A Financial Centre for Two Empires: Hong Kong's Corporate, Securities and Tax Laws in its Transition from Britain to China

294 Pages·2014·2.105 MB·English

by  David C. Donald

A FINANCIAL CENTRE FOR
TWO EMPIRES
Th is is a case study of legal transplant, economic development, cul-
tural adaptation and political integration. Hong Kong’s journey from
British entrepô t to China’s international fi nancial centre is one of the
most interesting legal stories of our time. But Hong Kong’s future is even
more interesting: will this region with British-origin institutions sur-
vive full integration into China and become its permanent international
fi nancial centre? Does Hong Kong have the legal infrastructure to com-
pete eff ectively with Shanghai and Singapore, and even New York and
London? A Financial Centre for Two Empires presents Hong Kong’s story,
examines its corporate economy and securities market, assesses its cor-
porate, securities and tax laws for doctrinal soundness and appropriate
remedies, and evaluates the quality of their enforcement empirically. It
closes with a view of Hong Kong from the perspective of developments in
Beijing and Shanghai, including an examination of the important polit-
ical dimension.
D AVID C. DONALD is a professor at the Faculty of Law of Th e Chinese
University of Hong Kong.
WANG JIANGYU is a professor at the Faculty of Law of the National
University of Singapore and a visiting professor at the Xi’an Jiaotong
University Law School.
JEFFERSON P. VANDERWOLK is a member of Ernst & Young’s Washington
Council Ernst & Young practice.
Cambridge University Press
I nternational Corporate Law and Financial
Market Regulation
C orporate law and fi nancial market regulation matter. Th e Global Financial Crisis has
challenged many of the fundamental concepts underlying corporate law and fi nancial
regulation; but crisis and reform has long been a feature of these fi elds. A burgeoning
and sophisticated scholarship now challenges and contextualizes the contested rela-
tionship between law, markets and companies, domestically and internationally. Th is
Series informs and leads the scholarly and policy debate by publishing cutting-edge,
timely and critical examinations of the most pressing and important questions in the
fi eld.
Series Editors
Professor Eilis Ferran , University of Cambridge.
Professor Niamh Moloney , London School of Economics and Political Science.
Professor Howell Jackson , Harvard Law School.
Editorial Board
Professor Marco Becht, Professor of Finance and Economics at Universit é Libre de
Bruxelles and Executive Director of the European Corporate Governance Institute
(ECGI).
P rofessor Brian Cheffi ns, S.J. Berwin Professor of Corporate Law at the Faculty of Law,
University of Cambridge.
P rofessor Paul Davies, Allen & Overy Professor of Corporate Law and Professorial
Fellow of Jesus College, University of Oxford.
P rofessor Luca Enriques, Visiting Professor, Harvard Law School.
P rofessor Guido Ferrarini, Professor of Business Law at the University of Genoa and
Fellow of the European Corporate Governance Institute (ECGI).
P rofessor Jennifer Hill, Professor of Corporate Law at Sydney Law School.
P rofessor Klaus J. Hopt, Director (emeritus) of the Max Planck Institute for Comparative
and International Private Law, Hamburg, Germany.
P rofessor Hideki Kanda, Professor of Law at the University of Tokyo.
P rofessor Colin Mayer, Peter Moores Professor of Management Studies at the Saï d
Business School and Director of the Oxford Financial Research Centre.
J ames Palmer, Partner of Herbert Smith, London.
P rofessor Michel Tison, Professor at the Financial Law Institute of the University of
Ghent, Belgium.
A ndrew Whittaker, Group General Counsel at Lloyds Banking Group.
Professor Eddy Wymeersch, former Chairman of the Committee of European
Securities Regulators (CESR); former Chairman of the IOSCO European Regional
Committee, and Professor of Commercial Law, University of Ghent, Belgium.
A FINANCIAL CENTRE FOR
TWO EMPIRES
H ong Kong’s Corporate, Securities and Tax Laws in its
Transition from Britain to China
DAVID C. DONALD
WITH CONTRIBUTIONS FROM
JEFFERSON P. VANDERWOLK AND
WANG JIANGYU
University Printing House, Cambridge CB2 8BS, United Kingdom
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© David C. Donald 2014
Th is publication is in copyright. Subject to statutory exception
a nd to the provisions of relevant collective licensing agreements,
n o reproduction of any part may take place without the written
p ermission of Cambridge University Press.
