In the first part of ALB’s web-only series on what the Year of the Monkey will look like for Asia’s key markets, we speak to Elaine Lo, Asia Chair & Senior Partner at Mayer Brown JSM, on what 2016 holds for Hong Kong.
ALB: What are some of the most important legal and regulatory developments you expect to see in Hong Kong in 2016?
Lo: Two important pieces of legislation with far-reaching consequences for Hong Kong business were recently enacted. These are the Contracts (Rights of Third Parties) Ordinance which came into effect on 1 January 2016, and the Competition Ordinance which came into effect on 14 December 2015.
The Contracts (Rights of Third Parties) Ordinance reforms the doctrine of privity of contract by providing a statutory framework for conferring contractual benefits on third parties. The Ordinance entitles a third party, who is not a party to a contract, to enforce the terms of that contract if a contractual term purports to confer a benefit on that identifiable third party.
The Competition Ordinance prohibits anti-competitive agreements, abuse of market power and anti-competitive mergers and acquisitions. The rationale is to promote economic growth by providing consumers with lower prices, more choice and better quality goods and services.
Both these pieces of legislations bring Hong Kong generally in line with UK, Singapore, China (in the case of anti-trust rules) and other countries which are trading partners of Hong Kong.
Of the bills that were introduced in LegCo during the past two years, the more noteworthy is the Copyright (Amendment) Bill 2014, which substantially amends the current 1998 Copyright Ordinance. The Copyright (Amendment) Bill is expected to be passed into law in 2016. Significant proposals under the current 2014 Bill include clarifying the exclusive right of the copyright owner to communicate works to the public through future modes of electronic transmission, introducing new fair dealing exemptions from civil and criminal liability for parody, imposing criminal sanctions against unauthorised communication of a copyright work, safe harbour provisions for online service providers, and introducing new factors to be considered by the court in assessing damages in civil cases where copyright infringement has been established. The need for Hong Kong to align its copyright regime with those of other jurisdictions (including the EU, Australia, UK, Singapore, etc.) will ensure that Hong Kong keeps pace with technological and international developments.
ALB: From an investors’ perspective, what were some of the trends you saw in 2015? Do you expect these to continue in 2016?
Lo: Things generally did not look very positive in 2015. There was volatility in the stock markets in Shanghai and Hong Kong, and all indications are that the U.S. Fed would raise interest rates, thus ending a decade of loose monetary policy. China's GDP growth in 2015 slowed to 6.9 percent, while the Central Government continues its efforts to rebalance the economy from an investment driven economy to a services oriented economy.
Looking at 2016, companies with U.S.-dollar-denominated debts will face some headwinds as the U.S. Fed continues to raise interest rates. However, the economies of China, Hong Kong and most Asian countries still look robust, and banks operating in the Asia Pacific region are well capitalised. Furthermore, Hong Kong should be a major beneficiary of China's One Belt, One Road initiative as our financial services industry is well positioned to raise funds for the infrastructure projects that will be developed in the countries along the Belt & Road region in 2016 and beyond.
According to a recent report by the United Nations Conference on Trade and Development, Hong Kong is the second biggest recipient of foreign direct investment in Asia after Mainland China. Almost 18 years after the return of its sovereignty to China, Hong Kong remains a popular destination for foreign investment and a hub for global trade. Its robust, services- oriented economy includes financial services, professional services, logistics, trading, and tourism. Hong Kong hosts a large number of regional headquarters and regional offices, with approximately 70 of the world's 100 largest banks maintaining operations here.
The Hong Kong SAR Government continues to encourage more companies from Mainland China as well as the ASEAN countries to invest in Hong Kong. We expect this trend to continue. The Hong Kong SAR Government has stated in its 2016 Policy Address that its priorities include the Shanghai-Hong Kong Stock Connect, developing Hong Kong into a global hub for offshore Renminbi business, and providing a wider choice of RMB investment products in Hong Kong. These trends indicate that demand for the services of business lawyers in Hong Kong will continue to increase.
