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Editorial

DOING BUSINESS IN HONG KONG

Contributed by Nixon Peabody CWL

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The following is a summary discussion of the law concerning, and certain aspects relating to, the establishment and maintenance of Hong Kong private companies limited by shares. It is based on law and practice as at 1 August 2017 and rates of taxation for the year of assessment 2017/2018. It may not be considered or relied upon as legal advice.

INTRODUCTION

Hong Kong is a Special Administrative Region of the People's Republic of China (PRC). Since Hong Kong’s sovereignty was resumed by the PRC in 1997, Hong Kong has reinforced its position as the most significant global financial centre in East Asia. Hong Kong is strategically located on the Pearl River Delta, which is one of the world’s leading regions for international finance, trade and technology. Hong Kong is considered the freest economy in the world, consistently ranking first in The Index of Economic Freedom since its creation by The Heritage Foundation and The Wall Street Journal in 1995. Hong Kong is fiscally strong with reserves of more than US$400 billion . Its currency, the Hong Kong dollar, is fully convertible with no exchange controls at a range-pegged rate to the US dollar.

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Overview

2016 was a banner year overall for outbound M&A in terms of deal volume and value; deals that caught the eye included Tencent’s $8.6bn acquisition of Supercell and Tianjin Tianhai’s $6.1bn acquisition of Ingram Micro. The end of 2016, however, saw a notable slowdown in transactional activity; this is largely attributable to the Chinese government’s imposition of controls on capital outflows (which were intended to address regulatory concerns about private Chinese companies moving large amounts of capital offshore). Global geopolitical developments, such as the outcome of the US election and Brexit, created additional uncertainty.

In another development, wider systemic risks posed by borrowers to the Chinese banking sector culminated in a number of the largest Chinese companies, such as Dalian Wanda and Anbang Insurance, being investigated recently in relation to the debt they have accumulated. Although this regulatory scrutiny (and associated uncertainty among transacting parties) is likely to be temporary, it remains to be seen how deal activity and the shape of transactions (including mega-deals and other very large deals) over the course of 2017 will bear out.

Elsewhere, in the equity capital markets arena, Hong Kong was the top fundraising market in 2016 for proceeds raised by IPOs and saw a record high in the number of listing applications. In addition, Hong Kong was the destination of the world’s largest IPO (Postal Savings Bank of China, which raised $7.4bn), since the record float of Alibaba on the New York Stock Exchange in 2014. Notwithstanding these positives, the year saw a dip in actual new listings (particularly in the context of mega and large IPOs), with there being 120 listings in 2016 compared with 124 in 2015. There was also a reduction in the amount raised from these listings: HK$195.3bn in 2016, compared with HK$262.1bn in 2015. In the first half of 2017, the Main Board IPOs in Hong Kong were dominated by small and mid-sized deals, with the average deal size falling to HK$1.5bn – the lowest since 2013.

In the dispute resolution arena, Hong Kong remains a hub for Asia Pacific regulatory investigations and white-collar crime work, and activity in this area continues to rise. On the arbitration front, lawyers welcomed a landmark decision in 2017 when Hong Kong’s Legislative Council passed a law allowing third-party funding for arbitration proceedings. This has been long anticipated and closely follows Singapore that changed its own laws to permit third-party funding earlier in 2017. It is viewed by market participants in both jurisdictions as being essential to maintaining their status popular arbitral seats.

The Hong Kong legal market is characterised by its fluidity, with the competition for mandates (and the associated fee pressures this presents) expected to hot up as law firms headquartered in mainland China increasingly move into an environment traditionally dominated by UK and US firms. In September 2016, Cadwalader, Wickersham & Taft LLP shut its Hong Kong (and also its Beijing) offices, with Fried, Frank, Harris, Shriver & Jacobson LLP having closed in Hong Kong (and Shanghai) a year earlier.

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