Hong Kong Student Law Gazette Fall 2013 Issue

Hong Kong Student Law Gazette Fall 2013 · Issue 3

Feature Interview with Mr Wong Yan Lung, SC

Articles Safeguard Hong Kong’s Public Interest by Strengthening Our Conflict of Interest Disclosure Rules Recommendations to Improve Undercover Policing Laws in Hong Kong Renewed Concerns Over Legal Risks of VIE Structures: Guidance from the SPC on Entrustment Agreements

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TABLE OF CONTENTS

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Hong Kong P4. Why Developing Country Parks is Not Feasible – A Legal Perspective P5. The Business Impact of the Amended Trade Descriptions Ordinance P6. Safeguard Hong Kong’s Public Interest by Strengthening Our Conflict of Interest Disclosure Rules P8. Understanding the New 2013 HKIAC Arbitration Rules P10. Does the Hong Kong Jury System Need a Reform?

P11. Prioritising the Protection of Sharks Over Delicacy P12. Should Jetstar be Allowed to Operate in Hong Kong?

P14. Recommendations to Improve Undercover Policing Laws in Hong Kong P16. A Timely Proposition: Hong Kong’s Alternative Business Structure P18. A Balance Between Attracting IPOs and Protecting Investors: The Case of Alibaba P20. Regulation of Parallel Trading

Feature P21. Interview with Mr Wong Yan Lung, SC

China P26. A Monumental Year in Intellectual Property Anti-Monopoly Law P28. Renewed Concerns Over Legal Risks of VIE Structures: Guidance From the SPC on Entrustment Agreements

International P30. A Long-Awaited Legal Remedy for International Child Abduction in Japan P32. “I’m sorry Dave, I’m afraid I can’t do that” HKSLG · FALL 2013 · ISSUE 3

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LETTER FROM THE EDITOR

“legal scholarship with integrity”

With every new academic year comes a new Editorial Board. Our vision for this issue has been to continue to stay true to our motto, “legal scholarship with integrity”. We aim to provide our fellow students with a platform with which they may contribute their thoughts and views on various legal topics that often lay beyond the scope of our law course curricula.

Since its inception two years ago, the Gazette has had remarkable achievements. The exclusive interview with The Honourable Mr Justice Kemal Bokhary in our previous issue (Spring 2013) was cited by the South China Morning Post on 18 April 2013. Following the outstanding work of the previous Editorial Boards, we hope that with this issue, we will continue to establish the Gazette as the leading student-run, academic law publication in Hong Kong.

This term, we were very fortunate to have the occasion to meet former Secretary for Justice, Mr Wong Yan Lung, SC. We took the opportunity to ask him for his views on some of the perceived challenges that have faced Hong Kong’s legal system. We also heard his reflections on his work and contributions during his tenure as the Secretary for Justice. We would like to thank him for accommodating us despite having been in the midst of a very important case!

We would also like to thank Clifford Chance LLP for their continuing, invaluable support which allows us to publish the Gazette in print and on our online platform, hongkongstudentlawgazette.com.

Finally, I would like to express my gratitude to our editors, layout team, and writers who have worked relentlessly to ensure the quality and success of this issue.

With exams imminently upon us, I wish you all the best of luck!

Mercedes Chien Editor-in-Chief

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TABLE OF CONTENTS

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Editorial Board

Mercedes Chien

Lisette Chan

James Ng

James Muirhead

Suzy Su

Nicole Sze-to

Louisa Wong

Layout Team

Suzy Su

Cynthia Or

Faculty Advisors

Michael Ramsden

Steven Gallagher

Eva Pils

Additional Thanks (in alphabetical order) Clifford Chance LLP CUHK Faculty of Law

Dr CUI Can Prof. Eva Pils Prof. Michael Ramsden

Mr Steven Brian Gallagher Mr Wong Yan Lung, SC HKSLG 路 FALL 2013 路 ISSUE 3

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HONG KONG

Tiffany Cheng

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n September 2013, in the face of the housing supply pressure, the Secretary for Development, Paul Chan, suggested zoning country parklands for residential flats. This has sparked heated debates. The Government may find itself entangled in numerous legal challenges, rather than a smooth solution to the land shortage issue, if it were to develop country parks.

Country parks are well-protected by the Country Parks Ordinance (Cap 208) (the Ordinance) for the purposes of nature conservation, countryside recreation, and outdoor education. Under the Ordinance, development projects are highly restrictive and are only allowed when there is an ‘overriding need’. For instance, the construction of gas pipes and lampposts in country parks was exceptionally approved for the interests of residents in remote villages.

Why Developing Country Parks is Not Feasible – A Legal Perspective other aggrieved parties would raise serious objections against the new draft map. As a result, the Authority is required to demonstrate serious considerations of such objections, and to hold a hearing before submitting the revised draft map to the Chief Executive in Council.

This imposes an onerous burden on the Authority, as it must now deal with pressure from the public and green groups, in addition to producing strongly persuasive reasons to support its position to amend the country park’s draft map.

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Even if the Government bypasses these challenges, the plan is susceptible to being judicially reviewed by green groups. In 1992, the construction of a private golf course in Sha Lo Tung Valley, situated in Pat Sin Leng Country Park, was eventually prevented by judicial review.

Given a successful precedent, the development of country parks might again be aborted by possible judicial reviews.

All in all, it would be difficult for the Government to implement any development plans within country parks. Our ‘green lungs’ are safeguarded by stringent legislation, which is enacted to prevent arbitrary encroachment from the Executive. In light of environmental protection and legal constraints, an overriding need must be satisfied before turning to country parks, which should be the last resort in addressing the land shortage issue.

To develop country parks, the Government may re-zone the country park area and produce a new draft map. Nevertheless, during this administrative process, two major obstacles from the public and the Legislative Council (LegCo) await the Executive.

If the Government proposes any development plans, the Country and Marine Parks Authority would be obliged to amend the draft map of the country park in accordance with section 8 of the Ordinance.

Any person aggrieved by the draft map may raise objections to the Authority within 60 days pursuant to section 11 of the Ordinance. It can be expected that, during this 60-day period, green groups and

LegCo, the Government yielded and disposed of the plan. Without solid grounds, the Government should anticipate severe resistance from LegCo.

Once the Chief Executive approves the map, it would be gazetted and tabled before LegCo for negative vetting, triggering another round of possible opposition from LegCo. The Government previously proposed taking five hectares of land from the Clear Water Bay Country Park in order to expand the Tseung Kwan O Landfill. However, in view of the strong opposition from

HONG KONG

The Business Impact of the Amended Trade Descriptions Ordinance

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dvertisements are prevalent in Hong Kong and exert an undeniable influence on consumers.

Slogans such as ‘70% off entire store’ are advertised almost everywhere, but these signs might only apply to a few items. The Trade Descriptions (Unfair Trade Practices) (Amendment) Ordinance 2012 (ATDO), which came into effect on 19 July 2013, aims to curb unfair trade practices in order to protect consumers from being misled or deceived.

Previous consumer protection mechanisms Prior to the recent amendment, protections available to consumers were rather limited. While the old Ordinance combated offers and false descriptions of “goods”, its protection did not extend to “services”. Due to this limitation, deceived customers could only rely on section 5 of the Supply of Services Ordinance (Cap 457) for remedies, which merely imposed an implied duty on service providers to carry out service with reasonable care and skill. As a result, problems such as misleading price indications, ambiguous price advantages, and deceptive descriptions of services were not effectively addressed.

The new ATDO offences The ATDO created five new offenses to cover both the goods and service sector in order to protect customers against unfair trade practices. They are: 1.) “Misleading omissions”, where material information is intention-

ally hidden to attract sales; 2.) “Aggressive commercial practices”, where vendors use undue influence to coerce customers into sales, thereby impairing their freedom of choice; 3.) “Bait advertising”, where discounted price is advertised at a price that the vendor does not intend to offer; 4.) “Bait and switch”, where the vendor appears to discount one product, but is in fact promoting the price of another; and 5.) “Wrongly accepting payment”, where the vendor accepts prepayment while knowing that the traded service or product cannot be delivered in time.

Impacts of the ATDO The effectiveness of the ATDO is clear. The tougher law has scrambled sellers ranging from small retailers to large retail chains. For example, supermarket chain 759 spent extra time replacing ‘discounted’ price tags with ‘original price’ to avoid potential violation of the ATDO. These changes will undoubtedly protect customers and uphold their freedom of choice. However, they might be detrimental to the business environment, especially the tourism industry.

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Catherine Leung

for the service sector and the overall economy of Hong Kong. The tougher Ordinance may deter people from pursuing a career in tourism, and travel agencies may be unwilling to promote a wider variety of tours in order to avoid legal violations. These implications coupled with stringent advertisement restrictions for other retailers may undermine the free market economy.

The importance of consumer protection and promotion of a laissezfaire economy has always been a trade-off. Where the tourism industry is at risk, the Government could offer subsidies to travel agencies to offset risks they are exposed to, or work with the Hong Kong Tourism Board to ensure that it is keeping tabs on the advertising techniques used in its industry. Although trade-offs are inevitable, a competitive market that protects consumers from deceptive trade practices is vital.

Inability to book hotels and flights during peak seasons may put travel agencies at risk of “wrongly accepting payment”. Their shopping arrangements may be considered as “aggressive commercial practices” if they pressure customers into making purchases.

Tourism is a major source of revenue HKSLG · FALL 2013 · ISSUE 3

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HONG KONG

Safeguard Hong Kong’s Public Interest by Strengthening Our Conflict of Interest Disclosure Rules

O

ver the summer, Secretary for Development, Paul Chan attracted a significant amount of political attention to his family land stakes scandal. Just as the Development Bureau announced the New Territories Northeast development plan, evidence revealed that Chan’s wife controlled a company with a minority interest in a 15,000 square foot plot of farmland in Kwu Tung North, while Chan was a former director of this company.

Many Hong Kong citizens, as a result, were critical of Chan’s apparent conflict of interest and demanded an explanation.

In accordance with the Regulations for Accountable Officials and Members of the Executive Council, Chan properly disclosed his interests to the Chief Executive in October 2012. Having learnt of the development plan, Chan’s wife subsequently sold her interest in the land to other family members. Legal repercussions were thus avoided, as current disclosure rules for appointed government officials do not require their spouses or other family members to declare their assets and other interests. While Chan re-iterated that the sale from his wife to her family members was done in an arm’s length manner, he declined to provide specific details of the sale arrangements, adding secrecy to the transaction.

In fact, if a proactive and forthcoming disclosure was made to the public from the very start, the ownership of a small plot of land purchased almost 20 years ago would HKSLG · FALL 2013 · ISSUE 3

Michael Leung

not raise much concern. Purchased in 1994 for HK$350,000, if the land was to be resumed by the Government for public housing, it was estimated to be worth more than HK$17 million. The lack of transparency in Chan’s manoeuvre left the community in doubt.

comprising of Qantas Airlines, China Southern Airlines and Shun Tak Holdings, with the objective of creating an alternative Hong Kong based airline to Cathay Pacific. As both decisions will have a significant impact to Cathay Pacific, the timing of the excursion raised significant concerns.

