Overview
In Hong Kong legal practice, share holdings are usually carried out through share trusts. This arrangement involves the transfer of legal title to the shares to a trustee, while the substantial owner is someone else. This approach has its unique advantages and challenges in handling company shareholdings and protecting assets.
Mainland share holdings: holding agreements and trusts
In the Mainland, the handling of share holdings is usually carried out through a holding agreement. A "Share Holding Agreement" is signed between the agent holder and the substantial equity holder to stipulate the rights and obligations of both parties. The legal basis for this arrangement is the principal-agent relationship. The Supreme People's Court confirmed in relevant judicial interpretations that as long as it does not violate mandatory provisions, the share holding agreement is valid.
In addition, the mainland also uses private trusts to handle share holdings. For example, in an employee stock ownership arrangement, an individual or company acts as a trust trustee to hold dispersed employee shares. However, mainland law is still undecided on the legal validity of private trusts, and there is great uncertainty about the legal validity of this approach.
Hong Kong share holding agency: share trust
In Hong Kong, share holdings are usually carried out through share trusts. The trustee unilaterally signs a trust declaration, stating that the shares he holds are held as a trustee, and that the substantial equity holder is someone else. The scope of the trustee's powers can be agreed upon in an agreement.
Since the legal relationship between the two parties is fully governed by the trust law, the content and form of the trust declaration must be drafted in strict accordance with the trust law, otherwise it may cause problems or even be invalid. In addition, documents relating to equity trusts are subject to stamp duty and stamp duty.
Trust for shares of Hong Kong listed companies
Many mainland companies listed in Hong Kong have shares held in trusts. For example, a large number of employees need to handle share holdings through proxy holding, or private enterprise owners hold shares through trusts to avoid the impact of marital changes on equity.
Case
For example, in the class action case concerning share trusts of China Shanshui Investment Co., Ltd., the executives of the collective enterprise’s listed company in Hong Kong held the shares of the collective economic members by establishing a discretionary trust (discretionary trust). However, the trustee used his discretion to damage or even swallow up the share rights and interests of collective economic members, triggering litigation.
For another example, some owners of listed private companies set up discretionary trusts to convert the shares of Hong Kong listed companies from their personal holdings to trust holdings, so that their spouses would not be able to share their property in accordance with mainland marital property laws upon divorce, thus triggering litigation.
Legal Risks and Protection
Under common law, trustees of a trust have strict fiduciary duties. The independence of trust property is not absolute. If the court believes that the trust is merely a cover to achieve some illegal purpose, it may lift the veil of the trust and make the actual controller liable.
Case
In the case of Jian Liqun v Poon Lok Tao (CFA Civil Appeal Nos. 20 and 21 of 2013), the husband set up a discretionary trust for his main assets (i.e. shares in a company), which were held by HSBC International Trustees Limited as the trustee. The wife claimed in the divorce proceedings that the trust property should be divided. The Court of Final Appeal adopted a test: if the husband requires the trustee to advance all or part of the capital income of the trust to him, is it reasonably likely, on a relative basis, that the trustee will do so? The court held that under the discretionary trust established by the husband for the shares of a listed company, the veil of the trust should be lifted and the wife was entitled to share all the trust property.
Conclusion
In Hong Kong, the trust holding of company shares involves complex legal issues. Whether it is legal practice in the Mainland or Hong Kong, it needs to be handled carefully to avoid legal risks and potential litigation. Choosing the right trustee and designing a reasonable trust structure are key to ensuring the effective operation of the trust and protecting the substantial stakeholders.
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