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Volume 3, Issue 1 |
March 2016 |
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For the first issue 2016 of Keep Your Counsel, Winston Asia Attorneys selected six topical issues happening in China, Hong Kong and Taiwan. For the China chapter, Daniel Tang discusses the dismantling of the VIE structure in China; Matthew Durham focuses on the impact of the PRC Anti-Terrorism Law on telecommunications operators and internet service providers; and Daniel Tang and Ivy Liu provide an update on the modifications of China rules on accreditation of high and new technology enterprises.
For Hong Kong, David Hall-Jones and Jasamine Yung talk about the enforcement of the Convention Awards in Hong Kong while Mabel Lui and Deidre Fu focus on the recent judgement sealing the unfortunate fate of Yung Kee Holdings Limited.
In Taiwan, Horng-Dar Lin and Jade Chen discuss the Taiwan Copyright Act. |
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| A variable interest entity (VIE) refers to an entity that is consolidated into another entity (i.e., the investor) for financial reporting purposes. Thus, the investor becomes the VIE’s primary beneficiary, which is achieved by de facto control instead of equity shareholding. This disparity between equity ownership and economic benefits is the key to getting around foreign ownership restrictions in sectors that are not fully open to foreign investors, particularly for floating such businesses in international capital markets such as New York and Hong Kong. |
| Click here to read more ► |
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| The Standing Committee of the National People’s Congress of the People’s Republic of China (PRC or China) has promulgated the PRC Anti-Terrorism Law (New Law) which became effective on January 1, 2016. Implementing regulations have not yet been issued, but are expected to be forthcoming and are hoped to provide further guidance on how the law will be interpreted. The stated purpose of the New Law is to guard against and punish terrorist activities, strengthen anti-terrorist initiatives, and safeguard national security, public security, and the security of the lives and property of the people. |
| Click here to read more ► |
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| One of China’s key tax policies to foster entrepreneurship and innovation is to reduce the corporate income tax rate from 25% to 15% for enterprises that qualify as high and new technology enterprises (HNTEs). The HNTE status is granted by provincial tax authorities in accordance with the Administration Rules on Accreditation of High and New Technology Enterprises issued in 2008 (Old Rules) and the related Work Guidance on Accreditation of HNTEs (Old Guidance). On January 29, 2016, the Ministry of Science and Technology (MST), Ministry of Finance (MOF) and State Administration of Taxation (SAT) jointly issued a new version of the Administration Rules on Accreditation of High and New Technology Enterprises (GuoKeFaHuo [2016] No. 32) (New Rules) which are retroactively effective since January 1, 2016. |
| Click here to read more ► |
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| Jasamine Yung |
| Trainee Solicitor |
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| The Arbitration Ordinance (Cap. 609) (AO) recognizes and provides that final and binding arbitral awards made outside of Hong Kong may be enforced in Hong Kong with leave of the High Court of Hong Kong. The scope of this section encapsulates arbitral awards obtained in another state or territory that is party to the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (the Convention). As a result of the Mainland having extended its membership in the Convention to Hong Kong, these Convention awards are directly enforceable in Hong Kong. |
| Click here to read more ► |
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| Mabel Lui |
| Partner and Head of Corporate – Asia |
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| On November 11, 2015, the Court of Final Appeal (CFA) handed down the judgment which sealed the fate of Yung Kee Holdings Limited (Company), a company registered in the BVI which holds various family companies of the Yung family, including those which operate the famous Yung Kee Restaurant (Restaurant) and the Kee Club in Hong Kong. The judgment which ordered the winding up of the Company became effective on December 17, 2015, when the two branches of the Yung family failed to agree on the Company shares buyout scheme by one of the branches. This outcome would probably have made the deceased family patriarch, Mr. Kam Shui Fai (Kam Senior), turn in his grave. |
| Click here to read more ► |
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| To stay afloat in the digital era, coping with changes to specific national copyright statutes is not just a worldwide trend, but a necessity. Although the statutory framework defining the Taiwan Copyright Act (Act)3 has remained largely untouched since it was first enacted in 1928, the Act has now begun to receive comprehensive scrutiny not only by academic critics, but also by industrial and governmental professionals. |
| Click here to read more ► |
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A variable interest entity (VIE) refers to an entity that is consolidated into another entity (i.e., the investor) for financial reporting purposes. Thus, the investor becomes the VIE’s primary beneficiary, which is achieved by de facto control instead of equity shareholding. This disparity between equity ownership and economic benefits is the key to getting around foreign ownership restrictions in sectors that are not fully open to foreign investors, particularly for floating such businesses in international capital markets such as New York and Hong Kong.
