On 27 December 2023, the Financial Services and the Treasury Bureau (the “FSTB”) and the Hong Kong Monetary Authority (the “HKMA“) published the Consultation Paper on the Legislative Proposal to Implement the Regulatory Regime for Stablecoin Issuers in Hong Kong (the “Consultation Paper“).  Prior to this consultation, the HKMA issued a Discussion Paper on Crypto-assets and Stablecoins in January 2022 (the “2022 Discussion Paper“), with its Conclusion issued in January 2023, whereby respondents generally supported the HKMA’s proposal of bringing stablecoins into the regulatory perimeter and the HKMA indicated its expected key regulatory scope and requirements.

What are stablecoins and what prompted the regulatory concern?

Stablecoins are a sub-set of crypto-assets (or known as virtual assets, which are digital representations of value that are cryptographically secured, typically through the use of distributed ledger technology (DLT), like blockchain) that aims to maintain a stable value with reference to certain asset(s), typically fiat currencies like the U.S. or Hong Kong dollar. They have been gaining popularity in the wider market for several reasons, including their commitment to minimize price volatility, enabling faster and more cost-effective cross-border payments, and increasing financial inclusivity by providing access to digital payments for the unbanked population.

The collapse of TerraUSD in 2022 highlighted the urgency to introduce a regulatory regime of stablecoins in Hong Kong, with fiat-referenced stablecoins (“FRS“) being a priority for regulation and legislative guidance as they are more likely to be used in day-to-day payments and have linkages with the traditional financial system, thereby creating more direct and imminent monetary and financial stability risks than other types of stablecoins or other crypto-assets.

Proposed new licensing regime for fiat-referenced stablecoins (FRS) issuers

Against the above background, and taking into account the market conditions and needs in Hong Kong, the FSTB and the HKMA propose to introduce a new piece of legislation to implement a licensing regime for FRS issuers with the following key features:

(1)  requiring all FRS issuers who (a) issue an FRS in Hong Kong; (b) issue a Hong Kong dollar-referenced stablecoin; or (c) actively market their issuance of FRS to the public of Hong Kong, to be licensed by the HKMA;

(2)  requiring that FRS can only be offered by specified licensed entities, including licensed FRS issuers[1], authorised institutions[2], licensed corporations[3] and licensed virtual asset trading platforms (“VATP“), and for FRS not licensed by the HKMA, they can only be offered by specified licensed entities to professional investors;

(3)  prohibiting the advertising of:

(a) a person’s issuance of FRS unless the person is licensed by the HKMA; or

(b) a person’s offering of FRS unless the person is a specified licensed entity;

(4)  providing the necessary supervisory and investigation powers for the authorities to adjust the parameters of in-scope stablecoins and activities having regard to the rapid virtual assets market development;

(5)  subjecting regulated activities without a licence to criminal and civil offence and sanction provisions, and setting up of an appeal tribunal mechanism to ensure there are checks and balances to the HKMA’s powers; and

(6)  providing a transitional arrangement to facilitate the implementation of the regulatory regime.

Respondents to the earlier 2022 Discussion Paper expressed concerns about potential overlap between the proposed regime and other financial regulatory regimes in Hong Kong, including the licensing regime for VATP operators, administered by the Securities and Futures Commission (the “SFC“) under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615). More information on this regime can be found in our prior news updates dated 25 April 2023 and 16 August 2023.

To address these concerns and prevent regulatory arbitrage, the FSTB and the HKMA will collaborate with the SFC and other stakeholders to formulate the specific details of the stablecoin regime.

The proposed regime aims to strike a good balance between safeguarding financial stability and embracing innovation. The public is encouraged to provide feedback on the proposals by 29 February 2024.

Access the full Consultation Paper here for more details.

[1] A licensed FRS issuer can only offer FRS it issues.

[2] An authorized institution means a licensed bank, a restricted licence bank or a deposit-taking company under the Banking Ordinance (Cap. 155).

[3] A licensed corporation means a corporation (that is not an authorized institution) which is granted a licence to carry on one or more regulated activities under sections 116 and 117 of the Securities and Futures Ordinance (Cap. 571). When offering FRS, licensed corporations must hold a licence for Type 1 regulated activity (dealing in securities) and be permitted by the SFC to carry out dealing in virtual assets.