Many lawmakers called for Chan’s resignation as the ordeal unfolded, including Democratic Party lawmaker Albert Ho. Incidentally, however, Ho himself was embroiled in a similar scandal. In August, 15 government officials, along with their families, were sponsored by Cathay Pacific to tour the Airbus factory in France as part of an airplane delivery ceremony. The timing of the Cathay Pacific junket is significant for two reasons. First, the budget approval for the Hong Kong International Airport third runway expansion was on the table in the Legislative Council. Second, the Hong Kong Airport Authority, a quasi-governmental organisation, was in the process of deliberating judgement on the operating application from Jetstar, a budget airline backed by a consortium

Ho, like many of his fellow lawmakers, heavily criticised Chan for his role in the Kwu Tung fiasco and championed for a more transparent government. Ironically, as a member on the Board of the Airport Authority, Ho exposed himself to a charge of conflict of interest . Ho attempted to rectify the situation by remunerating HK$50,000 to a Cathay Pacific charity. Meanwhile, fellow traveller Cheng Yiu-Tong, a member of the Executive Council, refused to apologise for the free voyage and rejected the pressure to repay his expenses or make a charitable donation in lieu.

Cheng’s response has legal basis.

According to section 83 of the Rules of Procedures of the Legislative Council, lawmakers are only required to disclose the receipt of

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any sponsorships or benefits to the clerk of the Council within 14 days from the receipt of such personal interests. There are no spending limits or pre-authorisation requirements. For members of the Executive Council, disclosing the benefit to the Chief Executive via the Annual Declaration of Registrable Interests is sufficient to satisfy their regulatory requirements.

In light of the negative publicity surrounding the junket, Cathay Pacific issued complaint letters to several news media outlets. In a letter to the South China Morning Post, Cathay explained that such trips are necessary because “aviation is an important industry in Hong Kong… and is a pillar of the local economy.” In a similar letter to the China Daily, “[Cathay] made it clear that discussion topics during the trip included issues relevant and important to Hong Kong aviation development, including the third runway at Hong Kong International Airport.” Nevertheless, a clear line must be drawn between providing arrangements for a legitimate business trip and attempting to influence public officials with extravagant benefits. Cathay failed to justify the necessity of discussing such “important matters” during a private and lavish trip, let alone generously extending the privilege to the lawmakers’ families.

From Antony Leung’s purchase of a luxury car in advance of a tax he personally imposed, to Donald Tsang’s acceptance of gifts from tycoons, Hong Kong has developed a laundry list of greedy and controversial politicians; perhaps it is due to the unique closeness of our governing organs to the business community and the societal embedment of traditional Chinese culture such as guanxi. While acts of lobbying are widely acceptable in other jurisdictions,

they are strictly regulated. Section 4(2) of the Prevention of Bribery Ordinance (Cap 201) prohibits any public servant from soliciting or accepting any advantage as an inducement or reward for various acts of influence without lawful authority or reasonable excuse. However, this ordinance does not apply specifically to the regulation of lobbying activities in Hong Kong.

Although it is premature to allege any criminal conduct, the integrity of all parties involved has suffered irreparable damage. Specific legislation which balances the rights of lobbyists and the concerns of the public could reconcile the gap in current law.

benefits such as free transportation will require prior authorisation.

Most importantly, there will be a mandatory disclosure of all public interest conflicts on a timely manner with increased accessibility to such records.

It is shameful that at every level of Hong Kong’s executive and legislative organs, our politicians have consistently displayed a disappointing lack of moral grounding.

Nothing short of a comprehensive revision of current disclosure of interest regulations can sufficiently protect Hong Kong’s public interest.

In the United States, Cathay Pacific’s actions would be strictly prohibited under the Honest Leadership and Open Government Act of 2007. Enacted to prevent congressional corruption, the Act requires comprehensive disclosure of lobbying activities, and limits gifts and privately-funded travel by lobbyists. It also provides for an electronic filing for a public, searchable database. If Hong Kong enacts similar legislation, any private enterprise which intends to connect with lawmakers will be obliged to register as a lobbyist and be subjected to inspection by an independent committee. The provision of HKSLG · FALL 2013 · ISSUE 3

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HONG KONG

Understanding the New 2013 HKIAC Arbitration Rules Garf Chan

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n 12 June 2013, the Hong Kong International Arbitration Centre (HKIAC) published the revision to its Administered Arbitration Rules (2013 Rules), which will come into force on 1 November 2013. The new rules are considered as a welcomed and comprehensive update to the 2008 Rules, as they reflect recent developments in international arbitration. This article aims to understand the meaning of the new arbitration provisions and evaluate whether the new changes would encourage more commercial disputes to be resolved in Hong Kong through institutional arbitration, consolidating Hong Kong’s position as one of the leading arbitration centres of the world.

Arbitration in Hong Kong Arbitration allows parties to resolve their disputes through an alternative system of dispute resolution, rather than the orthodox means of litigation in a court of law. Arbitration is generally more timeefficient, economical, and protects privacy better than litigation, while maintaining a binding effect on both parties. It is also more flexible than litigation,c as parties may freely choose the location of tribunal, the arbitrator, and the laws to be applied.

Although there are numerous international arbitration bodies in Hong Kong, the HKIAC deserves particular attention for the following reasons. First, established in 1995, it is the oldest, hence most experienced, locally established arbitration body. Second, according HKSLG · FALL 2013 · ISSUE 3

to various corporate law firms, the HKIAC is a cheaper arbitration venue compared with other institutional arbitration centres. Finally, there is an increasing number of disputes that used the HKIAC as arbitration venue over the years: in 2012 alone, there was a 40% increase from 2011 in the number of arbitration cases handled by the HKIAC, of which 68% were international disputes and 32% were domestic, with a total amount in dispute of approximately US$1.8 billion.

Parties to a contract usually include an agreed arbitration clause into their contract at the negotiation stage to avoid costly litigation, with the procedures for the conduct of subsequent proceedings often embodied in the arbitration agreement. If there is no pre-existing arbitration clause, parties may arrange arbitration after a dispute has arisen, provided that there is a prior agreement to resort to arbitration before litigation. When parties have agreed to resort to arbitration in Hong Kong, repudiating

the arbitration agreement generally

requires consent from both parties.

Under the Hong Kong Arbitration Ordinance (Cap 609) (the Ordinance), repudiation of the arbitration agreement by commencing legal proceedings in any court by one party allows the other party to apply to that Court to have the proceedings stayed.

Regarding the powers of an appointed arbitrator, he or she generally has control over procedures such as venue and time, subject to the applicable rules in the arbitration agreement. The arbitrator can, at the end of the arbitration hearing, grant an award to the successful party in dispute, which is enforceable against the unsuccessful party. Meanwhile, the unsuccessful party can seek leave to appeal to the Court of First Instance pursuant to grounds set out under section 81 of the Ordinance. This provision mirrors Article 34 of the United Nations Commission on International Trade Law Model Law. Hence, parties can have confidence in arbitration awards made in Hong Kong, as they are recognised

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and enforceable domestically and internationally in the courts of the 149 signatories to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) under section 87 of the Ordinance.

The 2013 Rules The key amendments in the 2013 HKIAC Arbitration Rules aim to address practical issues as opposed to a fundamental review of the 2008 Rules. The key amendments are: 1.) Parties may apply for enforceable emergency relief pursuant to Article 23 and Schedule 4 of the 2013 Rules. This assists parties in handling applications for interim measures prior to the appointment of an arbitration tribunal with effectiveness and efficiency.

2.) The arbitration tribunal can join additional parties under Article 27 of the 2013 Rules. This revision recognises the growing complexity of commercial disputes and seeks to maximise the ability of the HKIAC to handle multi-party and multi-contract disputes.

3.) Two or more arbitrations can be merged into one under Article 28 of the 2013 Rules. This saves parties’ time and costs in arbitration proceedings.

4.) One party can apply to the HKIAC for an expedited arbitration if the amount does not exceed HK$25 million under Article 41 of the 2013 Rules. This is a significant increase of threshold for expedited procedures from the 2008 Rules, thereby broadening the circumstances of application on an expedited basis.

5.) If parties agree on tribunal fees and expenses, they may elect for the fees and expenses of the arbitral tribunal to be determined at an hourly rate with a cap of HK $6,500 (Schedule 2 of the 2013

Rules) or on an ad valorem basis determined by the amount in dispute (Schedule 3 of the 2013 Rules). The new cap operates as an effective control on tribunal costs for parties.

who participated in arbitration prefer institutional arbitration due to its reputation, familiarity and convenience.

Purpose of the 2013 Rules

The new HKIAC arbitration rules maintain its recognition of the importance of parties’ autonomy in disputes whilst assisting them with flexible institutional involvement. The 2013 Rules provide more adaptable procedures that enhance efficacy and reduce costs.

It is therefore expected that the new rules will further improve the HKIAC’s appeal as an arbitration venue compared with other international arbitration branches set up in Hong Kong for professionals and commercial parties for setting disputes.

The Hong Kong Government aims to provide a more attractive arbitration institution for commercial arbitration by introducing the 2013 Rules. With reference to a recent speech given by Secretary for Justice, Mr Rimsky Yuen, SC, “This year (2013), Asia is leading the global economic recovery… with the Greater China region being the key growth engine... This means… the more economic and trade activities, the higher the need for arbitration and alternative dispute resolution services.”

Institutional arbitration in Hong Kong is perceived as an important alternative dispute resolution for attracting and sustaining international investments to Hong Kong.

Although by running ad hoc arbitration, parties can have more control over arbitration process with almost no fees to be paid to the administering institution, studies have shown that institutional arbitration is preferred by corporate entities. Up to 76% of corporations

Conclusion

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HONG KONG

Does the Hong Kong Jury System Need a Reform?

Natalie Lau

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he practice of trial by jury has long been an integral part of Hong Kong’s legal system. In Juries: A Hong Kong Perspective, the authors commented that juries are desirable because they “[represent] society as a whole,” and are “more likely to be independent of the state and impartial in [their] judgement.” Such a system, apparently based on the spirit of openness, fairness, and egalitarianism, has wide appeal, as evidenced by its popularity across most parts of the common law world. That being said, some common law jurisdictions now view juries as an undesirable means of upholding justice.

Singapore and India are two examples.

findings. This puts Hong Kong in a position no better than Singapore’s former position, as far as the credibility of verdicts is concerned.

Besides, jurors are generally seen to be good adjudicators of facts only for the assumption that they represent and reflect values commonly accepted by the public, so that their judgements are accountable.

Juxtaposing Hong Kong’s jury system with the defective Singaporean and Indian jury systems Singapore abolished juries in 1969.

This was chiefly a decision of the former Prime Minister Lee Kuan Yew, who observed that “three judges [could] decide questions of fact better than seven random jurymen,” because of the latter’s lack of legal knowledge and accountability.