In the People’s Republic of China (PRC), VIE structure has been used in telecommunications, e-commerce and other “sensitive” businesses that are restricted to foreign investments under the Foreign Investment Catalogue and its successive updates for the last two decades. In the last few years, a trend of dismantling the VIE structure has emerged. Initially, such dismantling was aimed at facilitating the privatization of overseas-listed Chinese companies seeking domestic listing in the PRC. Recent deals were structured to move the holding vehicle into the PRC to facilitate financing or acquisition by cash-rich PRC funds and other buyers. Apart from the overseas investors’ changing sentiments on China-concept companies and the progressive relaxation of the PRC’s foreign investment restrictions that paved the way for this process, the uncertainties around the future of the VIE structure highlighted in the PRC’s draft Foreign Investment Law have stirred up substantial anxieties amongst the stakeholders since its release in early 2015. |
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| As illustrated in the graph below, a typical VIE structure comprises a special purpose vehicle (SPV) group and an operating group. The SPV group is generally foreign-funded, with its founders (who are usually PRC citizens) and other investors holding equity shares in a Cayman or similar offshore vehicle (HoldCo), which in turn holds a wholly foreign-owned enterprise established in China (WFOE). The operating group is purely domestic, with two or more PRC individuals owning one or more operating companies (each referred to as an “OpCo”). The SPV group controls the OpCo group via a nexus of contractual arrangements, effectively exercising de facto control over the OpCo group and stripping cash revenue from them. In such a structure the WFOE owns the intellectual property rights and other key assets, whereas the OpCo entities hold the necessary operating permits and licenses that are not obtainable by the WFOE. |
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To transition into a domestic holding structure, the control agreements have to be terminated. A new holding company will be created in the OpCo group (either by adding an investment holding SPV or restructuring the shareholding of an existing OpCo). The relevant OpCo(s) can then acquire the key assets from the WFOE, which will distribute the sale proceeds received to the HoldCo and commence liquidation. The HoldCo will use those distributions received from the WFOE to buy back or redeem all issued shares from its shareholders, before being put into liquidation.
The key considerations are as follows: |
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Existing shareholders may or may not keep their shareholdings in the new structure. Commercial considerations aside, foreign ownership restrictions may apply and limit the aggregate foreign shareholdings. In some cases, the investors may take advantage of concessions made available in the free trade zones.
Furthermore, it is increasingly common for PRC parties to form their investment holding and fund-raising entity as a limited liability partnership to take advantage of the flexibility of such structure in terms of corporate governance, investment return distributions and tax planning. Where legally permissible, the lead investor tends to set up parallel offshore and onshore investment platforms to tap into available investor pools outside and inside the PRC. |
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The most straightforward option is to obtain RMB financing onshore. Previously there have been residue concerns over whether PRC non-financial enterprises may lawfully lend money to other legal entities. A set of judicial interpretations from the Supreme People’s Court in August 2015 now makes it clear that genuine lending and borrowing between individuals and non-financial enterprises are legally enforceable.
A key objective is to structure and time the restructuring steps in such a manner that cash movements are minimized. |
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| If a HoldCo has set up an employee stock option plan (ESOP) to incentivize its management personnel and other employees qualified to participate, it will also have to be “migrated” onshore. Qualified employees holding a foreign passport would often participate via an offshore SPV. |
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When the offshore investors exit from the HoldCo, they will be faced with the Chinese anti-tax avoidance rules that seek to “see through” offshore transfers and treat them as a transfer of the underlying China assets. The risks are particularly heightened when the HoldCo does not have substantial business operations, thereby exposing the transfers to being deemed “without reasonable commercial purpose.”
The other major tax exposure relates to the asset transfers between the HoldCo group and the OpCo group. The parties shall expect extensive discussions with the China tax authorities on the fair value of the assets being transferred. |
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| Where the founders have filed recordal with the foreign exchange authorities in respect to their round-trip investments at the time of setting up the VIE structure, they need to de-register their ownership in the SPV upon exit. |
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| When a new substantial investor finances the offshore-to-onshore migration, it will often seek a package of preferential deal terms, ranging from indemnification for pre-restructuring liabilities, veto rights on major matters, to most-favored-nation treatment. |
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The Standing Committee of the National People’s Congress of the People’s Republic of China (PRC or China) has promulgated the PRC Anti-Terrorism Law (New Law) which became effective on January 1, 2016.