The submission of “no case to answer” can be made in both criminal and civil trials. The rules are, however, different in these two types of trial. In a criminal trial, after the prosecution has presented its case, the defence counsel can submit there is no need for the defence to present his case as the prosecution’s evidence is insufficient to make out a prima facie case. However, one must exercise caution in making the same submission in a civil trial – the judge may ask the counsel to “elect” upon a submission of no case to answer. This means that unless counsel confirms that he will stand by his submission and call no evidence even if the judge rules against him, the judge will not entertain such a submission.

This is why a submission of no case to answer is rare in civil litigations, let alone in winding-up or unfair prejudice actions. In Re T-Hero Industrial Company Limited [2023] HKCFI 3118, the Honourable Harris J had the opportunity to elucidate the key principles of accepting a no case to answer submission in a winding-up action pursued on just and equitable ground.

Quasi Partnership

In this case, the three petitioners (against the remaining shareholder and the company) advanced the ground that there is a breakdown in mutual trust and confidence among the shareholders in seeking a compulsory winding-up. Their mutual trust and confidence engages equitable considerations, which restrict how the shareholders can exercise their legal rights. To demonstrate that a company is formed in such circumstances, it is necessary to show that the association among shareholders is not a purely commercial one ([18]). In this regard, the petitioners relied on a 2007 Shareholders Agreement which imposed certain restrictions on transfers of shares to say that the rights of the shareholders were circumscribed. However, the Court has difficulty to see these restrictions were intended for an indefinite period especially when all shareholders are also directors and that there has been a fundamental change in shareholding structure in 2012,

“It cannot possibly be that every agreement made after a company is formed about some aspect of the management of its affairs binds shareholder thereafter regardless of how circumstances change. Shareholders of small companies who also act as their directors will frequently agree aspects of its management as its business develops. In nearly all cases they will be intended to regulate the management of the company until such time as circumstances require them to be modified. They cannot sensibly be understood as restrictions on the way a shareholder is to exercise his rights for an indefinite period.” ([22])

No case to answer

A submission of no case to answer in the context of a civil trial can be made on two grounds:

(i) Where the plaintiff’s case, even accepting it at its face value, does not disclose a sustainable cause of action in law; or

(ii) The quality of the evidence given by the plaintiff is such that there is not even a prima facie case for the defendant to answer ([29]).

Further, the Court also has to consider if the claim has no prospect of success and it would be a waste of time and costs to hear the defendant’s evidence ([30]). Once a defendant elects to make a no case to answer submission, he so elects to call no evidence. If however, the Court finds there is a case to answer from the plaintiff, it will proceed to rule, on a balance of probabilities, whether the plaintiff’s case is made out, having regard to the plaintiff’s evidence (including that given under cross-examination) and the available documentary evidence, but without regard to the defendant’s witness statement ([32], where Harris J explicitly adopt the recent authority of the Privy Council in Roopnarine v Attorney General of Trinidad and Tobago [2023] UKPC 30 (27 June 2023) at [27] per Lord Hamblen).

Applying the above principles, the Court ruled that the petitioners failed to make out a case of the breakdown of the quasi partnership. On the evidential ground, other complaints such as exclusion from management were refuted by the contradictory witness statement of one of the petitioners ([47]).

Takeaways

The Court also reiterated that the petitioners are confined to their pleaded complaints in the petition, and as the petitioners were not legally represented, “they had no real understanding of what they needed to establish to obtain a winding up order” ([4]). They also ignored a sensible buy-out offer from the respondent shareholder to insist on a full-blown trial which amounted to an abuse of process. As the Hong Kong courts will now accept a submission of no case to answer in the appropriate circumstances, it would be prudent to take legal advice before commencing legal proceedings, instead doing so at one’s own peril.

See full judgment here.

