News & Publications

Deacons Ltigation and Dispute Resolution Newsletter - April 2012

Submitted By Firm: Deacons

Contact(s): Cynthia Chung


Robert Clark, Joseph Kwan, Paul Kwan, Vivian Leung, Karen Dicks

Date Published: 4/10/2012

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Waiver of Privilege or Not?

Defamation – An Update on Google Inc. and ISPs

Court of Appeal clarifies Court's jurisdiction to grant orders to the SFC under Section 213 of the Securities and Futures Ordinance

Head of European Credit Sales at Credit Suisse fined £210,000 by UK's Financial Services Authority for disclosing client confidential information

Statutory Derivative Actions - New hope for minority shareholders?

The Trade Descriptions (Unfair Trade Practices) (Amendment)
Bill 2012

Cantor Fitzgerald fails to win damages against departing senior management staff


Waiver of Privilege or Not?

by Robert Clark

In a Judgment handed down on 28 March 2012, Mr. Justice Hartmann JA determined various questions relating to legal professional privilege.

The case involved Citic Pacific. The underlying facts concern the alleged failure by Citic Pacific to make prompt or timely disclosure of huge losses it had sustained from foreign exchange trading during the 2008 crisis and, in particular, the circumstances surrounding a public announcement made at the time by Citic Pacific concerning its acquisition of an interest in two companies. The public announcement contained a statement that there were no material adverse changes to Citic Pacific's financial position since its last audited accounts. It is now known that immediately prior to issuing this public announcement at least some of the company's directors were aware of the various very significant foreign exchange losses that Citic Pacific had incurred.

Relatively soon after these circumstances came to light, the SFC began an investigation into Citic Pacific. Citic Pacific provided various documents to the SFC in connection with its investigation, including six documents which contained legal advice or a record of oral legal advice provided to the board of Citic Pacific.

The SFC then passed on these six documents to the Department of Justice ("DOJ") and the police wanted to obtain them from the DOJ. Citic Pacific claimed legal professional privilege and contended that the documents could not be reviewed by the DOJ or police and sought orders and protection from disclosure from the court.

The DOJ and police's position was essentially twofold:

  1. That as Citic Pacific had waived privilege on provision of the documents to the SFC, it had waived privilege to all and sundry and the privilege in the six documents no longer existed, and the DOJ and police could use them.
  2. The documents were the subject of the fraud exception; that is prima facie it appeared that they were part of a conspiracy to defraud, and thus the privilege in them no longer attached.

The DOJ and police succeeded in these arguments at First Instance before Mr. Justice Wright.

In the Court of Appeal, however, Mr. Justice Hartmann found against the DOJ/police, and in favour of Citic Pacific.

Most importantly from the perspective of our jurisprudence, Mr. Justice Hartmann found that the concept of a partial waiver of legal professional privilege existed in Hong Kong. This is arguably contrary to the position as it was previously understood, following a decision of Mr. Justice Keith JA in Rockefeller & Co. Inc. v Secretary for Justice [2000] 3 HKC 48. Mr. Justice Hartmann found that he was not bound by Mr. Justice Keith JA's decision, and held:

"Logic and authority dictate that, if the holder of privilege in a document voluntarily discloses that document to a specific party then, in respect of that specific party at least, privilege in the document must be lost."

Mr. Justice Hartmann posed the question that followed as:

"The question of course remains whether voluntary disclosure to one party constitutes disclosure to the whole world."

Mr. Justice Hartmann in answering this question preferred to follow the approach of the English Court (British Coal Corporation v Dennis Rye Ltd (No 2) [1988] 1 WLR 1113) and the decision of the Privy Council in B and Others v Auckland District Law Society and Another rather than that of Mr. Justice Keith JA in Rockefeller.

Mr. Justice Hartmann held that:

"In my judgment, therefore, on the basis of the authorities [the English and Privy Council authorities referred to above] which I have cited, I am satisfied that Hong Kong law incorporates the concept of partial waiver of privilege."

In addition Mr. Justice Hartmann was asked to determine the question of what was alleged to be the well-established rule that, if privileged information came into the hands of prosecuting authorities, whether through inadvertence, mistake or even surreptitious conduct by a third party, then privilege was lost and it was open to use by the authorities. In determining this question, Mr. Justice Hartmann declined to follow English case law and followed a New Zealand Court of Appeal decision R v Uljee [1982] 1 NZLR 561.

Mr. Justice Hartmann found that:

"It seems to me to be inherently contradictory to say that privilege, although a fundamental human right unassailable to competing issues of public interest, may nevertheless be lost in criminal matters without any intention on the part of the holder, indeed on no more than a whim of fate; that is, by accident or inadvertence, or even (at the outer extreme) by the surreptitious conduct of a third party. I do not accept that the Basic Law affords such frail protection. I am satisfied that, in both civil and criminal matters, privilege is not lost unless there is evidence that it has been intentionally waived by the holder of that privilege."

Finally, Mr. Justice Hartmann upheld the law in terms of what is known as the fraud exception to the rule of privilege; that if there were prima facie evidence that the documents were created for the purposes of a fraud then privilege is lost.

It is highly likely that this decision will be the subject of an application for leave to appeal to the Court of Final Appeal, and, this writer believes, highly likely to go on to the Court of Final Appeal for determination.