Implementing regulations have not yet been issued, but are expected to be forthcoming and are hoped to provide further guidance on how the law will be interpreted. The stated purpose of the New Law is to guard against and punish terrorist activities, strengthen anti-terrorist initiatives, and safeguard national security, public security, and the security of the lives and property of the people. Namely, to protect against “terrorism,” broadly defined to include actions and behavior which uses violence, intimidation, and other means to create social panic, endanger public safety, harm persons or property, or coerce State organs or international organizations in order to achieve political, ideological, or other objectives. It is hoped that the forthcoming guidance will provide greater clarity around the definition of terrorism and extremist content.
The new law has several specific provisions that relate to data privacy. In particular, it sets out potentially onerous requirements and obligations for telecommunications operators and internet service providers. There is no definition of “telecommunications operator” or “internet service provider,” nor any further guidance as to the scope of what these terms cover. Again, it is hoped that the implementing regulations will provide clarification. The law could potentially apply to a wide range of providers, including e-commerce businesses and data storage and mobile application providers.
Telecoms operators and internet service providers are required to provide technical support and assistance to assist the relevant PRC security authorities to investigate and prevent terrorist activities. This includes an obligation to supply technical interfaces and decryption technology to such agencies for this purpose, if required. In addition, telecoms operators and internet service providers must implement network security and monitoring systems to identify and prevent the dissemination of terrorist or extremist content. If information with such content is detected, the operators and providers have a duty to stop any transmission of this information, retain relevant evidence, delete offending information, and report the situation to the relevant PRC security agencies. A broad group of business operators and service providers is now also required to verify the identity of customers and clients before providing any services. This includes the following sectors: telecoms; internet; finance; hotels and lodgings; long-distance passenger transportation; and motor vehicle rental.
Penalties for failing to comply with the new law include both fines and detention. Companies can be fined RMB 200,000 – 500,000 (USD $30,000 – $80,000 [approx.]), and directly responsible managers or other responsible persons can be fined up to RMB 100,000 (USD $16,000 [approx.]). In cases deemed serious, the fine for companies can be above RMB 500,000, and the fine for responsible persons can be RMB 100,000 – 500,000. In addition, responsible persons may be detained for 5 – 15 days by security agencies.
There is no definition of responsible persons for this purpose. This potentially could include the legal representative, directors and officers, general manager, and other senior management personnel of a company in China.
TIP: It is unclear at this point how strictly the PRC authorities will enforce and use this new anti-terrorism law. Unless and until implementing regulations are issued, it is hard for companies to know exactly how to react. Nevertheless, given the wide potential implications from a technology, IP, and data privacy perspective, foreign companies operating in China should monitor developments closely, review their existing technology and security systems, and develop internal protocols for handling any requests from the PRC authorities. |
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One of China’s key tax policies to foster entrepreneurship and innovation is to reduce the corporate income tax rate from 25% to 15% for enterprises that qualify as high and new technology enterprises (HNTEs). The HNTE status is granted by provincial tax authorities in accordance with the Administration Rules on Accreditation of High and New Technology Enterprises issued in 2008 (Old Rules) and the related Work Guidance on Accreditation of HNTEs (Old Guidance). On January 29, 2016, the Ministry of Science and Technology (MST), Ministry of Finance (MOF) and State Administration of Taxation (SAT) jointly issued a new version of the Administration Rules on Accreditation of High and New Technology Enterprises (GuoKeFaHuo [2016] No. 32) (New Rules) which are retroactively effective since January 1, 2016.
