the employment terms and conditions for all employees. Japanese employment agreements with rank-and-file workers are often abbreviated documents, as most of the core employment provisions are incorporated by reference to the work rules.

What is the legal effect of confidentiality and intellectual property assignment provisions in a negotiated employment contract if the company's work rules are silent on the topic, or conflict with the negotiated terms, or contain more relaxed provisions? The answer is not clear. Japanese scholars argue that where there is discrepancy between the two documents, the work rules will prevail if they are more favorable to the employee, in accordance with Article 12 of the Labor Contract Act. There are a number of counter-arguments an employer could consider, however it is prudent for a company with valuable confidential information or intellectual property to maintain broad protection provisions in its work rules, and to seek legal advice if negotiated terms deviate from those rules.

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Recent Deacons' publications

China IP Bulletin - May 2012

Hong Kong IP Bulletin - May 2012

Litigation & Dispute Resolution Newsletter, Issue 2 of 2012: April

SEC revised "accredited investor" definition

Human Resources and Pensions Newsletter, Issue 2012.1

New requirements for disclosure of short positions in Hong Kong listed shares

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Whilst every effort has been made to ensure the accuracy of this publication, it is for general guidance only and should not be treated as a substitute for specific advice.