Trust and Nominee Holding of Shares in Hong Kong Companies: Law and Practice
In my long-time practice as a Hong Kong solicitor and as a Mainland solicitor, I have dealt with a relatively large number of legal matters relating to nominee shareholding in Mainland companies and nominee shareholding in Hong Kong companies, and I would like to give a brief summary of these matters.
Mainland share agency: nominee agreements and trusts
When dealing with share agency in the Mainland, it is a common practice for the nominee and the beneficial owner to sign a Share Holding Agreement, which sets out the rights and obligations of both parties. The legal basis of proxy holding is the principal-agent legal relationship. The Supreme People’s Court has also confirmed in the relevant judicial interpretation of the Company Law that a share holding agreement is valid provided that it does not contravene the mandatory requirements.
At the same time, I have also seen cases in which mainland lawyers have conducted shareholding in the form of private trusts. For example, in the case of staff shareholding arrangements, an individual or a company acts as the trustee of a trust to hold dispersed staff shares on behalf of the staff. Such an arrangement is understandable under the conditions that Mainland laws impose stringent restrictions on the number of shareholders in limited liability companies which are not public companies. However, in view of the fact that Mainland law is still inconclusive as to the legal effect of private trusts, there would be great uncertainty as to the legal effect of this so-called trust-based shareholding on behalf of employees.
Shareholding in Hong Kong: share trusts
In Hong Kong’s legal practice, shareholding is generally carried out by way of a share trust. A trustee unilaterally signs a declaration of trust stating that the shares are held by the trustee and that there is a different person who has a beneficial interest in the shares. The extent of the trustee’s powers can be set out in an agreement. As the legal relationship between the nominee parties is fully governed by the trust law, the content and form of the declaration of trust must be drafted strictly in accordance with the trust law, otherwise it may cause problems or even be invalid.
In addition, documents relating to shareholding trusts are subject to stamp duty and stamping.
Trusts of shares in Hong Kong listed companies
Many of the Mainland companies listed in Hong Kong have share trusts. There are various reasons for this, such as a large number of employees needing to hold shares through a trust, or the owner of a private company holding shares in a trust to avoid the possible impact of marital changes on the shareholding. As the design of an equity trust involves important interests of trustees, beneficial owners and third parties, it is not uncommon to see legal disputes and litigations in Hong Kong arising from equity trusts of Mainland listed companies in Hong Kong.
For example, in the cases I have experienced or seen, the executives of a collective enterprise listed in Hong Kong held the shares of members of the collective economy by way of setting up a discretionary trust. However, the trustee used the trustee’s discretionary power to injure or even swallow up the interests of the shares of the members of the collective economy, thus triggering litigation, such as the class action lawsuit of the China Shanshui Investment Company Limited in relation to a share trust. Another example is a case in which the owner of a privately-owned listed company changed the shares of a Hong Kong listed company from being held by him personally to being held by him in trust by setting up a discretionary trust, thus rendering his spouse unable to share his property in accordance with the law on joint property of husband and wife in the Mainland upon divorce, and thus triggering off litigation.
It should be noted that under common law, the trustee of a trust has fiduciary duties which are relatively strict. The independence of trust property is not entirely absolute. In relevant cases, however, where the court considers that the trust is merely a cover for some illegal purpose, it may simply lift the veil of the trust and hold the beneficial owner liable. In Kan Lai Kwan v Poon Lok To (Final Court Civil Appeal Nos. 20 & 21 of 2013), the husband had set up a discretionary trust of his principal asset, shares in a company, held by HSBC International Trustee Limited as trustee. The wife claimed division of the trust property in the divorce proceedings. To determine whether the property in the trust was the husband’s financial resources and distributable to the wife, the Court of Final Appeal adopted the following question as the test: if the husband had asked the trustees to advance all or part of the capital income of the trust to him, would it have been relatively likely that the trustees would have done so? The court in that case held that under a discretionary trust set up by the husband in respect of shares in a listed company, the veil of the trust should be lifted and the wife judged to be entitled to a share in the whole of the trust property.
If you have any questions about trusts in Hong Kong, please contact Mr. Yan for a consultation.