From a practical perspective, solicitors and their clients should take note that in the Citic Pacific case privileged documents were given to the SFC by solicitors then acting for Citic Pacific who did not state in specific terms at that time the basis upon which the documents were surrendered to the SFC (i.e. a partial waiver of privilege only). Mr. Justice Hartmann found that "Their failure to do so is troubling." Clearly the lesson here is to be very clear about the terms on which documents are provided to the authorities.

Defamation – An Update on Google Inc. and ISPs

by Robert Clark

The English High Court (Mr. Justice Eady) handed down its decision on 2 March 2012 in Tamiz v Google Inc. [2012] EWHC 449.

Mr. Tamiz sued Google for libel over allegedly defamatory remarks made on a blog posted on Google's service. In his decision, Mr. Justice Eady held that Google fulfilled:

"No more than the role of a passive medium for communication" and therefore "cannot be characterised as" a publisher. He also held that it was significant that Google:

"Is not required to take any positive step, technically, in the process of continuing the accessibility of the offending material, whether it has been notified of a complainant's objection or not … its role, as a platform provider, is a pure passive one".

Mr. Justice Eady's determination was that Google Inc. was not a publisher at common law and therefore could not be liable for defamation, even after it had been notified of allegedly defamatory material.

This decision moves the goalposts further towards the freedom of speech. It also develops the law from the decision of Mr. Justice Fok JA in Oriental Press Group Limited and Another v Fevaworks Solutions Limited, CACV No. 53 of 2011 (discussed in our February 2012 newsletter).

As we said in our last newsletter, the facts of each particular case need to be looked at, but where the ISP or intermediary is one which merely provides the means through which information is stored, transferred and accessed, its position is less likely to that of a publisher at common law.

Whether or not Mr. Justice Eady's decision will be followed in Hong Kong has yet to be seen, but one has to be hopeful, given Mr. Justice Fok JA's preference for following Mr. Justice Eady's approach in an earlier case (Metropolitan International Schools v Designtechnica Group and Others).

So, in conclusion Plaintiffs need to carefully determine the nature of the intermediary they intend to sue: they may be better served not pursuing a passive intermediary, but rather looking behind the intermediary to the "real" publisher and seeking relief against the writer or creator of defamatory content (relief alluded to by both Mr Justice Eady and
Mr Justice Fok JA).

Court of Appeal clarifies Court's jurisdiction to grant orders to the SFC under Section 213 of the Securities and Futures Ordinance

by Joseph Kwan
In the recent decision of Securities and Futures Commission v Tiger Asia Management LLC and others CACV 178/2011, the Court of Appeal allowed an appeal by the Securities and Futures Commission (the "SFC") and held that the SFC can seek relief from the Court of First Instance ("CFI") under Section 213 of the Securities and Futures Ordinance (the "SFO"), independently of any prior finding of market misconduct by a criminal court or the Market Misconduct Tribunal ("MMT").


The 1st Defendant, Tiger Asia Management LLC ("Tiger Asia"), is a New York based hedge fund manager. The 2nd to 4th Defendants ("D2-D4") are employees of Tiger Asia, all residing in New York. The SFC's case was that the Defendants had committed insider dealing and/or false trading (contrary to sections 291(5) and 295(1) of the SFO), by two short sales and one long sale of shares of China Construction Bank Corporation and the Bank of China, after receiving price sensitive information from its bankers. The SFO issued an Originating Summons against the Defendants under Section 213(1) of the SFO, seeking various relief, including injunctive relief restraining disposal of assets, an account of profits and payment of such sum to a court-appointed receiver and declarations to the effect that the Defendants had contravened the criminal provisions under s.291 (insider dealing) and s.295 (false trading) of the SFO.

The Defendants applied to strike out the Originating Summons. The Defendants argued that Part XIII of the SFO (which concerns market misconduct and established a MMT) and Part XIV of the SFO (which provides for market misconduct offences such as insider dealing and false trading) were intended to introduce a dual civil and criminal regime to deal with misconduct in the financial markets. If, following investigations, the SFC concludes that there is a potential case of market misconduct it may refer it to the Financial Secretary for civil proceedings before the MMT or to the Secretary for Justice for criminal prosecution on indictment. The SFC has to elect whether to bring civil or criminal proceedings. What section 213 did not do, the Defendants argued, was provide a third route by which the SFC could seek determination before the Court of conduct prohibited by Parts XIII and XIV. It followed, the Defendants argued, that where contravention of market misconduct provisions were relied on by the SFC, the Court did not have jurisdiction to make the declarations sought by the SFC before any finding by the MMT or the criminal court. Accordingly, the Originating Summons did not disclose a reasonable cause of action and was an abuse of process and should be struck out.

The CFI's Decision

The CFI agreed with the Defendants' argument that there should not be a third regime to determine if there is any contravention of market misconduct provisions. Accordingly, the Judge held that it did not have jurisdiction to grant the orders sought by the SFC.

The Court of Appeal's Decision

The Court of Appeal allowed the SFC's appeal. It agreed with the SFC that had the legislature intended to make the finding of contravention by another tribunal (such at the MMT) or the criminal court, a condition precedent to the exercise of the CFI's jurisdiction under section 213 of the SFO, it would have said so. The Court of Appeal said that section 213 is a broadly drafted provision under which the court may make orders which are essentially remedial, such as the grant of an injunction to restrain recurrence, declaring contracts to be void or voidable and requiring a person to pay damages. Section 213 was not, the Court of Appeal said, concerned solely with contraventions of Parts XIII and XIV. Section 213, was meant to augment the SFC's ability to protect the investing public and provide remedies for contraventions for the protection of investors and was complementary to the civil liabilities created by sections 281 and 305 of the SFO. Section 213, the Court of Appeal said, provides valuable tools to the SFC to protect the investing public, which is the objective of the SFO. The proceedings were not an abuse of section 213. Rather, they supported the view that section 213 provides much needed ammunition to the SFC to protect investors.