First published 2014
P rinted in the United Kingdom by Clays, St Ives plc
A catalogue record for this publication is available from the British Library
Library of Congress Cataloguing in Publication data
D onald, David C., 1958– author.
A fi nancial centre for two empires : Hong Kong’s corporate, securities and tax laws in its
t ransition from Britain to China / David Donald ; contributions by Jiangyu Wang; c ontributions
by Jeff erson P. VanderWolk.
p ages cm – (International corporate law and fi nancial market regulation)
I ncludes bibliographical references and index.
I SBN 978-1-107-00480-1 (hardback)
1 . Corporation law – China – Hong Kong – History – 20th century. 2. Financial
institutions – Law and legislation – China – Hong Kong – History – 20th century. 3. Hong
Kong (China) – History – Transfer of Sovereignty from Great Britain, 1997. 4. Hong Kong
(China) – Economic conditions. I. Title.
KNQ9328.D66 2014
346.5125ʹ066–dc23
2014009113
ISBN 978-1-107-00480-1 Hardback
C ambridge University Press has no responsibility for the persistence or accuracy of
U RLs for external or third-party internet websites referred to in this publication,
a nd does not guarantee that any content on such websites is, or will remain,
accurate or appropriate.
CONTENTS
List of fi gures ix
List of tables x
Preface xi
1 H istory’s marks on Hong Kong law: from British colony, to
Chinese SAR 1
A Hong Kong’s historically driven component culture 1
1 Th e endowments of an international fi nancial centre 1
2 Accidental haven with unintended consequences 4
B F orming Hong Kong’s ‘caretaker’ government model 9
1 Cutting in the middlemen 9
2 Institutions of intermediation 15
3 Cultivating community leaders 19
C Building the Hong Kong legal system 22
1 Laying the foundation 22
2 A ‘colonization kit’ of ordinances for the good order 25
3 Linking Hong Kong to the English Common Law 27
D Hong Kong as an exemplary jurisdiction in China 34
1 A new role for an old port 34
2 From caretaker society to civil society? 36
3 Laissez-faire policies are essentially fading path dependence 44
4 Hong Kong must begin to make common law 49
2 Hong Kong’s economic structure: the corporate control
context 54
A T wo salient economic characteristics 54
1 Th e dominance of substantial shareholders 54
2 A stock market dominated by companies formed under
foreign law 57
3 Data and methodology 59
v
vi Contents
B Hong Kong’s corporate groups 62
1 Th e fi nancial services sector 62
a Th e Bank of East Asia 62
b Th e Bank of China Group 64
c HSBC Holdings 66
d Standard Chartered 68
2 Th e property development sector 69
a Cheung Kong Holdings 71
b New World Group 73
c Th e Hang Lung Group 77
d Henderson Land 79
e Sun Hung Kai 83
3 Th e commerce and industry sector 8 5
a Jardine Matheson 86
b China Mobile Limited 88
c Hutchison Whampoa Limited 90
d Swire Pacifi c 91
e China Resources 93
f CITIC Pacifi c 95
4 Governance relevant information summarized for the dominant
corporate groups 97
C An exchange dominated by other countries’ companies 101
3 Hong Kong corporate and securities laws in
response to the Region’s role as China’s international
fi nancial centre 104
A Evaluating Hong Kong law on the basis of local risks 104
B Law transplanted (only) as the need arose 111
1 Slowly evolving company law 111
2 Crisis-driven securities regulation 117
C How good are the Hong Kong company and securities laws? 123
1 Does company law protect against majority shareholder
abuse? 123
a Public defence of minority shareholders 127
b Applying the unfair prejudice action to listed companies 131
2 Does company law address the specifi c risks of corporate
groups? 133
3 D oes company law protect both unsophisticated and sophisticated
creditors? 140
4 Does company law suffi ciently serve private companies? 147
Contents vii
5 Do company and securities laws suffi ciently limit risks from
foreign listed companies? 152
a Recognized and acceptable jurisdictions 153