In a recent Court of First Instance (“CFI“) decision, China Ping An Insurance Overseas (Holdings) Limited v Luck Gain Limited and ors [2023] HKCFI 3315, the CFI has demonstrated how investors with beneficial interest in global notes might be able to proceed against the issuer, notwithstanding the obstacle that such investors do not normally have standing to present a winding-up petition against issuers directly. Such an obstacle is commonly known as the “no look through” principle.

The “No look through” Principle

By way of background, bonds nowadays are rarely issued to investors as a definite note. Instead, a global note representing an entire issuance will be issued, which will then be deposited in a common depositary for the relevant clearing systems. Trading of bonds would then occur through the book-entry system maintained by the clearing systems. What the ultimate investor actually acquires is a portion of the indirect beneficial interest in the global note via their intermediaries, such as banks and brokers holding accounts with the clearing systems. In other words, the ultimate investor derives its interest in the securities through a chain of intermediaries between itself and the issuer.

In relation to the rights of an ultimate investor against the issuer in a typical global bond structure, the courts of Hong Kong have currently aligned themselves with the position of the United Kingdom, the Cayman Islands and Bermuda by adopting the “no look through” principle in Leading Holdings Group Limited [2023] HKCFI 1770.

Under the “no look through” principle, the ultimate investor would only have rights against their immediate counterparty in the chain of intermediaries, which is usually the banks or brokers who have accounts with the clearing systems. Should the ultimate investor decide to petition for a winding-up against the issuer, the investor would have no standing to do so. The rationale behind is to ensure that all the bondholders would act through the trustees, in order to prevent duplicity of actions (For a detail analysis of Leading Holdings Group Limited, see our previous article).

China Ping An Insurance Overseas (Holdings) Limited

Facts

In China Ping An Insurance Overseas (Holdings) Limited, a principal amount of US$200,000,000 of guaranteed bonds (“Bonds“) was issued by the 1^st Defendant (“Issuer“). The Bonds were constituted by a Deed of Covenant, a Fiscal Agency Agreement and a Global Certificate (collectively, “Bond Documents“), and were being cleared and settled through Euroclear Bank S.A./N.V (“Euroclear“). In this regard, the Bonds were structured in the typical way as mentioned above, where a single Global Certificate was issued and held by a custodian (who is the sole registered holder of the Global Certificate), who in turn, held the Global Certificate on behalf of Euroclear.

The Plaintiff holds beneficial interests of the Bonds through Bank of China (Hong Kong) Limited , which is an account holder in Euroclear. In particular, the Plaintiff has subscribed for an aggregate amount of US$190,000,000 of Bonds, constituting (i) an amount of US$50,000,000 of Bonds acquired under a Subscription Agreement entered between the Plaintiff, the issuer and the guarantor (“Subscription Agreement“); and (ii) US$140,000,000 of Bonds further acquired through the market.

Under Clause 4.2 of the Subscription Agreement, the Issuer and the Guarantor were obliged to make satisfactory arrangement to the subscriber (i.e. the Plaintiff) to ensure that Certificates are delivered to the registrar for authentication in accordance with the Fiscal Agency Agreement. The Fiscal Agency Agreement and the Global Certificate in turn provide for the exchange of the Global Certificate for Definitive Certificates if any of the events of default occurs.

Subsequently, the Issuer failed to pay the principal amount of the Bonds, and the demands to exchange the Global Certificate for Definitive Certificates were unanswered. This constituted one of the events of default.

Following an unsuccessful winding up petition against the Issuer due to a lack of standing, the Plaintiff attempted to overcome the obstacle by commenced proceedings for specific performance under Clause 4.2 of the Subscription Agreement to compel the Issuer to issue Definitive Certificates, which would then enable the Plaintiff to enforce the debts directly against it.

Ruling

In a decision in favour of the Plaintiff, the CFI explained that the ordinary and plain meaning of Clause 4.2 of the Subscription Agreement clearly confers the Plaintiff a right to compel the Issuer and the Guarantor to exchange the Global Certificate for Definitive Certificates.

In rejecting the defendant’s argument that Clause 4.2 should be interpreted in light of the Global Note structure in place (and hence finding the Plaintiff successful would be an encroachment to the “no look through” principle), the CFI did not see any inconsistencies between Clause 4.2 of the Subscription, and the underlying Global Note structure as provided by the Bond Documents, which is the natural consequence of the Issuer entering into separate agreements with the Plaintiff. This is the case even if it would mean the risk of duplicity of actions.