Since 2007, the SFC has been using section 213 to obtain injunctive relief in aid of its investigations. However, section 213 also provides that the SFC can apply for a final order, restoring the parties to a transaction to the position they were in before they entered into the transaction. The SFC can also apply for an order declaring any securities contract to be void or voidable as well as an order that the infringer pay damages to any other person. The Tiger Asia appeal is a very important decision for the SFC, as it confirms the availability to it of relief under section 213. However, since the SFC's power under section 213 is potentially very wide, each case should be examined carefully by the Court to avoid any unjust result.

It appears that the SFC's practice is not to pursue a section 213 action to trial unless there is a determination by the MMT or the criminal court of a breach of the market misconduct provisions. However, the Court of Appeal's decision does allow, in theory, the SFC to obtain an adjudication from the CFI on whether a person has contravened a market misconduct provision, without there being a determination by either the MMT or a criminal court. This is problematic because it is not contemplated under the SFO that there is a third way by which an alleged breach of the SFO can be adjudicated. Until the Court of Final Appeal has had the opportunity to address the relevant issues, the market should note the wide powers the SFC now has to take action against those who have allegedly committed market misconduct.

Head of European Credit Sales at Credit Suisse fined
£210,000 by UK's Financial Services Authority for disclosing client confidential information

by Joseph Kwan

Mr. Kyprios, Head of Credit Sales at Credit Suisse Securites (Europe) Ltd in London, has been fined £210,000 by the UK's Financial Services Authority ("the FSA") for disclosing client confidential information.


Credit Suisse acted on behalf of Liberty Global, Inc ("Liberty") during its takeover of Unitymedia GmbH ("Unitymedia"), which was partially funded by a bond issue.

Kyprios was wall-crossed regarding the takeover and related bond issue. Kyprios was instructed in writing by Credit Suisse that this was inside information, which he should not disclose to anyone outside Credit Suisse, apart from five pre-approved investors who he was also permitted to wall-cross.

In November 2009 Kyprios called a fund manager to invite him to the bond issue road show. The fund manager told Kyprios that he did not want to be wall-crossed. The fund manager asked Kyprios about the bond issue and in response Kyprios engaged in a guessing game, including advising him when he was "getting warmer". Through this guessing game, Kyprios signalled certain information to the fund manager, including (i) that Unitymedia was possibly about to bring a big bond issue to the market; (ii) the issue was intended to be announced the next day; (iii) the potential rating of the issue; (iv) that Unitymedia would redeem outstanding bonds; and (v) that the issue was M&A related. Kyprios called another fund manager and disclosed the identity of the issuer by another guessing game.

Why did the FSA take action?

The FSA found that Kyprios had breached Principles 2 (skill, care and diligence) and 3 (market conduct) of the FSA's Statements of Principles for Approved Persons. He had breached Principle 2 by failing to exercise the skill, care and diligence expected of approved persons, in that he had disclosed client confidential information without client permission. The FSA said that his lack of care was evidenced by his participation in a guessing game in which he effectively disclosed the name of the potential investor.

The FSA found that Kyprios had breached Principle 3 by disclosing information being treated internally as "inside information" without authority and in breach of wall-crossing procedures. The information was price sensitive to outstanding Unitymedia Floating Rate Notes and Unitymedia Credit Default Swaps ("CDS"), which were non-qualifying investments. There was a risk that the fund manager would trade on the information or tell others who would trade and therefore have an impact on the market. Kyprios’ misconduct had occurred on an open trading floor in earshot of his staff and traders responsible for trading Unitymedia bonds and CDSs. His conduct, the FSA found, fell below the standard of conduct required of an approved person.

Kyprios had tried to justify his actions by saying that he thought that the information was not "actionable". The FSA rejected this argument, saying that even if that were the case (which it was not because the information was price sensitive), this could not be a justification for his actions because the critical characteristic of client confidential information is its non-public nature and not its "actionability". Further, Kyprios was told that he had received inside information and that he was prohibited from discussing it with non wall-crossed parties.

The following aggravating factors committed by Kyprios are worth noting:

  1. As a senior person located on an open trading floor, his conversation would be heard by team members around him and this set a bad example for his subordinates. This also increased the chances of others hearing the confidential information;
  2. He ran the risk that the fund manager or those who got information from that manager, would trade on the information;
  3. He should have been extra circumspect in his use of the information as he had heard market rumours about Unitymedia; and
  4. His conduct was not isolated.


Although this was a UK FSA decision, a similar approach could be taken by Hong Kong's SFC, in an appropriate case, under its Code of Conduct. General Principle 2 of the Code of Conduct requires a registered person to act with due skill, care and diligence, in the best interests of its clients and the integrity of the market. This is similar to Principle 2 of the FSA's Statements of Principles for Approved Persons, which Kyprios was found to have breached.