Indeed, such incompetency can also be found in the jury system of Hong Kong, given our jurors’ limited legal expertise. Their professional ineptness becomes manifest when considering the fact that the judge interprets the law and decides what evidence they can hear.

Additionally, juries cannot be questioned on their verdict and do not need to give reasons for their HKSLG · FALL 2013 · ISSUE 3

Singapore’s. In the landmark case of K.M. Nanavati v State of Maharashtra, which led to the abolition of juries in 1960, it was in consensus that India’s jurors are unfavourable essentially on the ground that they were highly vulnerable to media and public influence.

In Hong Kong, it could be argued that the same susceptibility to media and public influence also exists, which is aggravated by the zest for freedom of press as well as the rampant growth of the cyber-world.

For example, it has been observed that the increased popularity of forensic-based television shows, both local and overseas, tends to deliver misleading legal concepts to potential jurors. This is referred to as the ‘CSI effect’, and is a growing concern of not only Hong Kong but the international legal community.

Concluding remarks

However, the Jury Ordinance (Cap 3) exempts a wide spectrum of persons, including professionals, from jury duty. Also, persons not proficient in English are often excluded, because most trials are conducted in English. As a result of such a stringent screening process, a significant portion of the population is excluded. Thus, not only are jurors in Hong Kong legally unskilled; it is also doubtful whether they are truly representative of the society they serve.

In India, the jury system failed also due to the widely perceived incompetency of jurors; albeit for a slightly different premise compared to

Although the practice of leaving the fate of the accused in the hands of his peers has been a cornerstone of many legal systems for the past 800 years, the flaws of the jury system are also quite self-evident.

The major shortcomings of the jury system as perceived in Singapore and India are highly relatable in Hong Kong. Therefore, Hong Kong should review its current jury system and consider whether to follow suit, or whether major changes are necessary. In fact, the Law Reform Commission has already started a review for that purpose. It seems that the future of the Hong Kong jury system has yet to be determined.

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Prioritising the Protection of Sharks Over Delicacy Jacky Liu

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hark fin soup, a traditional Chinese delicacy, is commonly served at formal occasions in Hong Kong. To obtain the key ingredient of the soup, fins are removed from live sharks, and their bodies are then unscrupulously discarded back into the sea. Without fins for swimming, these sharks slowly sink to their demise either through starvation or suffocation. This practice of shark finning not only accelerates the senseless mortality of sharks and depletion of their population, but may also endanger their sustainability. As a result, Hong Kong– the world’s largest shark fin trading centre dealing in half of the world’s trade– should take a more active role in the conservation of sharks by banning shark finning.

Under the Protection of Endangered Species of Animals and Plants Ordinance (PESAPO), only three shark species are protected from the shark fin trade.

However, 14 other species, which account for approximately 40% of the fins traded in Hong Kong, and listed on the International Union for Conservation of Nature’s Red List of Threatened Species, are not expressly protected by PESAPO. Therefore, it is evident that PESAPO does not protect all endangered or threatened shark species from trade, and it provides little help for shark conservation.

Not surprisingly, numerous countries have taken an ethical stance by enacting a shark finning prohibition that requires fins to be naturally attached to carcasses. Following this decree, the importation of

shark fins from participating countries dropped after the first year of its implementation: for instance, the import of shark fins from US to Hong Kong dropped by 54% in 2001 and 30% between 2003 and 2004 from EU countries. However, the advantages from banning shark finning come at the expense of shark-hunting fishermen. Since shark finning is mostly conducted on vessels with limited capacity, fishermen desire only the lighter fins which yield from 20 to 250 times the value of the meat. As they must now keep shark carcasses attached to the fins under the ban, the prohibition heavily reduces the profits of each finning trip due to the extra weight.

Furthermore, as a signatory to the Convention of Biological Diversity (CBD), the Hong Kong Government should take marine biodiversity into consideration, since the objectives of the CBD are the conservation of biological diversity

ponents. As the apex predators of the marine food chain, sharks have the role of balancing the marine ecosystem to prevent overpopulation. Currently, with populations of sharks depleting, shark finning has detrimentally influenced marine biodiversity, as sharks are considered to be a “keystone” species– the removal of which could cause the marine ecosystem to collapse.

Besides ecological considerations, the necessity of shark finning regulation also stems from the need to promote better understanding of the nutritional reality of eating shark fin. In reality, shark fin has little nutritional value and may, on the contrary, contains neurotoxins, such as methylmercury, through the shark’s bioaccumulation. At the end of the day, shark fin soup is merely a superannuated dish that symbolises status, respect, and honour; its benefits are certainly not enough to outweigh the urge to outlaw shark finning.

and the sustainable use of its comHKSLG · FALL 2013 · ISSUE 3

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HONG KONG

Should Jetstar be Allowed to Operate in Hong Kong?

George Lau

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s a global financial hub, travelling is of utmost importance to businesses and consumers in Hong Kong. In fact, people from Hong Kong are some of the most eager and frequent travellers across Asia Pacific. In view of such high demand, the Australia-based Qantas Group, and China Eastern Airlines entered into strategic alliance in early 2012, and created Jetstar Hong Kong, a low-cost carrier targeting short-haul routes in Asia.

Their venture into Hong Kong, however, has not been smooth.

Since its incorporation, Jetstar Hong Kong has struggled with applying for licences and has even been accused of contravening the Basic Law. Should Jetstar be allowed to operate in Hong Kong?

Air traffic rights and the Basic Law Currently, Hong Kong does not have an open skies agreement. Under the Civil Aviation Ordinance (Cap 488), airlines do not have the right to carry traffic between Hong Kong and other foreign countries without originating in

their home country. This means that an Australian airline must only operate a journey to Hong Kong from Australia, but not from other countries.

parties equally split the ownership of Jetstar Hong Kong, each having one-third of total shares.

In addition, Article 134(2) of the Basic Law stipulates that the Hong Kong Government can only issue licences to airlines incorporated in Hong Kong, and “with their principal place of business in Hong Kong”. This ensures the protection of sovereign air traffic rights and the local airline industry.

Despite multiple efforts to establish a genuine local business, resistance and objection remain inevitable for Jetstar Hong Kong when applying for an operating licence.

Cathay Pacific Airways, along with three other local carriers, filed formal objections to the application on the ground that Jetstar Hong Kong did not meet the requirement of having its “principal place of business in Hong Kong”.

In order to comply with these laws, the setting up of a separate local entity by Qantas can be seen as a strategic move. Under the shareholders’ agreement relating to the establishment of Jetstar Hong Kong, Qantas and China Eastern manifested that Jetstar Hong Kong would be a “Hong Kong-based” low-cost airline. Jetstar Hong Kong further strengthened the commitment to root its business in Hong Kong when they introduced Shun Tak Holdings, a leading conglomerate in Hong Kong, as its third shareholder. The three

Objections from Cathay Pacific

Cathay claimed that Jetstar Hong Kong is a franchise of Qantas and that management control would rest in Australia. They argued that the mere fact of having Hong Kong residents as particular officers of Jetstar Hong Kong does not determine management control and certainly will not prevent control from overseas. Therefore, granting a licence to Jetstar Hong Kong could be construed as a violation of the Basic Law. Another concern is that the approval will set a dangerous precedent by granting Hong Kong’s sovereign air traffic control to a foreign airline. It is enshrined in the Joint Declaration (Annex I, Article IX) and the Basic Law (Article 133) that the Government, under specific authorisation from the PRC Government, may negotiate and conclude new air service agreements outside PRC airspace.

Handing over these rights poses

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HONG KONG risks for Hong Kong, as it will open floodgates to foreign airlines reaping benefits of the Hong Kong aviation industry. Cathay argued that only the development of truly Hong Kong-based aviation should be supported, especially when the capacity of the Hong Kong International Airport is insufficient to meet current air traffic demands.

Air traffic liberalisation in Asia While concerns are legitimate, it is nevertheless beneficial for Hong Kong to approve the Jetstar’s application. In fact, it is detrimental if the application is not approved as Hong Kong may face the risk of marginalisation amid air traffic liberalisation in Asia.

Strong economic growth and a growing middle class in Asia propel rapid growth of travel demands in the region. In order to benefit from the trend and to increase economic integration, the Association of Southeast Asian Nations (ASEAN) has taken steps to liberalise their skies. The 2010 Multilateral Agreement on Air Services grants signatories the rights to conduct international air service, fly across territories without landing, and to make stops in territories for nontraffic purposes. ASEAN has even set a 2015 deadline to establish an

open skies agreement for the region with a view of building a single unified aviation market. Meanwhile, China has adopted the ASEANChina Air Transport Agreement in 2010, which includes the liberalisation of air transport between ASEAN and China as an express aim. This is the first treaty to provide unlimited rights to operate flights between China and the other signatories, superseding all earlier bilateral agreements.

Low cost carriers (LCC) are particularly well positioned in this liberalisation as they focus mainly on the short haul flight markets and provide more affordable fares. It is estimated that LCC continue to

grow at a rate of about 20% per annum in the region. Singapore is a good example to illustrate the benefits of LCC. The robust development of LCC allowed the Singapore Changi Airport to regain double-digit growth in passenger traffic for the past three years, despite setbacks of the global financial crisis.

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still remains during off-peak hours.

However, one inherent challenge for full-service airlines to use offpeak slots is that few passengers are willing to pay a premium price to travel on a flight that leaves at inconvenient hours. On the other hand, the LCC business model is designed to attract passengers to fly during off-peak hours with cheaper prices. This can increase the overall efficiency of the airport, bringing more passengers and business, rather than putting stress on the existing capacity.

Conclusion Air traffic liberalisation is prevalent in Asia, and is embraced by countries across the region. Hong Kong’s main competitors, such as Singapore and Japan, have already introduced the budget airline model, which brings fruitful results to their economies as a whole.

Allowing Jetstar’s application will enable Hong Kong to remain competitive. Doing so will also accord with the Government’s continuous efforts to brand Hong Kong as Asia’s world city, and to maintain a laissez-faire economy. Finally, an interpretation of Article 13 of the Basic Law in favour of a more open airline industry will almost certainly bring positive impacts to the local economy.

Introducing LCC is even more plausible if the capacity of the Hong Kong Airport is taken into account. While flight slots are saturated during prime hours, capacity HKSLG · FALL 2013 · ISSUE 3

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Recommendations to Improve Undercover Policing Laws in Hong Kong

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ong Kong has had a steady flow of undercover (UC) movies in the past decade, including the popular Infernal Affairs and Turning Point 2 featuring Laughing Gor. UC officers are often portrayed as heroes who embark on dangerous and life-threatening anti-crime operations to protect our society. While we enjoy the heroic tales of such fictitious UC films, hardly anyone has questioned the legal vulnerabilities of UC manoeuvres. According to former Deputy Commissioner of the Hong Kong Police, Mr. Yam Tatwing, many of Hong Kong’s antitriad initiatives have earned their success from “proactive undercover infiltration actions”. Just recently, on 30 March 2013, an UC police officer was sent to Wo Shing Wo (和勝和) for nine months to help break up two factions of the gang, and consequently arrested 63 people. On 19 June 2013, a youthfullooking officer also went undercover during ‘Operation Unilocker’, posing as a young drug abuser and subsequently arresting 58 alleged triad members. UC operations are common in Hong Kong, and are seen as a “cost effective method of getting at problems that could not be solved in any other way.” Despite the social legitimacy and popular support for the use of UCs, legal issues certainly exist and should not be overlooked.