Specific performance is granted accordingly, allowing the ultimate investor to then have a direct right to enforce against the Issuer.

Takeaways

The case of China Ping An Insurance Overseas (Holdings) Limited importantly demonstrates that where an entitlement for the exchange of the global certificate for definitive certificates is provided contractually, an ultimate investor may still proceed against the issuer notwithstanding the “no look through” principle.  It should be noted that here, the Plaintiff was able to enforce a direct contractual right against the Issuer.  Quite often is the case, a beneficial bondholder who is not the registered holder and does not have a direct contractual relationship with the issuer (or otherwise, whose rights are expressly curtailed by the underlying document, often, the indenture), may find him/herself having no standing against the issuer.  We would, in that scenario, have to be creative and think out of the box to find a way for such a bondholder to exert pressure on the issuer and work towards a recovery, which we are seeing in a case we are working on.

See the full judgment of China Ping An Insurance here.

Background 

On 29 November 2023, The Stock Exchange of Hong Kong Limited (“Exchange“) published the Guide for New Listing Applicants (“Guide”), which (1) has consolidated and enhanced all currently effective guidance letters and listing decisions related to new listing; and (2) provides updated guidance to reflect the latest regulatory practice and expected disclosures in listing documents.

The Guide is divided into the following six main sections and an annex of streamlined listing decisions:

1. Eligibility and suitability for listing
2. Special listing regimes
3. Listing document disclosure with guidance on specific sections;
4. Specific topics relating to a new listing application
5. Other listing structures; and
6. Other matters.

Updates

The updated guidance under the Guide is summarised below:

(1) Latest Regulatory Practice

Contractual Arrangements

Generally, where there is no foreign ownership restriction, applicants must not use contractual arrangements for conducting their business. In exceptional circumstances, applicants may be allowed to use contractual arrangements if their non-restricted businesses are inseparable from the prohibited or restricted businesses, and/or are immaterial in terms of revenue, profit or otherwise during the track record period and after listing (see:  paragraph 15 of Chapter 4.1 of the Guide).

Title Certificate Requirements

In the absence of the requisite land use right certificates and/or building ownership certificates (“Title Certificates”) for land and properties involved in an applicant’s business that are significant to its operations (“Relevant Properties“), the Exchange has the discretion to consider, on a case-by-case basis, whether such defect would affect the applicant’s suitability for listing, or can otherwise be addressed by way of disclosure.

To facilitate the Exchange’s assessment, the applicant should provide at least the following:

• Risk of eviction – Whether the applicant has obtained evidence and/or confirmations from all applicable competent authorities that it has the right to use the Relevant Properties.
• Contingency plans – Details and feasibility of the contingency plans (e.g. the availability of alternative project resources in the vicinity).
• Rectification measures – Whether the applicant is in the process of applying for the Title Certificates for the Relevant Properties and any legal impediments to obtaining the same.
• Business / financial impact of the title defects – Risk of material penalties, the revenue contribution from the Relevant Properties, and where applicable, the applicant’s contractual rights to seek indemnification from the relevant parties.
• Internal control – Enhanced internal control measures adopted by the applicant to prevent recurrence of similar incidents.

(See: paragraph 2 of Chapter 4.11 of the Guide)

Over-boarded independent non-executive director (“INED”)

Where an applicant identifies an independent non-executive director who will be holding their 7^th (or more) listed company directorship, the applicant should consider appointing another INED instead (see: paragraph 7 of Chapter 3.10 of the Guide).

Special Purpose Acquisition Companies (“SPAC”)

A SPAC and a Successor Company should seek legal advice on the extent to which its listing document at initial listing and the De-SPAC transaction (as the case may be) must comply with the prospectus requirements of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap.32). (see: paragraph 10 of Chapter 2.4 of the Guide, changes underlined).