Notwithstanding pressure in the market place to perform, high standards are expected by regulators. As stated by the FSA in their press release regarding the Kyprios case:

"While the FSA accepts that he did not set out to disclose the information, Kyprios' conduct in trying to push to the limit what he could say resulted in him crossing the line. His behaviour was well below the standards we expect of senior market professionals who we should be able to rely on to uphold the system rather than seek to get round it. The high penalty reflects the seriousness of Kyprios' breach. Approved persons who have been wall-crossed need to recognise the value of the information they have been given and be vigilant in ensuring they do not inadvertently or recklessly disclose such information in breach of wall crossing procedures."

Market players should review their practices in the light of this decision to avoid any practice which might cross the line.

Statutory Derivative Actions - New hope for minority shareholders?

by Paul Kwan and Vivien Leung

The statutory derivative action regime under Part IVAA of the Companies Ordinance (Cap. 32) enables a member to bring or intervene in legal proceedings on behalf of a company, with leave of the court, under section 168BC(3), provided that (i) the proceedings appear to be prima facie in the interests of the company; and (ii) there is a serious issue to be tried and the company has not itself brought proceedings. The regime came into force in July 2005, following concerns raised in relation to the limited scope for redress under the traditional common law derivative action regime, which strictly required the shareholder to prove fraud on the minority (at least to a degree of "equitable fraud" or abuse of power). By comparison, the statutory regime is wider and covers general misfeasance by directors of a company.

Locus Standi

If a wrong has been done to a company, the proper plaintiff would be the company itself. This is the rule in Foss v Harbottle1, a bedrock principle of corporate law under the common law. The constraints of the rule are obvious. A minority shareholder would not be able to raise a complaint, even though their interests (e.g. value of their shares) may be at stake. The concept of a derivative action (be it at common law or under statute) is an exception introduced to alleviate the harsh consequences of this rule on the minority shareholder.

In the context of the statutory derivative action regime, the right is extended to members of the company and since the further amendments to the Companies Ordinance in December 2010, to members of a related company as well2. A "related company" includes a holding company, a subsidiary or a subsidiary of a holding company of the subject company3, which means that multiple derivative actions are now permissible under the regime, provided the company is one which is incorporated in Hong Kong4.

However, it remains the case that only a member registered on the company's (or related company's) register of members would have standing to make an application under section 168BC. Standing is not conferred upon those who have beneficial ownership of the shares in the company (or related company) but are not, for whatever reason, registered as members. In Re Luen Fat Paint Co Ltd (unreported, HCMP 1791/2009, 11 February 2010), the administratrixes of a deceased member's estate under a limited grant who had yet to obtain the full grant of letters of administration (let alone be registered as members of the company in place of the deceased) were faced with a situation of having to make an application under section 168BC to stop an imminent sale of a property by the board of directors at a gross undervalue. The Court, at the initial hearing of the leave application under Part IVAA, ordered that the hearing be adjourned to enable an independent valuation to be conducted on the subject property, pursuant to section 168BG(1)(d). Fortunately for the applicants, by the time of the adjourned hearing, they were able to get themselves registered as members of the company in place of the deceased through a separate court application to rectify the register, by relying on the strength of the limited grant and on the court order made at the initial hearing and, therefore, to overcome the initial problem of their lack of standing.

Whilst the granting of the adjournment was a clear blessing for the applicants in that case, the principle distilled there from that an applicant need only be registered as a member of a company by the time that leave is granted (but not necessarily at the time of the application) is one that remains to be affirmed by higher authority.

In any event, the case does highlight a potential constraint in the statutory derivative regime, especially for beneficial owners of shares who are not registered as members (perhaps due to an error on the part of the company only) but are required to bring or intervene in proceedings on behalf of the company on an urgent basis.

Prima Facie Interests of the Company

The Hong Kong judiciary has been consistent all along, that the threshold that proceedings be prima facie in the interests of the company, is low5. At the stage when the member is applying for leave, the court will not attempt to resolve the underlying dispute. Instead, for the purpose of the leave application, the court will simply consider whether there is an arguable case before it and whether the company will suffer any prejudice from the bringing of the intended proceeding6.

The court may, in addition, enquire into whether the intended proceedings, even if successful, would positively serve the interests of the company, be it commercially or otherwise7. If the court has any hesitation in this regard, it could require the applicant to be responsible for the costs ordered against the company and to give an undertaking that he/she shall not seek contribution or indemnity from the company8.

Serious Question To be Tried

In a similar vein, the judiciary has emphasized that the threshold for a serious question to be tried is not difficult to meet and is in fact comparable to that required for an interlocutory injunction. The court would not look into the merits of the intended action to any great degree and would only consider whether there is enough to show a sufficient likelihood of success. In the recent case of Re Li Chung Shing Tong (Holdings) Ltd [2011] 5 HKC 531, the Court even went so far as to say that odds against success would not count against the plaintiff, unless the prospects of success were so dim that the plaintiff could not have no expectation but only a hope of success.

The Nexus Between the Two Criteria

The Court of First Instance raised an interesting point in the Li Chung Shing Tong case on how the two criteria of "the prima facie interests of the company" and "a serious question to be tried" interrelate. The Court was of the view that, in normal circumstances, where there is a serious issue to be tried, it is very likely that it would be in the prima facie interests of the company to bring the proposed legal action. However, such logic does not necessarily apply to every case. For instance, in situations where the company has a claim against a person with which it regularly does business, the proposed legal action is likely to damage the business relationship and maintenance of the relationship is more valuable to the company than any likely recovery in the contemplated proceedings. The Court was of the view that in such circumstances, one must first look to the decision of the directors who, having been given reasonable notice by a complainant in good faith, decide not to assert a corporate right of action. One must also be careful when looking at the directors' intention, as there would be cases in which the complaint relates to the misconduct of the directors and therefore their decision to bring a corporate action would inevitably not be impartial. Therefore, in cases in which a prospective claim is not against a director or directors, the board's view of what is in the interests of the company should generally be given considerable weight; in cases in which the prospective claim is against a director or directors, the board's view would be of less significance.