The main changes brought by the New Rules are related to the accreditation conditions and procedure, scope of High and New Technology Fields Particularly Supported by the State1 (HNT Fields), and post-accreditation supervision and administration. These revisions have been briefly summarized below. |
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| Under the New Rules, for enterprises with sales revenue equal to or less than RMB50 million in the immediately preceding year, the minimum ratio of its total R&D expenditures over its total sales revenue (R&D Expenditure Ratio) during the immediately preceding three years was reduced from 6% to 5%. The R&D Expenditure Ratio for the other two types of enterprises (i.e. with sales revenue for the immediately preceding year between RMB50 million and RMB200 million or above RMB200 million) remains unchanged under the New Rules. This change is clearly directed at allowing more small-scale enterprises to benefit from the HNTE policies. |
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| The requirements in relation to R&D personnel are more relaxed under the New Rules. The wording of the requirements has been changed from “the number of technical personnel with a college degree should be more than 30% of the overall number of employees, and the number of employees engaged in R&D works should be more than 10% of the overall numbers of employees” to “the number of technical personnel engaged in R&D and relevant technological innovation works should be no less than 10% of the overall number of employees.” The removal of the college degree requirement and relaxation of the technical personnel ratio have been adapted to take into consideration the current R&D outsourcing practices, which shall benefit all types of enterprises. |
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| Previously, one of the conditions to be qualified as a HNTE was that the “enterprise shall have obtained independent IPRs for the core technology of its main products (or services) for the last three years either through self-R&D, transfer/purchase, donation, merger and acquisition, etc., or through an exclusive license agreement for more than five years.” Under the New Rules, “enterprises shall have obtained ownership of IPRs for the key supporting functions of its main products (or services) through self-R&D, transfer/purchase, donation, merger and acquisition, etc.” The elimination of the practice whereby IPRs are obtained by way of exclusive license can be interpreted as an encouragement of self-R&D in the IPR area, which could be seen as the overall direction of HNTE policies. It is also worth noting that the qualifying words of “in the last three years” were deleted, hence removing the time constraint. |
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| Under the Old Rules, one of the accreditation conditions was that “indicators such as organization and management capacities on R&D, ability to commercialize technology findings, number of independent IPRs owned, and growth in sales and total assets shall conform to the requirements specified in the Old Guidelines.” Under the New Rules, requirements of the aforesaid four indicators were simplified to “evaluation of enterprises’ innovation capacity shall meet relevant requirements.” As the new guidelines will be separately issued in the near future, we believe that more detailed guidance on the definition of “innovation capacity” shall be provided. |
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| Nowadays, work safety and environmental protection have become prominent issues in China. As a result, a new requirement that “no serious safety or quality accidents or serious illegal environmental activities for the immediately preceding year has taken place at the time of enterprises’ application for accreditation” was added under the New Rules. |
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Additional supporting documents—there are more application documents to provide under the New Rules, such as annual declaration and payment receipt of corporate income tax for the past three years, relevant documents related to commercialization of technology findings and organization and administration on R&D, key technologies and technology indicators of high and new technology products (or services), certification and accreditation documents and related qualification certificates, etc.
Shorter notification period—the publication notification period for accredited HNTEs was shortened from 15 to 10 working days.
Annual disclosure—under the New Rules, accredited HNTEs are required to make annual filings on the website of the Administration of Verification of HNTEs 2 to disclose detailed information such as intellectual property, technology personnel, R&D expenditure and sales revenues in the immediately preceding year.
Abolition of the renewal procedure—the Old Rules allowed enterprises to renew their application, up to three months before the expiration of their HNTE certificate, with the local competent authority, which would only focus on the R&D Expenditure Ratio condition during the renewal review process. This renewal procedure option was removed in the New Rules, which implies that a fresh application must be submitted when the HNTE certificate expires. This is more complicated than the renewal procedure as all accreditation conditions will be reviewed by the local competent authority. |
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| The scope of HNT Fields was substantially expanded with the addition of a few new industries and technologies such as smart city, cloud computing technologies, graphene material and additive manufacturing etc., while some out-of-date technologies were deleted from the list. |
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| Post-accreditation supervision and administration were strengthened in the New Rules, enabling MST, MOF and SAT to perform random checks and implement key inspection mechanisms to strengthen the supervision of the verification work of HNTEs. HNTE-accredited enterprises failing the relevant authorities’ check of their daily administrative work shall be subject to a re-accreditation procedure. The HNTE qualification of enterprises who fail to pass the re-accreditation procedure will be revoked and tax incentives that had been enjoyed by such enterprises during the relevant unqualified period shall be refunded to the local tax authority. |
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| The New Rules continue to provide tax incentives to HNTEs. Although there is limited relaxation of accreditation conditions and procedures (particularly for small-scale enterprises), the accreditation work on HNTEs and post-accreditation administration on HNTEs were strengthened overall. |