Lack of statutory and legislative monitoring HKSLG · FALL 2013 · ISSUE 3

While it is an effective tactic for UC officers to infiltrate triad groups to gather intelligence and collect evidence, the fundamental rights of suspected targets are often neglected during this process. Controls over UC policing in Hong Kong are solely limited to general rules of evidence and internal police guidelines. The only legislation touching on UC operations is the Interception of Communication and Surveillance Ordinance (Cap 589) enacted in August 2006. This Ordinance aims to regulate public officers’ interception of communications and their use of surveillance devices. However, UC operations may involve not only covert surveillance, but also an extended degree of deception where agents “directly intervene to shape the suspect’s environment, perception or behaviour.” Thus, it is evident that the current Hong Kong

Mavis Lam

framework, which only contains a single statute pertaining to UC matters, is insufficient to meet the demands of these complex operations.

Hong Kong also lags behind its common law counterparts in terms of statutory oversight for the facilitation of UC acts. For example, in the United Kingdom, the Regulations of Investigatory Powers Act 2000 mandates that the use of investigatory powers by local authorities must be in accordance with fundamental human rights principles, such as those listed in the European Convention on Human Rights. In South Australia, clear definitions and authorisation protocols for UC operations are set out in its Criminal Investigation (Covert Operations) Act 2009.

It is clear that Hong Kong’s current system lacks comparable legal mechanisms.

Without proper statutory oversight, UC agents risk jeopardising basic human rights when executing their assigned duties. Perhaps Hong Kong should learn from its common law peers, and enact similar regulations to promote necessary and standardised guidance for UC operations.

Prejudicial effects of undercover operations Another insufficiency of using UCs is that defendants who are charged for acts conducted during UC

HONG KONG operations are prone to unwarranted criminal culpability. UC agents are given extensive decisionmaking powers during operations.

The current laws fail to recognise the problematic effects that police inducements can have on the accurate assessment of a defendant’s guilt.

Specifically, agents can independently decide on the type of UC tactics to use, the incentives to put forth, and even the words to be communicated to any parties involved. All such decisions can essentially form and shape various criminal offences. Consequently, UC operations are so convoluted that it is often impossible to clearly determine whether the operation is an incitement (a legally permissible method of criminal investigation) or an entrapment (an impermissible method of criminal investigation). Incitement occurs when a suspect is arrested for an offence that would not have been committed if only the suspect had known the person approaching him or her was a police officer. Conversely, entrapment occurs when law enforcement agents actively induce a person to commit an offence, which he or she would not have, or was unlikely to have, otherwise committed. The theoretical difference between the two concepts is clear – an UC agent plays a passive role in an incitement, but an active role in an entrapment. However, when coupled with the inherently deceptive and misleading nature of UC operations, the complicated facts of a case may not allow for a clear distinction between the two.

Suppose an UC officer infiltrates a criminal enterprise and partakes in the criminal activity to earn the trust of the suspect and to gather evidence. Hypothetically, such conduct would not constitute entrapment. However, what happens

when an UC officer indirectly but critically involved in furthering the suspect’s intention to commit a crime? In such cases, it may not be possible to differentiate between entrapment and incitement.

Despite such complexity in UC operations, Hong Kong does not recognise entrapment as an exculpatory defence. The current approach is limited to evidence only, and makes no assessment of the defendant’s culpability. If the judge is convinced that there is sufficient evidence indicating entrapment, and the evidence in question was obtained in an unfair or improper manner, it may be ruled inadmissible. This narrow approach appears overly subjective, and relies too heavily on judicial discretion. As a result, the requirement of fair trial for the accused may be offended, such that he or she may still be subjected to self-incriminating evidence. Hence, to ensure the proper administration of justice, a more objective and expansive approach should be adopted.

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while safeguarding defendants at trial.

Conclusion Few can challenge the bravery of UC agents who put themselves in great danger to expose criminal activity. However, controversies exist regarding the extent and limits of such operations. Based on the aforementioned reasons, it is apparent that unless Hong Kong strengthens its statutory controls for UC operations, it risks prejudicing defendants, and any subsequent convictions may be overruled. Improved safeguards for human rights, more transparent and objective protocols, and the possible acceptance of entrapment as a rebuttable presumption may be what our criminal justice system needs in order to keep up with international expectations regarding UC operations.

The author submits that all UC operations should be presumed to be as entrapments, and the burden of disproving this presumption should rest on the prosecution, in order to ensure that all UC agents conduct their jobs within legal boundaries. This approach will preserve the flexibility required

by UC officers during operations, HKSLG · FALL 2013 · ISSUE 3

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A Timely Proposition: Hong Kong’s Alternative Business Structure Keith Cheung

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n 2012, England and Wales adopted the Alternative Business Structure (ABS).

Under this scheme, non-legal professions can offer certain legal services but legal professions can also offer other professional services.

Known colloquially as ‘Tesco Law’ because the scheme could transform a supermarket into a legal advisor, the ABS was both welcomed and frowned upon. The Hong Kong Law Society has recently suggested that Hong Kong might adopt such a model. Any new decisions Hong Kong may adopt will not only affect local businesses but also international corporations operating within Hong Kong. What can we learn from our English counterparts? Is this a chance for Hong Kong to forge creative and new partnerships?

With an ABS license, law firms can now offer non-legal services and attract capital outside its partnerships while non-legal professions can now enter into the legal industry; albeit with restrictions to the type of activities the latter can provide. Under Part 3 of the LSA, there will be six reserved legal activities: 1.) the exercise of a right of audience; 2.) the conduct of litigation; 3.) reserved instrument activities; 4.) probate activities; 5.) notarial activities; and 6.) the administration of oaths.

interests.

Commissioned by the Law Society of England and Wales, Millner and Pardoe in Alternative Business Structures: A Compliance Guide affirm that the ABS will comply with existing regulations. The report goes on to detail the new important structural roles of the Compliance Officer for Legal Practice and Compliance Officer for Finance Administration. They concluded that the plan will bring about a positive impact to the profession.

Last year the Solicitors Regulation Authority (SRA), authorised by the Ministry of Justice, finally issued the first set of ABS licences. Antony Townsend, the SRA chief executive, declared that the ABS will stimulate competition, encourage innovation and “see consumer experience enjoy a major boost.”

ABS overview

Lessons from the UK

The ABS emerged as a result of efforts to reform the legal profession. In the words of the Clementi Report (2004), the legal profession needed to formulate a plan to “best promote competition, innovation and the public and consumer interest in an efficient, effective and independent legal sector.” This eventually led to the enactment of the Legal Services Act 2007 (LSA) of which Part 5 proposes the new ABS model. ABS then became an important means to expand the legal industry and to increase competition within the market.

Yet all pilot schemes are subject to criticism and problems often arise after they are introduced– the ABS is no exception. While the ABS might generate problems, this is no reason to fear it. Mr Ambrose Lam, president of the Hong Kong Law Society, acknowledges the criticisms levelled against the ABS and has said that they do not want the ABS “to affect the integrity of law firms.” Indeed, ABS should not be a way for non-legal professions to abuse existing legal frameworks to their advantage. Acquiring a legal licence through ABS would allow

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The Legal Services Board has already announced the intention to add will-writing and estate administration onto this list. Despite these new regulations, business entities have found, andwill continue to find, ways to maximise their

HONG KONG accounting firms to exclude certain accounts from tax inspections.

This is because they would qualify under the ‘legal advice privilege’ if a lawyer is involved during supervision. Already 20 out of the 25 member firms of the Institute Chartered Accountants in England and Wales have expressed interests, among which are the ‘Big Four’.

has now combined its technical expertise in finance and law to handle financial mis-selling claims.

This imaginative move exemplifies an industry increasingly responsive to the ABS and makes the most use out of it.

While the ABS would pose certain threats to existing regulations, it is not true that ABS would allow large non-legal corporations to threaten medium and small lcoal enterprises. With ABS, Liverpool law firm SGI Legal succeeded in acquiring investments and MSB Solicitors, also a Liverpudlian law firm, intends to expand its client base by providing insurance services. Practicing lawyers Reeve and Wright’s recent study also observed that while the transition into ABS might pose difficulties, successful long-term strategies can benefit the business and its clients. With careful planning, units within law firms would also be able to branch off to form new business entities.

Given that the ABS has been implemented for over a year in England and Wales, Hong Kong is now in the position to assess the benefits and faults of the plan in order to consider a policy that best suits our environment and needs.

The ABS expands upon the principle of free market economy which has enriched Hong Kong and cemented her position as a world city for businesses.

Ferguson Financial Limited is one such example. Originally a specialist business unit under Ferguson Solicitors, Ferguson Financial Limited

Hong Kong: adapting to the demands of time

Looking ahead towards China In recent years, international firms have found it difficult to open branches in the Mainland, with most firms limiting their offices to Beijing and Shanghai. However, the recent Shanghai Free-Trade Zone again reaffirms the benefits of free enterprise and will undoubtedly generate wealth locally and abroad.

This move also anticipates

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future economic reforms that would alter the current rules governing all industries.

While endeavours will continue in Shanghai, there is also an increasing trend to continue developments across central and western China.

The 12th Five-Year Plan heralds the Yangtze River Delta plan which will see strengthened foreign investments across Hangzhou, Nanjing, Ningbo, Suzhou and other cities. In an unprecedented move, the Hong Kong Law Society has proposed for Hong Kong firms to ‘tie up’ with Guangdong firms in giving advice on mainland laws once the Qianhai Special Economic Zone is completed in 2020.

Already new business structures are emerging to meet unprecedented changes that are happening in the Mainland and across the world: it is in the Hong Kong legal industry’s interest to find new ways to adapt to new challenges and opportunities.

Conclusion Given the global trend, Hong Kong should consider adopting some version of the ABS or another alternative if it wishes to maintain its competitive edge. Success stories in England exemplify an international market gradually adapting to new practices. As the Hong Kong Law Society suggested, the ABS in Hong Kong will be one that has accounted for criticisms levelled against the Tesco law. If the ABS is introduced locally, it should accommodate Hong Kong’s unique role as an international capital as well as its laissez-faire economy. We should look forward to our very own ‘ParknShop Law’ and make good use of it.

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A Balance Between Attracting IPOs and Protecting Investors: The Case of Alibaba

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he recent loss of the initial public offering (IPO) of Alibaba in Hong Kong has fuelled discussions about whether the Securities and Future Commission (SFC) should relax their listing rules.