Powers of the Court

Under section 168BG, the Court is empowered to make a wide range of orders at any stage of the application, including:

  1. Interim orders (section 168BG(1)(a));
  2. Directions concerning the conduct of the proceedings or application (section 168BG(1)(b));
  3. An order directing the company, or an officer of the company, to do, or not to do, any act (including the provision of information or assistance) (section 168BG(1)(c)); and
  4. An order appointing an independent person to investigate and report to the court on the financial position of the company or the facts or circumstances that gave rise to the proceedings or the costs incurred by the parties (section 168BG(1)(d)).

The power under section 168BG(1)(c) requiring the company or an officer of the company to do or not to do any act is an interesting one but one that is yet to be tested by the Hong Kong courts. The wording of the legislation is extremely wide and on the face of the legislation alone, it could arguably enable an applicant to obtain an order requiring the offending board of directors or any one of them to take positive steps to remedy or rectify the precise wrong done to the company which gave rise to the application in the first place.

As an order under section 168BG could be made at any stage of the proceedings or application, the applicant could arguably even rely on section 168BG(1)(c) to obtain interlocutory relief which is in effect akin to a mandatory or prohibitory injunction pending determination of the action.

The power to order an independent person to investigate under section 168BG(1)(d) is a useful tool for a minority shareholder, especially considering their limited rights to obtain information on the company to conduct an investigation on their own. Note the wording of section 168BG(1)(d) enables the independent person to investigate into not only the financial position of the company, but also the facts or circumstances that gave rise to the proceedings. Arguably, it follows that the independent person must also have the ancillary right to inspect the company's books and records for the purpose of conducting the investigation.

However, section 168BG(1)(d) is certainly not a remedy or tool as of right and to the contrary, the courts have been quite cautious in considering whether to make an order under this section, commenting to the effect that an order under section 168BG(1)(d) should not be made unless the applicant would not be able to successfully bring the intended action on behalf of the company without such assistance. It has been held that the existence of conflicting evidence alone would not justify the appointment of an independent person under this section9.

Whilst there is plenty of room for judicial activism in the wording of the legislation, the question is whether and how far the Hong Kong courts would be prepared to use its powers under the regime to actively assist an applicant to put together his/her case (whether under section 168BG(1)(c) or (d)) or even to intervene in the management of the affairs of the company under section 168BG(1)(c).

Rights of Access to Company's records

There would appear to be considerable overlap between section 168BG(1)(c), section 168BG(1)(d) and section 152FA, which entitles a certain class of members10 to inspect the company's records, provided the application is made in good faith and for a proper purpose. An order under section 152FA would be allowed if the inspection was sought as a means to investigate into the affairs of the company for the purpose of contemplated proceedings on behalf of the company11. This leads to the question of whether a member who has made an application under section 168BC to bring proceedings on behalf of the company, but has been denied access to information under section 168BG(1)(c) and/or section 168BG(1)(d), could seek to bypass the court's decision therein by way of a separate application under section 152FA. Could the application be considered as one which is lacking in "good faith", in view of the previously unsuccessful attempt under the statutory derivative regime?

By contrast, directors' rights (as opposed to a member's rights) to inspect the company's books and records under section 121 is read quite liberally. In the recent case of Re Fook Lam Moon Restaurant (unreported, HCMP 270 and 271/2010, 3 January 2011), the Court did not regard the introduction of certain rules by the board, which required the director seeking to inspect the company's records to state his purpose and to give a written undertaking to maintain confidentiality, as necessarily inconsistent with the director's right to inspect under the law. Since the rules were introduced by the directors, the same were binding on them as a matter of contract, but their right of inspection under the law was quite a separate matter.

It further appears that the director's right of inspection under section 121 would not be disturbed even if it would result in inconsistency with the company's articles of association. In Tsai Shao Chung v Asia Television Ltd [2011] 6 HKC 71, the Court held that the right under section 121 extended to each individual director of the company and not to the board as a whole even though such an interpretation would result in inconsistency with the company's articles of association. The director was not required to demonstrate that the inspection was appropriate in order to bring or intervene in proceedings (unlike section 168BG(1)(c)) or that the application was made in good faith and for a proper purpose (unlike section 152FA).

Therefore, in circumstances where a member merely has suspicion that a wrong has been done against the company, but does not yet have any solid evidential basis for either an application under section 168BC or even section 152FA, he/she may well have to resort to relying on the allegiance of a trusted director on the board to conduct investigations on his/her behalf.

On the other hand, the question may be wholly academic in the context of family companies, where the members are often the directors of the company as well, such that inspection of the company's books and records could simply be sought in the person's capacity as a director under section 121.


There have only been a handful of cases in Hong Kong so far to test the ambit of the statutory derivative action regime, but what is pleasing for investors, is that the general attitude of the courts at the moment, is one that would appear to be open and willing to explore the possibilities under the statutory derivative action regime to give further protection to the rights and interests of minority shareholders. Whilst there may be potential constraints in relation to the locus standi requirement or in the court's slight conservatism in exercising their powers under section 168BG(1)(d) as discussed above, the introduction of the statutory derivative action regime and the development in case law on members' and individual director's rights to inspect the company's records does herald another step forward for minority shareholders of Hong Kong companies, in line with similar developments taking place in the rest of the common law world.

