Clinton Morrow of Charltons takes part in Negotiating Effective Contracts & Dealing with Disputes

QUESTION ONE – Which techniques are typically used by international counterparties in your experience to overcome challenges in the negotiation process?

Overseas counterparties often look to engage local Hong Kong counsel as a means to minimise any cultural challenges when negotiating Hong Kong law documents. While in most circumstances this can indeed assist in the negotiation process, there can be issues with ‘too many cooks in the kitchen,’ where there is usually the principal, their overseas coordinating counsel and the Hong Kong counsel leading the negotiation. This can sometimes lead to inefficiencies in obtaining instructions and can cause misunderstandings between principals where information is passed and filtered between too many parties. One effective method we have seen is where the principal prefers to instruct their offshore counsel as opposed to Hong Kong counsel direct. The offshore counsel then takes the lead in negotiations on behalf of the principal, with the Hong Kong counsel taking a more review and comment role.

Further, when dealing with Chinese speaking counterparties, even if the negotiations are conducted in another language (typically English), a good technique is to have a Chinese speaking negotiator as part of the team. This helps pick up on the subtleties of the counterparties position, minimises misunderstandings and also shows a genuine intention to understand the counterparty and work together.

QUESTION TWO – Is there anything special or peculiar about commercial contract law in your country that General Counsel should be aware of?

Notwithstanding it is part of China, Hong Kong has its own unique set of laws and regulations as enshrined in the Hong Kong Basic Law. As part of a former British colony, the majority of contract law has developed from English common law principals. What is somewhat unique to Hong Kong commercial law, is that, as an international finance hub, Hong Kong Courts will not only look to Hong Kong precedents to determine case law, but will frequently look to other common law jurisdictions (such as Australia, Canada and the United Kingdom) on matters of law that have not yet been decided in Hong Kong or otherwise where international norms have moved on. This is exemplified in the membership of the Hong Kong Court of Final Appeal (which is the final appellate court within Hong Kong) which may, as required, invite judges from other common law jurisdictions to sit on the Court. Currently, these non-permanent overseas judges include judges from Guernsey, Australia, the United Kingdom and Fiji.

This international outlook allows Hong Kong law to continue to reflect not only Hong Kong’s robust common law system, but also to adapt to international laws and norms on an evolving basis.

QUESTION THREE – What recent legislative developments in your jurisdiction affect commonly drawn up contracts such as articles of incorporation, shareholder agreements or executive remuneration? Can you provide any relevant case law to illustrate this?

We don’t see that any recent legislative changes have generally impacted common legal documents or the negotiation thereof. Relatively recent legislative changes such as the introduction of the Contracts (Rights of Third Parties) Ordinance (Chapter 623 of the Laws of Hong Kong) in 2016 have legislatively overridden the common law privity of contract principle. This has largely been dealt with by updated boilerplate language in general agreements and the passing of amendments to the Companies Ordinance (Chapter 622 of the Laws of Hong Kong). With effect from 2018, a Significant Controllers Register requires that all shareholders of Hong Kong companies who exercise significant control are recorded on the company’s Significant Controllers Register. Other relatively recent changes such as the amendment to the Competition Ordinance (Chapter 619 of the Laws of Hong Kong) and changes to the Hong Kong Stock Exchange Listing Rules have a wider impact when dealing with listed entities and potential competition issues.

One common law principle that is followed in Hong Kong and is frequently overlooked relates to the relationship between a company’s Articles of Association and the shareholders’ agreement between its shareholders. As Hong Kong operates a public register for Hong Kong companies, any third party is able to download a copy of a Hong Kong company’s Articles of Association from the Hong Kong Companies Registry.

As such, there is often a desire to omit commercially sensitive information from the company’s Articles of Association and deal with such issues in the shareholders’ agreement, which is often a private document. In the Hong Kong case of Re Greater Beijing Region Expressways Ltd the Court of Appeal largely upheld an English common law principle that a shareholders’ agreement that fettered a company’s statutory right to exercise powers was invalid against the company and invalid against the shareholders where it was not a purely personal agreement. In this case, the shareholders’ agreement required that both shareholders must agree before the company (a company incorporated in the BVI) could petition for a winding-up. The shareholders’ agreement also included typical assignment provisions whereby it was a condition of any transfer that the incoming shareholder was bound by the shareholders’ agreement. The Court held that as the right of a company to petition for winding-up was a right enshrined in BVI company law, the requirement for both shareholders to agree to petition was inconsistent with the company’s statutory right and therefore against public policy. As between the shareholders, such agreement would be enforceable if it was a private agreement however as there was a condition effectively binding future shareholders, it rose to a regulation of the Company and therefore was invalid for the same reasons. This position was generally supported in Alan John Muir v John Robert Lampl & Another which declared a provision in a shareholders’ agreement which purported to restrict the removal of directors as void for fettering the company’s statutory right and also void against the shareholders as it was not a personal agreement.

While this case law has been somewhat established in Hong Kong for a period of time, it is still common for shareholders’ agreements to include such provisions and as such it is important that appropriate care is taken when negotiating these agreements.

TOP TIPS FOR: Successful negotiations

DOS

Take the time to really understand the counterparty’s position and what they want from the transaction.

While it is common for all negotiations to be done remotely from all parts of the world, if negotiations are stalling, it is often most efficient for all parties to physically meet to process and finalise negotiations.

Use timing to your advantage. Depending on your objectives, putting pressure on counterparties to resolve matters quickly or otherwise prolonging certain matters can often yield results.

DON’TS

Don’t make ultimatums unless you are really prepared to walk away.

Unless of critical importance, don’t reopen previously closed issues as this can often erode trust.

Don’t focus on why you need to complete the transaction, but focus on why the counterparty needs to complete the transaction. This often relieves pressure when negotiating and also allows you to focus on what the counterparty really needs/wants.

Don’t simply quote market practice as a negotiation strategy, as this shows it is not specifically important to your needs and also that you are not actually considering the counterparties specific needs and requirements.