Alibaba proposed to adopt either: 1.) A dual-class share structure (the structure) to allow Chairman Ma Yun and senior management to retain control of the Board by holding shares with superior voting rights; or 2.) The executive partnership structure to allow the management team (which collectively own about 10% of the company) to nominate a majority of the board members.

Alibaba’s hesitancy about listing in Hong Kong, in a share sale valued at over HK$100 billion, shows that the SFC and the Hong Kong Stock Exchange (HKEx) listing committee were not swayed by the financial appeal of Alibaba’s sizable IPO and did not deviate from the listing rules that ban any preferential treatment for one class of shareholders.

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Nonetheless, the listing authorities seem open to reviewing the regulatory framework to meet market demand where investor protection is ensured. In 2011, HKEx and SFC responded to market demand after Hutchison’s US$5.45 billion business trust IPO was lost to Singapore’s SGX. As the existing Securities and Futures Ordinance (Cap 571) had not provided for trusts, the SFC and HKEx created ‘stapled securities’, which allowed PCCW to raise US$1.2 billion through HKT Trust in a Business Trust IPO, while ensuring that investors were protected under the SFO. Losing the Alibaba IPO may be seen as an erosion of Hong Kong’s competitiveness. Is there a balance between attracting business and protecting investor?

Listing rules The ban on dual-class listings in Hong Kong dates back to the stock market crash in 1987 after a slew of B-class listing applica-

Silvia Leung

tions scared investors. At around the same time, however, the NYSE reluctantly voted to allow such listings to deal with the realities of modern-day corporate structure.

In this case, Alibaba’s proposals failed to comply with rule 8.11 on ‘Qualifications For Listing’, which states: “The share capital of a new applicant must not include shares of which the proposed voting power does not bear a reasonable relationship to the equity interest of such shares when fully paid (‘B Shares’)…”

Equal shareholders’ right is the crux to this rule, in line with SFC’s key objective under section 4(c) of SFO to “provide protection for members of the public investing in or holding financial products”.

Although rule 8.11(1) allows exceptions, this seems exceptionally difficult if investor protection is undermined.

A popular structure in the TMT industry Controlling shareholders argue that the structure enables them to focus on delivering long-term value while insulating the company from hostile takeovers and the need to meet short-term financial results.

Indeed, the structure is popular with companies in the Technology, Media and Telecommunications (TMT) industry. Google’s cofounders retained control by holding Class B stocks, which give ten times more voting power per share.

Similarly, Mark Zuckerberg retained

HONG KONG control of Facebook through Class B stocks and voting agreements with other Class B shareholders.

Other smaller TMT companies such as Groupon and LinkedIn also adopted a similar structure, giving their founders various degrees of control.

The structure and minority shareholder protection Opponents criticise its facilitation of poor corporate governance because it is difficult for minority shareholders to influence the Board if founders abuse their powers and diminish minority shareholders interests.

In common law, minority shareholders may bring a derivative action on behalf of the company to seek remedies for a wrong done to the company where the two elements of ‘fraud and control’ can be established. But a successful action is difficult mainly due to the restrictive proper plaintiff rule in Foss v Harbottle.

As an improvement, Part 14 Division 4 of the new Companies Ordinance (Cap 622) broadened derivative action such that: (a) ‘misconduct’ extends to ‘negligence’ (section 731); (b) member of company or of associated company can sue (section 732); (c) court’s leave is required and leave criteria are set out (section 733); (d) shareholders’ ratification does not bar an action (section 734).

Also, under secction 86, a minority shareholder has a personal right to sue to enforce the contract under the articles and shareholders’ agreement, e.g. to challenge improper alterations to the articles which were not “bona fide for the interests of the company as a whole.”

The authorities are, however, difficult to apply and this right is not absolute.

Finally, the unfair prejudice remedy contained in Part 14 Division 2 (sections 723-727) provides a more flexible tool for members to seek personal remedies or possibly corporate remedies when their interests are unfairly prejudiced. It aims to restrain and redress unfair prejudicial conducts, such as excessive remuneration, misappropriation, and mismanagement.

It is procedurally simpler than derivative action with a wider range of remedies. Most importantly, members are likely to receive direct personal remedies if an action is successful.

If the structure is to be allowed, Hong Kong will have a much better regulatory regime than it did in 1987.

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ers of superior voting shares can be collectively owned (e.g. 60%) and a lower limit can be set on the number of holders of such shares, and their respective voting rights (e.g. at least two holders with no less than 10% voting rights each).

These rules may help retain a meaningful voice of the minority shareholders on the Board.

Issuing superior voting shares after listing to existing holders of such shares or their family members could also be banned. This would prevent founders from cementing control perpetually.

Other safeguards may include more stringent disclosure rules relating to: 1.) related parties’ transactions; 2.) disposal or transfer of assets; 3.) disclosure of interests by directors; and 4.) procedures for approving remuneration of management and directors etc.

The overall aim would be to scrutinise controlling shareholders to protect minority shareholders.

Looking forward

Investor protection safeguards in the structure Moreover, stringent listing requirements can be used to filter applicants. Example includes requiring directors to have a good integrity record, a healthy liquidity ratio, proven internal control effectiveness, and stricter rules on auditors’ independence and qualifications.

To bring more checks and balances to the Board, an upper limit can be set on the voting rights that hold-

TMT companies are likely to remain popular in the future. The HKEx should aim to provide a better forum than its rivals for Chinese IPOs like Alibaba by being close to the company, its customers and suppliers while allowing access to international investment.

Tighter regulatory standards could also drive excellence in corporate governance in business. Costs of reforms and compliance may seem high now, but the market might get rewarded in the future by allowing diversities in listed companies’ structures.

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Regulation of Parallel Trading Sam Wong

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ranting multi-entry permits to Shenzhen residents since 2009 has encouraged parallel trading across the border. Given the Mainland’s worrying food-safety records, mainland tourists prefer buying daily commodities in Hong Kong, thereby triggering shortage and causing resentment among the locals.

In face of societal concerns, the Government imposed regulations and amended various ordinances, and yet their effectiveness have been doubted. This article will discuss the effectiveness of existing measures.

Common misconceptions about parallel trading Parallel import is often mistakenly regarded as an illegal activity. However, it is not expressly outlawed by any statutes. Under the Import and Export Ordinance (Cap 60), smuggling is defined as the importing and exporting of “article contrary to…this Ordinance or any other law controlling the import or export”. The Ordinance thus only prohibits the export of unmanifested cargo, which does not include articles brought on vessel, aircraft or vehicle by passengers.

exceed 23 kg. However, parallel traders may enlist middlemen to bring in smaller luggage and re-arrange the goods inside the station, rendering these by-laws ineffective.

In addition, the Immigration Ordinance (Cap 115) can be applied to prosecute parallel traders for breaching their condition of stay.

Regulation 2 of the Immigration Regulation (Cap 115A) states that a visitor “shall not take any employment.” Therefore, the condition will be breached if visitors work as parallel traders for a parallel import syndicate. However, proving an employment relationship between individual parallel traders and syndicates is difficult. Like other criminal offences, prosecution must prove all the elements of the offence beyond reasonable doubt.

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Other ordinances such as the Fixed Penalty (Public Cleanliness Offences) Ordinance (Cap 570) and the Public Health and Municipal Services Ordinance (Cap 132) can only be invoked when parallel traders have acted in a damaging way to the surroundings, such as obstructing the street or littering.

In early 2013, the Government amended the Import and Export (General) Regulations (Cap 60A), which now prohibits carrying formula products with weight exceeding 1.8 kg (amounting to two cans) within 24 hours. Any person convicted is potentially liable to a fine of HK$500,000 and two-year imprisonment. The amendment has seemingly alleviated the shortage.

Conclusion

Existing measures Among the existing measures which aim to ameliorate the current situation, section 39A of the Mass Transit Railway By-laws (Cap 556B) limits passengers’ luggage to total dimensions not exceeding 170 cm, and the weight must not

lationship. Without engaging any syndicate, parallel traders are legally regarded as tourists in Hong Kong, provided that they deny to have carried goods for profits. As a result, the conviction rate was at a measly 11.7% between 2010 and 2012. Worse still, the Ordinance has no effect on Hong Kong residents, who make up 60% of the parallel traders.

The prosecution is required to show mutual obligations between traders and syndicates to prove an employment relationships exists; casual work of short duration cannot constitute an employment re-

The issue of parallel trading does not have easy remedies. Existing measures may become less effective once the parallel traders have learned to bypass legal loopholes.

The Government is still looking into other solutions, amongst which is the setting-up of a special mall for parallel traders. Its feasibility awaits to be seen.

FEATURE

Interview with Mr Wong Yan Lung, SC

James Ng

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Louisa Wong

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r Wong Yan Lung, SC served as the Secretary for Justice between October 2005 and June 2012. He resumed his private practice with Temple Chambers in January 2013.

With a humble heart and devotion to public interests, Mr Wong shared with us his insights on the rule of law, judicial independence, professionalism of practitioners, and the importance of knowing yourself.

Why did you choose to pursue a career in law?

At Queen’s College, we were required to opt for either the science or arts stream in Secondary 3. As I was hopeless at mathematics and science, by elimination, I picked the arts stream. Among the relatively limited career options for the arts stream students, reading law was an obvious choice. My enthusiasm in Chinese debates at school and the positive comments I received also confirmed my choice.

Besides, as the Head Prefect at school, I was given the opportunity to participate in the formulation of school regulations. I learnt to see things from the perspectives of both the school authority and ‘the governed’. The challenges from the struggle to strike the right balance and the implementation of rules thrilled me. The fact that I enjoyed seeing law in operation encouraged me to go for law.

You were the last pupil of the former Chief Justice Andrew Li. What did you learn from him?

Mr Li is well known for his professionalism and there are two aspects to it. First, his standard as a legal

professional was extremely high.

For research, he expected pupils to read relevant chapters and even books from cover to cover. They had to make sure that all relevant cases were included. For drafting, he strived for perfection. I still remember him correcting a copy of my draft request for further and better particulars in red ink, and the entire piece turned crimson.

This reflects his high standard and his devotion in teaching his pupils. He tried his best to correct the details and showed his pupils ‘the right way’ in the legal industry.

Second, he is a trusted advocate by both the bench and his opponents.

He was fair and had an impeccable reputation. Being able to attain that reputation and status calls for a high standard of professional

ethics. As an advocate, you should put principles above success. Winning or losing is not the only thing.

For instance, as stipulated in the Bar’s Code, you cannot hide cases against your client in your pocket.

Instead, you should assist the court to address them and try to distinguish them. Do not capitalise on obvious mistakes made by the opponents or take unfair points. Over the years, the bench will know who is a fair advocate and place trust on that advocate, who will in the end command much more authority.

Why did you decide to take up the Secretary for Justice position?