1. (1843) 67 ER 189
2. Section 168BC(6) of the Companies Ordinance
3. Section 168BA of the Companies Ordinance
4. East Asia Satellite Television (Holdings) Ltd v New Cotai, LLC & Ors [2011] 4 HKC 115
5. Re F & S Express Ltd [2005] 4 HKLRD 743; Re Grand Field Group Holdings Ltd [2009] 3 HKC 81; Re Li Chung Shing Tong (Holdings) Ltd [2011] 5 HKC 531
6. Re Lucky Money Ltd [2007] 4 HKC 598
7. Carpenter Pioneer Park Pty Ltd [2004] NSWSC 1007; Re Li Chung Shing Tong (Holdings) Ltd [2011] 5 HKC 531
8. Fiduciary Ltd v Morningstar Research Pty Ltd [2005] NSWSC 442
9. Re Grand Field Group Holdings Ltd [2009] 3 HKC 81; Re Li Chung Shing Tong (Holdings) Ltd [2011] 5 HKC 531
10. See section 152FA(2) of the Companies Ordinance
11. Re Augold NL [1987] 2 Qd R 297

The Trade Descriptions (Unfair Trade Practices) (Amendment) Bill 2012

by Karen Dicks

What is the purpose of the Bill?

The Trade Descriptions Ordinance (Cap. 362) ("TDO") presently only prohibits false descriptions of goods and there has been strong public demand to enhance the scope of consumer protection and extend the ordinance to prohibit false descriptions of services and unfair trade practices.

The Trade Descriptions (Unfair Trade Practices) (Amendment) Bill 2012 ("the Bill"), which was introduced into LegCo on 24 February 2012, seeks to expand the scope of the TDO by:

  • expanding the definition of "trade description" in relation to goods
  • extending its coverage to services
  • prohibiting certain unfair trade practices
  • creating new criminal sanctions
  • putting in place a compliance based enforcement mechanism
  • giving wronged consumers the right to institute civil actions

Expanding definition of "Trade description" in respect of goods

The TDO currently prohibits anyone from applying a materially false or misleading indication of certain specified aspects (such as quantity, method of manufacture, and fitness for purpose) to any goods, in the course of trade or business. The current definition is considered too restrictive because important aspects of goods (such as availability and price) are not currently listed in the TDO and therefore not subject to its regulation. The Bill seeks to expand the definition of "Trade Description" in relation to goods, to the effect that false indications of any matters with respect to goods will be prohibited.

Trade Descriptions of Services

The present prohibition in the TDO against false and misleading trade descriptions of goods is extended in the Bill to apply to false and misleading trade descriptions of services. A "service" is defined in the Bill as any right, benefit, privilege or facility that is, or is to be provided, granted, conferred or offered under a contractual right, other than under a contract of employment.

Prohibiting Unfair Trade Practices Misleading Omissions

The rationale behind this prohibition is that consumers should not be misled by omissions or unclear or ambiguous presentation of information about products. A commercial practice will be considered as a "misleading omission" if in its factual context, it omits or hides material information, provides material information in an unclear or ambiguous manner or fails to identify its commercial intent (unless this is apparent) and, as a result, causes or is likely to cause the average consumer to make a transactional decision that he would not otherwise have made. Examples would be advertorials or the posting of comments by traders using pseudonyms in online discussion forums, with the aim of promoting sales.

Aggressive Commercial Practices

The Bill provides for the prohibition of aggressive practices in consumer transactions. A commercial practice will be considered aggressive if, in its factual context and taking into account the relevant circumstances, it significantly impairs or is likely to significantly impair, the average consumer's freedom of choice or conduct, through the use of harassment, coercion or undue influence, which causes him to make a transactional decision he would not have otherwise made. The Bill contains a list of factors to be taken into account when determining whether a practice uses harassment, coercion or undue influence, including, for example, its timing, location, nature and persistence and the use of threatening or abusive language or behaviour.

Bait Advertising

The Bill proposes to prohibit a trader from advertising to supply products at a specified price, where there are no reasonable grounds for believing that the trader will be able to offer for supply those products at that price for a reasonable period and in reasonable quantities, having regard to the nature of the product and nature of the advertisement. A trader may be held liable for this offence if he holds an unreasonable belief (even honestly) that he could have met the demand. To ensure that businesses acting in good faith are not inadvertently caught by the provision, a defence (additional to that currently available under the TDO) is proposed, namely that (with the consumer's consent) the trader supplied or procured a third party to supply the same or equivalent products, at the same price as advertised, within a reasonable time and in a reasonable quantity.

Bait and Switch

The Bill proposes to prohibit a trader from the practice of advertising or promoting products at bargain prices or on very favourable terms as bait to attract customers and then switching them to different products.

Wrongly Accepting Payment

The Bill proposes to prohibit a trader from accepting payment for a product when he intends not to supply the product or intends to supply a product that is materially different from the product for which payment was accepted. A trader will also commit an offence if there are no reasonable grounds for believing that he will be able to supply the product within the period specified or, where no period is specified, within a reasonable period. A defence (additional to that currently available under the TDO) will be available to a trader, namely that (with the consumer's consent) he successfully procured a third party to supply the same products or equivalent products, within a specified period (or where no period was specified, within a reasonable period).