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| Jasamine Yung |
| Trainee Solicitor |
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| The Arbitration Ordinance (Cap. 609) (AO) recognizes and provides that final and binding arbitral awards made outside of Hong Kong may be enforced in Hong Kong with leave of the High Court of Hong Kong. The scope of this section encapsulates arbitral awards obtained in another state or territory that is party to the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (the Convention). As a result of the Mainland having extended its membership in the Convention to Hong Kong, these Convention awards are directly enforceable in Hong Kong. |
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| Enforcement may be conducted either by (a) commencing a fresh action in Court or (b) obtaining the leave of the Court to enter judgment on the terms of the award by summary enforcement. An application for leave to enforce a Convention award may be made ex parte but the Court hearing the application may direct a summons to be issued, bringing the action to the notice of the other parties. If leave is granted, the Court will enter judgment in terms of the award and the award to be enforced in Hong Kong shall be treated as binding for all purposes on the parties and may accordingly be relied on by any of them by way of defense, set-off or otherwise in any legal proceedings in Hong Kong. |
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| The Courts have a strong presumption in favor of enforcement of Convention awards, unless the party against whom enforcement is being sought can successfully establish any one of the exhaustive grounds for refusal of enforcement set out under section 89 of the AO. In brief, the Court will not grant leave if the opposing party can convince the Court that: |
- it was under some incapacity;
- the arbitration agreement was not legally valid;
- it was not given proper notice of the appointment of an arbitrator or the arbitration proceedings, or was otherwise unable to present its case;
- the award deals with a difference or contains decisions which are beyond the scope of the terms of the submission to arbitration;
- the procedure of the arbitration or the composition of the arbitral authority was not in accordance with the arbitration agreement or the law of the seat of arbitration; or
- the underlying dispute is not capable of settlement by arbitration under the law of Hong Kong and it would be contrary to public policy to enforce the award.
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| If uncontested, enforcement proceedings are typically simple, do not involve substantial costs and may be concluded in a matter of months. Due to the strong presumption in favor of enforcing Convention awards in Hong Kong, prospective applicants will find enforcement actions to be particularly valuable against defendants with assets in Hong Kong. Whether such assets can still be located after a Court order is obtained is another matter. |
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| Mabel Lui |
| Partner and Head of Corporate – Asia |
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| On November 11, 2015, the Court of Final Appeal (CFA) handed down the judgment which sealed the fate of Yung Kee Holdings Limited (Company), a company registered in the BVI which holds various family companies of the Yung family, including those which operate the famous Yung Kee Restaurant (Restaurant) and the Kee Club in Hong Kong. The judgment which ordered the winding up of the Company became effective on December 17, 2015, when the two branches of the Yung family failed to agree on the Company shares buyout scheme by one of the branches. This outcome would probably have made the deceased family patriarch, Mr. Kam Shui Fai (Kam Senior), turn in his grave. |
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It was reported that Kam Senior founded the Restaurant, which became famous for its traditional Cantonese cuisine including roast goose and roast pork, in the 1940s. Kam Senior had always wanted his elder son (Kam Kwan Sing), the Petitioner/Appellant in these proceedings, and his second son (Kam Kwan Lai), the first Respondent in these proceedings, to work together in the family business. According to the Courts’ findings, since the 1970s, the elder son had been responsible for the day-to-day operations of the Restaurant, while the second son has been responsible for building maintenance of the properties (including the building where the Restaurant is located), the corporate and investment sides of the business.
Since the 1990s, the majority shareholding of the family companies was owned by a unit trust (Long Yau Unit Trust) with Long Yau Limited (Long Yau) acting as trustee. The sole shareholder of Long Yau was the Company and the initial shareholder of the Company was the wife of Kam Senior. It has not been denied that the arrangement was put in place in order to bring the shares of the family companies outside of Hong Kong for the purpose of minimizing estate duty exposure.
In 2009, after the demise of Kam Senior and the abolition of estate duty in Hong Kong, the unit trust was terminated. The Judge at the Court of First Instance (the trial judge) commented that no “particular explanation” was offered by any of the witnesses (including the family members and the financial advisor to Kam Senior) as to why the assets in the unit trust were being distributed in the way they were, but the result was that Long Yau became the legal and beneficial owner of the shares in the family companies while the Company became the ultimate holding company. Ownership of the shares in the Company became as follows:
- 35 percent being beneficially owned by the elder son/brother;
- 45 percent being beneficially owned by the second son/brother, after 10 percent of the shareholding was transferred to him from the third brother (who passed away in 2007);
- 10 percent being beneficially owned by the wife of Kam Senior, the mother; and
- 10 percent being beneficially owned by the sister.
The personal ownership allowed the family members to exercise their individual rights as shareholders, and eventually, a “divergence” within the family ensued. In May 2009, the mother decided to pass her shareholding to the elder brother to equalize his rights with the second brother. The sister then passed the voting rights attached to her shares to the second brother, believing him to be a better businessman.