To arrive at the decision, I asked myself two questions. First, was it worth doing? Yes, it definitely was. With the new constitutional HKSLG · FALL 2013 · ISSUE 3

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order of ‘One Country, Two Systems’, there were many areas untested. To be able to stand at the front line and help reinforce the rule of law would be worthwhile for any lawyer.

Second, could I do it? There would be no training school or probation period. You would be making decisions the very first day in office. With extensive areas of law to handle, anyone taking up that position would be stretched to the full. Sometimes, the challenges came from outside the law such as policies and people management.

However, I could not say that I definitely could not do it. I was prepared to have a go.

I also had to consider my family’s reaction. Becoming a public figure would affect the entire family.

My wife asked if I could return to private practise when I stepped down from office. I replied in the affirmative subject to a period of sanitisation. She approved and was prepared to ‘jump in’ with me.

With that, I was able to give my final nod. Even today, I am still extremely grateful to my wife for making the sacrifice, enabling us to take on the challenge together.

During your term, how did you ensure that you were making the right decisions for Hong Kong?

I always ensured everything was done according to the law to the best of my understanding. As the Government’s legal advisor, once I reached a legal conclusion with the best of my ability, this legal position will be that of the Government’s.

Sometimes, if a certain beneficial policy could not be implemented because the execution encountered legal obstacles, I as Secretary for Justice would proactively try to asHKSLG · FALL 2013 · ISSUE 3

sist my colleagues to think around the problem to execute the policy within the four corners of the law.

This was the challenging and rewarding part about working in the Government. In addition, the policy, for the most part, would affect a lot of people in the community; this was in contrast with private practise, where the case usually had immediate impact on individual clients only. The sort of satisfaction you receive as a government official is unparalleled.

What are your views on judicial reviews (JR)?

I echo former Chief Justice Mr Andrew Li’s viewpoint expressed in his speeches in the Ceremonial Opening of the Legal Year. He urged the public to bear in mind the limitations of judicial reviews, that it is not a panacea for all economic, social, and political issues.

During my tenure, there had been no shortage of unmeritorious applications for judicial reviews where leave was refused. We all have to mature as a community to understand the proper ambit of judicial reviews. In the Queen’s Pier case, the Court made it clear that it would scrutinise objectively what the applicant claims to be public interest: if the Court does not agree, the applicant could be penalised on costs. Subsequently, in the Chan Po

Fun Peter case, the Court clarified the threshold for obtaining leave in judicial reviews, making it consistent with that in the UK, namely, whether an arguable case for relief has been shown. These cases reflect the Court’s efforts to elucidate the proper threshold for judicial reviews, while emphasising the public interest consideration, and the importance of access to the courts..

If judicial reviews are properly utilised, they can enhance the rule of law and the quality of administration. From the reports published by the Court of Final Appeal (CFA) since 1997, various cardinal principles on human rights and constitutional issues were laid down in cases brought to the court’s determination by way of judicial reviews. Judicial reviews are thus the very media for these issues to be considered by the highest court, developing the jurisprudence for the good of Hong Kong.

Due to the extensive reach of the Basic Law, judicial reviews often involve the Basic Law, fundamental rights guaranteed by it, and the ‘One Country, Two Systems’ structure itself. With our constitution being relatively young, judicial reviews provide real life opportunities to test the Basic Law provisions.

Judicial reviews also help to ensure the Government remain vigilant.

Knowing that affected individuals can challenge your decision or even legislation in court, those involved in the administration have to make sure that such policies will be ‘JR-proof ’. The Department of Justice would assist Government colleagues to test whether they are compliant with all the basic human rights and the Basic Law. As no government is perfect, judicial reviews may help improve the quality of policies.

FEATURE However, these benefits can be enjoyed only if judicial reviews are brought within the proper ambit.

Otherwise, unmeritorious claims will lead to resources being wasted and tension between stakeholders.

Do you enjoy private practice more than public duty?

Yes and no. This might sound philosophical, but to me there are different seasons in life. I enjoyed my seven years in Government.

At times, admittedly, I was under inner pressure as to whether I had made a correct decision, since such decision would affect the whole society. Sometimes I was criticised, and the immediate taste was not pleasant. Nevertheless, I enjoyed working with my colleagues, in and out of the Department of Justice, and outside counsel. Different people might have different views on our performance, but I do find us a good team who collaborated well to try to make things work.

The experience was highly satisfying.

During my tenure as Secretary, I missed going to court. The Honourable Mr Justice Bokhary once jokingly complained about not seeing me in court. The Secretary for Justice’s duties are fairly different from that of the Attorney General’s before 1997. The office bearer has to participate a lot more in the administration. In my case, I could not afford to stay away for a few days to prepare solidly for a case.

Now returning to private practice, I enjoy the advocacy, the flexibility, and the absence of other types of pressure. It is more mono-track, as you only face the court, the opponents and hopefully all ‘reasonable men’. Still, I miss some of the momentum with my team and colleagues in the administration. As Secretary, I had to see the broader

picture and make collective decisions as the person in the driving seat, instead of reading every minute detail.

These are my different seasons. I have had very good experiences and I have been extremely fortunate.

You are known for your commitment to charitable work. What motivates you to do so?

This is due to my own faith as a Christian and my personal experience.

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er selfish motive to make myself more balanced as a person turned into a genuine and almost irresistible commitment to visit the homeless at least one evening per week.

The satisfaction was unspeakable, and I discovered that there could be so much more to life than just being a successful barrister.

Apart from visiting the homeless, with my skills as a lawyer, I helped poverty-relief agency to formulate positions and lobby the government. For instance, I represented them to successfully bargain with the Social Welfare Department for a short-term lease to set up a centre for the homeless.

What do you think of the recent critiques of our judicial system in Hong Kong, such as the “storm of unprecedented ferocity” which Justice Bokhary mentioned?

After being qualified in the UK, I came back to Hong Kong as a tenant in Mr Andrew Li’s chambers.

Mr Li was kind enough to recommend me to many solicitors. I was given many opportunities, and I seized upon all of them. Especially at the initial stage, I worked extremely hard to make a name.

However, as I focused on becoming a good barrister and making more money to improve my parents’ livelihood, I found myself becoming indifferent. I was not happy.

As a result, I turned to doing volunteering services as I always had some empathy with the less privileged owing to my own background. What started out as a rath-

Honestly, I really do not know what this storm is. The suggestion seems to be that there are some worrying influences or pressures over the heads of our judges. However, having been in the position as Secretary for Justice for seven years, and now back in private practice, I cannot see any worrying sign that judges in Hong Kong have compromised their positions or are put under pressure in that connection.

Judges may have different views and reach different judgments, but I think we should be very proud of our judges, particularly in the sensitive cases, for being extra-independent. I think so far, broadly speaking, the integrity and independence of our judiciary are not an issue at all. And since 1997, we have witnessed many new judges being recruited from the pool of top-notch barristers. The fact that they were prepared to give up their lucrative practice to join the judiciary – shows that the judiciary they join HKSLG · FALL 2013 · ISSUE 3

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FEATURE

is worth their sacrifice, doesn’t it?

That, in itself, is the best vote of confidence.

There were a few controversial cases where the Standing Committee of the National People’s Congress (NPCSC) intervened to interpret the Basic Law. Do you find it detrimental to the rule of law?

As a statement, that must be wrong. The interpretation by the NPCSC is part of the Basic Law under Article 158, and the Basic Law is the constitution of Hong Kong and the law of the PRC. I do not believe one can say that the law of the land is in and of itself detrimental to the rule of law. Nevertheless, with Hong Kong returning to the Mainland, the reality is that not only does Hong Kong operate a different legal system from the Mainland but the entire political system is different too. In the Mainland, the National People’s Congress (NPC) is the highest body in law. Under the Mainland system, the NPCSC has always enjoyed the ultimate power to interpret the law. You have to accept it is part of the sovereignty to be exercised over Hong Kong.

How do you then link up the two systems? Sir Anthony Mason, in the Lau Kong Yung case, was able to see things from an overarching perspective and gave an insightful exposition on the matter. According to him, Article 158 is the essential link under the ‘One Country, Two Systems’. And under Article 158(3) of the Basic Law, the courts of the HKSAR are under an obligation to seek an interpretation from the NPCSC on Basic Law provisions concerning, affairs which are the responsibility of the Central People’s Government and the relationship between the Central Authorities and the HKSAR, in HKSLG · FALL 2013 · ISSUE 3

circumstances prescribed by the Article. However, we all understand the controversies created by any NPCSC interpretation, particularly when the issue has already gone to the CFA. You can certainly see the tension there, and that is why during my term I vowed to try my very best, insofar as matters were within my control, to avoid a situation whereby I would have to consider asking for an NPCSC interpretation.

In the Congo case, even though the CFA had reached the provisional view to apply the PRC’s state immunity policy in Hong Kong, the Court still considered under Article 158 it was duty-bound to refer the matter to the NPCSC for interpretation, and they did. In terms of the Congo case, both the Law Society and the Bar Association confirmed that there had been no damage to the rule of law. It was but an implementation of what is provided for under the Constitution. The handling of the case confirmed the NPCSC’s authority in interpreting the Basic Law without curtailing the CFA’s constitutional power of final adjudication – everything was done in accordance with the law. As far as I was concerned

as Secretary for Justice, an NPCSC interpretation must be the very last resort– only if everything else has been exhausted and the matter cannot be resolved within the system in Hong Kong.

The Congo matter, in fact, has further improved the mutual understanding between Hong Kong and Beijing. Officials from the Ministry of Foreign Affairs sat through the appeal. Many of these officials are highly intelligent, well-versed in the English language, and legally trained. Some told me they were very impressed by our Court and the lawyers: the ways in which the arguments were exhausted, leaving no stone unturned, and the depth and dimensions that the considerations reached. Also, they were impressed with the judgment– not just because it was favourable, but because of the detailed analysis given by the judges. Overall, the Congo case was a powerful illustration of the strength of our Court and the common law legal system of Hong Kong under the new constitutional order.

Admittedly, some Basic Law issues could be alien to common law lawyers, including of course the

FEATURE NPCSC’s power of interpretation carrying legislative effect. But through the chain of high constitutional cases, the CFA did a lot of heart-searching and they stayed true to the law regarding the provisions of the Basic Law including the free-standing power to interpret the Basic Law by the NPCSC. The courts have to be extremely cautious with these sensitive cases– they must exercise independent views and their maximum judicial capability to ensure everything is in compliance with the Constitution.

And it is understandable why difficulties and controversies do arise when dealing with these cases: it is a completely virgin territory with no precedents.

Since the handover in 1997, has Hong Kong found any difficulties in maintaining an independent judiciary?

Although the path has been difficult, it is confirmed by the international monitoring bodies that we do have an independent judiciary.

The US and the UK governments have periodic reports on Hong Kong which naturally put emphasis to see whether independent judiciary and the rule of law are doing well – and I think the reports

so far have been very positive. For an independent judiciary, we all have to believe in it first and not just pay lip service to it.