The proposed maximum penalties for all of the above unfair trade practices is a fine of HK$500,000 and 5 years imprisonment.

Liability of Directors and Partners

If an offence is committed by a body corporate, a director, shadow director, secretary, principal officer or manager of that body corporate will also commit an offence if committed with that person's consent or connivance or by his neglect. Similarly, if an offence is committed by an unincorporated body, such as a partnership, a partner, office holder, member or manager of the unincorporated body will also commit an offence, if committed with his consent or connivance or by his neglect.

Extra Territoriality

A trader may commit an offence, even if the unfair trade practice is directed at consumers who are outside Hong Kong, if at the time of engaging in the practice, the trader is in Hong Kong or Hong Kong is the trader's usual place of business.


It is proposed that the Customs and Excise Department be responsible for enforcing the offences, with the Telecommunications Authority and Broadcasting Authority given concurrent enforcement powers in respect of telecommunications and broadcasting services respectively.

Compliance Based Enforcement

The Bill proposes that the enforcement agency be empowered to seek undertakings from traders suspected of engaging in unfair practice to stop and not repeat such practice, backed up, where necessary, by court injunctions.

Power to Inspect Books and Documents at Business Premises

Under the TDO enforcement agencies are permitted to inspect any goods and enter non-domestic premises in order to ascertain whether any offence under the TDO has been or is being committed, if it has reasonable cause to suspect that an offence has been committed. This power does not extend to inspecting books or documents. The Bill proposes to expand those powers to enable enforcement agencies to inspect books and documents (such as invoices required under the ordinance to be kept by traders) to help to ascertain if the ordinance is being complied with. Reasonable suspicion that an offence has been committed will no longer be required.

Consumer Redress

There is provision in the Bill for consumers, who suffer loss or damage as a result of conduct constituting an offence under the ordinance, to institute a private action for damages. It is also proposed that when convicting a person of an offence under the ordinance, the court may order the convicted person to compensate any person for financial loss resulting from the offence.

Exempt Persons

It is proposed that certain persons be exempt from the ordinance on the basis that they are already regulated by regulatory bodies. Such persons include, for example, accountants, pharmacists, dentists, barristers and solicitors, medical practitioners, engineers and surveyors.

When is the Bill likely to be enacted?

The Bills Committee was formed on 2 March 2012. It is expected that, if enacted, the Bill will be brought into operation only after implementation details are worked out, possibly in 2013. If enacted, it should enhance consumer protection and redress. The potential hefty fines and prison sentences for a conviction under the ordinance should deter traders from engaging in unfair trade practices and the compliance-based enforcement mechanism, available to enforcement agencies as an alternative to the criminal route, should encourage compliance.

Cantor Fitzgerald Fails to Win Damages Against Departing Senior Management Staff 

by Robert Clark


This was an action against former employees of Cantor Fitzgerald and concerned alleged breaches of employment contracts and fiduciary duties. Cantor Fitzgerald's case was that the four employees, who had all held senior management positions, had breached their duties of fidelity and fiduciary duties, by resigning on the same day and signing contracts with a competitor, Mansion House Financial Holdings Ltd ("Mansion House"). Cantor Fitzgerald also alleged that the Defendants had breached restrictive covenants in their employment contracts.

The 1st Defendant (D1) had been seconded from Cantor Fitzgerald Europe ("CFE") to Cantor Fitzgerald Hong Kong (CFHK) and was a director of CFHK. At the time of his resignation, he was one of the leading resident executives of Cantor Fitzgerald in Asia. The 2nd and 3rd Defendants (D2 and D3) were top revenue generators of CFHK's Cash Equities Desk, each holding the title of Managing Director of the Cash Equities Desk. The 4th Defendant (D4) was Managing Director, Chief Economist and Strategist (Asia) at CFHK.

Issues before the Court and Court's decision

The main issues before the Court and the Court's decision in relation to each of those issues were as follows:

1. Had any of the Defendants breached their fiduciary duties or duties of fidelity by procuring any of the other Defendants to resign and join a competitor or by acting in concert with any of the other Defendants to leave together to join a competitor?

  1. D1 had an employment contract with CFE and owed a contractual duty of fidelity to his employer, CFE, but not to CFHK, to whom he had been seconded. As a director of CFHK, he also owed fiduciary duties to CFHK.
  2. D2 and D3 had employment contracts with CFHK and each owed a contractual duty of fidelity to their employer, CFHK. Although they each held the title of "managing director", neither could be regarded as actual or substantive directors of CFHK. Neither actually sat as members of CFHK's board of directors or took decisions about the general management of CFHK. They did not, therefore, owe fiduciary duties to CFHK.
  3. D4 had an employment contract with CFHK and owed a contractual duty of fidelity to his employer, CFHK.
  4. Although each Defendant was fully aware that the others were negotiating to join Mansion House, all attended a lunch where the possibly of joining Mansion House was discussed, all engaged the same law firm to negotiate employment contracts with Mansion House (all of which contracts had near identical terms) and all resigned the same day (with resignation letters in near identical terms), it could not be inferred from this alone that they had acted in concert or procured each other to resign. It did not seem that they had persuaded or encouraged each other to resign, but rather that the Defendants had made up their minds separately from each other.