It was reported that the second brother then used his majority voting rights (55 percent) to change the constitution of the Company. Without calling a shareholders’ meeting, he changed the quorum requirement for the Company’s board meetings from all appointed directors (which was originally himself and the elder brother) to just half of the number of directors appointed. He also appointed his son Carrel as an additional director of the Company. Further steps were then taken to ensure that his family had control of Long Yau and the company which operates the Restaurant, by the appointment of Carrel as the additional director of these companies.
The elder brother complained that he was not consulted on these nor any other business decisions, such as increasing the remuneration for Carrel, or allowing Carrel and his sister to use properties owned by the family. He alleged that his access to the group’s financial information was denied and his control over the Restaurant was “usurped”. In 2010, the elder brother brought action for: (1) an order for the buyout of his shares in the Company under s168A of the Companies Ordinance (Ordinance) on the basis that the affairs of the Company were carried out in an unfairly prejudicial manner, or in the alternative; and (2) the winding up of the Company on “just and equitable” ground under s327(3)(c) of the Ordinance. |
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It is not the purpose of this article to go into the details of the company law and jurisdictional arguments which are important aspects of the Courts’ decisions. Suffice it to say that the Courts at all levels decided that s168A has no application on the basis that the Company has not established any “place of business” in Hong Kong. For the purpose of that provision, the place where the Company discussed its affairs and held its board meetings does not constitute its place of business. This may seem surprising to private wealth advisors who are used to the concept that the place where companies hold their board meetings to decide on strategic matters is often highly relevant in determining the tax residency of such companies.
As for the jurisdiction to wind up the Company, although rejected by the lower Courts, the CFA decided that the Company did not need to have a place of business in Hong Kong in order for a winding up order (under s 327(3)(c)) to be granted. All that was required was for the Company to show a “sufficient connection” with Hong Kong. This was established by the presence of its shareholders in Hong Kong, as well as by the assets in Hong Kong which may be made available to the Company’s liquidators for the benefit of its shareholders. The fact that the family companies’ assets in Hong Kong are held via its subsidiary (Long Yau, a BVI company), rather than directly by the Company, does not matter. |
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Having decided that it had jurisdiction, the CFA also looked at whether the conduct of the family business amounted to unfair prejudice against the elder brother.
The CFA acknowledged that there may be situations when the exercise of the strict legal rights of shareholders may be subject to equitable constraints, if there is sufficient unfairness or breaches of good faith between them. This may happen particularly if the company is a “quasi partnership” type of business. In the present case, it was found to be a “common understanding that each brother was entitled to participate in the business and had to be properly consulted”. It was therefore reasonable for the elder brother to expect that his views and position within the group would be respected.
By unilaterally reconstituting the boards of the various companies and then making various business decisions benefiting his family members, the second brother was found to have made a “pre-emptive strike” on the elder brother and to have “dictated” matters to him. The trial judge also found Carrel to be “gratuitously rude” to his uncle on various occasions. These actions were inconsistent with the “maintenance of trust and confidence that had existed in the past” and without “due regard to the personal nature of the relationship involved.” Accordingly, the second brother could not have insisted on his strict legal rights as a shareholder, and unfair prejudice was established justifying the grant of an order to wind up the Company.
It should be noted that CFA’s finding on unfairness centers on the failure to respect the elder brother’s right to be consulted. The elder brother’s right to participate in the business does not mean that he should have had a power of veto, nor that there must have been unanimity in every decision regarding the running of the family business. |
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The first observation is that the dispute leading to the legal action only started when the shareholding of the Company came into the individual ownership of the family members in 2009. If the ownership of the Company shares had been held by a discretionary trust for the benefit of an open class of beneficiaries, consisting of children and issue of the family, the winding up of the Company might have been avoided.
Trust ownership could prevent the fragmentation of the shareholding and the potential divergence resulting from individual ownership. The trustee of this family trust is preferably an institutional trustee to ensure continuity and also independence from any particular branch of the family. Kam Senior could also have made it known to the trustee and also the family members of his dreams and visions (via letters of wishes and also in the deed of addition of the assets to the trust) that several elements of the family business, in particular the Restaurant and the building where it is located, are to be preserved as strategic holdings of the trust, to generate economic benefits for the family for generations.
Purely sorting out the “ownership system” in the “three circle model” of family business via a trust ownership would not have helped to facilitate the brothers working together, though, and this is where a properly structured family governance system may come into play. We should be reminded that the findings of the CFA on “unfair prejudice” were centered on the violation of the elder brother’s right to be consulted. Facilitating fair process and proper communication among the family members is what a family governance mechanism ought to be able to achieve.