The Government should protect the Judiciary. Since the Judiciary cannot be too vocal, it is incumbent on the Government and the Secretary for Justice to remind the public not to put pressure on the court. The quality of judges matters as well– top-notch barristers and solicitors who believe in the good cause will continue to join the bench. The entirety of Hong Kong all have to be vigilant. With greater and inevitable integration with the Mainland economically, we have to beware that the degree of respect for the rule of law in some sectors of the Mainland may not be as high.

An independent judiciary is cardinal to the rule of law. In Hong Kong, the courts enjoy a good reputation, and the people trust the courts. However controversial the issues are, once the courts bang the gavel, the CFA in particular, that resolves matters. This is not necessarily so in some other countries– judges might not enjoy that reputation and the courts might not command that authority, but we

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still have that in Hong Kong. We really have to preserve it– so that our courts can continue to adjudicate cases, without fear and favour, according to the law and the facts.

What advice do you have for aspiring barristers or young lawyers generally?

First of all, know yourself and your ability. The legal profession is a meritocratic and competitive profession. Do not have any illusion– you have to be good.

Second, know your interests and your passion. For instance, after a court appearance, did you feel like vomiting or did you enjoy it? Do what you love, and love what you do. Of course, you all know that you have to work hard. Above all, be honest and do not waste time.

If law is not for you, go elsewhere– the world is very big. Not becoming a lawyer is not the end of the world.

For young and upcoming lawyers, drawing from my own experience, do not just think about yourself.

We are all privileged in terms of the remuneration and the lifestyle; but lawyers are in a special position to help others. If you have that goodwill within you, preserve it.

I am not asking you to do charitable work right now, but do keep the motivation there. During the next few years, you need to work hard and get qualified, but by that time some practitioners do not feel about anything anymore. So preserve that and work hard.

Do not forget to help others. There is nothing more satisfying than being able to utilise your skills and your knowledge to help not just yourself but others. Once you are able to help others, you will be a much happier person.

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CHINA

A Monumental Year in Intellectual Property Anti-Monopoly Law Charles Balvin

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n 1 August 2008, the first Anti-Monopoly Law (AML) of the People’s Republic of China came into effect. The AML covers a broad range of abusive actions by dominant ‘business operators’, who attempt to control the market by eliminating the competition.

However, China has only recently recognised the need to combat abuses of the use and licensing of intellectual property (IP) rights pertaining to patents, trademarks, copyrights, and other forms of IP. Earlier this year, the Shenzhen Intermediate People’s Court rendered the landmark decision of Huawei v InterDigital, which discusses whether a business operator violates the AML in the context of IP law. This case lays the bedrock for the State Administration for Industry and Commerce Task Force (SAIC) to implement new regulations that specifically target abuse and domination in the IP market. These recent steps taken by the Court system and SAIC clearly demonstrate that China is moving toward a rule of law that will protect the consumer and create a forum for IP entities to fairly compete with each other.

Huawei v InterDigital InterDigital Communications Inc. (InterDigital) is a licensor of standard-essential patents (SEPs) for mobile phones. Huawei Technologies Co. Ltd. (Huawei), produces wireless technologies that HKSLG · FALL 2013 · ISSUE 3

use this patented technology. Huawei made two separate accusations against InterDigital in the Shenzhen Intermediate People’s Court.

First, Huawei accused InterDigital of having a ‘dominant market position’ in China in the licensing of SEPs. This is based on the fact that InterDigital and its wholly owned subsidiaries control significant patent portfolios in the wireless industry in China. Thus, they argued that InterDigital abused its standing in the Chinese IP market by conducting unfair business practices.

4.) commenced litigation for patent infringement against Huawei in the United States during negotiations, all of which are tantamount to a violation of the AML.

Huawei asserted that InterDigital: 1.) charged Huawei higher royalty fees than other licensees for the SEPs; 2.) tied the licensing of the SEPs to non-essential patents; 3.) requested grant-backs of patent rights; and,

In an unprecedented decision, the Court found that InterDigital violated the AML. The Court ordered InterDigital to cease their excessive pricing and tying of SEPs to non-essential patents, and awarded Huawei RMB 20 million in damages. The Court even took a step

In a second complaint, Huawei alledged that InterDigital violated a previous agreement it made to abide by principles of negotiation set by the European Telecommunications Standards Institute (ETSI), which requires the use of fair, reasonable, and non-discriminatory (FRAND) terms.

CHINA further and found that, under Chinese law, InterDigital violated the FRAND terms of the agreement, and decided that the future royalties charged by InterDigital could not exceed 0.019% of the actual sale price of the product sold by Huawei. However, it should be noted that the Court did not explain how they arrived at the 0.019% figure. Nevertheless, the Court’s opinion is the first of its kind in China and demonstrates what the plaintiff must prove in order to prevail in an anti-monopoly case.

What constitutes unfair trade practices in the IP field?

Significantly, the ruling of the Shenzhen Court shows that tied sales involving IP rights are considered a badge of abuse in the IP market. Tying has previously been defined as the right holder (InterDigital) requiring the licensee (Huawei) to accept or purchase other IP rights which may be contrary to the wishes of the licensee.

Here, InterDigital demanded that Huawei purchase certain nonessential patents before granting Huawei the rights to the SEPs. This act evinced InterDigital’s dominant status in the market because as the sole owner of the SEPs, InterDigital could force Huawei to accept these terms. Such conduct, according to the Court, results in unfair business practices in the IP forum.

This decision also evinces the Court’s willingness to consider the parties’ status as members of ETSI and to enforce their agreement made pursuant to FRAND terms. FRAND is grounded in French law, yet the Court found that the negotiations did not comply with the FRAND terms pursuant to Chinese law. The Court’s application of FRAND indicates

the Court’s willingness to apply European law, which focuses on whether the negotiations are fair and reasonable, and mandates that the right holder treats all potential licensees equally. As a result, the Court employed both Chinese Law (AML) and European law (FRAND) in order to prevent abuse by InterDigital. Further, from the Court’s ruling that the commencement of a case during negotiations violated the Chinese AML, it seems that pending litigation in other jurisdictions may be considered as an unfair practice.

Thus, a potential plaintiff who initiates a lawsuit under the Chinese AML would be wise to include claims of abuse that arise domestically as well as internationally.

So can it be said that the Shenzhen Court has defined some of the elements and factors to be considered when evaluating an IP monopoly matter? SAIC is now taking the initiative to create regulations to address this concern.

SAIC’s proposed regulations to combat abuse in the IP market Recently, SAIC released its sixth draft of regulations on AML regarding IP rights. The regulations draw a correlation between AML and IP Law, specifically enunciating the need to promote innovation and competition while, at the same time, protecting the interests of the consumer and the public at large. The main focus of the regulations is to identify and deter unfair trade practices, including refusal to license, tying and bundling, grant-backs, and agreements which would fix the price of commodities with IP rights resold to third parties. Effectively, SAIC will implement regulations stemming from Huawei v InterDigital.

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the Shenzhen Court’s requirements, as SAIC has proposed regulations which will deter agreements between entities that fix the prices of IP and joint boycotts conducted by entities to force competitors out of the IP market. Further, these measures evince a trend towards preventing international corporations from price-fixing to the detriment of domestic Chinese companies. As such, SAIC will most likely be the primary enforcer of potential IP monopoly abuses.

Conclusion SAIC’s proposed regulations may prevent abuse in the IP market, but we will have to wait until they come into effect before we see results. However, China has taken great leaps to combat IP monopolies in 2013, and the improved deterrence of IP monopolies will serve to protect the public in coming years. It is clear that more judgments and legislations will follow to supplement the actions of the Shenzhen Court and SAIC. Following this trend, we will likely see increased competition among IP licensors in the Chinese market and more foreign investors willing to acquire patents in China.

These regulations may go beyond HKSLG · FALL 2013 · ISSUE 3

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CHINA

Cynthia Or

Renewed Concerns Over Legal Risks of VIE Structures: Guidance from the SPC on Entrustment Agreements

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s a state-controlled economy, the Chinese Government imposes restrictions against foreign direct investment (FDI) in ‘critical’ economic sectors like education, finance, media, and telecommunications. In response, businessmen and their legal advisors have resorted to using the ‘Variable Interest Entity’ (VIE). A VIE is a special investment structure designed to circumvent sector-specific restrictions. VIE structures are widely employed, with prominent examples including Sina, Alibaba, Baidu, and Focus Media.

Under a VIE structure, outside investors typically form a wholly foreign-owned enterprise (WFOE) in China, which in turn enters into a series of contracts with a domestic company having the required licences to operate in the FDI-prohibited sectors. Through contractual instruments such as call options, equity pledges, and service or consulting agreements, the VIE is obliged to submit to the control of the WFOE and to transfer all profits for consolidation under the WFOE’s account. In short, VIE allows foreign firms to control–but not legally own–Chinese companies in restricted sectors.

While such manipulation of regulatory loopholes has not been expressly clamped down, the absence of official approval of VIE structures implies that foreign investors have no legal recourse where a VIE breaches its contractual obligations. A recent ruling by the Supreme People’s Court (SPC) HKSLG · FALL 2013 · ISSUE 3

on Chinachem Financial Services v China Small and Medium Enterprise Investment Co. Ltd. has reaffirmed doubts surrounding the enforceability and sustainability of such foreign control arrangements.

The Chinachem case Instead of a VIE structure, an entrustment arrangement was in place between the parties in dispute. Chinachem, a Hong Kong company, entrusted China S.M.E. with US$11 million in 1995 to buy and hold a 6.5% stake in the China Minsheng Banking Corporation on its behalf. Under the terms of the entrustment agreement, China S.M.E. was obliged to transfer all dividends to Chinachem, and to vote at Chinachem’s direction.

However, Chinachem fell out with China S.M.E. in 1997, when the latter asserted itself as the rightful owner of the Minsheng shares. In 2001, China S.M.E brought the

case before the Beijing People’s Court, alleging that Chinachem was merely a creditor instead of a trustee, and therefore had no rightful claim over the disputed shares.

Adopting a holistic view of the deal structure, the Court concluded that Chinachem was more than a creditor because the contracts amounted to an entrustment arrangement. However, the Court held that the arrangement violated Article 52 of the PRC Contract Law as an attempt to “conceal illegal intention with lawful form.”

In particular, it was held that this arrangement was a contract to deliberately circumvent restrictions against foreign investment in financial institutions. As a result, the disputed shares worth an estimated US$700 million was held to belong to China S.M.E., the registered shareholder under PRC law. In return, China S.M.E. was ordered to pay back the principal of US$11

CHINA million in addition to compensation of US$4 million to Chinachem. On appeal by Chinachem, the Supreme People’s Court affirmed the lower court’s decision.

energy sector. Again, regulators did not take the opportunity to censure and ban other listings through VIEs. Such apparent lack of regulatory resolve may be explained by the Government’s concern over the negative effects of clamping down on VIEs, such as market disorder and problems of liquidity.