In addition, 2015 was an important year for innovation and technology in Hong Kong. We saw the establishment of the Innovation and Technology Bureau (ITB) which aims to proactively co-ordinate the work of universities, the Hong Kong Science Park, and the research and development institutes. The ITB is tasked with setting up a robust system for scientific research, development and production. Given the desire of the Hong Kong SAR Government to promote innovation, Hong Kong is expected to attract investments in the areas of technology, cyber security, telecommunications and life sciences.
ALB: What were some of the trends when it came to the kinds of work your firm did in 2015?
Lo: Mayer Brown JSM advises its clients across a wide array of legal areas and industry sectors. Among these, three areas have been of particular concern for our clients throughout the past year and we expect will continue to impact the business and legal strategy of companies operating in Hong Kong in 2016. These include:
1. The Contracts (Rights of Third Parties) Ordinance (Cap. 623) which came into effect on 1 January 2016. In 2015, we conducted a series of seminars and training workshops for in-house lawyers of clients to prepare them for the coming into effect of the Ordinance.
2. The Competition Ordinance (Cap. 619) – On 14 December 2015, the key prohibitions under the Competition Ordinance came into force. Throughout 2015, we conducted numerous seminars and workshops for chambers of commerce, trade associations and clients to prepare them for the full implementation of the Competition Ordinance. We have reviewed many clients' business arrangements, standard form contracts and terms of engagement with intermediaries (such as suppliers and distributors) to identify problematic areas, and to recommend remedial measures in order to comply with the Ordinance. We have also conducted compliance seminars for many clients to educate their staff about the best practices in our competition law regime.
3. Broader cyber security regulations – While banks and financial institutions remain subject to stringent regulations on their handling of customers' personal data, there was previously little or no control over the manner that non-financial companies operated a platform or system to facilitate mobile payments. On Nov. 13, last year, the Payment Systems and Stored Value Facilities Ordinance came into effect. This introduces new regulations for all non-financial institutions that operate certain payment systems and bring them under the scrutiny of the Hong Kong Monetary Authority. We expect clients that operate mobile payment systems to continue to seek regulatory advice and training to comply with the data privacy and data protection laws, as well as requirements under the new Payment Systems and Stored Value Facilities Ordinance.
ALB: How do you see the legal industry in Hong Kong evolving in 2016?
Lo: Unless they are sole proprietorships, up until now, law firms in Hong Kong have had no choice but to operate as general partnerships with partners assuming joint and several liability under the Partnership Ordinance. With the coming into effect on 1 March 2016 of the Legal Practitioners (Amendment) Ordinance (the “Amendment Ordinance”), law firms are now given a choice to operate as limited liability partnerships (LLPs). This is significant because if a law firm chooses to become a LLP, the innocent partners of the LLP will not be jointly and severally liable for the professional negligence of another partner of the LLP.
Unlike limited liability partnerships in many jurisdictions around the world, the new legislation only offers a "partial shield", and not a full shield against all partnership obligations such as non payment of office rent and employee salaries, for which the partners remain jointly and severally liable.
The Amendment Ordinance contains certain claw back provisions (for up to two years after the distribution) to prevent partners of the LLP from distributing profit or putting partnership assets beyond the reach of clients when there are reasonable grounds to believe that, after the distribution, the LLP will not be able to pay its obligations or the value of its assets is less than its obligations.
The ability to become a LLP will be particularly attractive for the smaller Hong Kong law firms that wish to grow in size by mergers, or by acquiring teams of new partners with different specialities and practice areas, while minimising the risk of them being made jointly and severally liable for the professional negligence of such new partners. In this regard we may start to see the number of sole proprietorships and small law firms decline as the legal industry goes through a consolidation phase. For some of the larger Hong Kong law firms, the decision to convert to a LLP may be more controversial for the partners, and perhaps also their clients (many of which may be institutional clients which are unaccustomed to such a move to limit liability by law firms in Hong Kong).
ALB: What kinds of advice are you giving clients about the coming year?
Lo: The above-mentioned newly enacted legislation and regulatory changes are likely to impact the business practices and operating environment of many companies operating in Hong Kong. Clients should work even more closely with their legal advisors in 2016 to ensure compliance with the emerging legislation and to cope with the regulatory changes.