A family governance mechanism usually consists of the establishment of a family council and a family assembly, and the entering into by the family members of a “family constitution,” the operation of which would interface with the trust structure to provide for checks and balances. It is beyond the scope of this article to examine the content of a family constitution, but typically this will include a mission statement, a set of family principles for doing business together, composition and function of the family council/ family assembly, criteria for participation in the family business, etc. To enable the constitution to have “teeth,” it would usually be specified that any failure by any family member to observe its terms may result in his/her losing an entitlement to the family wealth.
If, through the process of devising the family constitution (which should involve Kam Senior and all adult family members), it was apparent that the brothers still wanted to work together as joint owners of the family business, then the mechanism could have been put in place to better define their roles, separate their powers, and facilitate communication.
The second brother might have been given the role as head of the “business system,” since it was reported that the majority of the family members viewed him to be a better businessman. He could have been designated as the “Investment Advisor” in the family trust, having the voting powers attached to the shares and the right to decide on the directorship of the family companies (but without the right to sell the strategic family companies).
At the same time, the elder brother could have been designated as the head of the “family system” and become chairman of the family council (with casting and/or additional votes). The family council would have oversight of the family businesses, and could also be given the right to replace the “Investment Advisor” in the family trust. In this way, the second brother would have had to report to and consult with the elder brother (and also other family members) on important business decisions, such as the engagement and promotion of any family members in the business. The elder brother may also have been designated as the initial “Protector” of the family trust who could have given recommendations to the trustee, including whether to withhold trust distributions to family members for failing to comply with the terms or spirit of the family constitution. This might have ensured that all family members would stay in line and continue to respect each other.
The dynamics, values and concerns are no doubt different in every family and there is no set rules as to how a family constitution should be drawn up, or how it should interface with the operation of the family trust. However, the message brought home by the Yung Kee Holdings case is that trust ownership of the family business coupled with a well-designed family governance mechanism warrant due consideration. Such arrangement could effectively remove the family business and fortune from the strict and impersonal corporate regulatory regime, facilitate communication and respect between the family members, and bring about the harmony and continuity desired by founders of most family businesses. |
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To stay afloat in the digital era, coping with changes to specific national copyright statutes is not just a worldwide trend, but a necessity. Although the statutory framework defining the Taiwan Copyright Act (Act)3 has remained largely untouched since it was first enacted in 1928, the Act has now begun to receive comprehensive scrutiny not only by academic critics, but also by industrial and governmental professionals.
Following an announcement of copyright law reforms in 2010, the Taiwan Intellectual Property Office (TIPO) initiated a campaign to launch panel discussions and public comments on a variety of subjects involving the revision of the Act. TIPO released a “First Draft” series of initial proposals in April 2014, followed by a more sweeping series of “Second Draft” proposals in May 2015. Following public comment, these preliminary changes culminated in January 2016 with the publication of TIPO’s “Third Draft,” adding a further 32 articles to the Act.3 The revisions in the “Third Draft” referred, inter alia, to specific statutory modifications (i) redefining the types of copyright exploitation available under Taiwan law, and (ii) updating the scope of Taiwan’s fair use provisions in light of developing internet and digital convergence. In total, this Third Draft (discussed below) now proposes changes to a total of 149 articles under consideration for the anticipated “revised” Act. |
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A significant number of anticipated changes to the Act deal with the increasing importance of copyright issues directed to e-books, Internet Protocol Television systems (IPTVs) and other cloud computing services, and intangible copyright exploitation. As a fundamental step towards resolving the issues arising from intangible economic rights, the Third Draft has amended and clarified the definitions to address these novel technological advances. According to the Third Draft, “public broadcast” is no longer limited to “a broadcasting system of wire, [or] wireless,” but allows other methods having similar features (such as webcasting, which usually refers to non-interactive linear streams or events). By way of contrast, the interactivity embodied in the definition of “public transmission” has been strengthened by clearly requiring the content of copyrighted works to be received both at a time and at a place chosen by an individual receiver. The Third Draft gives these new copyright definitions further flexibility in terms of the communicated content, bringing more than “sounds or images” to characters and computer programs, just to name examples. (See Sub-paragraphs 6 and 9 of Article 3 of the Third Draft.)