Implications for VIEs The ruling is noteworthy for raising the possibility that the Chinese Courts will invalidate other similar foreign control agreements, including VIEs. In attempting to distinguish potential VIE disputes from the Chinachem case, some optimists may emphasise the considerable differences between VIEs and entrustment arrangements. It is argued that the complex structure of VIE arrangement makes it less conspicuously illegal. Under an entrustment agreement, offshore investors directly contract with, and control the onshore trustee without proxies in between. With VIE arrangements however, offshore investors of VIEs are several rungs removed from the business operation in restricted sectors, with management and contracting power vested with the onshore WFOE. As both VIEs and WFOEs are domestic onshore companies, contracts between them should be recognised as legal under PRC law. Assuming such reasoning is tenable, the ruling in Chinachem may not be applicable to the distinguished cases of VIEs. However, VIE structures do fit the description of an entrustment arrangement by the SPC in Chinachem - a product of ‘creative compliance’ seeking to circumvent restrictions and “conceal illegal intentions with a lawful form.” Since both transaction models serve similar functions, the PRC courts would likely dismiss the technical, structural differences between the two and find VIE structures void by analogy.

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Future of restricted FDI and VIE

Possible limitations to the ruling’s impact on VIEs Despite on-going debates over the ruling’s implications, other relevant institutional and political factors appear to suggest that its implications, if any, would be limited.

Firstly, there is no doctrine of binding precedent under the PRC legal system, so future court decisions may not be bound by the Chinachem ruling. Secondly, there are doubts over the strength of regulatory enforcement against VIEs. Although Chinese regulators have signalled a tougher stance against VIE structures in recent years, their actions so far were of limited impact. For example, the General Administration of Press and Publication published a circular in 2009, prohibiting foreign control of online gaming companies in China via various special contractual arrangements including VIEs. However, there has been no report on any VIE gaming company being penalised or ordered to be wound up by the regulators pursuant to the notice. Similarly, in 2011, the Government of Hubei banned the company, ‘Buddha Steel’s’, planned IPO in the US, citing that the company’s VIE structure contravened FDI restrictions in the

Taking into account the above factors, it is unlikely that the PRC would drastically clamp down on VIE structures in the near future.

However, the SPC decisions and recent regulatory actions show that the Government is trying to curtail the practice, albeit in a piecemeal fashion. Whether this policy shift would be coupled with further liberalisation of domestic markets remains to be seen. The official launch of the Shanghai Free Trade Zone (FTZ) this September has eased restrictions on foreign investment within the zone, including FDI in the financial and gaming industries. If the FTZ and its liberalised regime are eventually replicated in other cities, the waning need for VIE structures will phase out the practice in the long run.

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INTERNATIONAL

A Long-Awaited Legal Remedy for International Child Abduction in Japan Crystal Yeung

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n 25 October 1980, the Hague Conference on Private International Law concluded the Hague Convention on the Civil Aspects of International Child Abduction (the Convention). For over three decades, the Convention has served to protect children from wrongful removal and retention, established procedures for returning them promptly to the State of their habitual residence, and ensure that parental rights of access are respected by Contracting States. Canada, France, Switzerland, and Greece were the very first to sign the Convention upon its conclusion. Since then, 90 States have become contracting members to the Convention including all but one of the G8 nations – Japan.

Japan’s reluctance to sign the multilateral treaty has long been subject to international pressure and speculation. The US, for instance, repeatedly pressed Japan to ratify the Convention, as it would grant a remedy to American parents whose children have been abducted to Japan by their former spouses from Japan. Although diplomatic tension eased this past May when the Japanese Parliament voted unanimously to ratify the Convention, Japan has yet to declare formal accession to the treaty.

The Convention Under the Convention, children under 16 who are wrongfully taken or retained by one parent after a failed marriage must be returned to the country of their habitual residence. Generally, wrongful reHKSLG · FALL 2013 · ISSUE 3

tention is established when a child is taken from the country he primarily lives in and held in another country without the consent of one parent. Habitual residence, it follows, is the country the child routinely lives in. Through these guiding principles, the Convention presents an avenue for Contracting States to provide a remedy for cases of international child abduction.

a pair of twin boys from Ohio moved to Hong Kong for an intended two-year period. Their parents divorced after one year and the mother applied for sole custody in Hong Kong. Subsequently, the father filed proceedings for the return of the boys to Ohio. The Court of First Instance held in favour of the father, but its decision was reversed by the Court of Appeal on the grounds that the children, having lived in Hong Kong with parental agreement for the past year, had already established habitual residence in Hong Kong by the relevant date. As such, there was no wrongful retention according to the provisions of the Convention.

Japanese family law tradition

Determination of habitual residence has been controversial in many of the Hague Abduction cases since interpretation is derived from fact-based determinations.

BLW v BWL exposes the thin line that divides courts’ interpretation of habitual residence and the subtleties required to precisely determine wrongful retention. It also illustrates the undisputed recognition of the Convention by the Hong Kong Courts. In this case,

In contrast, under current Japanese family law, it is nearly impossible for a foreign parent to lawfully secure the return of a child abducted to Japan by a parent with Japanese nationality. This is primarily because Japan does not recognise joint custody. In Japan, the prevailing social sentiment in divorce is that there should be a complete separation of the child from one parent. Accordingly, Article 819(1) of the Japanese Civil Code stipulates that, in the case of divorce, only one parent will hold parental power. Consequently, when a Japanese parent holds custody (and the Japanese Courts predominantly award custody to the parent in current possession of the child), the retrieval of a child by the foreign parent will constitute an unlawful act. Japan previously rejected ratifying

INTERNATIONAL the Convention citing, inter alia, the need to protect Japanese mothers from abusive foreign husbands.

This is not a baseless concern. Although Article 13 of the Convention deems grave risk to a child’s well-bring as sufficient to rescind mandating the return of a child to his habitual residence, among the Hague Convention cases, there is a reluctance to accept that domestic violence exposes children to grave risk. Thus, Japanese mothers are forced to choose to return with their children at their own expense.

Other criticisms to the Convention include procedural issues such as separate representation for children, the impact various legal instruments have on implementation and differences in the interpretation of key concepts due to diverse case law judgments.

At the same time, the case against Japan’s archaic family law system is overwhelming. In 2009, the Japanese Government’s casual ambivalence towards this problem was forced to take a turn when an international child abduction case received global condemnation.

Christopher Savoie, an American father, was arrested by Japanese authorities for attempting to retrieve his children from his Japanese ex-wife, who had wrongfully taken them from Tennessee to Japan. Had Japan been party to the Convention, it would have been a prima facie matter for the Japanese Court to order the children’s return to Tennessee. Instead, Japan’s refusal to adopt the Convention resulted in an unjust outcome. In international child abduction cases, there are often compelling arguments by both parties and it should fall upon the Courts to examine cases in their entirety. Of course, public judgements tend to favour emotions over essential facts.

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The beginnings of change Japan is expected to formally ratify the Convention in March 2014.

However, this does not mean that distressed parents will be given the key to the toy box. For the Convention to operate as more than an empty promise, Japan must first finalise court rules and domestic legislation. Even then, legal experts are doubtful that the intent of the Convention will be implemented faithfully as Japan fundamentally supports the entrenched family law practices in force today.

Hans van Loon, said that one of the purposes of the Convention is to eliminate the conflicts that arise when courts are in different jurisdictions, thereby allowing for quicker resolution of practicalities.

The Convention has arguably, in many ways, achieved this purpose.

In Japan, the extent to which this objective will be realised depends on how the Convention’s provisions will be put into practice by judges in the Osaka and Tokyo Family Courts.

Finally, enforcement of return orders may be problematic since Japanese courts will not call for imprisonment of disobedient abductors or allow bailiffs to seize children.

All things considered, it is conceivable that the Convention will struggle, at least initially, to gain a foothold in a social structure that inherently favours absolute custody to the mother. However, as the Japanese proverb goes, ‘if you do not enter the tiger’s cave, you will not catch its cub’. At a recent seminar in Hong Kong, former Secretary General of the Hague Convention on Private International Law, Mr HKSLG · FALL 2013 · ISSUE 3

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INTERNATIONAL

“I’m sorry Dave, I’m afraid I can’t do that” James Muirhead

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ethal Autonomous Robots (LARs), designed to identify and engage targets without human input, are poised to change global military capabilities. There are approximately 77 countries with military robotics programs, including several developed nations which have robots with optional lethal autonomous functions that are operational. For the first time in human history, technology now has the ability to find and select specific targets without human input.

Benefits to international humanitarian law (IHL) LARs are attractive to militaries looking to lower their human cost in combat as they act as force multipliers, enabling fewer soldiers to project greater force. This may have the effect of encouraging states to use LARs to enforce IHL in dangerous situations without creating the political backlash that boots on the ground may have.

Humanitarian intervention is only permissible where authorised by UN mandate, or by customary law right of humanitarian intervention.

Use of LARs could enable the rapid deployment of assistance to alleviate human suffering without risking further lives unnecessarily. Robots with lethal capabilities could be used to deliver emergency medical supplies and protect vulnerable groups in conflict zones without further exacerbating the situation.

It is even argued that with the right artificial intelligence, LARs would be able to neutralise threats quicker HKSLG · FALL 2013 · ISSUE 3

and more effectively than humans, reducing collateral damage.

Integrating LARs into IHL Current IHR does not allow for military use of LARs, and there are very specific questions regarding control of, and liability for, these robots. Especially where human operators are ‘out of the loop’ there are doubts whether LARs could ever be developed that adhere to the principles of humanity and morality governing the use of force in IHL. Given the increased use of drones for extrajudicial killings, it is possible that further insulating commanders from the battlefield will make ordered strikes more tempting with LARs that have greater capabilities.

International consensus is needed to ensure that LARs are incorporated into a clear command structure for the apportionment of criminal responsibility. This is especially important where LARs have to make split second decisions to eliminate an identified target and human operators may not be able to intervene. The Human Rights Watch argues that human emotions “provide one of the best safeguards against killing civilians, and a lack of emotion can make killing easier.” Human intervention to make judgements both in the selection of targets and identifying illegal or immoral orders could prevent unnecessary killing.

States also need to be wary of an unrestricted use of LARs being con-

sidered an act of aggression. If the use of LARs is significant enough to constitute a use of force under Article 2(1) of the UN Charter, the opposing state has a customary law right recognised by Article 51 of the Charter to self-defence, which could spark all-out war.

Conclusion LARs represent an exciting new development in military technology, and it may be too late to ban their use entirely. While further developing this technology may be opening Pandora’s box, states have a binding obligation under Article 36 of Protocol I additional to the Geneva Conventions 1977, to decide on the proper legal framework to ensure LARs are used responsibly. Failure to do so may allow the proliferation of tireless robots making the world a battlefield with limited paths of recourse. If these concerns can be addressed, LARs may serve a critical role in preventing the deaths of innocent people and in aiding humanitarian intervention. If not, we may find ourselves trapped in a future where technology has the power to make life or death decisions on our behalf.

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