b Required provisions in articles 154
c Outreach provisions of the Companies Ordinance 155
6 Do securities laws and regulations prevent market abuse? 157
a Rules against insider dealing 159
b Rules against price manipulation 162
c Rules on short sales 163
d Requirements for investment banks sponsoring public
off erings 164
D R educing the risks of algorithmic trading through taxation 165
E Do Hong Kong company and securities laws measure up? 168
4 Th e role of Hong Kong’s tax policies 1 71
A Historical background 171
B Hong Kong’s tax system today 173
C Hong Kong tax seen on a global scale 176
1 Exchange of information 176
2 Hong Kong as a ‘tax haven’? 178
D Taxation and the fi nancial centre 183
1 Stamp duty on stock transfers 183
2 Exemption of off shore investment funds from profi ts tax 185
E Taxation and the rule of law in Hong Kong 186
5 Enforcement of corporate and securities law in
Hong Kong 188
A Th e institutional framework 188
1 Introduction 188
2 Th e courts 189
3 Th e Securities and Futures Commission (SFC) 1 91
4 Hong Kong Exchanges and Clearing Limited (HKEx) 193
B Private enforcement through litigation 196
1 Unfair prejudice actions 196
2 Shareholder derivative actions 201
3 Securities fraud actions 205
C Public enforcement 206
1 Th e range of the SFC’s activity 2 06
2 Supervising licensed corporations 211
3 Policing the market against misconduct 213
viii Contents
4 Direct government action: a tale of two bailouts 216
D Contractual sanctions by the HKEx 220
1 Th e enforcement record 220
2 Quality versus volume 221
6 C hina’s impact on Hong Kong’s position as an international
fi nancial centre: the legal and policy dimensions 223
A Introduction: integration, competition and erosion 223
B CEPA’s direct benefi ts for Hong Kong’s fi nancial sector 225
C L isting Chinese companies in Hong Kong: the regulatory and legal
challenges 228
1 Th e China factor, especially SOE listings, in Hong Kong’s stock
market 228
2 Th e legal framework for corporatized SOEs: the law on
paper 230
3 Legal-political governance of SOEs 234
a From traditional to corporatized SOEs 234
b SASAC as the de facto state shareholder 236
c Direct political control of SOEs by the party 238
4 P olitical and policy considerations behind the listing of SOEs in
Hong Kong 240
a Th e good policy pursuance: fi nancial and political reasons for
listing SOEs in Hong Kong 240
b B onding Chinese SOEs to Hong Kong’s better regulatory
regime 242
c Political control of SOE listings by the PRC 246
5 S OE listing: challenges for Hong Kong’s regulatory and legal
environment 249
a SOE operations: business judgement or political
judgement? 249
b Challenges on cross-border enforcement of securities fraud
between Hong Kong and mainland China 251
D Th e potential rise of Shanghai as a fi nancial centre 254
E Concluding remarks 256
References 258
Index 269
LIST OF FIGURES
2.1 BEA Group 64
2.2 BOC Group 66
2.3 Th e HSBC Group 68
2.4 Standard Chartered Group 70
2.5 Cheung Kong Group 74
2.6 New World Group 78
2.7 Hang Lung Group 80
2.8 Henderson Group 82
2.9 Sun Hung Kai Group 84
2.10 Jardine Matheson Group 87
2.11 China Mobile 90
2.12 H utchison Whampoa Ltd. 92
2.13 Swire Group 94
2.14 China Resources Group 96
2.15 Th e CITIC Group 98
2.16 C hanges in controlling shareholdings, 2003–12 100
2.17 S EHK listed companies – place of incorporation 102
2.18 SEHK Main Board, market capitalization of H-Shares (HKD mil),
1993–2013 103
5.1 Unfair prejudice actions, 1996–2012 197
5.2 A nnual success rate of unfair prejudice actions 197
5.3 Derivative actions, 1996–2013 203
5.4 S FC enforcement actions by nature, quarter ended
30 June 2013 209
5.5 Aggregate annual SFC enforcement actions, 1997–2013 209
5.6 S FC enforcement claims, 2003–5 212
5.7 V iolations of licensing requirements and duties to clients, 1997–2013 214
5.8 Policing against market misconduct, 1997–2013 217
5.9 HKEx enforcement actions, 2003–12 221
ix