To more carefully regulate certain “public re-communication” behaviors, the Third Draft includes within the definition of “intangible copyright exploitation” a new statutory provision focusing on the simultaneous communication to the public of the content of a work that has been communicated by means of public broadcast or public transmission through screens, loudspeakers or other equipment. Under this provision, a deli owner who turns on a television at his place of business for the entertainment of customers may now fall within the scope of copyright regulation, even though fair use protection may be applicable. Additionally, in the Third Draft the pre-existing rights for public recitation, public performance and public presentation are restructured to provide a better understanding of their respective content. (See Sub-paragraphs 7, 8, 10 of Article 3 of the Third Draft and Article 67 of the same.) |
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TIPO’s Third Draft also makes significant effort to update the “fair use” scheme embodied in the Act. For instance, Article 66 of the Draft now states that the work of another person that has been publicly released may be publicly presented or publicly performed for a non-profit purpose, provided that (i) no fee is directly or indirectly collected from the viewers or listeners, and (ii) no compensation is given to the performers. Article 66 further states that the work of another person that is publicly broadcast may be “publicly re-communicated” for a non-profit purpose, provided that no fee is directly or indirectly collected from the viewers or listeners. This newly proposed “fair use” provision dispenses with earlier “public broadcast” concepts in favor of an embodiment of “public re-communication” to achieve systematic accuracy. Also, the creation of a statutory license for regular uses distinguishes and limits the scope of the applicable fair uses “by means of public presentation or public performance” to non-regular events, thereby codifying TIPO’s present practices.
In addition, the Third Draft provides supplemental provisions dealing with the rising need to adapt digital based technologies for education and cultural preservation, making it feasible for schools to embrace distance learning as an effective way of teaching and for libraries to establish digital archive programs and utilize their digitalized collections within the frame of copyright laws. As this provision may shift the balance between proprietary and access interests, the Third Draft adds ancillary provisions requiring equitable compensation in certain circumstances (such as when public transmission may be unfavorable to copyright owners) and takes into account the application of technological protection measures when examining the proposed fair use policies. (See Articles 55 to 58 and Article 65.) |
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| The Third Draft also has adopted a range of mechanisms (e.g. the one dealing with orphan works) first introduced in the Taiwan’s “Law for the Development of the Cultural and Creative Industries (see Articles 23 and 24).” Under these new mechanisms, if a user has made best effort, but has failed to obtain a license from the copyright owner because either its identity or the location of the copyright owner is unknown, then the user may resort to the competent Copyright authority for a compulsory license to utilize the work within the permitted scope or even expedite the time to utilize the work by offering a deposit (see Articles 80 to 82). Similarly, it may become feasible to implement a “pledge” on copyright based on the provisions of Article 83. These provisions are clearly directed to promote the benefits of the copyright system to a broader extent (given that neither the compulsory license nor the copyright pledge is confined to any specific industries). |
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While the Third Draft focuses on an evolutionary adaption of Copyright law responding to modern digital-oriented culture, it also deals with long existing issues in the copyright system. For instance, the Third Draft lets stand the prohibition against parallel imports, along with updated provisions regarding distribution and exhaustion (see Articles 33, 34, 73 and 97). The Third Draft also permits copyright owners to petition Customs for relevant information about accused infringing imports, including the right to obtain samples to analyze for the purpose of detecting infringements (although accused infringers may also move to block any effort to attach alleged copyright infringements upon doubling a statutory deposit). (See Articles 104 to 110, which generally discuss border control.) In another aspect, sound recordings remain within the scope of copyright protection and the exclusive rights provided to performers have been updated to take into consideration the Beijing Treaty on Audiovisual Performances announced by the World Intellectual Property Organization (see Articles 35 and 36).
TIPO also revised the imposition of criminal sanctions against copyright infringers in response to the development of certain copyright-related industries (e.g., the declining CD industry). Furthermore, TIPO has clarified a number of provisions in the Third Draft relating to the entitlement to copyrights as well as the moral rights enjoyed by a copyright owner. |
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| The fundamental copyright law of Taiwan is now undergoing a “digital update.” For the first time in nearly a century, Taiwan has undertaken a comprehensive revision covering a wide array of copyright issues, from intangible copyright exploitation to various provision facilitating fair use and copyright marketing. As a result, the Third Draft has drawn significant legal attention from copyright owners in greater Asia. Both owners and users are encouraged to consider the flexibility embedded in the Third Draft as a critical step on the path to developing comprehensive value creation strategies. |
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| We hope you enjoyed this newsletter. Watch this space for more updates from our Asia practice. |
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