2. Had D1 and D2 breached express provisions in their employment contracts with Cantor Fitzgerald requiring them to notify their employer if they were approached or invited to take up employment or enter a business relationship with a "competitor"? Had D2 breached an express provision in his employment contract with Cantor Fitzgerald to inform his employer as soon as reasonably practicable, if he became aware at any time that another employee had been approached or invited to take up employment or enter into a business relationship with a "competitor"? Did D1 and D2's duty of fidelity or (or in the case of D1, fiduciary obligations) require them to disclose the fact that they were leaving or had been approached?

No. Neither D1 nor D2 had breached these provisions in their employment contracts because Mansion House could not be regarded as a "competitor" of Cantor Fitzgerald. At the time the Defendants joined Mansion House, it was only emerging from insolvency and near de-listing of its parent company and was starting from scratch, whereas Cantor Fitzgerald was a leading and long established global enterprise.

In light of the principle that an employee is free to work (or not work) for a given employer, it was unclear what purpose would be achieved by imposing a general duty in law of informing an employer that he had been approached or was thinking of leaving. Upon receipt of such information, the employer would not be entitled to force the employee to work for it.

A duty to inform an employer of one's intended resignation or of having been approached to resign could only arise from (and must be strictly delimited by) express terms in an employment contract. Even where there is an express term to that effect, given that an employee cannot be forced to work where he is unwilling to, it would be difficult to establish damage consequent upon breach of such term.

3. Had D1 been entitled to tender a payment in lieu of notice to CFE when resigning, pursuant to sections 6 and 7 of Hong Kong's Employment Ordinance, notwithstanding that his employment contract was governed by English law?

Yes. D1's employment contract with CFE was stated to be governed by English law. That contract had been varied by a secondment letter, which stated that his employment was governed by English law "save for any mandatory laws of Hong Kong." Sections 6 and 7 of the Employment Ordinance form part of the mandatory employment laws of Hong Kong, binding on CFE. One could not attempt to get around the protection afforded by the Employment Ordinance to employees working here, through the choosing of a foreign law. Section 70 of the Employment Ordinance nullifies any term of an employment contract which purports to extinguish or reduce any right, benefit or protection conferred on an employee by the Employment Ordinance.

4. Had D1, D2 and D3 breached the restrictive covenants in their employment contracts?

No. The restrictive covenant in D1's employment contract prohibiting him, for 12 months after termination of his employment, from poaching certain Cantor Fitzgerald staff was unenforceable. Although such covenant was reasonable for the protection of Cantor Fitzgerald's legitimate interests, the 12 month period was not reasonable and there was no evidence justifying such period.

D1 was not in breach of the restrictive covenant in his contract prohibiting him, for 12 months after termination of his contract, from engaging in business in competition with Cantor Fitzgerald. Again, the restrictive covenant was unenforceable because 12 months was unreasonably long. Further, there was ambiguity as to precisely what constituted "a business….in competition", as at the relevant time, it was difficult to see how Mansion House could be regarded as being in serious competition with the well established Cantor Fitzgerald.

Similarly, restrictive covenants in D2 and D3's contracts prohibiting them, for a period of 12 months after termination of their contracts, from enticing away certain classes of Cantor Fitzgerald group employees and from enticing away certain classes of clients of the Cantor Fitzgerald group, were unenforceable, as 12 months was again too long, in light of a lack of evidence justifying the same.

5. Was D2 liable to pay liquidated damages for leaving Cantor Fitzgerald without the latter's consent prior to the expiry of his contract term, as provided in his employment contract?

No. A claim could not arise under this clause because D2 had not left his employment in breach of his employment contract. He had legitimately terminated his employment with Cantor Fitzgerald, in accordance with the Employment Ordinance. Even if the liquidated damages clause were enforceable in principle, it would still have to be shown that the liquidated damages constituted a genuine pre-estimate of damage suffered by CFHK as a result of D2's premature departure. In this case, it was not shown how the formula (30% of recent average gross revenues attributable to D2, multiplied by months of notice to run under his contract) was a genuine pre-estimate of CFHK's likely damages.

6. What damages would Cantor Fitzgerald have been entitled to recover had the Defendants been found to have breached their obligations to it?

It was not possible to conclude that CFE and CFHK had suffered anywhere near the alleged 29% loss of revenue due to the Defendants' departures (a figure quantified by CFHK's Chief Financial Officer, by comparing CFHK's monthly average revenue in the 5 months following the Defendants' departure with the monthly average revenue in the first 5 months of 2011). Had the Defendants been found to have breached their obligations to CFE and CFHK, the Court said that it would have been hard pressed to quantify damages at anything other than a nominal sum.

Important points for employers to note

The judgment highlights a number of important matters for employers to bear in mind, as follows:

  1. To ensure that any restrictive covenants in employment contracts are carefully drafted to ensure that they are reasonable in terms of scope, period of application and to protect the employer's legitimate interests or else they will be held to be unenforceable.
  2. To ensure that terms used in employment contracts are clear and unambiguous, such as the words "competitor" and "competition" used in restrictive covenants.
  3. Ensure that they do not include terms in an employment contract which purport to restrict or extinguish any rights, benefits or protection afforded to employees by the Employment Ordinance (even where the contract is stated to be governed by a law other than that of Hong Kong), as such clause is liable to be struck down by Section 70 of the Employment Ordinance.
  4.  Ensure that in cases where employees have breached their obligations, giving rise to a claim for damages by employers, employers are able to accurately quantify their loss and justify the basis upon which it has been calculated or else the court is likely to award only nominal damages.

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