Biological Assets

Since biological assets are living animals or plants that are measured at fair value less costs to sell in accordance with applicable accounting standard, they are subject to high risk, given that they are perishable and their valuation is usually subject to higher uncertainty due to the complex and not-easily-verifiable assumptions adopted. Thus, the Guide clarified that when conducting due diligence,  the sponsor should advise the details of, and steps taken to address, any limitations on due diligence (e.g. limitation in stock take). The Exchange reminds the sponsor and the applicant that serious limitations may render an applicant unsuitable for listing (see: paragraph 4 – Risks and limitations, (ii) of Chapter 4.10 of the Guide, changes underlined).

(2) Updated Guidance on Disclosures in Listing Documents

The updated guidance on disclosures is based on comments commonly raised during the Exchange’s vetting process as a result of recent market developments (e.g. new regulations and/or emergence of new business models such as tech and e-commerce platform industries). The Guide provides the general principles on listing document disclosure and drafting together with guidance on specific sections. In addition, the Exchange has introduced a new chapter on disclosure requirements of Corporate Governance & Environmental, Social and Governance (Chapter 4.3 of the Guide) to help applicants and their advisers consider the relevant issues at an early stage.

Implementation

The Guide will come into effect on 1 January 2024, upon which the corresponding guidance letters and listing decisions will be archived. For future updates, the Exchange will issue new guidance by way of updating the Guide instead of publishing separate / standalone guidance letters and listing decisions.

For the full text, please refer to the Guide.

In the recent case of Song Lihua v Lee Chee Hon [2023] HKCFI 2540, the Court of First Instance (the “CFI“) has refused to enforce an arbitral award in an arbitration by the Chengdu Arbitration Commission in Mainland China as it would be contrary to public policy to enforce the award, pursuant to section 95(3)(b) of the Arbitration Ordinance (Cap. 609).

In that case, the Respondent sought to set aside the enforcement order on the grounds that, inter alia, in the second hearing of the arbitration, one of the three arbitrators who attended the hearing by video conference did not meaningfully participate in it. It was observed that during the course of the hearing, the arbitrator was:-

(i). moving from one location to another, indoors and outdoors,

(ii). travelling in a car,

(iii). appearing offline from time to time,

(iv). talking to someone else in his room,

(v). looking into the distance instead of focusing on the screen, and

(vi). giving no response to the questions from the chairman of the tribunal.

In light of the above, the CFI held that the conduct of the arbitration lacked due process and fell short of the high standards expected by Hong Kong courts for a fair and impartial hearing. While acknowledging the pro-arbitration and pro-enforcement stance of Hong Kong courts, the CFI reiterated the fundamental principle that no person shall be judged without a fair hearing in which each party is given the opportunity to respond to the evidence against it and to be heard on its case. The CFI emphasized that not only must justice be done, but it must also be seen to be done. In the circumstances of the case, enforcement of the award would violate the most basic notions of justice in Hong Kong and thus should be refused.

The significance of this case is twofold. Firstly, although the Applicant relied heavily on the fact that the supervisory court in Mainland China had not set aside the award and had allowed its enforcement in Mainland China, Hong Kong courts are prepared to apply their own standards and law when deciding whether enforcement would be contrary to the public policy of Hong Kong. Secondly, it highlighted the importance of due process and compliance with recognized rules of natural justice, which is quite often a precondition to recognizing and enforcing an arbitral award.

It is also worth mentioning that around the same time, the English High Court handed down the judgment of The Federal Republic of Nigeria v Process & Industrial Developments Limited [2023] EWHC 2638 (Comm), setting aside the arbitral awards pursuant to section 68(2)(g) of the Arbitration Act 1996 on the ground that they were obtained by fraud and contrary to public policy. Misconduct committed during the arbitration included bribing the other side’s staff, providing to the arbitral tribunal evidence which was known to be false, and improperly retaining and misusing the other side’s documents which were subject to legal professional privilege. The English court was of the view that such conduct represented the most severe abuses of the arbitral process which could not lead to a just result.

These recent enforcement related decisions in Hong Kong and the UK  serve as a helpful reminder that in relation to misconduct on the part of the arbitrator or the opposing party, one would sometimes have a potential last recourse to court by challenging the arbitral award.